<PAGE>
As filed with the Securities and Exchange Commission on September 17, 1999
Registration No. 333-78587
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 1
to
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
E2Enet, Inc.
(Exact name of registrant as specified in its charter)
---------------
Delaware 7389 52-2168495
(State or other (Primary standard industrial (I.R.S. employer
jurisdiction of classification code number) identification number)
incorporation or ---------------
organization)
800 Connecticut Ave., NW
Suite 1111
Washington, DC 20006
(202) 331-9000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Robert J. Smith
Chief Executive Officer
E2Enet, Inc.
800 Connecticut Ave., NW
Suite 1111
Washington, DC 20006
(202) 331-9000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Steven A. Museles R.W. Smith, Jr.
Hogan & Hartson L.L.P. Piper & Marbury L.L.P.
555 Thirteenth Street, N.W. 36 South Charles Street
Washington, DC 20004 Baltimore, MD 21201
(202) 637-5600 (410) 539-2530
---------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
---------------
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
<CAPTION>
Proposed
Maximum Proposed Maximum
Title Of Each Class Of Amount To Be Offering Price Aggregate Offering Amount Of
Securities To Be Registered Registered(1) Per Share Price(2) Registration Fee(3)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value... 11,500,000 $14.00 $161,000,000 $44,758
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 1,500,000 shares that may be purchased by the underwriters
pursuant to an over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
(3) The Registrant paid $47,955 in connection with its initial filing.
---------------
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 the provisions
of section 8(a) of the Securities Act of 1933, as amended, 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 is effective. This prospectus is not an +
+offer to sell these securities, and we are not soliciting an offer to buy +
+these securities in any state where their offer or sale is not permitted. +
+ +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated September 17, 1999
[E2Enet, Inc. LOGO]
- --------------------------------------------------------------------------------
10,000,000 Shares
Common Stock
- --------------------------------------------------------------------------------
This is E2E's initial public offering. We are offering 10,000,000 shares of
common stock. We anticipate that the public offering price will be between
$12.00 and $14.00 per share.
We have filed an application for the common stock to be quoted on the Nasdaq
National Market under the symbol "EENT."
Investing in our common stock involves risks that are described in "Risk
Factors" beginning on page 11 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these shares of common stock or
determined if this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
<TABLE>
<CAPTION>
Underwriting
discounts
Public offering and Proceeds to
price commissions E2E
--------------- ------------ -----------
<S> <C> <C> <C>
Per Share $ $ $
Total $ $ $
</TABLE>
The underwriters may also purchase from E2E up to an additional 1,500,000
shares of common stock within 30 days from the date of this prospectus to
cover over-allotments.
Deutsche Banc Alex. Brown
BancBoston Robertson Stephens
Friedman Billings Ramsey
Stephens Inc.
The date of this prospectus is , 1999
<PAGE>
ABOUT THIS PROSPECTUS
Although we refer to the companies in which we have acquired an equity
interest as our "partner companies," we do not:
. act as an agent or legal representative for any of our partner
companies;
. other than our investments in them, have any loss or revenue sharing
agreements with our partner companies;
. other than for our subsidiaries, have the power or authority to legally
bind any of our partner companies; and
. have the types of liabilities in relation to our partner companies that
a general partner of a partnership would have.
We are using the word "partner" in the generic sense to reflect an arrangement
between two or more parties.
Concurrently with the completion of this offering, we will acquire 100% of
MEI Software Systems, Inc. and 80% of Buyline.net, Inc. We may also acquire
additional equity interests in five of our other partner companies in which we
currently own interests.
SUMMARY
The following summary highlights selected information from this prospectus
and may not contain all the information that is important to you. To understand
our business and this offering fully, you should read this entire prospectus
carefully, including the financial statements and the related notes beginning
on page F-1.
E2Enet, Inc.
Our Business
E2Enet, Inc., the Entrepreneur-to-Entrepreneur network, was founded to
operate, develop, invest in and acquire Internet-related businesses, which we
refer to as our partner companies. Since our inception in September 1998, our
company has not generated any revenues. To date, we have invested in five
partner companies and have entered into agreements to acquire 100% of one and
80% of another partner company upon the completion of this offering. We are
building a platform of technologies, applications and services, that we believe
are common components of many Internet businesses. We are designing this
platform so that many of the components can be customized for the business to
business, or B2B, and business to consumer, or B2C, Internet-related market
sectors. We believe the ability of our partner companies to access our in-house
technologies, our relationships with professional service providers and our
management team of Internet entrepreneurs will enable our partner companies to
bring products and services to market more quickly and efficiently than their
competitors.
1
<PAGE>
Challenges Facing Emerging Internet Businesses
The rapid growth of the Internet combined with the amount of capital
available to early-stage Internet businesses has created a competitive
environment for Internet businesses. To succeed, we believe early-stage
Internet businesses require not only capital, but also a well-developed
business model, a scalable technological and corporate infrastructure and a
strong brand identity that enable them to accelerate their time to market and
manage growth.
The E2E Solution and Strategy
Our solution is based on our belief that many Internet businesses spend
significant resources building similar technologies, marketing skills,
distribution channels and administrative functions. By understanding the
development process of Internet businesses, we believe we can assemble a
flexible, customizable suite of technologies, products and services for use
across various Internet sectors and business applications.
Build the E2E platform to accelerate our partners companies' business
development.
Upon completion of this offering, we believe the E2E platform will include
much of the technology, applications, professional service relationships and
management expertise necessary to meet the challenges facing early-stage
Internet businesses and traditional businesses that are trying to establish a
means to conduct business on the Internet.
Business Model Development. We apply the experience of our management team to
guide our partner companies in developing their business plans, financial
models and marketing strategies. We assign at least one member of our
management team to work with each of our partner companies.
Technology Infrastructure. The technologies available to our partner companies
include the following representative tools and applications:
. Buyline transaction application. Upon its expected completion in early
2000, this software application will facilitate commercial transactions
between buyers and sellers over the Internet. We expect that some of our
partner companies will be able to use this technology to conduct e-
commerce.
. MEI audience management system. This technology enables a user to sort
and retrieve information on a range of criteria within a database. We
expect that some of our partner companies will be able to use this
technology to manage and track information about their customers and
visitors to their web sites.
. MEI PortalPlus(TM). PortalPlus(TM) is a suite of tools that provides the
core components of a web site.
. Cogit data mining. This technology, provided by one of our third-party
service providers, Cogit Corporation, consists of marketing software
that enables an Internet business to obtain detailed information about
its web site visitors.
2
<PAGE>
Corporate Infrastructure. We have established relationships with third parties
who can be engaged by our partner companies to assist in financial and
accounting matters, legal matters and executive search services.
Building a Brand. To assist our partner companies in marketing their web sites,
building their brands and creating customer loyalty, we have entered into
agreements with third parties to provide public relations, strategic planning
and marketing services.
Our partner companies will maintain full discretion to determine which of the
components of the E2E platform to use, if any. We expect that transactions
between partner companies will be arms-length transactions. We intend to
generate revenue by licensing our platform or its component parts to our
partner companies, as well as to non-partner Internet organizations and
traditional businesses that desire to develop a means to conduct business on
the Internet.
Maximize shareholder value by determining and acting on the strategic
alternative most appropriate for each of our partner companies.
We expect that many of our partner companies will reach stages of their
development at which public offerings, joint ventures, mergers or other
strategic transactions are necessary or advisable to continue to develop or
operate their businesses. At that time, we plan to use our knowledge of the
Internet market, our familiarity with financing and acquisition transactions
and our understanding of the business and prospects of our partner companies to
help determine the strategic alternatives most likely to maximize the long-term
value of the partner company.
Target for investment or acquisition businesses that will benefit from our
platform.
We have initially focused our partner company selection criteria on
Internet-related market sectors with a potential market size exceeding $30
billion and that are growing at an annual rate of at least 30%. Two of the
market sectors that meet these criteria are the B2B and B2C sectors. Within
these market sectors, we target (1) Internet-related companies that provide
technologies and services that are useful to early-stage Internet businesses,
(2) companies that meet the strategic, technological and corporate needs of our
existing partner companies, and (3) Internet entities that can benefit from our
platform.
Initial Partner Companies
To date, we have acquired minority interests in five partner companies and
entered into agreements to acquire 100% of MEI Software Systems, Inc. and 80%
of Buyline.net, Inc. concurrently with the completion of this offering. Our
agreements with these seven companies require a total equity investment paid in
cash by E2E of $45.0 million, of which $2.9 million has been funded to date.
Additionally, we have also funded $950,000 of working capital loans to MEI and
Buyline. To date, we have funded our equity investments and working capital
loans with the proceeds from (1) a $10.0 million loan provided by Jonathan J.
Ledecky, a significant stockholder, under which, to date, we have borrowed $4.5
million and (2) $4.0 million in
3
<PAGE>
convertible notes issued to Northwood Ventures LLC, a venture capital firm, and
its affiliate Northwood Capital Partners LLC. We intend to use the remaining
proceeds from the Northwood convertible notes to fund our working capital loans
to our partner companies. We will repay the outstanding balance on the Ledecky
loan plus accrued interest with the proceeds of this offering. The convertible
notes held by Northwood will convert into 459,242 shares of our common stock
upon the closing of this offering, assuming an initial public offering price of
$13.00 per share. In connection with our initial investments in four of our
partner companies, the principals of those partner companies purchased an
aggregate of 666,669 shares of our common stock for an aggregate consideration
of $6,667, which shares would have an aggregate value of approximately
$8.7 million, assuming an initial public offering price per share of $13.00.
The transactions in which we will acquire or have acquired interests in our
partner companies are summarized below.
. MEI Software Systems, Inc. provides customized software systems to
manage the databases of trade associations, professional associations,
fund raising organizations and chambers of commerce. We have entered
into an agreement to acquire 100% of MEI for $24.0 million in cash,
concurrently with the closing of the offering. Additionally, we have
agreed to loan up to $2.0 million to MEI for working capital purposes,
of which $400,000 has been borrowed to date.
. Buyline.net, Inc. is developing B2B e-commerce applications. We have
entered into an agreement to acquire 80% of Buyline for $12.0 million
concurrently with the closing of this offering. We have also agreed to
loan up to $950,000 to Buyline, of which $550,000 has been borrowed to
date.
. VIPRO Corporation provides repair guarantees against viruses that harm
computers. We have entered into an agreement to acquire 32.9% of VIPRO
for $2.25 million, concurrently with the closing of this offering. To
date, we have purchased convertible preferred shares for $250,000 under
this agreement, representing a 5.2% interest in VIPRO.
. Urban Box Office Network, Inc. is developing a network of web sites for
people interested in urban culture, information, entertainment and
products. We have entered into an agreement to acquire 20.8% of Urban
Box Office for $3.0 million and have issued 200,001 shares of our common
stock to its principals for an aggregate purchase price of $2,000, which
shares have an aggregate value of approximately $2.6 million based on an
assumed initial public offering price of $13.00 per share. To date, we
have purchased convertible preferred shares for $1.0 million under this
agreement, representing an 8.0% equity interest in Urban Box Office.
. Blue Rock Avenue, Inc. is developing a gift-giving e-commerce web site.
We have entered into an agreement to acquire a 40.0% equity interest in
Blue Rock Avenue for $1.5 million and have issued 133,334 shares of our
common stock to its principals for an aggregate purchase price of
$1,333, which shares have an aggregate value of approximately $1.7
million based on an assumed initial public offering price of
4
<PAGE>
$13.00 per share. To date, we have purchased convertible preferred
shares for $500,000 under this agreement representing an 18.0% equity
interest in Blue Rock Avenue.
. Hooey, Inc. is developing an arts and crafts community web site. We have
entered into an agreement to acquire a 34% equity interest in Hooey for
$1,275,000 and have issued 166,667 shares of our common stock to its
principals for an aggregate purchase price of $1,667, which shares have
an aggregate value of approximately $2.2 million based on an assumed
initial public offering price of $13.00 per share. To date, we have
purchased convertible preferred shares for $637,500 under this
agreement, representing a 20.0% equity interest in Hooey.
. bluemercury, Inc. is developing a web site focusing on women's cosmetic
products and accessories. We have entered into an agreement to acquire a
45.0% equity interest in bluemercury for $1.0 million and have issued
166,667 shares of our common stock to its principals for an aggregate
purchase price of $1,667, which shares have an aggregate value of
approximately $2.2 million based on an assumed initial public offering
price of $13.00 per share. To date, we have purchased convertible
preferred shares for $500,000, representing a 29.0% equity interest in
bluemercury.
Each of these businesses is in the early stages of its Internet business
development. MEI and VIPRO currently have operating web sites. Buyline expects
to have an operational web site in early 2000, and each of our other partner
companies expects to have an operational web site in the fourth quarter of
1999. For the six months ended June 30, 1999, MEI has generated revenues of
$6.1 million. To date, only MEI has generated any revenues, and for the six
months ended June 30, 1999, losses have been incurred by MEI of $1,151,868,
Buyline of $73,253, VIPRO of $229,581 (unaudited), Urban Box Office of
$231,180, Blue Rock Avenue of $284,536, Hooey of $135,031 and bluemercury of
$67,257.
Our executive offices are located at 800 Connecticut Avenue, N.W., Suite
1111, Washington, DC 20006. The telephone number of our principal executive
office is (202) 331-9000.
5
<PAGE>
The Offering
The following table summarizes this offering.
<TABLE>
<C> <S>
Stock offered by E2E................. 10,000,000 shares of common stock.
Stock outstanding after this 14,990,911 shares of common stock,
offering............................. assuming the underwriters do not
exercise their over-allotment option,
and including 459,242 shares of common
stock issuable upon conversion of
convertible notes held by Northwood
simultaneous with the closing of this
offering. We also have outstanding
warrants to purchase 400,000 shares of
common stock at the initial public
offering price and options to purchase
1,850,000 shares of common stock at a
weighted average exercise price of
$12.55 per share, assuming an initial
offering price of $13.00 per share.
Use of proceeds...................... We will receive net proceeds from the
offering of $118.9 million, assuming a
per share offering price of $13.00. We
intend to use $42.1 million of these
proceeds to acquire additional equity
interests in our partner companies,
$4.5 million to repay outstanding
indebtedness and $72.3 million for
general corporate purposes, including
working capital, new investments in our
current partner companies and
investments in new partner companies.
Proposed Nasdaq National Market
symbol............................... EENT
</TABLE>
6
<PAGE>
Summary Financial Data
The following tables show our summary historical and unaudited pro forma
combined financial information for the periods indicated. You should read this
information together with the financial statements and the notes to those
statements appearing in the prospectus and the information under "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Use of Proceeds," the financial statements of E2E
and the unaudited pro forma combined financial statements.
Summary Historical Financial Data
<TABLE>
<CAPTION>
Six months Cumulative
September 1, 1998 ended from
(inception) to June 30, inception to
December 31, 1998 1999 June 30, 1999
----------------- ------------- -------------
<S> <C> <C> <C>
Statement of Operations Data:
General and administrative
expense...................... $ 79,698 $ 644,617 $ 724,315
Stock compensation............ -- 26,288,080 26,288,080
Equity in loss of investees... -- 798,614 798,614
--------- ------------- -------------
Total expenses................ 79,698 27,731,311 27,811,009
--------- ------------- -------------
Interest expense.............. -- 28,726 28,726
--------- ------------- -------------
Net loss...................... $ (79,698) $ (27,760,037) $ (27,839,735)
========= ============= =============
Basic and diluted loss per
common share................. $ (0.05) $ (12.47) $ (14.39)
========= ============= =============
Weighted average shares
outstanding.................. 1,500,000 2,226,513 1,933,989
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ ----------
<S> <C> <C>
Balance Sheet Data:
Current assets......................................... $ -- $ 100,049
Total assets........................................... 6,288 9,937,401
Total liabilities...................................... 85,886 3,999,058
Total stockholders' (deficit) equity................... (79,598) 5,938,343
</TABLE>
Summary Unaudited Pro Forma Financial Data
The pro forma combined E2E amounts have been adjusted to reflect the
following events:
. the completed and committed investments by us in Urban Box Office, Blue
Rock Avenue, Hooey, bluemercury, our probable acquisition of MEI and our
probable investment in Buyline.
. financing obtained through the sale of $4.0 million in notes convertible
at a discount to the initial public offering price, and the issuance of
400,000 common stock warrants to Northwood.
7
<PAGE>
The pro forma combined as adjusted amounts reflect the closing of this
offering and the conversion of the Northwood notes.
<TABLE>
<CAPTION>
Pro forma
Pro forma combined as
Pro forma combined six adjusted six
combined for the months ended months ended
year ended June 30, June 30,
December 31, 1998 1999 1999
----------------- ------------ ------------
<S> <C> <C> <C>
Statement of Operations Data:
Revenue......................... $ 9,299,237 $ 6,140,540 $ 6,140,540
Cost of revenue................. 5,323,025 3,808,869 3,808,869
Operating expenses:
Sales and marketing............ 1,268,628 1,013,006 1,013,006
Research and development....... 1,990,079 1,251,568 1,251,568
Stock compensation............. 163,290 26,552,101 26,552,101
Amortization expense........... 8,603,977 4,440,020 4,440,020
General and administrative
expense....................... 1,726,601 1,635,105 1,635,105
------------ ------------ ------------
Total operating expense........ 13,752,575 34,891,800 34,891,800
------------ ------------ ------------
Loss from operations............ (9,776,363) (32,560,129) (32,560,129)
Interest expense................ 82,119 2,036,584 4,006,127
Equity in loss of investees..... -- 1,413,714 1,413,714
Minority interest in earnings of
subsidiaries................... -- (14,651) (14,651)
------------ ------------ ------------
Net loss....................... (9,858,482) (35,995,776) (37,965,319)
------------ ------------ ------------
Accretion on mandatorily
redeemable securities.......... (364,188) (382,168) (382,168)
------------ ------------ ------------
Net loss available to common
stockholders................... $(10,222,670) $(36,377,944) $(38,347,487)
============ ============ ============
Basic and diluted loss per
common share................... $ (4.11) $ (6.18) $ (6.51)
============ ============ ============
Weighted averages shares
outstanding.................... 2,485,113 5,886,328 5,886,328
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
-----------------------
Pro forma
Pro forma combined as
combined adjusted
---------- ------------
<S> <C> <C>
Balance Sheet Data:
Current assets......................................... $7,752,856 $106,205,296
Total assets........................................... 53,372,065 151,238,066
Total liabilities...................................... 45,464,179 22,399,723
Total stockholders' equity............................. 7,907,886 128,838,343
</TABLE>
8
<PAGE>
Summary Risk Factors
This offering is highly speculative in nature, and investing in our common
stock involves risks, including the following:
. we have a limited operating history upon which you can evaluate our
business and prospects;
. our strategy may not be successful for many reasons, including our
partner company selection criteria and our ability to provide companies
with business development support over a common platform of services and
technologies have not been tested and may fail;
. to date, six of the seven businesses we have committed to invest in are
Internet-related start-up companies, only one of these start-up
companies has launched its web site, and none has generated revenues;
. as of June 30, 1999, we had an accumulated deficit of $27.8 million, and
we had not generated any revenues. We expect to hold our investments for
the long term, and we do not anticipate generating significant revenue,
income or earnings for the foreseeable future;
. some members of our management team, board of directors and advisory
board own or participate in, or may in the future own or participate in,
companies competing with us for investments in Internet-related
companies, and we cannot assure you that their interests will not
conflict with ours or those of our stockholders; and
. our business strategy exposes us to the risk of being deemed an
investment company under the Investment Company Act of 1940, which would
prohibit us from engaging in our business and could result in criminal
and civil actions against us.
9
<PAGE>
Benefits to Related Parties
Between February and August of 1999, the following executive officers,
director, director nominees and significant stockholder purchased shares of our
common stock as follows:
<TABLE>
<CAPTION>
Aggregate value
Number of based on assumed
shares Aggregate offering price of
Name purchased purchase price $13.00 per share
---- --------- -------------- -----------------
<S> <C> <C> <C>
Executive Officers
Robert J. Smith, Chief Executive
Officer and Director Nominee 432,500 $ 4,325 $ 5,622,500
Michael C. Wheeler, President
and Director Nominee 345,000 3,450 4,485,000
Steven J. Quamme, Chief
Financial Officer and Director 216,000 2,160 2,808,000
Mark Lewyn, Senior Vice
President - Business
Development 216,000 2,160 2,808,000
Director Nominees
Lynda M. Applegate 86,500 865 1,124,500
Neil R. Austrian 86,500 865 1,124,500
George J. Mitchell 86,500 865 1,124,500
Jeffrey R. Sechrest 86,500 865 1,124,500
Gerald H. Taylor 86,500 865 1,124,500
Significant Stockholder
Jonathan J. Ledecky 1,300,000 13,000 16,900,000
--------- ------- -----------
Total 2,942,000 $29,420 $38,246,000
========= ======= ===========
</TABLE>
All of these shares are subject to lock-up agreements with E2E, and our
executive officers' shares are also subject to forfeiture as described under
"Shares Available for Future Sale--Lock-up Agreements" and "Management--
Employment Agreements."
We issued 923,000 additional shares to key employees, advisory board members
and others, and 666,669 shares to the principals of four of our partner
companies at $.01 per share.
10
<PAGE>
RISK FACTORS
You should consider carefully the following risks before you decide to buy
our common stock. Many of these risks will affect our partner companies and
will, as a result, affect our company to the extent of our interest in the
affected partner company. If any of the following risks actually occur, our
business, financial condition or results of operations would likely suffer. In
addition, the trading price of our common stock could decline, and you may lose
all or part of your investment.
RISKS PARTICULAR TO E2E
We have a limited operating history upon which you can evaluate our business
and prospects. Our business and prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in early
stages of development, particularly companies in new and rapidly evolving
markets such as e-commerce. If we are unable to effectively execute our
business plan, including the development of a common platform of technologies
and services for and with our partner companies, we may never generate
revenues.
Our strategy for providing business development support through our platform
has not been tested and may fail. Our business model depends to a large extent
on the willingness of our partner companies to use components of our platform
of technologies and services and the ability of our platform to provide
benefits to our partner companies. To date, we have limited experience
providing our services to our partner companies and no experience in providing
these services to established businesses attempting to create a means for
conducting business over the Internet. If our partner companies do not find our
platform useful to their businesses, or if we fail to develop relationships
with established businesses, major parts of our business strategy may fail.
This failure would make it extremely difficult for us to attract additional
partner companies and may delay, rather than accelerate, the growth and
marketability of our partner companies and their products and services, which
would adversely affect our ability to generate positive returns or otherwise
enhance value for our stockholders.
We currently have significant losses, and our business model contemplates
continued losses for the foreseeable future. To date, we have only engaged in
start-up activities and the negotiation and execution of agreements to purchase
equity interests in partner companies. As a result of the type of investments
we pursue and the anticipated period for our investments to mature, none of the
four partner companies in which we had invested as of June 30, 1999 had
generated revenues, and, as of June 30, 1999, we had an accumulated deficit of
$27.8 million. We will acquire MEI, which has generated revenues,
simultaneously with the closing of this offering. We intend to acquire equity
interests in a significant number of Internet-related businesses that have
limited or no revenues. We do not expect many of our partner companies to
generate revenues, income or cash for us in the foreseeable future, and they
may never produce revenues, income or cash. In addition, our expenses will
continue to increase as we continue to build an infrastructure to execute our
11
<PAGE>
business model. We expect that our operating expenses will be approximately
$8.0 million for the 12 months following this offering. Our future operating
results will depend to a significant degree on our ability to successfully
manage our growth and the growth of our partner companies.
Some members of our management team, board of directors and our advisory
board have interests that conflict with ours. Some members of our management
team, board of directors and advisory board own or participate in other
companies that may compete with us. Their interests could conflict with ours
and those of our stockholders in matters of timing and other factors relating
to our investments in, control over, and exit strategies from our partner
companies. For example, Robert J. Smith, our Chief Executive Officer, has a
small, indirect investment in MEI valued at approximately $12,000. Mr. Smith
has options to purchase 40,000 shares of VIPRO's common stock, which options
are currently valued at approximately $40,000. Mr. Smith also holds a note for
$25,000 issued to Buyline. Jeffrey Sechrest, one of our directors, is a member
of Evercore Partners, a merchant banking and financial advisory firm that may
in the future advise our competitors in connection with investments in which we
may also be interested. We cannot assure you that management team members and
directors will not make decisions based on interests other than those of our
stockholders.
In addition, members of our advisory board are employees or directors of
other companies that could seek to invest in or acquire the companies in which
we are seeking or may seek to invest. For example, Messrs. Cole, Leonsis,
Schiff and Wieler, members of our advisory board, are associated with entities
that invest in, and/or advise other entities that invest in, the type of
companies in which we intend to invest. Their interests may conflict with ours
in evaluating and committing to investments. They may be required to act in the
best interests of the companies with which they are employed because they may
owe fiduciary duties to those companies and their stockholders that they do not
owe to E2E or our stockholders.
We may be deemed an investment company, which would prohibit us from
engaging in business and could result in criminal and civil actions against
us. The Investment Company Act of 1940 regulates companies that primarily
invest in or own investment securities. In addition, any company that owns
investment securities with a value exceeding 40% of its total assets, excluding
cash and government securities, may be required to register as an investment
company and comply with the Investment Company Act. We believe that because of
the structure of our equity interests in our partner companies and the business
strategy we will pursue, we will not be regulated under the Investment Company
Act. As of the closing of this offering, and assuming the completion of all
pending transactions, approximately 72% of our total assets, as calculated
under the Investment Company Act guidelines, will consist of majority-owned
subsidiaries. We may rely on an SEC rule that would exempt us from investment
company regulation by having at least 55% of our total assets, including
government securities and cash, represented by, and at least 55% of our income,
if any, derived from, assets that meet the requirements of that exemption. The
assets that meet the requirements of the exemption include U.S. government
securities, securities of companies in which we own 50% or more of the
outstanding voting securities and securities of our less-than-majority-owned
subsidiaries
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which are controlled primarily by us and through which we engage in a non-
investment company business. For purposes of the exemption, our majority-owned
and controlled subsidiaries themselves must not be investment companies. We
intend to structure our assets to meet the conditions of this exemption.
We may not be able to meet these exemptions from investment company
regulation for various reasons, including the fact that our operating income,
total assets and interests in our partner companies and their associated values
will change. Classification as an investment company would significantly harm
our business and results of operations. If we fail to comply with the
requirements of available exemptions or are, for any other reason, required to
register under the Investment Company Act, we would be in violation of the
Investment Company Act unless we were to register. If we did not register when
required to do so, we would be prohibited from engaging in business or selling
our securities and could be subject to civil and criminal actions for doing so.
In addition, many of our contracts would be unenforceable unless a court were
to find that enforcement of our contracts would produce a more equitable
result. A court could also appoint a receiver to take control of our company
and liquidate our business. If we were obligated to register as an investment
company, we would have to comply with a variety of substantive requirements
under the Investment Company Act applicable to registered investment companies.
These requirements include:
. limitations on our ability to borrow by requiring 300% asset coverage
for indebtedness and allowing only one class of senior indebtedness;
. limitations on our equity capital structure by allowing only one class
of preferred stock, which would be required to satisfy a 200% asset
coverage requirement;
. a prohibition on our payment of dividends or other distributions, or
purchase of our capital stock, if the asset coverage requirements are
not met;
. restrictions on specified investments;
. prohibitions on transactions with affiliates, which include any person
owning or controlling 5% or more of the company's voting securities, as
well as any affiliate of a 5% owner; and
. compliance with reporting, record keeping, voting, proxy disclosure and
other rules and regulations that would significantly change our
operations.
To maintain compliance with the Investment Company Act exemption, we may be
required to increase our ownership interest in our partner companies or acquire
majority-owned operating companies at a time or on terms that may not be
favorable to us. In addition, we may be required to liquidate our interest in a
partner company prematurely to maintain compliance with an investment company
exemption rather than as a result of our business strategy. We also may have to
forego an attractive opportunity to acquire an interest in a partner company
because it would cause us to fall out of compliance with the investment company
exemption requirements.
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Our financial performance and your investment in our common stock may be
adversely affected by future acquisitions or investments. Our financial
performance is directly tied to the success of our partner companies and will
depend on our ability to continue to make acquisitions of, and investments in,
partner companies on beneficial terms. In particular, competition for
acquisitions and investments in the Internet business has intensified, becoming
more costly, and the prices we may have to pay could exceed the value of the
assets of the partner companies in which we invest. Any acquisition or
investment may involve potential risks, including:
. the inability to integrate the operations, personnel and technology of
the acquired business;
. the diversion of our management's attention from other business
concerns;
. an increase in our indebtedness that may result either from our use of
borrowings to fund acquisitions and investments or from assumption of
debt of our partner companies or companies that we acquire; and
. dilution to investors in this offering from the issuance of common stock
as part of the consideration for interests in our partner companies.
Our operating subsidiaries may fail to develop into profitable companies. If
our operating subsidiaries are not successful because of any of the following
reasons, our business model may not be successful:
. we may not be able to hire capable management teams for our operating
subsidiaries;
. we may not have the capital necessary to fund the further development
and growth of these operating subsidiaries; or
. we may not be able to successfully integrate these operating
subsidiaries into our operations.
Competition for investments may result in lower returns. We will compete
with other companies seeking to develop and invest in Internet-related
businesses. Competition to invest in Internet-focused businesses could cause us
to pay higher prices for our investments, resulting in lower returns on these
investments. We will primarily be competing with well- established and publicly
traded Internet companies and investors, including CMGI, Inc., Safeguard
Scientifics, Inc., Rare Medium Group, Inc. and Internet Capital Group, Inc. We
will also compete with privately held venture capital firms and other private
investors. In addition, we will be competing with corporate strategic investors
that include Fortune 500 companies that are developing an Internet strategy and
Internet capabilities as well as investing in Internet companies. Many of these
potential competitors have more experience identifying, investing in and
advising Internet companies, and possess greater financial, personnel or other
resources or industry contacts than we have. In addition, although most of our
investments will be made at a stage when our partner companies are not publicly
traded, we may pay higher prices for those investments because, partly as a
result of high trading prices for public Internet-related companies, these
companies are being valued at prices that are frequently disproportionate to
their revenues or earnings.
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If any member of our senior management team left our company, we would have
difficulties operating our business. Our performance depends on the continued
employment of our Chief Executive Officer, President and Senior Vice
Presidents. If any of these executive officers were unable or unwilling to
continue in his present position, our business could be adversely affected. The
familiarity of these individuals with the Internet industry and financial
markets makes them especially valuable to our success.
Our failure to develop and maintain positive brand-name awareness of the E2E
organization could impair our ability to attract partner companies. Promotion
and enhancement of our brand name will depend largely on our ability to provide
our partner companies with the business development support they need. If we
are unable to provide high quality support, the value of our brand name will
decline. If we fail to differentiate ourselves as a business development and
Internet industry partner, the value of our brand name could decline and our
prospects for future growth would diminish.
Our success could be impaired by low valuations placed on Internet-related
companies by the financial marketplace. Our strategy involves creating value
for our stockholders and the employees of our partner companies by helping our
partner companies grow and access the capital markets. We are therefore
dependent on the capital markets for Internet-related companies in general and
for initial public offerings of those companies in particular. To date, there
have been a substantial number of Internet-related initial public offerings and
additional offerings are expected to be made in the future. If the market for
Internet-related companies and initial public offerings were to weaken for an
extended period of time, the ability of our partner companies to grow and
access the capital markets would be impaired, and we may need to provide
additional capital to our partner companies.
We may not control all of the businesses in which we invest, which may
result in actions against our best interests. A significant part of our
business will consist of acquiring ownership positions in our partner
companies. Although we generally will seek to participate in the management of
the companies in which we invest, we may have limited control or no control
over some of these companies. Our investments in which we have limited or no
control will involve additional risks that could cause the performance of our
investments and our operating results to suffer, including:
. the management of our partner companies may have economic or business
interests or objectives which are inconsistent with ours; and
. businesses in which we invest may encounter financial or operating
difficulties that we would not be able to influence.
With respect to the five partner companies in which we own minority
interests, assuming we fund the remaining investments that we are committed to
make and no third-parties invest in these entities, we will be the largest
stockholder, on a fully diluted basis and assuming the conversion of our
preferred stock, in each company. Additionally, our current rights as a
preferred stockholder in each of these companies provide us with control over
significant actions of these companies. To the extent that we choose to convert
our preferred stock investments into common stock, we will lose these control
rights.
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Our inability to control some of our partner companies could prevent us from
assisting them financially or otherwise if needed, or could prevent us from
liquidating our interests at a time that is favorable to E2E. Additionally, to
the extent we do not control them, our partner companies could compete rather
than collaborate with each other. These factors could hamper our ability to
maximize a return on our investment, and may cause us to recognize losses on
our investments in these companies.
We may need to sell our interests in our partner companies under adverse
conditions to generate cash. Although we intend to hold the interests in our
partner companies for an indefinite period of time, and we expect to generate
cash from operating activities, borrowings or future issuances of our equity,
if we are not successful in generating cash from these sources, we may need to
sell interests in our partner companies under adverse conditions. Our ability
to dispose of these interests may be limited by:
. market conditions that might reduce the proceeds we could receive from a
sale;
. agreements with the other stockholders of our partner companies that
might require us to offer our interests to them first; and
. the fact that many of our partner companies will be private companies
whose securities will not trade or otherwise be liquid and the transfer
of these securities will be restricted by federal securities laws.
For these reasons, we may not be able to dispose of our interests in our
partner companies at all or at opportune times or favorable prices, which may
result in reduced cash flow to E2E.
RISKS PARTICULAR TO THE INTERNET INDUSTRY AND OUR PARTNER COMPANIES
Our partner companies will require significant additional financing that
they may not be able to obtain. Excluding MEI, all of our current partner
companies are in the early stages of their development. We expect our future
partner companies to be similarly situated. Our partner companies will require
significant amounts of additional capital to compete successfully, meet their
business objectives and produce revenues. If our partner companies are unable
to obtain additional capital, they may fail, and our investments in them may be
lost. We may not be able to accurately predict or fund their capital needs. We
may decide to provide the additional capital required. If we do not, our
interest may be diluted if the companies receive investments from other
sources.
Most of our partner companies have limited operating histories on which to
evaluate them and are in the early stages of their development. Because six of
the seven companies in which we have invested have not commenced significant
operations, we have limited information on which to assess the value of their
businesses. We expect to continue to invest in similar companies. As a result,
we may have paid and may in the future pay too much for our interests in these
companies which may result in our inability to generate a satisfactory return
on our investments or the loss of our entire investments in these partner
companies.
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Our partner companies may not be able to attract a loyal base of consumers
to their web sites which will negatively affect their ability to earn revenues
and profits. Some of our partner companies will be particularly dependent on
content and relationships with entities that can deliver content that attracts
large numbers of users. If our partner companies are unable to develop Internet
content, products or services that attract a loyal user base, their potential
to earn revenues and profits would be impaired. Our success depends upon the
ability of these partner companies to deliver compelling Internet content,
products or services to their targeted consumers. Internet users can freely
navigate and instantly switch among a large number of web sites. Many of these
web sites offer original
content, products or services, which may make it difficult for our partner
companies to distinguish the content on their web sites to attract a loyal base
of users. In addition, our partner companies will need to develop relationships
with entities, such as Internet service providers, Internet portals and e-
commerce web sites, typically called distribution partners, that can guide or
deliver consumers to visit our partner companies' web sites. There is intense
competition for these distribution partners. Accordingly we expect that
maintaining a strong base of distribution partners will be difficult and costly
for our partner companies.
Competition with our partner companies from larger, more established
competitors with greater financial resources could result in price reductions,
reduced profitability and loss of customers. Each of our initial partner
companies faces, and our future partner companies, if any, will face, intense
competition from better capitalized and more established Internet-related
businesses. The major competitors or potential competitors of our partner
companies include:
.MEI: .Blue Rock Avenue:
.Advanced Solutions, Inc. .911 Gifts.com
.Ablaze Business Systems, Inc. .eGift.com
. Technology, Management and Analysis Corporation
.BravoGifts.com, Inc.
.Peopleware, Inc. .AGC, Inc.
.CyberSERV, Inc. .Send.com
.Buyline: .Hooey:
.Respond.com, Inc. .eBay Inc.
.Imandi Corporation .build.com
.BizBuyer.com, Inc. .Artus
.Artisannet.com
.VIPRO:
.bluemercury:
.McAfee Corporation
.Eve.com, Inc.
.Urban Box Office: .Gloss.com
.Sephora
.BET.com
.beautyjungle.com
.NetNoir, Inc.
.ibeauty.com
.Afronet
.BlackVoice.com
.MTV Networks Online
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Many of our partner companies' competitors have greater brand recognition
and greater financial, marketing and other resources than our partner
companies. This may place our partner companies at a disadvantage in responding
to their competitors' pricing strategies, technological advances, advertising
campaigns, strategic partnerships and other initiatives. In addition, most of
our initial partner companies do not have operational web sites, while their
significant competitors are leaders in their market niches. The failure of our
initial partner companies to quickly develop web sites that provide quality
content and services could result in significant losses and could cause them to
cease operations. If our partner companies are unable to compete successfully
against their competitors, our partner companies may fail, resulting in a loss
of our investment.
Some of our partner companies may be unable to protect their proprietary
rights and may infringe on the proprietary rights of others, which could result
in costly litigation and distract management. The complexity of international
trade secret, copyright, trademark and patent law, coupled with the limited
resources of our partner companies and pressure to provide quick delivery of
products and services to market, creates risk that our partner companies'
efforts to protect their intellectual property will prove inadequate. Further,
the nature of Internet business demands that considerable detail about our
partner companies' innovative processes and techniques be exposed to
competitors, because it must be presented on the web sites to attract
customers. Some of our partner companies also license content from third
parties and it is possible that they could become subject to infringement
actions based upon the content licensed from those third parties. Any claims
against our partner companies' proprietary rights, with or without merit, could
subject our partner companies to costly litigation and the diversion of their
technical and management personnel. If our partner companies incur costly
litigation and their personnel are not effectively deployed, the expenses and
losses incurred by our partner companies will increase and their profits, if
any, will decrease.
Our partner companies' computer and communications systems could fail, which
might discourage content providers from using our partner companies' systems
and customers from visiting their web sites. Our partner companies' businesses
depend on the efficient and uninterrupted operation of their computer and
communications hardware systems. Any system interruptions that cause our
partner companies' web sites to be unavailable to web browsers may reduce the
attractiveness of our partner companies' web sites to third-party content
providers and visitors. If third-party content providers are unwilling to use
our partner companies' web sites, our business, financial condition and
operating results could be adversely affected. Interruptions could result from
natural disasters as well as power loss, telecommunications failure and similar
events.
Our partner companies may be unable to acquire or maintain easily
identifiable web site addresses or prevent third parties from acquiring web
site addresses similar to theirs. Some of our partner companies hold various
web site addresses relating to their brands. These partner companies may not be
able to prevent third parties from acquiring web site addresses that are
similar to their addresses, which could adversely affect the use by businesses
of our partner companies' web sites. In these instances, our partner companies
may not grow as we expect. The acquisition and maintenance of web site
addresses generally is regulated by governmental agencies and their designees.
The regulation of web
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site addresses in the United States and in foreign countries is subject to
change. As a result, our partner companies may not be able to acquire or
maintain relevant web site addresses in all countries where they conduct
business. Furthermore, the relationship between regulations governing such
addresses and laws protecting trademarks is unclear.
If the security measures of our partner companies fail, they may lose
customers or be sued, which would negatively affect their financial
performance. The secure transmission of confidential information over public
telecommunications facilities is a significant barrier to e-commerce and
communications on the Internet. Many factors may cause compromises or breaches
of the security systems used by our partner companies or other Internet sites
to protect proprietary information, including:
. advances in computer and software functionality; or
. new discoveries in the field of cryptography.
A compromise of security on the Internet would have a negative effect on the
use of the Internet for commerce and communications. This in turn would have a
negative effect on our partner companies and our results of operations and
could have a negative effect on our stock price. Protecting against the threat
of security breaches or alleviating problems caused by breaches may require our
partner companies to expend significant capital and other resources. When the
activities of our partner companies involve the storage and transmission of
proprietary information, such as credit card numbers, security breaches may
expose them to a risk of loss or litigation and possible liability. There is no
guarantee that their security measures will prevent security breaches.
Partner companies, like MEI, that sell products may lose existing customers
or be unable to attract new customers if they do not develop new products or if
their products contain defects. If our partner companies that sell products are
not able to maintain and improve their product lines and develop new products
that keep pace with competitive product introductions and technological
developments, satisfy diverse and evolving customer requirements and achieve
market acceptance, they may lose existing customers or be unable to attract new
customers. MEI has experienced delays in releasing new products and product
enhancements and may experience similar delays in the future. These delays or
problems in the installation or implementation of new releases, as well as
defects in these products, may cause customers to forego purchases of MEI's
products to purchase those of its competitors.
MEI's operating results may vary significantly due to its lengthy sales and
implementation cycles for its products, which could negatively affect our
results of operations. Because MEI's products and services have lengthy sales
and implementation cycles, it is difficult for MEI to forecast the timing and
recognition of revenues from sales of its products and services. The period of
time between initial customer contact and a purchase order may span several
months. Since MEI is unable to control many of the factors that will influence
its customers' buying decisions, the lengthy sales cycle could cause its
operating results to be below the expectations of analysts and investors, which
could cause our stock price to fall. During the evaluation period, a variety of
factors may lead customers not to purchase or to scale down orders of MEI's
products including:
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. reduction in demand for association management software;
. introduction of new products by competitors or pricing pressures;
. changes in MEI's customers' budgets and purchasing priorities; and
. diversion of resources and management's attention to other information
technology issues.
In addition, MEI is often required to educate its prospective customers
regarding the use and benefit of its products, which may cause additional
delays during the evaluation and acceptance process.
If MEI discovers software defects, it may have product-related liabilities
that may lead to loss of revenue or delay in market acceptance for its
products. MEI's software products are complex and may contain errors, defects
or failures, especially when first introduced or when new versions are
released. In the past MEI has discovered software errors in some of its
products after their introduction. Despite extensive testing, MEI may not be
able to detect and correct errors in products or releases before commencing
commercial shipments, which may result in loss of revenue or delays in market
acceptance. MEI's license agreements with its customers typically contain
provisions designed to limit its exposure to potential product liability
claims. All jurisdictions may not enforce these limitations. Although MEI has
not experienced any product liability claims to date, it may encounter claims
in the future. Product liability claims, whether or not successful, brought
against MEI could divert the attention of its management and key personnel and
could be expensive to defend.
Our business will suffer if any of our systems, or the products or systems
of our partner companies, fail to be year 2000 compliant. Many currently
installed computer systems and software products are coded to accept only two
digit entries in the date code field. These date code fields will need to
accept four digit entries to distinguish 21st century dates from 20th century
dates. As a result, many companies will need to update or replace their
software and computer systems to comply with year 2000 requirements. We will
evaluate the year 2000 compliance of any business in which we invest and of
third-party equipment and software that we use in both information technology
and non-information technology applications in our business. Examples of non-
information technology systems include our building security and voice mail
systems.
Based upon contractual representations made by our partner companies and an
assessment by our executive officers of systems and products of MEI and VIPRO,
which are our only partner companies that currently have any systems operating,
we do not anticipate costs associated with the year 2000 issue to have a
material financial impact on us or any of our partner companies. MEI has
allocated $100,000 to address remaining year 2000 issues prior to year end.
There may, however, be interruptions or other limitations of financial and
operating systems' functionality, and our partner companies may incur
additional costs to avoid these interruptions or limitations. In addition, our
partner companies may incur substantial costs to avoid product and service
interruptions. Our expectations about future costs associated with the year
2000 issue are limited by uncertainties that could cause actual costs to have a
greater financial impact than currently anticipated. Factors that could
influence the amount and timing of future costs
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include:
. the amount and magnitude of year 2000 issues encountered by our partner
companies, which could cause those businesses to incur costs or losses
or cause us to make additional investments in those businesses to help
pay for their costs of year 2000 compliance;
. our partner companies' success in identifying systems and programs that
contain two-digit year codes;
. the nature and amount of programming required to upgrade or replace any
affected programs;
. the rate and magnitude of related labor and consulting costs; and
. our success in addressing year 2000 issues with third-parties with which
our partner companies do business.
Our inability or the inability of our partner companies to successfully
become year 2000 compliant could result in system failures or miscalculations,
causing disruptions of operations, reductions in revenues and increases in our
expenses.
A drop in demand for Internet services and commerce or failure of components
of the Internet's infrastructure may cause a reduction in the value of our
partner companies. The businesses of our partner companies, and thus our
financial results, will rely on demand for access to the Internet and for
products and services related to the Internet. Recently introduced Internet-
related products and services may not be accepted in the market. Commerce and
communication over the Internet may not continue to develop and expand as
expected, and even if they do, the products and services offered over the
Internet by our partner companies may not become widely adopted for these
purposes.
Our partner companies will not grow as we expect if:
. the market for Internet services and commerce fails to continue to
develop;
. the Internet market develops more slowly than expected;
. the Internet market becomes saturated with competitors; or
. the Internet-related products and services offered by our partner
companies are not widely accepted.
The Internet's infrastructure may not be able to support the demands placed
on it by this continued growth without decreases in its performance or
reliability. Any outages or delays in services using the Internet could lower
the level of Internet usage. In addition, the infrastructure and complementary
products and services necessary to make the Internet a viable commercial
marketplace may not continue to develop. If usage of the Internet is curtailed
due to infrastructure constraints or lack of complementary products, we expect
an adverse impact on the business of our partner companies and a reduction in
the value of our partner companies.
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Future governmental regulation affecting the Internet could reduce the sales
and increase the operating costs of our partner companies, resulting in reduced
earnings. With the exception of regulation applicable to businesses generally,
most Internet businesses are not currently regulated by any government agency.
Due to increasing popularity and use of the Internet, however, it is possible
that a number of laws may be adopted that will apply to the Internet and will
affect our partner companies and our financial results. These potential laws
cover issues including:
. user privacy;
. dissemination of information;
. pricing of goods and services offered; and
. types of products and services offered.
An example of the types of laws that may be adopted to regulate use of the
Internet is the Telecommunications Act of 1996. The Telecommunications Act
prohibited the transmission over the Internet of some types of information.
Although the Telecommunications Act was held unconstitutional, similar laws may
be enacted in the future. Other nations, including Germany, have taken similar
actions to restrict the flow of information deemed to be objectionable on the
Internet. In addition, some telecommunications carriers continue to advocate
that telecommunications over the Internet should be regulated by the Federal
Communications Commission in the same manner as other telecommunications
services. These telecommunications carriers want to see the government
eliminate the current exemption from payment of telecommunications access
charges for Internet service providers.
If the government adopts any additional laws or regulations governing use of
the Internet, these actions could decrease the growth of the Internet or
increase the costs of doing business for Internet-focused companies. Finally,
the sales of goods and services by our partner companies may be reduced and the
costs of producing those goods and services may be increased if existing U.S.
state and federal laws and foreign laws governing issues such as commerce,
taxation, property ownership, defamation and personal privacy are increasingly
applied to the Internet.
RISKS RELATING TO THIS OFFERING
We will have significant discretion in the use of the proceeds of this
offering, and if we do not find suitable businesses to develop, operate, invest
in or acquire, the value of your investment in our company will decline. We
will have broad discretion over how we use the proceeds of this offering. We
may not identify or complete enough attractive investments or acquisitions to
generate an adequate return for our stockholders. Even if we successfully
identify and acquire interests in additional partner companies, it may take
considerable time to use all the proceeds of this offering.
Our stock price may not reflect the value of our assets. Prior to this
offering, there has been no public market for our common stock. Due to various
factors, including the difficulty in valuing our partner companies, concerns
about liquidity and possible adverse changes to, or perceptions of, the
Internet industry, the trading price of a share of our common stock may be
below the book value per share of our assets or the underlying value
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of our partner companies. The initial public offering price for our common
stock has been determined by negotiation between us and the representatives of
the underwriters. Among the factors considered in determining the public
offering price were:
. an assessment of our management team, board of directors and advisory
board;
. the opportunity to develop, operate and invest in start-up companies in
the Internet industry;
. the financial condition and results of operations of our partner
companies;
. prevailing market conditions in the U.S. economy and the Internet
industry; and
. the market capitalizations and stages of development of other companies
that the representatives of the underwriters believe to be comparable to
us.
We expect that the future price of our stock will be dependent upon the
market perception of our partner companies. Our assets will consist primarily
of ownership interests in Internet-related businesses and technologies. Many of
these businesses will be private companies, which will make it difficult to
determine the value of our interest in them. In addition, it will be difficult
to assess the potential liquidity of our interests and at what time we may
realize a return on an investment in one or more of our partner companies.
Fluctuations in our quarterly results may adversely affect our stock price.
If our operating results in one or more quarters do not meet securities
analysts' expectations, the price of our common stock could decline. We expect
that our quarterly results will fluctuate significantly due to many factors,
including:
. the operating results of our partner companies;
. completed investments or acquisitions;
. changes in our methods of accounting for our partner company interests
that may result from changes in our ownership percentages of our partner
companies;
. sales of equity securities by our partner companies that could cause us
to recognize gains or losses under applicable accounting rules;
. management of our growth and that of our partner companies; and
. divestiture of our interests in our partner companies.
Our stock price may be highly volatile. The market price of our common stock
is likely to be highly volatile and could fluctuate widely. In particular, the
Nasdaq Stock Market has experienced extreme price and volume fluctuations that
have particularly affected the market prices of equity securities of many
technology companies and have often been unrelated or disproportionate to the
operating performance of these companies. The trading prices of many technology
companies' stocks are at or near historical highs. We cannot assure you that
these high trading prices are sustainable or that our common stock will trade
at the same levels as other technology companies' stocks.
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The following factors will add to the volatility of the price of our common
stock:
. actual or anticipated variations in our quarterly operating results and
those of our partner companies;
. new products or services, or new sales formats offered by our partner
companies and their competitors;
. changes in our financial estimates and those of our partner companies by
securities analysts;
. conditions or trends in the Internet industry in general;
. announcements by our partner companies and their competitors of
technological innovations;
. announcements by us, our partner companies, our competitors or
competitors of our partner companies, of significant acquisitions,
strategic partnerships or joint ventures;
. changes in the market valuations of our partner companies and other
Internet companies;
. our capital commitments;
. additions or departures of our key personnel and key personnel of our
partner companies; and
. sales of our common stock.
Many of these factors are beyond our control. These factors may result in
decreases in the market price for our common stock, regardless of our operating
performance.
You will experience immediate and substantial dilution and pay a higher
price for our common stock than existing stockholders. The price you will pay
for our common stock will be substantially higher than the $.01 per share paid
by the majority of existing stockholders for their shares. As a result,
assuming an initial offering price of $13.00, you will experience immediate and
substantial dilution of $6.35 of tangible book value per share.
Future sales of our common stock in the public market could lower our stock
price and impair our ability to raise funds in new stock offerings. Assuming
the underwriters do not exercise their over-allotment option and including
459,242 shares of common stock issuable upon conversion of the convertible
notes held by Northwood and assuming no shares are issued in connection with
the repayment of accrued but unpaid interest on these notes, upon completion of
this offering, we will have 14,990,911 shares of common stock outstanding, of
which 4,990,911 shares will be "restricted shares." In addition, we may issue
in the future additional shares of common stock as consideration for our
investments. Sales of a substantial amount of common stock in the public
market, or the perception that these sales may occur, could adversely affect
the market price of our common stock prevailing from time to time in the public
market and could impair our ability to raise funds in additional stock
offerings.
24
<PAGE>
The shares of common stock sold in this offering will be freely tradable
without further restriction or further registration under the Securities Act,
except for shares purchased by an affiliate of ours, sales of which will be
limited by Rule 144 under the Securities Act. Holders of restricted shares
generally will be entitled to sell these shares in the public market without
registration either under Rule 144 or Rule 701 or any other applicable
exemption under the Securities Act.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about E2E and our
industry. We generally identify forward-looking statements in this prospectus
using words like "believe," "intend," "expect," "may," "will," "should,"
"plan," "project," "contemplate," "anticipate" or similar statements. These
statements are based on our beliefs as well as assumptions we made using
information currently available to us. Because these statements reflect our
current views concerning future events, these forward-looking statements
involve risks, uncertainties and assumptions about us and our partner
companies, including among other things:
. development of an e-commerce market;
. our ability to identify trends in our markets and the markets of our
partner companies and to offer new solutions that address the changing
needs of these markets;
. our ability to successfully execute our business model;
. our partner companies' ability to compete successfully against direct
and indirect competitors;
. our ability to acquire interests in additional companies;
. growth in demand for Internet products and services; and
. continued use of the Internet as an advertising medium.
In light of these risks, uncertainties and assumptions, our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of many factors that are more fully described in "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" and elsewhere in this prospectus. We are
not obligated to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
25
<PAGE>
USE OF PROCEEDS
We estimate that we will receive approximately $118.9 million in net
proceeds from this offering based on an assumed public offering price of $13.00
per share. This amount reflects deductions from the gross proceeds of the
offering of:
. approximately $9.1 million, which will be retained by the underwriters
as discounts and commissions; and
. $2.0 million, representing our estimated expenses for this offering.
Approximately $42.1 million of the net proceeds will be used to acquire
additional equity interests in our partner companies. These proceeds will be
used as follows:
. MEI--$24.0 million to acquire 100% of MEI;
. Buyline--$12.0 million to acquire an 80.0% equity interest;
. VIPRO--$2.0 million to increase our equity interest to 32.9%;
. Urban Box Office--$2.0 million to increase our equity interest to 20.8%;
. Blue Rock Avenue--$1.0 million to increase our equity interest to 40.0%;
. Hooey--$637,500 to increase our equity interest to 34.0%; and
. bluemercury--$500,000 to increase our equity interest to 45.0%.
In addition, we will use $4.5 million of the net proceeds to repay the
outstanding indebtedness under a note held by Jonathan Ledecky, a stockholder
of ours. Interest accrues under the note at the rate equal to J.P. Morgan's
prime rate, which was 8.25% as of September 1, 1999. This note is payable upon
the closing of this offering and is secured by our interests in our partner
companies. We used the proceeds of this loan as follows:
$1,000,000 for our initial investment in Urban Box Office;
$500,000 for our initial investment in Blue Rock Avenue;
$637,500 for our initial investment in Hooey;
$500,000 for our initial investment in bluemercury; and
$1,862,500 for our general and administrative expenses and transaction
costs.
We will use the remaining net proceeds, approximately $72.3 million, for
working capital and to develop, operate, invest in, acquire and support
Internet-related business including additional investments in our current
partner companies. Of that $72.3 million, we anticipate using approximately
$8.0 million for corporate overhead and administrative costs over the next
twelve months.
We have not identified any other businesses or other assets to acquire using
the net proceeds of this offering. Until appropriate partner companies are
identified, we intend to invest those net proceeds temporarily in interest-
bearing securities.
This use of proceeds does not reflect the exercise of the underwriters'
over-allotment option. We estimate that we will receive approximately $18.1
million in additional net proceeds if the underwriters exercise their over-
allotment option in full. Proceeds from
26
<PAGE>
exercise of the underwriters' over-allotment option, if any, will also be used
for working capital and to develop, operate, invest in, acquire and support
Internet-related businesses.
DIVIDEND POLICY
We do not intend to pay dividends on our common stock in the foreseeable
future. Instead, we will retain our earnings to finance our investments and for
general corporate purposes.
27
<PAGE>
CAPITALIZATION
The following table shows our capitalization on an actual basis as of June
30, 1999 and on a pro forma combined basis to reflect (1) our probable
acquisition of MEI and probable investment in Buyline, (2) our completed and
committed investments in Urban Box Office, Blue Rock Avenue, Hooey, bluemercury
and (3) our issuance of $4.0 million in convertible notes to Northwood.
The table also shows our capitalization as of June 30, 1999 on a pro forma
basis as adjusted to reflect (1) the public offering of 10,000,000 shares of
our common stock at $13.00 per share and the application of the net proceeds
from the offering after deducting estimated underwriting discounts and
commissions and estimated offering expenses and (2) the automatic conversion of
the Northwood convertible notes into 459,242 shares of common stock.
Common stock data excludes:
. 1,500,000 shares subject to the underwriters' over-allotment option;
. outstanding warrants to purchase 400,000 shares at an exercise price
equal to the initial public offering price;
. 3,000,000 shares of common stock reserved for issuance under our stock
option plan, under which options to purchase 1,850,000 shares were
outstanding as of the date of this prospectus at a weighted average
price of $12.55 per share, assuming an initial public offering price of
$13.00 per share; and
. additional shares for accrued interest under the Northwood notes.
<TABLE>
<CAPTION>
June 30, 1999
--------------------------------------
Pro forma
Pro forma combined as
Actual combined adjusted
----------- ----------- ------------
<S> <C> <C> <C>
Line of credit......................... $ -- $ 1,000,000 $ 1,000,000
Capital lease obligation, current
portion............................... -- 83,838 83,838
Notes payable.......................... -- 840,620 840,620
Payable to stockholders of MEI......... -- 24,000,000 --
License agreement payable, current
portion............................... -- 586,662 586,662
----------- ----------- ------------
Total short-term debt.............. $ -- $26,511,120 $ 2,511,120
=========== =========== ============
Long-term debt......................... $ -- $ 794,820 $ 794,820
Due to stockholder..................... 3,410,060 7,547,560 --
Convertible note....................... -- 2,030,457 --
Shareholders' equity:
Common stock, par value $.01;
100,000,000 shares authorized;
4,358,669 shares issued and
outstanding-actual; 4,358,669 shares
issued and outstanding-pro forma
combined; 14,817,911 shares issued
and outstanding-pro forma as
adjusted............................ 43,587 43,587 148,179
Common stock subscription
receivable.......................... (4,325) (4,325) (4,325)
Capital in excess of par value....... 33,738,816 37,678,508 160,473,916
Deficit accumulated during
development stage................... (27,839,735) (29,809,884) (31,779,427)
----------- ----------- ------------
Total stockholders' equity......... 5,938,343 7,907,886 128,838,343
----------- ----------- ------------
Total capitalization................... $ 9,348,403 $18,280,723 $129,633,163
=========== =========== ============
</TABLE>
28
<PAGE>
DILUTION
Our pro forma combined net tangible negative book value at June 30, 1999 was
$22.4 million or $(5.13) per share. Pro forma combined net tangible negative
book value per share is equal to our tangible assets less our total
liabilities, divided by the total number of shares of our common stock
outstanding.
After giving effect to:
. the issuance and sale by us of 10,000,000 shares of our common stock in
this offering at an assumed initial public offering price of $13.00 per
share, and the receipt and use of the estimated net proceeds of $118.9
million; and
. the conversion of the Northwood convertible notes into 459,242 shares of
common stock upon completion of this offering assuming an offering price
of $13.00 per share, excluding additional shares for accrued interest,
our pro forma as adjusted net tangible book value at June 30, 1999 would have
been $98.6 million or $6.65 per share. This represents an immediate increase in
net tangible book value of $11.78 per share to existing stockholders and an
immediate dilution of $6.35 per share to new investors purchasing shares of our
common stock in this offering. The following table illustrates the per share
dilution to the new investors.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $13.00
Pro forma net tangible negative book value per share at
June 30, 1999............................................ $(5.13)
Increase per share attributable to this offering.......... 11.78
Pro forma as adjusted net tangible book value per share
after this offering........................................ 6.65
------
Dilution per share to new investors in this offering........ $ 6.35
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1999,
the total number of shares of our common stock purchased from us, the total
consideration paid and the average price per share paid by the existing
stockholders and by the new investors in this offering at an assumed public
offering price of $13.00 per share and before deducting estimated underwriting
discounts and commissions and our estimated offering expenses:
<TABLE>
<CAPTION>
Average
Shares purchased Total consideration price
------------------ -------------------- per
Number Percent Amount Percent share
---------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 4,817,911 32.51% $ 4,043,587 3.02% $ 0.84
New investors................... 10,000,000 67.49% 130,000,000 96.98% $13.00
---------- ------- ------------ -------
Total......................... 14,817,911 100.00% $134,043,587 100.00% $ 9.05
========== ======= ============ =======
</TABLE>
The table above assumes the conversion of the Northwood convertible notes
into shares of common stock that are reflected as being held by existing
stockholders and that the underwriters do not exercise their over-allotment
option. If underwriters exercise their over-allotment option in full, we will
issue and sell an additional 1,500,000 shares.
29
<PAGE>
The discussion and tables above also assume no exercise of any stock options
outstanding as of June 30, 1999 or any common stock warrants. As of the date of
this prospectus, there were (1) options outstanding to purchase a total of
1,850,000 shares of common stock at a weighted average exercise price of $12.55
per share, assuming an initial public offering price of $13.00 per share, (2)
1,150,000 shares reserved for future grant under our stock option plan and (3)
400,000 common stock warrants at an exercise price equal to the initial public
offering price. To the extent that any of these shares are issued, there will
be further dilution to new investors.
30
<PAGE>
SELECTED FINANCIAL DATA
We have derived the following selected financial data as of and for the
periods indicated from the financial statements of E2E, and the unaudited pro
forma combined financial information included elsewhere in this prospectus.
You should read the information contained in this table together with the
sections entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Use of Proceeds" and the financial statements
of E2E and the unaudited pro forma combined financial statements included
elsewhere in this prospectus.
Historical E2E Financial Data:
<TABLE>
<CAPTION>
Cumulative
from
September 1, 1998 inception to
(inception) to Six months ended June 30,
December 31, 1998(1) June 30, 1999(5) 1999
-------------------- ---------------- ------------
<S> <C> <C> <C>
Statement of Operations
Data:
General and administrative
expense.................. $ 79,698 $ 644,617 $ 724,315
Stock compensation(2)..... -- 26,288,080 26,288,080
Equity in loss of
investees(3)............. -- 798,614 798,614
--------- ------------ ------------
Total expenses............ 79,698 27,731,311 27,811,009
--------- ------------ ------------
Interest expense.......... -- 28,726 28,726
--------- ------------ ------------
Net loss.................. $ (79,698) $(27,760,037) $(27,839,735)
========= ============ ============
Basic and diluted loss per
common share............. $ (.05) $ (12.47) $ (14.39)
========= ============ ============
Weighted average shares
outstanding(4)........... 1,500,000 2,226,513 1,933,989
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ ----------
<S> <C> <C>
Balance Sheet Data:
Current assets......................................... $ -- $ 100,049
Total assets........................................... 6,288 9,937,401
Total liabilities...................................... 85,886 3,999,058
Total stockholders' (deficit) equity................... (79,598) 5,938,343
</TABLE>
(1) Represents the combined results of E2E and Ironbound Partners LLC. On May
14, 1999, Ironbound was merged with E2E and ceased to exist. See Note 1 of
Notes to Combined Financial Statements for a description of E2E's business
and organization.
(2) See Note 4 of Notes to Combined Financial Statements for a description of
stock compensation expenses.
(3) See Note 3 of Notes to Combined Financial Statements for a description of
accounting for the partner company investments.
(4) See Note 2 of Notes to Combined Financial Statements for a description of
the method used to compute basic and diluted net loss per share.
(5) Includes investments in four-partner companies in May 1999.
31
<PAGE>
Historical MEI -- Financial Data
The selected financial data shown below of MEI Software Systems, Inc., our
predecessor, as of and for the years ended December 31, 1994, 1995, 1996, 1997
and 1998 has been derived from MEI's financial statements. The statement of
operations data for the year ended December 1994 and 1995 and the balance sheet
data as of December 31, 1994 and 1995 are unaudited, and, in MEI management's
opinion, include all of the adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the information.
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ 4,861,652 $ 5,015,369 $ 3,950,054 $ 5,714,282 $ 9,299,237
Cost of revenue......... 4,046,160 2,701,331 3,084,328 3,771,236 5,323,025
Gross profit............ 815,492 2,314,038 865,726 1,943,046 3,976,212
Operating expenses:
Sales and marketing.... 843,562 688,980 402,281 497,631 1,268,628
Research and
development........... 260,130 779,205 471,579 1,147,797 1,990,079
Stock compensation..... -- -- -- -- 163,290
General and
administrative........ 1,021,322 1,113,776 391,097 692,355 1,646,903
----------- ----------- ----------- ----------- -----------
Total operating
expense.............. 2,125,014 2,581,961 1,264,957 2,337,783 5,068,900
----------- ----------- ----------- ----------- -----------
Loss from
operations.......... (1,309,522) (267,923) (399,231) (394,737) (1,092,688)
Other income............ -- (181,425) --
Interest expense........ 136,548 66,918 62,390 29,279 82,119
----------- ----------- ----------- ----------- -----------
Net loss............... (1,446,070) (334,841) (461,621) (242,591) (1,174,807)
----------- ----------- ----------- ----------- -----------
Accretion on manditorily
redeemable convertible
preferred stock........ (304,726) (363,527) (364,077) (363,626) (364,188)
----------- ----------- ----------- ----------- -----------
Net loss available to
common stockholders... $(1,750,796) $ (698,368) $ (825,698) $ (606,217) $(1,538,995)
=========== =========== =========== =========== ===========
Basic and diluted loss
per common share....... $ (0.49) $ (0.20) $ (0.23) $ (0.17) $ (0.38)
=========== =========== =========== =========== ===========
Weighted average shares
outstanding............ 3,541,500 3,541,500 3,543,379 3,543,705 4,028,185
<CAPTION>
December 31,
---------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Current assets.......... $ 1,140,510 $ 1,005,015 $ 871,056 $ 1,510,493 $ 3,375,765
Total assets............ 1,481,945 1,203,133 1,005,508 1,701,296 4,148,627
Total liabilities....... 2,447,758 2,503,787 2,767,682 3,706,010 5,585,260
Total mandatorily
redeemable securities.. 3,619,806 3,983,333 4,347,410 4,711,036 6,592,218
Total stockholders'
deficit................ (4,585,619) (5,283,987) (6,109,584) (6,715,750) (8,028,851)
</TABLE>
32
<PAGE>
Unaudited Pro Forma Financial Data
Our June 30, 1999 pro forma combined historical amounts have been adjusted
to reflect (1) our consummated and committed investment in Urban Box Office,
Blue Rock Avenue, Hooey, bluemercury, (2) our probable investment in Buyline
and probable acquisition of MEI and (3) our issuance of $4.0 million in
convertible notes and 400,000 common stock warrants.
The pro forma combined, as adjusted amounts reflect this offering and the
conversion of the $4.0 million in convertible notes to common stock.
<TABLE>
<CAPTION>
Pro forma Pro forma
combined Pro forma combined
September 1, combined as adjusted
1998 six months six months
(inception) ended ended
to December June 30, June 30,
31, 1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Statement of Operations Data:
Revenue............................. $ 9,299,237 $ 6,140,540 $ 6,140,540
Cost of revenue..................... 5,323,025 3,808,869 3,808,869
Operating expenses:
Sales and marketing................ 1,268,628 1,013,006 1,013,006
Research and development........... 1,990,079 1,251,568 1,251,568
Stock compensation................. 163,290 26,552,101 26,552,101
Amortization expense............... 8,603,977 4,440,020 4,440,020
General and administrative......... 1,726,601 1,635,105 1,635,105
------------ ------------ ------------
Total operating expense........... 13,752,575 34,891,800 34,891,800
------------ ------------ ------------
Loss from operations............. (9,776,363) (32,560,129) (32,560,129)
------------ ------------ ------------
Interest expense.................... 82,119 2,036,584 4,006,127
Equity in loss of investees......... -- 1,413,714 1,413,714
Minority interest in earnings of
subsidiaries....................... -- (14,651) (14,651)
------------ ------------ ------------
Net loss........................... (9,858,482) (35,995,776) (37,965,319)
------------ ------------ ------------
Accretion on mandatorily redeemable
securities......................... (364,188) (382,168) (382,168)
------------ ------------ ------------
Net loss available to
common stockholders............... $(10,222,670) $(36,377,944) $(38,347,487)
============ ============ ============
Basic and diluted loss per
common share....................... $ (4.11) $ (6.18) $ (6.51)
============ ============ ============
Weighted average shares
outstanding........................ 2,485,113 5,886,328 5,886,328
<CAPTION>
June 30, 1999
--------------------------
Pro forma
Pro forma combined as
combined adjusted
------------ ------------
<S> <C> <C> <C>
Balance Sheet Data:
Current assets...................... $ 7,752,856 $106,205,296
Total assets........................ 53,372,065 151,238,066
Total liabilities................... 45,464,179 22,399,723
Total stockholders' deficit......... 7,907,886 128,838,343
</TABLE>
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read together with "Selected Financial
Data," "Unaudited Pro Forma Combined Financial Statements" and the Financial
Statements and related Notes of E2E, MEI, Buyline, Blue Rock Avenue,
bluemercury, Hooey and Urban Box Office, that appear elsewhere in this
prospectus.
Overview
E2E was an entity under common control with Ironbound Partners LLC, a
Delaware limited liability corporation, which was incorporated in September
1998. E2E, a Delaware corporation, was incorporated on February 9, 1999. On May
14, 1999, Ironbound Partners LLC was merged with and into E2E and ceased to
exist. The combination of Ironbound Partners LLC and E2E is further discussed
in the E2Enet, Inc. Historical Financial Statements.
We are engaged in Internet-related B2B and B2C businesses through a network
of partner companies. As of June 30, 1999, we had invested in and were
committed to make additional investments in four companies, all of which are
considered development stage companies. From July through September 1999, we
signed agreements to own or make investments in three additional companies, all
but one of which are considered development stage companies. Because we have
acquired significant interests in early stage Internet-based companies that are
currently generating net losses, we expect that we will report net losses for
the foreseeable future. Additionally, we also anticipate that we will
experience significant volatility from period to period due to one-time
transactions and other events related to our ownership interests in and
advances to our partner companies. On an ongoing basis, we intend to evaluate
the carrying value of our ownership interest in each of our partner companies
for possible impairment based on:
. achievement of business plan objectives and milestones;
. the fair value of each ownership interest in the partner company
relative to carrying value;
. the financial condition and prospects of the partner company; and
. other factors.
The business plan objectives and milestones we consider include:
. financial factors related to achieving budget and planned financial
results;
. raising additional outside capital;
. completing operational objectives such as hiring employees and
establishing sales, distribution and marketing relationships; and
. launching of a web site.
Additionally, we also consider the values at which parties other than E2E have
invested in our partner companies.
34
<PAGE>
Accounting for Investments
The interests that we acquire in our partner companies are accounted for
under three broad methods: consolidation, equity method and cost method. The
applicable accounting method is generally determined based on our ability to
exercise significant influence over the operating and financial policies of the
partner company. This would generally be evidenced by the percentage of
ownership in the partner company.
Consolidation. Partner companies in which we directly or indirectly own more
than 50% of the outstanding voting securities are generally consolidated with
us. For example, a partner company's results of operations are reflected within
our statement of operations. Participation of other partner company
stockholders in the earnings or losses of a consolidated partner company is
reflected in the caption "minority interest" in our statement of operations.
Minority interest adjusts our consolidated net results of operations to reflect
only our share of the earnings or losses of the consolidated partner company.
On a pro forma combined basis, MEI was our only consolidated partner company
for the year-ended December 31, 1998. MEI and Buyline were our consolidated
partner companies on a pro forma basis for the six-month period ended June 30,
1999.
The acquisition of MEI has been accounted for using the purchase method of
accounting. The excess value of the consideration to be issued in the
acquisition of MEI over the fair value of the net assets to be acquired totals
approximately $25.8 million and is recorded as goodwill on our pro forma
balance sheet. Goodwill will be amortized as a non-cash charge to the statement
of operations over a period of three years.
Equity Method. Partner companies whose results we do not consolidate, but
over whom we exercise significant influence, are generally accounted for under
the equity method of accounting. Whether or not we exercise significant
influence with respect to a partner company depends on an evaluation of several
factors including, among others, representation on the partner company's board
of directors, ownership level, which is generally a 20% to 50% interest in the
voting securities of the partner company, and voting rights associated with our
holdings in common, preferred and other convertible instruments in the partner
company. Under the equity method of accounting, a partner company's results of
operations are not reflected within our statement of operations; however, our
share of the earnings or losses of the partner company is reflected in the
caption "equity in loss of investees" in the statement of operations. If our
equity investment represents the entire financing in an investee, we will
reflect the entire loss of that investee in our statement of operations. At
June 30, 1999, we accounted for four of our partner companies under the equity
method of accounting.
35
<PAGE>
Our partner companies accounted for under the equity method of accounting at
June 30, 1999 included:
<TABLE>
<CAPTION>
Ownership
Interest at
Equity Method Partner Company Since June 30, 1999
- ------------- --------------------- -------------
<S> <C> <C>
Urban Box Office............................ May 14, 1999 10%
Blue Rock Avenue............................ May 14, 1999 18%
Hooey....................................... May 14, 1999 20%
bluemercury................................. May 14, 1999 29%
</TABLE>
Cost Method. Partner companies that are not consolidated or accounted for
under the equity method are accounted for under the cost method. Under this
method, our share of the earnings or losses of these companies is not included
in our statement of operations unless earnings or losses are distributed. On a
pro forma combined basis, as of June 30, 1999, we did not account for any of
our partner companies under the cost method of accounting.
We expect to record our ownership interest in equity securities of our
partner companies accounted for under the cost method at cost, unless these
securities have readily determinable fair values based on quoted market prices,
in which case these interests would be classified as available-for-sale
securities or some other classification in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." We have no cost method or available-for-sale
investments at June 30, 1999.
Results of Operations--E2Enet, Inc.--Six Months Ended June 30, 1999
General and administrative
Our general and administrative costs consist primarily of employee
compensation and outside services such as legal, accounting and consulting. For
the six-month period ended June 30, 1999 our general and administrative costs
were $644,617. We plan to continue to hire new employees and build our overall
infrastructure both directly at the E2E corporate level and indirectly by
acquiring or acquiring interests in other partner companies.
Stock Compensation
We sold 2,392,000 shares of our common stock in May 1999 to some of our
employees, directors and other individuals at $.01 per share for gross proceeds
of $19,595 in addition to a subscription receivable of $4,325. The issuance of
these shares resulted in our recording compensation expense of $26.3 million in
the second quarter of 1999, as the shares were issued at a price below the fair
value of our stock at the date of issuance. Since this charge was recognized
fully in the period incurred there is no future amortization impact on
earnings.
Income Taxes
From the period of September 1, 1998, our date of inception, through May 14,
1999, we were organized as a limited liability company, and management elected
to be taxed as a
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partnership under the Internal Revenue Code. As a result, the taxable losses
accrued to the individual member; therefore, we did not record a provision for
income taxes for this period. On May 14, 1999, we reorganized as a
C corporation and became subject to federal and state corporate income taxes.
As of June 30, 1999, our net operating loss carryforward was $301,400.
We have recorded a valuation allowance related to our gross deferred tax
assets because we believe that it is more likely than not that we will fail to
realize the benefits of these assets. The assets related primarily to our net
operating loss carryforward and the excess of the tax basis over book basis of
our partner companies. The differences in basis represent capital losses for
tax purposes which, if recognized, can only be deducted to the extent of
capital gains. Additionally, these losses may be carried back three years and
carried forward five years from the year in which they occur. Most of our
partner companies are in the early stages of development, currently generating
significant losses and are expected to continue to generate significant losses
in the future. The marketability of the securities we own of our partner
companies is generally limited as they primarily represent ownership interests
in companies whose stock is not publicly traded. As a result, there is
significant risk that we may not be able to realize the benefits of loss
carryforwards before they expire.
Equity in Loss of Partner Companies
A significant portion of our results of operations is derived from companies
in which we hold a significant minority ownership interest. These companies are
accounted for under the equity method of accounting. Equity income and loss
fluctuates with the number of companies accounted for under the equity method,
the amortization of the goodwill related to newly acquired equity method
companies, and the net results of operations of these companies. During the six
months ended June 30, 1999, we utilized $10.0 million, including the value of
the shares of our common stock issued to the founders of our initial partner
companies at an assumed price of $11.00 per share, to acquire partner companies
accounted for under the equity method of accounting resulting in goodwill of
$7.6 million, all of which will be amortized over three years. We assume an
$11.00 per share value for our founder's stock based on a discount of
approximately 15% from the assumed initial public offering price. This discount
represents the estimated value of our probable acquisition and our probable
investments entered into subsequent to June 30, 1999.
In the period ended December 31, 1998, we did not own any partner companies
that were accounted for under the equity method.
During the six months ended June 30, 1999, we accounted for four of our
partner companies under the equity method of accounting. These companies are
development stage enterprises, and they incurred significant losses for the six
months ended June 30, 1999. We recognized the entire loss of the investee
companies since the date of investment as we provided the entire amount of
partner company financing as of June 30, 1999. Our equity loss of $798,614 for
the six months ended June 30, 1999 consisted of $473,786 related to our share
of the equity method companies' losses and $324,828 of amortization of the
excess of cost over net book value of these companies.
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Liquidity and Capital Resources
Net cash used in development stage activities was $65,614 for the period of
September 1, 1998 through December 31, 1998 and $679,302 for the six months
ended June 30, 1999. Net cash used in development stage activities for the six
months ended June 30, 1999 resulted primarily from our net loss before non cash
charges for stock compensation and equity losses in partner companies, offset
in part by our increase in deferred offering costs and prepaid assets.
Net cash used in investing activities was $6,658 for the period of September
1, 1998 through December 31, 1998 and $2.7 million for the six months ended
June 30, 1999. Net cash used in investing activities for the six months ended
June 30, 1999 resulted from cash investments made to our partner companies.
Net cash provided by financing activities was $72,272 for the period of
September 1, 1998 through December 31, 1998 and $3.4 million for the six months
ended June 30, 1999. For each of these periods, net cash provided by financing
activities was primarily the result of borrowings from our founding
stockholder.
Additional investments or significant business developments in our partner
companies may result in the need for additional resources. Providing support to
underlying investment operations could result in these costs exceeding
estimates and funds being used sooner than anticipated.
Prior to this offering, we have funded our operations with $4.5 million of
borrowings under a note from a significant stockholder and the issuance of $4.0
million of convertible notes to Northwood.
Principal and interest are payable on the Ledecky note five days after the
closing of this offering, and will be repaid with the proceeds of this
offering. Simultaneous with the closing of this offering, the Northwood
convertible notes will convert into 459,242 shares of our common stock at a
price equal to $8.71 per share assuming an initial public offering price of
$13.00 per share, plus additional shares for accrued interest. If the offering
price is less than $13.00 per share, the conversion price of the Northwood
notes will be equal to 67% of the initial public offering price. In addition,
we have issued warrants to Northwood granting them the right to acquire 400,000
shares of our common stock at the initial offering price for a period of five
years from the completion of this offering. Following this offering, the
exercise price of the warrants is protected by an anti-dilution provision. The
$4.0 million principal amount of the convertible notes was allocated between
the value of the convertible notes and the warrants based on relative fair
values. This allocation results in a discount from the Northwood notes of $2.0
million, which will be recognized as interest expense through the conversion of
the notes. In addition, interest expense of $2.0 million will be recorded for
the beneficial conversion feature due to the conversion of the Northwood notes
at a discount from the initial offering price, assuming an initial offering
price of $13.00 per share.
As of June 30, 1999, we have invested $2.6 million in cash and have
outstanding commitments to invest an additional $4.1 million in our partner
companies. Subsequent to
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June 30, 1999, we signed agreements that contingently obligated us to fund
$38.3 million in additional investments. We have also made loans totalling
$950,000 to two of our partner companies. Beyond the next 12 to 18 months, we
will likely have to raise additional funds through the issuance of equity or
debt securities or obtain bank financing. If additional funds are raised
through equity securities, our existing shareholders may experience significant
dilution. We currently do not have any other source of liquidity and have no
plan or intention to obtain additional capital through debt or equity financing
in the next 12 months. If and when we require additional financing to implement
our business strategy or for other capital requirements, we may be unable to
obtain this financing on terms that we deem acceptable. We may also use our
common stock as a source of capital to provide a portion of the consideration
paid to acquire a partner company.
Following this offering, and after repayment of indebtedness, we will have
cash and cash equivalents of approximately $103.0 million, or $121.1 million if
the underwriters exercise their over-allotment option in full. We believe that
the cash and cash equivalents we will have following this offering will be
sufficient to fund our operations and investment program for the next 12
months. Based on currently anticipated levels of employment and growth to
support the proposed investment strategy, we estimate that our operating
expenses, which consist primarily of salaries, benefits, rent, professional
services, business development costs and other general administrative expenses
for the next 12 months will be approximately $8.0 million excluding direct
operating expenses of MEI and Buyline. MEI expects to fund its operating
expenses for the next 12 months through additional contributions to capital or
loans from E2E. Buyline expects to fund its operating expenses for the next 12
months with the proceeds of E2E's investment in Buyline.
Results of Operations--Partner Company Operations
MEI Software Systems, Inc.
On a pro forma combined basis, MEI will be one of our consolidated partner
companies. For the past 24 years, MEI has been a supplier of customized
software systems to manage databases of trade associations, professional
associations, fund raising organizations and chambers of commerce. MEI's
software enables the management of areas such as constituents, members,
meetings, subscriptions, committees, speakers, order entry and fulfillment,
advertisers, and continuing education.
MEI--Six Months Ended June 30, 1998 compared to Six Months Ended June 30,
1999
Revenues. Revenues increased 52.5% from $4.0 million for the six-month
period ended June 30, 1998 to $6.1 million for the six-month period ended June
30, 1999. The increase in revenues was primarily attributable to an increase in
the volume of professional services MEI provided and its acquisition of Phoenix
Solutions, Inc. on March 31, 1998.
Cost of Revenues. Cost of revenues increased 72.7% from $2.2 million for the
six-month period ended June 30, 1998 to $3.8 million for the six-month period
ended June 30, 1999. The increase in costs was primarily attributable to an
increase in service costs due to the increased volume of professional services
MEI provided, its acquisition of Phoenix Solutions, Inc. on
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March 31, 1998 and increasing salary and benefit costs. Cost of revenues as a
percentage of revenue increased from 55.0% for the period ended June 30, 1998
to 62.3% for the period ended June 30, 1999, primarily due to the utilization
of loss reserves established during 1996 and 1997 related to certain fixed-
price contracts during the six months ended June 30, 1998 and MEI's acquisition
of Phoenix Solutions, Inc.
Operating Expenses. Operating expenses increased 47.8% from $2.3 million for
the six month period ended June 30, 1998 to $3.4 million for the six-month
period ended June 30, 1999. The increase in operating expenses was primarily
attributable to (1) new lease agreements for both the corporate headquarters
and the primary operating facility for Phoenix Solutions, Inc., (2) research
and development efforts related to MEI's primary software product, including
the concurrent integration of Internet tools and functionality that were
acquired as part of a non-exclusive arrangement with another software
development company, (3) the addition of three sales staff and a professional
marketing manager, (4) an increase in the sales commission rate to provide
additional incentives to sales and marketing staff, (5) increasing salary and
benefit costs and (6) the acquisition of Phoenix Solutions, Inc. on March 31,
1998. Operating expenses as a percentage of revenue decreased from 57.5% for
the period ended June 30, 1998 to 55.7% for the period ended June 30, 1999,
primarily due to general and administrative expenses decreasing as a percentage
of total revenue as MEI achieved certain economies of scale from increased
revenue.
MEI--1997 compared to 1998
Revenues. Revenues increased 63.2% from $5.7 million in 1997 to $9.3 million
in 1998. The increase in revenues was primarily attributable to significant
increases in professional services and the acquisition of Phoenix Solutions,
Inc. on March 31, 1998.
Cost of Revenues. Cost of revenues increased 39.5% from $3.8 million in 1997
to $5.3 million in 1998. The increase is related to additional labor costs
resulting from an increase in professional services and MEI's acquisition of
Phoenix Solutions, Inc. on March 31, 1998. The cost of revenues as a percentage
of revenue decreased from 66.7% in 1997 to 57.0% in 1998, primarily due to the
utilization of loss reserves established in 1996 and 1997 related to fixed-
price contracts utilized during 1998.
Operating Expenses. Operating expenses increased 121.7% from $2.3 million in
1997 to $5.1 million in 1998. The increase in operating expenses was primarily
attributable to (1) ongoing software development costs related to enhancements
of MEI's primary product, (2) an increase in sales and marketing expense for
the promotion of two new products, (3) the hiring of a new vice president of
professional services, (4) the hiring of a chief executive officer, (5) the
implementation of a management incentive program and (6) MEI's acquisition of
Phoenix Solutions, Inc. on March 31, 1998. Consequently, operating expenses as
a percentage of revenue increased from 40.4% in 1997 to 54.8% in 1998.
MEI--1996 compared to 1997
Revenues. Revenues increased 42.5% from $4.0 million in 1996 to $5.7 million
in 1997. The increase in revenues was primarily attributable to increases in
professional services provided and the increase in revenue recognized from
software licenses during 1997.
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Costs of Revenues. Cost of revenues increased 22.6% from $3.1 million in
1996 to $3.8 million in 1997. The increase in costs was primarily attributable
to labor costs associated with an increase in professional services and the
additional provision for contract losses recorded during 1997. The cost of
revenues as a percentage of revenue decreased from 77.5% in 1996 to 66.7% in
1997, primarily as a result of an increase in the professional services margin
as well as a decreasing amount of low-margin hardware reselling arrangements.
Operating Expenses. Operating expenses increased 76.9% from $1.3 million in
1996 to $2.3 million in 1997. The increase in operating expenses was primarily
attributable to (1) an increase in software development expenses related to the
development of enhancements of MEI's primary product, (2) an increase in sales
and marketing expense related to the new versions of the products, and (3) the
addition of a sales executive. Operating expenses as a percentage of revenue
increased from 32.5% in 1996 to 40.4% in 1997 primarily due to the investments
that MEI made in research and development and sales and marketing for future
growth.
Buyline.net, Inc.
On a pro forma combined basis, Buyline.net, Inc. will be our other
consolidated partner company. Buyline was incorporated on May 18, 1999 and is
considered a development stage company. To date, Buyline's activities have
focused on creating e-commerce applications and developing its web site.
Buyline is developing an Internet software program designed to be a universal
platform for entry-level B2B e-commerce, linking buyers and sellers. Buyline's
application is intended for use in a full range of on-line advertising,
directories and web sites.
We have agreed to purchase up to 60,000,000 shares of common stock from
Buyline for $12 million, which would represent 80% equity ownership of Buyline.
Since the date of its inception through June 30, 1999, Buyline has generated
no revenue, and total expenses, including interest expense, of $73,253,
resulting in a net loss of $73,253. Its expenses consisted primarily of
amortization expense attributable to a software license agreement and an
officer's salary. Buyline expects general and administrative expenses to
increase significantly in future periods due to the expected growth in its
infrastructure.
At June 30, 1999, the following four partner companies were accounted for
under the equity method.
Blue Rock Avenue, Inc.
Blue Rock Avenue, Inc. was incorporated on January 5, 1999 and is considered
a development stage enterprise. To date, Blue Rock Avenue's activities have
focused on creating infrastructure, obtaining financing and developing its web
site. Since the date of its inception through June 30, 1999, Blue Rock Avenue
has generated no revenue and expenses of $285,359, resulting in a net loss of
$284,536. These expenses primarily relate to general and administrative
expenses to develop its technology and execute its business plan.
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Under an agreement dated May 14, 1999, Blue Rock Avenue sold 2,666,667
shares of its convertible preferred stock to us for $500,000 with a commitment
by us to purchase an additional 5,333,333 shares for $1.0 million. Our total
investment is expected to represent a 40% equity ownership of Blue Rock Avenue.
In addition, 133,334 shares of our common stock were sold to Blue Rock Avenue's
stockholders for $.01 per share.
General and Administrative Expenses. General and administrative expenses of
$285,359 for the period from the date of its inception to June 30, 1999 consist
of personnel costs, facility costs, professional fees and general costs to
support operations. Blue Rock Avenue expects general and administrative
expenses to increase significantly in future periods due to the expected growth
in its infrastructure.
bluemercury, Inc.
bluemercury, Inc. was incorporated on February 16, 1999 and is considered a
development stage enterprise. To date, bluemercury's activities have focused on
creating infrastructure, obtaining financing and developing its web site. Since
the date of its inception through June 30, 1999, bluemercury has generated no
revenue and expenses of $67,257, resulting in a net loss of $67,257. These
expenses primarily relate to general and administrative and other costs to
develop its technology and execute its business plan.
Pursuant to an agreement dated May 14, 1999, bluemercury sold 6,750,000
shares of its convertible preferred stock to E2E for $500,000 with a commitment
by E2E to purchase an additional 6,750,000 shares for $500,000. Our total
investment is expected to represent 45.0% ownership of bluemercury. In
addition, 166,667 shares of our common stock were sold to the bluemercury's
stockholders for $.01 per share.
General and Administrative Expenses General and administrative expenses of
$67,257 for the period from the date of inception to June 30, 1999 consist of
personnel costs, facility costs, professional fees and general costs to support
operations. bluemercury expects general and administrative expenses to increase
significantly in future periods due to the expected growth in its
infrastructure.
Hooey, Inc.
Hooey, Inc. was incorporated on April 15, 1999 and is considered a
development stage enterprise. To date, Hooey's activities have focused on
creating infrastructure, obtaining financing and developing its web site. Since
the date of its inception through June 30, 1999, Hooey has generated no revenue
and expenses of $136,369, resulting in a net loss of $135,031. These expenses
primarily relate to general and administrative costs to develop its technology
and execute its business plan.
Pursuant to an agreement dated, May 14, 1999, Hooey sold 63,750 shares of
its convertible preferred stock to E2E for $637,500 with a commitment by E2E to
purchase an additional 63,750 shares for $637,500. Our total investment is
expected to represent 34.0% ownership of Hooey. In addition, 166,667 shares of
our common stock were sold to Hooey's stockholders for $.01 per share.
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General and Administrative Expenses. General and administrative expenses of
$136,369 for the period from the date of inception to June 30, 1999 consist of
personnel costs, facility costs, professional fees and general costs to support
operations. Hooey expects general and administrative expenses to increase
significantly in future periods due to the expected growth in its
infrastructure.
Urban Box Office Network, Inc.
Urban Box Office Network, Inc. was incorporated on May 11, 1999 and is
considered a development stage enterprise. To date, Urban Box Office's
activities have focused on creating infrastructure, obtaining financing and
developing its web site. Since the date of inception through June 30, 1999,
Urban Box Office has generated no revenue and expenses of $235,219, resulting
in a net loss of $231,180. These expenses primarily relate to general and
administrative and other costs to develop its technology and execute its
business plan.
Pursuant to an agreement dated May 14, 1999, Urban Box Office sold 1,000
shares of its convertible preferred stock to us for $1.0 million with a
commitment by us to purchase an additional 2,000 shares for $2.0 million. Our
total investment is expected to represent 20.8% ownership of Urban Box Office.
In addition, 200,001 shares of our common stock were sold to Urban Box Office's
stockholders for $.01 per share.
General and Administrative Expenses. General and administrative expenses of
$235,219 for the period from the date of its inception to June 30, 1999 consist
of personnel costs, facility costs, professional fees and general costs to
support operations. Urban Box Office expects general and administrative
expenses to increase significantly in future periods due to the expected growth
in its infrastructure.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging. In July of 1999, FASB
released Statement of Financial Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133." SFAS No. 137 deferred the effective date of SFAS No. 133
from fiscal years beginning after June 15, 1999 to all fiscal years beginning
after June 15, 2000. Currently, as we have no derivative instruments, the
adoption of SFAS 133 would have no impact on our financial condition or results
of operations.
Year 2000 Readiness
Many computer programs have been written using two digits rather than four
digits 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.
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We currently use a Windows-based platform for our information technology
system and a number of non-information technology systems. Because of the
limited number of systems in place, we do not expect to incur material expenses
in connection with our year 2000 efforts.
The year 2000 readiness of MEI is described below. Because our other partner
companies are early stage companies, they have limited operating systems in
place at this time. As a result, we do not expect them to incur material
expenses in connection with their year 2000 efforts.
MEI--Year 2000 Readiness
MEI is dependent upon numerous internal systems that support their day-to-
day operations. If these systems are not year 2000 compliant, MEI may realize
significant exposure and risk. MEI's areas of exposure include hardware and
software purchased from third parties, third-party service providers,
accounting software, payroll processing software, time-attendance-billing
systems, help desk/support software, telephone and voice mail systems, and
various other non-information technology systems that maintain operations of
MEI's office space.
MEI has taken steps to ensure that these systems are year 2000 complaint.
MEI's accounting software was upgraded in the spring of 1999. This accounting
package is the package that MEI sells to customers and was installed at no
incremental cost. MEI is also working with third-party hardware and software
providers to ensure that their systems are in compliance. Payroll processing
software was upgraded to a year 2000 compliant version in April 1999 at no
incremental cost. MEI replaced their telephone and voice mail systems with a
new year 2000 compliant telephone and voice mail system in 1998 at a cost of
$61,607. The Time-attendance-billing system and help desk/support system will
be modified for compliance in the third and fourth quarters of 1999. This work
will be done by an employee at a total labor cost of approximately $3,000.
Alternatively, help desk/support software will be replaced in the fourth
quarter of 1999 at an estimated cost of $100,000. A new software package should
allow MEI to enhance its operations and to save on labor costs. MEI believes
that all non-information technology on which it is dependent either is or will
be year 2000 compliant before the end of 1999. In addition to the amount spent
on year 2000 compliance, expected additional costs to become fully year 2000
complaint in all areas will range from $3,000 to $100,000, depending on
software replacement decisions. There is a risk that the modifications or
replacements may not be completed on schedule or within estimated budgets, and
unforeseen problems may cause a delay in their schedules. If it appears likely
that year 2000 compliant replacements for any modules will not be fully
operational by January 1, 2000, MEI plans to modify the existing system quickly
to ensure compliance.
MEI has modified the software that was developed for customers to be year
2000 compliant. Customers who entered into new contracts with MEI during 1999
have received the latest compliant version of software. Older clients have
either completed their upgrades to the compliant version, are in the process of
upgrading to the new version, or are
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converting to a different vendor's software. All clients who wish to upgrade
their software will have their upgrades completed before the end of 1999. MEI
has notified all of its non-year 2000 compliant customers of their need to
upgrade their software to become compliant. There are no application software
costs to customers associated with the upgrade from the original releases
within the same version number. All services required to implement an upgrade
to software are billable to customers, pursuant to customer contracts.
If MEI's efforts to address and repair any year 2000 compliance issues are
not successful, or if third parties upon which MEI depends have not
successfully addressed and solved year 2000 compliance issues, MEI's business
operating results and financial position could be adversely affected. MEI is
confident that all such issues will be resolved before the end of 1999, and
believes that any disruption to its operations or those of its customers will
be minimal or nonexistent.
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BUSINESS
Our Company
E2Enet, Inc., the Entrepreneur-to-Entrepreneur network, was founded to
operate, develop, invest in and acquire Internet-related businesses, which we
refer to as our partner companies. To date, we have invested in five partner
companies and have entered into agreements to acquire 100% of MEI and 80% of
Buyline upon the completion of this offering. Through acquisitions,
investments, contractual relationships and our management team of Internet
entrepreneurs, we are building a platform of technologies, applications and
services, which we believe are common components of many Internet businesses.
We are designing this platform so that many of its components can be customized
for the Internet-related market sectors on which we focus. We currently focus
on the B2B and B2C market sectors. We believe the ability of our partner
companies to access our in-house technologies, our relationships with
professional service providers and our management team of Internet
entrepreneurs, will enable our partner companies to bring products and services
to market more quickly and efficiently than their competitors. We believe our
stockholders will benefit from the long-term capital appreciation of our
partner companies as well as from the financial performance of those partner
companies in which we maintain a controlling interest.
Industry Overview
Internet.
The emergence of the Internet as a global communications and commerce medium
has changed the way businesses distribute goods, services and information to
their customers. The Internet has also created new opportunities to conduct B2B
e-commerce, which enables organizations to streamline business processes, lower
operating costs and improve productivity. People and businesses are
increasingly relying on the Internet to access and share information as well as
to purchase and sell products and services. Jupiter Communications reports that
in 1998 more than 10 million households in the United States and Canada
purchased at least one product or service over the Internet. Jupiter
Communications estimates that 37.6 million United States households, or 83.4
million people, were on-line at the end of 1998 with the estimated number of
on-line users expected to grow to 67.6 million United States households, or
156.7 million people, by 2003.
Business-to-Business.
B2B businesses are organizations whose primary customers are other
commercial enterprises. In the past, B2B communication and commerce were
typically paper-based or conducted over telecommunications networks that were
costly to create and maintain and that were generally available only to a
limited number of participants. Today, the Internet
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provides an open forum with common communication standards that enable
businesses to build more efficient and cost-effective networks. The Internet
has enabled businesses to communicate with potential customers around the world
and open new distribution channels for their products or services. As Internet-
based network reliability, security and speed have improved in recent years,
more businesses have started using the Internet to conduct e-commerce and to
exchange information with their customers, suppliers and distributors. The
value of B2B e-commerce transactions is expected to grow from an estimated
$43.0 billion in 1998 to approximately $1.3 trillion in 2003, accounting for
more than 90% of the estimated dollar value of e-commerce in the United States
and representing a 98% compounded annual growth rate.
Business-to-Consumer.
B2C businesses are organizations whose primary customers are individual
consumers of retail goods or services. Through the Internet, B2C businesses
differentiate themselves from traditional store-based or catalog retailers by
delivering personalized services, offering a larger number of products than
traditional store-based or catalog retailers and changing their product
selections and their pricing in real-time. The relatively low cost of
publishing on the Internet, the ability to reach and serve a large and global
group of customers electronically from a central location and the potential for
personalized low-cost customer interaction generally provide additional
economic benefits to B2C businesses. Using the Internet, B2C businesses can
also obtain demographic and customer-specific data. This data can be analyzed
to determine behavioral patterns or to increase the opportunities for direct
marketing and personalized services. Jupiter Communications estimates that on-
line retail consumer commerce will grow from $5.8 billion in 1998 to $37.5
billion in 2002, representing a 59% compounded annual growth rate.
Challenges Facing Emerging Internet Businesses
The rapid growth of the Internet combined with the amount of capital
available to early-stage Internet businesses has created a competitive
environment for Internet businesses. To succeed, we believe early-stage
Internet businesses require not only capital, but also a well-developed
business model, strong brand identity, scalable technological and corporate
infrastructure and strategic relationships that enable them to accelerate their
time to market and manage growth.
. Business model development. To be successful, we believe an Internet
business must have specific knowledge regarding standard business
practices and operations of the industry sector in which it competes,
including distribution channels, procurement policies, product
information and customer support requirements, in addition to the
technologies necessary to bring that business on-line.
. Technology infrastructure. We believe Internet businesses require a
reliable, secure and scalable technology infrastructure that adapts to
increasing customer demand,
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evolving industry standards and changing technology. We believe that
most emerging Internet businesses spend significant time and capital to
build their technology infrastructure and to manage that infrastructure
on a day-to-day basis.
. Corporate infrastructure. Many Internet businesses are also facing
infrastructure challenges typical of more mature industries. Given the
rapid growth rates of these businesses, they often need well-developed
human resources, accounting or finance and business development
capabilities soon after they have commenced operations.
. Brand awareness. Competition among emerging Internet businesses has made
the creation of a strong brand identity critical to differentiating a
company from its competitors. We believe Internet businesses must have a
well-defined marketing strategy to attract users to their web site in a
cost-effective manner and to help build customer loyalty.
. Strategic relationships. We believe that many Internet businesses rely
upon strategic relationships with third parties such as Internet service
providers, Internet portals and e-commerce sites to direct traffic to
their web site and to market their products or services. These
agreements are often expensive and difficult for emerging businesses to
establish without long-standing relationships.
The emergence of Internet start-ups has also posed additional challenges to
traditional non-Internet businesses. Many traditional businesses are losing
market share to emerging Internet businesses due to the relative ease and
convenience of e-commerce and the delayed entry of traditional businesses into
the Internet marketplace. We believe that for these companies to maintain their
competitive position, they need to conduct business on the Internet. Many of
these companies need to develop Internet-based business platforms, but would
prefer not to incur the operational or financial impact associated with
developing an Internet business.
The E2E Solution and Strategy
Our solution is based on our belief that many Internet businesses spend
significant resources building similar technologies, marketing skills,
distribution channels and administrative functions. We believe that by
understanding this process and the common needs of early-stage Internet
companies, and by providing our partner companies with strategic and
operational resources, we can accelerate the business development process for
our partner companies. We also intend to make our Internet expertise and
operational resources available to traditional businesses that are trying to
establish a means to conduct business on the Internet, although we have not
done so to date.
Build the E2E Platform to Accelerate Our Partner Companies' Business
Development.
Upon completion of this offering, and the anticipated deployment of
Buyline's technology in early 2000, we believe the E2E platform will include
much of the technology,
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applications, professional service relationships and management expertise
necessary to meet the challenges facing early-stage Internet businesses.
Business Model Development. Members of our management team, board of directors
and advisory board have developed and operated Internet businesses, including
new media and electronic publishing businesses. We apply their experiences to
guide our partner companies in developing their business plans, financial
models and marketing strategies. We assign at least one member of our
management team to work with each of our partner companies to:
. implement its business plan;
. provide operational, technical and strategic guidance;
. act as a point-of-contact with the partner company for other members of
management, the board of directors and the advisory board;
. identify co-marketing, group purchasing power and volume discount
opportunities; and
. facilitate the exchange of information between partner companies so that
they can learn from each other's experience.
Technology Infrastructure. We believe that the platform of technologies that we
are assembling through our partner companies and third-party relationships will
be applicable to many Internet businesses. The technologies available to our
partner companies will include the following representative tools and
applications:
. Buyline transaction application. Upon its expected completion in early
2000, this software application will facilitate commercial transactions
between buyers and sellers over the Internet. Specifically, this
technology will enable purchasers of particular products and services to
request information or price quotes directly from a prospective seller
listed in on-line yellow pages and similar directories. As one component
of the E2E platform, we expect that some of our partner companies will
be able to use the Buyline transaction application to conduct e-commerce
in both the B2B and B2C market sectors.
. MEI audience management system. This technology enables a user to sort
and retrieve information on a topic within a database. MEI currently
provides this technology to industry associations to allow them to
organize and search their databases using selected criteria. Upon
completion of its planned enhancement in early 2000, we expect that this
database technology will enable our partner companies to manage, gather,
organize and track information about their customers and visitors to
their web sites.
. MEI PortalPlus(TM). PortalPlus(TM) is a comprehensive suite of tools
comprising the core components of a web site, including e-commerce
capabilities,
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chat, e-mail, document management, visitor tracking and administrative
tools, such as password validation and site security. We expect that our
partner companies will be able to use this technology to either create a
start-up web site or enhance the functionality of an existing site.
. Cogit data mining. This technology, provided by one of our third-party
service providers, Cogit Corporation, consists of marketing software
that enables an Internet business to obtain detailed information about
its web site visitors. Our current partner companies are, and those
companies that become partner companies through June 2000 will be,
offered the opportunity to enter into agreements with Cogit on pre-
negotiated terms. The Cogit database should help our partner companies
more effectively market products and services, allocate advertising
inventory and target customer promotions.
Corporate Infrastructure. We have established relationships with third
parties who can be engaged by our partner companies to assist in financial and
accounting matters, legal matters and executive search services. Additionally,
members of our management team will continue to draw on their personal
contacts within the Internet industry to identify and recruit employees for
partner companies. For example, to date, through their contacts in the
Internet industry, members of our management team have recruited three senior
managers for our partner companies.
Building a Brand. To assist our partner companies in marketing their web
sites, building their brands and creating customer loyalty, we have entered
into agreements with the following organizations to provide services to our
partner companies at pre-negotiated rates:
. KETCHUM to assist in public relations;
. RTCdirect to provide assistance with strategic planning and marketing;
and
. Exit1, Incorporated to assist with web site design and navigation.
By having these agreements in place, our partner companies' management
teams should be able to devote less time and effort to finding and negotiating
contracts with service providers and more time on developing their businesses.
Strategic Relationships. We intend to use the industry relationships of our
management team, board of directors and advisory board to facilitate the
development of key technology and distribution agreements for our partner
companies. For example, through an established relationship a member of our
management team has with InfoSpace.com, Inc., a provider of yellow pages on
the Internet, we helped Buyline negotiate a three-year promotion agreement,
which guarantees a specified number of page views over the course of the
agreement.
Maximize the Potential of Our Platform as a Partner Company Development Tool
and Revenue Source.
We believe that our platform provides many of the elements useful to
develop Internet-related businesses. Our platform has been designed as a
flexible and customizable suite of
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technologies, products and services for use across various Internet sectors and
business applications. Our partner companies maintain full discretion to
determine which of these products and services to use, if any. We expect that
transactions between partner companies will be arms-length transactions. We
intend to generate revenue by licensing our platform or its component parts to
our partner companies, as well as to non-partner Internet organizations and
traditional businesses that desire to develop a means to conduct business on
the Internet. We believe that these sources of revenue will enhance our
operating results due to the relatively fixed costs of our consolidated
organization. Additionally, relationships with non-partner companies may
develop into future investment or acquisition opportunities.
Maximize Shareholder Value by Determining and Acting on the Strategic
Alternative Most Appropriate for Each of Our Partner Companies.
We expect that many of our partner companies will reach stages of their
development at which public offerings, joint ventures, mergers or other
strategic transactions are necessary or advisable to continue to develop or
operate their businesses. At that time, we plan to utilize our knowledge of the
Internet market, our familiarity with financing and acquisition transactions
and our understanding of the business and prospects of our partner companies to
help determine the strategic alternatives most likely to maximize the long-term
value of the partner company.
Target for Investment or Acquisition Businesses that Will Benefit from Our
Platform.
We have initially focused our partner company selection criteria on
Internet-related market sectors with a potential market size exceeding $30
billion and that are growing at an annual rate of at least 30%. Two of the
market sectors that meet these criteria are the B2B and B2C sectors. Within
these market sectors, we target (1) Internet-related companies that provide
technologies and services that are useful to early-stage Internet businesses,
(2) companies that meet the strategic, technological and corporate needs of our
existing partner companies and (3) Internet entities that we believe can
benefit from our platform.
In evaluating whether to pursue an investment or acquisition opportunity, we
consider the individual characteristics of a potential partner company,
including the following:
. Management. We focus on companies with management teams that demonstrate
leadership, experience and the flexibility to adapt to market
conditions, competitive threats and new technologies.
. Multiple revenue streams. Potential sources of revenue include recurring
subscription fees, advertising sales, transaction fees from the sale of
goods and services, and service and licensing fees. We prefer business
models that present the opportunity for capturing more than one of these
revenue streams.
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. Technology advantage. We are interested both in companies that provide
basic enabling technologies such as e-mail, chat, and search engines, as
well as companies that provide innovative technological solutions that
will serve as a barrier to entry for competitors.
. Scalable business model and architecture. We seek companies that are
well-positioned to adapt quickly to a growing customer base. We believe
that as a company's customer base or web traffic increases, its
technology, management team and business model must be able to support
its growth.
. Complementary companies. We focus on businesses that will be able to
interact with, cross-market with, or provide services or products that
are complementary to those offered by our other partner companies. For
example, as discussed below, MEI has indicated an interest in
integrating Buyline's transaction application into its PortalPlus(TM)
application.
We also will maintain our flexibility to adjust these investment criteria to
take advantage of changing Internet industry trends or opportunities with
compelling financial or operating benefits.
Overview of Current Partner Companies
MEI Software Systems, Inc. MEI, a major contributor to the E2E platform,
provides customized software systems to manage the databases for trade
associations, professional associations, fund raising organizations and
chambers of commerce. MEI's 2,000 customers include the American Dental
Association, the American Psychological Association and the National Academy of
Sciences. MEI's software systems include an audience management system that
enables a user to sort and retrieve user-specified information based on a range
of criteria. Although a revenue-generating business, MEI is in the early stages
of developing its Internet-enabling business. As part of its expansion into the
Internet-enabling business, MEI offers PortalPlus(TM). PortalPlus(TM) is a
comprehensive suite of tools that helps associations and other businesses build
communities and establish and develop e-commerce applications. PortalPlus(TM)
is designed to attract members and consumers to a particular web site, provide
increased functionality and use valuable customer data to bring consumers and
companies together. MEI intends to combine its customer base with its
PortalPlus(TM) technology to launch multiple industry-specific web sites. Other
partner companies may also be able to use PortalPlus(TM) to establish a new web
presence or enhance the functionality of an existing site.
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The following table outlines the applications and relevant tools included
in PortalPlus(TM):
<TABLE>
<CAPTION>
Tools Description
<C> <S>
e-Calendar(TM) Enables event listing relevant to a particular audience
e-Librarian(TM) Establishes a library of documents to be shared over the
Internet
e-DocSelect(TM) Searches for and displays selected documents and uploads
and downloads documents over the Internet
e-Directory(TM) Maintains targeted audience groups such as member
directory, committee list or contacts lists
e-Locator(TM) Assists with professional services searches
e-Communicator(TM) Allows promotional broadcast e-mail newsletter publishing
to targeted audience groups
e-Broadcaster(TM) Enables on demand broadcast e-mail to targeted audiences
e-Support(TM) Provides customer support, help desk and task tracking
e-Staffer(TM) Tracks detailed information on staff members or candidates
for employment and creates on-line resume bank or job
listings
e-Classroom(TM) Creates on-line classrooms
e-Forum(TM) Enables private forums, news groups, discussion groups
e-Shopper(TM) Facilitates e-commerce for products and services
e-Visitor(TM) Tracks visitor responses
e-Manager(TM) Provides administrative tools such as password validation,
security navigation, error detection, graphics
e-WebBuilder(TM) Creates HTML-based newsletters or web pages
e-Trakker(TM) Provides decision and document tracking and workflow
management
</TABLE>
For the fiscal year ended December 31, 1998, MEI had revenue of $9.3
million and losses of $1.2 million. For the six months ended June 30, 1999,
MEI had revenue of $6.1 million and losses of $1.2 million. As of September 1,
1999, MEI had 130 employees, 110 of whom are technical developers.
We have entered into an agreement under which we will acquire 100% of MEI
for a purchase price of $24.0 million in cash concurrently with the completion
of this offering. As part of the agreement, we also agreed to loan $2.0
million to MEI. MEI operates a web site at www.meisoft.com.
Buyline.net, Inc. Buyline, which is expected to be a major contributor of
components to the E2E platform, is currently preparing to launch the
proprietary Buyline RFQ, or Request for Quotes application, an on-line lead
qualification, management and purchasing system. Buyline RFQ is primarily an
e-commerce application that introduces buyers and sellers over the Internet
and provides users with leads to potential buyers. Buyline RFQ enables
purchasers of particular products and services to request information or price
quotes directly from prospective sellers. The system will primarily be
distributed through publishers that provide business directories, databases,
and classified-style listings.
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When completed, we believe that the Buyline RFQ will enable buyers to
generate and distribute requests for quotes, products or services on the
Internet. Buyline intends to generate revenue through the sale of targeted
banner, classified and directory advertising, and also intends to charge
transaction fees on purchases made through the Buyline applications. We expect
that our partner companies will also be able to employ the Buyline RFQ, or
components of that technology, to transact e-commerce in both the B2B and B2C
market sectors. In addition, MEI has indicated that it is interested in
integrating Buyline RFQ into its PortalPlus(TM) application. MEI believes that
the Buyline RFQ will enhance the functionality, e-commerce capabilities and
marketability of the web sites it builds for its trade and professional
association customers.
Buyline estimates that the Buyline RFQ will launch in early 2000. Upon its
launch, the Buyline RFQ will provide the following capabilities:
. directories of goods and services that catalog buyers and sellers;
. key word searches that enable a user to search either the Internet or a
particular web site by typing only a few words;
. targeted display or banner advertising that includes brand recognition,
product specification information as well as simple name, address, phone
numbers and web addresses; and
. sales management tools facilitating:
. lead generation and management capabilities that enable the
automated response and prioritization of leads; and
. the aggregation of bids and requests for bids.
Product enhancements for Buyline RFQ to be released following its initial
launch will include sales management tools facilitating:
. the negotiation and execution of on-line purchases in a secure
environment; and
. the verification and qualification of buyers and sellers.
The Buyline RFQ is based on a non-exclusive license from EC Cubed, Inc.
On September 9, 1999, Buyline and Infospace signed agreements related to
Buyline's RFQ services. Under these agreements, Infospace will integrate the
Buyline RFQ services into its yellow page product listings and other web sites
maintained by InfoSpace and its affiliates, which currently includes sites such
as Netscape's Netcenter, Lycos and Microsoft Network. Infospace has agreed to
guarantee a specified number of page views over a three-year term in exchange
for payments to InfoSpace. A separate agreement also grants Infospace the non-
exclusive right to resell the Buyline RFQ services to its customers.
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We have entered into an agreement under which, concurrently with the closing
of this offering, we will purchase 80% of Buyline for $12.0 million, which
represents the majority of the estimated $15.0 million cost of developing the
Buyline business. We have also agreed to loan up to $950,000 to Buyline, of
which $550,000 has been borrowed to date. Upon completion of our investment in
Buyline, we will have the right to appoint a majority of Buyline's board of
directors. Buyline has applied for patents on its underlying business process.
Buyline's web site will be available at www.buyline.net in early 2000.
VIPRO Corporation. VIPRO markets a Virus Service Plan that guarantees repair
of a computer operating system that has been infected by a virus. If a
customer's operating system becomes damaged, VIPRO will first attempt to remove
the virus through its web site technical support, telephone technical support,
Norton anti-virus software and an on-line Virus Resource Center. If VIPRO is
unable to repair the problem, the customer may get the computer repaired at no
expense at one of AON Innovative Solutions' 4,000 approved repair centers.
VIPRO is able to support 10 million active users through its alliances with
Symantec Corporation, a computer utilities company, AON Innovative Solutions, a
claims administrator and Virginia Surety Company, Inc., an insurance
underwriter. VIPRO operates its web site at www.virusplan.com.
We have invested $250,000 in VIPRO stock currently convertible into 5.2% of
its common stock. We are committed and intend to invest an additional $2.0
million to purchase additional shares of convertible preferred stock which, if
converted, would bring our ownership interest up to 32.9% of its common stock,
based on its capitalization as of the date of this prospectus. We will fund the
$2.0 million balance immediately upon the closing of this offering.
Urban Box Office Network, Inc. Urban Box Office is developing a network of
web sites for people interested in urban culture, information, entertainment
and products. Urban Box Office was founded in 1998 by George Jackson, the
former president of Motown records, Frank Cooper, the former head of business
operations for Def Jam Records/Polygram Holding, Inc. and Adam Kidron, a record
producer. When completed, the network of web sites will provide an integrated
on-line experience, including interest-specific channels with content, e-
commerce and community features such as chat and e-mail. Urban Box Office
intends to derive revenue from advertising and e-commerce transaction fees.
This company intends to have its first web site operational by the fourth
quarter of 1999. Urban Box Office's web site will be available at www.ubo.net.
We have invested $1.0 million to purchase shares of preferred stock of Urban
Box Office currently convertible into 8.0% of its common stock, as of June 30,
1999. We are committed to invest an additional $2.0 million to purchase
additional shares of preferred stock which, if converted, would bring our
ownership interest up to 20.8% of its common stock, based on its capitalization
as of the date of this prospectus. We will fund the balance of our investment
as soon as practical after the closing of this offering. In connection with our
initial investment in Urban Box Office, we issued 200,001 shares of our common
stock to Urban Box Office's principals for an aggregate purchase price of
approximately $2,000, with an aggregate value of approximately $2.6 million
based on an assumed per share public offering price of $13.00.
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Blue Rock Avenue, Inc. Blue Rock Avenue intends to offer a wide variety of
gift selections from top quality branded retailers and charitable organizations
to make the gift selection process over the Internet fast, efficient and
effective. Blue Rock Avenue will complement these selections with gift
services, ideas and content. Its web site will allow the customer to search for
a gift based on a wide range of criteria. Each shopper will be provided with a
host of organizing services that are designed to enhance the gift giving
experience. Blue Rock Avenue expects to derive revenues from transaction fees
with its product partners, as well as through the sale of advertising. Blue
Rock Avenue expects that its web site will be operational in the fourth quarter
of 1999. Blue Rock Avenue will operate its web site at www.bluerockave.com.
We have invested $500,000 to purchase shares of preferred stock of Blue Rock
Avenue currently convertible into 18% of Blue Rock Avenue's common stock. We
are committed to invest an additional $1.0 million to purchase additional
shares of preferred stock which, if converted, would bring our ownership
interest up to 40% of its common stock based on its capitalzation as of the
date of this prospectus. We will fund the balance of our investment as soon as
practical after the closing of this offering. In connection with our initial
investment in Blue Rock Avenue, we issued 133,334 shares of our common stock to
Blue Rock Avenue's principals for an aggregate purchase price of approximately
$1,333, with an aggregate value of approximately $1.7 million based on an
assumed per share public offering price of $13.00.
Hooey, Inc. Hooey is building an arts and crafts community web site. Hooey
intends to provide features such as search capabilities, community event
listings, "how to" chat rooms, e-mail and personal home pages. By building a
community around its auction network, Hooey intends to create a place where
buyers and sellers meet, exchange information and buy and sell their hand-made
products. Hooey does not intend to carry any inventory and expects to derive
revenue from product listing fees, sales commissions and advertising sales.
Hooey intends to launch its web site and commence operating activities in the
fourth quarter of 1999. Hooey's web site will be available at www.hooey.com.
We have invested $637,500 to purchase shares of preferred stock of Hooey
currently convertible into 20% of Hooey's common stock. We are committed to
invest an additional $637,500 to purchase additional shares of preferred stock
which, if converted, would bring our ownership interest up to 34% of its common
stock based on its capitalization as of the date of this prospectus. Our
agreement with Hooey requires us to complete our investment in Hooey on or
before the fifteenth business day following the closing of this offering,
unless that time period is extended by mutual agreement. We intend to exercise
our right to purchase these additional shares of preferred stock as soon as
practical after the closing of this offering. In connection with our initial
investment in Hooey, we issued 166,667 shares of our common stock to Hooey's
principals for an aggregate purchase price of approximately $1,667, with an
aggregate value of approximately $2.2 million based on an assumed per share
public offering price of $13.00.
bluemercury Inc. bluemercury is developing a web site focusing on offering a
broad range of women's cosmetic products and accessories. bluemercury is
building an on-line storefront that will also provide women with product
recommendations and other editorial
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content. bluemercury will also aggregate customer-buying information and then
attempt to base its featured product listings based on its customers' buying
patterns. bluemercury intends to generate revenue primarily through e-commerce
transaction fees, sponsorships and through the sale of advertising. bluemercury
intends to have its web site operational by the fourth quarter of 1999.
bluemercury's web site will be available at www.bluemercury.com.
We have invested $500,000 to purchase shares of preferred stock of
bluemercury currently convertible into 29% of its common stock. We are
committed to invest an additional $500,000 to purchase additional shares of
convertible preferred stock which, if converted, would bring our ownership
interest up to 45% of its common stock based on its capitalization as of the
date of this prospectus. Our agreement with bluemercury requires us to complete
our investment no later than the closing date of this offering. In connection
with our initial investment in bluemercury, we issued 166,667 shares of our
common stock to bluemercury's principals for an aggregate purchase price of
approximately $1,667, with an aggregate value of approximately $2.2 million
based on an assumed per share public offering price of $13.00.
Although our agreements with VIPRO, Urban Box Office, Blue Rock Avenue,
Hooey and bluemercury commit us to invest additional amounts as described
above, these commitments are subject to each of these companies satisfying
specified conditions. To the extent these conditions are not met, we may choose
not to invest additional amounts in one or more of these companies. In
addition, we have preemptive rights that permit us to maintain our percentage
ownership in each of these partner companies to the extent they issue
additional securities to third-parties for cash. Depending upon the facts and
circumstances at the time, we may choose not to exercise our preemptive rights,
in which case our percentage ownership would be diluted below the percentages
specified above.
Following our acquisition of MEI, MEI will have a newly instituted stock
option plan. Under the terms of the new plan, MEI will be able to reserve for
issuance up to 20% of its equity for grants to its employees. To the extent
those options are issued and exercised, our ownership of MEI will be diluted.
Investment Structure
We intend to continue to acquire at least 25% equity interests in our
partner companies. These interests may represent a minority stake or a
controlling interest in the enterprise, depending on the stage of the company's
development and the entrepreneur's objectives. Over time, as our partner
companies require more capital to meet their business objectives, we may
provide additional capital and increase our ownership in those companies. We
intend to continue to structure most of our investments so that we have rights
of participation in and control over material decisions affecting the partner
company. We also expect to continue to negotiate to obtain additional rights,
including registration rights, rights of first refusal, buy/sell arrangements,
anti-dilution protection and preemptive rights relating to the partner
company's issuance of additional equity. Members of our management team will
generally take seats on our partner companies' boards of directors.
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With respect to our four initial partner companies and VIPRO, in which we
own minority interests, our investments provide us with the following control
rights in addition to the rights of the common stockholders of our partner
companies:
. We have, or upon fulfilling our investment commitment in the case of
VIPRO, will have, the right to appoint two of the five members of each
company's board of directors, except for Urban Box Office for which we
have the right to appoint two of the seven members of its board of
directors.
. To maintain the value of our stock in our partner companies, we
generally have anti-dilution rights. These rights require our partner
companies to issue us additional shares if the partner company sells
shares of its stock below the conversion price of our preferred stock.
. We also generally have the right to purchase our pro rata share of
future sales of equity securities of each company until they complete a
public offering, except for the issuance of shares by the companies in
connection with acquisitions and the issuance of shares pursuant to
stock options or similar rights.
. We generally, except in the case of bluemercury, have a veto right over
a number of major decisions of the companies, including the sale or
merger of the companies and the issuance of any other equity security
senior to our preferred stock.
Competition
We expect to encounter intense competition from other companies seeking to
invest in Internet-related businesses. Traditional venture capital and private
equity firms have dominated investments in emerging high technology companies,
and their involvement has been particularly strong in areas such as Internet
enabling technology, vertical applications, e-commerce, security and customized
software systems development. In addition, several public companies such as
CMGI, Inc., Internet Capital Group, Inc., Rare Medium Group, Inc., and
Safeguard Scientifics, Inc. and private venture funds devote significant
resources to providing capital and other resources to entrepreneurs and their
emerging Internet companies. Finally, corporate strategic investors including
Fortune 500 and other significant companies are developing an Internet strategy
and capability. These strategic investors also include many of the larger
technology and established Internet companies, which are also a source of
competition for us, as these groups often partner with emerging Internet
companies to seek to obtain access to a promising product or technology.
Many of these potential competitors may have more experience identifying,
investing in and advising Internet-focused companies and may possess greater
financial, personnel or other resources or industry contacts than we have.
Although we do not believe this has occurred yet, competition to invest in a
limited number of Internet-focused businesses could cause us to pay higher
prices for our investments. These inherent competitive disadvantages to us may
make acquisition or investment opportunities more difficult to accomplish and
may
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compel us to select less attractive investment prospects. Further, our efforts
to differentiate ourselves from our competitors may not prove effective and we
ultimately may not be able to compete effectively for the acquisition of equity
stakes in attractive Internet-focused businesses.
Government Regulation and Legal Uncertainties
With the exception of regulation applicable to businesses generally, most
Internet-related companies are not currently regulated by any government
agency. Due to increasing popularity and use of the Internet, however, it is
possible that a number of laws may be adopted that will apply to the Internet
in the future and will affect our partner companies and our financial results.
These potential laws cover issues including:
. user privacy;
. dissemination of information;
. pricing of goods and services offered; and
. types of products and services offered.
An example of the type of law that may be adopted to regulate use of the
Internet is the Telecommunications Act of 1996. The Telecommunications Act
prohibited the transmission over the Internet of specific types of information.
Although the Telecommunications Act was held unconstitutional, similar laws may
be enacted in the future. Other nations, including Germany, have taken similar
actions to restrict the free flow of information deemed to be objectionable on
the Internet. In addition, some telecommunications carriers continue to
advocate that telecommunications over the Internet should be regulated by the
Federal Communications Commission in the same manner as other
telecommunications services. These telecommunications carriers want to see the
government eliminate the current exemption from payment of telecommunications
access charges for Internet service providers.
If the government adopts additional laws or regulations governing use of the
Internet, these actions could decrease the growth of the Internet or increase
the costs of doing business for Internet-focused companies. Finally, the sales
of goods and services by our partner companies may be reduced and the costs of
producing those goods and services may be increased if existing United States,
state and federal laws and foreign laws governing issues such as commerce,
taxation, property ownership, defamation and personal privacy are increasingly
applied to the Internet.
. Taxes. Congress recently enacted a three-year moratorium, ending on
October 21, 2001, on the application of "discriminatory" or "special"
taxes by the states on Internet access or on products and services
delivered over the Internet. Congress further declared that there will
be no federal taxes on e-commerce until the end of the moratorium. This
moratorium, however, does not prevent states from taxing activities or
goods and services that the states would otherwise have the power to
tax. Furthermore, the moratorium does not apply to some state taxes that
were in place before the moratorium was enacted.
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. On-line Privacy. Both Congress and the Federal Trade Commission are
considering regulating the extent to which companies should be able to
use and disclose information they obtain on-line from consumers. If any
regulations are enacted, e-commerce and Internet direct marketing
companies may find their marketing activities restricted. Also, the
European Union has directed its member nations to enact much more
stringent privacy protection laws than are generally found in the United
States, and has threatened to prohibit the export of specified personal
data to United States companies if similar measures are not adopted in
the United States. This type of prohibition could limit the growth of
foreign markets for United States Internet-related companies. The
Department of Commerce is negotiating with the Federal Trade Commission
to provide exemptions from the European Union regulations, but the
outcome of these negotiations is uncertain.
. Other Regulations. The growth of the Internet and e-commerce may lead to
the enactment of more stringent consumer protection laws. The Federal
Trade Commission may use its existing jurisdiction to police e-commerce
activities, and it is possible that the Federal Trade Commission will
seek authority from Congress to regulate on-line activities. The Federal
Trade Commission has already issued for public comment proposed
regulations governing the collection of information on-line from
children.
. Potential Liability. Some of our partner companies may host a wide
variety of information, community, communications and commerce services
that enable individuals to exchange information, generate content,
conduct business and engage in various on-line activities. The laws
relating to the liability of providers of these on-line services for
activities of their users is currently unsettled. Claims could be made
against us or our partner companies for defamation, negligence,
copyright or trademark infringement, personal injury or other theories
based on the nature and content of information that may be posted on-
line by users. Similar claims have been brought, and sometimes
successfully pressed, against on-line service providers in the past. In
addition, we or our partner companies could be exposed to liability with
respect to the selection of listings that may be accessible through
branded products and media properties, or through content and materials
that may be posted by users in classifieds, message board, clubs, chat
room, or other interactive community-building services. These claims
might include, among others, that by providing hypertext links to web
sites operated by third parties, we or a partner company is liable for
copyright or trademark infringement or other wrongful actions by those
third parties through those web sites, or that we or a partner company
is responsible for legal injury caused by statements made to, actions
taken by or content generated by, participants in the third-party's
message board services, or other community building services. It is also
possible that if any information provided by us or one of our partner
companies, such as stock quotes, analyst estimates or other trading
information, contains errors, third parties could make claims against us
or our partner companies for losses incurred in reliance on this
information. Investigating and defending these types of claims is
expensive, even to the extent these types of claims do not result in
liability.
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. Sweepstakes. The business of some of our partner companies may involve
use of sweepstakes, contests and similar promotional events to solicit
user registration and involvement in direct marketing relationships.
Sweepstakes and contests are subject to extensive government regulation
throughout the world, including different regulatory programs under
states and territories in the United States, and may be subject to laws
governing lotteries and gambling. Exemptions from these laws may not be
available to our partner companies.
Personnel
As of September 1999, we employed 11 persons, five of whom were employed as
executive officers.
Properties
Our executive offices are currently located at leased space at 800
Connecticut Avenue, Suite 1111, Washington, DC 20006 and our telephone number
is (202) 331-9000. We also lease office space at 570 Lexington Avenue, 23rd
floor, New York, NY 10022.
Legal Proceedings
We are not a party to any material legal proceedings.
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MANAGEMENT
Executive Officers, Key Employees, Director and Director Nominees
We show below information regarding our executive officers, key employees,
director and director nominees:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Executive Officers
Robert J. Smith 42 Chief Executive Officer and Director Nominee
Michael C. Wheeler 49 President and Director Nominee
Steven J. Quamme 39 Senior Vice President, Chief Financial Officer and
Director
James R. Smith, Jr. 32 Senior Vice President and Chief Technology Officer
Mark Lewyn 39 Senior Vice President--Business Development
Key Employees
Edward S. Hauck 40 Senior Vice President
Michael J. Deale 35 Senior Vice President
Donita L. Prakash 38 Vice President--Business Development
Director Nominees
Lynda M. Applegate 50 Director Nominee
Neil R. Austrian 58 Director Nominee
George J. Mitchell 65 Director Nominee
Jeffrey R. Sechrest 43 Director Nominee
Gerald H. Taylor 57 Director Nominee
</TABLE>
Robert J. Smith has served as Chief Executive Officer of our company since
April 1999, and will serve as chairman of the Board of Directors of our company
beginning upon completion of this offering. From June 1998 until April 1999,
Mr. Smith was a private consultant to early-stage Internet companies. From
January 1993 to March 1998, Mr. Smith was employed as a member of management of
American Online, Inc. in various capacities including as founder, Senior Vice
President and General Manager of AOL Digital Cities, Vice President of
Affiliate Development at AOL, General Manager of Community Central and Manager
of Business Development at AOL. Mr. Smith currently serves as a director of
Hooey, Blue Rock Avenue and bluemercury.
Michael C. Wheeler has served as President of our company since June 1999,
and will serve as a director of our company beginning upon completion of this
offering. Mr. Wheeler was the President of CNBC/Dow Jones Business Video from
March 1996 to June 1999. Mr. Wheeler was Senior Vice President and General
Manager of NBC New Media from June 1991 to March 1996, where he oversaw NBC's
investments in new technology platforms. Mr. Wheeler is also a founding member
and Vice Chairman of the New York Media Association. Mr. Wheeler currently
serves as a director of Urban Box Office.
Steven J. Quamme has served as a Senior Vice President, Chief Financial
Officer and sole director of our company since April 1999. Mr. Quamme has been
a partner in International Equity Partners, L.P., a private equity firm making
direct investments in emerging markets since January 1993. He served as Senior
Vice President of International Equity Partners from August 1998 through June
1999. From August 1997 to July 1998, he was also a private consultant. From
July 1993 to July 1997, Mr. Quamme was the founder and Chief Executive Officer
of Mayfair Partners, L.P., a diversified restaurant management and operating
company.
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Mayfair Partners filed for bankruptcy protection in September 1998. From May
1989 to June 1992 Mr. Quamme was a managing director of the Winston Group,
Inc., a private equity firm. From September 1986 to May 1989, he was an
attorney with the law firm of Baker & Botts. Mr. Quamme currently serves as a
director of Urban Box Office, Blue Rock Avenue, Hooey and bluemercury.
James R. Smith, Jr. has served as Chief Technology Officer of our company
since September 1999. From May 1990 to September 1999, he served as an
Associate Partner at Andersen Consulting, where he focused on developing
internet strategies and architectures primarily for financial services, such as
banking, investments, insurance and healthcare.
Mark Lewyn has served as Senior Vice President--Business Development of our
company since April 1999. From January 1998 until March 1999, Mr. Lewyn worked
as a private consultant for Internet-related companies. From April 1996 to
January 1998, Mr. Lewyn served as a member of management at TicketMasterOnline-
CitySearch as Director of Corporate Development, where Mr. Lewyn was involved
in building the editorial operations of TicketMasterOnline-CitySearch. From
June 1989 to April 1996, Mr. Lewyn served as the Washington, D.C. technology
correspondent for Business Week.
Edward S. Hauck has served as our Senior Vice President since September
1999. From May 1996 to September 1999, Mr. Hauck was Senior Vice President and
Group Publisher of Phillips Business Information, Inc., an information services
company. From 1990 until May 1996, Mr. Hauck served in various positions at
Congressional Quarterly, Inc., a publishing company. Most recently, he served
as a member of its board of directors and as Vice President and Associate
Publisher from January 1995 until May 1996.
Michael J. Deale has served as our Senior Vice President since August 1999.
Prior to joining us he served as an Entrepreneur in Residence at Next
Generation Fund, LLC, a venture capital fund, from July 1998 until August 1999.
From July 1997 to June 1998, Mr. Deale served as Chief Operating Officer for
Power Navigator, a web site service for the newly deregulated electric utility
industry. From June 1996 to June 1997, Mr. Deale served as Vice President,
Customer Advocacy for Arbor Software Company, a builder of an on-line analytic
processing database. From February 1993 to June 1996, Mr. Deale served in
various capacities including Director of Technology and Director of Engineering
at Red Pepper Software Company.
Donita L. Prakash has served as our Vice President of Business Development
since August 1999. Prior to joining us, Ms. Prakash specialized in providing
business strategy and business development skills to Internet companies through
her own consulting practice, Sapient Technology, Inc., which she started in May
1999. From March 1996 until April 1999 Ms. Prakash was employed by America
Online, Inc. where she was responsible for managing the business of classifieds
and directories within the e-commerce group. Ms. Prakash spent six years at
MCI/Worldcom, from January 1990 until March 1996, where she served as manager
of the product marketing group in the MCI/News Corp Internet joint venture.
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Lynda M. Applegate will serve as a director of our company beginning upon
completion of this offering. She is the MBA class of 1952 Distinguished
Professor of Business Administration at Harvard Business School, teaching
courses in general management, management information systems and organization
design. Prior to joining the Harvard Business School faculty in 1986, she was
on the faculties of the University of Michigan, University of Washington and
University of Arizona. Dr. Applegate is also a member of the board of directors
of MicroAge, Inc. and Extraprise, Inc., and the strategic advisory boards for
Mainspring Communications, WebLine, Ventix, bluemercury and the Alliance
Analyst. Dr. Applegate is also member of the United States General Accounting
Office Executive Council on Information Management and Telecommunications.
Neil R. Austrian will serve as a director of our company beginning upon
completion of this offering. Mr. Austrian has served as President and Chief
Operating Officer of the National Football League since April 1991. He was a
Managing Director of Dillon, Read & Co. Inc. from October 1987 until March
1991. Mr. Austrian served as a director of Viking Office Products, Inc. from
1988 until August 1998. He also serves as a director of REFAC Technology
Development Corporation and Office Depot, Inc.
Senator George J. Mitchell will serve as a director of our company beginning
upon the completion of this offering. Since 1995, Senator Mitchell has been
special counsel to the law firm of Verner, Liipfert, Bernhard, McPherson & Hand
in Washington, D.C. and senior counsel to the firm of Preti, Flaherty, Beliveau
& Pachios in Portland, Maine. He served as a United States Senator for 15 years
commencing in 1980, and was Senate Majority Leader from 1989 to 1995. Senator
Mitchell is a member of the Board of Directors of UNUM Corporation, FDX
Corporation, Xerox Corporation, KTI, Inc., and Staples, Inc. He is also a
trustee of Starwood Hotels & Resorts.
Jeffrey R. Sechrest will serve as a director of our company beginning upon
completion of this offering. He is a founding member of Evercore Partners, a
merchant banking and financial advisory firm based in New York City where he
has worked since May 1997. Prior to joining Evercore Partners, Mr. Sechrest was
a senior Managing Director at Lehman Brothers from February 1987 to May 1997
where he headed several investment banking business units including mergers and
acquisitions and media and telecommunications.
Gerald H. Taylor will serve as a director of our company beginning upon
completion of this offering. Since November 1998, Mr. Taylor has been a
telecommunications consultant and investor. From 1969 to October 1998,
Mr. Taylor worked for MCI Communications Corp. holding a variety of senior
management positions. Mr. Taylor became Chief Executive Officer of MCI in
November 1996 after serving as president and chief operating officer from 1994
to 1996. Mr. Taylor currently serves on the boards of Voyager.net and Lafarge
Corporation.
Our board of directors will consist of between one and 15 directors.
Directors will serve for a term expiring at the annual meeting of stockholders
held in the year following their election and until their successors have been
duly elected and qualified or until any director's earlier death, resignation
or removal.
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Advisory Board
Consistent with our philosophy of creating, developing, operating, investing
in, acquiring and supporting entrepreneurial businesses, we have established an
advisory board whose members provide links to the entrepreneurial community and
who provide us and our partner companies with strategic guidance in issues
relating to general management, sales and marketing and information technology
particular to emerging companies in the Internet and interactive media markets.
The advisory board will meet periodically with management as a group and
individually, and we intend to reimburse reasonable travel and related expenses
incurred by advisory board members in connection with each meeting. In
addition, we are in contact on a regular basis with various individual members
of the advisory board in connection with ongoing operations. We expect to
increase the size of our advisory board as appropriate. The members of the
advisory board qualify for grants of non-qualified stock options under the 1999
Stock Option and Incentive Plan. Members of the advisory board are eligible to
receive an individual grant of 5,000 options and may receive additional grants
in the future of up to 5,000 options each year.
David C. Cole, 47, has been chairman of the Cole-Gilburne Fund, an investment
firm specializing in the early-stage development of companies in the
information sciences industry since 1986. Since 1997, Mr. Cole has been
president of Aquaterra Corporation, a private investment management firm.
Aquaterra Corporation is the managing general partner of both Pan Pacific
Ventures and Catalyst II, investment partnerships. Mr. Cole served as an
officer of America Online, Inc., from 1984 through 1996, initially as president
of AOL's Internet Services Company and later as president of the AOL New
Enterprises Group. He held operating responsibility for AOL International, AOL
Enterprises, AOL Digital Cities and AOL Corporate Development. Mr. Cole
previously served as chairman, president and Chief Executive Officer of
Navisoft, Inc., an Internet-based software provider that AOL acquired in 1994.
From 1985-1986 he served as President of Ziff Communications and from 1981-1984
he served as Chief Executive Officer of Ashton-Tate, a database software
company. He also serves as a director of Healthnotes, Inc. and the Daily
Wellness Company.
Charles Conn III, 38, has served as a director of TicketMasterOnline-
CitySearch since March 1999, as Chief Executive Officer since September 1998
and as Chief Executive Officer of CitySearch since he co-founded CitySearch in
September 1995. Mr. Conn also served as President of CitySearch from September
1995 to October 1996 and served as a director from September 1995 until
September 1998. From September 1990 to September 1995, he was a consultant at
McKinsey & Company, where he was elected Partner. From September 1986 to
September 1988, Mr. Conn worked with the Boston Consulting Group in Boston and
Tokyo and in 1989 with Canon, Inc.
Eric J. Gertler, 36, is currently Co-Chairman of www.doublebill.com, a
Silicon Valley Internet start-up. From April 1998 to March 1999, Mr. Gertler
served as President and Chief Operating Officer for U.S. News & World Report,
The Atlantic Monthly and Fast Company. From February 1997 to April 1998, Mr.
Gertler was Executive Vice President of U.S. News & World Report. In January
1996, Mr. Gertler was named President of The New Media Group for these media
properties, including The New York Daily News, and developed, launched and
oversaw the operations of the newspaper's web site. From January 1993 through
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December 1996, Mr. Gertler served in a number of capacities for The New York
Daily News, including Vice President and Secretary of Legal & Business Affairs,
and Vice President, Editorial Administration. Mr. Gertler also worked as a
communications and media attorney for the law firm Skadden, Arps, Slate,
Meagher & Flom.
Theodore J. Leonsis, 42, has served as President, Interactive Properties
Group of America Online, Inc. since March 1999. From November 1996 to March
1999, Mr. Leonsis was President of America Online Studios, a division of
American Online, Inc. Prior to that, Mr. Leonsis was President of America
Online Services Company, also a division of America Online, Inc., from 1994 to
1996. Mr. Leonsis was previously Chief Executive Officer of Redgate
Communications Corporation, a media marketing company which was founded in 1987
and sold to America Online, Inc. in 1994. Mr. Leonsis is also a director of
U.S.A. Floral Products, Inc., Preview Travel, Inc., and Proxicom Inc.
Luther M. Shannon, 36, will serve as a member of our advisor board upon
completion of this offering. Mr. Shannon was Executive Vice President and Chief
Technology Officer of EHQ, Inc. from February 1997 through July 1999, where he
focused on managing and developing Internet based software for automatic speech
recognition. From July 1996 through January 1997, Mr. Shannon was Executive
Vice President and Chief Technology Officer of FoneLink, LLC, where he designed
and managed network integrated, real-time, phone-based purchasing and
information systems. Mr. Shannon was the Chief Technology Officer at Providence
Technologies from July 1995 through November 1995 where he designed and managed
the implementation of parental guidance software for Windows 95. From March
1994 through November 1995, Mr. Shannon worked at Xerox Corporation as a
Principal Design Consultant and Principal Consulting Engineer.
Peter G. Schiff, 47, has been the President of Northwood Ventures LLC since
he founded it in 1983. He is also the President of Northwood Capital Partners
LLC. Northwood Ventures specializes in venture capital and leveraged buyouts.
Prior to founding Northwood Ventures, Mr. Schiff worked in the venture capital
division of E.M. Warburg, Pincus & Co. and, prior to that, was an officer in
the corporate division of Chase Manhattan Bank. Mr. Schiff serves as a director
of Cell Pathways, Inc.
Scott A. Wieler, 41, is a Managing Director of Deutsche Bank Securities Inc.
and is co-head of Deutsche Banc Alex. Brown's Media and Communications group in
Corporate Finance, focusing on outdoor advertising, education, publishing,
Internet and emerging communications and information services. Mr. Wieler
joined BT Alex. Brown before its merger with Deutsche Bank Securities, Inc. as
a managing director in 1994. Previously he held the position of co-head of
Media and Communications Banking at Bankers Trust.
The members of our advisory board may change from time to time based upon
the evolving needs of our management team and partner companies.
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Committees of the Board of Directors
Our board of directors intends to establish a compensation committee to
consist solely of non-employee directors. The compensation committee will
provide a general review of our compensation plans to ensure that they meet
corporate objectives and will administer our stock plan. Our board of directors
also intends to establish an audit committee that will be comprised solely of
independent directors. The responsibilities of the audit committee will
include:
. recommending to our board of directors the independent public
accountants to conduct the annual audit of our books and records;
. reviewing the proposed scope of the audit;
. approving the audit fees to be paid;
. reviewing accounting and financial controls with the independent public
accountants and our financial and accounting staff; and
. reviewing and approving transactions between us and our directors,
officers and affiliates.
Director Compensation
All directors who are not currently receiving compensation as officers,
employees or consultants of ours are entitled to receive an annual retainer fee
of $5,000, plus reimbursement of expenses for each meeting of our board of
directors and each committee meeting that they attend in person. In addition,
non-employee directors may, in the board's sole discretion, be eligible for
grants of non-qualified stock options under our stock option and incentive
plan.
Co-investment Policy
Our board of directors has adopted a resolution prohibiting members of the
board and our executive officers from investing in our partner companies. This
policy does not apply to our advisory board members and may be changed at any
time by our board of directors in its sole discretion.
Employment Agreements
Executive Officers. We have entered into senior management agreements with each
of our executive officers. Each agreement has an initial term of two years and
will be extended for two additional years unless we or the employee elects to
terminate the agreement within 60 days of the second anniversary of the date of
employment. Under these agreements, these employees will receive an initial
annual base salary that may be increased by our board of
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directors based on performance objectives they establish, and an annual bonus
based upon many factors, including results of operations, achievement of
targeted business objectives and stock price. Currently, other than James R.
Smith Jr., no executive officer is collecting the salary indicated in his
senior management agreement. Salary payments will commence upon the completion
of this offering, or upon an earlier date as established by our board of
directors. These employees also will receive, upon the completion of this
offering, options to acquire shares of common stock at the initial public
offering price, except for James R. Smith Jr., who will receive options to
acquire shares of our common stock at $10.00 per share. With respect to all
options granted to these executive officers, except for Mr. James R. Smith Jr.,
one-fourth will vest on the first anniversary of the closing date of this
offering, and the remaining three-fourths of these options will vest at a rate
of 1/36th per month. One-fourth of Mr. James R. Smith Jr.'s options will vest
six months following the closing date of this offering and the remaining three-
fourths of these options will vest at a rate of 1/42 per month. All of these
options will vest in full upon a change in control of E2E. The following table
shows compensation information contained in the senior management agreements.
<TABLE>
<CAPTION>
Initial
Annual Maximum
Base Annual
Executive Officer Salary Bonus Options
----------------- -------- -------- -------
<S> <C> <C> <C>
Robert J. Smith $215,000 $107,500 275,000
Michael C. Wheeler $215,000 $107,500 275,000
James R. Smith, Jr. $215,000 $107,500 275,000
Steven J. Quamme $180,000 $ 90,000 175,000
Mark Lewyn $180,000 $ 90,000 175,000
</TABLE>
If, during the term of one of these agreements, we terminate the employee's
employment without cause or the employee terminates employment for good reason,
the employee will be entitled to receive his or her base salary and all
employee benefits for a period of one year from the date of the termination of
employment, and all options granted to that employee will vest in full.
Under the terms of these agreements, these employees have agreed to preserve
the confidentiality and the proprietary nature of all information relating to
us, our partner companies and our business during the term of the agreement and
for two years after the term of the agreement ends. In addition, each of these
employees has agreed to non-competition and non-solicitation provisions that
will be in effect during the term of his agreement and for two years after the
term of the agreement ends.
Restricted Stock Agreements
Under the terms of restricted stock agreements between each executive
officer and E2E, each executive officer who purchased shares of our common
stock prior to this offering for $.01 per share will be required to forfeit
that portion of his shares that remains subject to the lock-up arrangements
with us at $.01 per share if and when we terminate that employee's employment
for cause or the employee terminates his employment with us without good
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reason. The lock-up arrangement with us permits these employees to transfer up
to 50% of their shares beginning one year following this offering, 75% of their
shares beginning 18 months after this offering and all of their shares after
two years. If, for example, we terminate one of these employees for cause 14
months after this offering, 50% of his shares would be redeemed by us at $.01
per share. For the number of shares purchased prior to this offering by each of
our executive officers see "Transactions with Related Parties," below.
1999 Stock Option and Incentive Plan
Our stock option plan will authorize the grant of:
. stock options;
. stock appreciation rights;
. restricted stock;
. deferred stock;
. restricted stock units;
. unrestricted stock;
. dividend equivalents;
. performance awards; and
. annual incentive awards to provide incentives to attract and retain
executive officers, directors, employees and other key personnel.
A committee of our board of directors will administer the stock option plan.
The maximum number of shares available for issuance under the stock option plan
will be 3,000,000. Of those 3,000,000 shares, no more than 500,000 can be used
for awards other than stock options.
In each fiscal year, any person who is eligible to participate may not be
granted awards relating to more than 1,000,000 shares. In addition, the maximum
amount that may be earned as an annual incentive award or other cash award in
any fiscal year by any one participant is $300,000 and the maximum amount that
may be earned as an incentive award or other cash award in respect of a
performance period by any one participant is $900,000. If and to the extent
that the committee determines that an award to be granted to a participant
should qualify as "performance-based compensation" for purposes of Section
162(m) of the Internal Revenue Code, the grant, exercise and/or settlement of
that award will be contingent upon achievement of preestablished performance
goals. The performance goals will be one or more of the following business
criteria for us and/or our specified subsidiaries or business units, except
with respect to the total stockholder return and earnings per share criteria:
(1) total stockholder return;
(2) total stockholder return as compared to total return, on a comparable
basis, of a publicly available index such as, but not limited to, the
Standard & Poor's 500 Stock Index;
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(3) net income;
(4) pretax earnings;
(5) earnings before interest expense, taxes, depreciation and amortization;
(6) pretax operating earnings after interest expense and before bonuses,
service fees and extraordinary or special items;
(7) operating margin;
(8) earnings per share;
(9) return on equity;
(10) return on capital;
(11) return on investment;
(12) operating earnings;
(13) working capital; and
(14) ratio of debt to stockholders' equity.
Stock Options. Our stock option plan permits the granting of options to
purchase shares of common stock intended to qualify as incentive options under
the Internal Revenue Code and options that do not qualify as incentive options.
The exercise price of each option will be determined by the committee but may
not be less than 100% of the fair market value of our common stock on the date
of grant.
The term of each option will be fixed by the committee and may not exceed 10
years from the date of grant. The committee will determine at what time or
times each option may be exercised and the period of time, if any, after
retirement, death, disability or termination of employment during which options
may be exercised. Options may be made exercisable in installments. The
exercisability of options may be accelerated by the committee.
To exercise an option, the optionee must pay the exercise price in full
either in cash or cash equivalents by delivery of shares of common stock
already owned by the optionee. The exercise price may also be delivered by a
broker under irrevocable instructions to the broker from the optionee.
Restricted Stock. The committee may also award shares of common stock to
participants. These stock awards may be conditioned on the achievement of
performance goals and/or continued employment with us through a specified
restricted period. If the performance goals and any other restrictions are not
attained, the participants will forfeit their restricted shares. The purchase
price of restricted shares of common stock will be determined by the committee.
Restricted Stock Units. The Committee may also award restricted stock units
which represent a conditional right to receive a share of common stock in the
future, and which is subject to restrictions and a risk of forfeiture. These
awards may be conditioned on the achievement of performance goals and/or
continued employment with us through a specified restricted period. If the
performance goals and other restrictions are not attained, the participants
will forfeit these restricted stock units.
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Deferred Stock. The committee may also award deferred stock units, which are
ultimately payable in the form of shares of common stock. A deferred stock
award may be conditioned or restricted in whatever manner the committee may
determine. These conditions and restrictions may include the achievement of
performance goals and/or continued employment with us through a specified
restricted period. If the performance goals and other restrictions are not
attained, the participants will forfeit their deferred stock units. During the
deferral period, the deferred stock units may be credited with dividend
equivalent rights.
Unrestricted Stock. The committee may also grant shares of common stock at
no cost or for a purchase price determined by the committee which are free from
any restrictions under the stock option plan. Unrestricted shares of common
stock may be issued to participants in recognition of past services or other
valid consideration, and may be issued in lieu of cash compensation to be paid
to participants.
Performance Stock Awards. The committee may also grant performance stock
awards to participants entitling the participants to receive shares of common
stock upon the achievement of performance goals and other conditions determined
by the committee.
Dividend Equivalent Rights. The committee may grant dividend equivalent
rights entitling the recipient to receive credits for dividends that would have
been paid if the recipient had held a specified number of shares of common
stock. Dividend equivalent rights may be granted as a component of another
award or as a freestanding award. Dividend equivalent rights credited under the
stock option plan may be paid currently or be deemed to be reinvested in
additional shares of common stock, and may accrue additional dividend
equivalent rights after reinvestment at fair market value at the time of deemed
reinvestment. Dividend equivalent rights may be settled in cash, common stock
or a combination of cash and shares, in a single installment or installments,
as specified in the award. Awards payable in cash on a deferred basis may
provide for crediting and payment of interest equivalents.
Stock Appreciation Rights. The committee may grant a right to receive a
number of shares or, in the discretion of the committee, an amount in cash or a
combination of shares and cash, based on the increase in the fair market value
of the shares underlying the right during a stated period specified by the
committee. The committee may approve the grant of these stock appreciation
rights related or unrelated to stock options. Upon exercise of a stock
appreciation right that is related to a stock option granted, the holder of the
related option will surrender the option for the number of shares as to which
the stock appreciation right is exercised and will receive payment of an amount
computed as provided in the stock appreciation right award.
Generally, a stock appreciation right granted in connection with a stock
option will be exercisable at the time or times, and only to the extent that,
the related stock option is exercisable, and will not be transferable except to
the extent that the related option may be transferable.
Performance and Annual Incentive Awards. Our stock option plan authorizes
the committee to grant multiyear and annual incentive awards based upon
achievement of pre-established performance goals, including awards that qualify
as "performance-based
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compensation" for purposes of the Internal Revenue Code. The grant, exercise
and/or settlement of a performance award may be made contingent upon
achievement of pre-established performance goals. Achievement of performance
goals will be measured over a performance period of up to 10 years, as
specified by the committee.
The amount of an incentive award is based upon the achievement of a
performance goal or goals based on one or more of the business criteria
described above during the given performance period specified by the committee.
The committee may specify the amount of the incentive award as a percentage of
these business criteria, a percentage in excess of a threshold amount or as
another amount which need not bear a strictly mathematical relationship to
these business criteria.
Other Stock-Based Awards. The committee is authorized to grant to
participants other awards that may be based on or related to our common stock,
including:
.convertible or exchangeable debt securities;
.other rights convertible or exchangeable into shares;
.purchase rights for shares;
.incentive awards with value and payment contingent upon performance; and
. incentive awards valued by reference to the performance of specified
subsidiaries or business units.
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TRANSACTIONS WITH RELATED PARTIES
Between February and August of this year, we entered into agreements with
our sole director, director nominees, executive officers and other persons
affiliated with us. Under these agreements, the following persons purchased
shares of common stock in the following amounts:
(1) Robert J. Smith, our Chief Executive Officer and a director nominee,
purchased 432,500 shares of common stock at a purchase price of $.01
per share, for an aggregate consideration of $4,325. Based on an
assumed public offering price of $13.00 per share, these shares would
have an aggregate value of $5,622,500.
(2) Michael C. Wheeler, our President and a director nominee, purchased
345,000 shares of common stock at a purchase price of $.01 per share,
for an aggregate consideration of $3,450. Based on an assumed public
offering price of $13.00 per share, these shares would have an
aggregate value of $4,485,000.
(3) Steven J. Quamme, our Chief Financial Officer and sole director, and
Mark Lewyn, Senior Vice President--Business Development, each purchased
216,000 shares of common stock at a purchase price of $.01 per share,
for an aggregate consideration of $2,160 each. Based on an assumed
public offering price of $13.00 per share, these shares would have an
aggregate value to each of these executive officers of $2,808,000.
(4) Lynda M. Applegate, Neil R. Austrian, Senator George J. Mitchell,
Jeffrey R. Sechrest and Gerald H. Taylor, director nominees of our
company, each purchased 86,500 shares of common stock at a purchase
price of $.01 per share or $865. Based on an assumed public offering
price of $13.00 per share, these shares would have an aggregate value
to each of these director nominees of $1,124,500.
(5) Jonathan J. Ledecky, a significant stockholder, purchased 1,300,000
shares of common stock at a purchase price of $.01 per share, for an
aggregate consideration of $13,000. Based on an assumed public offering
price of $13.00 per share, these shares would have an aggregate value
of $16,900,000.
David Ledecky, a former executive officer and the brother of Jonathan
Ledecky, purchased 216,000 shares of common at a purchase price of $.01 per
share, for an aggregate consideration of $2,160. Based on an assumed public
offering price of $13.00, these shares would have an aggregate value of
$2,808,000.
In May 1999, Jonathan J. Ledecky agreed to loan up to $10.0 million to E2E
in exchange for a promissory note. As of September 1, 1999, the loan balance
was $4.5 million, bore interest at a rate of 8.25% and is secured by our
interests in some of our partner companies. We will repay the outstanding
balance on the note upon the closing of this offering out of the proceeds of
this offering.
In June 1999, we engaged the law firm of Verner, Liipfert, Bernhard,
McPherson & Hand to perform legal services for E2E. We paid Verner, Liipfert a
retainer fee of $100,000 for future legal services. Senator George J. Mitchell,
a director nominee, is special counsel to Verner, Liipfert.
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Robert J. Smith, our Chief Executive Officer and director nominee, owns a 1%
interest in Next Generation Fund, which owns a 6% interest in MEI. If Next
Generation Fund distributes the proceeds it receives from the merger of MEI
into E2E, Mr. Smith would receive approximately $12,000. Mr. Smith also holds
fully vested options to purchase 40,000 shares of VIPRO common stock, which he
received for consulting services in 1998. If exercised on September 1, 1999,
these options would have a value to Mr. Smith of approximately $40,000. Mr.
Smith holds a promissory note for $25,000 from Buyline.
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PRINCIPAL STOCKHOLDERS
The following shows the number and percentage of outstanding shares of our
common stock that were owned as of September 10, 1999 and the percentage that
will be owned immediately following this offering by:
. all persons known by us to own beneficially more than 5% of our common
stock;
. each director, director nominee and executive officer; and
. all directors, director nominees and executive officers as a group.
The number of outstanding shares shown below includes 459,242 shares of our
common stock that we will issue to Northwood upon conversion of its convertible
notes simultaneous with the closing of this offering, assuming an initial
offering price of $13.00, but does not include shares that we will issue to
cover the conversion of the accrued interest on those notes. At the time of the
closing of this offering we will also have outstanding (1) options to purchase
1,850,000 shares of common stock at a weighted average price of $12.55 per
share, assuming an initial offering price of $13.00 per share, none of which
will be exercisable within 60 days following this offering and none of which
are reflected in the following table and (2) currently exercisable warrants to
purchase 400,000 shares of our common stock at the initial public offering
price, which are included in the number of shares in the table shown as
beneficially owned by Northwood.
An asterisk indicates ownership of less than 1%.
<TABLE>
<CAPTION>
Number of Percentage Ownership
Shares -------------------------
Beneficially Before After
Name and Address Owned Offering Offering
- ---------------- ------------ ---------- ----------
<S> <C> <C> <C>
Officers and Directors
Robert J. Smith.................... 432,500 8.7% 2.9%
800 Connecticut Ave., N.W.
Suite 1111
Washington, D.C. 20006
Michael C. Wheeler................. 345,000 6.9 2.3
570 Lexington Avenue
23rd Floor
New York, NY 10022
Steven J. Quamme................... 216,000 4.3 1.4
800 Connecticut Ave., N.W.
Suite 1111
Washington, D.C. 20006
James R. Smith, Jr. ............... 0 * *
800 Connecticut Ave., N.W.
Suite 1111
Washington, D.C. 20006
Mark Lewyn......................... 216,000 4.3 1.4
800 Connecticut Ave., N.W.
Suite 1111
Washington, D.C. 20006
Lynda M. Applegate................. 86,500 1.7 *
Harvard Business School
Baker 474
Soldiers Field Road
Boston, MA 02163
Neil R. Austrian................... 86,500 1.7 *
National Football League
280 Park Avenue, 17th Floor
New York, NY 10017
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Number of Percentage Ownership
Shares -----------------------
Beneficially Before After
Name and Address Owned Offering Offering
- ---------------- ------------ ---------- ----------
<S> <C> <C> <C>
George J. Mitchell .................... 86,500 1.7 *
Verner, Liipfert, Bernhard, McPherson
and Hand
901 15th Street, NW
Washington, D.C. 20005-2301
Jeffrey R. Sechrest ................... 86,500 1.7 *
Evercore Partners
65 E. 55th Street
New York, NY 10022
Gerald H. Taylor ...................... 86,500 1.7 *
c/o E2Enet, Inc.
800 Connecticut Ave., N.W.
Suite 1111
Washington, D.C. 20006
All directors, director nominees and
executive officers as a
group (10 persons).................... 1,642,000 32.9 11.0
5% Stockholders
Jonathan J. Ledecky.................... 1,300,000 26.0 8.7
The Ledecky Foundation
1615 L Street, N.W.
Washington, D.C. 20036
Northwood Ventures LLC................. 859,242 15.9 5.6
Northwood Capital Partners LLC
485 Underhill Boulevard
Syosset, NY 11791
</TABLE>
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common stock,
par value $.01 per share, and 10,000,000 shares of preferred stock, par value
$.01 per share. We do not have any outstanding shares of preferred stock.
Following this offering, we will have outstanding 14,990,911 shares of
common stock, assuming the underwriters do not exercise their over-allotment
option. This number includes 459,242 shares of common stock that we will issue
to Northwood upon conversion of its convertible notes simultaneous with the
closing of this offering, assuming an initial offering price of $13.00, but
does not include shares that we will issue to cover the conversion of the
accrued interest on those notes. If the underwriters exercise their over-
allotment option in full, we will have 16,490,911 shares of common stock
outstanding after this offering.
The following is a description of our capital stock.
Common Stock
We are authorized to issue 100,000,000 shares of common stock. Each
stockholder of record will be entitled to one vote for each outstanding share
of our common stock owned by that stockholder on every matter properly
submitted to the stockholders for their vote. After satisfaction of the
dividend rights of holders of preferred stock, holders of common stock are
entitled to any dividend declared by the board of directors out of funds
legally available for this purpose, and, after the payment of liquidation
preferences to holders of preferred stock, holders of common stock are entitled
to receive, on a pro rata basis, all our remaining assets available for
distribution to the stockholders in the event of our liquidation, dissolution
or winding up. Holders of common stock do not have any preemptive right to
become subscribers or purchasers of additional shares of any class of our
capital stock. The outstanding shares of common stock are, and the shares of
common stock offered in this offering will be, when issued and paid for, fully
paid and nonassessable. The rights, preferences and privileges of holders of
common stock may be adversely affected by the rights of the holders of shares
of any series of preferred stock that we may designate and issue in the future.
Preferred Stock
Our certificate of incorporation allows us to issue without stockholder
approval preferred stock having rights senior to those of the common stock. No
shares of preferred stock are outstanding. Our board of directors will be
authorized, without further stockholder approval, to issue up to 10,000,000
shares of preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions of any series of preferred stock,
including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, and to fix the number of shares
constituting any series and the designations of these series.
Our issuance of preferred stock may have the effect of delaying or
preventing a change in control. Our issuance of preferred stock could decrease
the amount of earnings and assets available for distribution to the holders of
common stock or could adversely affect the rights and powers, including voting
rights, of the holders of common stock. The issuance of
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<PAGE>
preferred stock could also have the effect of decreasing the market price of
the common stock. We currently have no plans to issue any shares of preferred
stock.
Limitation of Liability of Directors and Officers
As permitted by the Delaware General Corporation Law, our certificate of
incorporation provides that our directors will not be personally liable to us
or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the Delaware General Corporation Law, relating to
unlawful dividends or unlawful stock purchases or redemptions, or
. for any transaction from which the director derives an improper personal
benefit.
As a result of this provision, we and our stockholders may be unable to
obtain monetary damages from a director for breach of his or her duty of care.
Our certificate of incorporation and bylaws provide for the indemnification
of our directors and officers to the fullest extent authorized by the Delaware
General Corporation Law, except that we will indemnify a director or officer in
connection with an action initiated by that person only if the action was
authorized by our board of directors. The indemnification provided under our
certificate of incorporation and the bylaws includes the right to be paid
expenses in advance of any proceeding for which indemnification may be had,
provided that the payment of these expenses incurred by a director or officer
in advance of the final disposition of a proceeding may be made only upon
delivery to us of an undertaking by or on behalf of the director or officer to
repay all amounts paid in advance if it is ultimately determined that the
director or officer is not entitled to be indemnified. Under our bylaws, if we
do not pay a claim for indemnification within 60 days after we have received a
written claim, the director or officer may bring an action to recover the
unpaid amount of the claim and, if successful, the director or officer also
will be entitled to be paid the expense of prosecuting the action to recover
these unpaid amounts.
Under our bylaws, we have the power to purchase and maintain insurance on
behalf of any person who is or was one of our directors, officers, employees or
agents, or is or was serving at our request as a director, officer, employee,
partner or agent of another corporation or of a partnership, joint venture,
limited liability company, trust or other enterprise, against any liability
asserted against the person or incurred by the person in any of these
capacities, or arising out of the person's fulfilling one of these capacities,
and related expenses, whether or not we would have the power to indemnify the
person against the claim under the provisions of the Delaware General
Corporation Law. We intend to purchase director and officer liability insurance
on behalf of our directors and officers.
Anti-Takeover Provisions
Our certificate of incorporation and bylaws contain provisions that are
intended to enhance the likelihood of continuity and stability in the
composition of our board of directors and in the policies formulated by our
board of directors. In addition, provisions of
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Delaware law may hinder or delay an attempted takeover of E2E other than
through negotiation with our board of directors. These provisions could have
the effect of discouraging attempts to acquire us or remove incumbent
management even if some or a majority of our stockholders believe this action
to be in their best interest, including attempts that might result in the
stockholders receiving a premium over the market price for their shares of
common stock.
Removal of Directors; Vacancies. Our certificate of incorporation provides
that directors may be removed only for cause. In addition, vacancies and newly
created directorships resulting from any increase in the size of the board of
directors may be filled only by the affirmative vote of a majority of the
directors then in office, even if they do not constitute a quorum, or by a sole
remaining director. These provisions would prevent stockholders from removing
incumbent directors without cause and filling the resulting vacancies with
their own nominees.
Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors. Our bylaws establish an advance notice procedure with
regard to the nomination, other than by the board of directors, of candidates
for election to the board of directors and with regard to matters to be brought
before an annual meeting of our stockholders by a stockholder. For nominations
and other business to be brought properly before an annual meeting by a
stockholder, the stockholder must deliver notice to us not less than 60 days
nor more than 90 days prior to the first anniversary of the preceding year's
annual meeting. Separate provisions based on public notice by us specify how
this advance notice requirement operates if the date of the annual meeting is
advanced by more than 30 days or delayed by more than 60 days from the
anniversary date. The stockholder's notice must set forth specified information
regarding the stockholder and its holdings, as well as background information
regarding any director nominee, together with that person's written consent to
being named in the proxy statement as a nominee and to serving as a director if
elected, and a brief description of any business desired to be brought before
the meeting, the reasons for conducting the business at the meeting and any
material interest of the stockholder in the business proposed. In the case of a
special meeting of stockholders called for the purpose of electing directors,
nominations by a stockholder may be made only by delivery to us, no later than
10 days following the day on which public announcement of the special meeting
is made, a notice that complies with the above requirements. Although our
bylaws do not give our board of directors any power to approve or disapprove
stockholder nominations for the election of directors or any other business
desired by stockholders to be conducted at an annual meeting, the bylaws:
. may have the effect of precluding a nomination for the election of
directors or precluding the conduct of business at a particular annual
meeting if the proper procedures are not followed; or
. may discourage or deter a third party from conducting a solicitation of
proxies to elect its own slate of directors or otherwise attempting to
obtain control of E2E, even if the conduct of this solicitation or the
attempt to obtain control might be beneficial to E2E and our
stockholders.
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Special Stockholders' Meetings. Under our certificate of incorporation and
bylaws, special meetings of stockholders, unless otherwise prescribed by
statute, may be called only:
. by the board of directors or by our Chairman; or
. by the holders of at least a majority of the securities of E2E
outstanding and entitled to vote generally in the election of directors.
Section 203 of Delaware Law. In addition to the foregoing provisions of our
certificate of incorporation and bylaws, we will be subject to the provisions
of Section 203 of the Delaware General Corporation Law. Section 203 prohibits
publicly held Delaware corporations from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless
the business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in
a financial benefit to the interested stockholder. Generally, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years did own, 15% or more of the corporation's voting stock.
These provisions could have the effect of delaying, deferring or preventing a
change in control of E2E or reducing the price that investors might be willing
to pay in the future for shares of our common stock.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company, 40 Wall Street, New York, NY 10005.
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<PAGE>
SHARES AVAILABLE FOR FUTURE SALE
Following this offering, we will have 14,990,911 shares of common stock
outstanding, assuming the underwriters do not exercise their over-allotment
option. This number includes 459,242 shares of common stock that we will issue
to Northwood upon conversion of its convertible notes simultaneous with the
closing of this offering assuming an initial offering price of $13.00, but does
not include shares that we will issue to cover the conversion of the accrued
interest on those notes. All of the shares we sell in this offering will be
freely tradable without restriction or further registration under the
Securities Act, except that any shares purchased by our affiliates, as that
term is defined in Rule 144, may generally only be sold in compliance with the
limitations of Rule 144 described below.
Of the shares of common stock outstanding following this offering, 4,990,911
will be restricted shares under the terms of the Securities Act. Sales of the
restricted shares to be outstanding upon completion of this offering will be
limited by lock-up agreements with the underwriters and with us as described
below.
Rule 144
In general, under Rule 144, a stockholder who owns restricted shares that
have been outstanding for at least one year is entitled to sell, within any
three-month period, a number of these restricted shares that does not exceed
the greater of:
. one percent of the then outstanding shares of common stock, or
approximately 150,000 shares immediately after this offering; or
. the average weekly trading volume in the common stock on the Nasdaq
Stock Market during the four calendar weeks preceding the sale.
In addition, our affiliates must comply with the restrictions and
requirements of Rule 144, other than the one-year holding period requirement,
to sell shares of common stock that are not restricted securities.
Under Rule 144(k), a stockholder who is not currently, and who has not been
for at least three months before the sale, an affiliate of ours and who owns
restricted shares that have been outstanding for at least two years may resell
these restricted shares without compliance with the above requirements. The
one- and two-year holding periods described above do not begin to run until the
full purchase price is paid by the person acquiring the restricted shares from
us or an affiliate of ours.
Common Stock and Options Issuable under our Equity Compensation Plans
Simultaneously with the completion of this offering, we will issue options
to acquire 1,175,000 shares of common stock to our executive officers and
675,000 shares of common stock to other employees, which generally will vest
over four years from the date of this offering.
Warrants
In connection with the Northwood investment in E2E, we have issued currently
exercisable warrants to purchase 400,000 shares of our common stock to
Northwood at the initial public offering price. Following this offering, the
exercise price of the warrant is protected by anti-dilution rights.
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Lock-up Agreements
Our officers, director, director nominees and all of our other stockholders,
who hold an aggregate of 4,990,911 shares of common stock, including holders of
warrants and convertible debt, have agreed that they will not, without the
prior written consent of Deutsche Bank Securities Inc., offer, sell or
otherwise dispose of any shares of our capital stock or any securities
convertible into or exercisable or exchangeable for, or any rights to acquire
or purchase, any of our capital stock, or publicly announce an intention to
effect any of these transactions, for a period of 180 days after the date of
the underwriting agreement, other than shares of common stock transferred in
connection with a pledge agreement or disposed of as bona fide gifts approved
by Deutsche Bank Securities, Inc. Deutsche Bank Securities, Inc. has no current
intention to consent to any other disposition of any shares covered by these
lock-up agreements but will consider each request for its consent at the time
and under the circumstances of the request.
In addition, all of our executive officers and other key employees have
agreed that they will not, without our prior written consent, transfer any of
the shares of common stock they currently own, for one year following this
offering, and then only as follows:
. after one year they may transfer 50% of their shares;
. after 18 months they may transfer 75% of their shares;
. after two years they may transfer 100% of their shares.
Mr. Jonathan Ledecky has agreed to a similar lock-up with E2E with respect
to his shares, except that he has the right to transfer his shares as part of a
pledge, hedging or similar transaction during his lock-up period.
In addition to their lock-up agreement, Messrs. Smith, Wheeler, Quamme and
Lewyn have agreed to forfeit portions of their shares to E2E if their
employment with E2E is terminated by E2E for cause or by the employee without
good reason during the lock-up period. For a discussion of this forfeiture
obligation, see "Management--Employment Agreements," above.
Registration Rights
We have entered into a registration rights agreement with all of our
existing stockholders. If we propose to register our securities under the
Securities Act after this offering, these stockholders will be entitled to
notice of the registration and to include their shares in the registration,
provided that the underwriters for the proposed offering will have the right to
limit the number of shares included in the registration.
As part of this registration rights agreement we have granted additional
rights to Northwood with respect to the restricted shares we will issue to them
upon conversion of their convertible notes and upon exercise of their warrants
to purchase restricted shares of our common stock. Beginning 180 days after the
closing of this offering, Northwood is entitled to two demand registrations.
Under each of the two demand registrations,
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Northwood can require us to file a registration statement covering the shares
with an anticipated aggregate offering price, net of underwriting discounts and
commissions, of not less than $5.0 million. In addition, after we become
eligible to use short form registration statements, Northwood is entitled to
demand short form registrations. Under each of the short form registrations,
Northwood can require us to file a registration statement covering shares with
an anticipated aggregate offering price, net of underwriting discounts and
commissions, of not less than $5.0 million.
All rights granted under this registration rights agreement expire on
September 10, 2003. For any individual stockholder, the rights will expire
before that date (1) if and when the stockholder is able to sell all of his or
her shares according to Rule 144(k) of the Securities Act, or any similar rule
then in force, in one transaction or (2) if and when E2E has registered the
stockholder's shares via a short form registration and has kept that
registration effective for at least one year. If a stockholder is unable, as of
September 10, 2003, to sell all of his or her then-remaining shares pursuant to
Rule 144(k) in a single transaction, the agreement is extended, for that
stockholder only, until September 10, 2005.
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UNDERWRITING
The underwriters named below, through their representative Deutsche Bank
Securities Inc., have severally agreed to purchase from E2E the following
numbers of shares of common stock at the public offering price less the
underwriting discounts and commissions shown on the cover page of this
prospectus.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
- ----------- ----------
<S> <C>
Deutsche Bank Securities Inc. .......................................
BancBoston Robertson Stephens Inc....................................
Friedman, Billings, Ramsey & Co., Inc. ..............................
Stephens Inc.........................................................
----------
Total.............................................................. 10,000,000
==========
</TABLE>
We have entered into an underwriting agreement with the underwriters which
provides that the underwriters are obligated to purchase all of the shares of
common stock we are offering to sell in this offering, other than shares
covered by the over-allotment option described below, if any of the shares are
purchased. We expect to issue these shares on , 1999.
The underwriters propose to offer the shares of common stock to the public
at the public offering price set forth on the cover page of this prospectus and
to dealers at a price that represents a concession not in excess of $ per
share under the public offering price. The underwriters may allow, and dealers
may re-allow, a concession not in excess of $ per share to other dealers.
After the initial offering, the offering price and other selling terms may be
changed by the representatives of the underwriters.
The underwriting fee is equal to the public offering price per share of
common stock less the amount paid by the underwriters to us per share of common
stock. We anticipate that the total underwriting fee will be approximately %
of the aggregate initial public offering price. The following table summarizes
the underwriting compensation that will be paid in connection with this
offering.
<TABLE>
<CAPTION>
Total
----------------------------- ---
Per Without With
Share Over-allotment Over-allotment
----- -------------- --------------
<S> <C> <C> <C> <C>
Public offering price................. $ $ $
Underwriting discounts and commissions
paid by us........................... $ $ $
Proceeds, before expenses to us....... $ $ $
</TABLE>
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $2.0 million.
Until , 1999, or 25 days after this offering begins, all dealers that
buy, sell or trade these shares of common stock, whether or not participating
in this offering, may be required to deliver a prospectus. This is in addition
to the dealers' obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
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We have granted to the underwriters an option, exercisable not later than 30
days after the date of this prospectus, to purchase up to 1,500,000 additional
shares of common stock at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this prospectus. The
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the common stock offered in this offering. To the
extent that the underwriters exercise this option, each of the underwriters
will become obligated to purchase approximately the same percentage of
additional shares of common stock as the number of shares of common stock to be
purchased by it in the above table bears to 10,000,000, and we will be
obligated to sell these shares to the underwriters to the extent they exercise
the option. If any additional shares of common stock are purchased, the
underwriters will offer these additional shares on the same terms as those on
which the initial 10,000,000 shares are being offered.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to shares of the common stock for purchase by our
directors, officers and employees and their business associates and related
persons. The number of shares of our common stock offered to the public will be
reduced to the extent these persons purchase these reserved shares. The
underwriters will offer to the public on the same basis as the other shares any
reserved shares that are not purchased by these persons.
We have agreed to indemnify the underwriters against liabilities in
connection with this offering, including liabilities under the Securities Act.
We have agreed with the underwriters that we will not issue any additional
shares of common stock for 180 days following the date of this offering, except
that we may issue, and grant options or warrants to purchase, shares of common
stock or any securities convertible into, exercisable for or exchangeable for
shares of common stock, upon the exercise of outstanding options and warrants
and our issuance of options and stock granted under the existing stock option
and stock purchase plans and in connection with acquisition transactions.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
To facilitate the offering of the common stock, the underwriters may engage
in transactions that stabilize, maintain or otherwise affect the market price
of the common stock. Specifically, the underwriters may over-allot shares of
the common stock in connection with this offering by creating a short position
in the common stock for their own accounts. Additionally, to cover these over-
allotments or to stabilize the market price of the common stock, the
underwriters may bid for, and purchase, shares of common stock in the open
market. Finally, the representatives, on behalf of the underwriters, also may
reclaim selling concessions allowed to an underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Any of these activities may maintain the market price of our common
stock at a level above that which might otherwise prevail in the open market.
The underwriters are not required to engage in these activities and, if
commenced, may end any of these activities at any time.
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The underwriters do not have any agreements or understandings with third-
party purchasers that would in any way limit the transfer of securities by
those third parties following this offering.
Scott Wieler, a member of the advisory board, is a managing director of
Deutsche Bank Securities, Inc.
Pricing of this Offering
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock has
been determined by negotiation between us and the representatives of the
underwriters. Among the factors considered in determining the public offering
price were:
. the opportunity to create, develop, operate and invest in start-up
companies in the Internet industry;
. an assessment of our management team board of directors and advisory
board;
. prevailing market conditions in the U.S. economy and the Internet
industry; and
. the market capitalizations and stages of development of other companies
which the representatives of the underwriters believe to be comparable
to us.
EXPERTS
The combined financial statements of E2Enet, Inc. as of December 31, 1998
and June 30, 1999 and for the period of September 1, 1998, the date of
inception, through December 31, 1998 and for the six-month period ended June
30, 1999 included in this prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of MEI Software Systems, Inc. as of
December 31, 1998 and for each of the three years in the period ended December
31, 1998 and as of June 30, 1999 and for the six-month period ended June 30,
1999 included in this prospectus have been so included in reliance on the
report, which contains an explanatory paragraph relating to MEI's ability to
continue as a going concern as described in Note 3 to the financial statements,
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
The financial statements of Buyline.net, Inc. as of June 30, 1999 and for
the period from May 18, 1999, the date of inception, through June 30, 1999
included in this prospectus have been so included in reliance on the report,
which contains an explanatory paragraph relating to Buyline's ability to
continue as a going concern as described in Note 2 to the financial statements,
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
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The financial statements of Urban Box Office Network, Inc. as of June 30,
1999 and for the period from May 11, 1999, the date of inception, through June
30, 1999 included in this prospectus have been so included in reliance on the
report, which contains an explanatory paragraph relating to Urban Box Office's
ability to continue as a going concern as described in Note 2 to the financial
statements, of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
The financial statements of Blue Rock Avenue, Inc. as of June 30, 1999 and
for the period from January 5, 1999, the date of inception, through June 30,
1999 included in this prospectus have been so included in reliance on the
report, which contains an explanatory paragraph relating to Blue Rock Avenue's
ability to continue as a going concern as described in Note 2 to the financial
statements, of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of Hooey, Inc. as of June 30, 1999 and
for the period from April 15, 1999, the date of inception, through June 30,
1999 included in this prospectus have been so included in reliance on the
report, which contains an explanatory paragraph relating to Hooey's ability to
continue as a going concern as described in Note 2 to the consolidated
financial statements, of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The financial statements of bluemercury, Inc. as of June 30, 1999 and for
the period from February 16, 1999, the date of inception, through June 30, 1999
included in this prospectus have been so included in reliance on the report,
which contains an explanatory paragraph relating to bluemercury's ability to
continue as a going concern as described in Note 2 to the financial statements,
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
VALIDITY OF THE SHARES
The validity of shares of common stock will be passed upon on our behalf by
Hogan & Hartson L.L.P., Washington, D.C. Legal matters will be passed upon for
the underwriters by Piper & Marbury L.L.P., Baltimore, Maryland.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement, including exhibits,
schedules and amendments. This prospectus is a part of the registration
statement and includes all of the information which we believe is material to
an investor considering whether to make an investment in our common stock. We
refer you to the registration statement for additional information about E2E,
our common stock and this offering, including the full texts of the exhibits,
some of which have been summarized in this prospectus. The registration
statement is available for inspection and copying at the SEC's Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain
information about the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-0330. In addition, the SEC
87
<PAGE>
maintains an Internet site that contains the registration statement. The
address of the SEC's Internet site is "http://www.sec.gov."
We intend to furnish our stockholders annual reports containing financial
statements audited by our independent accountants.
88
<PAGE>
INDEX TO E2ENET, INC. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
E2ENET, INC.
Report of Independent Accountants F-1
Combined Balance Sheets F-2
Combined Statements of Operations F-3
Combined Statements of Changes in Stockholders' (Deficit) Equity F-4
Combined Statements of Cash Flows F-5
Notes to Combined Financial Statements F-6
E2ENET, INC. UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Combined Financial Statements F-21
Unaudited Pro Forma Combined Statements of Operations F-23
Unaudited Pro Forma Combined Balance Sheet F-25
Notes to Unaudited Pro Forma Combined Financial Statements F-26
MEI SOFTWARE SYSTEMS, INC.
Report of Independent Accountants F-36
Consolidated Balance Sheets F-37
Consolidated Statements of Operations F-38
Consolidated Statements of Changes in Stockholders' Deficit F-39
Consolidated Statements of Cash Flows F-40
Notes to Consolidated Financial Statements F-41
BUYLINE.NET, INC.
Report of Independent Accountants F-59
Balance Sheet F-60
Statement of Operations F-61
Statement of Changes in Stockholder's Deficit F-62
Statement of Cash Flows F-63
Notes to Financial Statements F-64
BLUE ROCK AVENUE, INC.
Report of Independent Accountants F-69
Balance Sheet F-70
Statement of Operations F-71
Statement of Changes in Stockholders' Equity F-72
Statement of Cash Flows F-73
Notes to Financial Statements F-74
BLUEMERCURY, INC.
Report of Independent Accountants F-81
Balance Sheet F-82
Statement of Operations F-83
Statement of Changes in Stockholders' Equity F-84
Statement of Cash Flows F-85
Notes to Financial Statements F-86
HOOEY, INC.
Report of Independent Accountants F-91
Consolidated Balance Sheet F-92
Consolidated Statement of Operations F-93
Consolidated Statement of Changes in Stockholders' Equity F-94
Consolidated Statement of Cash Flows F-95
Notes to Consolidated Financial Statements F-96
URBAN BOX OFFICE NETWORK, INC.
Report of Independent Accountants F-102
Balance Sheet F-103
Statement of Operations F-104
Statement of Changes in Stockholders' Equity F-105
Statement of Cash Flows F-106
Notes to Financial Statements F-107
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
E2Enet, Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the combined financial
position of E2Enet, Inc., a development stage enterprise, at December 31, 1998
and June 30, 1999, and the combined results of its operations and its cash
flows for the period from September 1, 1998 (date of inception) through
December 31, 1998, for the six months ended June 30, 1999, and cumulative since
inception, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
McLean, VA
September 16, 1999
F-1
<PAGE>
E2ENET, INC.
(a development stage enterprise)
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ ------------
<S> <C> <C>
Assets
Current assets:
Prepaid expenses.................................. $ -- $ 100,049
-------- ------------
Total current assets............................ 100,049
Investments in affiliates........................... 9,221,073
Deferred offering costs............................. 586,439
Other assets........................................ 20,204
Fixed assets, net................................... 6,288 9,636
-------- ------------
Total assets.................................... $ 6,288 $ 9,937,401
======== ============
Liabilities and Stockholders' (Deficit) Equity
Liabilities:
Accrued expenses.................................. $ 13,714 $ 588,998
-------- ------------
Total current liabilities....................... 13,714 588,998
-------- ------------
Due to stockholder................................ 72,172 3,410,060
-------- ------------
Total liabilities............................... 85,886 3,999,058
-------- ------------
Commitments and contingencies (Note 8)
Stockholders' (deficit) equity:
Common stock; par value $.01; 100,000,000 shares
authorized; 4,358,669 shares issued and
outstanding at June 30, 1999..................... -- 43,587
Common stock subscription receivable.............. -- (4,325)
Capital in excess of par value.................... 100 33,738,816
Deficit accumulated during development stage...... (79,698) (27,839,735)
-------- ------------
Total stockholders' (deficit) equity............ (79,598) 5,938,343
-------- ------------
Total liabilities and stockholders' (deficit)
equity......................................... $ 6,288 $ 9,937,401
======== ============
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-2
<PAGE>
E2ENET, INC.
(a development stage enterprise)
COMBINED STATEMENTS OF OPERATIONS
for the period from September 1, 1998 (date of inception) through
December 31, 1998, and the six months ended June 30, 1999, and
cumulative since inception
<TABLE>
<CAPTION>
September 1, Six
1998 through months ended Cumulative
December 31, June 30, Since
1998 1999 Inception
------------ ------------ ------------
<S> <C> <C> <C>
Expenses:
General and administrative.......... $ 79,698 $ 644,617 $ 724,315
Stock compensation.................. -- 26,288,080 26,288,080
Equity in loss of investees......... -- 798,614 798,614
---------- ------------ ------------
Total expenses..................... 79,698 27,731,311 27,811,009
Interest expense..................... -- 28,726 28,726
---------- ------------ ------------
Loss before income taxes............. (79,698) (27,760,037) (27,839,735)
Provision for income taxes........... -- -- --
---------- ------------ ------------
Net loss........................... $ (79,698) $(27,760,037) $(27,839,735)
========== ============ ============
Basic and diluted loss per common
share............................... $ (.05) $ (12.47) $ (14.39)
========== ============ ============
Weighted average common shares
outstanding......................... 1,500,000 2,226,513 1,933,989
========== ============ ============
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-3
<PAGE>
E2ENET, INC.
(a development stage enterprise)
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
for the period from September 1, 1998 (date of inception)
through December 31, 1998 and the six months ended June 30, 1999
<TABLE>
<CAPTION>
Member Deficit
Interest/ Accumulated
Common Stock Capital in Common Stock Treasury Stock During
----------------- Excess of Subscription ----------------- Development
Shares Amount Par Value Receivable Shares Amount Stage Total
--------- ------- ----------- ------------ -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 1,
1998 (date of
inception)
Sale of member
interests.............. $ 100 $ 100
Net loss................ $ (79,698) (79,698)
--------- ------- ----------- ------- -------- ------- ------------ ------------
Balance, December 31,
1998................... 100 (79,698) (79,598)
Issuance of common stock
upon incorporation..... 1,500,000 $15,000 15,000
Repurchase of common
stock.................. (200,000) $(2,000) (2,000)
Non-cash transactions:
Issuance of common stock
for investments........ 466,669 4,667 7,326,692 200,000 2,000 7,333,359
Issuance of common stock
to employees, directors
and others............. 2,392,000 23,920 26,288,080 $(4,325) 26,307,675
Non-cash capital
contribution........... 123,944 123,944
Net loss................ (27,760,037) (27,760,037)
--------- ------- ----------- ------- -------- ------- ------------ ------------
Balance, June 30, 1999.. 4,358,669 $43,587 $33,738,816 $(4,325) -- $ -- $(27,839,735) $ 5,938,343
========= ======= =========== ======= ======== ======= ============ ============
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-4
<PAGE>
E2ENET, INC.
(a development stage enterprise)
COMBINED STATEMENTS OF CASH FLOWS
for the period from September 1, 1998 (date of inception) through
December 31, 1998 and the six months ended June 30, 1999
and cumulative since inception
<TABLE>
<CAPTION>
September 1, Six months
1998 through ended Cumulative
December 31, June 30, Since
1998 1999 Inception
------------ ------------- -------------
<S> <C> <C> <C>
Operating activities:
Net loss........................... $(79,698) $(27,760,037) $(27,839,735)
-------- ------------- -------------
Adjustments to reconcile net loss
to net cash used in development
stage activities:
Stock compensation............... -- 26,288,080 26,288,080
Equity loss...................... -- 798,614 798,614
Non-cash expenses................ -- 123,944 123,944
Depreciation and amortization.... 370 1,505 1,875
Changes in assets and
liabilities:
Increase in prepaid expenses... -- (100,049) (100,049)
Increase in deferred offering
costs......................... -- (586,439) (586,439)
Increase in other assets....... -- (20,204) (20,204)
Increase in accrued expenses... 13,714 575,284 588,998
-------- ------------- -------------
Total adjustments.............. 14,084 27,080,735 27,094,819
-------- ------------- -------------
Net cash used in development stage
activities........................ (65,614) (679,302) (744,916)
-------- ------------- -------------
Investing activities:
Cash investments................... -- (2,692,995) (2,692,995)
Purchases of fixed assets.......... (6,658) (4,853) (11,511)
-------- ------------- -------------
Net cash used in investing
activities........................ (6,658) (2,697,848) (2,704,506)
-------- ------------- -------------
Financing activities:
Sale of member interest............ 100 -- 100
Issuance of common stock........... -- 39,262 39,262
Borrowings from stockholder........ 72,172 3,337,888 3,410,060
-------- ------------- -------------
Net cash provided by financing
activities........................ 72,272 3,377,150 3,449,422
-------- ------------- -------------
Net increase in cash............... -- -- --
Cash, beginning of period.......... -- -- --
-------- ------------- -------------
Cash, end of period................ $ -- $ -- $ --
======== ============= =============
Supplemental cash flow information:
Issuance of common stock for
subscription receivable......... $ -- $ 4,325 $ 4,325
======== ============= =============
Issuance of common stock for
investments..................... $ -- $ 7,326,692 $ 7,326,692
======== ============= =============
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-5
<PAGE>
E2ENET, INC.
(a development stage enterprise)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Business and Organization
E2Enet, Inc., a Delaware corporation (the "Company"), was incorporated on
February 9, 1999, to acquire assets and businesses, make equity investments in
and provide a wide range of business development support services to businesses
primarily engaged in Internet related commerce, media, technology and services.
The Company may also provide technical and Internet industry expertise to
traditional non-Internet businesses seeking partners to provide that expertise
as they enter the Internet marketplace. No revenues have been generated since
the inception of the Company. To date, the Company has primarily focused on
creating infrastructure and raising financing. Accordingly, the Company's
financial statements are presented as those of a development stage enterprise,
as prescribed by Statement of Financial Accounting Standards No. 7, "Accounting
and Reporting by Development Stage Enterprises." As a development stage
enterprise, the Company has been relying on stockholder loans and contributions
of capital as its primary sources of cash since inception.
Ironbound Partners LLC ("Ironbound"), a limited liability company formed
pursuant to and in accordance with the laws of the state of Delaware, was
formed in September 1998. Ironbound did not have any operations which generated
revenues. On May 14, 1999, Ironbound was merged with the Company and ceased to
exist. For the period from September 1, 1998 through December 31, 1998,
Ironbound incurred a loss of $79,698. For the period January 1, 1999 through
May 14, 1999, Ironbound incurred a loss of $248,652. Expenses incurred through
May 14, 1999 were solely for the establishment of Ironbound and costs in
connection with the analysis of the potential initial investments of the
Company.
Prior to and at the time of the merger on May 14, 1999, the voting rights of
the Company and Ironbound were both 100% under common control through direct
ownership or irrevocable unilateral proxy by the founder and sole member of
Ironbound and founder and majority stockholder of the Company (collectively,
the "Founder"). See further discussion regarding the Company's structure in
Note 4. All Ironbound activities were for the benefit of the establishment of
Ironbound. Accordingly, the accompanying financial statements have been
presented on a combined basis, at historical cost, similar to a pooling of
interests. All intercompany transactions have been eliminated.
The presentation of these combined financial statements assumes that the
Company is not considered an investment company. If the Company were to be
considered an investment company, the Company would be required to record its
investments at fair market value.
2. Summary of Significant Accounting Policies
Use of Estimates
The financial statements are prepared on the accrual basis of accounting in
conformity with generally accepted accounting principles. The preparation of
financial statements in
F-6
<PAGE>
E2ENET, INC.
(a development stage enterprise)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
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 revenues and expenses
during the reported period. Actual results could differ from those estimates.
Accounting for Investments
The various investments that the Company acquires are accounted for under
three broad methods: consolidation, equity method and cost method. The
applicable accounting method is generally determined based on the Company's
voting interest in an investment, degree of influence over the operations and
controlling positions.
Consolidation
Investments in which the Company owns more than 50% of the outstanding
voting securities are generally accounted for under the consolidation
method of accounting. Under this method, the subsidiary company's results
are reflected within the Company's financial statements. All significant
intercompany accounts and transactions are eliminated. Participation of
other stockholders in the earnings or losses of the consolidated subsidiary
is reflected as minority interest such that the Company's results of
operations reflect only the Company's share of such earnings or losses. The
Company has no consolidated subsidiaries as of June 30, 1999 or in the
periods presented herein.
The amount by which the Company's carrying value exceeds its share of
the underlying net assets of investments accounted for under the
consolidation method of accounting is amortized on a straight-line basis
over the useful life of the underlying assets or investments, generally
three years. Amortization is reflected in operating expenses on a
consolidated basis.
Equity Method
Investments whose results are not consolidated, but over which the
Company exercises significant influence, are accounted for under the equity
method of accounting. Whether or not the Company exercises significant
influence with respect to investments depends on several factors, including
but not limited to, an ownership level of 20% to 50% interest in the voting
securities, active participation on the board of directors, approval of
operating and budgetary decisions and other supermajority rights. Under the
equity method of accounting, an investment's results of operations are not
reflected within the Company's consolidated accounts; however, the
Company's share of the earnings or losses of the investment is reflected in
the caption "equity in loss of investees" in the statement of operations.
If the Company's equity investment represents the sole financing of the
respective investee, the Company will reflect 100% of the loss of the
investee in the statement of operations.
F-7
<PAGE>
E2ENET, INC.
(a development stage enterprise)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The amount by which the Company's carrying value exceeds its share of
the underlying net assets of investments accounted for under the equity
method of accounting is amortized on a straight-line basis over the useful
life of the underlying assets or investments, generally three years.
Amortization is reflected as an adjustment of the Company's share of the
investments' earnings or losses.
Cost Method
Investments not accounted for under the consolidation or equity method
of accounting are accounted for under the cost method of accounting. Under
this method, the Company's share of the earnings or losses of the
investment is not included in the statement of operations. However, cost
method impairment charges are recognized in the statement of operations if
circumstances indicate a permanent impairment.
The Company records its ownership interest in equity securities of
investments accounted for under the cost method at cost, unless these
securities have readily determinable fair values based on quoted market
prices, in which case these interests would be classified as available-for-
sale securities or some other classification in accordance with Statement
of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Company has no cost method
or available-for-sale investments at June 30, 1999 or in the periods
presented herein.
All investments are stated at the lower of cost or net realizable value.
The Company continually evaluates investments for indications of impairment
based on the fair value of each investment relative to cost, financial
condition, near-term prospects of the investment and other relative
factors.
Accounting for Sales of Stock by a Subsidiary
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
51, at the time an investment accounted for under the consolidation or equity
method of accounting sells its stock at a price per share different from the
investment's book value per share, the Company's share of the investment's net
equity changes. If at that time, the investment is not a newly formed, non-
operating entity, nor a research and development, start-up or development stage
company, nor is there question as to the investment's ability to continue in
existence, the Company records the change in its share of the investment's net
equity as a non-operating gain or loss in its statement of operations.
F-8
<PAGE>
E2ENET, INC.
(a development stage enterprise)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Cash and Cash Equivalents
Highly liquid investments with maturities of three months or less at the
date of purchase are considered cash equivalents. As the Company has been
substantially financed through the draw of stockholder loans, there are no cash
or cash equivalents at December 31, 1998 or June 30, 1999.
There were no cash payments for interest or taxes in the period ended
December 31, 1998 or the six months ended June 30, 1999.
During the six months ended June 30, 1999, significant non-cash investing
activities included issuances of the Company's common stock as the
consideration for investments by the Company. Such amounts have been disclosed
in the combined statements of cash flows and the combined statements of changes
in stockholders' (deficit) equity.
Fixed Assets
Fixed assets, which consists of office computers, are stated at cost, less
accumulated depreciation. The cost of additions and improvements are
capitalized, while maintenance and repairs are charged to expense when
incurred. Depreciation is provided on the straight-line basis over the
estimated useful life of the fixed assets of three years. The Company
recognizes gains or losses on the sale or disposal of fixed assets in the
period of disposal. Long-lived assets held and utilized by the Company are
reviewed for impairment whenever changes in circumstances indicate the carrying
value of such assets may not be recoverable.
Organization Costs
The Company accounts for organization costs under the provisions of
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities,"
which requires that all organization costs be expensed as incurred.
Income Taxes
The Company accounts for income taxes in accordance with the liability
method. Deferred income taxes are recognized for the tax consequences in future
years for differences between the tax bases of assets and liabilities and their
financial reporting amounts at the end of the period, based on enacted laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the expected realizable amount. The provision
for income taxes consists of the current tax provision and the change during
the period in deferred tax assets and liabilities.
F-9
<PAGE>
E2ENET, INC.
(a development stage enterprise)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Deferred Offering Costs
At June 30, 1999 specific incremental costs directly attributable to a
planned initial public offering ("IPO") of the Company's shares have been
deferred. These deferred costs, totaling $586,439, are included in the combined
balance sheet. These costs will be charged against capital in excess of par
value in connection with the consummation of the Company's IPO or expensed
through the combined statements of operations in the event the offering is not
consummated.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"), permits entities to choose between a fair
value based method of accounting for employee stock options and similar equity
instruments and the intrinsic value based method of accounting prescribed under
Accounting Principles Board Opinion No. 25 ("APB 25"). The Company has elected
to apply the intrinsic value based method of APB 25 in accounting for its
employee stock-based compensation programs and will disclose the pro forma net
income and earnings per share as if the fair value method had been applied. All
non-employee stock-based compensation plans are accounted for under the fair
value based method of SFAS 123. At June 30, 1999, the Company has issued no
such equity instruments.
Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," requires the presentation and disclosure of all changes
in equity from non-owner sources as "Comprehensive Income." The Company had no
items of Comprehensive Income in the period from September 1, 1998 (date of
inception) through December 31, 1998 or the six months ended June 30, 1999.
Segment Reporting
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), replaces the
industry segment approach under previously issued pronouncements with the
management approach. The management approach designates the internal
organization that is used by management for allocating resources and assessing
performance as the source of the Company's reportable segments. SFAS 131 also
requires disclosures about products and services, geographic areas and major
customers. The Company currently operates in one industry segment.
Loss Per Common Share
Basic loss per common share is computed using the weighted average number of
shares of common stock outstanding during the period. Diluted loss per common
share is computed
F-10
<PAGE>
E2ENET, INC.
(a development stage enterprise)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
using the weighted average number of shares of common stock outstanding,
adjusted for the dilutive effect of potential common shares consisting of
common stock options and warrants and contingently issuable shares of common
stock. Potential common shares are calculated using the treasury stock method.
There are no stock options, warrants or contingently issuable shares of common
stock outstanding at December 31, 1998 or June 30, 1999, and accordingly, there
is no reconciliation between basic and diluted loss per common share for each
of the periods presented.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging. In
July 1999, Statement of Financial Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of Financial Accounting Standards Board Statement No. 133" ("SFAS 137"), was
issued. SFAS 137 deferred the effective date of SFAS 133 from fiscal years
beginning after June 15, 1999 to all fiscal years beginning after June 15,
2000. Currently, as the Company has no derivative instruments, the adoption of
SFAS 133 would have no impact on the Company's financial condition or results
of operations.
3. Investments
On May 14, 1999, the Company entered into stock purchase agreements to
acquire convertible and voting preferred stock in four companies. These
preferred stock investments convert to common stock at the option of the
Company and no later than the investee's IPO. The investments, all of which are
development stage enterprises, are summarized below:
. bluemercury, Inc.--is developing a web site focusing on offering a broad
range of women's cosmetic products and accessories.
. Blue Rock Avenue, Inc.--is developing an electronic commerce web site
focused on unique gift selection and related services.
. Hooey, Inc.--is developing an electronic commerce community focused on
hand-made products.
. Urban Box Office Network, Inc.--is developing an online web-site for
consumers of urban culture, information, entertainment and products.
F-11
<PAGE>
E2ENET, INC.
(a development stage enterprise)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The significant terms of these agreements are summarized below:
<TABLE>
<CAPTION>
Ownership
Additional Fair Value Interest
Investment Cash Cash of E2Enet at
Company Name Date Invested Committed Stock Sold 6/30/99
------------ ------------ ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
bluemercury, Inc........ May 14, 1999 $ 520,376 $ 500,000 $1,831,670 29%
Blue Rock Avenue, Inc... May 14, 1999 515,522 1,000,000 1,465,341 18%
Hooey, Inc.............. May 14, 1999 641,345 637,500 1,831,670 20%
Urban Box Office
Network, Inc........... May 14, 1999 1,015,752 2,000,000 2,198,011 10%
---------- ---------- ----------
Total.................. $2,692,995 $4,137,500 $7,326,692
========== ========== ==========
</TABLE>
The cash invested represents the initial investment and the direct costs
incurred by the Company for these transactions. The direct cost of the
investment totaled $55,495 as of June 30, 1999. The additional cash commitments
will be funded, at the request of the investee or upon IPO of the Company. The
Company's common stock issued was sold to the owners of the investees at $.01
per share as part of the Company's investment. The fair value of the Company's
stock was $7.3 million, and the difference between the fair value and the price
owners of the investees paid has been recognized in the basis for each
investment.
Equity losses reduced the carrying value of the equity method investments by
$473,786 during the six months ended June 30, 1999. As discussed in Note 2, the
Company has recognized the entire loss of the investee companies since the date
of investment as the Company has provided the entire amount of investee company
financing to June 30, 1999.
The following summarizes the Company's ownership interests in and advances
to investee companies accounted for under the equity method of accounting.
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1999
------------------- ----------------------
Carrying Carrying
Value Cost Basis Value Cost Basis
-------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Equity Method..................... $-- $-- $10,019,687 $9,221,073
</TABLE>
At June 30, 1999 the Company's carrying value in its investments accounted
for under the equity method exceeded its share of the underlying equity in the
net assets of such companies by $7.3 million. This excess is being amortized
over a three-year period. Amortization expense of $324,828 is included in
"equity loss of investees" in the accompanying combined statement of operations
for the period ended June 30, 1999.
F-12
<PAGE>
E2ENET, INC.
(a development stage enterprise)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The following summarized financial information for investments accounted for
under the equity method of accounting at June 30, 1999 has been compiled from
the financial statements of the respective investments:
<TABLE>
<CAPTION>
June 30,
1999
----------------
<S> <C>
Balance Sheets:
Current assets............................................ $2,189,835
Non-current assets........................................ 161,332
----------
Total assets............................................ $2,351,167
==========
Current liabilities....................................... $ 406,744
Non-current liabilities................................... --
Stockholders' equity...................................... 1,944,423
----------
Total liabilities and shareholders' equity.............. $2,351,167
==========
<CAPTION>
Six months ended
June 30, 1999
----------------
<S> <C>
Results of Operations:
Revenue................................................... $ --
Net loss.................................................. $ (718,004)
</TABLE>
4. Stockholders' Equity
The Company's authorized common stock consists of 100,000,000 shares, par
value $.01 per share. The holders of common stock are entitled to one vote per
share and are entitled to dividends as declared. Dividends may be restricted by
the inability to liquidate ownership interests in investments to fund cash
distributions.
The Company may establish one or more classes or series of preferred stock.
The holders of the preferred stock may be entitled to preferences over common
stock or stockholders with respect to dividends, liquidation, dissolution, or
dilution as established by the Board of Directors. No preferred stock is
authorized or issued at June 30, 1999.
Certain stockholders were granted registration rights that become effective
after the completion of a public offering of the Company's equity securities.
Certain stockholders holding 3,058,669 shares have provided irrevocable
voting proxy rights to the Founder. The Founder may exercise the irrevocable
voting proxy at any time and without advance notice to the stockholders. Such
proxy rights are in effect until the proxy agreement is terminated.
Common Stock
On September 1, 1998, the Founder invested $100 for 100% of the member
interest in Ironbound.
F-13
<PAGE>
E2ENET, INC.
(a development stage enterprise)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
For presentation purposes, all such Ironbound ownership interests are
presented as capital in excess of par value of the Company. On February 9,
1999, the Founder of the Company invested $15,000 for 1,000 shares of common
stock; subsequently, in May 1999, the Company authorized a 15,000-to-1 stock
split. The effect of the stock split was recorded retroactively to the date of
incorporation. On May 7, 1999, the Company repurchased 200,000 shares from the
stockholder at the original issuance price. On May 14, 1999, all Ironbound
units were converted to common stock of the Company.
During May 1999, the Company sold 2,392,000 shares of the Company's common
stock to certain employees, directors and other individuals at $.01 per share
for gross proceeds of $19,595 in addition to a subscription receivable of
$4,325. Though these are voting shares, the stockholders have given unilateral
and irrevocable proxy to vote such shares to the Founder. The issuance of these
shares also resulted in the Company recording compensation expense of
$26,288,080 representing the difference between the purchase price and the fair
value of the Company's stock on the date of issuance.
In connection with the four investments entered on May 14, 1999, the Company
issued 666,669 shares of common stock at a purchase price of $.01 per share.
The fair value of these shares is $7,326,692. The difference between fair value
and the price paid is included in the basis of each investment.
1999 Stock Option and Incentive Plan
The Company's Board of Directors plans to adopt a stock option and incentive
plan (the "1999 Plan"). Management expects that the 1999 Plan will authorize
the grant of stock, stock options, stock appreciation rights, restricted stock,
deferred stock, dividend equivalents and other stock-based, performance and
annual incentive awards to provide incentives to attract and retain executive
officers, directors, employees, advisors, consultants and other key personnel.
The terms of the grants under the 1999 Plan are expected to be administered by
a committee of the Company's Board of Directors. As of June 30, 1999, there
have been no grants to employees under the 1999 Plan. Non-employee directors
may receive grants of non-qualified stock options under the 1999 Plan, at the
sole discretion of the Board of Directors. As of June 30, 1999, there have been
no options granted to non-employee directors under the 1999 Plan.
The Company plans to grant 1,850,000 options to acquire common stock to
executive officers, directors and other employees concurrent with the adoption
of the Plan. These shares will be issued with a fair value exercise price with
the exception of 275,000 shares issued at an exercise price of $10 (resulting
in non-cash compensation of $825,000).
F-14
<PAGE>
E2ENET, INC.
(a development stage enterprise)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
5. Fixed Assets, net
Fixed assets consist of the following:
<TABLE>
<CAPTION>
June
December 31, 30,
1998 1999
------------ -------
<S> <C> <C>
Computer equipment..................................... $6,658 $11,511
Less: accumulated depreciation......................... (370) (1,875)
------ -------
Fixed assets, net...................................... $6,288 $ 9,636
====== =======
</TABLE>
Depreciation expense was $370 and $1,505 for September 1, 1998 (date of
inception) through December 31, 1998 and the six months ended June 30, 1999,
respectively.
6. Non-Cash Capital Contribution
The Company's management team did not receive salaries for the period from
May 14, 1999 (date of employment agreements) through June 30, 1999. These
individuals will receive salaries prospectively at the earlier of an initial
public offering of the Company or the Board of Directors passing a resolution
to commence compensating the executives. In accordance with Securities and
Exchange Commission Staff Accounting Bulletin No. 79, the Company has measured
the value of compensation at $123,944 (based upon total future annual
compensation as provided in each individual's employment agreements) which has
been recognized in the accompanying combined statements of operations as an
expense and in the combined statements of changes in stockholders' (deficit)
equity as a capital contribution.
7. Income Taxes
From the period of September 1, 1998 (date of inception) through May 14,
1999, Ironbound reflected no provision for income taxes. As a limited liability
corporation, Ironbound's management elected to be taxed as a partnership under
the Internal Revenue Code. As a result, taxable income or losses accrued to the
individual member.
Effective May 14, 1999, the Founder of the Company merged the two companies.
This merger resulted in a termination of Ironbound's legal existence and all of
its assets and liabilities became the assets and liabilities of the Company.
F-15
<PAGE>
E2ENET, INC.
(a development stage enterprise)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The provision for income taxes for the period from May 14, 1999 (date of
inception) to June 30, 1999 is comprised of the following:
<TABLE>
<S> <C>
Deferred:
Federal........................................................ $(263,564)
State.......................................................... (31,006)
---------
Total deferred............................................... (294,570)
Less valuation allowance......................................... 294,570
---------
Total income tax provision................................... $ --
=========
</TABLE>
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
June 30,
1999
---------
<S> <C>
Deferred tax assets:
Net operating loss carryforward................................. $ 114,532
Equity in net loss before taxes of investees.................... 180,038
---------
Total deferred tax assets before valuation allowance.......... 294,570
Less valuation allowance.......................................... (294,570)
---------
Deferred tax assets........................................... $ --
=========
</TABLE>
Had the results of Ironbound been included in the provision above, the tax
asset would have been increased by approximately $30,285 and $124,772
cumulatively at December 31, 1998 and June 30, 1999, but offset with an equal
valuation allowance, resulting in no change to the income tax provision or
deferred tax assets.
The Company has no net operating loss carry forwards at December 31, 1998.
Deferred income taxes are provided for temporary differences between the
financial reporting basis and the tax basis of the Company's assets. The
temporary differences that give rise to the deferred tax assets are the
Company's net operating losses since the merger and equity in net loss before
taxes of investees. At current statutory rates, the net operating loss
carryforward tax asset at June 30, 1999 will offset approximately $301,400 in
taxable income and will expire in 2019.
Gross deferred tax assets at June 30, 1999, prior to valuation allowances,
are $294,570. A valuation allowance of $294,570 was provided against the net
deferred tax asset due to the uncertainty of realizing the benefit of these
assets.
No income taxes were paid from May 14, 1999 (date of merger) to June 30,
1999.
F-16
<PAGE>
E2ENET, INC.
(a development stage enterprise)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
A reconciliation between the statutory federal income tax rate and the
effective rate of income tax expense follows:
<TABLE>
<CAPTION>
For the Period from May 14,
1999 (date of Merger)
through June 30, 1999
---------------------------
<S> <C>
Statutory federal income tax rate................ (34.00)%
State income taxes............................... (4.00)%
Deferred compensation............................ 36.31%
Amortization of equity investments............... 0.45%
Non-cash management salary expense............... 0.17%
Change in valuation allowance.................... 1.07%
--------
--
========
</TABLE>
8. Commitments and Contingencies
In connection with its ownership interests in certain investments, the
Company has committed to make additional investments of $4.1 million to
existing investee companies upon request by those companies or upon the IPO by
the Company.
The Company leases certain buildings for use in its operations under
noncancelable operating lease agreements. The leases generally provide for
renewal terms, and the Company is required to pay a portion of the common area
expenses. Rent expense was $2,000 and $24,479 for the period of inception
through December 31, 1998 and the six months ended June 30, 1999, respectively.
The minimum future rental commitments over the next five years under the
existing non-cancelable operating leases at June 30, 1999 are as follows:
<TABLE>
<S> <C>
1999.............................................................. $ 46,549
2000.............................................................. 245,530
2001.............................................................. 245,530
2002.............................................................. 248,385
2003.............................................................. 262,660
Thereafter........................................................ 1,577,863
----------
Total........................................................... $2,626,517
==========
</TABLE>
Because many of its investments are not majority-owned subsidiaries, changes
in the value of the Company's interests and the income or loss and revenue
attributable to them could require the Company to register under the Investment
Company Act unless it takes action to avoid being required to registered.
However, the Company believes it can take steps to avoid being required to
register under the Investment Company Act which would not adversely affect its
operations or stockholder value.
F-17
<PAGE>
E2ENET, INC.
(a development stage enterprise)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
9. Related Party Transactions
On December 23, 1998, the Company entered into a promissory note with its
Founder. This advance is included in "due to stockholder" in the combined
balance sheets. The promissory note provided for the Company to receive
advances of up to $500,000. On May 7, 1999, the promissory note was amended to
allow advances up to $10 million, which includes amounts outstanding under the
December 23, 1998 promissory note. Interest accrues on the unpaid principal
balance at a rate equal to the prime rate that at June 30, 1999 was 7.75%.
Principal and accrued interest owed under this promissory note are due and
payable in full upon the IPO of the Company or on demand by the Founder at
December 31, 2000. Advances are used to make investments and support the
Company's current operations. The unpaid balance at December 31, 1998 and June
30, 1999 was $72,172 and $3,410,060. No interest was paid during the period
from inception through June 30, 1999, and accrued interest was $28,876 at June
30, 1999.
10. Subsequent Events
Subsequent to June 30, 1999, the Company sold 86,500 shares of the Company's
common stock to two director nominees, respectively, at $.01 per share for
gross proceeds of $1,730. The issuance of these shares will result in the
Company recording compensation expense of $2.2 million representing the
difference between the purchase price and the fair value of the Company's stock
on the issuance date.
In August 1999, the Company signed an agreement to purchase 15,000,000
shares of Buyline.net, Inc.'s ("Buyline.net") common stock for $3 million in
cash at the earlier of November 30, 1999 or upon the Company's IPO. If the
Company's IPO does not occur, the Company is not obligated to make this
purchase. The excess of the fair value over the Company's portion of net assets
acquired will be amortized over three years. This investment represents 51% of
the outstanding common stock of Buyline.net. The Company also has the option to
purchase an additional 45,000,000 shares of Buyline.net common stock for $.20
per share until December 31, 2000. If this option is exercised, the Company's
ownership of Buyline.net would increase to 80%. Prior to the investment, the
Company is required to make short-term loans up to $950,000 on an as-needed
basis. As of September 13, 1999, the Company made three advances on these loans
totaling $550,000. The short-term loans are to be repaid upon the completion of
the initial investment and bear interest at the prime rate. If the $3 million
investment does not occur, the loans are due on November 30, 2000.
On September 16, 1999 the Company entered into a definitive agreement,
contingent upon the IPO of the Company, to purchase 100% of the outstanding
capital stock of MEI Software Systems, Inc. ("MEI") for $24,000,000. The
Company will also pay an additional purchase price based on MEI's closing net
worth to be determined subsequent to the closing. The Company will account for
this transaction as a purchase business combination. The excess of the fair
value over net assets acquired will be amortized over three years.
F-18
<PAGE>
E2ENET, INC.
(a development stage enterprise)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
In conjunction with the signing of the definitive agreement on September 16,
1999, the Company issued a convertible note to MEI for cash proceeds of up to
$2,000,000.
The convertible note bears interest at 10%. If the Company fails to
consummate the merger transaction, the Company may, at its option on or before
March 31, 2000, convert the note into MEI's Series D mandatorily redeemable
convertible preferred stock ("Series D preferred stock"), par value $.10 per
share, at a conversion price of $1.06 per share. If MEI terminates the merger
agreement, the Company may, at its option, convert the note into Series D
preferred stock or require immediate repayment of the note and accrued
interest. The Series D preferred stock has substantially similar rights and
privileges as MEI's issued and outstanding mandatorily redeemable convertible
preferred stock. In addition, the Series D preferred stockholders have the
following additional rights: (1) a liquidation preference of $1.06 per share
plus accrued dividends, (2) a cumulative annual dividend of $0.0636 per share
and (3) the ability to appoint an additional board member.
As of September 16, 1999, the Company has advanced $400,000 of cash to MEI.
The remaining advances of $1,600,000 will occur as follows: $300,000 on
September 27, 1999, $400,000 on October 11, 1999, $300,000 on October 25, 1999,
$300,000 on November 8, 1999 and $300,000 on November 22, 1999. MEI may use the
loan proceeds for general working capital purposes and not for repayment of its
existing line of credit. If the Company extends the closing of the agreement
beyond November 30, 1999, the Company shall advance MEI an additional $200,000
subject to terms similar to the issued convertible note.
On September 10, 1999, the Company issued Convertible Secured Notes (the
"Notes") for $4.0 million to Northwood Ventures LLC and Northwood Capital
Partners LLC that bear interest at the prime rate and mature on the earlier of
(a) five days after the IPO or (b) December 31, 2000. The Notes are convertible
into the Company's common stock at a conversion price of $8.71 per share but
may be reduced if the IPO price is lower than $13 per share. The reduced
conversion price will represent 67% of the price per share for the Company's
IPO. The Notes will convert into common stock at the option of the holders or
upon the closing of the Company's initial public offering. Interest expense of
$2.0 million will be recorded for the beneficial conversion feature that
consists of the excess of the fair value of the Company's common stock over the
Notes' conversion rate upon the issuance of the Notes.
In conjunction with the Notes, Northwood Ventures LLC and Northwood Capital
Partners LLC received a total of 400,000 warrants to purchase shares of common
stock at a price equal to the IPO price resulting in a discount from the Notes'
face value of $2.0 million. The warrants may be exercised for a term that is
the lesser of seven years from the closing of the Notes agreements or five
years from the completion of the Company's IPO. Based on the relative fair
market values of the Notes and the warrants, $2.03 million and $1.97 million
F-19
<PAGE>
E2ENET, INC.
(a development stage enterprise)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
have been assigned to the convertible notes and warrants, respectively. The
discount will be recognized as interest expense through the conversion of the
Notes.
In September 1999, the Company signed a Summary Term Sheet to purchase
approximately 2.3 million shares of Series A Convertible Preferred Stock of
Vipro Corporation ("Vipro") for $2.25 million. The Company's investment will
represent approximately 33% of Vipro's common stock. The Series A Convertible
Preferred Stock will automatically convert into common stock concurrently with
the closing of an IPO by Vipro.
On August 30, 1999, four senior executive stockholders entered into
restricted stock agreements under which the shares of common stock of the
Company that they have acquired will be subject to repurchase at the option of
the Company under certain circumstances, including delay of the Company's
planned IPO or ratably over a two year period after a successful offering. The
shares, while held, are subject to the same rights and privileges of all other
common stock, including voting and dividend rights.
F-20
<PAGE>
E2ENET, INC.
(a development stage enterprise)
Introduction to Unaudited Pro Forma Combined Financial Statements
The following unaudited pro forma combined financial statements have been
prepared to give effect to the following:
In the pro forma combined column, the historical E2Enet, Inc. (the
"Company") amounts have been adjusted to reflect the following events:
. The consummated and committed investments by the Company in Blue Rock
Avenue, Inc. ("Blue Rock Avenue"), bluemercury, Inc. ("bluemercury"),
Urban Box Office Network, Inc. ("Urban Box Office"), and Hooey, Inc.
("Hooey").
. The Company's probable investment in Buyline.net, Inc. ("Buyline.net").
The investment will represent an 80% ownership interest in Buyline.net.
This investment will occur simultaneously with the closing of the
Company's initial public offering, assumes the exercise of an option to
acquire additional shares, and will be accounted for using the purchase
method of accounting and will be consolidated.
. The Company's probable acquisition of MEI Software Systems, Inc.
("MEI"). The Company will acquire 100% of MEI's capital stock. This
acquisition will occur simultaneously with and is contingent upon the
closing of the Company's initial public offering and will be accounted
for using the purchase method of accounting.
. The financing obtained in September 1999 through the issuance of $4
million in convertible notes payable ("Convertible Notes") and issuance
of 400,000 common stock warrants, and the beneficial conversion feature.
The pro forma combined, as adjusted, amounts reflect the following events:
. The Company's initial public offering.
. The conversion of the Convertible Notes into common stock.
F-21
<PAGE>
E2ENET, INC.
(a development stage enterprise)
Introduction to Unaudited Pro Forma Combined Financial Statements
Blue Rock Avenue, bluemercury, Urban Box Office, Hooey, Buyline.net and MEI
are referred to collectively herein as the "Partner Companies."
The unaudited pro forma combined financial data has been presented for
illustrative purposes only and is not necessarily indicative of the financial
position or results of operations that would have actually been reported had
the acquisition and investments occurred at the beginning of the periods
presented or at the balance sheet date presented, nor is it necessarily
indicative of future results of operations or financial position. These
unaudited pro forma combined financial statements including the notes thereto
are qualified in their entirety by reference to and should be read in
conjunction with the financial statements and notes thereto of the Company and
the financial statements and notes thereto of MEI, Buyline.net, Blue Rock
Avenue, bluemercury, Urban Box Office and Hooey.
The unaudited pro forma combined balance sheet gives effect to the
consummated investments and probable acquisition and investment as if they had
occurred on June 30, 1999. The unaudited pro forma combined statements of
operations gives effect to the Company's consummated investments and probable
acquisition and investment as if such events had occurred on the later of
January 1, 1998 or the date that the Company or the Partner Companies were
incorporated. MEI, Buyline.net, Blue Rock Avenue, bluemercury, Urban Box
Office, and Hooey were incorporated on October 1, 1975, May 18, 1999,
January 5, 1999, February 16, 1999, May 11, 1999 and April 15, 1999,
respectively.
Subsequent to June 30, 1999, the Company signed a summary term sheet to
purchase approximately 2.3 million shares of Vipro Corporation ("VIPRO") Series
A convertible preferred stock for $2.25 million for approximately 33% voting
ownership of VIPRO. The investment in Vipro is considered insignificant and has
been excluded from the pro forma combined financial statements. This investment
will be accounted for using the equity method.
The presentation of the pro forma combined financial statements assumes that
the Company is not considered an investment company. If the Company were
considered an investment company, the Company would be required to record its
investments at fair market value.
The pro forma amounts are based on estimates, available information and
certain assumptions and may be revised, as additional information becomes
available, Management does not expect the final amounts to be materially
different. The pro forma financial data does not purport to represent what the
Company's financial position or results of operations would actually have been
if such transactions in fact had occurred on those dates and are not
necessarily representative of the Company's financial position or results of
operations for any future period. Since the Partner Companies were not under
common control or management, historical combined results may not be comparable
to, or indicative of, future performance. The unaudited pro forma combined
financial statements should be read in conjunction with the financial
statements and notes thereto included elsewhere in this Registration Statement.
F-22
<PAGE>
E2Enet, Inc.
(a development stage enterprise)
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the year ending December 31, 1998
<TABLE>
<CAPTION>
Pro Forma
MEI Adjustments Pro Forma
E2Enet, Inc. (A) (Note 3) (Note 4) Combined
---------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues................ $ -- $ 9,299,237 $ -- $ 9,299,237
Costs of revenues....... -- 5,323,025 -- 5,323,025
--------- ----------- ----------- ------------
Gross Profit -- 3,976,212 -- 3,976,212
Operating expenses:
Sales and marketing.... -- 1,268,628 -- 1,268,628
Research and
development........... -- 1,990,079 -- 1,990,079
Stock compensation..... -- 163,290 -- 163,290
Goodwill amortization.. -- -- 8,603,977 8,603,977
General and
administrative........ 79,698 1,646,903 -- 1,726,601
--------- ----------- ----------- ------------
Total operating
expenses............. 79,698 5,068,900 8,603,977 13,752,575
--------- ----------- ----------- ------------
Loss from operations.. (79,698) (1,092,688) (8,603,977) (9,776,363)
Interest expense........ -- 82,119 -- 82,119
--------- ----------- ----------- ------------
Loss before income
taxes................ (79,698) (1,174,807) (8,603,977) (9,858,482)
Provision for income
taxes.................. -- -- -- --
--------- ----------- ----------- ------------
Net loss.............. (79,698) (1,174,807) (8,603,977) (9,858,482)
Accretion on mandatorily
redeemable securities.. -- (364,188) -- (364,188)
--------- ----------- ----------- ------------
Net loss available to
common stockholders.. $ (79,698) $(1,538,995) $(8,603,977) $(10,222,670)
========= =========== =========== ============
Basic and diluted loss
per common share....... $ (0.05) $ (4.11)
========= ============
Weighted average shares
outstanding (basic and
diluted) (Note 6)...... 1,500,000 2,485,113
========= ============
</TABLE>
- --------
(A) Represents combined results of E2Enet, Inc. and Ironbound Partners LLC
activity from September 1, 1998.
The accompanying notes are an integral part of these pro forma combined
financial statements
F-23
<PAGE>
E2Enet, Inc.
(a development stage enterprise)
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the period ending June 30, 1999
<TABLE>
<CAPTION>
Blue Rock Urban Box
Avenue bluemercury Hooey Office Pro Forma
Adjustments Adjustments Adjustments Adjustments Buyline.net MEI Adjustments
E2Enet, Inc. (Note 2) (Note 2) (Note 2) (Note 2) (Note 3) (Note 3) (Note 4)
------------ ----------- ----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues......... $ -- $ -- $ -- $ -- $ -- $ -- $ 6,140,540 $ --
Cost of
revenues......... -- -- -- -- -- -- 3,808,869 --
------------ --------- --------- -------- -------- -------- ----------- ------------
Gross profit..... -- -- -- -- -- -- 2,331,671 --
Operating
expenses:
Sales and
marketing........ -- -- -- -- -- -- 1,013,006 --
Research and
development...... -- -- -- -- -- -- 1,251,568 --
Stock
compensation..... 26,288,080 -- -- -- -- -- 264,021 --
Amortization
expense.......... -- -- -- -- -- -- -- 4,440,020
General and
administrative... 644,617 -- -- -- -- 72,916 917,572 --
------------ --------- --------- -------- -------- -------- ----------- ------------
Total operating
expenses........ 26,932,697 -- -- -- -- 72,916 3,446,167 4,440,020
------------ --------- --------- -------- -------- -------- ----------- ------------
Loss from
operations....... (26,932,697) -- -- -- -- (72,916) (1,114,496) (4,440,020)
Other expenses... -- -- -- -- -- -- -- --
Interest
expense.......... 28,726 -- -- -- -- 337 37,372 --
Equity in loss of
investees........ 798,614 274,390 183,452 92,064 65,194 -- -- --
Minority interest
in earnings of
subsidiaries..... -- -- -- -- -- (14,651) -- --
------------ --------- --------- -------- -------- -------- ----------- ------------
Loss before
income taxes..... (27,760,037) (274,390) (183,452) (92,064) (65,194) (58,602) (1,151,868) (4,440,020)
Provision for
income taxes..... -- -- -- -- -- -- -- --
------------ --------- --------- -------- -------- -------- ----------- ------------
Net loss......... (27,760,037) (274,390) (183,452) (92,064) (65,194) (58,602) (1,151,868) (4,440,020)
Accretion on
mandatorily
redeemable
securities....... -- -- -- -- -- -- (281,547) (100,621)
------------ --------- --------- -------- -------- -------- ----------- ------------
Net loss
available to
common
stockholders..... $(27,760,037) $(274,390) $(183,452) $(92,064) $(65,194) $(58,602) $(1,433,415) $(4,540,641)
============ ========= ========= ======== ======== ======== =========== ============
Basic and diluted
loss per common
share............ $ (12.47)
============
Weighted average
shares
outstanding
(basic and
diluted) (Note
6)............... 2,226,513
============
<CAPTION>
Pro Forma
Financing Offering Pro Forma
Adjustments Pro Forma Adjustments Combined
(Note 4) Combined (Note 4) As Adjusted
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenues......... $ -- $ 6,140,540 $ -- $ 6,140,540
Cost of
revenues......... -- 3,808,869 -- 3,808,869
------------ ------------- ------------ -------------
Gross profit..... -- 2,331,671 -- 2,331,671
Operating
expenses:
Sales and
marketing........ -- 1,013,006 -- 1,013,006
Research and
development...... -- 1,251,568 -- 1,251,568
Stock
compensation..... -- 26,552,101 -- 26,552,101
Amortization
expense.......... -- 4,440,020 -- 4,440,020
General and
administrative... -- 1,635,105 -- 1,635,105
------------ ------------- ------------ -------------
Total operating
expenses........ -- 34,891,800 -- 34,891,800
------------ ------------- ------------ -------------
Loss from
operations....... -- (32,560,129) -- (32,560,129)
Other expenses... -- -- -- --
Interest
expense.......... 1,970,149 2,036,584 1,969,543 4,006,127
Equity in loss of
investees........ -- 1,413,714 -- 1,413,714
Minority interest
in earnings of
subsidiaries..... -- (14,651) -- (14,651)
------------ ------------- ------------ -------------
Loss before
income taxes..... (1,970,149) (35,995,776) (1,969,543) (37,965,319)
Provision for
income taxes..... -- -- -- --
------------ ------------- ------------ -------------
Net loss......... (1,970,149) (35,995,776) (1,969,543) (37,965,319)
Accretion on
mandatorily
redeemable
securities....... -- (382,168) -- (382,168)
------------ ------------- ------------ -------------
Net loss
available to
common
stockholders..... $(1,970,149) $(36,377,944) $(1,969,543) $(38,347,487)
============ ============= ============ =============
Basic and diluted
loss per common
share............ $ (6.51)
=============
Weighted average
shares
outstanding
(basic and
diluted) (Note
6)............... 5,886,328
=============
</TABLE>
The accompanying notes are an integral part of these pro forma combined
financial statements.
F-24
<PAGE>
E2Enet, Inc.
(a development stage enterprise)
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
June 30, 1999
<TABLE>
<CAPTION>
Blue Rock Urban Box
Avenue bluemercury Hooey Office Pro Forma
E2Enet, Adjustments Adjustments Adjustments Adjustments Buyline.net MEI (Note Adjustments
Inc. (Note 2) (Note 2) (Note 2) (Note 2) (Note 3) 3) (Note 5)
----------- ----------- ----------- ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.... $ -- $ -- $ -- $ -- $ -- $ 5,065 $ 580,851 $ --
Accounts
receivable,
net............ -- -- -- -- -- -- 2,904,003 --
Prepaid
expenses....... 100,049 -- -- -- -- -- 162,888 --
Other
receivables.... -- -- -- -- -- -- -- --
Deferred tax
assets......... -- -- -- -- -- -- -- --
----------- ---------- -------- -------- ---------- ---------- ---------- -----------
Total current
assets......... 100,049 -- -- -- -- 5,065 3,647,742 --
Investments in
affiliates..... 9,221,073 1,000,000 500,000 637,500 2,000,000 -- -- --
Deferred
offering
costs.......... 586,439 -- -- -- -- -- -- --
Other assets.... 20,204 -- -- -- -- -- 311,346 --
Software
licenses....... -- -- -- -- -- -- 479,117 --
Intangible
asset, net..... -- -- -- -- -- 2,001,227 -- 28,270,533
Equipment, net.. 9,636 -- -- -- -- -- 582,134 --
----------- ---------- -------- -------- ---------- ---------- ---------- -----------
Total assets.... $ 9,937,401 $1,000,000 $500,000 $637,500 $2,000,000 $2,006,292 $5,020,339 $28,270,533
=========== ========== ======== ======== ========== ========== ========== ===========
LIABILITIES AND
STOCKHOLDERS'
(DEFICIT)/EQUITY
Current
liabilities:
Line of credit.. $ -- $ -- $ -- $ -- $ -- $ -- $1,000,000 $ --
Accounts
payable........ -- -- -- -- -- 13,499 756,459 --
Deferred
revenue........ -- -- -- -- -- -- 3,990,478 --
Capital lease
obligations,
current
portion........ -- -- -- -- -- -- 83,838 --
Payable to
stockholders of
MEI............ -- -- -- -- -- -- -- 24,000,000
Notes payable... -- -- -- -- -- 800,000 15,620 --
Income taxes
payable........ -- -- -- -- -- -- -- --
License
agreement
payable........ -- -- -- -- -- 586,662 -- --
Accrued
expenses....... 588,998 -- -- -- -- 135 686,004 --
Note payable to
officer........ -- -- -- -- -- 25,000 -- --
----------- ---------- -------- -------- ---------- ---------- ---------- -----------
Total current
liabilities.... 588,998 -- -- -- -- 1,425,296 6,532,399 24,000,000
Capital lease
obligation, net
of current..... -- -- -- -- -- -- 140,571 --
Convertible note
payable........ -- -- -- -- -- -- -- --
Due to
stockholder.... 3,410,060 1,000,000 500,000 637,500 2,000,000 -- -- --
Minority
interest in
subsidiary..... -- -- -- -- -- -- -- 2,385,349
Deferred rent... -- -- -- -- -- -- 159,300 --
License
agreement
payable........ -- -- -- -- -- 654,249 -- --
----------- ---------- -------- -------- ---------- ---------- ---------- -----------
Total
liabilities.... 3,999,058 1,000,000 500,000 637,500 2,000,000 2,079,545 6,832,270 26,385,349
----------- ---------- -------- -------- ---------- ---------- ---------- -----------
Commitments and
contingencies
Mandatorily
redeemable
convertible
preferred
stock.......... -- -- -- -- -- -- 6,870,612 (6,870,612)
Mandatorily
redeemable
common stock... -- -- -- -- -- -- 503,153 (503,153)
----------- ---------- -------- -------- ---------- ---------- ---------- -----------
Total
mandatorily
redeemable
securities..... -- -- -- -- -- -- 7,373,765 (7,373,765)
----------- ---------- -------- -------- ---------- ---------- ---------- -----------
Stockholders'
(deficit)/equity:
Preferred
stock.......... -- -- -- -- -- -- -- --
Common stock.... 43,587 -- -- -- -- -- 54,402 (54,402)
Common stock
subscription
receivable..... (4,325) -- -- -- -- -- -- --
Capital in
excess of par
value.......... 33,738,816 -- -- -- -- -- 208,516 (208,516)
Deferred
compensation... -- -- (370,704) 370,704
Accumulated
deficit........ -- -- (9,077,910) 9,077,910
Deficit
accumulated
during
development
stage.......... (27,839,735) -- -- -- -- (73,253) -- 73,253
----------- ---------- -------- -------- ---------- ---------- ---------- -----------
Total
stockholders'
(deficit)/equity:.. 5,938,343 -- -- -- -- (73,253) (9,185,696) 9,258,949
----------- ---------- -------- -------- ---------- ---------- ---------- -----------
Total
liabilities and
stockholders'
(deficit)/equity.. $ 9,937,401 $1,000,000 $500,000 $637,500 $2,000,000 $2,006,292 $5,020,339 $28,270,533
=========== ========== ======== ======== ========== ========== ========== ===========
<CAPTION>
Pro Forma
Financing Offering Pro Forma
Adjustments Pro Forma Adjustments Combined As
(Note 5) Combined (Note 5) Adjusted
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.... $4,000,000 $ 4,585,916 $98,452,440 $103,038,356
Accounts
receivable,
net............ -- 2,904,003 -- 2,904,003
Prepaid
expenses....... -- 262,937 -- 262,937
Other
receivables.... -- -- -- --
Deferred tax
assets......... -- -- -- --
------------ ------------ ------------ -------------
Total current
assets......... 4,000,000 7,752,856 98,452,440 106,205,296
Investments in
affiliates..... -- 13,358,573 -- 13,358,573
Deferred
offering
costs.......... -- 586,439 (586,439) --
Other assets.... -- 331,550 -- 331,550
Software
licenses....... -- 479,117 -- 479,117
Intangible
asset, net..... -- 30,271,760 -- 30,271,760
Equipment, net.. -- 591,770 -- 591,770
------------ ------------ ------------ -------------
Total assets.... $4,000,000 $53,372,065 $97,866,001 $151,238,066
============ ============ ============ =============
LIABILITIES AND
STOCKHOLDERS'
(DEFICIT)/EQUITY
Current
liabilities:
Line of credit.. $ -- $ 1,000,000 $ -- $ 1,000,000
Accounts
payable........ -- 769,958 10,513,561 11,283,519
Deferred
revenue........ -- 3,990,478 -- 3,990,478
Capital lease
obligations,
current
portion........ -- 83,838 -- 83,838
Payable to
stockholders of
MEI............ -- 24,000,000 (24,000,000) --
Notes payable... -- 815,620 -- 815,620
Income taxes
payable........ -- -- -- --
License
agreement
payable........ -- 586,662 -- 586,662
Accrued
expenses....... -- 1,275,137 -- 1,275,137
Note payable to
officer........ -- 25,000 -- 25,000
------------ ------------ ------------ -------------
Total current
liabilities.... -- 32,546,693 (13,486,439) 19,060,254
Capital lease
obligation, net
of current..... -- 140,571 -- 140,571
Convertible note
payable........ 2,030,457 2,030,457 (2,030,457) --
Due to
stockholder.... -- 7,547,560 (7,547,560) --
Minority
interest in
subsidiary..... -- 2,385,349 -- 2,385,349
Deferred rent... -- 159,300 -- 159,300
License
agreement
payable........ -- 654,249 -- 654,249
------------ ------------ ------------ -------------
Total
liabilities.... 2,030,457 45,464,179 (23,064,456) 22,399,723
------------ ------------ ------------ -------------
Commitments and
contingencies
Mandatorily
redeemable
convertible
preferred
stock.......... -- -- -- --
Mandatorily
redeemable
common stock... -- -- -- --
------------ ------------ ------------ -------------
Total
mandatorily
redeemable
securities..... -- -- -- --
------------ ------------ ------------ -------------
Stockholders'
(deficit)/equity:
Preferred
stock..........
Common stock.... -- 43,587 104,592 148,179
Common stock
subscription
receivable..... -- (4,325) -- (4,325)
Capital in
excess of par
value.......... 3,939,692 37,678,508 122,795,408 160,473,916
Deferred
compensation... -- -- -- --
Accumulated
deficit........ -- -- -- --
Deficit
accumulated
during
development
stage.......... (1,970,149) (29,809,884) (1,969,543) (31,779,427)
------------ ------------ ------------ -------------
Total
stockholders'
(deficit)/equity:.. 1,969,543 7,907,886 120,930,457 128,838,343
------------ ------------ ------------ -------------
Total
liabilities and
stockholders'
(deficit)/equity.. $4,000,000 $53,372,065 $97,866,001 $151,238,066
============ ============ ============ =============
</TABLE>
The accompanying notes are an integral part of these pro forma combined
financial statements
F-25
<PAGE>
E2ENET, INC.
(a development stage enterprise)
Notes to Unaudited Pro Forma Combined Financial Statements
1. General
E2Enet, Inc. (the "Company") was established to acquire assets and
businesses, make equity investments and provide a wide range of business and
technology development support services to businesses primarily engaged in
Internet related commerce, media, technology and services. The Company will
also provide technical and Internet industry expertise to traditional non-
internet businesses seeking partners as they enter the Internet marketplace
although they have not done so to date.
Refer to discussion of the Company's accounting policy relating to its
accounting for investments in Note 2 to its audited financial statements. In
applying the equity method, if the Company's equity investment represents the
sole financing of the respective investee, the Company will reflect the entire
loss of the investment in the statement of operations.
The Company's consummated investments are summarized as follows:
On May 14, 1999, the Company entered into a definitive agreement to
purchase 2,666,667 shares of Blue Rock Avenue Series A convertible
preferred stock for $500,000 with a commitment to purchase an additional
5,333,333 shares for $1.0 million at the earlier of Blue Rock Avenue's
request or the Company's initial public offering. The convertible preferred
stock will automatically convert into common shares upon an initial public
offering of Blue Rock Avenue. In addition, 133,334 shares of Company common
stock were sold to Blue Rock Avenue's stockholders for $.01 per share. The
Company's total committed investment in Blue Rock Avenue is $3.0 million
representing $1.5 million of cash commitments and $1.5 million reflecting
the fair market value of the Company's common stock. The estimated fair
value of the common stock reflects the sale of 133,334 Company shares for a
price of $.01 that has an estimated fair market value of $1.5 million. The
historical amount of our investment in excess of the investee's book value
of net assets was $1.6 million that was comprised of stock consideration,
the investee's accumulated deficit at the investment date and direct costs
related to the investment of $1.5 million, $101,946, $15,522, respectively.
On May 14, 1999, the Company entered into a definitive agreement to
purchase 6,750,000 shares of bluemercury Series A convertible preferred
stock for $500,000 with a commitment to purchase an additional 6,750,000
shares for $500,000 at the earlier of bluemercury's request or the
Company's initial public offering. In addition, 166,667 shares of Company
common stock were sold to bluemercury's stockholders for $.01 per share.
The Company's total committed investment in bluemercury is $2.8 million
representing $1.0 million of cash commitments and $1.8 million reflecting
the fair market value of the Company's common stock. The estimated fair
value of the common stock reflects the sale of 166,667 Company shares for a
price of $.01 that has an estimated fair market value of $1.8 million. The
historical amount of our investment in excess of the investee's book value
of net assets was $1.9 million that was comprised of stock
F-26
<PAGE>
E2ENET, INC.
(a development stage enterprise)
Notes to Unaudited Pro Forma Combined Financial Statements--(continued)
consideration, the investee's accumulated deficit at the investment date
and direct costs related to the investment of $1.8 million, $35,818,
$20,376 respectively.
On May 14, 1999, the Company entered into a definitive agreement to
purchase 63,750 shares of Hooey Series A convertible preferred stock for
$637,500 with a commitment to purchase an additional 63,750 shares for
$637,500 at the time of the Company's initial public offering. The
convertible preferred stock will automatically convert into common shares
upon an initial public offering of Hooey. In addition, 166,667 shares of
Company common stock were sold to Hooey's stockholders for $.01 per share.
The Company's total committed investment in Hooey is $3.1 million
representing $1.3 million of cash commitments and $1.8 million reflecting
the fair market value of the Company's common stock. The estimated fair
value of the common stock reflects the sale of 166,667 Company shares for a
price of $.01 that has an estimated fair market value of $1.8 million. The
historical amount of our investment in excess of the investee's book value
of net assets was $1.9 million that was comprised of stock consideration,
the investee's accumulated deficit at the investment date and direct costs
related to the investment of $1.85 million, $44,723, $3,845, respectively.
On May 14, 1999, the Company entered into a definitive agreement to
purchase 1,000 shares of Urban Box Office Series A convertible preferred
stock for $1,000,000 with a commitment to purchase an additional 2,000
shares for $2,000,000 subsequent to Urban Box Office utilizing at least 90%
of the $1,000,000. The convertible preferred stock will automatically
convert into common shares upon an initial public offering of Urban Box
Office. In addition, 200,001 shares of Company common stock were sold to
Urban Box Office's stockholders for $.01 per share. The Company's total
committed investment in Urban Box Office is $5.2 million representing $3
million of cash commitments and $2.2 million reflecting the fair market
value of the Company's common stock. The estimated fair value of the common
stock reflects the sale of 200,001 Company shares for a price of $.01 that
an estimated fair market value of $2.2 million. The historical amount of
our investment in excess of the investee's book value of net assets was
$2.3 million that was comprised of stock consideration, the investee's
accumulated deficit at the investment date and direct costs related to the
investment of $2.2 million, $61,731, $15,752, respectively.
The Company's probable investment and acquisition are summarized as
follows:
In August 1999, the Company signed an agreement to purchase 15,000,000
shares of Buyline.net common stock for $3 million in cash at the earlier of
November 30, 1999 or upon the Company's initial public offering. This
investment represents 51% of the outstanding common stock of Buyline.net.
The Company also has the option to purchase 45,000,000 additional shares of
Buyline.net common stock for $.20 per share until December 31, 2000 that,
if acquired, will represent, when combined with the initial purchase,
approximately 80% of Buyline.net's outstanding common stock.
F-27
<PAGE>
E2ENET, INC.
(a development stage enterprise)
Notes to Unaudited Pro Forma Combined Financial Statements--(continued)
On September 16, 1999, the Company entered into a definitive agreement,
that is contingent upon the initial public offering of the Company, to
purchase MEI for $24,000,000. The Company will acquire all of MEI's issued
and outstanding Series A, B, and C convertible preferred stock, and common
stock. Each outstanding share of common stock of MEI and all other rights
to acquire any capital interest in MEI will convert into the right to
receive the respective proportional share, determined on a fully diluted
basis, of the $24,000,000 cash proceeds.
The Company's financing is summarized as follows:
In September 1999, the Company issued Convertible Notes for $4 million to
Northwood Ventures LLC and Northwood Capital Partners LLC that bear
interest at the prime rate and mature on the earlier of (a) 5 days after
the initial public offering or (b) December 31, 2000. The Convertible Notes
are convertible into the Company's common stock at a conversion price of
$8.71 per share which may be reduced if the initial public
offering price is lower than $13 per share. The reduced conversion price
will represent 67% of the price per share for the Company's initial public
offering. The Convertible Notes will convert into common stock at the
option of the holder or automatically upon the closing of the Company's
initial public offering. The beneficial conversion feature represents the
difference between the assumed initial public offering price and the
conversion rate.
The periods included in these pro forma financial statements for the Company
are from September 1, 1998 (date of inception) through December 31, 1998 and
for the six month period ended June 30, 1999. MEI is included in the pro forma
financial statements for the year ended December 31, 1998 and the period from
January 1, 1999 through June 30, 1999 as if it were acquired on January 1, 1998
for the pro forma combined statement of operations and on June 30, 1999 for the
pro forma combined balance sheet. The period included in these pro forma
financial statements for Buyline.net, Blue Rock Avenue, BlueMercury, Hooey and
Urban Box Office is the respective investee company's date of inception through
June 30, 1999 as they were not incorporated until 1999. The audited financial
statements of the Company and Partner Companies are included elsewhere in this
registration statement.
F-28
<PAGE>
E2ENET, INC.
(a development stage enterprise)
Notes to Unaudited Pro Forma Combined Financial Statements--(continued)
2. Unaudited Pro Forma Combined Adjustments for Investments Accounted for using
the Equity Method
Pro Forma Balance Sheet Adjustments
<TABLE>
<CAPTION>
Blue Rock Urban
Avenue bluemercury Hooey Box Office
Adjustments Adjustments Adjustments Adjustments
----------- ----------- ----------- -----------
A B C D
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Investments.................. $1,000,000 $500,000 $637,500 $2,000,000
---------- -------- -------- ----------
Total assets.................. $1,000,000 $500,000 $637,500 $2,000,000
========== ======== ======== ==========
LIABILITIES AND STOCKHOLDERS'
(DEFICIT) EQUITY
Current liabilities:
Due to stockholder........... $1,000,000 $500,000 $637,500 $2,000,000
---------- -------- -------- ----------
Total liabilities............. 1,000,000 500,000 637,500 2,000,000
---------- -------- -------- ----------
Total liabilities and
stockholders' (deficit)
equity....................... $1,000,000 $500,000 $637,500 $2,000,000
========== ======== ======== ==========
</TABLE>
(A) Records the additional investment of $1 million to acquire an additional
5,333,333 shares that the Company has committed to invest in Blue Rock
Avenue.
(B) Records the additional investment of $500,000 to acquire an additional
6,750,000 shares that the Company has committed to invest in bluemercury.
(C) Records the additional investment of $637,500 to acquire an additional
63,750 shares that the Company has committed to invest in Hooey.
(D) Records the additional investment of $2,000,000 to acquire an additional
2,000 shares that the Company has committed to invest in Urban Box Office.
Pro Forma Statement of Operations Adjustments
<TABLE>
<CAPTION>
Blue Rock Urban Box
Avenue bluemercury Hooey Office
Adjustments Adjustments Adjustments Adjustments
----------- ----------- ----------- -----------
A B C D
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Expenses:
Equity in loss of investee..... $(101,946) $ (35,818) $(44,723) $(61,731)
Goodwill amortization.......... (172,444) (147,634) (47,341) (3,463)
--------- --------- -------- --------
Equity in loss of investees.... (274,390) (183,452) (92,064) (65,194)
--------- --------- -------- --------
Total expenses.................. $(274,390) $(183,452) $(92,064) $(65,194)
========= ========= ======== ========
</TABLE>
(A) Records the $101,946 net loss of Blue Rock Avenue. This represents Blue
Rock Avenue's net loss prior to the Company's investment (January 5, 1999
(date of inception) through May 14, 1999 (Company's investment date)). If
the Company had made its investment in Blue Rock Avenue on January 5, 1999,
the amount of our investment in excess of the investee's book value of net
assets would have been $1.5 million comprising the stock consideration and
direct costs related to the investment of $1.5 million and $15,522,
respectively.
F-29
<PAGE>
E2ENET, INC.
(a development stage enterprise)
Notes to Unaudited Pro Forma Combined Financial Statements--(continued)
Amortization expense for the period of January 5, 1999 to May 14, 1999 is
$172,444. Amortization expense of $67,416 subsequent to May 14, 1999 is
recorded in the historical financial statements of the Company.
(B) Records the $35,818 net loss of bluemercury. This represents bluemercury's
net loss prior to the Company's investment (February 16, 1999 (date of
inception) through May 14, 1999 (Company's investment date)). If the
Company had made its investment in bluemercury on February 16, 1999, the
amount of our investment in excess of the investee's book value of net
assets would have been $1.8 million comprising the stock consideration and
direct costs related to the investment of $1.8 million and $20,376,
respectively. Amortization expense for the period of February 16, 1999 to
May 14, 1999 is $147,634. Amortization expense of $80,409 subsequent to May
14, 1999 is recorded in the historical financial statements of the Company.
(C) Records the $44,723 net loss of Hooey. This represents Hooey's net loss
prior to the Company's investment (April 15, 1999 (date of inception)
through May 14, 1999 (Company's investment date)). If the Company had made
its investment in Hooey on April 15, 1999, the amount of our investment in
excess of the investee's book value of net assets would have been $1.8
million comprising the stock consideration and direct costs related to the
investment of $1.8 million and $3,845, respectively. Amortization expense
for the period of April 15, 1999 to May 14, 1999 is $47,341. Amortization
expense of $80,084 subsequent to May 14, 1999 is recorded in the historical
financial statements of the Company.
(D) Records the $61,731 net loss of Urban Box Office. This represents Urban Box
Office's net loss prior to the Company's investment (May 11, 1999 (date of
inception) through May 14, 1999 (Company's investment date)). If the
Company had made its investment in Urban Box Office on May 11, 1999, the
amount of our investment in excess of the investee's book value of net
assets would have been $2.2 million comprising the stock consideration and
direct costs related to the investment of $2.2 million and $15,752,
respectively. Amortization expense for the period of May 11, 1999 to May
14, 1999 is $3,463. Amortization expense of $96,919 subsequent to May 14,
1999 is recorded in the historical financial statements of the Company.
3. Probable Acquisition and Investment
Investment in Buyline.net
Concurrent with the completion of the initial public offering, the Company
will acquire 80% of the outstanding common stock of Buyline.net for $12 million
in cash. Since the Company will own the majority of Buyline.net's outstanding
common stock, Buyline.net's financial statements will be consolidated with the
Company.
Acquisition of MEI
Concurrent with the closing of the Company's initial public offering, the
Company will acquire all of the capital stock of MEI. The acquisition of MEI
will be accounted for using the purchase method of accounting.
The following table sets forth the consideration to be paid in cash for the
investment in Buyline.net and to the stockholders of MEI. The entire excess
purchase price has been preliminarily allocated to goodwill.
F-30
<PAGE>
E2ENET, INC.
(a development stage enterprise)
Notes to Unaudited Pro Forma Combined Financial Statements--(continued)
<TABLE>
<CAPTION>
Useful
Total Life
Consideration Goodwill (in years)
------------- ------------ ---------
<S> <C> <C> <C>
Buyline.net............................... 12,000,000 2,458,602 3
MEI....................................... 24,000,000 25,811,931 3
------------ ------------
$ 36,000,000 $ 28,270,533
============ ============
</TABLE>
. Buyline.net's goodwill represents the Company's purchase consideration
in excess of the Company's 80% ownership interest of the fair value of
Buyline.net's net assets (an accumulated deficit of $73,253) on a post-
investment basis.
. MEI's goodwill represents the Company's purchase consideration in excess
of the fair value of MEI's net assets (an accumulated deficit of $9.2
million) giving effect to the redemption of MEI's mandatorily redeemable
securities of $7.4 million.
4. Unaudited Pro Forma Combined Statements of Operations Adjustments for
Consolidated Investments
The following tables summarize unaudited adjustments to the pro forma
combined statements of operations:
For the period ended December 31, 1998:
<TABLE>
<CAPTION>
Pro Forma
Adjustments
-----------
A
-----------
<S> <C>
Goodwill amortization....................................... $ 8,603,977
-----------
</TABLE>
(A) Reflects the amortization over a period of three years of the $25,811,931
of goodwill to be recorded as a result of the probable acquisition of MEI.
For the period ended June 30, 1999:
<TABLE>
<CAPTION>
Pro Forma
Purchasing Accounting Financing Offering
Adjustments Adjustments Adjustments
--------------------------------- Pro Forma ----------- -----------
A B C Adjustments D E
--------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Goodwill amortization... $ -- $ 4,301,989 $ 138,031 $ 4,440,020 $ -- $ --
--------- ----------- --------- ----------- ----------- -----------
Loss from operations.... -- (4,301,989) (138,031) (4,440,020) -- --
Interest expense........ -- -- -- -- 1,970,149 1,969,543
--------- ----------- --------- ----------- ----------- -----------
Loss before income
taxes.................. -- (4,301,989) (138,031) (4,440,020) (1,970,149) (1,969,543)
Accretion on mandatorily
redeemable securities.. (100,621) -- -- (100,621)
--------- ----------- --------- ----------- ----------- -----------
Net loss available to
common stockholders.... $(100,621) $(4,301,989) $(138,031) $(4,540,641) $(1,970,149) $(1,969,543)
========= =========== ========= =========== =========== ===========
</TABLE>
(A) In May 1999, MEI issued 943,396 shares of mandatorily redeemable common
stock for $.53 per share to a vendor in connection with a software license
agreement. The
F-31
<PAGE>
E2ENET, INC.
(a development stage enterprise)
Notes to Unaudited Pro Forma Combined Financial Statements--(continued)
mandatorily redeemable common stock is redeemable at a redemption price of
up to $.64 per share. Through June 30, 1999, MEI accreted $3,153 of the
mandatorily redeemable stock. At the completion of the Company's
acquisition of MEI, the holder of the mandatorily redeemable common stock
is expected redeem the mandatorily redeemable common stock. The pro forma
adjustment reflects the accretion of the mandatorily redeemable common
stock up to the redemption price of $0.64 per share.
(B) Reflects the amortization of the goodwill to be recorded as a result of
the probable acquisition of MEI over a period of three years.
(C) Reflects the amortization expense to be recorded as a result of the
probable investment in Buyline.net for the period from Buyline.net's date
of inception to the probable investment date of the intangible asset.
Additionally, the adjustment includes the amortization of the goodwill
over a period of three years.
(D) Reflects the interest expense for the beneficial conversion feature
relating to the Convertible Notes that were issued in September 1999. This
charge represents the difference between the Convertible Notes' conversion
price and the fair value of the stock at the time the Convertible Notes
were issued.
(E) Reflects the amortization of the discount on the Convertible Notes of
$1.97 million. The discount on the Convertible Notes is related to the
allocation of the proceeds between the relative fair values of the common
stock warrants and the Convertible Notes.
F-32
<PAGE>
E2ENET, INC.
(a development stage enterprise)
Notes to Unaudited Pro Forma Combined Financial Statements--(continued)
5. Unaudited Pro Forma Combined Balance Sheet Adjustments for Consolidated
Investments and Initial Public Offering
The following table summarizes unaudited pro forma combined balance sheet
adjustments:
<TABLE>
<CAPTION>
Pro Forma
Financing
Purchase Accounting Adjustments Adjustments
---------------------------------------------- Pro Forma -----------
A B C D Adjustments E
----------- -------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents.... $ -- $ -- $ -- $ -- $ -- $ 4,000,000
----------- -------- ----------- ---------- ----------- -----------
Total current
assets......... -- -- -- -- -- 4,000,000
----------- -------- ----------- ---------- ----------- -----------
Deferred offering
costs........... -- -- -- -- -- --
Goodwill, net.... -- -- 25,811,931 2,458,602 28,270,533 --
----------- -------- ----------- ---------- ----------- -----------
Total assets.... $ -- $ -- $25,811,931 $2,458,602 $28,270,533 $ 4,000,000
=========== ======== =========== ========== =========== ===========
Liabilities and
Stockholders'
(Deficit) Equity
Accounts
payable........ $ -- $ -- $ -- $ -- $ -- $ --
Payable to
shareholders of
MEI............ 24,000,000 -- -- -- 24,000,000 --
----------- -------- ----------- ---------- ----------- -----------
Total current
liabilities.... 24,000,000 -- -- -- 24,000,000 --
Minority interest
in subsidiary... -- -- -- 2,385,349 2,385,349 --
Convertible note
payable......... -- -- -- -- -- 2,030,457
Due to
stockholder..... -- -- -- -- -- --
----------- -------- ----------- ---------- ----------- -----------
Total
liabilities.... 24,000,000 -- -- 2,385,349 26,385,349 2,030,457
----------- -------- ----------- ---------- ----------- -----------
Mandatorily
redeemable
convertible
preferred
stock........... -- -- (6,870,612) -- (6,870,612) --
Mandatorily
redeemable
common stock.... -- 100,621 (603,774) -- (503,153) --
----------- -------- ----------- ---------- ----------- -----------
Total mandatorily
redeemable
securities...... -- 100,621 (7,474,386) -- (7,373,765) --
----------- -------- ----------- ---------- ----------- -----------
Stockholders'
(deficit)
equity:
Common stock.... -- -- (54,402) -- (54,402) --
Capital in
excess of
par value...... (24,000,000) -- 23,791,484 -- (208,516) 3,939,692
Deferred
compensation... -- -- 370,704 -- 370,704 --
Accumulated
deficit........ -- (100,621) 9,178,531 -- 9,077,910 --
Deficit
accumulated
during
development
stage.......... -- -- -- 73,253 73,253 (1,970,149)
----------- -------- ----------- ---------- ----------- -----------
Total
stockholders'
(deficit)
equity.......... (24,000,000) (100,621) 33,286,317 73,253 9,258,949 1,969,543
----------- -------- ----------- ---------- ----------- -----------
Total liabilities
and
stockholders'
(deficit)
equity.......... $ -- $ -- $25,811,931 $2,458,602 $28,270,533 $ 4,000,000
=========== ======== =========== ========== =========== ===========
<CAPTION>
Offering Adjustments
---------------------------------------- Offering
F G H Adjustments
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents.... $130,000,000 $(24,000,000) $(7,547,560) $98,452,440
------------- ------------- ------------ ------------
Total current
assets......... 130,000,000 (24,000,000) (7,547,560) 98,452,440
------------- ------------- ------------ ------------
Deferred offering
costs........... (586,439) -- -- (586,439)
Goodwill, net.... -- -- -- --
------------- ------------- ------------ ------------
Total assets.... $129,413,561 $(24,000,000) $(7,547,560) $97,866,001
============= ============= ============ ============
Liabilities and
Stockholders'
(Deficit) Equity
Accounts
payable........ $ 10,513,561 $ -- $ -- $10,513,561
Payable to
shareholders of
MEI............ -- (24,000,000) -- (24,000,000)
------------- ------------- ------------ ------------
Total current
liabilities.... 10,513,561 (24,000,000) -- (13,486,439)
Minority interest
in subsidiary... -- -- -- --
Convertible note
payable......... -- -- (2,030,457) (2,030,457)
Due to
stockholder..... -- -- (7,547,560) (7,547,560)
------------- ------------- ------------ ------------
Total
liabilities.... 10,513,561 (24,000,000) (9,578,017) (23,064,456)
------------- ------------- ------------ ------------
Mandatorily
redeemable
convertible
preferred
stock........... -- -- -- --
Mandatorily
redeemable
common stock.... -- -- -- --
------------- ------------- ------------ ------------
Total mandatorily
redeemable
securities...... -- -- -- --
------------- ------------- ------------ ------------
Stockholders'
(deficit)
equity:
Common stock.... 100,000 -- 4,592 104,592
Capital in
excess of
par value...... 118,800,000 -- 3,995,408 122,795,408
Deferred
compensation... -- -- -- --
Accumulated
deficit........ -- -- -- --
Deficit
accumulated
during
development
stage.......... -- -- (1,969,543) (1,969,543)
------------- ------------- ------------ ------------
Total
stockholders'
(deficit)
equity.......... 118,900,000 -- 2,030,457 120,930,457
------------- ------------- ------------ ------------
Total liabilities
and
stockholders'
(deficit)
equity.......... $129,413,561 $(24,000,000) $(7,547,560) $97,866,001
============= ============= ============ ============
</TABLE>
F-33
<PAGE>
E2ENET, INC.
(a development stage enterprise)
Notes to Unaudited Pro Forma Combined Financial Statements--(continued)
(A) Records the liability for probable consideration to be paid to the
stockholders of MEI.
(B) In May 1999, MEI issued 943,396 shares of mandatorily redeemable common
stock for $0.53 per share to a vendor in connection with a software license
agreement. The mandatorily redeemable common stock is redeemable at a
redemption price of up to $.64 per share. Through June 30, 1999, MEI
accreted $3,153 of the mandatorily redeemable stock. At the completion of
the Company's acquisition of MEI, the holder of the mandatorily redeemable
common stock is expected to redeem the mandatorily redeemable common stock.
The pro forma adjustment reflects the accretion of the mandatorily
redeemable common stock up to the redemption price of $.64 per share.
(C) Reflects the Company's acquisition of 100% of the capital stock of MEI
consisting of $24,000,000 in cash and the recognition of the excess
purchase price over the fair value of the net assets that has been
allocated to goodwill.
(D) Reflects the goodwill and minority interest recorded for the Company's
probable investment (including the exercise of the option to acquire
additional shares) of 80% of the common stock of Buyline.net for
$12,000,000 in cash. The minority interest has been assigned a value
representing 20% of Buyline.net's pro forma net assets.
(E) Reflects the Company's September 1999 issuance of the $4 million
Convertible Notes that are convertible into shares of the Company's common
stock automatically upon the initial public offering or at the option of
the holder. The holders of the Convertible Notes also received 400,000
warrants resulting in a discount from the note's face value of $1.97
million. Based on the relative fair market values, $2.03 million and $1.97
million have been assigned to the Convertible Notes and warrants,
respectively. The conversion rate of the Convertible Notes is $8.71 per
share that is reduced to 67% of the price per share of the Company's
initial public offering if the offering price is lower than $13 per share.
The pro forma adjustment reflects $1.97 million in interest expense
recorded for the beneficial conversion feature of the Convertible Notes
(difference between assumed initial public offering price of $13 and
conversion rate of $8.71).
(F) Records the cash proceeds from the issuance of shares of the Company's
common stock at an assumed initial public offering price of $13 per share,
net of estimated offering costs. Offering costs primarily consist of
underwriting discounts and commissions, accounting fees, legal fees, and
printing expenses. $586,439 of these costs has been recorded in the
historical accounts as deferred offering costs. Upon the initial public
offering, deferred offering costs will be reclassified as a reduction to
capital in excess of par value.
(G) Records the cash consideration in connection with the investment in
Buyline.net and acquisition of MEI.
(H) Records the repayment of the promissory note due to stockholder of
$7,547,560 that is payable at the earlier of the initial public offering or
on demand after December 31, 2000. In addition, this adjustment reflects
the conversion of the Convertible Notes into 459,242 shares of common stock
based on the assumed initial offering price of $13 per share, and the
amortization of the discount on the Convertible Notes.
F-34
<PAGE>
E2ENET, INC.
(a development stage enterprise)
Notes to Unaudited Pro Forma Combined Financial Statements--(continued)
6. Unaudited Pro Forma Combined Statements of Operations Adjustments
In addition to the shares that are reflected in the historical financial
statements, the shares used in computing the pro forma combined net loss per
share reflect the weighted-average of the 1,985,112 shares necessary to fund
the MEI acquisition as if these pro forma shares were issued on January 1,
1998, the 992,556 shares necessary to fund the investment in Buyline.net as if
these shares were issued on May 18, 1999 (Buyline.net's date of inception) and
the 624,281 shares necessary to repay the promissory note due to stockholder,
as if those shares were issued on May 14, 1999 or as of the respective
inception date of Blue Rock Avenue, bluemercury, Hooey and Urban Box Office,
all assuming $12.09 of net proceeds to be received per common share.
F-35
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of MEI Software Systems, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' deficit and
of cash flows present fairly, in all material respects, the financial position
of MEI Software Systems, Inc. and its subsidiary as of December 31, 1997 and
1998 and June 30, 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 and the
six months in the period ended June 30, 1999 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 3. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
McLean, VA
August 30, 1999, except for Note 3 and Note 17 which are as of September 16,
1999
F-36
<PAGE>
MEI SOFTWARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
------------------------ -----------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............. $ 351,035 $ 1,267,950 $ 580,851
Accounts receivable, net.............. 1,144,139 2,067,442 2,904,003
Prepaid and other current assets...... 15,319 40,373 162,888
----------- ----------- -----------
Total current assets................ 1,510,493 3,375,765 3,647,742
Property and equipment, net........... 184,879 546,773 582,134
Software license...................... -- -- 479,117
Other assets.......................... 5,924 226,089 311,346
----------- ----------- -----------
Total assets........................ $ 1,701,296 $ 4,148,627 $ 5,020,339
=========== =========== ===========
Liabilities, Mandatorily Redeemable
Securities and Stockholders' Deficit
Current liabilities:
Line of credit........................ $ -- $ 800,000 $ 1,000,000
Accounts payable...................... 190,716 836,808 756,459
Accrued expenses...................... 1,454,047 910,205 686,004
Deferred revenue...................... 1,816,218 2,798,903 3,990,478
Current portion of capital lease
obligations.......................... 30,964 72,557 83,838
Notes payable......................... -- 15,620 15,620
Related party debt.................... 209,638 -- --
----------- ----------- -----------
Total current liabilities........... 3,701,583 5,434,093 6,532,399
Deferred rent........................... -- -- 159,300
Capital lease obligations, net of
current portion........................ 4,427 151,167 140,571
----------- ----------- -----------
Total liabilities................... 3,706,010 5,585,260 6,832,270
----------- ----------- -----------
Commitments and contingencies
Mandatorily redeemable securities:
Mandatorily redeemable convertible
preferred stock; $.10 par value;
7,063,718, 9,965,667 and 9,965,667
shares issued and outstanding
(liquidation preference $6,906,363).. 4,711,036 6,592,218 6,870,612
Mandatorily redeemable common stock;
$.01 par value; 943,396 shares issued
and outstanding...................... -- -- 503,153
----------- ----------- -----------
Total mandatorily redeemable
securities......................... 4,711,036 6,592,218 7,373,765
----------- ----------- -----------
Stockholders' deficit:
Common stock, Class A; $.01 par value;
50,000 shares authorized; 41,500, 0
and 0 shares issued and outstanding.. 415 -- --
Common stock, Class B; $.01 par value;
18,500,000 shares authorized;
3,507,000, 0 and 0 shares issued and
outstanding.......................... 35,070 -- --
Common stock; $.01 par value;
25,000,000 shares authorized; 0,
4,185,341, and 5,440,258 shares
issued and outstanding............... -- 41,853 54,402
Additional paid-in-capital............ -- 109,363 208,516
Deferred compensation................. -- (254,025) (370,704)
Accumulated deficit................... (6,751,235) (7,926,042) (9,077,910)
----------- ----------- -----------
Total stockholders' deficit......... (6,715,750) (8,028,851) (9,185,696)
----------- ----------- -----------
Total liabilities, mandatorily
redeemable securities and
stockholders' deficit.............. $ 1,701,296 $ 4,148,627 $ 5,020,339
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-37
<PAGE>
MEI SOFTWARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
December 31, Six months ended June 30,
----------------------------------- ----------------------------
1996 1997 1998 1998 1999
---------- ---------- ----------- ----------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue................. $3,950,054 $5,714,282 $ 9,299,237 $ 4,029,971 $ 6,140,540
---------- ---------- ----------- ------------ -------------
Cost of revenue:
License fees, services
and support.......... 2,794,403 3,060,761 5,323,025 2,227,478 3,808,869
Provision for contract
losses............... 289,925 710,475 -- -- --
---------- ---------- ----------- ------------ -------------
Total cost of
revenues........... 3,084,328 3,771,236 5,323,025 2,227,478 3,808,869
---------- ---------- ----------- ------------ -------------
Gross profit............ 865,726 1,943,046 3,976,212 1,802,493 2,331,671
Operating expenses:
Sales and marketing... 402,281 497,631 1,268,628 655,334 1,013,006
Research and
development.......... 471,579 1,147,797 1,990,079 843,822 1,251,568
General and
administrative....... 391,097 692,355 1,646,903 729,355 917,572
Compensation expense
on employee stock
options.............. -- -- 163,290 120,273 264,021
---------- ---------- ----------- ------------ -------------
Total operating
expenses........... 1,264,957 2,337,783 5,068,900 2,348,784 3,446,167
---------- ---------- ----------- ------------ -------------
Loss from operations.... (399,231) (394,737) (1,092,688) (546,291) (1,114,496)
Other income.......... -- 181,425 -- -- --
Interest expense...... (62,390) (29,279) (82,119) (24,915) (37,372)
---------- ---------- ----------- ------------ -------------
Net loss................ (461,621) (242,591) (1,174,807) (571,206) (1,151,868)
Accretion on mandatorily
redeemable securities.. (364,077) (363,626) (364,188) (181,838) (281,547)
---------- ---------- ----------- ------------ -------------
Net loss available to
common stockholders.... $ (825,698) $ (606,217) $(1,538,995) $ (753,044) $ (1,433,415)
========== ========== =========== ============ =============
Net loss per common
share (basic and
diluted): $ (0.23) $ (0.17) $ (0.38) $ (0.19) $ (0.32)
========== ========== =========== ============ =============
Shares used in computing
per share amounts
(basic and diluted): 3,543,379 3,543,705 4,028,185 4,027,199 4,457,635
========== ========== =========== ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
<PAGE>
MEI SOFTWARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock, Common Stock, Total
Class A Class B Common Stock Additional Deferred Accumu- Stock-
--------------- -------------------- ----------------- Paid-in Compen- lated holders'
Shares Amount Shares Amount Shares Amount Capital sation Deficit Deficit
------- ------ ---------- -------- --------- ------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1,
1996............ 41,500 $ 415 3,501,000 $ 35,010 -- $ -- $ -- $ -- $(5,319,410) $(5,283,985)
Exercise of
stock options.. -- -- 1,000 10 -- -- 90 -- -- 100
Accretion of
preferred stock
redemption
price.......... -- -- -- -- -- -- -- -- (10,038) (10,038)
Accretion of
cumulative
preferred
dividends...... -- -- -- -- -- -- (90) -- (353,949) (354,039)
Net loss........ -- -- -- -- -- -- -- -- (461,621) (461,621)
------- ----- ---------- -------- --------- ------- -------- --------- ----------- -----------
Balance at
December 31,
1996............ 41,500 415 3,502,000 35,020 -- -- -- -- (6,145,018) (6,109,583)
Exercise of
stock options.. -- -- 5,000 50 -- -- -- -- -- 50
Accretion of
preferred stock
redemption
price.......... -- -- -- -- -- -- -- -- (9,587) (9,587)
Accretion of
cumulative
preferred
dividends...... -- -- -- -- -- -- -- -- (354,039) (354,039)
Net loss........ -- -- -- -- -- -- -- -- (242.591) (242,591)
------- ----- ---------- -------- --------- ------- -------- --------- ----------- -----------
Balance at
December 31,
1997............ 41,500 415 3,507,000 35,070 -- -- -- -- (6,751,235) (6,715,750)
Exercise of
stock options.. -- -- 12,000 120 -- -- -- -- -- 120
Issuance of
common stock
for business
acquisition.... -- -- 624,841 6,248 -- -- 56,236 -- -- 62,484
Conversion of
Class A and
Class B common
stock to Common
Stock.......... (41,500) (415) (4,143,841) (41,438) 4,185,341 41,853 -- -- -- --
Grant of
employee stock
options below
fair market
value.......... -- -- -- -- -- -- 315,315 (315,315) -- --
Record
compensation
expense on
variable plan
stock options.. -- -- -- -- -- -- 102,000 -- -- 102,000
Amortization of
deferred
compensation... -- -- -- -- -- -- -- 61,290 -- 61,290
Accretion of
preferred stock
redemption
price.......... -- -- -- -- -- -- (9,636) -- -- (9,636)
Accretion of
cumulative
preferred
dividends...... -- -- -- -- -- -- (354,552) -- -- (354,552)
Net loss........ -- -- -- -- -- -- -- -- (1,174,807) (1,174,807)
------- ----- ---------- -------- --------- ------- -------- --------- ----------- -----------
Balance at
December 31,
1998............ -- -- -- -- 4,185,341 41,853 109,363 (254,025) (7,926,042) (8,028,851)
Exercise of
stock options.. -- -- -- -- 1,254,917 12,549 -- -- -- 12,549
Grant of
employee stock
options below
fair market
value.......... -- -- -- -- -- -- 167,700 (167,700) -- --
Record
compensation
expense on
variable plan
options........ -- -- -- -- -- -- 213,000 -- -- 213,000
Amortization of
deferred
compensation... -- -- -- -- -- -- -- 51,021 -- 51,021
Accretion of
redemption
price on
mandatorily
redeemable
convertible
preferred
stock.......... -- -- -- -- -- -- (9,093) -- -- (9,093)
Accretion of
cumulative
dividends on
mandatorily
redeemable
convertible
preferred
stock.......... -- -- -- -- -- -- (269,301) -- -- (269,301)
Accretion of
redemption
price on
mandatorily
redeemable
common stock... -- -- -- -- -- -- (3,153) -- -- (3,153)
Net loss........ -- -- -- -- -- -- -- -- (1,151,868) (1,151,868)
------- ----- ---------- -------- --------- ------- -------- --------- ----------- -----------
Balance at June
30, 1999........ -- $ -- -- $ -- 5,440,258 $54,402 $208,516 $(370,704) $(9,077,910) $(9,185,696)
======= ===== ========== ======== ========= ======= ======== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-39
<PAGE>
MEI SOFTWARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
December 31, June 30,
--------------------------------- -----------------------
1996 1997 1998 1998 1999
--------- --------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss............... $(461,621) $(242,591) $(1,174,807) $(571,206) $(1,151,868)
Adjustments to
reconcile net loss to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization......... 109,420 85,978 198,068 89,071 164,029
Provision for
allowance for
doubtful accounts.... (27,850) 15,000 86,844 10,774 49,680
Loss on disposal of
fixed assets......... -- -- -- -- 57,877
Provision for contract
loss................. 289,925 710,475 -- -- --
Gain on purchase
liability
settlement........... -- (124,180) -- -- --
Gain on shares
received from
insurance company
demutualization...... -- (49,568) -- -- --
Gain on sale of
investment........... -- (7,677) -- -- --
Amortization of
compensation
expense.............. -- -- 163,290 120,273 264,021
Changes in assets and
liabilities:
Accounts receivable.. 136,556 (330,974) (1,010,147) (233,375) (886,241)
Prepaids and other
current assets...... 46,655 15,180 (25,054) (34,078) (122,515)
Other assets......... 31,644 993 (33,201) (22,923) (126,832)
Accounts payable..... (252,605) 176 486,532 93,997 (80,349)
Accrued expenses..... (134,677) 59,968 (478,234) (356,918) (224,200)
Deferred revenue..... 550,699 356,911 982,685 547,040 1,191,575
Deferred rent........ -- -- -- -- 159,300
--------- --------- ----------- --------- -----------
Net cash provided by
(used in) operating
activities......... 288,146 489,691 (804,024) (357,345) (705,523)
--------- --------- ----------- --------- -----------
Cash flows from
investing activities:
Purchase of property
and equipment........ (41,509) (117,841) (237,369) (141,092) (157,376)
Sale of investment.... -- 57,245 -- -- --
Acquisition costs..... -- -- (30,495) (30,495) --
--------- --------- ----------- --------- -----------
Net cash used in
investing
activities......... (41,509) (60,596) (267,864) (171,587) (157,376)
--------- --------- ----------- --------- -----------
Cash flows from
financing activities:
Proceeds from issuance
of mandatorily
redeemable
convertible preferred
stock................ -- -- 1,250,000 -- --
Costs incurred in
connection with the
issuance of
mandatorily
redeemable
convertible preferred
stock................ -- -- (21,039) -- --
Proceeds from exercise
of stock options..... 100 50 120 60 12,549
Borrowings on line of
credit............... -- -- 800,000 425,000 200,000
Issuance of note
payable.............. -- -- 15,620 15,620 --
Payments on related
party debt........... (150,249) (41,652) (9,638) (9,638) --
Payments on purchased
software liability... -- (22,500) -- -- --
Principal payments on
capital lease
obligations.......... (121,227) (26,350) (46,260) (10,422) (36,749)
--------- --------- ----------- --------- -----------
Net cash (used in)
provided by
financing
activities......... (271,376) (90,452) 1,988,803 420,620 175,800
--------- --------- ----------- --------- -----------
Net increase (decrease)
in cash and cash
equivalents........... (24,739) 338,643 916,915 (108,312) (687,099)
Cash and cash
equivalents at
beginning of period... 37,131 12,392 351,035 351,035 1,267,950
--------- --------- ----------- --------- -----------
Cash and cash
equivalents at end of
period................ $ 12,392 $ 351,035 $ 1,267,950 $ 242,723 $ 580,851
========= ========= =========== ========= ===========
Cash paid for
interest.............. $ 38,390 $ 5,280 $ 44,874 $ 9,721 $ 28,463
========= ========= =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-40
<PAGE>
MEI SOFTWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
MEI Software Systems, Inc. and its subsidiary ("the Company") was
incorporated in the state of Delaware in 1975. The Company provides association
management software systems and Internet tools to trade associations and other
not-for-profit organizations. The Company's products are marketed as a
combination of membership management applications, accounting applications
Internet tools and services including system installation, customization,
modification, maintenance and training.
2. Summary of Significant Accounting Policies
Basis of consolidation
The accompanying consolidated financial statements include those of MEI
Software Systems, Inc. and its subsidiary, after elimination of all significant
intercompany accounts and transactions.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue recognition
In 1998, the Company adopted SOP 97-2 "Software Revenue Recognition" and SOP
98-4 "Deferral of the Effective Date of a Provision of SOP 97-2," which did not
significantly affect existing revenue recognition policies.
The Company enters into arrangements to deliver software licenses that also
provide for services, usually billed on a time and materials basis. License
revenue is recognized using the percentage of completion method of accounting.
Services consist of fees for system requirements definition, system design
and analysis, customization and installation services, system enhancements,
maintenance and training. Services revenue is recognized as the services are
performed, primarily on a time and materials basis. Revenue from maintenance
contracts is recognized ratably over the maintenance period. When appropriate,
a portion of the license fee is identified as maintenance and recognized
accordingly.
Revenue on fixed price contracts is recognized using the percentage-of-
completion method and is comprised of the portion of expected total contract
earnings represented by
F-41
<PAGE>
MEI SOFTWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
actual costs incurred to date as a percentage of the contract's total estimated
costs at completion. Provisions for anticipated contract losses are recognized
at the time that they become evident.
Deferred revenue relates primarily to license fee revenue, which has been
paid by the customers prior to the recognition of revenue.
Cost of revenue is comprised primarily of salaries and related benefits and
provision for contract losses.
Software development costs
Software development expenditures incurred prior to the development of
technological feasibility are expensed to operations as incurred. Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," requires capitalization of
certain software development costs subsequent to the establishment of
technological feasibility. Based on the Company's product development process,
technological feasibility is established upon completion of a working model.
Costs incurred by the Company between completion of the working model and the
point at which the product is ready for general release have been
insignificant. Accordingly, to date, all software development costs have been
expensed.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. As of
December 31, 1997, December 31, 1998 and June 30, 1999, the Company maintained
a cash balance with a financial institution that exceeded the $100,000
federally insured limit.
Unbilled receivables
Unbilled receivables result from revenue that has been earned but not yet
billed. The unbilled receivables can be invoiced at contractually defined
intervals or milestones, as well as upon completion of the contract.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years for computer equipment and software, seven years for
furniture and fixtures, and the shorter of the useful life or term of the lease
for leasehold improvements. Upon retirement or disposition of property and
equipment, the related gain or loss is reflected in the statement of
operations.
F-42
<PAGE>
MEI SOFTWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts and the tax basis
of existing assets and liabilities. A valuation allowance is recorded to reduce
tax assets to an amount whose realization is more likely than not.
Comprehensive income
The Company does not have any components of comprehensive income other than
net loss.
Segment disclosures
During 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information
("SFAS 131")." This statement changes the way companies report information
about segments of their business in the financial statements. It also requires
entity-wide disclosures about the products and services an entity provides, the
material countries in which it holds assets and reports revenues, and its major
customers. The Company currently operates in one industry and geographic
segment. Accordingly, the adoption of SFAS No. 131 did not have a material
effect on the current reporting or disclosure requirements.
Accounting for stock-based compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," ("APB 25") and related Interpretations. Under
APB 25, compensation cost is measured as the excess, if any, of the quoted
market price of the Company's stock at the date of grant over the exercise
price of the option granted. Compensation costs for stock options, if any, is
recognized ratably over the vesting period.
Concentrations of credit risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash equivalents and accounts receivable.
The Company limits the amount of investment exposure in any one financial
instrument and does not have any foreign currency investments nor does it
accept payment from customers in foreign currency. The Company sells products
and services to various companies in one primary industry without requiring
collateral. However, the Company routinely assesses the financial strength of
its customers and maintains allowances for anticipated losses.
F-43
<PAGE>
MEI SOFTWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
There was one customer that represented 10% or more of accounts receivable
as of December 31, 1997 and 1998. For the years ended December 31, 1996, 1997
and 1998, there was one customer that represented 10% or more of revenue. There
was one customer that represented 10% or more of accounts receivable as of June
30, 1999 and 10% or more of revenue for the period then ended.
Net loss per share
Basic earnings per share is computed based on the weighted average number of
outstanding shares of common stock. Diluted earnings per share adjusts the
weighted average for the potential dilution that could occur if stock options,
warrants or manditorily redeemable securities were exercised or converted into
common stock. Diluted earnings per share is the same as basic earnings per
share in periods with net losses because the effects of such items are anti-
dilutive in those periods.
Recent accounting pronouncements
In March, 1998 the American Institute of Certified Public Accountants issued
Statement of Position 98-1, ("SOP 98-1") "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is effective for the
year ended December 31, 1999. SOP 98-1 provides guidance for the costs of
computer software developed or obtained for internal use. The Company adoption
of SOP 98-1 did not have a material impact on its financial position or results
of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
The statement is effective for the year ended December 31, 2001. SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. The
Company does not expect adoption of this statement to have a material impact on
its financial position or results of operations.
Interim results (unaudited)
The accompanying statements of operations and of cash flows for the six
months ended June 30, 1998 are unaudited. In the opinion of management, these
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting of only normal recurring
adjustments, necessary for the fair presentation of the results of the interim
period.
F-44
<PAGE>
MEI SOFTWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Going Concern
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As presented in the financial
statements during the years ended December 31, 1996, 1997 and 1998 and the six
months ended June 30, 1999, the Company incurred losses of ($461,621),
($242,591), ($1,174,807) and (1,151,868), respectively. In addition, the
Company used $804,024 and $705,523 of cash in operating activities for the year
ended December 31, 1998 and the six months ended June 30, 1999, respectively.
These factors among others may indicate that the Company will be unable to meet
its obligations as they become due and to continue as a going concern for a
reasonable period of time.
The financial statements do not include any adjustments relating to the
recoverability of assets and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern. As
described in Note 7, the Company was not in compliance with the convenants of
its line of credit agreement for the year ended December 31, 1998, but a waiver
was obtained from the bank for its violations. The Company's ability to
continue as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis, to comply with
the terms of its line of credit, to obtain additional financing as may be
required, and ultimately to attain profitability.
The Company signed a definitive acquisition agreement with E2Enet, Inc.
during September 1999 to sell the Company for approximately $24,000,000 in cash
proceeds (see Note 17). The Company is also actively pursuing additional equity
financing through discussions with potential institutional investors.
4. Acquisition
On March 31, 1998, the Company acquired Phoenix Solutions, Inc. for a
purchase price of $92,979, consisting of 624,841 shares of common stock valued
at $.10 per share. In connection with the acquisition, the Company incurred
$30,495 in acquisition costs. Phoenix Solutions, Inc. develops and provides
software solutions to the meetings and membership management industries. The
acquisition has been accounted for as a purchase and, accordingly, the results
of operations of Phoenix Solutions, Inc. have been included in the accompanying
statement of operations since the date of the acquisition.
F-45
<PAGE>
MEI SOFTWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The net identifiable assets acquired were assigned a portion of the
consideration based upon their estimated fair values at March 31, 1998 as
follows:
<TABLE>
<S> <C>
Property and equipment............................................ $ 41,805
Goodwill.......................................................... 249,451
Accounts payable and accrued expenses............................. (159,559)
Other assumed liabilities......................................... (38,718)
---------
Total consideration............................................. $ 92,979
=========
</TABLE>
The goodwill is being amortized over its estimated useful life of 3 years.
For the year ended December 31, 1998 and the six months ended June 30, 1999,
the Company recognized $62,488 and $41,575 of amortization expense,
respectively.
The following unaudited pro forma results of operations for the year ended
December 31, 1997 and 1998 are presented as though Phoenix Solutions, Inc. had
been acquired in the beginning of 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
Revenue............................................. $5,985,370 $ 9,570,680
Net loss............................................ (661,225) (1,564,495)
Earnings per share:
Basic and diluted................................. $ (0.19) $ (0.39)
========== ===========
</TABLE>
The pro forma results of operations are not necessarily indicative of the
results that would have occurred had the Phoenix Solutions, Inc. acquisition
been consummated as of January 1, 1997 or 1998, nor are they necessarily
indicative of future operating results.
5. Accounts Receivable
Accounts receivable as of December 31, 1997, December 31, 1998 and June 30,
1999 consists of the following:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Billed receivables...................... $ 803,844 $1,753,713 $2,063,205
Unbilled receivables.................... 400,295 460,573 1,037,322
---------- ---------- ----------
1,204,139 2,214,286 3,100,527
Less allowance for doubtful accounts.... (60,000) (146,844) (196,524)
---------- ---------- ----------
Accounts receivable, net................ $1,144,139 $2,067,442 $2,904,003
========== ========== ==========
</TABLE>
F-46
<PAGE>
MEI SOFTWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Property and Equipment
Property and equipment as of December 31, 1997, December 31, 1998 and June
30, 1999 consists of the following:
<TABLE>
<CAPTION>
1997 1998 1999
--------- ---------- ----------
<S> <C> <C> <C>
Computer equipment and software......... $ 598,387 $ 881,214 $ 957,659
Office equipment, furniture and fix-
tures.................................. 164,973 343,750 427,326
Leasehold improvements.................. 36,780 75,481 34,788
--------- ---------- ----------
800,140 1,300,445 1,419,773
Less accumulated depreciation and amor-
tization............................... (615,261) (753,672) (837,639)
--------- ---------- ----------
Property and equipment, net............. $ 184,879 $ 546,773 $ 582,134
========= ========== ==========
</TABLE>
Depreciation and amortization expense was $109,420, $85,978, $135,580 and
$101,571 for the years ended December 31, 1996, 1997 and 1998 and the six
months ended June 30, 1999, respectively.
Property and equipment includes $61,373, $297,428 and $334,861 of equipment
acquired with capital leases as of December 31, 1997, December 31, 1998 and
June 30, 1999, respectively. Accumulated amortization includes $17,253, $60,452
and $95,582 of accumulated amortization on equipment acquired with capital
leases as of December 31, 1997, December 31, 1998 and June 30, 1999,
respectively.
7. Debt
Line of credit
In March 1998, the Company obtained a $1,000,000 line of credit, subject to
certain borrowing base restrictions, maturing on September 12, 1999 (see Note
17). Availability of the funds under the line is also subject to the Company's
compliance with certain restrictive covenants; the most restrictive of which
imposes restrictions on payment of dividends. As of December 31, 1998 and for
certain compliance periods during 1998, the Company was not in compliance with
certain of the financial covenants. The Company has obtained a waiver from the
financial institution with respect to these covenant violations. In addition,
the Company issued to the financial institution 92,308 warrants exercisable at
$0.65 per share in connection with these covenant violations. The fair value
ascribed to these warrants was insignificant. The line of credit bears interest
at the prime rate (7.75% as of December 31, 1998 and June 30, 1999) plus 1.5%.
The line is collateralized by a lien on all corporate assets. As of December
31, 1998 and June 30, 1999, $800,000 and $1,000,000 respectively was
outstanding under this facility. Interest expense was $40,290 and $31,500 for
the year ended December 31, 1998 and the six months ended June 30, 1999.
F-47
<PAGE>
MEI SOFTWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Related party debt
Convertible debt
In November 1992 and October 1993, the Company issued warrants to purchase
326,389 and 156,250 shares of the Company's Class B common stock at $0.36 per
share in connection with the issuance of related party convertible debt. The
fair value ascribed to these warrants was insignificant. The related
convertible debt was converted into Series B preferred stock in 1994. As of
December 31, 1998 and June 30, 1999, 482,639 warrants were exercisable for
common stock at $0.36 per share.
In November 1994 and September 1995, the Company issued convertible debt of
$100,000 and $100,000, respectively, to a preferred stockholder. The interest
rate on the convertible debt was 12% and the debt was due on demand. As of
December 31, 1997, there was $200,000 of convertible debt outstanding plus
accrued interest of $88,033. In December 1998, the convertible debt and accrued
interest were converted by its terms into 543,458 shares of mandatorily
redeemable convertible preferred stock, Series C. Interest expense incurred on
the convertible debt was $24,000 for each of the three years ended December 31,
1998.
Other related party debt
The Company has issued unsecured notes payable to certain affiliates of the
Company. The notes are payable in quarterly installments of $9,831, including
annual interest at 10%. As of December 31, 1997, $9,638 of affiliate debt was
outstanding. The affiliate debt was repaid during 1998.
Capital lease obligations
Future minimum lease payments for assets under non-cancelable capital leases
as of June 30, 1999 are as follows:
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Six months ended December 31, 1999................................. $ 55,767
2000............................................................... 108,137
2001............................................................... 77,990
2002............................................................... 21,851
Six months ended June 30, 2003..................................... 12,696
--------
Total minimum lease payments....................................... 276,441
Less amount representing interest.................................. (52,032)
--------
Present value of net minimum lease payments........................ 224,409
Less current portion............................................... (83,838)
--------
Long term portion.................................................. $140,571
========
</TABLE>
F-48
<PAGE>
8. Mandatorily Redeemable Convertible Preferred Stock
The Company is authorized to issue 10,013,718 shares of mandatorily
redeemable convertible preferred stock divided into three classes, (i) the
first class consists of 4,563,718 shares of Series A Mandatorily Redeemable
Convertible Preferred Stock (Series A), (ii) the second class consists of
2,500,000 shares of Series B Mandatorily Redeemable Convertible Preferred Stock
(Series B) and (iii) the third class consists of 2,950,000 shares of Series C
Mandatorily Redeemable Convertible Preferred Stock (Series C) each with a $.10
par value.
In conjunction with the issuance of the Series A mandatorily redeemable
convertible preferred stock in 1993, the Company issued warrants to purchase
312,000 shares of the Company's Class B common stock. The fair value ascribed
to these warrants was insignificant. As of December 31, 1998 and June 30, 1999,
312,000 warrants were exercisable for common stock at $0.48 per share.
In December 1998, a preferred stockholder converted its $200,000 outstanding
convertible note and approximately $88,033 of accrued interest into 543,458
shares of Series C preferred stock (Series C) (see Note 7). An additional
943,397 shares of Series C Preferred Stock were issued at $.53 per share for
cash proceeds of $500,000 to the existing preferred stockholder and an
additional 1,415,094 shares of Series C Preferred Stock were issued at $.53 per
share for cash proceeds of $750,000 to new investors. Costs incurred in
connection with the issuance of the Series C Preferred Stock were $21,039.
The mandatorily redeemable convertible redeemable preferred stock activity
is summarized as follows:
<TABLE>
<CAPTION>
Series C Series B Series A Total
-------------------- -------------------- -------------------- ---------------------
Shares Amount Shares Amount Shares Amount Shares Amount
--------- ---------- --------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... -- $ -- 2,500,000 $ 865,109 4,563,718 $3,118,224 7,063,718 $3,983,333
Preferred dividends.... -- 90,000 -- 264,039 -- 354,039
Accretion of redemption
price................. -- 1,258 -- 8,780 -- 10,038
--------- ---------- --------- ---------- --------- ---------- ---------- ----------
Balance, December 31,
1996................... -- -- 2,500,000 956,367 4,563,718 3,391,043 7,063,718 4,347,410
Preferred dividends.... -- -- -- 90,000 -- 264,039 -- 354,039
Accretion of redemption
price................. -- -- -- 1,260 -- 8,327 -- 9,587
--------- ---------- --------- ---------- --------- ---------- ---------- ----------
Balance, December 31,
1997................... -- -- 2,500,000 1,047,627 4,563,718 3,663,409 7,063,718 4,711,036
Issuance of shares net
of issuance costs..... 2,901,949 1,516,994 -- -- -- -- 2,901,949 1,516,994
Preferred dividends.... -- 513 -- 90,000 -- 264,039 -- 354,552
Accretion of redemption
price................. -- -- -- 1,262 -- 8,374 -- 9,636
--------- ---------- --------- ---------- --------- ---------- ---------- ----------
Balance, December 31,
1998................... 2,901,949 1,517,507 2,500,000 1,138,889 4,563,718 3,935,822 9,965,667 6,592,218
Preferred dividends.... -- 92,282 -- 45,000 -- 132,019 -- 269,301
Accretion of redemption
price................. -- 4,256 -- 632 -- 4,205 -- 9,093
--------- ---------- --------- ---------- --------- ---------- ---------- ----------
Balance, June 30, 1999.. 2,901,949 $1,614,045 2,500,000 $1,184,521 4,563,718 $4,072,046 9,965,667 $6,870,612
========= ========== ========= ========== ========= ========== ========== ==========
Liquidation preference
(exclusive of
cumulative
dividends)............ $1,538,033 $ 750,000 $2,200,324 4,488,357
Cumulative dividends... 92,795 437,055 1,888,156 2,418,006
---------- ---------- ---------- ----------
Total liquidation
preference............ $1,630,828 $1,187,055 $4,088,480 $6,906,363
========== ========== ========== ==========
Authorized shares....... 2,950,000 2,500,000 4,563,718 10,013,718
</TABLE>
F-49
<PAGE>
MEI SOFTWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Conversion
Each share of the Series A, B and C preferred stock is convertible into one
share of common stock at the option of the holder at any time. The conversion
ratio is subject to adjustments for events such as stock splits, stock
dividends or an issuance of stock.
Automatic conversion is required if at any time (1) less than 2,500,000
shares of preferred stock remain outstanding and (2) the Company completes an
initial public offering at a per share price of at least $1.59 that results in
gross proceeds to the Company of at least $15,000,000.
At December 31, 1998 and June 30, 1999, the Company had reserved 10,013,718
shares of common stock for the conversion of all classes of preferred stock.
Liquidation preference
In the event of any liquidation or winding up of the Company, the holders of
the Series A, B and C preferred stock will be entitled to a liquidation
preference over the Company's common stock. The liquidation preference equals
the original face amount plus any accrued and unpaid dividends. No dividends
have been paid through June 30, 1999.
In the event the amount available for such distribution is insufficient to
pay the full liquidation amount, then no amount shall be distributed to the
holders of common stock and the assets shall be distributed among the holders
of the preferred stock on a pro rata basis based on the holders respective
ownership interests. After the payment of the liquidation amount to the holders
of preferred stock, any remaining assets shall be distributed to the holders of
common stock on a pro rata basis based on the number of shares of common stock
held by each shareholder.
Mandatory redemption
At any time after June 30, 2001, the holders with a two-thirds majority vote
of the then outstanding preferred stock may require the Company to redeem their
shares at $0.4821 per share for Series A, $0.30 per share for Series B and
$0.53 per share for Series C plus any accrued and unpaid dividends.
Dividends, voting and other rights
Dividends
Cumulative dividends accrue annually at $0.0578573 per share for Series A,
$0.036 per share for Series B, and $0.0636 per share for Series C,
respectively. Such dividends are payable only (1) as determined by the Board of
Directors, (2) upon the liquidation, dissolution, or winding up of the Company
or (3) redemption of the preferred stock. No dividends have been paid through
June 30, 1999.
F-50
<PAGE>
MEI SOFTWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Voting and other rights
Holders of the preferred stock are entitled to the number of votes which is
equal to the number of shares of common stock into which the preferred stock is
convertible into. The preferred stockholders vote together with all other
classes and series of stock of the Company as a single class on all actions
taken by the stockholders of the Company. The holders of the Series A and
Series B shares, voting together as one class, shall be entitled to elect two
directors of the Company. The holders of the Series C shares shall be entitled
to elect one director of the Company. The board of directors is limited to six
directors.
As long as any of the preferred stock remains outstanding, the Company must
obtain approval from a majority of the holders of the preferred stock in order
to (a) issue additional preferred stock or issue any other class of stock that
is on parity or senior to the preferred stock, (b) enter into any transaction
for the sale, merger or dissolution of the Company or a disposition of a
significant portion of the business, (c) amend, alter or repeal the Company's
Certificate of Incorporation or By-laws, (d) pay dividends or repurchase shares
on any shares other than the Preferred stock, (e) redeem or otherwise acquire
any shares of Preferred stock except as expressly authorized, or (f) change the
size of the Board of Directors.
9. Mandatorily Redeemable Common Stock
In May 1999, the Company entered into a two-year license, royalty and
service agreement (the "License Agreement") with a vendor. The agreement
provides the Company with a non-exclusive right to use the license. The Company
is required to pay cash royalties to the vendor upon attaining $1,666,667 in
sales of the product and to purchase a minimum of $500,000 in services from the
vendor (see Note 14). In conjunction with the agreement, the Company issued
943,396 shares of mandatorily redeemable common stock at $0.53 per share to the
vendor for a software license. The software license is being amortized over the
two-year term of the agreement. The Company recognized $20,883 of amortization
expense for the six months ended June 30, 1999.
Mandatory redemption
For the two years after November 30, 2001, the vendor may require the
Company to redeem its shares at a price up to $0.64 per share. The Company is
accreting to the redemption price of $0.64 per share over the period from
issuance to November 30, 2001 using the effective interest method. The
mandatorily redeemable common stock was accreted $3,153 for the six month
period ended June 30, 1999.
F-51
<PAGE>
MEI SOFTWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Dividends, voting and other rights
The mandatorily redeemable common stockholders are entitled to the same
dividends, voting and other rights as the common stockholders (see Note 10).
10. Common Stock
The common stockholders are entitled to receive dividends when declared by
the Board of Directors and subject to the prior payment of all cumulative
preferred stock dividends. Common stockholders are entitled to one vote per
share of common stock in matters for which the common stockholders have the
right to vote. In the event of liquidation and after satisfaction of preferred
stock preferences, any remaining assets then available for payment,
distribution or exchange to the holders of the Company's capital stock shall be
made to the holders of the common stock on a pro rata basis. For purposes of
effecting the conversion of the preferred stock, the Company is required to
reserve common stock from its authorized and unissued shares of common stock.
In December 1998, Class A and Class B common shares were combined on a one
for one basis into one class of shares known as Common Stock.
11. Employee Benefit Plan
The Company sponsors a plan to provide retirement benefits for its
employees. As allowed under Section 401(k) of the Internal Revenue Code, the
plan provides for tax-deferred salary deductions for eligible employees. The
plan provides for Company contributions and the Company contributed $56,105,
$76,968, $112,700 and $82,970 to the plan for the years ended December 31,
1996, 1997 and 1998 and the six months ended June 30, 1999, respectively.
12. Stock Option Plans
The Company original stock option plan was adopted in 1992. Options granted
under the 1992 Non-Qualified Stock Option Plan (the "1992 Plan") were repriced
during 1997 to provide additional incentives to employees, directors and
officers. During 1997, options granted under the 1992 Plan were cancelled and
new options were issued under the 1997 Plan.
The Company adopted the 1997 Non-Qualified Stock Option Plan (the "1997
Plan") to provide incentives to employees, directors and officers. The Company
has reserved 6,000,000 shares of common stock for issuance under the 1997 Plan.
Options under the 1997 Plan may be granted for periods of up to ten years and
at prices that may be less than the fair value of the shares on the date of
grant as determined by the Board of Directors (the "Board"). Generally, options
vest over four or five years on a ratable basis, however, the Board determines
the vesting terms for option grants on an individual basis. At December 31,
1998 and June 30, 1999, there are 777,724 and 387,724 options available,
respectively, for future grant under the 1997 Plan and no options available for
future grant under the 1992 Plan.
F-52
<PAGE>
MEI SOFTWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company recognizes compensation expense over the vesting period of
granted stock options when the estimated fair value of the underlying common
stock on the date of grant is in excess of the exercise price of the options.
As a result, for certain stock option grants, the Company recorded deferred
compensation of $315,315 and $167,700 during the year ended December 31, 1998
and the six months ended June 30, 1999, respectively. This amount was recorded
in stockholders' deficit and is being amortized as a charge to operations over
the vesting period of the related options. For the year ended December 31, 1998
and the six months ended June 30, 1999, the Company recognized $61,290 and
$51,021, respectively, of compensation expense related to these options. In
1998, the Company granted a key executive 300,000 variable stock options which
vest upon certain specified performance criteria. For the year ended December
31, 1998 and the six months ended June 30, 1999, the Company recognized
$102,000 and $213,000, respectively, of compensation expense related to these
options.
A summary of the status of the 1992 Plan and 1997 Plan is presented below
for the three years in the period ended December 31, 1998 and the six months in
the period ended June 30, 1999:
<TABLE>
<CAPTION>
Range of
Number of Exercise Options
Options Price Exercisable
---------- ---------- -----------
<S> <C> <C> <C>
Options outstanding at January 1, 1996.. 542,500 $0.10-0.48
Options granted......................... -- --
Options exercised....................... (1,000) 0.10
Options canceled........................ (61,500) 0.10-0.48
---------- ----------
Options outstanding at December 31,
1996................................... 480,000 0.10-0.48 327,250
---------
Options granted......................... 1,955,000 0.01
Options exercised....................... (5,000) 0.01
Options canceled........................ (500,000) 0.01-0.48
---------- ----------
Options outstanding at December 31,
1997................................... 1,930,000 0.01 802,083
---------
Options granted......................... 3,427,943 0.01-0.10
Options exercised....................... (12,000) 0.01
Options canceled........................ (140,667) 0.01
---------- ----------
Options outstanding at December 31,
1998................................... 5,205,276 $0.01-0.10 1,450,085
---------
Options granted......................... 410,000 0.10
Options exercised....................... (1,254,917) 0.01
Options canceled........................ (20,000) 0.01-0.10
---------- ----------
Options outstanding at June 30, 1999.... 4,340,359 $0.01-0.10 919,212
========== ========== =========
</TABLE>
As of December 31, 1998 and June 30, 1999, the weighted average remaining
contractual life was 8.33 and 8.68 years, respectively, and the weighted-
average exercise price was $0.02 and $0.03, respectively, for the outstanding
options.
F-53
<PAGE>
MEI SOFTWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company accounts for its stock-based compensation in accordance with the
provision of APB 25. If compensation expense had been recorded based on the
fair value at the grant dates for the awards under the 1992 Plan and 1997 Plan
consistent with the recognition method prescribed by SFAS 123, the Company's
net loss would have been adjusted to the pro forma amounts presented below:
<TABLE>
<CAPTION>
Year Year Six months
ended ended ended
December 31, December 31, June 30,
1997 1998 1999
------------ ------------ -----------
<S> <C> <C> <C>
Net loss available to common
stockholders:
As reported..................... $(606,217) $(1,538,995) $(1,433,415)
Pro forma....................... $(606,217) $(1,566,419) $(1,463,139)
Loss per common stockholder:
As reported..................... $ (0.17) $ (0.38) $ (0.32)
Pro forma....................... $ (0.17) $ (0.39) $ (0.33)
</TABLE>
The weighted average fair value of options granted was $0.00, $0.14 and
$0.45 during the years ended December 31, 1997 and 1998 and the six months
ended June 30, 1999 respectively. As discussed above, the Company has
recognized compensation expense for the year ended December 31, 1998 and the
six months ended June 30, 1999 due to the grant of stock options below fair
market value in these periods. The fair value of each option is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions used for grants issued during the two years in the period
ended December 31, 1998 and the six months in the period ended June 30, 1999:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Dividend yield....................................... 0% 0% 0%
Expected volatility.................................. 0% 0% 0%
Risk-free interest rate.............................. 5.71% 4.54% 5.81%
Expected term........................................ 4 years 5 years 5 years
</TABLE>
13. Income Taxes
Deferred taxes assets are comprised of the following at December 31, 1997,
December 31, 1998 and June 30, 1999:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Provision for contract loss........... $ 380,152 $ 122,911 $ 54,350
Non-cash compensation expense......... -- 62,050 162,378
Net operating loss.................... 1,121,142 1,706,060 2,077,327
Other................................. 42,882 75,883 94,761
Less valuation allowance.............. (1,544,176) (1,966,904) (2,388,816)
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
F-54
<PAGE>
MEI SOFTWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability
of the deferred tax assets such that, a full valuation allowance is required.
Such factors include the lack of significant history of material profits,
recent increases in expense levels to support the Company's growth, the fact
that the market in which the Company competes is intensely competitive and
characterized by rapidly changing technology, the lack of carryback capacity to
realize deferred tax assets and the market uncertainty regarding acceptance of
new versions of the Company's software.
As of December 31, 1997, December 31, 1998 and June 30, 1999, the Company
has $2,846,000, $4,385,266, and $5,362,283 of cumulative federal net operating
losses, respectively. These amounts will be carried forward to offset future
taxable income, subject to ownership change limitations. The net operating loss
will begin to expire in 2005.
14. Commitments and Contingencies
Lease obligations
The Company leases certain office facilities and equipment under
noncancelable operating leases. The Company entered into a lease for new office
space in April 1999 which had a rent abatement for $162,000 that is being
amortized over the lease term of ten years. Rental expense for the years ended
December 31, 1996, 1997 and 1998 and the six months ended June 30, 1999 was
$188,189, $167,290, $294,532 and $234,255, respectively.
Future minimum lease payments under noncancelable operating leases as of
June 30, 1999 are:
<TABLE>
<S> <C>
Six months ended December 31, 1999............................... $ 420,994
2000............................................................. 841,987
2001............................................................. 855,064
2002............................................................. 867,982
2003............................................................. 876,228
Six months ended June 30, 2004................................... 392,857
----------
Total.......................................................... $4,255,112
==========
</TABLE>
Sublease commitments
The Company began to sublease certain office space in May 1999. Sublease
rental income earned for the six months ended June 30, 1999 was $1,740.
Future minimum rentals on noncancelable subleases as of June 30, 1999 are:
<TABLE>
<S> <C>
Six months ended December 31, 1999................................. $ 96,648
2000............................................................... 153,223
2001............................................................... --
2002............................................................... --
2003............................................................... --
Six months ended June 30, 2004..................................... --
--------
Total............................................................ $249,871
========
</TABLE>
F-55
<PAGE>
MEI SOFTWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Purchase obligations
Under the terms of the License Agreement (see Note 9), the Company is
required to purchase a minimum of $500,000 in services (services obligation)
from this vendor. License payments and royalty payments do not reduce this
obligation. As of June 30, 1999, the Company had paid the vendor $7,000 in
satisfying this obligation. The remaining obligation will be paid as follows:
<TABLE>
<S> <C>
Six months ended December 31, 1999................................. $ 50,000
2000............................................................... 295,000
2001............................................................... 148,000
--------
Total............................................................ $493,000
========
</TABLE>
The Company may reduce its obligation by paying the vendor twenty percent
of its remaining Services Obligation and repurchasing, if requested by the
vendor, some or all of the shares issued to the vendor for a software license
and not previously repurchased at $.64 per share.
Litigation
The Company is subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, the Company
does not believe that the outcome of any of these legal matters will have a
material adverse effect on the Company's business, operating results,
financial position or cash flows. However, an unfavorable resolution of these
matters could materially affect the Company's future results of operations,
financial condition or cash flows in a particular period.
15. Other Non-operating Income
Other non-operating income consisted of the following for the year ended
December 31, 1997:
<TABLE>
<S> <C>
Gain on shares received from insurance company demutualization.... $ 49,568
Gain on sale of investment........................................ 7,677
Gain on purchased software liability settlement................... 124,180
--------
Total........................................................... $181,425
========
</TABLE>
During 1997, the Company negotiated a settlement of a liability associated
with a software development and marketing agreement. The related asset from
the software purchase was written off in 1994 when management determined the
cost of the software was not recoverable.
F-56
<PAGE>
MEI SOFTWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Supplemental Cash Flow Information
Noncash investing and financing activities were as follows:
<TABLE>
<CAPTION>
Six months
December 31, ended
-------------------------- June 30,
1996 1997 1998 1999
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Capital lease obligations............... $ 35,891 $ 25,482 $218,300 $ 37,433
======== ======== ======== ========
Conversion of convertible debt and
accrued interest to Series C preferred
stock.................................. $ -- $ -- $288,033 $ --
======== ======== ======== ========
Accretion of redemption price on
mandatorily redeemable convertible
preferred stock........................ $ 10,038 $ 9,587 $ 9,636 $ 9,093
======== ======== ======== ========
Accretion of cumulative dividends on
mandatorily redeemable convertible
preferred stock........................ $354,039 $354,039 $354,552 $269,301
======== ======== ======== ========
Accretion of redemption price on
mandatorily redeemable common stock.... $ -- $ -- $ -- $ 3,153
======== ======== ======== ========
Issuance of common stock in connection
with the acquisition of Phoenix
Solutions, Inc......................... $ -- $ -- $ 62,484 $ --
======== ======== ======== ========
Issuance of manditorily redeemable
common stock for software license...... $ -- $ -- $ -- $500,000
======== ======== ======== ========
Grant of employee common stock options
below fair value....................... $ -- $ -- $315,315 $167,700
======== ======== ======== ========
</TABLE>
17. Subsequent Events
For the June 30, 1999 compliance period, the Company was not in compliance
with certain of the financial covenants under its line of credit. The Company
obtained a waiver on September 14, 1999 from the financial institutions with
repect to these covenant violations. In addition, the financial institution
extended the maturity date of the line of credit to January 10, 2000, however,
the extension is subject to the Company's ongoing compliance with certain
restrictive covenants.
During September 1999, the Company signed a definitive acquisition agreement
with E2Enet, Inc. (E2Enet) to sell the Company for approximately $24,000,000 in
cash. The acquisition was approved by the Company's Board of Directors and
mandatorily redeemable preferred stockholders. E2Enet will acquire all equity
interests in the Company, including all of the Company's issued and outstanding
Series A, B and C mandatorily redeemable preferred stock, par value of $.10 per
share, mandatorily redeemable common stock, par value of $0.01 per share, and
common stock, par value of $0.01 per share. As a result of the acquisition,
each outstanding share of the Company's common stock and all other rights to
acquire any capital interest in the Company (including, without limitation, any
convertible securities, vested options or warrants) will convert into the right
to receive their proportional share, determined on a fully-diluted basis, of
the $24,000,000 of cash proceeds. The cash proceeds will be reduced by the
amount by which the Company's liabilities reflected in the
F-57
<PAGE>
MEI SOFTWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 1999 audited balance sheet exceed the liabilities reflected in the
unaudited June 30, 1999 balance sheet provided to the buyer. E2Enet has the
unilateral right to extend the closing of the transaction to on or before
December 31, 1999 if a registration statement filed with the Securities and
Exchange Commission has not yet been declared effective. The closing may be
further extended beyond December 31, 1999 by mutual agreement of the Company
and E2Enet. E2Enet's obligation to consummate the acquisition is subject to
E2Enet's completion of its initial public offering of common stock. E2Enet may
elect to consummate the acquisition in advance of completion of such offering
with reasonable notice to the Company and selling stockholders.
In conjunction with the signing of the definitive agreement on September 16,
1999, the Company issued a convertible note to E2Enet, Inc. for cash proceeds
of up to $2,000,000 from E2Enet Inc.
The convertible note bears interest at 10%. If E2Enet fails to consummate
the acquisition, the Company may, at its option on or before March 31, 2000,
convert the note into the Company's Series D mandatorily redeemable convertible
preferred stock (Series D preferred stock), par value $0.10 per share, at a
conversion price of $1.06 per share. If the Company terminates the acquisition,
E2Enet may, at its option, convert the note into Series D preferred stock or
require immediate repayment of the note and accrued interest. The Series D
preferred stock has substantially similar rights and privileges as the
Company's issued and outstanding mandatorily redeemable convertible preferred
stock. In addition, the Series D preferred stockholders have the following
additional rights: (1) a liquidation preference of $1.06 per share plus accrued
dividends, (2) a cumulative annual dividend of $0.0636 per share and (3) the
ability to appoint an additional board member. As of September 14, 1999, E2Enet
has advanced $400,000 of cash to the Company.
The remaining advances of $1,600,000 are subject to certain representations,
warranties and covenants and will occur as follows: $300,000 on September 27,
1999, $400,000 on October 11, 1999, $300,000 on October 25, 1999, $300,000 on
November 8, 1999 and $300,000 on November 22, 1999. The Company may use the
loan proceeds for general working capital purposes and not for repayment of its
existing line of credit. If E2Enet extends the closing of the agreement beyond
November 30, 1999, E2Enet shall advance the Company an additional $200,000
subject to terms similar to the issued convertible note.
F-58
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Buyline.net, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholder's deficit and of cash flows present
fairly, in all material respects, the financial position of Buyline.net, Inc.,
a development stage enterprise, at June 30, 1999, and the results of its
operations and its cash flows for the period May 18, 1999 (date of inception)
through June 30, 1999, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 1 and 2 to the
financial statements, the Company is a development stage enterprise, has
suffered losses and has working capital and stockholder's deficits, raising
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
McLean, VA
August 17, 1999
F-59
<PAGE>
BUYLINE.NET, INC.
(a development stage enterprise)
BALANCE SHEET
<TABLE>
<CAPTION>
June 30, 1999
-------------
<S> <C>
Assets
Current assets:
Cash........................................................... $ 5,065
----------
Total current assets......................................... 5,065
Intangible asset, net of accumulated amortization of $39,684..... 2,001,227
----------
Total assets................................................. $2,006,292
==========
Liabilities and Stockholder's Deficit
Liabilities:
Accounts payable............................................... $ 13,499
Accrued expenses............................................... 135
Notes payable to related parties............................... 800,000
License agreement payable, current portion..................... 586,662
Note payable to officer........................................ 25,000
----------
Total current liabilities.................................... 1,425,296
License agreement payable, less current portion................ 654,249
----------
Total liabilities............................................ 2,079,545
----------
Commitments and contingencies (See Note 3)
Stockholder's deficit:
Common stock; $.00001 par value; 150,0000,000 shares
authorized; one share issued and outstanding.................. --
Deficit accumulated during development stage................... (73,253)
----------
Total stockholder's deficit.................................. (73,253)
----------
Total liabilities and stockholder's deficit.................. $2,006,292
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
BUYLINE.NET, INC.
(a development stage enterprise)
STATEMENT OF OPERATIONS
for the period from May 18, 1999 (date of inception) through June 30, 1999
<TABLE>
<CAPTION>
Cumulative
Since
Inception
----------
<S> <C>
Expenses:
General and administrative (including $3,200 to a related party).... $ 72,916
--------
Total expenses.................................................... 72,916
Interest expense to related parties................................. 337
--------
Loss before income taxes............................................ (73,253)
Provision for income taxes.......................................... --
--------
Net loss............................................................ $(73,253)
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE>
BUYLINE.NET, INC.
(a development stage enterprise)
STATEMENT OF CHANGES IN STOCKHOLDER'S DEFICIT
for the period from May 18, 1999 (date of inception) through June 30, 1999
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock During
------------- Development
Shares Amount Stage Total
------ ------ ----------- --------
<S> <C> <C> <C> <C>
Balance, May 18, 1999 (date of
inception)...............................
Issuance of common stock upon
incorporation............................ 1 $ -- $ --
Net loss.................................. $(73,253) (73,253)
--- ---- -------- --------
Balance, June 30, 1999.................... 1 $ -- $(73,253) $(73,253)
=== ==== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE>
BUYLINE.NET, INC.
(a development stage enterprise)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
Since
Inception
----------
<S> <C>
Operating activities:
Net loss.......................................................... $ (73,253)
----------
Adjustments to reconcile net loss to net cash flows used in
development stage activities:
Amortization expense............................................ 39,684
Changes in liabilities:
Increase in accounts payable.................................. 13,499
Increase in accrued expenses.................................. 135
----------
Total adjustments............................................. 53,318
----------
Net cash used in development stage activities..................... (19,935)
----------
Financing activities:
Borrowings on note payable to officer............................. 25,000
Borrowings on note payable to related party....................... 25,000
Repayment of license agreement payable............................ (25,000)
----------
Net cash provided by financing activities..................... 25,000
----------
Net increase in cash.............................................. 5,065
Cash, beginning of period......................................... --
----------
Cash, end of period............................................... $ 5,065
==========
Supplemental cash flow information:
Non-cash transaction for acquisition of software license........ $2,040,911
==========
Cash interest paid.............................................. $ 203
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE>
BUYLINE.NET, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
1. Business and Organization
Buyline.net, Inc., a Delaware corporation ("Company"), was incorporated on
May 18, 1999. The Company is developing an internet software application and a
web-site, that intends to be a universal platform for entry-level business-to-
business electronic commerce linking buyers and sellers. The Company's
application is intended for use in a full range of online advertising,
directories and websites. No revenues have been generated since inception of
the Company. To date, the Company's activities have focused on creating
infrastructure and developing its web site. Accordingly, the Company's
financial statements are presented as those of a development stage enterprise,
as prescribed by Statement of Financial Accounting Standards No. 7, "Accounting
and Reporting by Development Stage Enterprises." As a development stage
enterprise, the Company has been relying on contributions of capital for its
primary source of cash since inception.
2. Summary of Significant Accounting Policies
Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates ongoing
development of its technology, revenue-producing operations and realization of
assets in the ordinary course of business. As the Company has incurred only
expenses since its inception, additional capital will be needed to further the
Company's development. An agreement was signed in July 1999 that will provide
the Company with capital from E2Enet, Inc., as described in Note 8. However, in
order for the Company to achieve its expectations, additional sources of
financing will be needed. The Company plans to pursue additional financing from
third party sources. Accordingly, substantial doubt currently exists about the
Company's ability to continue as a going concern.
Use of Estimates
The financial statements are prepared on the accrual basis of accounting in
conformity with generally accepted accounting principles. 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 revenues and expenses during the reported period. Actual results
could differ from those estimates.
Intangible Asset
The Company's intangible asset includes the costs incurred to acquire a
software license. The intangible asset is being amortized over a three year
period, using the straight line
F-64
<PAGE>
BUYLINE.NET, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
method. The Company continually reviews the intangible asset to assess
recoverability from estimated future results of operations and cash flows.
Organization Costs
The Company accounts for organization costs under the provisions of
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities,"
which requires that all organization costs be expensed as incurred.
Financial Instruments
The carrying value of the Company's financial instruments, which includes
accounts payable, note payable to officer, notes payable to related parties and
license agreement payable, is considered to approximate fair value due to the
relative short maturities of the respective instruments.
Technical and System Development
Technical and system development expenses consist primarily of payroll-
related expenses and consulting fees for the development of software to support
the Company's web-site. Through June 30, 1999, technical and system development
costs have been expensed as incurred.
Income Taxes
The Company accounts for income taxes in accordance with the liability
method. Deferred income taxes are recognized for the tax consequences in future
years for differences between the tax bases of assets and liabilities and their
financial reporting amounts at the end of the period, based on enacted laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the expected realizable amount. The provision
for income taxes consists of the current tax provision and the change during
the period in deferred tax assets and liabilities.
Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," requires the presentation and disclosure of all changes
in equity from non-owner sources as "Comprehensive Income". The Company had no
items of other comprehensive income in the period from May 18, 1999 (date of
inception) through June 30, 1999.
Segment Reporting
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), replaces the
industry segment approach
F-65
<PAGE>
BUYLINE.NET, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
under previously issued pronouncements with the management approach. The
management approach designates the internal organization that is used by
management for allocating resources and assessing performance as the source of
the Company's reportable segments. SFAS 131 also requires disclosures about
products and services, geographic areas and major customers. The Company has
determined that it has one reportable segment.
3. License Agreement
In June 1999, the Company signed a co-license agreement with LightMedia
Interactive Corporation ("LightMedia") that granted the Company the use of a
software license that LightMedia had acquired in March 1999. An officer of the
Company is the majority stockholder of LightMedia. The licensed software will
be embedded in the technology that will be developed and utilized by the
Company in delivering the Company's Internet services. Under the terms of the
co-license agreement, the Company is obligated to pay LightMedia $775,000 and
has signed a note payable in that amount. The Company's note agreement for
$775,000 with LightMedia bears interest at the prime rate. The note is due in
full on the earlier of November 30, 1999 or upon the Company receiving an
aggregate investment of $2.5 million. If the Company has not received
investments exceeding the $2.5 million investment threshold by September 1,
1999, an initial payment of $100,000 is due by that date. As part of this
arrangement, the Company assumed LightMedia's obligations under its software
license agreement with EC Cubed, Inc. The EC Cubed, Inc. license agreement
requires quarterly payments totaling $1,400,000 through November 2000. Under a
separate maintenance agreement with EC Cubed, Inc., in February 2000, the
Company is required to pay $212,500 for support and maintenance services for
the period March 2000 through March 2001.
The $775,000 LightMedia note payable and the present value of the $1,400,000
due to EC Cubed Inc. have been recognized as liabilities of the Company along
with a corresponding intangible asset that will be amortized over three years.
The $1,400,000 due to EC Cubed, Inc. has been discounted utilizing an interest
rate of 12% and has an unamortized discount of $134,089 as of June 30, 1999.
The Company made one payment of $25,000 to LightMedia during the period ended
June 30, 1999.
The aggregate payments that remain under the EC Cubed, Inc. agreement after
June 30, 1999 are $225,000 for the period July 1, 1999 through December 31,
1999 and $1,150,000 during the fiscal year ended December 31, 2000.
4. Debt
The Company signed a note agreement with an officer of the Company that has
a maximum borrowing limit of $35,000. As of June 30, 1999, the Company had
borrowed $25,000. Amounts borrowed under this agreement were used for working
capital purposes. The note is due on September 1, 1999 and bears interest at
12% per annum.
F-66
<PAGE>
BUYLINE.NET, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In May 1999, the Company entered into a note agreement with an officer of
E2Enet, Inc. for $25,000. The note is due on May 11, 2000 and has an interest
rate of 12% per annum.
5. Income Taxes
The provision for income taxes for the period from May 18, 1999 (date of
inception) to June 30, 1999 is comprised of the following:
<TABLE>
<S> <C>
Deferred:
Federal.......................................................... $ 24,906
State............................................................ 2,930
--------
Total Deferred..................................................... 27,836
Less valuation allowance........................................... (27,836)
--------
Total income tax provision......................................... $ --
========
</TABLE>
The temporary difference that gives rise to the deferred tax asset is the
Company's net operating loss since inception. At the current statutory rates,
the net operating loss carryfoward tax asset will offset approximately $73,253
in taxable income and will expire in 2019.
A valuation allowance of $27,836 was provided against the deferred tax asset
due the uncertainty of realizing the benefit of this asset.
No income taxes were paid from May 18, 1999 (date of inception) to June 30,
1999.
6. Related Party Transactions
The Company pays rent of $1,600 on a monthly basis to LightMedia in which an
officer of the Company is the majority shareholder (See Note 3). Rent expense
of $3,200 was recognized for the period May 18, 1999 (date of inception)
through June 30, 1999 and remains unpaid as of June 30, 1999. Management
estimated rent expense.
F-67
<PAGE>
BUYLINE.NET, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Common Stock
Upon the incorporation of the Company, 150,000,000 shares were authorized
and one share of stock was issued. Shares of common stock have certain rights
with respect to dividends, liquidation, and voting, as follows:
Dividends
Dividends may be paid on the common stock in cash, in property or in shares
of common stock as declared by the Board of Directors. No dividends were
declared as of June 30, 1999.
Liquidation
Upon dissolution, liquidation, or winding up of the Company, the holders of
the common stock are entitled to participate in the distribution of assets
remaining after the Company shall have paid all debts and liabilities.
Voting
Each holder of shares of common stock shall be entitled to cast one vote for
each outstanding share of common stock.
8. Subsequent Events
In August 1999, the Company signed an agreement to sell 15,000,000 shares of
the Company's common stock to E2Enet, Inc. for $3 million in cash (the "Initial
Investment") that will represent 51% of the Company. The Initial Investment
will occur at the earlier of November 30, 1999 or upon the completion of
E2Enet, Inc.'s initial public offering ("IPO"). If the IPO does not occur,
E2Enet, Inc. is not obligated to make the initial investment. The Company also
has the option to sell 45,000,000 additional shares of common stock to E2Enet,
Inc. for $.20 per share until December 31, 2000. The total E2Enet, Inc.
investment will represent 80% ownership of the Company, excluding potential
dilution from any other third-party investments. Prior to the investment,
E2Enet, Inc. is obligated to make up to $950,000 in loans to the Company on an
as needed basis. In July and August of 1999, the Company received two
installments on these loans totaling $250,000. These loans are to be repaid
upon the completion of the Initial Investment and bear interest at the prime
rate. If the Initial Investment does not occur, the loans are due on November
30, 2000.
F-68
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Blue Rock Avenue, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Blue Rock Avenue,
Inc., a development stage enterprise, at June 30, 1999, and the results of its
operations and its cash flows for the period January 5, 1999 (date of
inception) through June 30, 1999, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 1 and 2 to the
financial statements, the Company is a development stage enterprise and has
suffered losses that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
McLean, VA
August 19, 1999
F-69
<PAGE>
BLUE ROCK AVENUE, INC.
(a development stage enterprise)
BALANCE SHEET
<TABLE>
<CAPTION>
June 30, 1999
-------------
<S> <C>
Assets
Current assets:
Cash and cash equivalents...................................... $ 387,199
---------
Total current assets......................................... 387,199
Fixed assets, net................................................ 38,201
Other assets..................................................... 779
---------
Total assets................................................. $ 426,179
=========
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable and accrued expenses.......................... $ 160,875
---------
Total current liabilities.................................... 160,875
---------
Stockholders' equity:
Series A Convertible Preferred Stock; $.01 par value; 8,000,000
shares authorized; 2,666,667 shares issued and outstanding;
(liquidation preference $500,000)............................. 26,667
Common stock; $.01 par value; 25,000,000 shares authorized;
11,900,000 shares issued and outstanding...................... 119,000
Capital in excess of par value................................... 413,048
Deferred compensation............................................ (8,875)
Deficit accumulated during development stage..................... (284,536)
---------
Total stockholders' equity................................... 265,304
---------
Total liabilities and stockholders' equity................... $ 426,179
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-70
<PAGE>
BLUE ROCK AVENUE, INC.
(a development stage enterprise)
STATEMENT OF OPERATIONS
for the period from January 5, 1999 (date of inception) through June 30, 1999
<TABLE>
<CAPTION>
Cumulative
Since
Inception
----------
<S> <C>
Expenses:
General and administrative (including $1,458 to a related party)... $ 285,359
---------
Total expenses................................................. 285,359
Interest income.................................................... 823
---------
Loss before income taxes........................................... (284,536)
Provision for income taxes......................................... --
---------
Net loss........................................................... $(284,536)
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-71
<PAGE>
BLUE ROCK AVENUE, INC.
(a development stage enterprise)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
for the period from January 5, 1999 (date of inception) through June 30, 1999
<TABLE>
<CAPTION>
Deficit
Accumulated
Preferred Stock Common Stock Capital in During
----------------- ------------------- Excess of Deferred Development
Shares Amount Shares Amount Par Value Compensation Stage Total
--------- ------- ---------- -------- ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 5, 1999
(date of inception)....
Issuance of common stock
upon incorporation..... 11,900,000 $119,000 $(109,000) $ 10,000
Issuance of preferred
stock; net of issue
costs.................. 2,666,667 $26,667 425,523 452,190
Non-cash capital
contribution........... 78,775 78,775
Grant of stock options
below market value..... 17,750 $(8,875) 8,875
Net loss................ $(284,536) (284,536)
--------- ------- ---------- -------- --------- ------- --------- ---------
Balance, June 30, 1999.. 2,666,667 $26,667 11,900,000 $119,000 $ 413,048 $(8,875) $(284,536) $ 265,304
========= ======= ========== ======== ========= ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-72
<PAGE>
BLUE ROCK AVENUE, INC.
(a development stage enterprise)
STATEMENT OF CASH FLOWS
for the period from January 5, 1999 (date of inception) through June 30, 1999
<TABLE>
<CAPTION>
Cumulative
Since
Inception
----------
<S> <C>
Operating activities:
Net loss........................................................... $(284,536)
---------
Adjustments to reconcile net loss to net cash used in development
stage activities:
Depreciation and amortization.................................... 1,906
Non-cash expenses................................................ 78,775
Expense recorded for stock options granted below market value.... 8,875
Changes in assets and liabilities:
Increase in other non-current assets........................... (779)
Increase in accounts payable................................... 160,875
---------
Total adjustments............................................ 249,652
---------
Net cash used in development stage activities...................... (34,884)
---------
Investing activities:
Purchases of fixed assets.......................................... (33,107)
---------
Net cash used in investing activities.............................. (33,107)
---------
Financing activities:
Issuance of common stock........................................... 3,000
Issuance of preferred stock........................................ 452,190
---------
Net cash provided by financing activities.......................... 455,190
---------
Net increase in cash............................................... 387,199
Cash and cash equivalents, beginning of period..................... --
---------
Cash and cash equivalents, end of period........................... $ 387,199
=========
Supplemental cash flow information:
Founder contribution of equipment in exchange for common stock... $ 7,000
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-73
<PAGE>
BLUE ROCK AVENUE, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
1. Business and Organization
Blue Rock Avenue, Inc., a Georgia corporation (the "Company"), was
incorporated on January 5, 1999 to create a gift-shopping web-site that
aggregates select gifts from the world's most respected, branded retailers and
charitable organizations. The Company will enhance these gifts with gift
services and expert gift selection ideas. No revenues have been generated since
its inception. To date, the Company's activities have focused on creating
infrastructure, raising financing and developing a web-site. Accordingly, the
Company's financial statements are presented as those of a development stage
enterprise, as prescribed by Statement of Financial Accounting Standards No. 7,
"Accounting and Reporting by Development Stage Enterprises." As a development
stage enterprise, the Company has been relying on contributions of capital and
proceeds from sales of securities for its primary sources of cash since
inception.
Pursuant to a definitive agreement dated, May 14, 1999, the Company sold
2,666,667 shares of Series A convertible preferred stock to E2Enet, Inc. for
$500,000 with a commitment by E2Enet, Inc. to purchase an additional 5,333,333
shares for $1.0 million. E2Enet, Inc. is committed to purchase additional
shares at the earlier of the Company's request or E2Enet, Inc.'s initial public
offering. The Series A convertible preferred stock will convert into common
shares at the option of E2Enet, Inc. or automatically convert into common
shares upon an initial public offering of the Company (Note 7). The total
E2Enet, Inc. investment will represent 40% ownership of the Company, excluding
potential dilution from any other third-party investments. In conjunction with
this transaction, 133,334 shares of E2Enet, Inc. common stock were sold to the
Company's stockholders for $.01 per share, with an estimated fair value of
$1,465,341.
2. Summary of Significant Accounting Policies
Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates ongoing
development of its technology, revenue-producing operations and realization of
assets in the ordinary course of business. As the Company has incurred only
expenses since its inception, additional capital will be needed to further the
Company's development. The majority of the capital was obtained from E2Enet,
Inc. in May 1999, as described in Note 1. However, in order for the Company to
achieve its expectations, additional sources of financing will be needed. The
Company plans to pursue additional financing from third party sources.
Accordingly, substantial doubt currently exists about the Company's ability to
continue as a going concern.
Use of Estimates
The financial statements are prepared on the accrual basis of accounting in
conformity with generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make
F-74
<PAGE>
BLUE ROCK AVENUE, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 revenues and expenses
during the reported period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
maturities of three months or less at date of purchase to be cash equivalents.
Organization Costs
The Company accounts for organization costs under the provisions of
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities,"
which requires that all organization costs be expensed as incurred.
Financial Instruments
The carrying value of the Company's financial instruments, which includes
accounts payable and a money market account, are considered to approximate fair
value due to the relative short maturities of the respective instruments.
Technical and System Development
Technical and system development expenses consist primarily of payroll-
related expenses and consulting fees for the development of software to support
the Company's web-site. Through June 30, 1999, technical and system development
costs have been expensed as incurred.
Fixed assets
Fixed assets, which consist of office computers, are stated at cost, less
accumulated depreciation. The cost of additions and improvements are
capitalized, while maintenance and repairs are charged to expense when
incurred. Depreciation is provided on a straight-line basis over the estimated
useful life of the fixed assets, three years. The Company recognizes gains or
losses on the sale or disposal of fixed assets in the period of disposal. Long-
lived assets held and utilized by the Company are reviewed for impairment
whenever changes in circumstances indicate the carrying value of such assets
may not be recoverable.
Income Taxes
The Company accounts for income taxes in accordance with the liability
method. Deferred income taxes are recognized for the tax consequences in future
years for
F-75
<PAGE>
BLUE ROCK AVENUE, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
differences between the tax bases of assets and liabilities and their financial
reporting amounts at the end of the period, based on enacted laws and statutory
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the expected realizable amount. The provision for income
taxes consists of the current tax provision and the change during the period in
deferred tax assets and liabilities.
Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," requires the presentation and disclosure of all changes
in equity from non-owner sources as "Comprehensive Income". The Company had no
items of Comprehensive Income in the period from January 5, 1999 (date of
inception) through June 30, 1999.
Segment Reporting
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), replaces the
industry segment approach under previously issued pronouncements with the
management approach. The management approach designates the internal
organization that is used by management for allocating resources and assessing
performance as the source of the Company's reportable segments. SFAS 131 also
requires disclosures about products and services, geographic areas and major
customers. The Company has determined that it has one reportable segment.
Stock-Based Compensation
Statement of Financial Accounting No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), encourages companies to adopt a fair value approach
to valuing stock options that would require compensation cost to be recognized
based on the fair value of stock options granted. The Company has elected, as
permitted by the standard, to follow the intrinsic value based method of
accounting for stock options given to employees consistent with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Under the intrinsic method, compensation cost for stock options is
measured as the excess, if any, of the market price of the Company's stock at
the measurement date over the exercise price.
F-76
<PAGE>
BLUE ROCK AVENUE, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Fixed Assets
Fixed assets consist of the following:
<TABLE>
<CAPTION>
June 30, 1999
-------------
<S> <C>
Computer equipment............................................. $40,107
Less: accumulated depreciation................................. 1,906
-------
Fixed assets, net.............................................. $38,201
=======
</TABLE>
Depreciation expense was $1,906 for the period January 5, 1999 (date of
inception) through June 30, 1999.
4. Non-Cash Capital Contribution
The Company's management team and common stockholders elected not to receive
a salary for the period from January 5, 1999 (date of inception) through April
30, 1999. In accordance with the intent of Securities and Exchange Commission
Staff Accounting Bulletin No. 79, the Company has measured the value of
compensation at $78,775 (based upon the future annual compensation level as
provided by each stockholder's employment agreement) which has been recognized
in the accompanying statement of operations as an expense and in the statement
of stockholders' equity as an additional capital contribution.
5. Income Taxes
The provision for income taxes for the period from January 5, 1999 (date of
inception) to June 30, 1999 is comprised of the following:
<TABLE>
<S> <C>
Deferred:
Federal.......................................................... $ 66,941
State............................................................ 7,875
--------
Total Deferred..................................................... 74,816
Less valuation allowance........................................... (74,816)
--------
Total income tax provision......................................... $ --
========
</TABLE>
The temporary difference that gives rise to the deferred tax asset is the
Company's net operating loss since inception. At current statutory rates, the
net operating loss carryforward tax asset will offset approximately $196,886 in
taxable income and will expire in 2019.
A valuation allowance of $74,816 was provided against the deferred tax asset
due the uncertainty of realizing the benefit of these assets.
F-77
<PAGE>
BLUE ROCK AVENUE, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The difference between the statutory federal and state income tax rates and
the Company's effective income tax rate is primarily due to the non-
deductibility of the compensation cost recorded for the non-cash capital
contributions.
No income taxes were paid from January 5, 1999 (date of inception) to June
30, 1999.
6. Related Party Transactions
The Company conducts its operations from a residence of the majority
stockholder. Rent expense of $1,458 was incurred during the period January 5,
1999 (date of inception) through June 30, 1999. Management estimated rent
expense.
7. Stockholders' Equity
Preferred Stock
As of June 30, 1999, the Company had 2,666,667 shares of Series A
Convertible Preferred Stock ("Preferred Stock") issued and outstanding. The
Preferred Stock is convertible into common shares at the option of the holder
or automatically upon an initial public offering of the Company. Shares of
Preferred Stock have certain rights with respect to voting, the Board of
Directors, dividends, liquidation and conversion rights, as follows:
Voting
Each holder of Preferred Stock is entitled to the equivalent number of
votes granted upon conversion to common stock.
Board of Directors
The holders of Preferred Stock have the right, voting as a single class, to
elect two of the five seats on the Board of Directors, including the removal
or replacement of such members.
Dividends
Participation with the holders of common stock for dividends declared by
the Board of Directors, in the equivalent amount per share as entitled upon
conversion to common stock.
Liquidation
Upon liquidation, dissolution or winding up of the Company, holders of
Preferred Stock shall be entitled to be paid, senior to all other classes and
series of capital stock or other equity securities of the Company. The payment
will equal the sum of the (i) original issue price and (ii) all declared and
unpaid dividends on each share of Preferred Stock held.
F-78
<PAGE>
BLUE ROCK AVENUE, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Conversion Rights
The Preferred Stock may be converted into shares of common stock at the
option of the holder or automatically upon the initial public offering of the
Company at a rate of one share of common stock for one share of Preferred
Stock.
Common Stock
At June 30, 1999, the Company had 11,900,000 shares of common stock issued
and outstanding. Upon the incorporation, the Company issued 1,000,000 shares;
subsequently in May 1999, the Board of Directors declared and approved a 11.9
for 1 split of the Company's common stock in the form of a stock dividend. The
effect of the stock dividend was recorded retroactively to the date of
inception. Shares of common stock have certain rights with respect to
dividends, liquidation and voting, as follows:
Dividends
Dividends may be paid on the common stock, but only out of any assets
legally available for the payment of dividends as declared by the Board of
Directors. No dividends were declared as of June 30, 1999.
Liquidation
Upon dissolution, liquidation, or winding up of the Company, the holders of
the common stock are entitled to participate in the distribution of assets
remaining after the Company shall have paid (i) all debts and liabilities and
(ii) the holders of any stock having preference over the common stock.
Voting
Each holder of shares of common stock shall be entitled to cast one vote for
each outstanding share of common stock.
8. Stock Option Plan
In May 1999, the Company established a stock option plan (the "Plan") under
which employees, directors, consultants, distributors or other persons who have
rendered services to the Company may be granted options to purchase shares of
the Company's common stock. The Plan provides for the issuance of a maximum
number of options to purchase 4,700,000 shares of common stock. Options granted
under the Plan generally vest ratably over a four-year period and expire ten
years from the date of the grant. As of June 30, 1999, 315,000 options were
granted and 4,385,000 options are available for grant under the Plan.
F-79
<PAGE>
BLUE ROCK AVENUE, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In May 1999, the Company granted 100,000 options to one of the Company's
Board of Directors for an exercise price of $.01 per share that is below the
fair value of the underlying common stock on the date of grant. Accordingly,
compensation expense has been recorded for these options. In addition, 215,000
options were granted to the Company's employees in June of 1999. These options
provide the holders the ability to convert the options into shares of the
Company's common stock at an exercise price of $0.25 per share.
Transactions in stock options are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Number Average
of Exercise
Shares Price
------- --------
<S> <C> <C>
Balance, at January 5, 1999................................. -- $ --
Granted................................................... 315,000 0.17
Exercised................................................. -- --
Forfeited................................................. -- --
------- -----
Balance, at June 30, 1999................................... 315,000 $0.17
======= =====
Shares exercisable at June 30, 1999......................... 50,000 $ .01
</TABLE>
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of APB 25. For disclosure purposes under SFAS
123, the fair value of each option is estimated on the date of grant using the
minimum value method with the following assumptions: zero dividends, zero
volatility, risk-free interest rate of 5.76%, and an expected life of four
years. Utilizing these assumptions, the weighted average fair value of the
options granted during the period ended June 30, 1999 was $0.11 per share.
The aggregate fair value of the stock options granted in 1999 amounted to
$23,650, which would be amortized over the respective vesting periods. Had
compensation cost for the Company's option grants to employees been determined
based on the fair value at the grant dates, as prescribed in SFAS 123, the
Company's pro forma net loss would have been $284,774.
F-80
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
bluemercury, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of bluemercury, Inc.,
a development stage enterprise, at June 30, 1999, and the results of its
operations and its cash flows for the period February 16, 1999 (date of
inception) through June 30, 1999, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 1 and 2 to the
financial statements, the Company is a development stage enterprise and has
suffered losses that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
McLean, VA
August 13, 1999
F-81
<PAGE>
BLUEMERCURY, INC.
(a development stage enterprise)
BALANCE SHEET
<TABLE>
<CAPTION>
June 30,
1999
--------
<S> <C>
Assets
Current assets:
Cash and cash equivalents........................................... $496,374
--------
Total current assets.............................................. 496,374
--------
Total assets...................................................... $496,374
========
Liabilities and Stockholders' Equity
Liabilities:
Accrued expenses.................................................... $ 61,743
--------
Total current liabilities......................................... 61,743
--------
Commmitments and contingencies (Note 6)
</TABLE>
<TABLE>
<S> <C>
Stockholders' equity:
Series A Convertible Preferred Stock; par value $.001; 13,500,000
shares authorized; 6,750,000 issued and outstanding; (liquidation
preference, $500,000)............................................. 6,750
Common stock; par value $.001; 61,500,000 shares authorized;
16,500,000 issued and outstanding................................. 16,500
Capital in excess of par value..................................... 478,638
Deficit accumulated during development stage....................... (67,257)
--------
Total stockholders' equity....................................... 434,631
--------
Total liabilities and stockholders' equity....................... $496,374
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-82
<PAGE>
BLUEMERCURY, INC.
(a development stage enterprise)
STATEMENT OF OPERATIONS
for the period from February 16, 1999 (date of inception) through June 30, 1999
<TABLE>
<CAPTION>
Cumulative
Since
Inception
----------
<S> <C>
Expenses:
General and administrative.......................................... $ 67,257
--------
Total expenses.................................................. 67,257
--------
Loss before income taxes............................................ (67,257)
Provision for income taxes.......................................... --
--------
Net loss............................................................ $(67,257)
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-83
<PAGE>
BLUEMERCURY, INC.
(a development stage enterprise)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
for the period from February 16, 1999 (date of inception) through June 30, 1999
<TABLE>
<CAPTION>
Capital
in Deficit
Excess Accumulated
Preferred Stock Common Stock of During
---------------- ------------------ Par Development
Shares Amount Shares Amount Value Stage Total
--------- ------ ---------- ------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, February 16,
1999 (date of
inception).............
Issuance of common stock
upon incorporation..... 16,500,000 $16,500 $ 3,500 $ 20,000
Issuance of preferred
stock; net of issue
costs.................. 6,750,000 $6,750 453,388 460,138
Non-cash capital
contribution........... 21,750 21,750
Net loss................ $(67,257) (67,257)
--------- ------ ---------- ------- -------- -------- --------
Balance, June 30, 1999.. 6,750,000 $6,750 16,500,000 $16,500 $478,638 $(67,257) $434,631
========= ====== ========== ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-84
<PAGE>
BLUEMERCURY, INC.
(a development stage enterprise)
STATEMENT OF CASH FLOWS
For the period from February 16, 1999 (date of inception) through June 30, 1999
<TABLE>
<CAPTION>
Cumulative
Since
Inception
----------
<S> <C>
Operating activities:
Net loss........................................................... $(67,257)
--------
Adjustments to reconcile net loss to net cash provided by
development stage activities:
Non-cash expenses................................................ 21,750
Changes in liabilities:
Increase in accrued expenses................................... 61,743
--------
Total adjustments.............................................. 83,493
--------
Net cash provided by development stage activities.................. 16,236
--------
Financing activities:
Issuance of common stock........................................... 20,000
Issuance of preferred stock........................................ 460,138
--------
Net cash provided by financing activities.......................... 480,138
--------
Net increase in cash............................................... 496,374
Cash and cash equivalents, beginning of period..................... --
--------
Cash and cash equivalents, end of period........................... $496,374
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-85
<PAGE>
BLUEMERCURY, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
1. Business and Organization
bluemercury, Inc., a Delaware corporation ("the Company"), was incorporated
on February 16, 1999 to be an online buying agent and upscale retailer for
professional women. The Company intends to develop a web site focusing on
offering a broad range of women's cosmetic products and accessories, which will
offer premium brands, quick ordering and immediate delivery. No revenues have
been generated since its inception. To date, the Company's activities have
focused on creating infrastructure, raising financing and developing a web
site. Accordingly, the Company's financial statements are presented as those of
a development stage enterprise, as prescribed by Statement of Financial
Accounting Standards No. 7, "Accounting and Reporting by Development Stage
Enterprises." As a development stage enterprise, the Company has been relying
on contributions of capital and proceeds from sales of securities for its
primary sources of cash since inception.
Pursuant to a definitive agreement dated, May 14, 1999, the Company sold
6,750,000 shares of Series A convertible preferred stock to E2Enet, Inc. for
$500,000 with a commitment by E2Enet, Inc. to purchase an additional 6,750,000
shares for $500,000. E2Enet, Inc. is committed to purchase additional shares at
the earlier of the Company's request or E2Enet, Inc.'s initial public offering.
The Series A preferred stock will convert into common shares at the option of
E2Enet, Inc. or automatically upon an initial public offering of the equity of
the Company (Note 5). The total E2Enet, Inc. investment will represent 45%
ownership of the Company, excluding potential dilution from any other third-
party investments. In conjunction with this transaction, 166,667 shares of
E2Enet, Inc. common stock were sold to the Company's stockholders for $.01 per
share, with an estimated fair value of $1,831,670.
2. Summary of Significant Accounting Policies
Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates ongoing
development of its technology, revenue producing operations and realization of
assets in the ordinary course of business. As the Company has incurred only
expenses since its inception, additional capital will be needed to further the
Company's development. The majority of the capital was obtained from E2Enet,
Inc. in May 1999 as described in Note 1. However, in order for the Company to
achieve its expectations, additional sources of financing will be needed. The
Company plans to pursue additional financing from third party sources.
Accordingly, substantial doubt currently exists about the Company's ability to
continue as a going concern.
Use of Estimates
The financial statements are prepared on the accrual basis of accounting in
conformity with generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make
F-86
<PAGE>
BLUEMERCURY, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 revenues and expenses
during the reported period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
maturities of three months or less at date of purchase to be cash equivalents.
Organization Costs
The Company accounts for organization costs under the provisions of
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities,"
which requires that all organization costs be expensed as incurred.
Financial Instruments
The carrying value of the Company's financial instruments, which includes
accounts payable, is considered to approximate fair value due to the relative
short maturities of the respective instruments.
Technical and System Development
Technical and system development expenses consist primarily of payroll-
related expenses and consulting fees for the development of software to support
the Company's web-site. Through June 30, 1999, technical and system development
costs have been expensed as incurred.
Income Taxes
The Company accounts for income taxes in accordance with the liability
method. Deferred income taxes are recognized for the tax consequences in future
years for differences between the tax bases of assets and liabilities and their
financial reporting amounts at the end of the period, based on enacted laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the expected realizable amount. The provision
for income taxes consists of the current tax provision and the change during
the period in deferred tax assets and liabilities.
Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," requires the presentation and disclosure of all changes
in equity from non-owner
F-87
<PAGE>
BLUEMERCURY, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
sources as "Comprehensive Income". The Company had no items of Other
Comprehensive Income in the period from the date of inception through June 30,
1999.
Segment Reporting
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), replaces the
industry segment approach under previously issued pronouncements with the
management approach. The management approach designates the internal
organization that is used by management for allocating resources and assessing
performance as the source of the Company's reportable segments. SFAS 131 also
requires disclosures about products and services, geographic areas and major
customers. The Company has determined that it has one reportable segment.
3. Non-Cash Capital Contributions
The Company conducts its operations from a residence owned by the majority
stockholder. Rent expense of $1,750, while not paid, was recognized for the
period February 16, 1999 (date of inception) through June 30, 1999. Management
estimated rent expense. This expense has been recognized in the accompanying
statement of operations as an expense and in the statement of changes in
stockholders' equity as an additional capital contribution.
The Company's management team and common stockholders elected not to receive
a salary for the period from February 16, 1999 (date of inception) through June
30, 1999. In accordance with the intent of Securities and Exchange Commission
Staff Accounting Bulletin No. 79, the Company has measured the value of
compensation at $20,000 (based upon the future annual compensation level as
provided by each stockholder's employment agreement). This amount has been
recognized in the accompanying statement of operations as an expense and in the
statement of changes in stockholders' equity as an additional capital
contribution. This amount of compensation represents services performed for the
period of May 14, 1999 to June 30, 1999. Prior to May 14, 1999, the management
team of common stockholders did not provide significant services on behalf of
the Company.
4. Income Taxes
The provision for income taxes for the period from February 16, 1999 (date
of inception) to June 30, 1999 is comprised of the following:
<TABLE>
<S> <C>
Deferred:
Federal........................................................... $15,472
State............................................................. 1,820
-------
Total Deferred.................................................. 17,292
Less valuation allowance............................................ 17,292
-------
Total income tax provision.......................................... $ --
=======
</TABLE>
F-88
<PAGE>
BLUEMERCURY, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The temporary difference that gives rise to the deferred tax asset is the
Company's net operating loss since inception. At current statutory rates, the
net operating loss carryforward will offset approximately $45,507 in taxable
income and will expire in 2019.
A valuation allowance of $17,292 was provided against the deferred tax asset
due the uncertainty of realizing the benefit of these assets.
The difference between the statutory federal and state income tax rates and
the Company's effective income tax rate is primarily due to the non-
deductibility of the expenses recorded for the non-cash capital contributions.
No income taxes were paid from February 16, 1999 (date of inception) to June
30, 1999.
5. Stockholders' Equity
Preferred Stock
At June 30, 1999, the Company had 6,750,000 shares of Series A Convertible
Preferred Stock ("Preferred Stock") issued and outstanding. The Preferred Stock
is convertible into common shares at the option of the holder or automatically
upon an initial public offering of the Company. Shares of Preferred Stock have
certain rights with respect to voting, the Board of Directors, dividends,
liquidation and conversion rights, as follows:
Voting
Each holder of Preferred Stock is entitled to the equivalent number of votes
granted upon conversion to common stock.
Board of Directors
The holders of Preferred Stock have the right, voting as a separate class,
to elect two of the five seats on the Board of Directors, including the removal
or replacement of such members.
Dividends
Preferred stockholders participate with the holders of common stock for
dividends declared by the Board of Directors, in the equivalent amount per
share as entitled upon conversion to common stock.
Liquidation
Upon liquidation, dissolution or winding up of the Company, holders of
Preferred Stock will be entitled to be paid, senior to all other classes and
series of capital stock or other
F-89
<PAGE>
BLUEMERCURY, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
equity securities of the Company, the sum of the (i) original issue price and
(ii) all declared and unpaid dividends on each share of Preferred Stock held.
Conversion Rights
The Preferred Stock may be converted into shares of common stock at the
option of the holder or automatically upon the initial public offering of the
Company at a rate of one share of common stock for one share of Preferred
Stock.
Common Stock
At June 30, 1999, the Company had 16,500,000 shares of common stock issued
and outstanding. Upon the incorporation, the Company authorized 1,000,000
shares; subsequently, in May 1999, the Board of Directors increased the
authorized shares of common stock to 61,5000,000. Shares of common stock have
certain rights with respect to dividends, liquidation and voting, as follows:
Dividends
Dividends may be paid on the common stock, but only out of any assets
legally available for the payment of dividends as declared by the Board of
Directors. No dividends were declared at June 30, 1999.
Liquidation
Upon dissolution, liquidation, or winding up of the Company, the holders of
the common stock are entitled to participate in any distribution of assets
remaining after the Company shall have paid (i) all debts and liabilities of
the Company and (ii) the holders of any stock having preference over the common
stock.
Voting
Each holder of shares of common stock shall be entitled to cast one vote for
each outstanding share of common stock.
6. Commitments and Contingencies
At June 30, 1999, 200,000 shares of common stock owned by the stockholders
have been placed in escrow for potential claims of 20,000 shares. The Company
is not aware of any claims as of June 30, 1999. Management believes this
contingency will not have an adverse material impact on the Company.
F-90
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Hooey, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' equity and
of cash flows present fairly, in all material respects, the financial position
of Hooey, Inc. and its subsidiary, development stage enterprises, at June 30,
1999, and the results of their operations and their cash flows for the period
April 15, 1999 (date of inception) through June 30, 1999, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Notes 1 and 2 to the consolidated financial statements, the Company is a
development stage enterprise and has suffered losses that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
McLean, VA
August 13, 1999
F-91
<PAGE>
HOOEY, INC.
(a development stage enterprise)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, 1999
-------------
<S> <C>
Assets
Current assets:
Cash and cash equivalents...................................... $ 535,667
---------
Total current assets......................................... 535,667
Fixed assets, net................................................ 16,551
---------
Total assets................................................. $ 552,218
=========
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable............................................... $ 51,049
---------
Total current liabilities.................................... 51,049
---------
Stockholders' equity:
Series A Convertible Preferred Stock; $.001 par value; 200,000
shares authorized; 63,750 shares issued and outstanding;
(liquidation preference $637,500)............................. 64
Common stock; par value $.001; 1,400,000 shares authorized;
495,000 shares issued and outstanding......................... 495
Capital in excess of par value................................. 635,641
Deficit accumulated during development stage................... (135,031)
---------
Total stockholders' equity................................... 501,169
---------
Total liabilities and stockholders' equity................... $ 552,218
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-92
<PAGE>
HOOEY, INC.
(a development stage enterprise)
CONSOLIDATED STATEMENT OF OPERATIONS
For the period from April 15, 1999 (date of inception) through June 30, 1999
<TABLE>
<CAPTION>
Cumulative
Since
Inception
----------
<S> <C>
Expenses:
General and administrative (including $32,263 to related parties).. $ 136,369
---------
Total expenses................................................. 136,369
Interest income.................................................... 1,338
---------
Loss before income taxes........................................... (135,031)
Provision for income taxes......................................... --
---------
Net loss........................................................... $(135,031)
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-93
<PAGE>
HOOEY, INC.
(a development stage enterprise)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the period from April 15, 1999 (date of inception) through June 30, 1999
<TABLE>
<CAPTION>
Deficit
Accumulated
Preferred Stock Common Stock Capital in During
----------------- -------------- Excess of Development
Shares Amount Shares Amount Par Value Stage Total
--------- ------- ------- ------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 15, 1999
(date of inception)
Issuance of common stock
upon incorporation..... 495,000 $495 $ 4,455 $ 4,950
Issuance of preferred
stock; net of issue
costs.................. 63,750 $ 64 612,436 612,500
Non-cash capital
contribution........... 18,750 18,750
Net loss................ $(135,031) (135,031)
--------- ------ ------- ---- -------- --------- ---------
Balance, June 30, 1999.. 63,750 $ 64 495,000 $495 $635,641 $(135,031) $ 501,169
========= ====== ======= ==== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-94
<PAGE>
HOOEY, INC.
(a development stage enterprise)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the period from April 15, 1999 (date of inception) through June 30, 1999
<TABLE>
<CAPTION>
Cumulative
Since
Inception
----------
<S> <C>
Operating activities:
Net loss........................................................... $(135,031)
Adjustments to reconcile net loss to net cash used in development
stage activities:
Depreciation and amortization.................................... 751
Non-cash expenses................................................ 18,750
Changes in liabilities:
Increase in accounts payable................................... 51,049
---------
Total adjustments.............................................. 70,550
---------
Net cash used in development stage activities...................... (64,481)
---------
Investing activities:
Purchases of fixed assets.......................................... (17,302)
---------
Net cash used in investing activities.............................. (17,302)
---------
Financing activities:
Issuance of common stock........................................... 4,950
Issuance of preferred stock........................................ 612,500
---------
Net cash provided by financing activities.......................... 617,450
---------
Net increase in cash............................................... 535,667
Cash and cash equivalents, beginning of period..................... --
---------
Cash and cash equivalents, end of period........................... $ 535,667
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-95
<PAGE>
HOOEY, INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Organization
Hooey, Inc., a Delaware corporation (the "Company"), was incorporated on
April 15, 1999 to create an electronic commerce community focused on hand made
products. The Company subsequently formed Hooey, Ltd. a wholly owned subsidiary
incorporated in the Republic of Ireland. Hooey, Ltd. had no activity since its
inception. The financial statements are consolidated and include the accounts
of the Company and Hooey, Ltd. No revenues have been generated since inception
of the Company. To date, the Company's activities have focused on gaining
infrastructure, raising financing and developing a web-site. Accordingly, the
Company's consolidated financial statements are presented as those of a
development stage enterprise, as prescribed by Statement of Financial
Accounting Standards No. 7, "Accounting and Reporting by Development Stage
Enterprises." As a development stage enterprise, the Company has been relying
on contributions of capital and proceeds from sales of securities for its
primary sources of cash since inception.
Pursuant to a definitive agreement dated, May 14, 1999, the Company sold
63,750 shares of Series A convertible preferred stock to E2Enet, Inc. for
$637,500 with a commitment by E2Enet, Inc. to purchase an additional 63,750
shares for $637,500. E2Enet, Inc. is committed to purchase additional shares no
later than E2Enet, Inc.'s initial public offering. The Series A convertible
preferred stock will convert into common shares at the option of E2Enet, Inc.
or automatically upon an initial public offering of the Company (Note 7). The
total E2Enet, Inc. investment will represent 34% of the Company, excluding
potential dilution from any other third-party investments. In conjunction with
this transaction, 166,667 shares of E2Enet, Inc. common stock were sold to the
Company's stockholders for $.01 per share, with an estimated fair value of
$1,831,670.
2. Summary of Significant Accounting Policies
Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
on going development of its technology, revenue producing operations and
realization of assets in the ordinary course of business. As the Company has
incurred only expenses since its inception, additional capital will be needed
to further the Company's development. The majority of the capital was obtained
from E2Enet, Inc. in May 1999, as described in Note 1. However, in order for
the Company to achieve its expectations, additional sources of financing will
be needed. The Company plans to pursue additional financing from third party
sources. Accordingly, substantial doubt currently exists about the Company's
ability to continue as a going concern.
Use of Estimates
The consolidated financial statements are prepared on the accrual basis of
accounting in conformity with generally accepted accounting principles. The
preparation of consolidated
F-96
<PAGE>
HOOEY, INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 consolidated financial statements and
the reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
maturities of three months or less at date of purchase to be cash equivalents.
Fixed Assets
Fixed assets, which consist of computer equipment, are stated at cost, less
accumulated depreciation. The cost of additions and improvements are
capitalized, while maintenance and repairs are charged to expense when
incurred. Depreciation is provided on the straight-line basis over the
estimated useful life of the fixed assets, which is three years for computers.
The Company recognizes gains or losses on the sale or disposal of fixed assets
in the period of disposal. Long-lived assets held and utilized by the Company
are reviewed for impairment whenever changes in circumstances indicate the
carrying value of such assets may not be recoverable.
Organization Costs
The Company accounts for organization costs under the provisions of
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities,"
which requires that all organization costs be expensed as incurred.
Financial Instruments
The carrying value of the Company's financial instruments, which includes
accounts payable, is considered to approximate fair value due to the relative
short maturities of the respective instruments.
Technical and System Development
Technical and system development expenses consist primarily of payroll-
related expenses and consulting fees for the development of software to support
the Company's website. Through June 30, 1999, technical and system development
costs have been expensed as incurred.
F-97
<PAGE>
HOOEY, INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
The Company accounts for income taxes in accordance with the liability
method. Deferred income taxes are recognized for the tax consequences in future
years for differences between the tax bases of assets and liabilities and their
financial reporting amounts at the end of the period, based on enacted laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the expected realizable amount. The provision
for income taxes consists of the current tax provision and the change during
the period in deferred tax assets and liabilities.
Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," requires the presentation and disclosure of all changes
in equity from non-owner sources as "Comprehensive Income". The Company had no
items of Other Comprehensive Income in the period from April 15, 1999 (date of
inception) through June 30, 1999.
Segment Reporting
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), replaces the
industry segment approach under previously issued pronouncements with the
management approach. The management approach designates the internal
organization that is used by management for allocating resources and assessing
performance as the source of the Company's reportable segments. SFAS 131 also
requires disclosures about products and services, geographic areas and major
customers. The Company has determined that it has one reportable segment.
3. Fixed Assets
Fixed assets consist of the following:
<TABLE>
<CAPTION>
June 30, 1999
-------------
<S> <C>
Computer equipment............................................. $17,302
Less: accumulated depreciation............................... 751
-------
Fixed assets, net.............................................. $16,551
=======
</TABLE>
Depreciation expense was $751 for the period April 15, 1999 (date of
inception) through June 30, 1999.
F-98
<PAGE>
HOOEY, INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Non-Cash Capital Contribution
The Company's management team and common stockholders elected not to receive
a salary for the period from April 15, 1999 (date of inception) through May 31,
1999. In accordance with the intent of Securities and Exchange Commission Staff
Accounting Bulletin No. 79, the Company has measured the value of compensation
at $18,750 (based upon the initial annual compensation level as provided by
each stockholder's employment agreement). This expense has been recognized in
the accompanying consolidated statement of operations as expenses and in the
consolidated statement of changes in stockholders' equity as an additional
capital contribution.
5. Income Taxes
The provision for income taxes for the period from April 15, 1999 (date of
inception) to June 30, 1999 is comprised of the following:
<TABLE>
<S> <C>
Deferred:
Federal............................................................ $ 39,536
State.............................................................. 4,651
--------
Total Deferred................................................... 44,187
Less valuation allowance............................................. (44,187)
--------
Total income tax provision........................................... $ --
========
</TABLE>
The temporary difference that gives rise to the deferred tax asset is the
Company's net operating loss since inception. At current statutory rates, the
net operating loss carryfoward tax asset will offset approximately $116,281 in
taxable income and will expire in 2019.
A valuation allowance of $44,187 was provided against the deferred tax asset
due the uncertainty of realizing the benefit of this asset.
The difference between the statutory federal and state income tax rates and
the Company's effective income tax rate is primarily due to the non-
deductibility of the expense recorded for the non-cash capital contribution.
No income taxes were paid from April 15, 1999 (date of inception) to June
30, 1999.
6. Related Party Transactions
The Company contracts information technology services and leases office
space from a related technology services firm, in which a member of the
Company's management and stockholder is a director. For the period from April
15, 1999 (date of inception) through June 30, 1999, the Company incurred
$31,262 for consulting services and rent of $1,001 to this related technology
services firm, of which $28,204 has been paid.
F-99
<PAGE>
HOOEY, INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Stockholders' Equity
Preferred Stock
At June 30, 1999, the Company had 63,750 shares of Series A Convertible
Preferred Stock ("Preferred Stock") issued and outstanding. The Preferred Stock
is convertible into an equal number of common shares at the option of the
holder or automatically upon an initial public offering of the equity of the
Company. Shares of Preferred Stock have certain rights with respect to voting,
the Board of Directors, dividends, liquidation and conversion, as follows:
Voting
Each holder of Preferred Stock is entitled to the equivalent number of votes
granted upon conversion to common stock.
Board of Directors
The holders of Preferred Stock have the right, voting as a single class, to
elect two of the five seats on the Board of Directors, including the removal or
replacement of such members.
Dividends
Preferred stockholders participate with the holders of common stock for
dividends declared by the Board of Directors, in the equivalent amount per
share as entitled upon conversion to common stock.
Liquidation
Upon liquidation, dissolution or winding up of the Company, holders of
Preferred Stock shall be entitled to be paid, senior to all other classes and
series of capital stock or other equity securities of the Company, the sum of
the (i) original issue price and (ii) all declared and unpaid dividends on each
share of Preferred Stock held.
Conversion Rights
The Preferred Stock may be converted into shares of common stock at the
option of the holder or automatically upon the initial public offering of the
Company at a rate of two shares of common stock for one share of Preferred
Stock.
Common Stock
At June 30, 1999, the Company had 495,000 shares of common stock issued and
outstanding. Shares of common stock have certain rights with respect to
dividends, liquidation and voting, as follows:
F-100
<PAGE>
HOOEY, INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Dividends
Dividends may be paid on the common stock, but only out of any assets
legally available for the payment of dividends as declared by the Board of
Directors. No dividends were declared at June 30, 1999.
Liquidation
Upon dissolution, liquidation, or winding up of the Company, the holders of
the common stock are entitled to participate in the distribution of assets
remaining after the Company shall have paid (i) all debts and liabilities and
(ii) the holders of any stock having preference over the common stock.
Voting
Each holder of shares of common stock shall be entitled to cast one vote for
each outstanding share of common stock.
F-101
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Urban Box Office Network, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Urban Box Office
Network, Inc., a development stage enterprise, at June 30, 1999, and the
results of its operations and its cash flows for the period May 11, 1999 (date
of inception) through June 30, 1999, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 1 and 2 to the
financial statements, the Company is a development stage enterprise and has
suffered losses that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
McLean, VA
August 11, 1999
F-102
<PAGE>
URBAN BOX OFFICE NETWORK, INC.
(a development stage enterprise)
BALANCE SHEET
<TABLE>
<CAPTION>
June 30, 1999
-------------
<S> <C>
Assets
Current assets:
Cash and cash equivalents...................................... $ 713,733
Prepaid expenses............................................... 56,862
---------
Total current assets......................................... 770,595
Fixed assets, net................................................ 29,985
Deposits......................................................... 75,816
---------
Total assets................................................. $ 876,396
=========
Liabilities And Stockholders' Equity
Liabilities:
Accrued expenses............................................... $ 71,901
Accrued salaries............................................... 61,176
---------
Total current liabilities.................................... 133,077
---------
Commitments and contingencies (Note 6)
Stockholders' equity:
Series A Convertible Preferred Stock; par value $.01; 50,000
shares authorized; 1,000 shares issued and outstanding;
(liquidation preference $1,000,000)........................... 10
Common stock; par value $.01; 100,000 shares authorized; 9,000
shares issued and outstanding................................. 90
Common stock subscription receivable........................... (90)
Capital in excess of par value................................. 974,489
Deficit accumulated during development stage................... (231,180)
---------
Total stockholders' equity................................... 743,319
---------
Total liabilities and stockholders' equity................... $ 876,396
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-103
<PAGE>
URBAN BOX OFFICE NETWORK, INC.
(a development stage enterprise)
STATEMENT OF OPERATIONS
for the period from May 11, 1999 (date of inception) through June 30, 1999
<TABLE>
<CAPTION>
Cumulative
Since
Inception
----------
<S> <C>
Expenses:
General and administrative......................................... $ 235,219
---------
Total expenses................................................. 235,219
Interest income.................................................... 4,039
---------
Loss before income taxes........................................... (231,180)
Provision for income taxes......................................... --
---------
Net loss........................................................... $(231,180)
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-104
<PAGE>
URBAN BOX OFFICE NETWORK, INC.
(a development stage enterprise)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
for the period from May 11, 1999 (date of inception) through June 30, 1999
<TABLE>
<CAPTION>
Accumulated
Preferred Common Deficit
Stock Common Stock Stock Capital in During
------------- ------------- Subscription Excess of Development
Shares Amount Shares Amount Receivable Par Value Stage Total
------ ------ ------ ------ ------------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, February 16,
1999 (date of
inception)
Issuance of common stock
upon incorporation..... 9,000 $90 $(90) $ --
Issuance of preferred
stock; net of issue
costs.................. 1,000 $10 $974,489 974,499
Net loss................ $(231,180) (231,180)
----- --- ----- --- ---- -------- --------- ---------
Balance, June 30, 1999.. 1,000 $10 9,000 $90 $(90) $974,489 $(231,180) $ 743,319
===== === ===== === ==== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-105
<PAGE>
URBAN BOX OFFICE NETWORK, INC.
(a development stage enterprise)
STATEMENT OF CASH FLOWS
for the period from May 11, 1999 (date of inception) through June 30, 1999
<TABLE>
<CAPTION>
Cumulative
Since
Inception
----------
<S> <C>
Operating activities:
Net loss........................................................... $(231,180)
---------
Adjustments to reconcile net loss to net cash used in development
stage activities:
Depreciation expense............................................. 618
Changes in assets and liabilities:
Increase in prepaid expenses................................... (56,862)
Increase in deposits........................................... (75,816)
Increase in accrued expenses................................... 71,901
Increase in accrued salaries................................... 61,176
---------
Total adjustments.............................................. 1,017
---------
Net cash used in development stage activities...................... (230,163)
---------
Investing activities:
Purchases of fixed assets.......................................... (30,603)
---------
Net cash used in investing activities.............................. (30,603)
---------
Financing activities:
Issuance of preferred stock........................................ 974,499
---------
Net cash provided by financing activities.......................... 974,499
---------
Net increase in cash............................................... 713,733
Cash and cash equivalents, beginning of period..................... --
---------
Cash and cash equivalents, end of period........................... $ 713,733
=========
Supplemental cash flow information:
Issuance of common stock for subscription receivable............. $ 90
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-106
<PAGE>
URBAN BOX OFFICE NETWORK, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
1. Business and Organization
Urban Box Office Network, Inc., a Delaware corporation ("the Company"), was
incorporated on May 11, 1999 to develop a web-site that will target consumers
of the urban culture, information, entertainment and products. The Company
intends to provide an interactive environment in which users can directly
experience unique interaction with celebrities, access proprietary content and
access information about the urban market. No revenues have been generated
since inception of the Company. To date, the Company's activities have focused
on creating infrastructure, raising financing and developing a web-site.
Accordingly, the Company's financial statements are presented as those of a
development stage enterprise, as prescribed by Statement of Financial
Accounting Standards No. 7, "Accounting and Reporting by Development Stage
Enterprises." As a development stage enterprise, the Company has been relying
on contributions of capital and proceeds from sales of securities for its
primary sources of cash since inception.
Pursuant to a definitive agreement dated, May 14, 1999, the Company sold
1,000 shares of Series A convertible preferred stock to E2Enet, Inc. for
$1,000,000 with a commitment by E2Enet, Inc. to purchase an additional 2,000
shares for $2,000,000. E2Enet, Inc. is committed to purchase additional shares
once the Company has utilized at least 90% of the proceeds of the initial
purchase. The Series A preferred stock will convert into common shares at the
option of E2Enet, Inc. or automatically upon an initial public offering of the
equity of the Company (Note 5). The total E2Enet, Inc. investment will
represent 20.8% ownership of the company, after considering the additional
financing discussed in Note 7, excluding potential dilution from any other
third-party investments. In conjunction with this transaction, 200,001 shares
of E2Enet Inc. common stock were sold to the Company's stockholders for $.01
per share, with an estimated fair value of $2,198,012.
2. Summary of Significant Accounting Policies
Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates ongoing
development of its technology, revenue producing operations and realization of
assets in the ordinary course of business. As the Company has incurred only
expenses since its inception, additional capital will be needed to further the
Company's development. The majority of the capital was obtained from E2Enet,
Inc. in May 1999 as described in Note 1. However, in order for the Company to
achieve its expectations, additional sources of financing will be needed. The
Company plans to pursue additional financing from third party sources.
Accordingly, substantial doubt currently exists about the Company's ability to
continue as a going concern.
Use of Estimates
The financial statements are prepared on the accrual basis of accounting in
conformity with generally accepted accounting principles. The preparation of
financial statements in
F-107
<PAGE>
URBAN BOX OFFICE NETWORK, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 revenues and expenses
during the reported period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
maturities of three months or less at date of purchase to be cash equivalents.
Organization Costs
The Company accounts for organization costs under the provisions of
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities,"
which requires that all organization costs be expensed as incurred.
Financial Instruments
The carrying value of the Company's financial instruments, which includes
accounts payable, is considered to approximate fair value due to the relative
short maturities of the respective instruments.
Fixed Assets
Fixed assets, which consist of office computers and construction-in-process,
are stated at cost, less accumulated depreciation. The cost of additions and
improvements are capitalized, while maintenance and repairs are charged to
expense when incurred. Depreciation for computer equipment is provided on the
straight-line basis over the estimated useful life of the fixed asset, which is
three years for computers. The Company recognizes gains or losses on the sale
or disposal of fixed assets in the period of disposal. Long-lived assets held
and utilized by the Company are reviewed for impairment whenever changes in
circumstances indicate the carrying value of such assets may not be
recoverable.
Technical and System Development
Technical and system development expenses consist primarily of payroll-
related expenses and consulting fees for the development of software to support
the Company's web-site. Through June 30, 1999, technical and system development
costs have been expensed as incurred.
F-108
<PAGE>
URBAN BOX OFFICE NETWORK, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income Taxes
The Company accounts for income taxes in accordance with the liability
method. Deferred income taxes are recognized for the tax consequences in future
years for differences between the tax bases of assets and liabilities and their
financial reporting amounts at the end of the period, based on enacted laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the expected realizable amount. The provision
for income taxes consists of the current tax provision and the change during
the period in deferred tax assets and liabilities.
Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," requires the presentation and disclosure of all changes
in equity from non-owner sources as "Comprehensive Income". The Company had no
items of Other Comprehensive Income in the period from May 11, 1999 (date of
inception) through June 30, 1999.
Segment Reporting
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), replaces the
industry segment approach under previously issued pronouncements with the
management approach. The management approach designates the internal
organization that is used by management for allocating resources and assessing
performance as the source of the Company's reportable segments. SFAS 131 also
requires disclosures about products and services, geographic areas and major
customers. The Company has determined that it has one reportable segment.
3. Fixed Assets
Fixed assets consist of the following:
<TABLE>
<CAPTION>
June 30, 1999
-------------
<S> <C>
Computer equipment............................................. $22,256
Leasehold improvements......................................... 8,347
Less: accumulated depreciation............................... (618)
-------
Fixed assets, net.............................................. $29,985
=======
</TABLE>
Depreciation expense was $618 for the period May 11, 1999 (date of
inception) through June 30, 1999.
F-109
<PAGE>
URBAN BOX OFFICE NETWORK, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Income Taxes
The provision for income taxes for the period from May 11, 1999 (date of
inception) to June 30, 1999 is comprised of the following:
<TABLE>
<S> <C>
Deferred:
Federal............................................................. $78,601
State............................................................... 9,247
-------
Total Deferred.................................................... 87,848
Less valuation allowance.............................................. (87,848)
-------
Total income tax provision............................................ $ --
=======
</TABLE>
The temporary difference that gives rise to the deferred tax asset is the
Company's net operating loss since inception. At current statutory rates, the
net operating loss carryforward will offset approximately $231,180 in taxable
income and will expire in 2019.
A valuation allowance of $87,848 was provided against the deferred tax asset
due to the uncertainty of realizing the benefit of this asset.
No income taxes were paid from May 11, 1999 (date of inception) to June 30,
1999.
5. Stockholders' Equity
Preferred Stock
At June 30, 1999, the Company had 1,000 shares of Series A Convertible
Preferred Stock ("Preferred Stock") issued and outstanding. The Preferred Stock
is convertible into common shares at the option of the holder or automatically
upon an initial public offering of the Company. Shares of Preferred Stock have
certain rights with respect to voting, the Board of Directors, dividends,
liquidation and conversion rights, as follows:
Voting
Each holder of Preferred Stock is entitled to the equivalent number of votes
granted upon conversion to common stock.
Board of Directors
The holders of Preferred Stock have the right, voting as a single class, to
elect two of the seven seats on the Board of Directors, including the removal
or replacement of such members.
F-110
<PAGE>
URBAN BOX OFFICE NETWORK, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Dividends
Preferred stockholders participate with the holders of common stock for
dividends declared by the Board of Directors, in the equivalent amount per
share as entitled upon conversion to common stock.
Liquidation
Upon liquidation, dissolution or winding up of the Company, holders of
Preferred Stock will be entitled to be paid, senior to all other classes and
series of capital stock or other equity securities of the Company, the sum of
the (i) original issue price and (ii) all declared and unpaid dividends on each
share of Preferred Stock held.
Conversion Rights
The Preferred Stock may be converted into shares of common stock at the
option of the holder or automatically upon the initial public offering of the
equity of the Company at a rate of one share of common stock for one share of
Preferred Stock.
Common Stock
At June 30, 1999, the Company had 9,000 shares of common stock issued and
outstanding. Shares of common stock have certain rights with respect to
dividends, liquidation and voting, as follows:
Dividends
Dividends may be paid on the common stock, but only out of any assets
legally available for the payment of dividends as declared by the Board of
Directors. No dividends were declared at June 30, 1999.
Liquidation
Upon dissolution, liquidation, or winding up of the Company, the holders of
the common stock are entitled to participate in any distribution of assets
remaining after the Company shall have paid (I) all debts and liabilities of
the Company and (ii) the holders of any stock having preference over the common
stock.
Voting
Each holder of shares of common stock shall be entitled to cast one vote for
each outstanding share of common stock.
F-111
<PAGE>
URBAN BOX OFFICE NETWORK, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Commitments and Contingencies
At June 30, 1999, the Company is committed for the payment of minimum
rentals for its facility under an operating lease agreement as follows:
<TABLE>
<S> <C>
2000.............................................................. $ 235,000
2001.............................................................. 247,000
2002.............................................................. 256,000
2003.............................................................. 263,000
2004.............................................................. 133,794
----------
Total........................................................... $1,134,794
==========
</TABLE>
Rent expense was approximately $22,804 for the period May 11, 1999 (date of
inception) through June 30, 1999.
7. Subsequent Events
On July 19, 1999, the Company entered into a definitive agreement to sell
450 shares of the Company's Preferred Stock to an individual for $450,000.
On August 10, 1999, the Company entered into a definitive agreement to sell
2,000 shares of the Company's Preferred Stock for $2,000,000 and issue warrants
to purchase 1,005 shares of the Company's Preferred Stock at an exercise price
of $1,000 per share, expiring in July 2006. These warrants are being provided
in exchange for future financial advisory services, including advising
management on its future business plans, financing alternatives, and merger and
acquisition activity. The Company will value the warrants at fair value on a
quarterly basis. The value of the warrants will be recognized in the Company's
statement of operations as an expense.
On August 11, 1999, the Company established the 1999 Stock Option Plan (the
"Plan") under which the employees, directors and consultants may be granted
options to purchase shares of the Company's common stock. The Company has
reserved 15% of the Company's common stock for issuance under the Plan.
Currently, there have not been any stock options granted under the Plan.
F-112
<PAGE>
You may rely on the information contained in this prospectus. We have not
authorized anyone to provide information different from that contained in this
prospectus. Neither the delivery of this prospectus nor the sale of the shares
of common stock means that information contained in this prospectus is correct
after the date of this prospectus. This prospectus is not an offer to sell or
solicitation of an offer to buy these shares in any circumstances under which
the offer or solicitation is unlawful.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 11
Forward Looking Statements............................................... 25
Use of Proceeds.......................................................... 26
Dividend Policy.......................................................... 27
Capitalization........................................................... 28
Dilution................................................................. 29
Selected Financial Data.................................................. 31
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 34
Business................................................................. 46
Management............................................................... 62
Transactions with Related Parties........................................ 73
Principal Stockholders................................................... 75
Description of Capital Stock............................................. 77
Shares Available for Future Sale......................................... 81
Underwriting............................................................. 84
Experts.................................................................. 86
Validity of the Shares................................................... 87
Where You Can Find More Information...................................... 87
</TABLE>
Dealer Prospectus Delivery Obligation:
Until , 1999 (25 days after the date of this prospectus), all dealers that
buy, sell, or trade in these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus.
Dealers are also obligated to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
- -------------------------------------------------------------------------------
[E2Enet Logo]
10,000,000 Shares
Common Stock
Deutsche Banc Alex. Brown
BancBoston Robertson Stephens
Friedman Billings Ramsey
Stephens Inc.
Prospectus
, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth all fees and expenses, other than the
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of the Common Stock being registered. All amounts shown are
estimates except for the SEC registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
Amount
-------
<S> <C>
SEC registration fee................................................ $51,152
NASD filing fee..................................................... 17,750
Nasdaq National Market listing fee.................................. 76,625
Accounting fees and expenses........................................ *
Legal fees and expenses............................................. *
Printing and engraving expenses..................................... *
Blue Sky qualification fees and expenses............................ *
Transfer agent and registrar fees................................... *
Miscellaneous expenses.............................................. *
-------
Total............................................................. *
=======
</TABLE>
- --------
* To be completed by amendment.
Item 14. Indemnification of Directors and Officers
The Certificate of Incorporation and Bylaws of the Registrant provide for
the indemnification of the Registrant's directors and officers to the fullest
extent authorized by, and subject to the conditions set forth in the General
Corporation Law of the State of Delaware (the "DGCL"), except that the
Registrant will indemnify a director or officer in connection with a proceeding
(or part thereof) initiated by the person only if the proceeding (or part
thereof) was authorized by the Registrant's Board of Directors. The
indemnification provided under the Certificate of Incorporation and Bylaws
includes the right to be paid by the Registrant the expenses (including
attorneys' fees) in advance of any proceeding for which indemnification may be
had in advance of its final disposition, provided that the payment of such
expenses (including attorneys' fees) incurred by a director or officer in
advance of the final disposition of a proceeding may be made only upon delivery
to the Registrant of an undertaking by or on behalf of the director or officer
to repay all amounts so paid in advance if it is ultimately determined that the
director or officer is not entitled to be indemnified. Pursuant to the Bylaws,
if a claim for indemnification is not paid by the Registrant within 60 days
after a written claim has been received by the Registrant, the claimant may at
any time thereafter bring an action against the Registrant to recover the
unpaid amount of the claim and, if successful in whole or in part, the claimant
will be entitled to be paid also the expense of prosecuting the action.
As permitted by the DGCL, the Registrant's Certificate of Incorporation
provides that directors of the Registrant shall not be liable to the Registrant
or its stockholders for
II-1
<PAGE>
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the
Registrant or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, relating to unlawful payment of dividends or unlawful
stock purchase or redemption or (iv) for any transaction from which the
director derived an improper personal benefit. As a result of this provision,
the Registrant and its stockholders may be unable to obtain monetary damages
from a director for breach of his or her duty of care.
Under the Bylaws, the Registrant has the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the Registrant, or is or was serving at the request of the
Registrant as a director, officer, employee, partner (limited or general) or
agent of another corporation or of a partnership, joint venture, limited
liability company, trust or other enterprise, against any liability asserted
against the person or incurred by the person in any such capacity, or arising
out of the person's status as such, and related expenses, whether or not the
Registrant would have the power to indemnify the person against such liability
under the provisions of the DGCL. The Registrant intends to purchase director
and officer liability insurance on behalf of its directors and officers.
Item 15. Recent Sales of Unregistered Securities
(a) Between May 7, 1999 and May 17, 1999, 29 investors, director, director
nominees and employees of E2E purchased an aggregate of 4,358,669 shares
of common stock at a price per share of $.01 for an aggregate
consideration of $43,584. These shares include shares issued in
connection with acquisitions. These sales were effected without
registration under the Securities Act in reliance upon the exemption
from registration contained in Section 4(2) of the Securities Act. Each
of the foregoing transactions was effected without the use of an
underwriter.
(b) Between May 18, 1999 and August 23, 1999 three director nominees
purchased an aggregate of 259,500 shares of common stock at a price per
share of $.01 for an aggregate consideration of $2,595. These sales were
effected without registration under the Securities Act in reliance upon
the exemption from registration contained in Section 4(2) of the
Securities Act. Each of the foregoing transactions was effected without
the use of an underwriter.
(c) On September 10, 1999, E2E issued convertible promissory notes in the
aggregate principal amount of $4.0 million to Northwood Ventures LLC and
its affiliate, Northwood Capital Partners LLC, venture capital funds.
The convertible notes held by Northwood will convert into 459,242
shares, plus additional shares for accrued interest, of E2E's common
stock. In addition E2E has issued 400,000 warrants to purchase E2E
common stock at the initial public offering price. These sales were
effected without registration under the Securities Act in reliance upon
the exemption from registration contained in Section 4(2) of the
Securities Act. These transactions were effected without the use of an
underwriter.
II-2
<PAGE>
Item 16. Exhibit and Financial Statement Schedules
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Form of Third Amended and Restated Certificate of Incorporation of
the Registrant
3.2 Form of Third Amended and Restated Bylaws of the Registrant
4.1* Form of Common Stock Certificate
5.1* Opinion of Hogan & Hartson L.L.P.
10.1 Agreement and Plan of Merger made as of September 16, 1999, by and
among the Registrant, MEI Merger Company, Inc. and MEI Software
Systems, Inc.
10.2 Loan Agreement between the Registrant and MEI Software Systems,
Inc. dated
September 16, 1999
10.3 Replacement Convertible Promissory Note issued by MEI in favor of
the Registrant dated September 16, 1999
10.4 Senior Management Agreement between the Registrant and Robert J.
Smith dated
May 14, 1999
10.5 Senior Management Agreement between the Registrant and Michael C.
Wheeler dated May 14, 1999
10.6 Senior Management Agreement between the Registrant and Steven J.
Quamme dated
May 14, 1999
10.7 Management Agreement between the Registrant and James R. Smith,
Jr. dated
September 10, 1999
10.8 Senior Management Agreement between the Registrant and Mark Lewyn
dated May 14, 1999
10.9 Restricted Stock Agreement between the Registrant and Robert S.
Smith dated
September 15, 1999
10.10 Restricted Stock Agreement between the Registrant and Michael C.
Wheeler dated
September 15, 1999
10.11 Restricted Stock Agreement between the Registrant and Steven J.
Quamme dated
September 15, 1999
10.12 Restricted Stock Agreement between the Registrant and Mark Lewyn
dated
September 15, 1999
10.13 Lock-Up Agreement between the Registrant and Jonathan J. Ledecky
dated
September 11, 1999
10.14 Convertible Note and Warrant Purchase Agreement by and between the
Registrant, and Northwood Ventures LLC and Northwood Capital
Partners LLC dated September 10, 1999
10.15 Warrant to purchase 350,000 shares of common stock of the
Registrant issued to
Northwood Ventures LLC
10.16 Warrant to purchase 50,000 shares of common stock of the
Registrant issued to
Northwood Capital Partners LLC
10.17 Convertible Secured Note issued by the Registrant in favor of
Northwood
Ventures LLC dated September 10, 1999
10.18 Convertible Secured Note issued by the Registrant in favor of
Northwood Capital
Partners LLC dated September 10, 1999
10.19 Loan and Pledge Agreement Between the Registrant and Jonathan J.
Ledecky dated
as of May 14, 1999, as amended
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.20 Second Amended and Restated Promissory Note issued by the
Registrant in favor of Jonathan J. Ledecky dated as of September
10, 1999
10.21 Registration Rights Agreement dated September 10, 1999 between
the Registrant and the Stockholders executing same
10.22 Form of Subscription Agreement between the Registrant and its
executive officers and directors for the purchase of shares of
the Registrant
10.23 E2Enet, Inc. 1999 Stock Option and Incentive Plan
10.24 Purchase Agreement between the Registrant and Buyline.net, Inc.
dated August 10, 1999
23.1* Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1)
23.2 Consent of PricewaterhouseCoopers LLP
23.3** Consent of Lynda Applegate, as Director Nominee
23.4** Consent of Neil Austrian, as Director Nominee
23.6** Consent of Robert J. Smith, as Director Nominee
23.7** Consent of Michael Wheeler, as Director Nominee
23.8 Consent of George J. Mitchell, as Director Nominee
23.9 Consent of Jeffrey R. Sechrest, as Director Nominee
23.10 Consent of Gerald H. Taylor, as Director Nominee
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by Amendment
** Previously filed
Item 17. Undertakings.
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as may be required by the
underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 of this
Registration Statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. If 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.
II-4
<PAGE>
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the 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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Washington, DC, on the 16th day of
September, 1999.
E2Enet, Inc.
By /s/ Robert J. Smith
----------------------------------
Robert J. Smith
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons as of September
16, 1999 in the capacities indicated.
Signature Title
/s/ Robert J. Smith Chief Executive
- ------------------------------------- Officer
Robert J. Smith
/s/ Steven J. Quamme Senior Vice
- ------------------------------------- President and Chief
Steven J. Quamme Financial Officer
and Sole Director
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Form of Third Amended and Restated Certificate of Incorporation of
the Registrant
3.2 Form of Third Amended and Restated Bylaws of the Registrant
4.1* Form of Common Stock Certificate
5.1* Opinion of Hogan & Hartson L.L.P.
10.1 Agreement and Plan of Merger made as of September 16, 1999, by and
among the Registrant, MEI Merger Company, Inc. and MEI Software
Systems, Inc.
10.2 Loan Agreement between the Registrant and MEI Software Systems,
Inc. dated
September 16, 1999
10.3 Replacement Convertible Promissory Note issued by MEI in favor of
the Registrant dated September 16, 1999
10.4 Senior Management Agreement between the Registrant and Robert J.
Smith dated
May 14, 1999
10.5 Senior Management Agreement between the Registrant and Michael C.
Wheeler dated May 14, 1999
10.6 Senior Management Agreement between the Registrant and Steven J.
Quamme dated
May 14, 1999
10.7 Management Agreement between the Registrant and James R. Smith,
Jr. dated
September 10, 1999
10.8 Senior Management Agreement between the Registrant and Mark Lewyn
dated May 14, 1999
10.9 Restricted Stock Agreement between the Registrant and Robert S.
Smith dated
September 15, 1999
10.10 Restricted Stock Agreement between the Registrant and Michael C.
Wheeler dated
September 15, 1999
10.11 Restricted Stock Agreement between the Registrant and Steven J.
Quamme dated
September 15, 1999
10.12 Restricted Stock Agreement between the Registrant and Mark Lewyn
dated
September 15, 1999
10.13 Lock-Up Agreement between the Registrant and Jonathan J. Ledecky
dated
September 11, 1999
10.14 Convertible Note and Warrant Purchase Agreement by and between the
Registrant, and Northwood Ventures LLC and Northwood Capital
Partners LLC dated September 10, 1999
10.15 Warrant to purchase 350,000 shares of common stock of the
Registrant issued to
Northwood Ventures LLC
10.16 Warrant to purchase 50,000 shares of common stock of the
Registrant issued to
Northwood Capital Partners LLC
10.17 Convertible Secured Note issued by the Registrant in favor of
Northwood
Ventures LLC dated September 10, 1999
10.18 Convertible Secured Note issued by the Registrant in favor of
Northwood Capital
Partners LLC dated September 10, 1999
10.19 Loan and Pledge Agreement Between the Registrant and Jonathan J.
Ledecky dated
as of May 14, 1999, as amended
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.20 Second Amended and Restated Promissory Note issued by the Registrant in favor of
Jonathan J. Ledecky dated as of September 10, 1999
10.21 Registration Rights Agreement dated September 10, 1999 between the Registrant and
the Stockholders executing same
10.22 Form of Subscription Agreement between the Registrant and its executive officers
and directors for the purchase of shares of the Registrant
10.23 E2Enet, Inc. 1999 Stock Option and Incentive Plan
10.24 Purchase Agreement between the Registrant and Buyline.net, Inc. dated August 10, 1999
23.1* Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1)
23.2 Consent of PricewaterhouseCoopers LLP
23.3** Consent of Lynda Applegate, as Director Nominee
23.4** Consent of Neil Austrian, as Director Nominee
23.6** Consent of Robert J. Smith, as Director Nominee
23.7** Consent of Michael Wheeler, as Director Nominee
23.8 Consent of George J. Mitchell, as Director Nominee
23.9 Consent of Jeffrey R. Sechrest, as Director Nominee
23.10 Consent of Gerald H. Taylor, as Director Nominee
27.1 Financial Data Schedule
</TABLE>
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* To be filed by Amendment
** Previously filed
<PAGE>
Exhibit 1.1
10,000,000 Shares
E2Enet, Inc.
Common Stock
($.01 Par Value)
UNDERWRITING AGREEMENT
----------------------
September __, 1999
Deutsche Bank Securities Inc.
BancBoston Robertson Stephens
Friedman Billings Ramsey & Co. Inc.
Stephens Inc.
As Representatives of the
several Underwriters
c/o Deutsche Bank Securities Inc.
One South Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
E2Enet, Inc., a Delaware corporation (the "Company"), proposes to sell to
the several underwriters (the "Underwriters") named in Schedule I hereto for
whom you are acting as representatives (the "Representatives") an aggregate of
10,000,000 shares of the Company's Common Stock, $.01 par value (the "Firm
Shares"). The respective amounts of the Firm Shares to be so purchased by the
several Underwriters are set forth opposite their names in Schedule I hereto.
The Company also proposes to sell at the Underwriters' option an aggregate of up
to 1,500,000 additional shares of the Company's Common Stock (the "Option
Shares") as set forth below.
As the Representatives, you have advised the Company (a) that you are
authorized to enter into this Agreement on behalf of the several Underwriters,
and (b) that the several Underwriters are willing, acting severally and not
jointly, to purchase the numbers of Firm Shares set forth opposite their
respective names in Schedule I, plus their pro rata portion of the Option Shares
if you elect to exercise the over-allotment option in whole or in part for the
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<PAGE>
accounts of the several Underwriters. The Firm Shares and the Option Shares (to
the extent the aforementioned option is exercised) are herein collectively
called the "Shares."
Simultaneously with the closing with respect to the purchase of the Firm
Shares by the Underwriters, the Company will acquire each of the Acquired
Companies (as hereinafter defined) (collectively, the "Acquisitions"), the
consideration for which will be as described in the Registration Statement.
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. Representations and Warranties of the Company.
---------------------------------------------
The Company represents and warrants to each of the Underwriters as follows:
(a) A registration statement on Form S-1 (File No. 333-78587) with respect
to the Shares has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") promulgated thereunder and has been filed
with the Commission. Copies of such registration statement, including any
amendments thereto, the preliminary prospectuses (meeting the requirements of
the Rules and Regulations) contained therein and the exhibits, financial
statements and schedules, as finally amended and revised, have heretofore been
delivered by the Company to you. Such registration statement as amended at the
time it becomes effective, together with any registration statement filed by the
Company pursuant to Rule 462(b) of the Act, herein referred to as the
"Registration Statement," which shall be deemed to include all information
omitted therefrom in reliance upon Rule 430A and contained in the Prospectus
referred to below, has become effective under the Act and no post-effective
amendment to the Registration Statement has been filed as of the date of this
Agreement. "Prospectus" means (a) the form of prospectus first filed with the
Commission pursuant to Rule 424(b) or (b) the last preliminary prospectus
included in the Registration Statement filed prior to the time it becomes
effective or filed pursuant to Rule 424(a) under the Act that is delivered by
the Company to the Underwriters for delivery to purchasers of the Shares,
together with any term sheet or abbreviated term sheet filed with the Commission
pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus included
in the Registration Statement prior to the time it becomes effective is herein
referred to as a "Preliminary Prospectus."
(b) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement. Each of the entities which
will become a subsidiary of the Company upon the consummation of the
Acquisitions as listed in Exhibit A hereto (collectively, the "Acquired
Companies") has been duly organized and is validly existing as a corporation, in
good standing under the laws of the
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<PAGE>
jurisdiction of its incorporation, as the case may be, with corporate power and
authority to own or lease its properties and conduct its business as described
in the Registration Statement. As of the date hereof, the Company has no
subsidiaries. The Company and each of the Acquired Companies are duly qualified
to transact business in all jurisdictions in which the conduct of their business
requires such qualification except where the failure to qualify would not have a
material adverse effect on the Company and the Acquired Companies taken as a
whole.
(c) The outstanding shares of Common Stock of the Company have been duly
authorized and validly issued and are fully paid and non-assessable; the Shares
to be issued and sold by the Company pursuant to this Agreement have been duly
authorized and when issued and paid for as contemplated herein will be validly
issued, fully paid and non-assessable; and no preemptive rights of stockholders
exist with respect to any of the Shares or the issue and sale thereof. Neither
the filing of the Registration Statement nor the offering or sale of the Shares
as contemplated by this Agreement gives rise to any rights, other than those
which have been waived or satisfied, for or relating to the registration of any
shares of Common Stock.
The outstanding shares of capital stock of each of the Acquired Companies
have been duly authorized and validly issued, and are fully paid and non-
assessable. As of the Closing Date (as hereinafter defined), after giving
effect to the Acquisitions, all of the outstanding shares of capital stock of
each of the Acquired Companies ( will be owned by the Company free and clear of
all liens, encumbrances, equities and claims; and except as described in the
Registration Statement, no options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to convert any
obligations into shares of capital stock or ownership interests in the Acquired
Companies will be outstanding.
(d) The information set forth under the caption "Capitalization" in the
Prospectus is true and correct. All of the Shares conform to the description
thereof contained in the Registration Statement. The form of certificates for
the Shares conforms, in all material respects, to the corporate law of the
jurisdiction of the Company's incorporation.
(e) The Commission has not issued an order preventing or suspending the
use of any Prospectus relating to the proposed offering of the Shares nor
instituted proceedings for that purpose. The Registration Statement contains,
and the Prospectus and any amendments or supplements thereto will contain, all
statements which are required to be stated therein by, and will conform in all
material respects, to the requirements of the Act and the Rules and Regulations.
The Registration Statement and any amendment thereto do not contain, and will
not contain, any untrue statement of a material fact and do not omit, and will
not omit, to state any material fact required to be stated therein or necessary
to make the statements therein not misleading. The Prospectus and any
amendments and supplements thereto do not contain, and will not contain, any
untrue statement of material fact; and do not omit, and will not 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; provided, however, that the Company makes no
representations or warranties as to information contained
-3-
<PAGE>
in or omitted from the Registration Statement or the Prospectus, or any such
amendment or supplement, in reliance upon, and in conformity with, written
information furnished to the Company by or on behalf of any Underwriter through
the Representatives, specifically for use in the preparation thereof.
(f) The financial statements of the Company and Ironbound Partners LLC and
the separate financial statements of the Acquired Companies, in each case,
together with related notes and schedules as set forth in the Registration
Statement, present fairly the financial position and the results of operations
and cash flows of the Company and Ironbound Partners LLC and the Acquired
Companies, respectively, at the indicated dates and for the indicated periods.
Such financial statements and related schedules have been prepared in accordance
with generally accepted principles of accounting, consistently applied
throughout the periods involved, except as disclosed therein, and all
adjustments necessary for a fair presentation of results for such periods have
been made. The summary financial and operating data included in the
Registration Statement present fairly the information shown therein and such
data has been compiled on a basis consistent with the financial statements
presented therein and the books and records of the Company and Ironbound LLC
each of the Acquired Companies. The pro forma combined financial statements of
the Company and other pro forma financial information included in the
Registration Statement and the Prospectus present fairly the information shown
therein, have been prepared in accordance with the Commission's rules and
guidelines with respect to pro forma financial statements, have been properly
compiled on the pro forma bases described therein, and, in the opinion of the
Company, the assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the transactions or
circumstances referred to therein.
(g) PricewaterhouseCoopers LLP, who have certified certain of the
financial statements filed with the Commission as part of the Registration
Statement, are independent public accountants as required by the Act and the
Rules and Regulations.
(h) There is no action, suit, claim or proceeding pending or, to the
knowledge of the Company, threatened against the Company before any court or
administrative agency or otherwise which if determined adversely to the Company
would result in any material adverse change in the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company or prevent the consummation of the
transactions contemplated hereby, except as set forth in the Registration
Statement.
(i) The Company and each of the Acquired Companies has good title to all
of the properties and assets reflected as owned by it in the financial
statements (or as described in the Registration Statement) hereinabove
described, subject to no lien, mortgage, pledge, charge or encumbrance of any
kind except those reflected in such financial statements (or as described in the
Registration Statement) or which are not material in amount. The Company
occupies its leased properties under valid and binding leases conforming in all
material respects to the description thereof set forth in the Registration
Statement.
-4-
<PAGE>
(j) The Company has filed or obtained an extension to file all Federal,
State, local and foreign income tax returns which have been required to be filed
and has paid all taxes indicated by said returns and all assessments received by
it to the extent that such taxes have become due and are not being contested in
good faith. All tax liabilities incurred by the Company but not yet due have
been adequately provided for in the financial statements of the Company.
(k) Since the respective dates as of which information is given in the
Registration Statement, as it may be amended or supplemented, there has not been
any material adverse change or any development involving a prospective material
adverse change in or affecting the earnings, business, management, properties,
assets, rights, operations, financial condition, or prospects of the Company and
each of the Acquired Companies, whether or not occurring in the ordinary course
of business, and there has not been any material transaction entered into or any
material transaction that is probable of being entered into by the Company or
the Acquired Companies, other than transactions in the ordinary course of
business and changes and transactions described in the Registration Statement,
as it may be amended or supplemented. The Company does not have any material
contingent obligations which are not disclosed in the Company's financial
statements which are included in the Registration Statement.
(l) Neither the Company nor any of the Acquired Companies is, or with the
giving of notice or lapse of time or both, will be, in violation of or in
default under its Certificate of Incorporation or By-Laws or under any
agreement, lease, contract, indenture or other instrument or obligation to which
it is a party or by which it, or any of its properties, is bound and which
default is of material significance in respect of the business, management,
properties, assets, rights, operations, financial condition or prospects of the
Company and the Acquired Companies, taken as a whole. The execution and
delivery of this Agreement and the consummation of the transactions herein
contemplated and the fulfillment of the terms hereof will not conflict with or
result in a breach of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust or other agreement or instrument
to which the Company or any Acquired Company is a party, or of the Certificate
of Incorporation or By-Laws of the Company or any order, rule or regulation
applicable to the Company or any Acquired Company of any court or of any
regulatory body or administrative agency or other governmental body having
jurisdiction except for such conflicts, breaches or defaults as would not have a
material adverse effect on the Company and the Acquired Companies, taken as a
whole.
(m) Each approval, consent, order, authorization, designation, declaration
or filing by or with any regulatory, administrative or other governmental body
necessary in connection with the execution and delivery by the Company of this
Agreement and the consummation of the transactions herein contemplated (except
such additional steps as may be required by the Commission or the National
Association of Securities Dealers, Inc. (the "NASD")) has been obtained or made
and is in full force and effect except for such approvals, consents, orders,
authorizations, designations, declarations or filings which the failure to
obtain or make would not have a material adverse effect on the Company.
-5-
<PAGE>
(n) The Company holds all material licenses, certificates and permits from
governmental authorities which are necessary to the conduct of their businesses;
and the Company has not infringed any patents, patent rights, trade names,
trademarks or copyrights, which infringement is material to the business of the
Company. The Company knows of no material infringement by others of patents,
patent rights, trade names, trademarks or copyrights owned by or licensed to the
Company.
(o) Neither the Company, nor to the Company's best knowledge, any of its
affiliates, has taken or may take, directly or indirectly, any action designed
to cause or result in, or which has constituted or which might reasonably be
expected to constitute, the stabilization or manipulation of the price of the
shares of Common Stock to facilitate the sale or resale of the Shares.
(p) The Company is not, and upon the consummation of the transactions
contemplated by this Agreement and the transactions described in the
Registration Statement will not be, an "investment company" as that term is
defined under the Investment Company Act of 1940, as amended (the "1940 Act"),
and the rules and regulations of the Commission thereunder.
(q) 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 authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements 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; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(r) The Company carries, or is covered by, insurance in such amounts and
covering such risks as is adequate for the conduct of its business and the value
of its properties and as is customary for companies engaged in similar
industries.
(s) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security Act
of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the Company
would have any liability; the Company has not incurred and does not expect to
incur liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and published
interpretations thereunder (the "Code"); and each "pension plan" for which the
Company would have any liability that is intended to be qualified under Section
401(a) of the Code is so qualified in all material respects and nothing has
occurred, whether by action or by failure to act, which would cause the loss of
such qualification.
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<PAGE>
(t) The Company has provided the Representatives true and correct copies
of the material agreements entered into in connection with the Acquisitions (the
"Acquisition Agreements"); the Company expects that the Acquisitions will close
on or about the Closing Date in accordance with the terms of the Acquisition
Agreements.
2. Purchase, Sale and Delivery of the Firm Shares.
----------------------------------------------
(a) On the basis of the representations, warranties and covenants herein
contained, and subject to the conditions herein set forth, the Company agrees to
sell to the Underwriters and each Underwriter agrees, severally and not jointly,
to purchase, at a price of $_____ per share, the number of Firm Shares set forth
opposite the name of each Underwriter in Schedule I hereof, subject to
adjustments in accordance with Section 9 hereof.
(b) Payment for the Firm Shares to be sold hereunder is to be made in same
day funds via wire transfer to the order of the Company against delivery of the
Firm Shares to the Representatives for the several accounts of the Underwriters.
Such payment and delivery are to be made at the offices of Deutsche Bank
Securities Inc., 1 South Street, Baltimore, Maryland, at 10:00 a.m., Baltimore
time, on the third business day after the date of this Agreement or at such
other time and date not later than three business days thereafter as you and the
Company shall agree upon, such time and date being herein referred to as the
"Closing Date." (As used herein, "business day" means a day on which the New
York Stock Exchange is open for trading and on which banks in New York are open
for business and are not permitted by law or executive order to be closed.) The
certificates for the Firm Shares will be delivered in such denominations and in
such registrations as the Representatives request in writing not later than the
second full business day prior to the Closing Date, and will be made available
for inspection by the Representatives at least one business day prior to the
Closing Date.
(c) In addition, on the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase the Option
Shares at the price per share as set forth in paragraph (a) of this Section 2.
The option granted hereby may be exercised in whole or in part by giving written
notice (i) at any time before the Closing Date and (ii) only once thereafter
within 30 days after the date of this Agreement, by you, as Representatives of
the several Underwriters, to the Company setting forth the number of Option
Shares as to which the several Underwriters are exercising the option, the names
and denominations in which the Option Shares are to be registered and the time
and date at which such certificates are to be delivered. The time and date at
which the Option Shares are to be delivered shall be determined by the
Representatives but shall not be earlier than three nor later than 10 full
business days after the exercise of such option, nor in any event prior to the
Closing Date (such time and date being herein referred to as the "Option Closing
Date"). If the date of exercise of the option is three or more days before the
Closing Date, the notice of exercise shall set the Closing Date as the Option
Closing Date. The number of Option Shares to be purchased by each Underwriter
shall be in the same proportion to the total number of Option Shares being
purchased as the number of Firm Shares being
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<PAGE>
purchased by such Underwriter bears to 10,000,000, adjusted by you in such
manner as to avoid fractional shares. The option with respect to the Option
Shares granted hereunder may be exercised only to cover over-allotments in the
sale of the Firm Shares by the Underwriters. You, as Representatives of the
several Underwriters, may cancel such option at any time prior to its expiration
by giving written notice of such cancellation to the Company. To the extent, if
any, that the option is exercised, payment for the Option Shares shall be made
on the Option Closing Date in same day funds via wire transfer to the order of
the Company against delivery of certificates therefor at the offices of Deutsche
Bank Securities Inc., 1 South Street, Baltimore, Maryland.
3. Offering by the Underwriters.
----------------------------
It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representatives deem it advisable to
do so. The Firm Shares are to be initially offered to the public at the initial
public offering price set forth in the Prospectus. The Representatives may from
time to time thereafter change the public offering price and other selling
terms. To the extent, if at all, that any Option Shares are purchased pursuant
to Section 2 hereof, the Underwriters will offer them to the public on the
foregoing terms.
It is further understood that you will act as the Representatives for the
Underwriters in the offering and sale of the Shares in accordance with a Master
Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. Covenants of the Company.
------------------------
The Company covenants and agrees with the several Underwriters that:
(a) The Company will (i) use its best efforts to cause the Registration
Statement to become effective or, if the procedure in Rule 430A of the Rules and
Regulations is followed, to prepare and timely file with the Commission under
Rule 424(b) of the Rules and Regulations a Prospectus in a form approved by the
Representatives containing information previously omitted at the time of
effectiveness of the Registration Statement in reliance on Rule 430A of the
Rules and Regulations and (ii) not file any amendment to the Registration
Statement or supplement to the Prospectus of which the Representatives shall not
previously have been advised and furnished with a copy or to which the
Representatives shall have reasonably objected in writing or which is not in
compliance with the Rules and Regulations.
(b) The Company will advise the Representatives promptly (i) when the
Registration Statement or any post-effective amendment thereto shall have become
effective, (ii) of receipt of any comments from the Commission, (iii) of any
request of the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, and (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the use of the Prospectus or of the institution of any
proceedings for
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<PAGE>
that purpose. The Company will use its best efforts to prevent the issuance of
any such stop order preventing or suspending the use of the Prospectus and to
obtain as soon as possible the lifting thereof, if issued.
(c) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary Prospectus
as the Representatives may reasonably request. The Company will deliver to, or
upon the order of, the Representatives during the period when delivery of a
Prospectus is required under the Act, as many copies of the Prospectus in final
form, or as thereafter amended or supplemented, as the Representatives may
reasonably request. The Company will deliver to the Representatives at or
before the Closing Date, four signed copies of the Registration Statement and
all amendments thereto including all exhibits filed therewith, and will deliver
to the Representatives such number of copies of the Registration Statement
(including such number of copies of the exhibits filed therewith that may
reasonably be requested), and of all amendments thereto, as the Representatives
may reasonably request.
(d) The Company will comply with the Act and the Rules and Regulations,
and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the rules and regulations of the Commission thereunder, so as to permit the
completion of the distribution of the Shares as contemplated in this Agreement
and the Prospectus. If during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer, any event shall occur as a
result of which, in the judgment of the Company or in the reasonable opinion of
the Underwriters, it becomes necessary to amend or supplement the Prospectus in
order to make the statements therein, in light of the circumstances existing at
the time the Prospectus is delivered to a purchaser, not misleading, or, if it
is necessary at any time to amend or supplement the Prospectus to comply with
any law, the Company promptly will prepare and file with the Commission an
appropriate amendment to the Registration Statement or supplement to the
Prospectus so that the Prospectus as so amended or supplemented will not, in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with the law.
(e) The Company will make generally available to its security holders, as
soon as it is practicable to do so, but in any event not later than 15 months
after the effective date of the Registration Statement, an earning statement
(which need not be audited) in reasonable detail, covering a period of at least
12 consecutive months beginning after the effective date of the Registration
Statement, which earnings statement shall satisfy the requirements of Section
11(a) of the Act and Rule 158 of the Rules and Regulations and will advise you
in writing when such statement has been so made available.
(f) The Company will, for a period of five years from the Closing Date,
deliver to the Representatives copies of annual reports and copies of all other
documents, reports and information furnished by the Company to its stockholders
or filed with any securities exchange pursuant to the requirements of such
exchange or with the Commission pursuant to the Act or the Exchange Act. The
Company will deliver to the Representatives similar reports with respect to
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<PAGE>
significant subsidiaries, as that term is defined in Regulation S-X promulgated
by the Commission, which are not consolidated in the Company's financial
statements.
(g) No offering, sale, short sale or other disposition of any shares of
Common Stock of the Company or other securities convertible into or exchangeable
or exercisable for shares of Common Stock or derivative of Common Stock (or
agreement for such) will be made for a period of 180 days after the date of this
Agreement, directly or indirectly, by the Company without the prior written
consent of Deutsche Bank Securities Inc., except for shares of Common Stock
issued pursuant to the terms of the Acquisition Agreements, the grant of
employee stock options (up to a maximum of ____________ shares) under the 1999
Stock Option and Incentive Plan, or the issuance of shares in connection with
acquisitions of businesses, provided that future acquisition agreements contain
lock-up arrangements prohibiting dispositions of Common Stock prior to the
expiration of the aforementioned 180 day period.
(h) The Company will use its best efforts to arrange for the quotation of,
subject to notice of issuance, the Shares on the Nasdaq National Market.
(i) The Company has caused each officer and director, certain stockholders
and certain persons who will become stockholders of the Company upon the
consummation of the Acquisitions to furnish to you, on or prior to the date of
this Agreement, a letter or letters, in form and substance satisfactory to the
Underwriters, pursuant to which each such person has agreed not to offer, sell,
sell short, pledge or otherwise dispose of any shares of Common Stock of the
Company or other capital stock of the Company, or any other securities
convertible, exchangeable or exercisable for Common Shares or derivative of
Common Shares owned by such person (or as to which such person has the right to
direct the disposition of) or request the registration for the offer or sale of
any of the foregoing, for a period of 180 days after the date of this Agreement,
directly or indirectly, except with the prior written consent of Deutsche Bank
Securities Inc. ("Lockup Agreements") and except for shares of Common Stock
purchased on the open market after the date of this Agreement.
(j) The Company will (i) use its reasonable best efforts to close the
Acquisitions in accordance with the terms of the Acquisition Agreements and (ii)
will promptly notify the Representatives of the occurrence of any event which
may result in the non-consummation of or material change in the terms of any of
the Acquisitions on the Closing Date.
(k) The Company shall apply the net proceeds of its sale of the Shares as
set forth in the Prospectus and shall file such reports with the Commission with
respect to the sale of the Shares and the application of the proceeds therefrom
as may be required in accordance with Rule 463 under the Act.
(l) The Company shall not invest or otherwise use the proceeds received by
the Company from its sale of the Shares in such a manner as would require the
Company to register as an investment company under the 1940 Act.
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<PAGE>
(m) The Company will maintain a transfer agent and, if necessary under the
jurisdiction of incorporation of the Company, a registrar for the Common Stock.
(n) The Company will not take, directly or indirectly, any action designed
to cause or result in, or that has constituted or might reasonably be expected
to constitute, the stabilization or manipulation of the price of any securities
of the Company.
5. Costs and Expenses.
------------------
The Company will pay all costs, expenses and fees incident to the
performance of its obligations under this Agreement and in connection with the
Acquisitions, including, without limiting the generality of the foregoing, the
following: accounting fees of the Company; the fees and disbursements of
counsel for the Company; the cost of printing and delivering to, or as requested
by, the Underwriters copies of the Registration Statement, Preliminary
Prospectuses, the Prospectus, this Agreement, the Underwriters' Invitation
Letter; the filing fees of the Commission; the filing fee of the NASD; and the
Listing Fee of the Nasdaq Stock Market. The Company shall not, however, be
required to pay for any of the Underwriter's expenses (other than the NASD fee)
except that, if this Agreement shall not be consummated because the conditions
in Section 6 hereof are not satisfied, or because this Agreement is terminated
by the Representatives pursuant to Section 11(b)(i) or 11(b)(vi) hereof, or by
reason of any failure, refusal or inability on the part of the Company to
perform any undertaking or satisfy any condition of this Agreement or to comply
with any of the terms hereof on its part to be performed, unless such failure to
satisfy said condition or to comply with said terms is due to the default or
omission of any Underwriter, then the Company shall reimburse the several
Underwriters for reasonable out-of-pocket expenses, including fees and
disbursements of counsel, reasonably incurred in connection with investigating,
marketing and proposing to market the Shares or in contemplation of performing
their obligations hereunder; but the Company shall not in any event be liable to
any of the several Underwriters for damages on account of loss of anticipated
profits from the sale by them of the Shares.
6. Conditions of Obligations of the Underwriters.
---------------------------------------------
The several obligations of the Underwriters to purchase the Firm Shares on
the Closing Date and the Option Shares, if any, on the Option Closing Date are
subject to the accuracy, as of the Closing Date or the Option Closing Date, as
the case may be, of the representations and warranties of the Company contained
herein, and to the performance by the Company of its covenants and obligations
hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective amendments thereto
shall have become effective and any and all filings required by Rule 424 and
Rule 430A of the Rules and Regulations shall have been made, and any request of
the Commission for additional information (to be included in the Registration
Statement or otherwise) shall have been disclosed to the Representatives and
complied with to their reasonable satisfaction. No stop order suspending the
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effectiveness of the Registration Statement, as amended from time to time, shall
have been issued and no proceedings for that purpose shall have been taken or,
to the knowledge of the Company, shall be contemplated by the Commission and no
injunction, restraining order, or order of any nature by a Federal or state
court of competent jurisdiction shall have been issued as of the Closing Date
which would prevent the issuance of the Shares.
(b) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Hogan & Hartson L.L.P.,
counsel for the Company, dated the Closing Date or the Option Closing Date, as
the case may be, addressed to the Underwriters (and stating that it may be
relied upon by counsel to the Underwriters) to the effect that:
(i) The Company has been duly incorporated and is validly existing and in
good standing as of the date of the certificate specified in such opinion under
the laws of the State of Delaware. The Company has corporate power and
corporate authority under its Certificate of Incorporation and the Delaware
General Corporation Law ("DGCL") to own, lease and operate its properties and
conduct its business as described in the Registration Statement; the Company is
duly qualified to transact business as a foreign corporation in the States of
New York and Virginia, as of the dates of the certificates specified in such
opinion; and, to such counsel's knowledge, upon consummation of the
Acquisitions, the outstanding shares of capital stock of each of the Acquired
Companies will be owned free and clear of all liens, encumbrances and equities
and claims, and no options, warrants or other rights to purchase, agreements or
other obligations to issue or other rights to convert any obligations into any
shares of capital stock of the Acquired Companies will be outstanding except as
described in the Prospectus
(ii) The authorized, issued and outstanding capital stock of the Company,
as of June 30, 1999 was set forth under the caption "Capitalization" in the
Prospectus and except as set forth in the Prospectus, no change there to has
occurred since that date; the outstanding shares of the Company's Common Stock
have been duly authorized and assuming the receipt of consideration therefor as
provided in resolutions of the Company's Sole Director authorizing issuance
thereof, are validly issued, fully paid and non-assessable; all of the Shares
conform in all material respects to the description thereof set forth in the
Prospectus; the certificates evidencing the Shares, assuming they are in the
form filed with the Commission, comply with the requirements of Section 158 of
the DGCL; when issued in accordance with the terms of this Agreement the Shares,
will be duly authorized, validly issued, fully paid and non-assessable when
issued and paid for as contemplated by this Agreement; and no holder of
outstanding shares of Common Stock has any statutory preemptive right under the
DGCL, the certificate of incorporation or bylaws of the Company, or to the
knowledge of such counsel, any contractual right to subscribe for any of the
Shares.
(iii) Except as described in or contemplated by the Prospectus, to the
knowledge of such counsel, the Company has not issued any outstanding securities
convertible into or exchangeable for, or evidencing the right to purchase or
subscribe for any shares of capital stock of the
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Company, outstanding or authorized options, warrants or other rights to purchase
or subscribe for any shares of its capital stock or any securities convertible
or exchangeable into or evidencing the right to purchase or subscribe for any
shares of such stock; and except as described in the Prospectus, to the
knowledge of such counsel, the Company has not granted to any holder of any
securities of the Company or any other person has the right, contractual or
otherwise, which has not been satisfied or effectively waived, to cause the
Company to sell or otherwise issue to them, or to permit them to underwrite the
sale of, any of the Shares or the right to have any shares of Common Stock or
other securities of the Company included in the Registration Statement or the
right, as a result of the filing of the Registration Statement, to require
registration under the Act of any shares of Common Stock or other securities of
the Company.
(iv) The Registration Statement has become effective under the Act and, to
the best knowledge of such counsel, no stop order proceedings with respect
thereto have been instituted or are pending or threatened under the Act.
(v) The Registration Statement, the Prospectus comply as to form in all
material respects with the requirements of the Act and the applicable rules and
regulations thereunder (except that such counsel need express no opinion as to
the financial statements and related schedules therein).
(vi) The statements in the Prospectus under the captions "Risk Factors -
We may be deemed an investment company, which would prohibit us from engaging in
business and could result in criminal and civil actions against us." "Business
Government Regulation," "Management Employment Agreements," "- 1999 Stock
Option and Incentive Plan," "Description of Capital Stock" and "Shares Available
for Future Sale," insofar as such statements constitute a summary of documents
referred to therein or matters of law, fairly summarize in all material respects
the information called for with respect to such documents and matters.
(vii) Each of the Acquisition Agreements has been duly authorized,
executed and delivered by the Company. Assuming due authorization, execution
and delivery by the other parties thereto, each Acquisition Agreement
constitutes a valid and binding obligation of the Company, except to the extent
that enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights generally and by general principles of equity
regardless of whether enforceability is considered in a proceeding in equity or
at law.
(viii) The execution, delivery and performance of this Agreement do not
and will not (a) violate the Certificate of Incorporation or By-Laws of the
Company, or (ii) conflict or result in a breach of any of the terms or
provisions of, or constitute a default under, any Acquisition Agreement or any
agreement or contract filed as an exhibit to the Registration Statement.
(ix) This Agreement has been duly authorized, executed and delivered by
the Company.
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<PAGE>
(x) No approval, consent, order, authorization, designation, declaration
or filing by or with any regulatory, administrative or other governmental body
is necessary in connection with the execution and delivery of this Agreement and
the consummation of the transactions herein contemplated (other than as may be
required by the NASD and state securities or "blue sky" laws, as to which such
counsel need express no opinion) except such as have been obtained or made,
specifying the same.
(xi) The Company is not, and will not become as a result of the
consummation of the transactions contemplated by this Agreement and the
Registration Statement, including the use of proceeds as described therein,
required to register as an investment company under the 1940 Act.
In rendering such opinion Hogan & Hartson L.L.P. may rely as to matters
governed by the laws of states other than Delaware or Federal laws and on local
counsel in such jurisdiction and may rely on counsel (such counsel having been
deemed acceptable by the Underwriters) to one or more of the Acquired Companies
with respect to matters relating to the Acquired Companies, provided that in
each case Hogan & Hartson L.L.P. shall state that they believe that they and the
Underwriters are justified in relying on such other counsel and the opinion of
such other counsel shall confirm the entitlement of Hogan & Hartson L.L.P. and
the Underwriters to rely thereon. In addition to the matters set forth above,
such opinion shall also include a statement to the effect that no facts have
come to the attention of such counsel which causes them to believe that (i) the
Registration Statement, at the time it became effective under the Act (but after
giving effect to any modifications incorporated therein pursuant to Rule 430A
under the Act) and as of the Closing Date or the Option Closing Date, as the
case may be, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus, or any supplement
thereto, on the date it was filed pursuant to the Rules and Regulations and as
of the Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements, in the light of the circumstances
under which they were made, not misleading or (ii) there are any legal or
governmental proceedings pending or threatened against the Company or any of the
Acquired Companies that are required to be disclosed in the Registration
Statement or the Prospectus, other than those disclosed therein, or (iii) there
are any contracts or documents of a character required to be disclosed in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or referred to therein or so
filed; provided that in making the foregoing statements (which shall not
constitute an opinion) such counsel need not express any views as to financial
statements and supporting schedules and other financial and statistical
information and data included in or omitted from the Registration Statement or
the Prospectus. With respect to such statement, Hogan & Hartson L.L.P. may
state that their belief is based upon the procedures set forth therein, but is
without independent check and verification.
(c) The Representatives shall have received from on the Closing Date the
opinion of counsel for each of the Acquired Companies dated the Closing Date,
addressed to the
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Underwriters (and stating that it may be relied upon by counsel to the
Underwriters) in substantially the form attached hereto as Exhibit B.
(d) The Representatives shall have received Piper & Marbury L.L.P.,
counsel for the Underwriters, an opinion dated the Closing Date or the Option
Closing Date, as the case may be, substantially to the effect specified in
subparagraphs (ii), (iii), (iv) and (ix) of Paragraph (b) of this Section 6, and
that the Company is a duly organized and validly existing corporation under the
laws of the State of Delaware. In rendering such opinion, Piper & Marbury
L.L.P. may rely as to all matters governed other than by the laws of the State
of Delaware or Federal laws on the opinion of counsel referred to in Paragraph
(b) of this Section 6. In addition to the matters set forth above, such opinion
shall also include a statement to the effect that nothing has come to the
attention of such counsel which leads them to believe that (i) the Registration
Statement, or any amendment thereto, as of the time it became effective under
the Act (but after giving effect to any modifications incorporated therein
pursuant to Rule 430A under the Act) as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (ii) the
Prospectus, or any supplement thereto, on the date it was filed pursuant to the
Rules and Regulations and as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or omitted to
state a material fact, necessary in order to make the statements, in the light
of the circumstances under which they are made, not misleading (except that such
counsel need express no view as to financial statements, schedules and
statistical information therein). With respect to such statement, Piper &
Marbury L.L.P. may state that their belief is based upon the procedures set
forth therein, but is without independent check and verification.
(e) You shall have received, on each of the dates hereof, the Closing Date
and the Option Closing Date, as the case may be, a letter dated the date hereof,
the Closing Date or the Option Closing Date, as the case may be, in form and
substance satisfactory to you, of PricewaterhouseCoopers LLP confirming that
they are independent public accountants within the meaning of the Act and the
applicable published Rules and Regulations thereunder and stating that in their
opinion the financial statements and schedules of the Company and each of the
other financial statements examined by them and included in the Registration
Statement comply in form in all material respects with the applicable accounting
requirements of the Act and the related published Rules and Regulations; and
containing such other statements and information as is ordinarily included in
accountants' "comfort letters" to Underwriters with respect to the financial
statements and certain financial and statistical information contained in the
Registration Statement and Prospectus.
(f) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of the
Chief Executive Officer and the Chief Financial Officer of the Company to the
effect that, as of the Closing Date or the Option Closing Date, as the case may
be, each of them severally represents in his capacity as an officer of the
Company as follows:
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(i) The Registration Statement has become effective under the Act and
no stop order suspending the effectiveness of the Registration Statement has
been issued, and no proceedings for such purpose have been taken or are, to his
knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company contained in
Section 1 hereof are true and correct as of the Closing Date or the Option
Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules 424 or
430A under the Act have been made;
(iv) He has carefully examined the Registration Statement and the
Prospectus and, in his or her opinion, as of the effective date of the
Registration Statement, the statements contained in the Registration Statement
were true and correct, and such Registration Statement and Prospectus did not
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, and since the effective
date of the Registration Statement, no event has occurred which should have been
set forth in a supplement to or an amendment of the Prospectus which has not
been so set forth in such supplement or amendment; and
(v) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, there has not been any material
adverse change or any development involving a prospective material adverse
change in or affecting the financial condition, of the Company or the Acquired
Companies or the earnings, business, management, properties, assets, rights,
operations, financial condition or prospects of the Company and the Acquired
Companies, whether or not arising in the ordinary course of business.
(g) The Company shall have furnished to the Representatives such further
certificates and documents confirming the representations and warranties,
covenants and conditions contained herein and related matters as the
Representatives may reasonably have requested.
(h) The Firm Shares and Option Shares, if any, shall have been approved
for designation upon notice of issuance on the Nasdaq Stock Market.
(i) The Lockup Agreements described in Section 4(i) shall be in full force
and effect.
(j) Each of the Acquisitions shall have been completed upon terms which
are in all material respects consistent with the terms set forth in the
Prospectus simultaneously with the closing of the purchase of the Firm Shares by
the Underwriters.
The opinions and certificates mentioned in this Agreement shall be deemed
to be in compliance with the provisions hereof only if they are in all material
respects satisfactory to the Representatives and to Piper & Marbury L.L.P.,
counsel for the Underwriters.
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<PAGE>
If any of the conditions hereinabove provided for in this Section 6 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Representatives by notifying the Company of such termination in writing or by
telegram at or prior to the Closing Date or the Option Closing Date, as the case
may be.
In such event, the Company and the Underwriters shall not be under any
obligation to each other (except to the extent provided in Sections 5 and 8
hereof).
7. Conditions of the Obligations of the Company.
--------------------------------------------
The obligations of the Company to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing Date,
as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. 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 the Act,
against any losses, claims, damages or liabilities to which such Underwriter or
any such controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading in light of the circumstances in which
they were made; and will reimburse each Underwriter and each such controlling
person upon demand for any legal or other expenses reasonably incurred by such
Underwriter or such controlling person in connection with investigating or
defending any such loss, claim, damage or liability, action or proceeding or in
responding to a subpoena or governmental inquiry related to the offering of the
Shares, whether or not such Underwriter or controlling person is a party to any
action or proceeding; provided, however, that the Company will not be liable in
any such case (x) to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement,
or omission or alleged omission made in the Registration Statement, any
Preliminary Prospectus, the Prospectus, or such amendment or supplement, in
reliance upon and in conformity with written information furnished to the
Company by or through the Representatives specifically for use in the
preparation thereof, or (y) with respect to any Preliminary Prospectus to the
extent that any such loss, claim, damage or liability (or any actions or
proceedings in respect thereof) results from such Underwriter's sale of Shares
to a person as to whom it shall be established that there was not sent or given,
at or prior to the written confirmation of such sale, a copy of the Prospectus
as then amended or supplemented in
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any case where such delivery is required by the Act if the Company has
previously furnished copies thereof to such Underwriter and the loss, claim,
damage or liability of such Underwriter results from an untrue statement or
omission of a material fact contained in the Preliminary Prospectus which was
corrected in the Prospectus or in the Prospectus as then amended or
supplemented. This indemnity agreement will be in addition to any liability
which the Company may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of the Act, against any losses, claims, damages or
liabilities to which the Company or any such director, officer, or controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, mages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or (ii) the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were made; and
will reimburse upon demand any legal or other expenses reasonably incurred by
the Company or any such director, officer, or controlling person in connection
with investigating or defending any such loss, claim, damage, liability, action
or proceeding or in responding to a subpoena or governmental inquiry related to
the offering of the Shares, whether or not the Company or any such director,
officer or controlling person is a party to any action or proceeding; provided,
however, that each Underwriter will be liable in each case to the extent, but
only to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission has been made in the Registration Statement, any
Preliminary Prospectus, the Prospectus or such amendment or supplement, in
reliance upon and in conformity with written information furnished to the
Company by or through the Representatives specifically for use in the
preparation thereof. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
(c) In case any proceeding (including any governmental investigation) is
instituted involving any person in respect of which indemnity may be sought
pursuant to this Section 8, such person (the "indemnified party") shall promptly
notify each person against whom such indemnity may be sought (the "indemnifying
party") in writing. No indemnification provided for in Section 8(a) or (b)
shall be available to any party who shall fail to give notice as provided in
this Section 8(c) if the party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was materially prejudiced
by the failure to give such notice, but the failure to give such notice shall
not relieve the indemnifying party or parties from any liability which it or
they may have to the indemnified party for contribution or otherwise than on
account of the provisions of Section 8(a) or (b). In case any such proceeding
is brought against any indemnified party and it notifies the indemnifying party
of the commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it
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<PAGE>
may elect, by written notice delivered to the indemnified party promptly after
receiving the aforesaid notice, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party and shall pay as incurred the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own counsel
at its own expense. Notwithstanding the foregoing, the indemnifying party shall
pay as incurred (or within 30 days of presentation) the fees and expenses of the
counsel retained by the indemnified party in the event (i) the indemnifying
party and the indemnified party shall have mutually agreed to the retention of
such counsel, (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified party
and representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them or (iii) the
indemnifying party shall have failed to assume the defense and employ counsel
acceptable to the indemnified party within a reasonable period of time after
notice of commencement of the action. It is understood that the indemnifying
party shall not, in connection with any proceeding or related proceedings in the
same jurisdiction, be liable for the reasonable fees and expenses of more than
one separate firm for all such indemnified parties. Such firm shall be
designated in writing by you in the case of parties indemnified pursuant to
Section 8(a) and by the Company in the case of parties indemnified pursuant to
Section 8(b). The indemnifying party shall not be liable for any settlement of
any proceeding effected without its written consent but if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. In addition, the
indemnifying party will not, without the prior written consent of the
indemnified party, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified party is
an actual or potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.
(d) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under Section 8(a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) referred to therein, then each indemnifying
party shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law then each indemnifying party shall contribute to such amount paid
or payable by such indemnified party in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company on the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, (or actions or proceedings in respect thereof), as well as any
other relevant
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equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault shall be determined by
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 on the one hand or the
Underwriters on the other 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 contributions pursuant to this Section 8(d) 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 in this Section 8(d). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) referred
to above in this Section 8(d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), (i) no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts and commissions
applicable to the Shares purchased by such Underwriter 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. The Underwriters' obligations in this Section
8(d) to contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
reimbursement, indemnification and contribution agreements contained in this
Agreement and the representations, warranties and covenants in this Agreement
shall remain operative in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
its directors or officers and (c) delivery of and payment for the Shares under
this Agreement. A successor to any Underwriter, or to the Company, its
directors or
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officers, or any person controlling the Company, shall be entitled to the
benefits of the indemnity, contribution and reimbursement agreements contained
in this Section 8.
9. Default by Underwriters.
-----------------------
If on the Closing Date or the Option Closing Date, as the case may be, any
Underwriter shall fail to purchase and pay for the portion of the Shares which
such Underwriter has agreed to purchase and pay for on such date (otherwise than
by reason of any default on the part of the Company), you, as Representatives of
the Underwriters, shall use your reasonable efforts to procure within 36 hours
thereafter one or more of the other Underwriters, or any others, to purchase
from the Company such amounts as may be agreed upon and upon the terms set forth
herein, the Firm Shares or Option Shares, as the case may be, which the
defaulting Underwriter or Underwriters failed to purchase. If during such 36
hours you, as such Representatives, shall not have procured such other
Underwriters, or any others, to purchase the Firm Shares or Option Shares, as
the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of shares with respect to which
such default shall occur does not exceed 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Shares or Option Shares, as the case may be,
which such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of shares of Firm Shares or Option Shares, as the case may
be, with respect to which such default shall occur exceeds 10% of the Firm
Shares or Option Shares, as the case may be, covered hereby, the Company or you
as the Representatives of the Underwriters will have the right, by written
notice given within the next 36-hour period to the parties to this Agreement, to
terminate this Agreement without liability on the part of the non-defaulting
Underwriters or of the Company except to the extent provided in Section 8
hereof. In the event of a default by any Underwriter or Underwriters, as set
forth in this Section 9, the Closing Date or Option Closing Date, as the case
may be, may be postponed for such period, not exceeding seven days, as you, as
Representatives, may determine in order that the required changes in the
Registration Statement or in the Prospectus or in any other documents or
arrangements may be effected. The term "Underwriter" includes any person
substituted for a defaulting Underwriter. Any action taken under this Section 9
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
10. Notices.
-------
All communications hereunder shall be in writing and, except as otherwise
provided herein, will be mailed, delivered, telecopied or telegraphed and
confirmed as follows: if to the Underwriters, to Deutsche Bank Securities Inc.,
1 South Street, Baltimore, Maryland 21202, Attention: Scott Wieler; with a copy
to Deutsche Bank Securities Inc., 1 South Street, Baltimore, Maryland 21202.
Attention: General Counsel; if to the Company, to E2Enet, Inc., 800 Connecticut
Avenue, Suite 1111, Washington, DC 20006, Attention: Robert J. Smith; with a
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<PAGE>
copy to Hogan & Hartson L.L.P., 555 Thirteenth Street, N.W., Washington, D.C.
20004, Attention Steven A. Museles.
11. Termination.
-----------
This Agreement may be terminated by you by notice to the Company as
follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on
the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or any
development involving a prospective material adverse change in or affecting the
earnings, business, management, properties, assets, rights, operations,
financial condition or prospects of the Company, whether or not arising in the
ordinary course of business; (ii) any outbreak or escalation of hostilities or
declaration of war or national emergency or other national or international
calamity or crisis or change in economic or political conditions if the effect
of such outbreak, escalation, declaration, emergency, calamity, crisis or change
on the financial markets of the United States would, in your reasonable
judgment, make it impracticable to market the Shares or to enforce contracts for
the sale of the Shares; (iii) trading generally shall have been suspended or
materially limited on or by, as the case may be, any of the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market; (iv) the
enactment, publication, decree or other promulgation of any statute, regulation,
rule or order of any court or other governmental authority which in your opinion
materially and adversely affects or may materially and adversely affect the
business or operations of the Company; (v) declaration of a banking moratorium
by United States or New York State authorities, (vi) the suspension of trading
of the Company's common stock on the Nasdaq Stock Market or (vii) the taking of
any action by any governmental body or agency in respect of its monetary or
fiscal affairs which in your reasonable opinion has a material adverse effect on
the securities markets in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. Successors.
----------
This Agreement has been and is made solely for the benefit of the
Underwriters and the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and controlling
persons referred to herein, and no other person will have any right or
obligation hereunder. No purchaser of any of the Shares from any Underwriter
shall be deemed a successor or assign merely because of such purchase.
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<PAGE>
13. Information Provided by Underwriters.
------------------------------------
The Company and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company for
inclusion in any Prospectus or the Registration Statement consists of the
information set forth in the last paragraph on the front cover page (insofar as
such information relates to the Underwriters), legends required by Item 502(d)
of Regulation S-K under the Act and the information under the caption
"Underwriting" in the Prospectus.
14. Miscellaneous.
-------------
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Delaware.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
Very truly yours,
E2ENET, INC.
By ________________________________
Steven Quamme
Senior Vice President and Chief Financial
Officer
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<PAGE>
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
DEUTSCHE BANK SECURITIES, INC.
BANCBOSTON ROBERTSON STEPHENS
FRIEDMAN BILLINGS RAMSEY & CO. INC.
STEPHENS INC.
As Representatives of the several
Underwriters listed on Schedule I
By: Deutsche Bank Securities Inc.
By: __________________________________
Authorized Officer
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<PAGE>
Exhibit 3.1
THIRD AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
E2ENET, INC.
(Originally incorporated February 9, 1999)
The following Third Amended and Restated Certificate of Incorporation
restates and amends the Certificate of Incorporation, as heretofore in effect,
of E2Enet, Inc. herein (the "Corporation"). In accordance with Section 245 of
the General Corporation Law of the State of Delaware (the "Delaware General
Corporation Law"), this Third Amended and Restated Certificate of Incorporation
was proposed by the Board of Directors of the Corporation (the "Board") and
adopted by stockholders of the Corporation in the manner and by the vote
described by Section 242 of the Delaware General Corporation Law.
ARTICLE 1. NAME
The name of the Corporation is E2Enet, Inc.
ARTICLE 2. REGISTERED OFFICE AND AGENT
The registered office of the Corporation shall be located at 1209
Orange Street, in the City of Wilmington, County of New Castle, in the State of
Delaware. The registered agent of the Corporation at such address shall be the
Corporation Trust Company.
ARTICLE 3. PURPOSE AND POWERS
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Delaware General
Corporation Law. The Corporation shall have all power necessary or convenient
to the conduct, promotion or attainment of such acts and activities.
<PAGE>
ARTICLE 4. CAPITAL STOCK
4.1. Authorized Shares
The total number of shares of all classes of stock that the
Corporation shall have the authority to issue is 110,000,000, of which
100,000,000 of such shares shall be Common Stock having a par value of $.01 per
share ("Common Stock"), and 10,000,000 of such shares shall be Preferred Stock,
having a par value of $.01 per share ("Preferred Stock").
4.2. Common Stock
4.2.1. Relative Rights
The Common Stock shall be subject to all of the rights, privileges,
preferences and priorities of the Preferred Stock as set forth in the
certificate of designations filed to establish the respective series of
Preferred Stock. Each share of Common Stock shall have the same relative rights
as and be identical in all respects to all the other shares of Common Stock.
4.2.2. Dividends
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of shares of any class of stock having preference over
the Common Stock as to the payment of dividends, the full amount of dividends
and of sinking fund or retirement payments, if any, to which such holders are
respectively entitled in preference to the Common Stock, then dividends may be
paid on the Common Stock and on any class or series of stock entitled to
participate therewith as to dividends, out of any assets legally available for
the payment of dividends thereon, but only when and as declared by the Board of
Directors of the Corporation.
4.2.3. Dissolution, Liquidation, Winding Up
In the event of any dissolution, liquidation, or winding up of the
Corporation, whether voluntary or involuntary, the holders of the Common Stock,
and holders of any class or series of stock entitled to participate therewith,
in whole or in part, as to the distribution of assets in such event, shall
become entitled to participate in the distribution of any assets of the
Corporation remaining after the Corporation shall have paid, or provided for
payment of, all debts and liabilities of the Corporation and after the
Corporation shall have paid, or set aside for payment, to the holders of any
class of stock having preference over the Common Stock in the event of
dissolution, liquidation or winding up the full preferential amounts (if any) to
which they are entitled.
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<PAGE>
4.2.4. Voting Rights
Each holder of shares of Common Stock shall be entitled to attend all
special and annual meetings of the stockholders of the Corporation and, share
for share and without regard to class, together with the holders of all other
classes of stock entitled to attend such meetings and to vote (except any class
or series of stock having special voting rights), to cast one vote for each
outstanding share of Common Stock so held upon any matter or thing (including,
without limitation, the election of one or more directors) properly considered
and acted upon by the stockholders.
4.3. Preferred Stock
The Board is authorized, subject to limitations prescribed by the
Delaware General Corporation Law and the provisions of this Third Amended and
Restated Certificate of Incorporation, to provide, by resolution or resolutions
from time to time and by filing a certificate of designations pursuant to the
Delaware General Corporation Law, for the issuance of the shares of Preferred
Stock in series, to establish from time to time the number of shares to be
included in each such series, to fix the powers, designations, preferences and
relative, participating, optional or other special rights of the shares of each
such series and to fix the qualifications, limitations or restrictions thereof.
4.4. Special Meetings
Special meetings of the stockholders, for any purpose or purposes,
unless otherwise prescribed by statute, may be called (a) by the Board on its
own behalf or one or more officers of the Corporation as provided in the bylaws
or (b) by stockholders of the Corporation upon the written request of the
holders of at least a majority of the securities of the Corporation outstanding
and entitled to vote generally in the election of directors.
4.5. Action Without a Meeting
Any action required or permitted to be taken at a stockholders'
meeting may be taken without a meeting, without prior notice and without a vote,
if the action is taken by persons who would be entitled to vote at a meeting and
who hold shares having voting power equal to not less than the minimum number of
votes of each class or series that would be necessary to authorize or take the
action at a meeting at which all shares of each class or series entitled to vote
were present and voted. The action must be evidenced by one or more written
consents describing the action taken, signed by the stockholders entitled to
take action without a meeting, and delivered to the Corporation in the manner
prescribed by the Delaware General Corporation Law for inclusion in the minute
book. No
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<PAGE>
consent shall be effective to take the corporate action specified unless the
number of consents required to take such action are delivered to the Corporation
within 60 days of the delivery of the earliest-dated consent. Written notice of
the action taken shall be given in accordance with the Delaware General
Corporation Law to all stockholders who do not participate in taking the action
who would have been entitled to notice if such action had been taken at a
meeting having a record date on the date that written consents signed by a
sufficient number of holders to take the action were delivered to the
Corporation.
ARTICLE 5. BOARD OF DIRECTORS
5.1. Number; Election
The Board of Directors of the Corporation shall consist of between
one and fifteen directors. The number of directors shall initially be one, which
number shall otherwise be fixed from time to time by the affirmative vote of a
majority of the total number of directors which the Corporation would have,
prior to any increase or decrease, if there were no vacancies. The term of the
directors elected at an annual meeting of stockholders shall expire at the
annual meeting of the stockholders held in the third year following the year of
the directors' election. Unless and except to the extent that the bylaws of the
Corporation shall otherwise require, the election of directors of the
Corporation need not be by written ballot.
5.2. Management of Business and Affairs of the Corporation
The business and affairs of the Corporation shall be managed by or
under the direction of the Board. Except as otherwise provided in this Third
Amended and Restated Certificate of Incorporation, each director of the
Corporation shall be entitled to one vote per director on all matters voted or
acted upon by the Board.
5.3. Vacancies; Resignation; Removal
Vacancies and newly created directorships resulting from any increase
in the number of directors on the Board may be filled only by the affirmative
vote of a majority of the directors then in office, even if less than a quorum
exists, or by a sole remaining director. Whenever the holders of any class or
classes of stock or series thereof are entitled to elect one or more directors
by the provisions of this Third Amended and Restated Certificate of
Incorporation, vacancies and newly created directorships of such class or
classes or series may be filled by the affirmative vote of a majority of the
directors elected by such class or classes or series thereof then in office, or
by a sole remaining director so elected. Each director so chosen shall hold
office until the next annual meeting of stockholders,
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<PAGE>
and until such director's successor is elected and qualified, or until the
director's earlier death, resignation or removal.
A director may resign at any time upon written notice to the
Corporation, and the resignation shall take effect at the time it specifies,
without any need for acceptance by the Board. In the event that one or more
directors resigns from the Board, effective at a future date, a majority of the
directors then in office, including those who have so resigned, shall have power
to fill such vacancy or vacancies, with the vote thereon to take effect when
such resignation or resignations becomes effective. From and following the date
on which the Registration Statement on Form S-1 relating to the Corporation's
initial public offering is declared effective by the Securities and Exchange
Commission, Directors may only be removed for cause upon the affirmative vote of
at least a majority of the entire voting power of all the then-outstanding
shares of stock of the Corporation entitled to vote generally in the election of
directors, voting together as a single class.
5.4. Limitation of Liability
No director of the Corporation shall be liable to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that this provision shall not eliminate or limit the
liability of a director (a) for any breach of the director's duty of loyalty to
the Corporation or its stockholders, (b) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (c) under
Section 174 of the Delaware General Corporation Law or (d) for any transaction
from which the director derived an improper personal benefit. Any repeal or
modification of this Section 5.4 shall be prospective only and shall not
adversely affect any right or protection of, or any limitation of the liability
of, a director of the Corporation existing at, or arising out of facts or
incidents occurring prior to, the effective date of such repeal or modification.
ARTICLE 6. COMPROMISE OR ARRANGEMENTS
Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of Section 291 of Title 8 of the Delaware Code or on the application
of trustees in dissolution or of any receiver or receivers appointed for the
Corporation under the provisions of Section 279 of Title 8 of the Delaware Code
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be, to
be summoned in such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as
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<PAGE>
the case may be, agree to any compromise or arrangement and to any
reorganization of the Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of the Corporation, as the case may be,
and also on the Corporation.
ARTICLE 7. AMENDMENT OF BYLAWS
In furtherance and not in limitation of the powers conferred by the
Delaware General Corporation Law, the Board of Directors of the Corporation is
expressly authorized and empowered to adopt, amend and repeal the bylaws of the
Corporation. The bylaws of the Corporation may be adopted, amended or repealed
by the stockholders of the Corporation only upon the affirmative vote of at
least a majority of the entire voting power of all the then-outstanding shares
of stock of the Corporation entitled to vote generally in the election of
directors, voting together as a single class.
ARTICLE 8. RESERVATION OF RIGHT TO AMEND CERTIFICATE OF INCORPORATION
The Corporation reserves the right at any time, and from time to
time, to amend, alter, change, or repeal any provision contained in this Third
Amended and Restated Certificate of Incorporation, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted, in the manner now or hereafter prescribed by law; and all
rights, preferences, and privileges of any nature conferred upon stockholders,
directors or any other persons by and pursuant to this Third Amended and
Restated Certificate of Incorporation in its present form or as hereafter
amended are granted subject to the rights reserved in this Article 8.
* * * * *
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<PAGE>
IN WITNESS WHEREOF, the undersigned, being the Senior Vice President,
CFO and sole Director of the Corporation, hereby certifies that the facts
hereinabove stated are truly set forth, and accordingly executes this Third
Amended and Restated Certificate of Incorporation this ____ day of September
1999.
--------------------------------
Steven J. Quamme
Senior Vice President,
CFO and sole Director
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<PAGE>
Exhibit 3.2
E2ENET, INC.
THIRD AMENDED AND RESTATED BYLAWS
Adopted
as of
September , 1999
<PAGE>
TABLE OF CONTENTS
Page
----
1. OFFICES
1.1 Registered Office.................................. 1
1.2 Other Offices...................................... 1
2. MEETINGS OF STOCKHOLDERS............................... 1
2.1 Place of Meetings.................................. 1
2.2 Annual Meetings.................................... 1
2.3 Special Meetings................................... 3
2.4 Notice of Meetings................................. 3
2.5 Waivers of Notice.................................. 4
2.6 List of Stockholders............................... 4
2.7 Quorum at Meetings................................. 4
2.8 Voting and Proxies................................. 5
2.9 Required Vote...................................... 5
2.10 Inspectors........................................ 5
3. DIRECTORS.............................................. 6
3.1 Powers............................................. 6
3.2 Number and Election................................ 7
3.3 Meetings........................................... 7
3.3.1 Regular Meetings............................ 7
3.3.2 Special Meetings............................ 7
3.3.3 Telephone Meetings.......................... 7
3.3.4 Action Without Meeting...................... 8
3.3.5 Waiver of Notice of Meeting................. 8
3.4 Quorum and Vote at Meetings........................ 8
3.5 Committees of Directors............................ 8
3.6 Compensation of Directors.......................... 9
4. OFFICERS............................................... 9
4.1 Positions.......................................... 9
4.2 Chairman and Vice Chairman......................... 10
4.3 Chief Executive Officer............................ 10
4.4 President.......................................... 10
4.5 Chief Operating Officer............................ 10
4.6 Chief Financial Officer............................ 11
4.7 Senior Vice President.............................. 11
4.8 Vice Presidents.................................... 11
4.9 Secretary.......................................... 11
4.10 Assistant Secretary............................... 12
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<PAGE>
4.11 Treasurer......................................... 12
4.12 Assistant Treasurer............................... 12
4.13 Term of Office.................................... 12
4.14 Compensation...................................... 12
4.15 Fidelity Bonds.................................... 13
5. CAPITAL STOCK.......................................... 13
5.1 Certificates of Stock; Uncertificated Shares....... 13
5.2 Lost Certificates.................................. 13
5.3 Record Date........................................ 14
5.3.1 Actions by Stockholders..................... 14
5.3.2 Payments.................................... 14
5.4 Stockholders of Record............................. 14
6. INDEMNIFICATION; INSURANCE............................. 15
6.1 Authorization of Indemnification................... 15
6.2 Right of Claimant to Bring Action Against
the Corporation.................................... 16
6.3 Non-exclusivity.................................... 16
6.4 Survival of Indemnification........................ 17
6.5 Insurance.......................................... 17
7. GENERAL PROVISIONS..................................... 17
7.1 Inspection of Books and Records.................... 17
7.2 Dividends.......................................... 18
7.3 Reserves........................................... 18
7.4 Execution of Instruments........................... 18
7.5 Fiscal Year........................................ 18
7.6 Seal............................................... 18
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<PAGE>
THIRD AMENDED AND RESTATED BYLAWS
OF
E2ENET, INC.
1. OFFICES
1.1 Registered Office
The registered office of the Corporation shall be in Wilmington,
Delaware, and the initial registered agent in charge thereof shall be The
Corporation Trust Company.
1.2 Other Offices
The Corporation may also have offices at such other places, both
within and without the State of Delaware, as the Board of Directors of the
Corporation (the "Board") may from time to time determine or as may be necessary
or useful in connection with the business of the Corporation.
2. MEETINGS OF STOCKHOLDERS
2.1 Place of Meetings
All meetings of the stockholders shall be held at such place as may be
fixed from time to time by the Board, the Chairman, the Chief Executive Officer
or the President.
2.2 Annual Meetings
(a) The Corporation shall hold annual meetings of stockholders,
commencing with the year 2000, on such date and at such time as shall be
designated from time to time by the Board, the Chairman, the Chief Executive
Officer or the President. At each annual meeting, the stockholders shall elect
by a plurality vote (as provided in Section 2.9 hereof) directors to succeed
those whose terms expire at the time of the annual meeting. The nomination of
persons for election to the Board and the proposal of any other business to be
transacted at an annual meeting may be made only (i) by or at the direction of
the Board or (ii) by
<PAGE>
any stockholder of record who gives notice in accordance with the procedures set
forth in paragraph (b) of this Section 2.2 and who is a stockholder of record
both on the date of giving such notice and on the record date for the
determination of stockholders entitled to vote at such annual meeting; only
persons thereby nominated shall be eligible to serve as directors and only
business thereby proposed shall be transacted at an annual meeting. The
presiding officer of the annual meeting shall determine whether a nomination or
any proposal of business complies or complied with this Section 2.2.
(b) For nominations and other business to be brought properly before
an annual meeting by a stockholder pursuant to clause (ii) of paragraph (a) of
this Section 2.2, the stockholder must deliver notice to the Secretary of the
Corporation at the principal executive offices of the Corporation in accordance
with this Section 2.2(b). The notice must be received by the Secretary not less
than 60 days nor more than 90 days prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event that the
-------- -------
date of the annual meeting is advanced by more than 30 days or delayed by more
than 60 days from such anniversary date, the stockholder must so deliver the
notice not earlier than the 90th day prior to such annual meeting and not later
than the close of business on the later of the 60th day prior to such annual
meeting or the tenth day following the day on which public announcement of the
date of such meeting is first made; provided further, however, that in the event
-------- ------- -------
that the number of directors to be elected to the Board is increased and there
is no public announcement naming all of the nominees for director or specifying
the size of the increased Board made by the Corporation at least 70 days prior
to the first anniversary of the preceding annual meeting, with respect to
nominees for any new position created by the increase, the stockholder must so
deliver the notice not later than the close of business on the tenth day
following the day on which such public announcement is first made. The
stockholder's notice must set forth: (i) as to each person whom the stockholder
proposes to nominate for election or reelection as a director, all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors pursuant to Section 14(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations thereunder (together with such person's written consent to being
named in the proxy statement as a nominee and to serving as a director if
elected), whether or not the Corporation is then subject to Section 14(a) and
such rules and regulations; (ii) as to any other business that the stockholder
proposes to transact at the meeting, a brief description of the business desired
to be brought before the meeting, the reasons for conducting the business at the
meeting and any material interest in the business of the stockholder and of the
beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to
the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made, the name and address of
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<PAGE>
the stockholder, as they appear on the Corporation's books, and of such
beneficial owner, the class and number of shares of the Corporation that are
owned beneficially and of record by such stockholder and such beneficial owner
and a representation that the stockholder intends to appear in person or by
proxy at the annual meeting to bring such business before the meeting. For
purposes of this Section 2.2 and Section 2.3 hereof, a "public announcement"
means disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable news service, in a document publicly filed with
the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of
the Exchange Act (or their successor provisions), or in a notice of meeting or
proxy statement mailed generally to the Corporation's stockholders. In giving
notice under this Section 2.2, a stockholder must also comply with state law and
the Exchange Act (and the rules and regulations thereunder). Nothing in this
Section 2.2 shall be deemed to affect the rights of a stockholder to request
inclusion of proposals in the Corporation's proxy statement pursuant to
Rule 14a-8 (or its successor provision) under the Exchange Act.
2.3 Special Meetings
Special meetings of the stockholders, for any purpose or purposes,
unless otherwise prescribed by statute, may be called only by the Board, the
Chairman, or the Chief Executive Officer or by the stockholders as set forth in
the Corporation's Certificate of Incorporation (as amended and restated from
time to time, the "Certificate of Incorporation"). Business transacted at any
special meeting of stockholders shall be limited to the purposes stated in the
notice relating to such meeting (or to the purposes for which the meeting is
called if such notice is waived or is not required as provided in the General
Corporation Law of the State of Delaware (the "Delaware General Corporation
Law") or these Bylaws). In the case of a special meeting of stockholders called
for the purpose of electing directors nominations may be made only (i) by or at
the direction of the Board or (ii) by any stockholder of record who delivers to
the Secretary, no later than the tenth day following the day on which public
announcement of the special meeting is made, a notice that complies with and is
delivered in accordance with Section 2.2(b) above.
2.4 Notice of Meetings
Written notice of any meeting of stockholders, stating the place, date
and hour of the meeting, and (if it is a special meeting) the purpose or
purposes for which the meeting is called, shall be given to each stockholder
entitled to vote at such meeting not less than ten nor more than 60 days before
the date of the meeting (except to the extent that such notice is waived or is
not required as provided in the
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<PAGE>
Delaware General Corporation Law or these Bylaws). Such notice shall be given in
accordance with, and shall be deemed effective as set forth in, Section 222 (or
any successor section) of the Delaware General Corporation Law.
2.5 Waivers of Notice
Whenever the giving of any notice is required by statute, the
Certificate of Incorporation or these Bylaws, a waiver thereof, in writing and
delivered to the Corporation, signed by the person or persons entitled to said
notice, whether before or after the event as to which such notice is required,
shall be deemed equivalent to notice. Attendance of a stockholder at a meeting
shall constitute a waiver of notice (1) of such meeting, except when the
stockholder at the beginning of the meeting objects to holding the meeting or
transacting business at the meeting, and (2) (if it is a special meeting) of
consideration of a particular matter at the meeting that is not within the
purpose or purposes described in the meeting notice, unless the stockholder
objects to considering the matter at the beginning of the meeting.
2.6 List of Stockholders
After the record date for a meeting of stockholders has been fixed, at
least ten days before such meeting, the officer or other agent of the
Corporation who has charge of the stock ledger of the Corporation shall make a
list of all stockholders entitled to vote at the meeting, arranged in
alphabetical order and showing the address of each stockholder and the number of
shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place in the city where the meeting is to be held, which
place is to be specified in the notice of the meeting, or at the place where the
meeting is to be held. Such list shall also, for the duration of the meeting,
be produced and kept open to the examination of any stockholder who is present
at the time and place of the meeting.
2.7 Quorum at Meetings
Stockholders may take action on a matter at a meeting only if a quorum
exists with respect to that matter. Except as otherwise provided by statute or
by the Certificate of Incorporation, a quorum shall exist if there are present
in person or represented by proxy the holders of a majority of the shares
entitled to vote at the meeting. Where a separate vote by a class or classes is
required, a majority of the outstanding shares of such class or classes, present
in person or represented by proxy, shall constitute a quorum entitled to take
action with respect
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to that vote on that matter. Once a share is represented for any purpose at a
meeting (other than solely to object (1) to holding the meeting or transacting
business at the meeting or (2) (if it is a special meeting) to consideration of
a particular matter at the meeting that is not within the purpose or purposes
described in the meeting notice), it is deemed present for quorum purposes for
the remainder of the meeting and for any adjournment of that meeting unless a
new record date is or must be set for the adjourned meeting. The holders of a
majority of the voting shares represented at a meeting, whether or not a quorum
is present, may adjourn such meeting from time to time.
2.8 Voting and Proxies
Unless otherwise provided in the Delaware General Corporation Law or
in the Certificate of Incorporation, and subject to the other provisions of
these Bylaws, each stockholder shall be entitled to one vote on each matter, in
person or by proxy, for each share of the Corporation's capital stock that has
voting power and that is held by such stockholder. No proxy shall be voted or
acted upon after three years from its date, unless the proxy provides for a
longer period. A duly executed appointment of proxy shall be irrevocable if the
appointment form states that it is irrevocable and if, and only as long as, it
is coupled with an interest sufficient in law to support an irrevocable power.
2.9 Required Vote
When a quorum is present at any meeting of stockholders, all matters
shall be determined, adopted and approved by the affirmative vote (which need
not be by ballot) of the holders of a majority of the shares present in person
or represented by proxy at the meeting and entitled to vote with respect to the
matter, unless the proposed action is one upon which, by express provision of
statutes or of the Certificate of Incorporation, a different vote is specified
and required, in which case such express provision shall govern and control with
respect to that vote on that matter. Where a separate vote by a class or
classes is required, the affirmative vote of the holders of a majority of the
shares of such class or classes present in person or represented by proxy at the
meeting shall be the act of such class. Notwithstanding the foregoing,
directors shall be elected by a plurality of the votes of the shares present in
person or represented by proxy at the meeting and entitled to vote on the
election of directors.
2.10 Inspectors
Prior to any meeting of stockholders, the Board, the Chief Executive
Officer, or the President shall appoint one or more inspectors to act at such
meeting
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and make a written report thereof and may designate one or more persons as
alternate inspectors to replace any inspector who fails to act. If no inspector
or alternate is able to act at the meeting of stockholders, the person presiding
at the meeting shall appoint one or more inspectors to act at the meeting. Each
inspector, before entering upon the discharge of his or her duties, shall take
and sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his or her ability. The inspectors
shall ascertain the number of shares outstanding and the voting power of each,
determine the shares represented at the meeting and the validity of proxies and
ballots, count all votes and ballots, determine and retain for a reasonable
period a record of the disposition of any challenges made to any determination
by the inspectors and certify their determination of the number of shares
represented at the meeting and their count of all votes and ballots. The
inspectors may appoint or retain other persons to assist them in the performance
of their duties. The date and time of the opening and closing of the polls for
each matter upon which the stockholders will vote at a meeting shall be
announced at the meeting. No ballot, proxy or vote, nor any revocation thereof
or change thereto, shall be accepted by the inspectors after the closing of the
polls. In determining the validity and counting of proxies and ballots, the
inspectors shall be limited to an examination of the proxies, any envelopes
submitted therewith, any information provided by a stockholder who submits a
proxy by telegram, cablegram or other electronic transmission from which it can
be determined that the proxy was authorized by the stockholder, ballots and the
regular books and records of the Corporation, and they may also consider other
reliable information for the limited purposes of reconciling proxies and ballots
submitted by or on behalf of banks, brokers, their nominees or similar persons
that represent more votes than the holder of a proxy is authorized by the record
owner to cast or more votes than the stockholder holds of record. If the
inspectors consider other reliable information for such purpose, they shall, at
the time they make their certification, specify the precise information
considered by them, including the person or persons from whom they obtained the
information, when the information was obtained, the means by which the
information was obtained and the basis for the inspectors' belief that such
information is accurate and reliable.
3. DIRECTORS
3.1 Powers
The business and affairs of the Corporation shall be managed by or
under the direction of the Board, which may exercise all such powers of the
Corporation and do all such lawful acts and things, subject to any limitation
set
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forth in the Certificate of Incorporation or as otherwise may be provided in
the Delaware General Corporation Law.
3.2 Number and Election
The number of directors constituting the entire Board shall be the
number, within the range set forth in the Certificate of Incorporation, fixed
from time to time by the Board in the manner set forth in the Certificate of
Incorporation. Directors shall be elected at an annual meeting of the
stockholders in accordance with the Certificate of Incorporation. Vacancies on
the Board shall be filled in accordance with the Certificate of Incorporation.
Once elected or chosen pursuant to the Certificate of Incorporation, a director
shall hold office until the director's successor is elected and qualified or
until the director dies, resigns or is removed; provided, however, that if the
-----------------
Board decreases the number of directors constituting the Board and designates a
particular directorship to be eliminated due to the decrease, a director in the
eliminated directorship shall cease to hold office after the next election of
such directorship, unless the director is nominated and elected to another
directorship on the Board.
3.3 Meetings
3.3.1 Regular Meetings
Regular meetings of the Board may be held without notice at such time
and at such place as shall from time to time be determined by the Board.
3.3.2 Special Meetings
Special meetings of the Board may be called by the Chairman, the Chief
Executive Officer or the President on one day's notice to each director, either
personally or by telephone, express delivery service (so that the scheduled
delivery date of the notice is at least one day in advance of the meeting),
telegram or facsimile transmission, and on five days' notice by mail (effective
upon deposit of such notice in the mail). The notice need not describe the
purpose of a special meeting.
3.3.3 Telephone Meetings
Members of the Board may participate in a meeting of the Board by any
communication by means of which all participating directors can simultaneously
hear each other during the meeting. A director participating in a meeting by
this means is deemed to be present in person at the meeting.
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3.3.4 Action Without Meeting
Any action required or permitted to be taken at any meeting of the
Board may be taken without a meeting if the action is taken by all members of
the Board. The action must be evidenced by one or more written consents
describing the action taken, signed by each director, and delivered to the
Corporation for inclusion in the minute book.
3.3.5 Waiver of Notice of Meeting
A director may waive any notice required by statute, the Certificate
of Incorporation or these Bylaws before or after the date and time stated in the
notice. Except as set forth below, the waiver must be in writing, signed by the
director entitled to the notice, and delivered to the Corporation for inclusion
in the minute book. Notwithstanding the foregoing, a director's attendance at
or participation in a meeting waives any required notice to the director of the
meeting unless the director at the beginning of the meeting objects to holding
the meeting or transacting business at the meeting and does not thereafter vote
for or assent to action taken at the meeting.
3.4 Quorum and Vote at Meetings
At all meetings of the Board, a quorum of the Board consists of one-
third (1/3) of the total number of directors comprising the full Board as
established pursuant to Section 3.2 of these Bylaws. The vote of a majority of
the directors present at any meeting at which there is a quorum shall be the act
of the Board, except as may be otherwise specifically provided by statute or by
the Certificate of Incorporation or by these Bylaws.
3.5 Committees of Directors
The Board may designate one or more committees, each committee to
consist of one or more directors. The Board may designate one or more directors
as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. If a member of a committee
is absent from any meeting, or disqualified from voting thereat, the remaining
member or members present and not disqualified from voting, whether or not such
member or members constitute a quorum, may, by unanimous vote, appoint another
member of the Board to act at the meeting in the place of such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board, shall have and may exercise all the powers and
authority of the Board in the management of the business and affairs of the
Corporation, and may authorize the
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seal of the Corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority in reference to approving or
adopting, or recommending to the stockholders, any action or matter expressly
required by the Delaware General Corporation Law to be submitted to stockholders
for approval or adopting, amending or repealing any Bylaw of the Corporation;
and unless the resolution designating the committee, these Bylaws or the
Certificate of Incorporation expressly so provides, no such committee shall have
the power or authority to declare a dividend, to authorize the issuance of stock
or to adopt a certificate of ownership and merger pursuant to Section 253 of the
Delaware General Corporation Law. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the Board. Each committee shall keep regular minutes of its meetings and report
the same to the Board, when required. Unless otherwise specified in the Board
resolution appointing the Committee, all provisions of the Delaware General
Corporation Law and these Bylaws relating to meetings, action without meetings,
notice (and waiver thereof) and quorum and voting requirements of the Board
apply, as well, to such committees and their members.
3.6 Compensation of Directors
The Board shall have the authority to fix the compensation of
directors. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.
4. OFFICERS
4.1 Positions
The officers of the Corporation shall be a Chairman, a Chief Executive
Officer, a President, a Chief Operating Officer, a Chief Financial Officer, a
Treasurer, and a Secretary, and such other officers as the Board (or an officer
authorized by the Board) from time to time may appoint, including one or more
Vice Chairmen, one or more Vice Presidents (any of whom may be designated
Executive Vice President and/or Senior Vice President), Assistant Secretaries
and Assistant Treasurers. Each such officer shall exercise such powers and
perform such duties as shall be set forth below and such other powers and duties
as from time to time may be specified by the Board or by any officer(s)
authorized by the Board to prescribe the duties of such other officers. Any
number of offices may be held by the same person, except that in no event shall
the President and the Secretary be the same person. Each of the Chairman, Chief
Executive Officer, President, Chief Operating Officer, Chief Financial Officer
and/or any Senior Vice President may
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execute bonds, mortgages, contracts and other instruments and documents under
the seal of the Corporation, if required, except where required or permitted by
law to be otherwise executed and except where the execution thereof shall be
expressly delegated by the Board to some other officer or agent of the
Corporation.
4.2 Chairman and Vice Chairman
The Chairman shall (when present and unless otherwise provided by
resolution of the Board or delegated by the Chairman) preside at all meetings of
the Board and stockholders, and shall ensure that all orders and resolutions of
the Board and stockholders are carried into effect. The Vice Chairman (if there
be one, and if there be more than one, in the order designated, or in the
absence of any designation, then in the order of their election) shall, in the
absence of the Chairman (unless otherwise provided by resolution of the Board),
preside at all meetings of the Board and stockholders.
4.3 Chief Executive Officer
The Chief Executive Officer of the Corporation shall be the Chief
Executive of the Company and shall have full responsibility and authority for
management of the operations of the Corporation, subject, however, to the
control of the Board. The Chief Executive Officer shall perform all duties
incident to the office of the Chief Executive, and shall have and perform such
other duties as may be prescribed by the stockholders, the Board or the
Executive Committee (if any).
4.4 President
The President shall have shall have full responsibility and authority
for management of the operations of the Corporation, subject, however, to the
control of the Board. The President shall perform all duties incident to the
office of the President, and shall have and perform such other duties as may be
prescribed by the stockholders, the Board or the Executive Committee (if any).
4.5 Chief Operating Officer
The Chief Operating Officer shall have the responsibilities and duties
as set forth by the Chief Executive Officer, the President, the Board or the
Executive Committee (if any).
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4.6 Chief Financial Officer
The Chief Financial Officer shall have the responsibilities and duties
as set forth by the Chief Executive Officer, the President, the Board or the
Executive Committee (if any). Such responsibilities may include all
responsibilities assumed by the Treasurer, and may also include the management
of any and all Treasurers and Assistant Treasurers.
4.7 Senior Vice President
The Senior Vice Presidents shall have the responsibilities and duties
as set forth by the Chief Executive Officer, the President, the Board or the
Executive Committee (if any). The responsibilities of any such Senior Vice
President may include all responsibilities assumed by any Vice President, and
may also include the management of any and all Vice Presidents.
4.8 Vice Presidents
In the absence of the Chief Executive Officer and the President, or in
the event of the inability or refusal to act by the Chief Executive Officer and
the President (or in the event there is more than one Vice President, the Vice
Presidents in the order designated, or in the absence of any designation, then
in the order of their election) shall perform the duties of the President, and
when so acting shall have all the powers of, and be subject to all the
restrictions upon, the President. Unless the order is otherwise designated, (i)
the Chief Operating Officer shall come in order before any Executive Vice
President, any Senior Vice President and any Vice President; (ii) the Chief
Operating Officer and any Executive Vice President shall come in order before
any Senior Vice President and any Vice President; and (iii) the Chief Operating
Officer, any Executive Vice President, and any Senior Vice President shall come
in order before any Vice President.
4.9 Secretary
The Secretary shall have responsibility for preparation of minutes of
meetings of the Board and of the stockholders and for authenticating records of
the Corporation. The Secretary shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the Board. The Secretary
or an Assistant Secretary may also attest all instruments signed by any other
officer of the Corporation.
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4.10 Assistant Secretary
The Assistant Secretary, or if there be more than one, the Assistant
Secretaries in the order determined by the Board (or if there shall have been no
such determination, then in the order of their election), shall, in the absence
of the Secretary or in the event of the Secretary's inability or refusal to act,
perform the duties and exercise the powers of the Secretary.
4.11 Treasurer
The Treasurer, if one is appointed, shall have responsibility for the
custody of the corporate funds and securities and shall see to it that full and
accurate accounts of receipts and disbursements are kept in books belonging to
the Corporation. The Treasurer, if one is appointed, shall render to the
Chairman, the Chief Executive Officer, the President, the Chief Financial
Officer and the Board, upon request, an account of all financial transactions
and of the financial condition of the Corporation.
4.12 Assistant Treasurer
The Assistant Treasurer, or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board (or if there shall
have been no such determination, then in the order of their election), shall, in
the absence of the Treasurer or in the event of the Treasurer's inability or
refusal to act, perform the duties and exercise the powers of the Treasurer.
4.13 Term of Office
The officers of the Corporation shall hold office until their
successors are chosen and qualify or until their earlier resignation or removal.
Any officer may resign at any time upon written notice to the Corporation. Any
officer elected or appointed by the Board may be removed at any time, with or
without cause, by the affirmative vote of a majority of the Board.
4.14 Compensation
The compensation of officers of the Corporation shall be fixed by the
Board or by any officer(s) authorized by the Board to prescribe the compensation
of such other officers.
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4.15 Fidelity Bonds
The Corporation may secure the fidelity of any or all of its officers
or agents by bond or otherwise.
5. CAPITAL STOCK
5.1 Certificates of Stock; Uncertificated Shares
The shares of the Corporation shall be represented by certificates,
provided that the Board may provide by resolution that some or all of any or all
classes or series of the Corporation's stock be uncertificated shares. Any such
resolution shall not apply to shares represented by a certificate until the
certificate is surrendered to the Corporation. Notwithstanding the adoption of
such a resolution by the Board, every holder of stock represented by
certificates, and upon request every holder of uncertificated shares, shall be
entitled to have a certificate (representing the number of shares registered in
certificate form) signed in the name of the Corporation by the Chairman, the
Chief Executive Officer, the President, the Chief Operating Officer, any
Executive Vice President, or any Vice President, and by the Treasurer, Secretary
or any Assistant Treasurer or Assistant Secretary of the Corporation. Any or
all the signatures on the certificate may be facsimile. In case any officer,
transfer agent or registrar whose signature or facsimile signature appears on a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if such person were such officer, transfer agent or registrar at
the date of issue.
5.2 Lost Certificates
The Board, Chairman, Chief Executive Officer, President, or Secretary
may direct a new certificate of stock to be issued in place of any certificate
theretofore issued by the Corporation and alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
that the certificate of stock has been lost, stolen or destroyed. When
authorizing such issuance of a new certificate, the Board or any such officer
may, as a condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed certificate or certificates, or such owner's legal
representative, to advertise the same in such manner as the Board or such
officer shall require and/or to give the Corporation a bond or indemnity, in
such sum or on such terms and conditions as the Board or such officer may
direct, as indemnity against any claim that may be made against the Corporation
on account of the certificate alleged to have been lost,
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stolen or destroyed or on account of the issuance of such new certificate or
uncertificated shares.
5.3 Record Date
5.3.1 Actions by Stockholders
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders, the Board may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board, and which record date
shall not be more than 60 days nor less than ten days before the date of such
meeting. If no record date is fixed by the Board, the record date for
determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be the close of business on the day next preceding the day on
which notice is given, or, if notice is waived, at the close of business on the
day next preceding the day on which the meeting is held. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting, unless the Board
fixes a new record date for the adjourned meeting.
5.3.2 Payments
In order that the Corporation may determine the stockholders entitled
to receive payment of any dividend or other distribution or allotment of any
rights or the stockholders entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action, the Board may fix a record date, which record date shall not precede the
date upon which the resolution fixing the record date is adopted, and which
record date shall be not more than 60 days prior to such action. If no record
date is fixed, the record date for determining stockholders for any such purpose
shall be at the close of business on the day on which the Board adopts the
resolution relating thereto.
5.4 Stockholders of Record
The Corporation shall be entitled to recognize the exclusive right of
a person registered on its books as the owner of shares to receive dividends, to
receive notifications, to vote as such owner and to exercise all the rights and
powers of an owner. The Corporation shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part of
any other person, whether or not it shall have express or other notice thereof,
except as otherwise may be provided by the Delaware General Corporation Law.
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6. INDEMNIFICATION; INSURANCE
6.1 Authorization of Indemnification
Each person who was or is a party or is threatened to be made a party
to or is involved in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative and whether
by or in the right of the Corporation or otherwise (a "proceeding"), by reason
of the fact that he or she is or was a director or officer of the Corporation or
is or was serving at the request of the Corporation as a director, officer,
employee, partner (limited or general) or agent of another corporation or of a
partnership, joint venture, limited liability company, trust or other
enterprise, including service with respect to an employee benefit plan, shall be
(and shall be deemed to have a contractual right to be) indemnified and held
harmless by the Corporation (and any successor to the Corporation by merger or
otherwise) to the fullest extent authorized by, and subject to the conditions
and (except as provided herein) procedures set forth in the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but any such
amendment shall not be deemed to limit or prohibit the rights of indemnification
hereunder for past acts or omissions of any such person insofar as such
amendment limits or prohibits the indemnification rights that said law permitted
the Corporation to provide prior to such amendment), against all expenses,
liabilities and losses (including attorneys' fees, judgments, fines, ERISA taxes
or penalties and amounts paid or to be paid in settlement) actually and
reasonably incurred or suffered by such person in connection therewith if such
person acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interests of the Corporation, and, with respect to
any criminal proceeding, had no reasonable cause to believe such person's
conduct was unlawful; provided, however, that the Corporation shall indemnify
--------- -------
any such person seeking indemnification in connection with a proceeding (or part
thereof) initiated by such person (except for a suit or action pursuant to
Section 6.2 hereof) only if such proceeding (or part thereof) was authorized by
the Board. Persons who are not directors or officers of the Corporation and are
not so serving at the request of the Corporation may be similarly indemnified in
respect of such service to the extent authorized at any time by the Board. The
indemnification conferred in this Section 6.1 also shall include the right to be
paid by the Corporation (and such successor) the expenses (including attorneys'
fees) incurred in the defense of or other involvement in any such proceeding in
advance of its final disposition; provided, however, that, if and to the extent
--------- -------
the Delaware General Corporation Law requires, the payment of such expenses
(including attorneys' fees) incurred by a director or officer in advance of the
final disposition of a proceeding shall be made only upon delivery to the
Corporation of an undertaking by or on behalf of such director or officer to
repay all amounts so paid in advance if it shall ultimately be
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determined that such director or officer is not entitled to be indemnified under
this Section 6.1 or otherwise; and provided further, that such expenses incurred
-------- -------
by other employees and agents may be so paid in advance upon such terms and
conditions, if any, as the Board deems appropriate.
6.2 Right of Claimant to Bring Action Against the Corporation
If a claim under Section 6.1 is not paid in full by the Corporation
within 60 days after a written claim has been received by the Corporation, the
claimant may at any time thereafter bring an action against the Corporation to
recover the unpaid amount of the claim and, if successful in whole or in part,
the claimant shall be entitled to be paid also the expense of prosecuting such
action. It shall be a defense to any such action (other than an action brought
to enforce a claim for expenses incurred in connection with any proceeding in
advance of its final disposition where the required undertaking, if any is
required, has been tendered to the Corporation) that the claimant has not met
the standards of conduct that make it permissible under the Delaware General
Corporation Law for the Corporation to indemnify the claimant for the amount
claimed or is otherwise not entitled to indemnification under Section 6.1, but
the burden of proving such defense shall be on the Corporation. The failure of
the Corporation to have made a determination (in the manner provided under the
Delaware General Corporation Law) prior to or after the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law shall not be a defense to the action or create
a presumption that the claimant has not met the applicable standard of conduct.
Unless otherwise specified in an agreement with the claimant, an actual
determination by the Corporation (in the manner provided under the Delaware
General Corporation Law) after the commencement of such action that the claimant
has not met such applicable standard of conduct shall not be a defense to the
action, but shall create a presumption that the claimant has not met the
applicable standard of conduct.
6.3 Non-exclusivity
The rights to indemnification and advance payment of expenses provided
by Section 6.1 hereof shall not be deemed exclusive of any other rights to which
those seeking indemnification and advance payment of expenses may be entitled
under any Bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his or her official capacity and as to action in
another capacity while holding such office.
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6.4 Survival of Indemnification
The indemnification and advance payment of expenses and rights thereto
provided by, or granted pursuant to, Section 6.1 hereof shall, unless otherwise
provided when authorized or ratified, continue as to a person who has ceased to
be a director, officer, employee, partner or agent and shall inure to the
benefit of the personal representatives, heirs, executors and administrators of
such person.
6.5 Insurance
The Corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee, partner (limited or general) or agent of another
corporation or of a partnership, joint venture, limited liability company, trust
or other enterprise, against any liability asserted against such person or
incurred by such person in any such capacity, or arising out of such person's
status as such, and related expenses, whether or not the Corporation would have
the power to indemnify such person against such liability under the provisions
of the Delaware General Corporation Law.
7. GENERAL PROVISIONS
7.1 Inspection of Books and Records
Any stockholder, in person or by attorney or other agent, shall, upon
written demand under oath stating the purpose thereof, have the right during the
usual hours for business to inspect for any proper purpose the Corporation's
stock ledger, a list of its stockholders, and its other books and records, and
to make copies or extracts therefrom. A proper purpose shall mean a purpose
reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
Corporation at its registered office or at its principal place of business.
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7.2 Dividends
The Board may declare dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation and
the laws of the State of Delaware.
7.3 Reserves
The directors of the Corporation may set apart, out of the funds of
the Corporation available for dividends, a reserve or reserves for any proper
purpose and may abolish any such reserve.
7.4 Execution of Instruments
All checks, drafts or other orders for the payment of money and
promissory notes of the Corporation shall be signed by such officer or officers
or such other person or persons as the Board may from time to time designate.
7.5 Fiscal Year
The fiscal year of the Corporation shall end on the 31st of December
in each year.
7.6 Seal
The corporate seal shall be in such form as the Board shall approve.
The seal may be used by causing it or a facsimile thereof to be impressed or
affixed or otherwise reproduced.
* * * *
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The foregoing Third Amended and Restated Bylaws were adopted by the
sole Director on September , 1999.
--------------------------------
Steven J. Quamme
Secretary
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EXHIBIT 10.1
AGREEMENT AND PLAN OF MERGER (this "Agreement") made as of September 16,
1999, by and among E2ENET, INC., a Delaware corporation (the "Buyer"); MEI
MERGER COMPANY, INC., a Delaware corporation ("Merger Sub"); and MEI SOFTWARE
SYSTEMS, INC., a Delaware corporation (the "Company"). Buyer, Merger Sub and
the Company are sometimes collectively referred to herein as the "Parties" and
each individually as a "Party."
WITNESSETH:
WHEREAS, the Board of each of the Company, Buyer and Merger Sub has
approved this Agreement and deems it advisable and in the best interests of
their respective stockholders that the Company be acquired by Buyer through the
merger (the "Merger") of Merger Sub with and into the Company on the terms and
conditions set forth in this Agreement; and
WHEREAS, certain terms used in this Agreement with initial capital letters
are defined in Article XI.
NOW, THEREFORE, in consideration of the representations, warranties,
agreements and covenants herein contained, the Parties, intending legally to be
bound, agree as follows.
ARTICLE I
THE MERGER
1.1 Merger. Subject to the terms and conditions hereafter set forth,
Merger Sub shall be merged with and into the Company in accordance with the
DGCL.
1.2 Name. The name of the surviving corporation (the "Surviving
Corporation"), when reference is made to it after the Effective Time, shall be
"MEI Software Systems, Inc."
1.3 Certificate of Incorporation; Bylaws. As a result, and upon the
effectiveness, of the Merger, the Certificate of Incorporation and Bylaws of
Merger Sub in effect as of the Effective Time shall, without further action, be
the Certificate of Incorporation and Bylaws of the Surviving Corporation.
1.4 Board of Directors; Officers.
(a) The members of the Board of the Surviving Corporation from and
after the Effective Time and until their successors are duly elected and
qualified shall be Henry S. Firey, Steven J. Quamme and Robert J. Smith.
<PAGE>
(b) The officers of the Company at the Effective Time shall serve as
the officers of the Surviving Corporation from and after the Effective Time and
until they are removed or their successors are duly appointed by the Board of
the Surviving Corporation.
1.5 Effect of the Merger. At the Effective Time, the separate corporate
existence of Merger Sub shall cease and the Company, as the Surviving
Corporation, shall succeed to and possess all of the properties, rights, powers,
privileges, franchises, patents, trademarks, licenses, registrations, and other
assets of every kind and description of Merger Sub, and shall be subject to, and
be responsible for, all debts, liabilities, and obligations of Merger Sub, all
without further act or deed, and in accordance with the applicable provisions of
the DGCL.
1.6 Closing; Effective Time.
(a) Subject to the terms and conditions of this Agreement, the closing
of the Merger (the "Closing") shall take place on a date and at a time (the
"Closing Date") specified by the Buyer with at least 10 days prior written
notice to the Company but, in any event, no later than November 30, 1999 unless
such date is extended as provided herein, at the offices of Verner, Liipfert,
Bernhard, McPherson & Hand, Chartered, 901 Fifteenth Street N.W., Washington, DC
20005. Buyer may unilaterally extend the Closing Date (i) beyond November 30,
1999, but not later than December 31, 1999, provided that Buyer has, on or
before November 30, 1999, filed a registration statement (the "Registration
Statement") for its securities with the SEC which has not been declared
effective at least 10 days prior to November 30, 1999, and (ii) beyond December
31, 1999 until not later than 3 Business Days after expiration of any applicable
waiting period following any filing by the Buyer or the Company in accordance
with the HSR Act; provided, however, that, if all conditions precedent to the
-------- -------
Buyer's obligation to effect the Merger have been satisfied, or waived by the
Buyer, the Closing shall occur not later than the first Business Day after
consummation of the Buyer=s initial public offering of common stock.
(b) As soon as practicable after satisfaction or, to the extent
permitted hereunder waiver, of all conditions to the Merger, the Company and
Merger Sub shall (i) execute a certificate of merger in compliance with the
requirements of the DGCL (the "Certificate of Merger"), and shall file the
Certificate of Merger in the Office of the Secretary of State of the State of
Delaware in accordance with the DGCL, and (ii) make all other filings or
recordings and take all such other and further actions as may be required by law
to make the Merger effective. The Merger shall become effective at such time
(the "Effective Time") as the Certificate of Merger is duly filed with the
Secretary of State of the State of Delaware or, if agreed by the Company and
Buyer, at such later time as is specified in the Certificate of Merger.
ARTICLE II
CONVERSION OF SHARES
2.1 Conversion of Shares of Capital Stock. At the Effective Time,
(a) each
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issued and outstanding share of Preferred Stock and Common Stock, other than
any Dissenting Share shall, subject to the terms and conditions of this
Agreement, be converted into the right to receive an amount in immediately
available funds equal to the Merger Consideration Per Share (without interest),
and (b) each Dissenting Share shall be converted into the right to receive
payment from the Surviving Corporation with respect thereto in accordance with
the provisions of the DGCL, provided, however, that the Merger Consideration Per
-------- -------
Share shall be subject to equitable adjustment in the event of any stock split,
stock dividend, reverse stock split, or other change in the number of shares of
Preferred Stock or Common Stock outstanding between the date hereof and the
Effective Time. No share of Preferred Stock or Common Stock shall be deemed to
be outstanding or to have any rights other than those set forth above in this
Section 2.1 from and after the Effective Time.
2.2 Escrow Agreement; Procedure for Payment.
(a) On or before the Closing Date, Buyer, the Shareholders
Representative and a Qualifying Escrow Agent designated by the Buyer and the
Shareholders Representative (the "Escrow Agent") shall enter into an escrow
agreement (the "Escrow Agreement") in form and substance reasonably satisfactory
to the Buyer and the Shareholders Representative which shall, among other
things, provide as follows:
(i) Immediately after the Effective Time, the Buyer will
cause the Surviving Corporation to furnish to the Escrow Agent for
deposit in the Escrow Account immediately available funds in an amount
equal to the Merger Consideration payable to all Company Shareholders,
other than the holders of any Dissenting Shares. All such funds while
on deposit in the Escrow Account, plus all net earnings thereon, are
sometimes referred to herein as the "Escrow Amount."
(ii) The Escrow Agent shall promptly transfer 90% of the
Merger Consideration deposited in accordance with subparagraph (i)
(such 90% portion being herein sometimes referred to as the "Immediate
Payment Funds") into an account (the "Immediate Payment Account") at
the Escrow Agent which shall be used to make payment, on the Business
Day after the Effective Time, in the following order: (A) first, of
the Esch Fees, and (B) second, subject to satisfaction of the
requirements of Sections 2.2(a)(iv) and (v), in accordance with this
Agreement, to the holders as of the Effective Time of all outstanding
shares of Preferred Stock or Common Stock (other than Dissenting
Shares), Warrants and Vested Options.
(iii) The Shareholders Representative shall,
contemporaneously with the Surviving Corporation's deposit of the
Merger Consideration into the Escrow Account in accordance with
subparagraph (i), instruct the Escrow Agent to transfer and maintain
the remaining 10% of such Merger Consideration in and to an account
(the "Reimbursement Account") at the Escrow Agent, which amount shall
be available to make payments in satisfaction of Claims, if any, by
the Buyer in
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<PAGE>
accordance with the Escrow Agreement and Article IX of this Agreement.
(iv) Buyer shall cause the Escrow Agent to mail a letter of
transmittal (with instructions for its use), in the form to be
attached to the Escrow Agreement, to each record holder as of the
Effective Time of outstanding shares of Preferred Stock or Common
Stock and Vested Options, for the holder to use in surrendering the
certificates or other instruments, if any, which represented his
shares of Preferred Stock, Common Stock, Warrants or Vested Options,
against payment of the Merger Consideration Per Share. No interest
will accrue or be paid to the holder of any outstanding share of
Preferred Stock, Common Stock, Warrants or Vested Option.
(v) As promptly as possible after receipt of such letter of
transmittal from the Escrow Agent, the Company shall use its best
efforts to cause each former holder of shares of Preferred Stock,
Common Stock or Warrants to surrender his or her certificates
representing such shares to the Escrow Agent; provided, however, that
-------- -------
if any such holder shall be unable to surrender such certificates due
to loss or mutilation thereof, he or she may make a constructive
surrender by following the procedures customarily followed by the
Buyer in the replacement of lost or mutilated certificates, including,
if necessary, the posting of appropriate bond. Upon actual or
constructive surrender of such certificates from any such holder, the
Escrow Agent shall issue to such holder a receipt indicating such
surrender.
(b) The Escrow Amount and the income attributable thereto shall be
beneficially owned by the holders as of the Effective Time of outstanding shares
of Preferred Stock, Common Stock, Warrants and Vested Options but shall be
available to make payments to Buyer in satisfaction of Claims in accordance with
the Escrow Agreement and Article IX of this Agreement.
(c) All payments to the Buyer in respect to Claims shall be made by
the Escrow Agent as and when provided in accordance with the Escrow Agreement.
(d) Fifty percent of the funds in the Reimbursement Account as to
which a Claim by the Buyer in accordance with the Escrow Agreement and
Article IX of this Agreement has not been made shall, promptly following the
180th day after the Effective Time, be available to be withdrawn from the
Reimbursement Account for payment to the holders as of the Effective Time of the
outstanding shares of Preferred Stock, Common Stock (other than holders of
Dissenting Shares), Warrants and Vested Options in accordance with this
Agreement, and the Shareholders Representative shall instruct the Escrow Agent
to make such payment; all remaining funds in the Reimbursement Account as to
which a Claim by the Buyer in accordance with the Escrow Agreement and Article
IX of this Agreement has not been made shall, promptly following the first
anniversary of the Effective Time, be available to be withdrawn from the
reimbursement Account
4
<PAGE>
for payment to the holders as of the Effective Time of the outstanding shares of
Preferred Stock, Common Stock (other than holders of Dissenting Shares),
Warrants and Vested Options in accordance with this Agreement, and the
Shareholders Representative shall instruct the Escrow Agent to make such
payment; and thereafter all holders as of the Effective Time of shares of
Preferred Stock, Common Stock (other than holders of Dissenting Shares),
Warrants and Vested Options shall look solely to the Shareholders Representative
(subject to abandoned property, escheat, and other similar laws) as general
creditors thereof with respect to the portion of the Merger Consideration Per
Share comprising funds in the Reimbursement Account.
(e) The holders of all outstanding shares of Preferred Stock, Common
Stock, Warrants and Vested Options acknowledge and agree that, by virtue of
the approval of this Agreement by the holders of the Company's capital stock,
Edison Venture Fund II, L.P. (the "Shareholders Representative") shall be fully
authorized and empowered to act, in accordance with the Escrow Agreement and
this Agreement, for and on behalf of the holders as of the Effective Time of all
outstanding shares of Preferred Stock, Common Stock (other than holders of
Dissenting Shares), Warrants and Vested Options in connection with all matters
relating to the execution, delivery, enforcement and implementation of the
Escrow Agreement and Article IX of this Agreement.
(f) The Escrow Agent may invest the funds maintained in the Escrow
Account and its sub-accounts only in one or more of the Permitted Investments as
defined in the Escrow Agreement; provided, however, that such Investments shall
-------- -------
be such as to permit the Escrow Agent to make prompt payment to the holders as
of the Effective Time of outstanding shares of Preferred Stock, Common Stock
(other than holders of Dissenting Shares), Warrants or Vested Options of the
Merger Consideration Per Share, or in satisfaction of Claims, as necessary. The
Escrow Agent shall from time to time pay over to the Shareholders
Representative, for payment to the holders as of the Effective Time of
outstanding shares of Preferred Stock, Common Stock (other than holders of
Dissenting Shares), Warrants and Vested Options, in accordance with this
Agreement, any net earnings with respect to such Investments.
(g) The Escrow Agent shall pay over to the Surviving Corporation any
portion of the Immediate Payment Funds (including any earnings thereon not
previously transferred to the Shareholders Representative) remaining 180 days
after the Effective Time, and thereafter all holders as of the Effective Time of
outstanding shares of Preferred Stock, Common Stock (other than holders of
Dissenting Shares), Warrants and Vested Options shall look solely to the
Surviving Corporation (subject to abandoned property, escheat, and other similar
laws) as general creditors thereof with respect to the portion of the Merger
Consideration Per Share comprising Immediate Payment Funds and payable upon
surrender of their certificates or other instruments, if any.
(h) The Buyer shall cause the Surviving Corporation to pay all
reasonable charges and expenses of the Escrow Agent.
2.3 Options; Treasury Shares; Warrants.
5
<PAGE>
(a) The Board of the Company (or, as applicable, any committee
thereof) shall promptly hereafter provide notice to each holder of a vested
outstanding option (a "Vested Option") issued by the Company under its 1997 Non-
Qualified Stock Option Plan (the "MEI Option Plan") that at the Effective Time,
each Vested Option shall, automatically and without further action, be
terminated and converted into the right to receive, subject to the terms and
conditions of this Agreement, an amount in immediately available funds equal to
the Merger Consideration Per Share.
(b) The Board of the Company (or, as applicable, any committee
thereof) shall, promptly after the date hereof, provide notice to all holders of
non-vested options issued under the MEI Option Plan that all such options must
be exercised, to the extent then exercisable or to be exercisable as a result of
the Merger, on or before the period ending on the Closing Date, at the end of
which period all such options shall terminate, provided, however, that options
-------- -------
which vest by virtue of the Merger will be deemed Vested Options.
(c) All shares of Preferred Stock or Common Stock held by the Company
as treasury shares or by any subsidiary of the Company (other than in a
fiduciary capacity), shall be canceled and shall not be converted as provided in
Section 2.1(a).
(d) All Warrants outstanding as of the Effective Time shall be
tendered for cancellation in exchange for the right to receive, subject to the
terms and conditions of this Agreement, a payment in immediately available
funds equal to the Merger Consideration Per Share.
2.4 Conversion of Shares of Merger Sub. At the Effective Time, each
of the outstanding shares of common stock, par value $.01 per share, of Merger
Sub shall, automatically and without further action, be converted into and
become one share of the common stock, par value $.01 per share, of the Surviving
Corporation.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
3.1 Organization, Qualifications and Corporate Power.
(a) The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware and is duly
licensed or qualified to transact business as a foreign corporation and, with
such exceptions as do not either individually or in the aggregate, have a
Material Adverse Effect on the business of the Company, is in good standing in
each jurisdiction in which the nature of the business transacted by it or the
character of the properties owned or leased by it requires such licensing or
qualification. A list of such jurisdictions is set forth in Schedule 3.1(a).
-------- ------
The Company has the corporate power and authority to own and hold its
6
<PAGE>
properties and to carry on its business as now conducted and as proposed to be
conducted, and to execute, deliver and perform this Agreement and the
transactions contemplated herein. True and complete copies of the Certificate of
Incorporation and By-laws of the Company and its subsidiaries, each as amended
and as in effect on the date hereof, are attached hereto as Schedule 3.1(a).
-------- ------
The Company is not in default under or in violation of any provision of its
Certificate of Incorporation or By-laws.
(b) Schedule 3.1(b) attached hereto contains a list of all past or
-------- ------
present subsidiaries of the Company. Except for such subsidiaries, the Company
does not (i) own of record or beneficially, directly or indirectly, (A) any
shares of capital stock or securities convertible into capital stock of any
other corporation or (B) any participating interest in any partnership, joint
venture or other non-corporate business enterprise, or (ii) control, directly or
indirectly, any other entity. Each of the subsidiaries is a corporation duly
incorporated, validly existing, with such exceptions as do not either
individually or in the aggregate have a Material Adverse Effect on the business
of such subsidiary, and is in good standing under the laws of its respective
jurisdiction of incorporation and is duly licensed or qualified to transact
business as a foreign corporation and is in good standing in each jurisdiction
in which the nature of the business transacted by it or the character of the
properties owned or leased by it requires such licensing or qualification. A
list of such jurisdictions is set forth in Schedule 3.1(b). Each of the
-------- ------
subsidiaries has the corporate power and authority to own and hold its
properties and to carry on its business as now conducted and as proposed to be
conducted. All of the outstanding shares of capital stock of each of the
subsidiaries are owned beneficially and of record by the Company, one of its
other subsidiaries, or any combination of the Company and/or one or more of its
other subsidiaries, in each case free and clear of any liens, charges,
restrictions, claims or encumbrances of any nature whatsoever; and there are no
outstanding subscriptions, warrants, options, convertible securities, or other
rights (contingent or other) pursuant to which any of the subsidiaries is or may
become obligated to issue any shares of its capital stock to any person other
than the Company or one of the other subsidiaries. As used in this Article III,
unless the context other requires, the term "Company" shall mean the Company and
each of its subsidiaries.
3.2 Authorization of Transactions; Company Action. The Company has the
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. The execution and delivery of this Agreement
and the performance by the Company of this Agreement and the consummation by the
Company of the transactions contemplated hereby have been duly and validly
authorized by the Board of Directors of the Company and no other corporate
action or proceeding on the part of the Company is necessary to authorize this
Agreement or the Certificate of Merger or to consummate the transactio ns
contemplated hereby and thereby other than the approval of this Agreement by the
shareholders of the Company, if required. This Agreement has been duly and
validly executed and delivered by the Company, and assuming the due
authorization, execution and delivery by Buyer and Merger Sub, constitutes a
valid and binding obligation of the Company, enforceable against the Company in
accordance with its terms, except as enforcement may be limited by bankruptcy,
insolvency, fraudulent conveyance, reorganization,
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<PAGE>
moratorium and other similar laws affecting the enforcement of creditors'
rights generally, except that the availability of equitable remedies, including
specific performance, is subject to the discretion of the court before which any
proceeding therefor may be brought.
3.3 Non-contravention. Except for any applicable requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act")
and except as set forth in Schedule 3.3 hereof, neither the execution and
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delivery of this Agreement by the Company, or the consummation by the Company of
the transactions contemplated hereby, will (a) conflict with or violate any
provision of the Certificate of Incorporation or By-laws of the Company, (b)
require on the part of the Company any filing with, or any permit,
authorization, consent or approval of, any Federal, state, municipal or other
governmental department, commission, board, bureau, agency, authority,
instrumentality, court, arbitration tribunal or administrative agency, whether
domestic or foreign (a "Governmental Entity"), other than the filing of the
Certificate of Merger in accordance with the DGCL, (c) conflict with, result in
a breach of, constitute (with or without due notice or lapse of time or both) a
default under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify or cancel, or require any notice, consent or
waiver under, any contract, lease, sublease, license or sublicense (including,
without limitation, the agreements listed in Schedules 3.10, 3.11, 3.13, 3.14 or
--------- ---- ---- ---- ----
3.23 hereto), or any franchise, registration or permit, or any instrument of
- ----
indebtedness or any indenture, mortgage or other agreement for borrowed money,
or any Security Interest (as defined below) or any other arrangement to which
the Company is a party or by which the Company is bound or to which any of its
assets are subject, (d) result in the imposition of any Security Interest upon
any assets of the Company or (e) violate in any material respect any order,
writ, injunction, decree, statute, rule or regulation applicable to the Company,
any of its properties or assets. For purposes of this Agreement, "Security
Interest" means any mortgage, pledge, security interest, encumbrance, charge, or
other lien (whether arising by contract or by operation of law), other than (i)
mechanic's, materialmen's, and similar liens, (ii) liens arising under worker=s
compensation, unemployment insurance, social security, retirement, and similar
legislation, and (iii) liens on goods in transit incurred pursuant to
documentary letters of credit, in each case arising in the ordinary course of
business consistent with past custom and practice of the Company (including with
respect to frequency and amount) ("Ordinary Course of Business") and not
material to the Company.
3.4 Authorized Capital Stock.
(a) The authorized capital stock of the Company consists of (i)
10,013,718 shares of Preferred Stock, of which 4,563,718 shares are Series A
Preferred Stock, 2,500,000 shares are Series B Preferred Stock, and 2,950,000
shares are Series C Preferred Stock, and (ii) 25,000,000 shares of Common
Stock.
(b) (i) As of the date hereof, 8,249,543 shares of Common Stock,
4,563,718 shares of Series A Preferred Stock, 2,500,000 shares of
Series B Preferred Stock, and 2,901,949 shares of Series C
Preferred Stock have been
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<PAGE>
and will have been validly issued and outstanding, fully paid and
nonassessable with no personal liability attaching to the
ownership thereof, and all shares of capital stock are free of
preemptive rights.
(ii) As of the date hereof, each share of Series A Preferred
Stock is convertible into 1.10641747 shares of Common Stock, each
share of Series B Preferred Stock is convertible into one share
of Common Stock and each share of Series C Preferred Stock is
convertible into one share of Common Stock.
(iii) Subject to the exercise in accordance with their terms
of Warrants outstanding as of the date hereof, and assuming the
conversion of all of the issued and outstanding shares of
Preferred Stock into shares of Common Stock, as of the Effective
Time, 19,835,923 shares of Common Stock, will have been validly
issued and outstanding, fully paid and nonassessable with no
personal liability attaching to the ownership thereof, and all
shares of capital stock are free of preemptive rights.
(iv) In the event the Effective Time is November 30,
1999, assuming no exercise of Vested Options on or after the
date hereof, the total number of Vested Options shall be
1,216,026.
(c) As of the date hereof, the stockholders of record and holders of
subscriptions, warrants, options, convertible securities, and other rights
(contingent or other) to purchase or otherwise acquire equity securities of the
Company, and the number of shares of Common Stock, Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock and the number of such
subscriptions, warrants, options, convertible securities, and other such rights
held by each are set forth in Schedule 3.4(c) hereof. Except as set forth in
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Schedule 3.4(c), (i) no person or entity owns of record or is known to the
- -------- ------
Company to own beneficially any share of Common Stock, Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock, (ii) no subscription,
warrant, option, convertible security, or other right (contingent or other) to
purchase or otherwise acquire equity securities of the Company is authorized or
outstanding and (iii) there is no commitment by the Company to issue shares,
subscriptions, warrants, options, convertible securities, or other such rights
or to distribute to holders of any of its equity securities any evidence of
indebtedness or asset.
(d) Assuming that (i) between the date hereof and the Effective Time
the Company does not issue any of its equity securities or grant any
subscriptions, warrants, options, convertible securities, or other rights
(contingent or other) to purchase or otherwise acquire any of its equity
securities, (ii) each holder of convertible securities of the Company
(including, without limitation, the holders of the Series A Preferred Stock,
Series B Preferred Stock and Series C
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<PAGE>
Preferred Stock) that currently has or as a result of the Merger will have a
right to convert its equity securities in the Company into Common Stock converts
said equity securities into Common Stock, and (iii) each holder of any
subscription, warrant, option, convertible security, or other right (contingent
or other) to purchase or otherwise acquire equitysecurities of the Company that
currently has or as a result of the Merger will have a right to convert its
equity securities in the Company into Common Stock converts said subscription,
warrant, option, conv ertible security, or other right into Common Stock, then
as of the Merger (A) Schedule 3.4(d) sets forth a complete list of all persons
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or entities that will own of record or otherwise shares of the Common Stock, as
well as the number of shares of Common Stock that will be held by such persons
or entities and (B) there will be no other stockholders of record or holders of
subscriptions, warrants, options, convertible securities, or other rights
(contingent or other) to purchase or otherwise acquire equity securities of the
Company, other than in favor of the Buyer and the rights of the persons
identified in Schedule 3.4(d)(1) hereto who hold unvested options for the
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number ed shares of Common Stock set forth next to each such person's name in
Schedule 3.4(d)(1) hereof (the "Unvested Option Holders").
- -------- ---------
(e) Except as provided in the Company's Certificate of Incorporation
or as set forth in the attached Schedule 3.4(e), the Company has no obligation
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(contingent or other) to purchase, redeem or otherwise acquire any of its equity
securities or any interest therein or to pay any dividend or make any other
distribution in respect thereof. As of the Merger, there will be no voting
trusts or agreements, stockholders' agreements, pledge agreements, buy-sell
agreements, rights of first refusal, preemptive rights or proxies relating to
any securities of the Company or any of its subsidiaries (whether or not the
Company or any of its subsidiaries is a party thereto). All of the outstanding
securities of the Company were issued in compliance with all applicable federal
and state securities laws.
3.5 Financial Statements. (a) The Company has furnished to the
Buyer (a) the consolidated balance sheets of the Company and its subsidiaries as
of December 31, 1997 and 1998, and for the six months ended June 30, 1999, and
the related consolidated statements of income, stockholders' equity and cash
flows of the Company and its subsidiaries for the year ended December 31, 1997
and 1998, and for the six months ended June 30, 1999, as certified by the
certified public accounting firm of PriceWaterhouseCoopers (including each such
firm's report thereon) (collectively, the "Audited Financial Statements") and
(b) the unaudited consolidated balance sheet of the Company and its subsidiaries
as of June 30, 1999, and the related consolidated statements of income,
stockholders' equity and cash flows of the Company and its subsidiaries for the
six months ended June 30, 1999 (the "Interim Financial Statements") prepared by
the Company. A true and complete copy of each of the Audited Financial
Statements and the Interim Financial Statements is attached hereto as Schedule
--------
3.5. Except as set forth in Schedule 3.5, since June 30, 1999, (i) there has
- --- -------- ---
been no change in the assets, liabilities or financial condition of the Company
and its subsidiaries (on a consolidated basis) from that reflected in the
Audited Financial Statements as of and for the six months ended June 30, 1999,
except for changes in the Ordinary Course of Business which in the aggregate
have not been materially adverse and (ii) none of the business, prospects,
financial condition, operations, property or affairs of the Company and its
subsidiaries (on a consolidated
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basis) has been materially adversely affected by any occurrence or development,
individually or in the aggregate, whether or not insured against. The Company
has been advised by PriceWaterhouseCoopers that its current revenue recognition
policies of the Company are in compliance with the American Institute of
Certified Public Accountants Statement of Position 97-2. The Company does not
capitalize software development but expenses such costs in the period incurred.
(b) The Company has no liability (whether known or unknown, whether
absolute or contingent, whether liquidated or unliquidated and whether due or to
become due), except for (i) liabilities accrued or reserved against on the
Interim Financial Statements, (ii) liabilities which have arisen since the date
of the Interim Financial Statements in the Ordinary Course of Business and which
are similar in nature and amount to the liabilities which arose during the
comparable period of time in the immediately preceding fiscal period, (iii)
contractual or statutory liabilities incurred in the Ordinary Course of Business
which would not be required by United States generally accepted accounting
principles ("GAAP") to be reflected on a balance sheet, (iv) the Company's
accounting and legal fees associated with negotiating and entering into this
Agreement and consummating the transactions contemplated herein (the
"Professional Costs"), and (v) liabilities set forth on Schedule 3.5 hereto.
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3.6 Events Subsequent to the Date of the Interim Financial Statements.
Except as set forth in Schedule 3.6, since the date of the Interim Financial
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Statements, the Company has not (a) issued any of its equity securities
(including, without limitation, any Common Stock, preferred stock (including
Preferred Stock), bond or other corporate security) or granted any subscription,
warrant, option, convertible security, or other right (contingent or other) to
purchase or otherwise acquire any of its equity securities, other than as
contemplated in the Loan Agreement, (b) borrowed any amount or incurred or
become subject to any liability (absolute, accrued or contingent), other than as
contemplated in the Loan Agreement and current liabilities incurred and
liabilities under contracts entered into in the Ordinary Course of Business, (c)
discharged or satisfied any lien or encumbrance or incurred or paid any
obligation or liability (absolute, accrued or contingent) other than current
liabilities shown on the Interim Financial Statements and current liabilities
incurred since the date of the Interim Financial Statements in the Ordinary
Course of Business, (d) declared or made any payment or distribution to
stockholders or purchased or redeemed any share of its capital stock or other
security, (e) mortgaged, pledged or subjected to lien any of its assets,
tangible or intangible, other than liens securing advances by Buyer as
contemplated in the Loan Agreement and liens of current real property taxes not
yet due and payable, (f) sold, assigned or transferred any of its tangible
assets except in the Ordinary Course of Business, or canceled any debt or claim,
(g) sold, assigned, transferred or granted any exclusive license with respect to
any patent, trademark, trade name, service mark, copyright, trade secret or
other intangible asset, (h) suffered any material loss of property or waived any
right of material value whether or not in the Ordinary Course of Business, (i)
made any change in officer compensation except in the Ordinary Course of
Business and consistent with past practice, (j) made any material change in the
manner
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of business or operations of the Company, (k) entered into any transaction
except in the Ordinary Course of Business or as otherwise contemplated hereby or
(l) entered into any commitment (contingent or otherwise) to do any of the
foregoing.
3.7 Litigation; Compliance with Law. Except as set forth in Schedule 3.7,
-------- ---
there is no (a) action, suit, claim, proceeding or investigation pending or, to
the best of the Company's knowledge, threatened against or materially adversely
affecting the Company, at law or in equity, or before or by any Governmental
Entity, (b) arbitration proceeding relating to the Company pending under
collective bargaining agreements or otherwise or (c) inquiry by a Governmental
Entity pending or, to the best of the Company's knowledge, threatened against or
affecting the Company (including without limitation any inquiry as to the
qualification of the Company to hold or receive any license or permit), and
there is no basis for any of the foregoing. The Company has not received any
opinion or memorandum or legal advice from legal counsel to the effect that it
is exposed, from a legal standpoint, to any liability or disadvantage which may
be material to its business, prospects, financial condition, operations,
property or affairs. The Company is not in default with respect to any order,
writ, injunction or decree known to or served upon the Company or any
Governmental Entity. There is no action or suit by the Company pending or
threatened against others. The Company has complied with all laws, rules,
regulations and orders of a material nature of any Governmental Entity
applicable to its business, operations, properties, assets, products and
services, and the Company has all necessary permits, licenses and other
authorizations required to conduct its business as conducted and as proposed to
be conducted, with such exceptions as do not, either individually or in the
aggregate, have a Material Adverse Effect on the business, prospects, financial
condition, operations, property or affairs of the Company. There is no existing
law, rule, regulation or order, and the Company is not aware of any proposed
law, rule, regulation or order, whether Federal or state, which would prohibit
or restrict the Company from, conducting its business in any jurisdiction in
which it is now conducting business or in which it proposes to conduct business
which prohibition or restriction would have a Material Adverse Effect on the
Company.
3.8 Proprietary Information of Third Party. Except as set forth in
Schedule 3.8, to the best of the Company's knowledge, no third party has claimed
- ------------
or has reason to claim that any person employed by or affiliated with the
Company has (a) violated or may be violating any of the terms or conditions of
his employment, non-competition or nondisclosure agreement with such third
party, (b) disclosed or may be disclosing or utilized or may be utilizing any
trade secret or proprietary information or documentation of such third party or
(c) interfered or may be interfering in the employment relationship between such
third party and any of its present or former employees. To the best of the
Company's knowledge, no person employed by or affiliated with the Company has
employed or proposes to employ any trade secret or any information or
documentation proprietary to any former employer, and to the best of the
Company's knowledge, no person employed by or affiliated with the Company has
violated any confidential relationship
12
<PAGE>
which such person may have had with any third party, in connection with the
development, manufacture or sale of any product or proposed product or the
development or sale of any service or proposed service of the Company, and the
Company has no reason to believe there will be any such employment or violation.
To the best of the Company's knowledge, none of the execution or delivery of
this Agreement, or the carrying on of the business of the Company as officers,
employees or agents by any officer, director or key employee of the Company, or
the conduct or proposed conduct of the business of the Company, will conflict
with or result in a breach of the terms, conditions or provisions of or
constitute a default under any contract, covenant or instrument under which any
such person is obligated.
3.9 Title to Properties. Except as set forth in Schedule 3.9, the Company
-------- ---
and its subsidiaries have good and marketable title to their respective
properties and assets reflected on the Interim Financial Statements or acquired
by them since the date of the Interim Financial Statements (other than
properties and assets disposed of in the Ordinary Course of Business since the
date of the Interim Financial Statements), and all such properties and assets
are (a) all the properties and assets necessary for the conduct of the Company's
business as presently conducted and (b) except for (i) the security interest(s)
granted by the Company to PNC Bank pursuant to the certain Security Agreement
between PNC and Company dated March 12, 1998, as amended (the "PNC Security
Agreement"), securing the Company's obligations under the Loan Agreement between
PNC and Company dated March 12, 1998, as amended (the "PNC Loan Agreement"), and
(ii) the security interests granted by the Company to Buyer, as contemplated by
the Loan Agreement, free and clear of mortgages, pledges, security interests,
liens, charges, claims, restrictions and other encumbrances, except for liens
for current taxes not yet due and payable and minor imperfections of title, if
any, not material in nature or amount and not materially detracting from the
value or impairing the use of the property subject thereto or impairing the
operations or proposed operations of the Company and its subsidiaries. Such
properties and assets are free from material defects, have been maintained in
accordance with normal industry practice, are in good operating condition and
repair (subject to normal wear and tear) and are suitable for the purposes for
which they presently are used. The Company does not own any real property.
3.10 Leasehold Interests. Schedule 3.10 lists each lease (including any
-------- ----
sublease) or agreement to which the Company is a party under which it is a
lessee of any property, real or personal, and the Company has previously
provided a true and complete copy of each such lease or agreement (as amended to
date) to Buyer. Each such lease or agreement is legal, valid, binding,
enforceable and in full force and effect with respect to the Company, to the
Company's knowledge is legal, valid, binding, enforceable and in full force and
effect with respect to each other party
13
<PAGE>
thereto, and will continue to be so following the Merger in accordance with the
terms thereof as in effect prior to the Merger. No event has occurred and is
continuing which, with due notice or lapse of time or both, would constitute a
default or event of default by the Company under any such lease or agreement or,
to the best of the Company's knowledge, by any other party thereto, and there
are no disputes, oral agreements or forbearance programs in effect as to any
such lease or agreement. The Company's possession of such property has not been
disturbed and, to the best of the Company's knowledge, no claim has been
asserted against the Company adverse to its rights in such leasehold interests.
The Company has not assigned, transferred, conveyed, mortgaged, deeded in trust
or encumbered any interest in any such leasehold or agreement.
3.11 Insurance. (a) Schedule 3.11 lists each insurance policy (including
-------- ----
fire, theft, casualty, general liability, workers compensation, business
interruption, environmental, product liability and automobile insurance policies
and bond and surety arrangements) to which the Company is a party, a named
insured, or otherwise the beneficiary of coverage at any time within the past
year. Schedule 3.11 lists each person or entity required to be listed as an
-------- ----
additional insured under each such policy. Each such policy is in full force and
effect and by its terms and with the payment of the requisite premiums thereon
will continue to be in full force and effect through and after the Merger.
(b) The Company is not in breach or default (including with respect to
the payment of premiums or the giving of notices) in any material respect under
such policy, and no event has occurred which, with notice or the lapse of time,
would constitute such a breach or default or permit termination, modification or
acceleration, under such policy; and the Company has not received any notice
from the insurer disclaiming coverage or reserving rights with respect to a
particular claim or such policy in general. The Company has not incurred any
loss, damage, expense or liability covered by any such insurance policy for
which it has not properly asserted a claim under such policy. The Company is
covered by insurance in scope and amount customary and reasonable for the
businesses in which it is engaged.
3.12 Taxes.
(a) The Company has filed all Tax Returns that it was required to file
and all such Tax Returns were correct and complete in all material respects. The
Company has paid or will pay all Taxes due on or before the Effective Time,
regardless of whether shown on any such Tax Returns, except such as are being
contested in good faith by appropriate proceedings (to the extent any such
proceedings are required) and with respect to which the Company is maintaining
reserves adequate for their payment, and which are described in Schedule 3.12.
-------- ----
The accrued but unpaid Taxes of the Company for tax periods through the date of
the Interim Financial Statements do not exceed the accruals and reserves for
Taxes (other than deferred Taxes) set forth on the Interim Financial Statements.
The accrued but unpaid Taxes of the Company for all periods through the
Effective Time do not exceed the reserves for payment thereof maintained by the
Company and which are described on Schedule 3.12. All Taxes attributable to the
-------- ----
period January 1, 1999 through the Effective Time are attributable to the
conduct by the Company of its operations in the Ordinary Course of Business. The
Company has no actual or potential liability
14
<PAGE>
for any Tax obligation of any taxpayer (including without limitation any
affiliated group of corporations or other entities that included the Company
during a prior period) other than the Company. All Taxes that the Company is or
was required by law to withhold or collect have been duly withheld or collected
and, to the extent required, have been paid to the proper Governmental Entity,
except such as are being contested in good faith by appropriate proceedings (to
the extent any such proceedings are required), with respect to which the Company
is maintaining reserves adequate for their payment and which are described in
Schedule 3.12. The Federal Tax Returns of the Company have never been audited by
- -------- ----
the Internal Revenue Service. No deficiency assessment with respect to, or
proposed adjustment of, the Company's Taxes is pending or, to the best of the
Company's knowledge, threatened. There is no tax lien, whether imposed by any
Federal, state, county or local taxing authority, outstanding against the
assets, properties or business of the Company. Neither the Company nor any of
its stockholders has ever filed an election pursuant to Section 1362 of the
Internal Revenue Code of 1986, as amended (the "Code"), that the Company be
taxed as an S corporation.
(i) For purposes of this Agreement, "Taxes" means all taxes,
charges, fees, levies or other similar assessments or liabilities,
including without limitation income, gross receipts, ad valorem,
premium, value-added, excise, real property, personal property, sales,
use, transfer, withholding, employment, payroll and franchise taxes
imposed by the United States of America or any state, local or foreign
government, or any agency thereof, or other political subdivision of
the United States or any such government, and any interest, fines,
penalties, assessments or additions to tax resulting from,
attributable to or incurred in connection with any Tax or any contest
or dispute thereof and any amounts of Taxes of another person that the
Company is liable to pay by law or otherwise.
(ii) For purposes of this Agreement, "Tax Returns" means all
reports, returns, declarations, statements or other information
required to be supplied to a taxing authority in connection with
Taxes.
(b) Attached as Schedule 3.12 are correct and complete copies of all
-------- ----
federal income Tax Returns, examination reports and statements of deficiencies
assessed against or agreed to by the Company. No examination or audit of any Tax
Returns of the Company by any Governmental Entity is currently in progress or,
to the knowledge of the Company, threatened or contemplated. The Company has not
waived any statute of limitations with respect to Taxes or agreed to an
extension of time with respect to a tax assessment or deficiency.
(c) The Company is not a "consenting corporation" within the meaning
of Section 341(f) of the Code and none of the assets of the Company is subject
to an election under Section 341(f) of the Code. The Company has not been a
United States real property holding
15
<PAGE>
corporation within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(l)(A)(ii) of the Code. The Company
is not a party to any Tax allocation or sharing agreements.
(d) Except with respect to Phoenix, the Company is not and has never
been a member of an "affiliated group" of corporations (within the meaning of
Section 1504 of the Code).
(e) No deductions by the Company for severance payments are subject to
limitation based on the "golden parachute provisions" of Section 280(G) of the
Code.
3.13 Other Agreements. Except as set forth in Schedule 3.13, the Company is
-------- ----
not a party to or otherwise bound by any written or oral contract or instrument
or other restriction which individually or in the aggregate could materially
adversely affect the business, prospects, financial condition, operations,
property or affairs of the Company. Except as set forth in Schedule 3.13, the
-------- ----
Company is not a party to or otherwise bound by any written or oral:
(a) distributor, dealer, manufacturer's representative or sales agency
contract or agreement which is not terminable on less than ninety (90) days'
notice without cost or other liability to the Company (except for contracts
which, in the aggregate, are not material to the business of the Company);
(b) sales contract which entitles any customer to a rebate or right of
set-off, to return any product to the Company after acceptance thereof or to
delay the acceptance thereof (except for sales contracts used consistent with
past practice), or which varies in any material respect from the Company's
standard form contracts;
(c) contract or other commitment with any supplier containing any
provision permitting any party other than the Company to renegotiate the price
or other terms, or containing any pay-back or other similar provision, upon the
occurrence of a failure by the Company to meet its obligations under the
contract when due or the occurrence of any other event;
(d) contract for the future purchase of fixed assets or for the future
purchase of materials, supplies or equipment in excess of its normal operating
requirements;
(e) contract for the employment of any officer, employee or other
person on a full-time or consulting basis which is not terminable on notice
without cost or other liability to the Company, except normal severance
arrangements and accrued vacation pay;
(f) bonus, pension, profit-sharing, retirement, hospitalization,
insurance, stock purchase, stock option or other plan, contract or understanding
pursuant to which benefits are
16
<PAGE>
provided to any employee of the Company (other than group insurance plans
applicable to employees generally);
(g) agreement or indenture relating to the borrowing of money or to
the mortgaging or pledging of, or otherwise placing a lien or security interest
on, any asset of the Company;
(h) guaranty of any obligation for borrowed money or otherwise;
(i) voting trust or agreement, stockholders' agreement, pledge
agreement, buy-sell agreement or first refusal or preemptive rights agreement
relating to any securities of the Company, other than that certain Stockholders'
Agreement by and among certain shareholders of the Company and appended to
Schedule 3.13 (the "Stockholders' Agreement"), which Stockholders' Agreement
- -------- ----
shall be amended, as necessary, to provide that it will automatically terminate
effective as of the Merger;
(j) agreement, or group of related agreements with the same party or
any group of affiliated parties, under which the Company has advanced or agreed
to advance money or has agreed to lease any property as lessee or lessor;
(k) agreement or obligation (contingent or otherwise) to issue, sell
or otherwise distribute or to repurchase or otherwise acquire or retire any
share of its capital stock or any of its other equity securities;
(l) assignment, license or other agreement with respect to any form of
intangible property;
(m) agreement under which it has granted any person any registration
rights, other than the Registration Rights Agreement dated December 20, 1991, as
amended, by and among the Company, Peter W. Kaufmann, and the holders of the
issued and outstanding Preferred Stock;
(n) agreement under which it has limited or restricted its right to
compete with any person in any respect;
(o) other contract or group of related contracts with the same party
involving more than $30,000 or continuing over a period of more than six months
from the date or dates thereof (including renewals or extensions optional with
another party), which contract or group of contracts is not terminable by the
Company without penalty upon notice of thirty (30) days or less, but excluding
any contract or group of contracts with a customer of the Company for
17
<PAGE>
the sale, lease or rental of the Company's products or services if such contract
or group of contracts was entered into by the Company in the Ordinary Course of
Business; or
(p) other contract, instrument, commitment, plan or arrangement, a
copy of which would be required to be filed with the Securities and Exchange
Commission (the "Commission") as an exhibit to a registration statement on Form
S-1 if the Company were registering securities under the Securities Act of 1933,
as amended (the "Securities Act").
The Company, and to the best of the Company's knowledge, each other party
thereto have in all material respects performed all the obligations required to
be performed by them to date, have received no notice of default and are not in
default (with due notice or lapse of time or both) under any lease, agreement or
contract now in effect to which the Company is a party or by which it or its
property may be bound. The Company has no present expectation or intention of
not fully performing all its obligations under each such lease, contract or
other agreement, and the Company has no knowledge of any breach or anticipated
breach by the other party to any lease, agreement, contract or commitment to
which the Company is a party.
3.14 Intellectual Property.
(a) The Company owns, or is licensed or otherwise possesses legally
enforceable rights to use (free and clear of any liens or encumbrances), all
issued patents, trademarks, trade names, service marks, copyrights, and any
applications for such trademarks, trade names, service marks and copyrights, and
all patent rights, trade secrets, schematics, technology, know-how, computer
software programs or applications and tangible or intangible proprietary
information or material (collectively, "Intellectual Property") that are
reasonably necessary to conduct its business as currently conducted.
(i) Schedule 3.14(a)(i) lists all Intellectual Property
-------- ----------
consisting of registered and pending applications for patents, trademarks
and copyrights owned by the Company, including the jurisdictions in which
each Intellectual Property right has been issued or registered or in which
any such application for such issuance or registration has been filed.
(ii) Schedule 3.14(a)(ii) lists all written licenses, sublicenses
-------- -----------
and other agreements to which the Company is a party and pursuant to which
any person is authorized to use any Intellectual Property rights of the
Company, including such licenses, sublicenses or other agreements with end-
users that grant non-exclusive rights to use a Company product in
accordance with the Company's standard form of end-user license agreement.
18
<PAGE>
(iii) Schedule 3.14(a)(iii) lists all written licenses,
-------- ------------
sublicenses and other agreements as to which the Company is a party and
pursuant to which the Company is authorized to use any third party patents,
patent rights, trademarks, service marks, trade secrets or copyrights,
including, without limitation, third party software, including, without
limitation, packaged commercially available licensed software programs sold
to the public ("Third Party Intellectual Property") which are used in the
business of the Company or which form a part of any existing product or
service of the Company; provided, however, that packaged commercially
-------- -------
available licensed software programs sold to the public may be excluded
from the Third Party Intellectual Property listed in Schedule 3.14(a)(iii)
-------- ------------
but shall be included in the term "Third Party Intellectual Property" for
all other purposes of this Agreement.
(iv) Schedule 3.14(a)(iv) lists all material written agreements
-------- -----------
or other arrangements under which the Company has provided or agreed to
provide source code of any Intellectual Property or other product to any
third party.
The Company has made available to Buyer correct and complete copies of any
patents, registrations, applications, licenses, sublicenses and agreements, as
amended to date, relating to any Intellectual Property. The Company is not a
party to any oral license, sublicense or agreement which, if reduced to written
form, would be required to be listed in Schedules 3.14(a)(i)-(iv) under the
--------- ---------------
terms of this Section 3.14(a).
(b) With respect to each item of Intellectual Property that the
Company owns: (i) subject to such rights as have been granted by the Company
under license agreements entered into by the Company and listed in Schedule
--------
3.14(a)(i) (true and complete copies of which previously have been delivered to
- ----------
Buyer), the Company is the sole and exclusive owner, and possesses all right,
title and interest in and to such item and is not obligated to pay any
compensation to any other party in respect thereof; and (ii) such item is not
subject to any outstanding judgment, order, decree, stipulation or injunction.
With respect to each item of Third Party Intellectual Property: (i) the license,
sublicense or other agreement covering such item is legal, valid, binding,
enforceable and in full force and effect with respect to the Company and, to the
Company's knowledge, is legal, valid, binding, enforceable and in full force and
effect with respect to each other party thereto; (ii) the Company is not in
material breach or material default under, and to the Company's knowledge, no
other party is in material breach or material default under, any such license or
other agreement and no event has occurred which with notice or lapse of time
would constitute a material breach or material default or permit termination,
modification or acceleration thereunder; (iii) such item of Third Party
Intellectual Property is not subject to
19
<PAGE>
any outstanding judgment, order, decree, stipulation, injunction or adverse
claim to which the Company is a party or has been specifically named or, to the
Company's knowledge, subject to any other outstanding judgment, order, decree,
stipulation, or injunction; and (iv) no license or other fee is payable upon
change of control of the Company or any transfer or assignment of such license,
sublicense or other agreement.
(c) Except as briefly described in Schedule 3.14(c), the Company (i)
-------- -------
has not been served in any suit, action or proceeding which involves a claim of
infringement or misappropriation of any Third Party Intellectual Property and
(ii) has not received any written notice alleging any such claim of infringement
or misappropriation. The Company has previously delivered to Buyer correct and
complete copies of all such suits, actions or proceedings or written notices.
The manufacturing, marketing, licensing or sale of the products or service
offerings of the Company do not currently infringe, and have not since the
Company's inception, infringed, any Intellectual Property right of any third
party; and to the Company's knowledge, the Intellectual Property rights of the
Company are not being infringed by activities, products or services of any third
party.
(d) The Company has taken reasonable security measures to safeguard
and maintain the secrecy, confidentiality and value of, and its property rights
in, all Intellectual Property. All officers, employees and consultants of the
Company have executed and delivered to the Company agreements regarding the
protection of proprietary information and the assignment to the Company of all
Intellectual Property arising from the services performed for the Company, which
agreements are substantially in the form attached to Schedule 3.14(d), and such
-------- -------
agreements are in full force and effect. Buyer has received a copy of the form
or forms of such agreement and a list of all subject officers, employees and
consultants. No current or prior officers, employees or consultants of the
Company or any parent claim any ownership interest in any material Intellectual
Property as a result of having been involved in the development of such property
while employed by or consulting to the Company, or otherwise. All of the
Intellectual Property has been developed by employees of or consultants to the
Company within the scope of their employment or consulting.
(e) The Company has the right, title and interest in and to all
material software development tools, whether or not entirely developed
internally, used by the Company in the development of any of the computer
software included in the Intellectual Property.
(f) As of the date hereof, there are no material defects in the
Company's software and/or the products and services provided to the Company's
customers, and there are no material errors in any documentation,
specifications, manuals, user guides, promotional material, technical
documentation, drawings, flow charts, diagrams, source language statements, demo
disks and other written materials related to, associated with or used or
produced in the development of the Company's software and/or the products and
services provided to the Company's customers, which defects or errors would
reasonably be expected to have, individually or in the aggregate,
20
<PAGE>
a Material Adverse Effect on the Company. The Company's products operate in all
material respects as represented in the specifications, manuals, user guides,
promotional materials and demo disks for such products. The occurrence in or use
of dates on or after January 1, 2000 (the "Millennial Dates") by the Company's
software and/or products and services currently provided to the Company's
customers will not materially adversely affect the performance of the software
with respect to date dependent data, computations, output or other functions
(including without limitation, calculating, computing and sequencing), and the
software will create, sort and generate output data related to or including
Millennial Dates without material errors or material omissions, provided,
--------
however, in each case, each software or hardware product used in conjunction
- -------
with the Company's computer software products are also able to create, generate,
sort, output and otherwise process Millennial Dates.
(g) No government funding or university or college facilities were
used in the development of the Company's commercially available products and
products under development.
3.15 Loans and Advances. Except as identified in Schedule 3.15, the Company
-------- ----
does not have any outstanding loans or advances to any person and is not
obligated to make any such loans or advances, except, in each case, for advances
to employees of the Company in respect of reimbursable business expenses
anticipated to be incurred by them in connection with their performance of
services for the Company.
3.16 Assumptions, Guaranties, Etc., of Indebtedness of Other Persons. The
Company has not assumed, guaranteed, endorsed or otherwise become directly or
contingently liable on any indebtedness of any other person (including, without
limitation, liability by way of agreement, contingent or otherwise, to purchase,
to provide funds for payment, to supply funds to or otherwise invest in the
debtor, or otherwise to assure the creditor against loss), except for guaranties
by endorsement of negotiable instruments for deposit or collection in the
Ordinary Course of Business.
3.17 Significant Customers and Suppliers. Except as specified in Schedule
--------
3.17, no customer or supplier which was significant to the Company during the
- ----
period covered by the financial statements referred to in Section 3.5 or which
has been significant to the Company thereafter, has terminated, materially
reduced or threatened to terminate or materially reduce its purchases from or
provision of products or services to the Company, as the case may be. The
Company has not engaged in any fraudulent conduct with respect to any customer
or supplier of the Company.
3.18 Disclosure. Neither this Agreement, nor any Schedule, Exhibit or
attachment to this Agreement, contains an untrue statement of a material fact
or, considered in the aggregate, omits a material fact necessary to make the
statements contained herein or therein not misleading.
21
<PAGE>
None of the certificates or other instruments prepared and supplied by the
Company or its agents or designees with respect to the transactions contemplated
hereby contains an untrue statement of a material fact or omits a material fact
necessary to make the statements contained therein not misleading. There is no
fact which the Company has not disclosed to the Buyer and its counsel in writing
and of which the Company is aware which materially and adversely affects or
could materially and adversely affect the business, prospects, financial
condition, operations, property or affairs of the Company or any of its
subsidiaries.
3.19 Brokers. Except for the agreement by and between Arthur Esch and the
Company, dated as of November 22, 1998 (the "Esch Agreement"), the Company has
no contract, arrangement or understanding with any broker, finder or similar
agent with respect to the transactions contemplated by this Agreement. Any fees,
costs or reimbursable expenses that are due from the Company under the Esch
Agreement shall be paid solely in accordance with Section 2.2(a)(ii).
3.20 Transactions With Affiliates. Except as identified in Schedule 3.15 or
-------- ----
Schedule 3.20, no director, officer, employee or stockholder of the Company, or
- -------- ----
member of the family of any such person, or any corporation, partnership, trust
or other entity in which any such person, or any member of the family of any
such person, has a substantial interest or is an officer, director, trustee,
partner or holder of more than 5% of the outstanding capital stock thereof
(collectively, "Affiliates"), is a party to any transaction with the Company,
including any loan, debt, contract, agreement or other arrangement providing for
the employment of, furnishing of services by, rental of real or personal
property from or otherwise requiring payments to any such person or firm.
3.21 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Company.
3.22 Employees.
(a) Schedule 3.22 lists all employees of the Company, along with the
-------- ----
position and the current annual rate of compensation of each such person. To the
Company's knowledge, no employee or group of employees has any plans to
terminate employment with the Company. The Company is not a party to or bound by
any collective bargaining agreement, nor has it experienced any strikes,
grievances, claims of unfair labor practices or other collective bargaining
disputes. The Company has no knowledge of any organizational effort made or
threatened, either currently or within the past two years, by or on behalf of
any labor union with respect to employees of the Company. The Company is in
compliance in all material respects with all currently applicable laws and
regulations respecting wages, hours, occupational safety, health and employment
practices, and discrimination in employment terms and conditions, and is not
engaged
22
<PAGE>
in any unfair labor practice. There are no pending claims against the Company
under any workers compensation plan or policy or for long term disability. The
Company has no obligations under COBRA with respect to any former employees or
beneficiaries thereunder that would reasonably be expected to have a Material
Adverse Effect on the Company. There are no proceedings pending or, to the
knowledge of the Company, threatened, between the Company and its employees,
which proceedings would reasonably be expected to have a Material Adverse Effect
on the Company. In addition, the Company has provided each of its employees with
all relocation benefits, stock options, bonuses and incentives, and all other
compensation that such employee has earned up through, and that were due and
payable to such employee on or before, the date of this Agreement.
(b) Company Shareholders that are executive officers of the Company
devote their full business time and efforts to the business of the Company and
to the knowledge of the Company do not engage in consulting work or any trade or
business for their own account or for or on behalf of any other person, firm or
corporation which competes, conflicts or interferes with the performance of
their duties to the Company in any way, or otherwise have any obligations in
respect of the operations of any other person, firm or corporation which could
reasonably be expected to prevent such officers from devoting their full
business time and efforts to the business of the Company.
3.23 Employee Benefits.
(a) Schedule 3.23(a) contains a complete and accurate list of all
-------- -------
Employee Benefit Plans maintained, or contributed to, by the Company, or any
ERISA Affiliate. For purposes of this Agreement, "Employee Benefit Plan" means
any "employee pension benefit plan" (as defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), any "employee
welfare benefit plan" (as defined in Section 3(1) of ERISA), and any other
written or oral plan, agreement or arrangement involving direct or indirect
compensation, including without limitation insurance coverage, severance
benefits, disability benefits, deferred compensation, bonuses, stock options,
stock purchase, phantom stock, stock appreciation or other forms of incentive
compensation or post-retirement compensation. For purposes of this Agreement,
"ERISA Affiliate" means any entity which is a member of (i) a controlled group
of corporations (as defined in Section 414(b) of the Code), (ii) a group of
trades or businesses under common control (as defined in Section 414(c) of the
Code), or (iii) an affiliated service group (as defined under Section 414(m) of
the Code or the regulations under Section 414(o) of the Code), any of which
includes the Company. Complete and accurate copies of (i) all Employee Benefit
Plans which have been reduced to writing, (ii) written summaries of all
unwritten Employee Benefit Plans, (iii) all related trust agreements, insurance
contracts and summary plan descriptions, and (iv) all annual reports filed on
IRS Form 5500, 5500C or 5500R for the last five plan years for each Employee
Benefit Plan, have been delivered to Buyer. Each
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Employee Benefit Plan has been administered in accordance with its terms in all
material respects and each of the Company and the ERISA Affiliates, if any, has
met its obligations with respect to such Employee Benefit Plan in all material
respects and has made all required contributions thereto. The Company and all
Employee Benefit Plans are in compliance with the currently applicable
provisions of ERISA and the Code and the regulations thereunder in all material
respects.
(b) There are no investigations to the Company's knowledge by any
Governmental Entity, termination proceedings or other claims (except claims for
benefits payable in the normal operation of the Employee Benefit Plans and
proceedings with respect to qualified domestic relations orders), suits or
proceedings against or involving any Employee Benefit Plan or asserting any
rights or claims to benefits under any Employee Benefit Plan that could give
rise to any liability.
(c) All the Employee Benefit Plans that are intended to be qualified
under Section 401(a) of the Code have received determination letters from the
Internal Revenue Service to the effect that such Employee Benefit Plans are
qualified and the plans and the trusts related thereto are exempt from federal
income taxes under Sections 401(a) and 501(a), respectively, of the Code, no
such determination letter has been revoked and revocation has not been
threatened, and no such Employee Benefit Plan has been amended since the date of
its most recent determination letter or application therefor in any respect, and
no act or omission has occurred, that would reasonably be expected to adversely
affect its qualification or increase its cost.
(d) Neither the Company nor any ERISA Affiliate has ever maintained an
Employee Benefit Plan subject to Section 412 of the Code or Title IV of ERISA.
(e) At no time has the Company or any ERISA Affiliate been obligated
to contribute to any "multi-employer plan" (as defined in Section 4001(a)(3) of
ERISA).
(f) There are no unfunded obligations under any Employee Benefit Plan
providing benefits after termination of employment to any employee of the
Company (or to any beneficiary of any such employee), including but not limited
to retiree health coverage and deferred compensation, but excluding continuation
of health coverage required to be continued under Section 4980B of the Code and
insurance conversion privileges under federal or state law.
(g) No act or omission has occurred and no condition exists with
respect to any Employee Benefit Plan maintained by the Company or any ERISA
Affiliate that would reasonably be expected to subject the Company or any ERISA
Affiliate to any material fine, penalty, tax or liability of any kind imposed
under ERISA or the Code.
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(h) No Employee Benefit Plan is funded by, associated with, or related
to a "voluntary employee's beneficiary association" within the meaning of
Section 501(c)(9) of the Code.
(i) No Employee Benefit Plan, plan documentation or agreement, summary
plan description or other written communication distributed generally to
employees by its terms prohibits the Company from amending or terminating any
such Employee Benefit Plan.
(j) Schedule 3.23(j) discloses each: (i) agreement with any director,
-------- -------
executive officer or other employee of the Company (A) the benefits of which are
contingent, or the terms of which are altered, upon the occurrence of a
transaction involving the Company of the nature of any of the transactions
contemplated by this Agreement, (B) providing any term of employment or
compensation guarantee or (C) providing severance benefits or other benefits
after the termination or other expiration of the term of employment of such
director, executive officer or employee; (ii) agreement, plan or arrangement
under which any person may receive payments from the Company that may be subject
to the tax imposed by Section 4999 of the Code or included in the determination
of such person's "parachute payment" under Section 280G of the Code; and (iii)
agreement or plan binding the Company, including without limitation any stock
option plan, stock appreciation right plan, restricted stock plan, stock
purchase plan, severance benefit plan, or any Employee Benefit Plan, any of the
benefits of which will be increased, or the vesting of the benefits of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement (any such agreements, plans or arrangements being hereinafter
collectively referred to as "Contingent Benefits"). Schedule 3.23(j) also
-------- -------
discloses the amount and terms of any contingent or non-contingent bonuses that
any director, executive officer, other employee or consultant of the Company is
or may be entitled to under current employment and/or bonus agreements or
policies, whether written or oral, which individually or collectively exceed or
may exceed Five Thousand Dollars ($5,000) over the twelve month period following
the date hereof (any such bonuses being hereinafter referred to as
"Extraordinary Bonuses"). Prior to Closing, the Company will satisfy or
otherwise discharge any and all rights to Contingent Benefits and/or
Extraordinary Benefits exceeding or which on or after Closing may exceed, in the
aggregate, $150,000, and shall incur no cost in doing so other than (i)
reasonable legal and administrative costs, if necessary, in negotiating the
satisfaction or discharge of such rights and (ii) the cost of granting vested
stock option rights or issuing Company Common Stock, which said vested stock
option rights and/or Company Common Stock, if any, shall be reflected in
Schedule 3.4(d)(i).
---------
3.24 U.S. Real Property Holding Corporation. The Company is not now and has
never been a "United States real property holding corporation", as defined in
Section 897(c)(2) of the Internal Revenue Code of 1986, as amended, and Section
1.897-2(b) of the Regulations promulgated by the Internal Revenue Service.
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3.25 Environmental Matters.
(a) Each of the Company and its subsidiaries is now and has at all
times been in compliance with all applicable Environmental Laws (as hereinafter
defined) except for such non-compliance that would not have a Material Adverse
Effect on the Company or any of is subsidiaries. There is no pending or, to the
Company's knowledge, threatened civil or criminal litigation, written notice of
violation, formal administrative proceeding, or investigation, inquiry or
information request by any Governmental Entity, relating to any Environmental
Law involving the Company or its subsidiaries. For purposes of this Agreement,
"Environmental Law" means any federal, state or local law, statute, rule or
regulation relating to the environment or occupational health and safety,
including without limitation any statute, regulation or order pertaining to (i)
treatment, storage, disposal, generation and transportation of industrial, toxic
or hazardous substances or toxic or hazardous waste; (ii) air, water and noise
pollution; (iii) groundwater and soil contamination; (iv) the release or
threatened release into the environment of industrial, toxic or hazardous
substances, or solid or hazardous waste, including without limitation emissions,
discharges, injections, spills, escapes or dumping of pollutants, contaminants
or chemicals; (v) the protection of wild life, marine sanctuaries and wetlands,
including without limitation all endangered and threatened species; (vi) storage
tanks, vessels and containers; and (vii) underground and other storage tanks or
vessels, abandoned, disposed or discarded barrels, containers and other closed
receptacles; (viii) health and safety of employees and other persons. As used
above, the terms "release" and "environment" shall have the meaning set forth in
the federal Comprehensive Environmental Compensation, Liability and Response Act
of 1980 ("CERCLA").
(b) There have been no releases of any Materials of Environmental
Concern (as hereinafter defined) into the environment at any space leased,
operated or controlled by the Company (or any of its subsidiaries) during the
time that such space was leased, operated or controlled by the Company (or any
of its subsidiaries) and, to the knowledge of the Company, there have been no
releases of any Materials of Environmental Concern into the environment at any
parcel of real property or any facility during the time when such real property
or facility was leased, operated or controlled by the Company (or any of its
subsidiaries). The Company is not aware of any other releases of Materials of
Environmental Concern that could reasonably be expected to have an impact on the
real property or facilities owned, leased, operated or controlled by the Company
(or any of its subsidiaries). For purposes of this Agreement, "Materials of
Environmental Concern" means any chemicals, pollutants or contaminants,
hazardous substances (as such term is defined under CERCLA), hazardous wastes
(as such terms are defined under the federal Resources Conservation and Recovery
Act), toxic materials, oil or petroleum and petroleum products, or any other
material subject to regulation under any Environmental Law, other than office
products in reasonable amounts commonly used by similarly situated companies and
which are disposed of by the Company in the Ordinary Course of Business.
(c) The Company is not aware of any environmental reports,
investigations or
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audits relating to premises currently or previously leased or operated by the
Company (or any of its subsidiaries) (whether conducted by or on behalf of the
Company, any of its subsidiaries or a third party, and whether done at the
initiative of the Company (or any of its subsidiaries) or directed by a
Governmental Entity or other third party) being issued or conducted during the
past five years.
3.26 Permits. Schedule 3.26 sets forth a list of all permits, licenses,
-------- ----
registrations, certificates, orders or approvals from any Governmental Entity
(including without limitation those issued or required under applicable export
laws or regulations) ("Permits") issued to or held by the Company. Such listed
Permits are the only Permits that are required for the Company to conduct its
business as presently conducted, except for those the absence of which would not
have a Material Adverse Effect on the Company. Each such Permit is in full force
and effect and, to the knowledge of the Company, no suspension or cancellation
of any such Permit is threatened, and there is no reasonable basis for believing
that any such Permit will not be renewable upon expiration. Each such Permit
will continue in full force and effect following the Effective Time.
3.27 Books and Records. The minute books and other similar records of the
Company contain true and complete records of all material actions taken at any
meetings of the Company's stockholders, Board of Directors or any committee
thereof and of all written consents executed in lieu of the holding of any such
meeting. The books and records of the Company accurately reflect in all material
respects the assets, liabilities, business, financial condition and results of
operations of the Company and have been maintained in accordance with good
business and bookkeeping practices.
3.28 Restrictions on Business Activities. There is no agreement, judgment,
injunction, order or decree binding upon the Company or its properties
(including, without limitation, Intellectual Property) which has or could
reasonably be expected to have the effect of prohibiting or materially impairing
any acquisition of property by the Company or the conduct of any business by the
Company.
3.29 Certain Payments. To the Company's knowledge, neither the Company nor
any director, officer, employee or agent of the Company has directly or
indirectly (a) made any contribution, gift, bribe, rebate, payoff, influence
payment, kickback, or other payment in violation of any federal, state, local,
municipal, foreign or other constitution, ordinance, regulation, statute,
treaty, or other law to any person or entity, private or public, regardless of
form, whether in money, property, or services (i) to obtain favorable treatment
in securing business, (ii) to pay for favorable treatment for business secured,
or (iii) to obtain special concessions or for special concessions already
obtained, for or in respect of the Company or any affiliate of the Company or
(b) established or maintained any fund or asset that has not been recorded in
the books and records of the Company.
3.30 No Pending Transactions. Except for the transactions contemplated by
this Agreement, the Company is not a party to or bound by or the subject of any
agreement, undertaking, commitment, negotiation or discussion with another party
with respect to any Acquisition
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Transaction (as hereinafter defined). For purposes of this Section, the term
"Acquisition Transaction" means any (i) acquisition of all or any material
portion of the assets of, or any equity interest in, any corporation,
partnership, joint venture, company, organization or other entity, (ii) sale of
all or any material portion of the assets of, or equity interest in, the Company
or (iii) any merger, consolidation, business combination (or other similar
transaction) involving the Company.
3.31 Stockholder Consents. Schedule 3.31 includes a true and complete copy
-------- ----
of the Shareholder Consent executed by each of (i) Henry S. Firey, (ii) Edison
Venture Fund II, L.P., (iii) Edison Venture Fund II-PA, L.P., and (iv) Peter W.
and Margaret Kaufmann, as holders of capital stock of the Company, as to the
approval of this Agreement and the Merger.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer and Merger Sub jointly and severally represent and warrant to the
Company as follows:
4.1 Organization. Each of Buyer and Merger Sub is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. With such exceptions as do not either individually or in the aggregate
have a Material Adverse Effect on Buyer and Merger Sub, each of Buyer and Merger
Sub is duly qualified to conduct business and is in corporate good standing
under the laws of each jurisdiction in which the nature of its business or the
ownership or leasing of its properties requires such qualification.
4.2 Authorization of Transaction. Each of Buyer and Merger Sub has all
requisite corporate power and authority to execute and deliver this Agreement
and to perform its respective obligations hereunder. The execution and delivery
of this Agreement by the Buyer and Merger Sub and the performance by the Buyer
and Merger Sub of this Agreement and the consummation by the Buyer and Merger
Sub of the transactions contemplated hereby have been duly and validly
authorized by the respective Board of Buyer and Merger Sub and, in the case of
this Agreement, by Buyer as the sole shareholder of Merger Sub and no other
corporate action or proceeding on the part of Buyer or Merger Sub is necessary
to authorize this Agreement (including the Certificate of Merger) or to
consummate the transactions contemplated hereby and thereby. This Agreement has
been duly and validly executed and delivered by each of Buyer and Merger Sub
and, assuming the due authorization, execution and delivery by the Company,
constitutes a valid and binding obligation of each of Buyer and Merger Sub,
enforceable against it in accordance with its terms, except as enforcement may
be limited by bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights generally, and except that the availability of
equitable remedies, including specific performance, is subject to the discretion
of the court before which any proceeding
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therefor may be brought.
4.3 Non-contravention. Except for any applicable requirements of the HSR
Act, neither the execution and delivery of this Agreement, nor the consummation
by Buyer and Merger Sub of the transactions contemplated hereby, will (a)
conflict with or violate any provision of the Certificate of Incorporation or
By-laws of Buyer or Merger Sub, (b) require on the part of Buyer or Merger Sub
any filing with, or permit, authorization, consent or approval of, any
Governmental Entity (other than the Certificate of Merger), (c) conflict with,
result in breach of, constitute (with or without due notice or lapse of time or
both) a default under, result in the acceleration of, create in any party any
right to accelerate, terminate, modify or cancel, or require any notice, consent
or waiver under, any contract, lease, sublease, license, sublicense, franchise,
permit, indenture, agreement or mortgage for borrowed money, instrument of
indebtedness, Security Interest or other arrangement to which either Buyer or
Merger Sub is a party or by which either is bound or to which any of their
assets are subject, or (d) violate any order, writ, injunction, decree, statute,
rule or regulation applicable to Buyer or Merger Sub or any of their respective
properties or assets.
4.4 Brokers' Fees. Neither Buyer nor Merger Sub has any liability or
obligation to pay any fees or commissions to any broker, finder or agent with
respect to the transactions contemplated by this Agreement.
ARTICLE V
COVENANTS
5.1 Forbearance by the Company. From the date hereof until the Effective
Time, the Company covenants and agrees that it will not do, or agree or commit
to do, or permit any Company subsidiary to do or agree or commit to do, without
the prior written consent of the Buyer, any of the following:
(a) except as in the ordinary course of business consistent with past
practice, enter into or assume any material contract, make any material
commitment, incur any material liabilities or material obligations, whether
directly or by way of guaranty, including any obligation for borrowed money
whether or not evidenced by a note, bond, debenture or similar instrument,
acquire or dispose of any material property or asset, or engage in any
transaction not in the ordinary course of business consistent with past practice
or subject any of the Company's assets or properties to any lien, claim, charge
or encumbrances whatsoever;
(b) grant any general increase in compensation to its employees or
officers or directors, pay any bonus, or effect any increase in retirement
benefits to any class of its employees or officers (unless any such change shall
be required by applicable law);
(c) declare, set aside or pay any dividend or other distribution on any
class of capital stock;
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(d) redeem, purchase or otherwise acquire any shares of its capital
stock or any securities or obligations convertible into or exchangeable for any
shares of its capital stock; merge into any other corporation or permit any
other corporation to merge into it, or consolidate with any other corporation;
liquidate, sell or dispose of any assets or acquire any assets, other than in
the ordinary course of its business consistent with past practice; or agree to
do any of the foregoing;
(e) issue any share of its capital stock or permit any share of its
capital stock held in its treasury to become outstanding, except for the
issuance of shares of Common Stock pursuant to the exercise of Vested Options
outstanding as of the date hereof pursuant to the MEI Option Plan or Warrants
outstanding as of the date hereof, in each case in accordance with their
respective terms; or issue, grant or extend the term of any option, warrant, or
stock appreciation right;
(f) amend the Certificate of Incorporation or Bylaws of the Company or
any Company subsidiary;
(g) effect any capital reclassification, stock dividend, stock split,
consolidation of shares or similar change in capitalization;
(h) take, cause or permit the occurrence of any change or event which
would render any of its representations and warranties contained herein untrue
in any material respect at and as of the Effective Time;
(i) enter into any affiliated party transaction of the type
contemplated by Section 3.20 hereof, except for transactions in the ordinary
course of business, on substantially the same terms as those prevailing for
comparable transactions with unaffiliated parties;
(j) solicit, encourage, or authorize any person, including but not
limited to its directors, officers, shareholders, or employees, to solicit from,
or communicate with, any third party, inquiries or proposals relating to the
disposition of the Company's or any Company subsidiary's business or assets, or
the acquisition of the Company's or any Company subsidiary's voting securities,
or the merger of the Company or any Company subsidiary with any person other
than the Buyer or any subsidiary of the Buyer, or provide any such person with
information or assistance or negotiate or conduct any discussions with any such
person in furtherance of such inquiries or to obtain a proposal, or continue any
such activities in progress on the date hereof, and the Company shall promptly
notify the Buyer of all of the relevant details, including the identity of such
third party and the nature of any such third party proposal, relating to all
inquiries and proposals which it may receive relating to any of such matters; or
(k) knowingly take any action which would (i) adversely affect the
ability to obtain the necessary approvals of Governmental Entities required for
the transactions
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contemplated hereby; or (ii) adversely affect its ability to perform the
covenants and agreements under the Agreement.
5.2 Conduct of Business. From the date hereof until the Effective Time, the
Company covenants and agrees that, except as otherwise consented to by the Buyer
in writing, it shall, and shall cause each Company subsidiary to:
(a) carry on its business, and maintain its books of account and other
corporate records, in the ordinary course consistent with past practice and
legal and regulatory requirements;
(b) to the extent consistent with prudent business judgment, use all
reasonable efforts to preserve its present business organization, to retain the
services of its officers and employees, and maintain customer and other business
relationships;
(c) maintain all of the structures, equipment, and other real and
personal property of the Company and any Company subsidiaries in good repair,
order and condition, ordinary wear and tear and unavoidable casualty excepted;
(d) use all reasonable efforts to preserve or collect all material
claims or causes of action of the Company or the Company subsidiaries;
(e) keep in full force and effect all insurance coverages maintained by
the Company or the Company subsidiaries;
(f) perform in all material respects all obligations under all material
agreements, contracts, commitments and other instruments to which the Company or
any Company subsidiary is a party or by which they may be bound or which relate
to or affect any of their respective assets or properties; and
(g) comply in all material respects with all statutes, laws,
regulations, rules, ordinances, orders, decrees, consents agreements and other
federal, state and local governmental or regulatory directives applicable to the
Company or any Company subsidiary and the conduct of their respective
businesses.
5.3 Consent by Shareholders of the Company. The Company shall, as soon as
reasonably possible, obtain the written consent by holders of the requisite
number of shares of its capital stock under its Certificate of Incorporation,
its financing or other agreements, and the DGCL as to the approval of the Merger
and the adoption of this Agreement, and shall promptly cause to be distributed
to each holder of record of its capital stock and of Vested Options and
Warrants, such disclosure materials as the Company considers reasonably
necessary to seek their consent or other approval to the extent required in
respect to this Agreement and the Merger. Such materials shall,
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without limitation, disclose that the Board of the Company recommended to the
Company's shareholders that they approve the Merger and adopt this Agreement.
5.4 Notices and Consents. Each of Buyer, Merger Sub and the Company shall
use commercially reasonable efforts to obtain, at its expense, all such waivers,
permits, consents, approvals or other authorizations from third parties and
Governmental Entities, and to effect all such registrations, filings (including,
without limitation, the making of all necessary filings under the HSR Act) and
notices with or to third parties and Governmental Entities, as may be required
by or with respect to Buyer, Merger Sub or the Company,respectively, in
connection with the transactions contemplated by this Agreement (including
without limitation, with respect to the Company, those listed in Schedule 3.3).
------------
5.5 Full Access. The Company shall permit Buyer and its representatives to
have full access (at all reasonable times, and in a manner so as not to
interfere materially with the normal business operations of the Company) to all
premises, properties, financial and accounting records, contracts, other records
and documents and personnel, of or pertaining to the Company or any Company
subsidiary, subject to compliance with applicable confidentiality obligations of
the Company.
5.6 Notice of Breaches. The Company shall promptly deliver to Buyer written
notice of any event or development that would (a) render any statement,
representation or warranty of the Company in this Agreement (including the
Schedules hereto) inaccurate or incomplete in any material respect, or (b)
- ---------
constitute or result in a breach by the Company of, or a failure by the Company
to comply with, any agreement or covenant in this Agreement applicable to such
party. Buyer shall promptly deliver to the Company written notice of any event
or development that would (i) render any statement, representation or warranty
of Buyer or Merger Sub in this Agreement inaccurate or incomplete in any
material respect, or (ii) constitute or result in a breach by Buyer or Merger
Sub of, or a failure by Buyer or Merger Sub to comply with, any agreement or
covenant in this Agreement applicable to such party.
5.7 Press Release and Announcements. Except for such disclosures that Buyer
reasonably determines are required to be made in connection with the
Registration Statement and the offering of its securities contemplated thereby,
no Party shall issue any press release or make any public disclosure relating to
the subject matter of this Agreement without the prior written approval of each
other Party.
5.8 Current Information. During the period from the date of this Agreement
to the Effective Time, the Company will cause one or more of its representatives
to confer on a regular and frequent basis with representatives of the Buyer and
to report on the general status of its ongoing operations. The Company will
promptly notify the Buyer of any material change in the normal course of its
business or in the operation of its properties and, to the extent permitted by
applicable law, of any governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated), or the institution
or the threat of material litigation involving the
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Company, and will keep the Buyer fully informed with respect to such events.
5.9 Expenses. Each Party hereto shall pay its own expenses incident to
preparing for, entering into and carrying out this Agreement and to the
consummation of the Merger and the transactions contemplated hereby. The Company
agrees that the aggregate expenses of the Company, including all fees and
expenses of legal counsel, accountants, and financial or other advisors, shall
not exceed reasonable amounts in light of the circumstances and the amount and
nature of work or services to be performed.
5.10 Miscellaneous Agreements and Consents.
(a) On or before the Closing Date, the Board of the Company (or, as
applicable, any committee thereof) shall take all actions necessary to:
(i) provide that, immediately prior to the Effective Time, each
outstanding Warrant, whether or not then exercisable, shall be canceled by
the Company, and the holders thereof shall be entitled to receive, subject
to the terms and conditions of this Agreement, a payment in immediately
available funds equal to the Merger Consideration Per Share, and
(ii) use its best efforts to cause the holders of all shares of
the Company's issued and outstanding Preferred Stock to convert such shares
into Common Stock on or before the Closing Date.
(b) Subject to the terms and conditions herein provided, each of the
Parties hereto agrees to use all reasonable efforts to take, or cause to be
taken, all action, and to do, or cause to be done, all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement, including, without
limitation, using reasonable efforts to lift or rescind any injunction or
restraining order or other order adversely affecting the ability of the Parties
to consummate the transactions contemplated hereby. The Buyer and the Company
will, and the Company will cause any Company subsidiary to, use its best efforts
to obtain consents of all third parties and governmental bodies necessary or
desirable for the consummation of the transactions contemplated by this
Agreement.
5.11 Certificate of Incorporation of Merger Sub. Buyer and Merger Sub shall
not, on or prior to the Effective Time, amend or modify the provisions of Merger
Sub's Certificate of Incorporation (a true and complete copy of which is
attached hereto) governing the number of authorized shares of Merger Sub's
common stock.
ARTICLE VI
CONDITIONS TO CONSUMMATION OF MERGER
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6.1 Conditions to Each Party's Obligations To Effect the Merger.
The respective obligations of each Party to effect the Merger shall be
subject to the continued fulfillment, or waiver by all such Parties, at the
Effective Time, of the following conditions:
(a) this Agreement and the Merger shall have been adopted and approved
by the affirmative vote or written consent of the holders of the requisite
number of shares of capital stock of the Company in accordance with the
Company's Certificate of Incorporation and the DGCL;
(b) each of the Company, Buyer, Merger Sub and any other person (as
defined in the HSR Act and the rules and regulations thereunder) required in
connection with the Merger to file a Notification and Report Form for Certain
Mergers and Acquisitions with the Department of Justice and the Federal Trade
Commission pursuant to Title II of the HSR Act shall have made such filing and
the applicable waiting period with respect to each such filing (including any
extension thereof by reason of a request for additional information) shall have
expired or been terminated;
(c) no temporary restraining order, preliminary or permanent injunction
or other order issued by any court of competent jurisdiction or other legal or
regulatory restraint or prohibition preventing the consummation of the
transactions contemplated herein or limiting or restricting Buyer's or the
Company's conduct or operation of its business after the transactions
contemplated herein shall have been issued, nor shall any proceeding brought by
any Governmental Entity seeking any of the foregoing be pending; nor shall there
be any action taken, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the transactions contemplated herein which
makes the consummation of the transactions contemplated herein illegal;
(d) Buyer, the Shareholders Representative and a Qualifying Escrow
Agent shall have entered into the Escrow Agreement; and
(e) the Surviving Corporation and Henry S. Firey shall have entered
into an employment agreement, satisfactory in form and substance to the Buyer
and Henry S. Firey, providing for limitations on his ability to compete with the
Surviving Corporation and such other provisions as are set forth in a term sheet
of even date herewith executed by Mr. Firey and Buyer.
6.2 Conditions to Obligation of the Buyer and Merger Sub to Effect the
Merger. The obligation of the Buyer and Merger Sub to effect the Merger shall be
subject to the continued fulfillment or waiver by Buyer, at the Effective Time,
of the following additional conditions:
(a) Representations and Warranties; Corporate Proceedings. The
representations and warranties of the Company set forth in Article III shall be
true and correct in all material respects as of the date of this Agreement and
as of the Effective Time, and the Buyer shall
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have received a certificate of the President of the Company to that effect. All
corporate action required to have been taken by, or on the part of, the Company
to authorize the execution, delivery and performance of this Agreement and the
Merger, respectively, shall have been duly and validly taken and shall be in
full force and effect, and the Buyer shall have received certified copies of the
resolutions evidencing such authorizations.
(b) Performance of Obligations. The Company shall have in all material
respects performed all obligations required to be performed by it under this
Agreement at or prior to the Effective Time, and the Buyer shall have received a
certificate of the President of the Company to that effect.
(c) Permits, Authorizations, Etc. The Company and the Company
subsidiaries shall have obtained any and all material permits, authorizations,
consents, waivers, clearances or approvals required for the lawful consummation
of the Merger.
(d) No Material Adverse Change. There shall not have been any material
adverse change in the business, operation, assets, financial condition,
prospects or results of operations of the Company or any Company subsidiary. For
purposes hereof, adverse developments with respect to any matter disclosed to
the Buyer prior to the date hereof and included herein shall not constitute a
material adverse change to the extent that the nature and scope of the adverse
development is of the nature and within the scope of the matter disclosed.
(e) Regulatory Approvals. The Buyer shall have received unconditional
approval of the Merger contemplated by this Agreement from any federal or state
regulatory agencies whose approval is required for consummation of such
transaction (except for such conditions as are ordinarily imposed in connection
with transactions of the type contemplated hereby and which are not, in the
opinion of the Buyer, unduly burdensome), and all notice and waiting periods
after the granting of any such approval shall have expired.
(f) Litigation. Except as set forth in Schedule 3.7, at the Effective
------------
Time, there shall not be pending or threatened against the Company or any
Company subsidiary or the officers or directors thereof in their capacity as
such, any suit, action or proceeding (including antitrust actions) which, if
successful, would, in the reasonable judgment of the Buyer, have a material
adverse effect on the business, operation, assets, financial condition,
prospects or results of operations of the Company or any Company subsidiary.
(g) Opinion of Counsel. The Company shall have delivered to the Buyer
an opinion, dated the Effective Time, of counsel to the Company, in form and
substance reasonably satisfactory to Buyer and its counsel, to the effect that:
(i) the Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware, and has
full corporate
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power and authority to own and operate its business and properties and
to carry on its business as currently conducted;
(ii) Phoenix is a corporation duly organized, validly existing and
in good standing under the laws of the State of California, and has
full corporate power and authority to own and operate its business and
properties and to carry on its business as currently conducted;
(iii) (A) the authorized capital stock of the Company consists of
(1) 10,013,718 shares of Preferred Stock, of which 4,563,718 shares
are Series A Preferred Stock, 2,500,000 shares are Series B
Preferred Stock, and 2,950,000 shares are Series C Preferred Stock,
and (2) 25,000,000 shares of Common Stock;
(B) as of the date of this Agreement, 4,179,346 shares of
Common Stock, 4,563,718 shares of Series A Preferred Stock,
2,500,000 shares of Series B Preferred Stock, and 2,901,949
shares of Series C Preferred Stock have been validly issued and
outstanding, fully paid and nonassessable with no personal
liability attaching to the ownership thereof;
(C) as of the date of this Agreement, each share of Series A
Preferred Stock is convertible into 1.10641747 shares of Common
Stock, each share of Series B Preferred Stock is convertible into
one share of Common Stock and each share of Series C Preferred
Stock is convertible into one share of Common Stock;
(D) subject to the exercise in accordance with their terms of
Warrants outstanding as of the date of this Agreement, and
assuming the conversion of all of the issued and outstanding
shares of Preferred Stock into shares of Common Stock, as of the
Effective Time, 19,835,923 shares of Common Stock will have been
validly issued and will be outstanding, fully paid and
nonassessable with no personal liability attaching to the
ownership thereof;
(E) no shares of capital stock in the Company have been
issued in violation of the preemptive rights of any person and
all such shares are free of preemptive rights.
(iv) to the knowledge of such counsel, there are no outstanding
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obligations of the Company or any Company subsidiary to purchase, reacquire or
redeem any shares of capital stock of the Company;
(v) execution, delivery and performance of this Agreement by the
Company and consummation of the transactions contemplated by this Agreement do
not and will not conflict with, or result in the breach of, or constitute a
default under, any of the provisions of the Certificate of Incorporation or
Bylaws of the Company or any Company subsidiary or, to the knowledge of such
counsel, any material agreement to which the Company or any such subsidiary is a
party or by which their properties or assets may be bound;
(vi) the Company has full corporate power and corporate authority to
execute, deliver and perform this Agreement, and this Agreement has been duly
authorized, approved and adopted by all requisite corporate action of the
Company, and by the shareholders of the Company, and constitutes the valid and
legally binding obligation of the Company in accordance with its terms, subject
to applicable bankruptcy, insolvency, reorganization, moratorium and similar
laws relating to or affecting creditors' rights generally and subject to general
equity principles which may limit the enforcement of certain remedies; and
(vii) to the knowledge of such counsel, execution, delivery and
performance of the Escrow Agreement by the Shareholders Representative and
consummation of the transactions contemplated thereby do not and will not
conflict with, or result in the breach of, or constitute a default under, any
material agreement to which the Shareholders Representative is a party or by
which his properties or assets may be bound;
(viii) the Shareholders Representative has full power and authority to
execute, deliver and perform the Escrow Agreement, and the Escrow Agreement has
been duly authorized, approved and adopted by all requisite corporate action of
the Company's shareholders, and constitutes the valid and legally binding
obligation of the Shareholders Representative in accordance with its terms,
subject to applicable bankruptcy, insolvency, reorganization, moratorium and
similar laws relating to or affecting creditors' rights generally and subject to
general equity principles which may limit the enforcement of certain remedies;
(ix) except as set forth in Schedule 3.7, as updated as of the
-------- ---
Closing, such counsel does not know of any claim, litigation, arbitration
proceeding, labor dispute or investigation of any kind pending or threatened
against the Company or any Company subsidiary in any court or before any
federal, state or municipal or other governmental agency or instrumentality
relating in any way to the transactions contemplated in this Agreement, or which
if determined adversely to the Company
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or any such subsidiary would have a Material Adverse Effect on the
financial condition, results of operations, business, properties, or assets
of the Company and such subsidiaries, taken as a whole.
(h) Third Party Consents. The Company shall have obtained all material
third party consents under any agreement, contract, lease, note, license, permit
or other document by which Company or any Company subsidiary is bound or to
which any of their respective properties is subject required for the
consummation of the transactions contemplated hereby.
(i) Initial Public Offering. Buyer shall have completed an initial
public offering of its common stock, unless Buyer has waived this condition by
giving the Company written notice of such waiver prior to Closing.
6.3 Conditions to Obligation of the Company to Effect the Merger. The
obligation of the Company to effect the Merger shall be subject to the continued
fulfillment, or waiver by the Company at or prior to the Effective Time, of the
following additional conditions:
(a) Representations and Warranties; Corporate Proceedings. The
representations and warranties of Buyer and Merger Sub set forth in Article IV
shall be true and correct in all material respects as of the date of this
Agreement and as of the Effective Time, and the Company shall have received a
certificate of the President of the Buyer to that effect. All corporate action
required to have been taken by, or on the part of, the Buyer or Merger Sub to
authorize the execution, delivery and performance of this Agreement and the
Merger, respectively, shall have been duly and validly taken, and shall be in
full force and effect, and the Company shall have received certified copies of
the resolutions evidencing such authorizations.
(b) Performance of Obligations. Buyer and Merger Sub each shall have
in all material respects performed all obligations required to be performed by
it under this Agreement at or prior to the Effective Time, and the Company shall
have received a certificate of the President of the Buyer to that effect.
(c) Opinion of Counsel. The Buyer shall have delivered to the Company
an opinion, dated the Effective Time, of counsel to the Buyer, in form and
substance reasonably satisfactory to the Company and its counsel, to the effect
that:
(i) Buyer and Merger Sub each is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Delaware; and each has full corporate power and authority to own and
operate its business and properties and to carry on its business as
currently conducted;
(ii) execution, delivery and performance of this Agreement by each
of Buyer and Merger Sub and consummation of the transactions contemplated
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<PAGE>
in this Agreement do not and will not conflict with, or result in the breach of,
or constitute a default under, any of the provisions of the Certificate of
Incorporation or Bylaws of the Buyer or Merger Sub or, to the knowledge of such
counsel, any material agreement to which the Buyer or Merger Sub is a party or
by which their properties or assets may be bound;
(iii) Buyer and Merger Sub each has full corporate power and
corporate authority to execute, deliver and perform this Agreement, and this
Agreement has been duly authorized, approved and adopted by all requisite
corporate action of each of Buyer and Merger Sub, and by the shareholders of
Merger Sub, and constitutes the valid and legally binding obligation of Buyer
and Merger Sub in accordance with its terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws relating to or affecting
creditors' rights generally and subject to general equity principles which may
limit the enforcement of certain remedies; and
(iv) such counsel does not know of any claim, litigation,
arbitration proceeding, labor dispute or investigation of any kind pending or
threatened against the Buyer or Merger Sub in any court or before any federal,
state or municipal or other governmental agency or instrumentality relating in
any way to the transactions contemplated in this Agreement.
ARTICLE VII
TERMINATION
7.1 Termination of Agreement. This Agreement may be terminated prior to the
Closing Date as provided below:
(a) the Company and Buyer may terminate this Agreement by mutual
written consent;
(b) Buyer may terminate this Agreement by giving written notice to the
Company in the event that the Company is in material breach of any
representation, warranty, or covenant of the Company contained in this
Agreement, and such breach is not remedied by the Company within 10 days of
delivery of written notice thereof;
(c) the Company may terminate this Agreement by giving written notice
to Buyer in the event that (i) Buyer and/or Merger Sub is in material breach of
any representation, warranty, or covenant of Buyer and/or Merger Sub contained
in this Agreement, and such breach is not remedied by Buyer and/or Merger Sub,
as applicable, within 10 days of delivery of written notice
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thereof, or (ii) Buyer fails to make any disbursement of the loan required under
the Loan Agreement and such failure is not remedied by Buyer within 5 Business
Days of delivery of written notice thereof;
(d) either the Company or Buyer may terminate this Agreement by giving
written notice to the other Parties if the Closing shall not have occurred on or
before (i) November 30, 1999, unless Buyer elects to extend the Closing in
accordance with Section 1.6(a)(i) hereof, or (ii) if said extension of the
Closing occurs, the date as to which Closing has been extended in accordance
with this Agreement (provided, however, that the right to terminate this
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Agreement under this Section 7.1(d) shall not be available to any Party whose
failure to fulfill any obligation under this Agreement has been the cause of or
resulted in the failure of the transactions contemplated herein to be completed
on or before such date); or
(e) either the Company or Buyer may terminate this Agreement by giving
written notice to the other Parties if a court of competent jurisdiction or
other Governmental Entity shall have issued a final order, decree or ruling, or
taken any other action, having the effect of permanently restraining, enjoining
or otherwise prohibiting the transactions contemplated herein, and all appeals
with respect to such order, decree, ruling or action have been exhausted or the
time for appeal of such order, decree, ruling or action shall have expired.
7.2 Effect of Termination. In the event of the termination and abandonment
of this Agreement pursuant to Section 7.1, written notice thereof shall promptly
be given to the other Parties, whereupon this Agreement shall terminate, all
further obligations of the Parties hereunder to satisfy the conditions precedent
to the Closing shall terminate, and the transactions contemplated hereby shall
be abandoned without further action by any of the Parties. Any termination
pursuant to Section 7.1 shall be without liability to the Buyer, Merger Sub or
the Company, except to the extent that there shall have occurred any breach of
this Agreement, as to each of which all legal remedies of the Party(ies)
adversely affected shall survive and be enforceable.
ARTICLE VIII
POST-CLOSING COVENANTS AND OTHER AGREEMENTS
8.1 Further Assurances. Each Party, at the reasonable request of another
Party, shall execute and deliver such other instruments and do and perform such
other acts and things as may be reasonably necessary or desirable for effecting
completely the consummation of this Agreement and the transactions contemplated
hereby.
8.2 Survival of Representations and Warranties.
(a) For purposes of the Indemnification obligations set forth in
Article IX, and subject to the limitations set forth therein, the
representations, warranties, covenants and agreements set forth in this
Agreement shall survive the Closing and remain in full force and effect until
the first anniversary of the Effective Time.
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(b) Notwithstanding anything to the contrary set forth herein, (i) any
representations and warranties contained in any separate agreement contemplated
herein shall survive the Closing as provided in such separate agreement and (ii)
any claims, actions or suits based upon fraud, willful misconduct or intentional
misrepresentation shall continue in full force and effect without limitation
until expiration of the statute of limitations applicable thereto.
(c) If prior to the close of business on the scheduled date for
expiration of a particular representation, warranty, covenant or agreement that
is the basis for a Claim, Buyer shall have provided notice of such Claim in
accordance with the Escrow Agreement and Article IX of this Agreement, then the
representation, warranty, covenant or agreement that is the basis for such Claim
shall continue to survive to the extent of such specific Claim only, until such
Claim is finally resolved or disposed of.
8.3 Surviving Corporation Stock Option Plan. As soon as reasonably
practicable after the Effective Time, Buyer, as the sole shareholder of the
Surviving Corporation, will cause the Surviving Corporation to adopt an option
plan for the benefit of the Surviving Corporation's employees so as to provide
for the award of options to such employees, at the discretion of the Surviving
Corporation's Board, to purchase shares of the Surviving Corporation's common
stock issuable under the plan. The option plan shall provide that the number of
such shares issuable thereunder shall be an aggregate amount equal to 20% of the
Surviving Corporation's issued and outstanding common stock at Closing (or such
lesser percentage as Buyer's accountants or counsel shall determine is necessary
to allow Buyer to consolidate with the Surviving Corporation for federal income
tax purposes).
8.4 Put Options.
(a) If, on or before the third anniversary of the Closing, the
Surviving Corporation has not effected a public offering of its equity
securities or a merger or other business combination of the Surviving
Corporation, the Surviving Corporation shall, upon receiving a written election
by any ACurrent Employee" listed on Schedule 8.4 (a "Current Employee"),
------------
delivered to the Surviving Corporation within the 30-day period following the
third anniversary of Closing (the "Put Election"), and provided that such
electing Current Employee remains at such time an employee of the Surviving
Corporation, purchase all (but not less than all) (i) stock options issued or
deemed issued by the Surviving Corporation which are vested and outstanding and
held by such Current Employee at such time and (ii) shares of the Surviving
Corporation's common stock previously issued upon exercise of stock options (the
"Option Shares") issued or deemed issued by the Surviving Corporation, which
Option Shares are held by such electing Current Employee at such time, for
consideration equal to the independently determined fair market value of, as
applicable, such stock options and/or Option Shares as of the date of the Put
Election, payable at the Surviving Corporation's election in cash or securities
of Buyer. The Surviving Corporation's President may, prior to expiration of the
six month period following the Closing, designate the two "Proposed Employees"
referenced in Schedule 8.4 to be included as Current Employees subject to the
------------
approval
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of the Surviving Corporation's Board.
(b) If, on or before the fourth anniversary of the Closing, the
Surviving Corporation has not effected a public offering of its equity
securities or a merger or other business combination of the Surviving
Corporation, the Surviving Corporation shall, upon written election by any
Current Employee, delivered to the Surviving Corporation within the 30-day
period following the fourth anniversary of Closing, and provided that such
electing Current Employee remains at such time an employee of the Surviving
Corporation, purchase all (but not less than all) (i) stock options issued or
deemed issued by the Surviving Corporation which are vested and outstanding and
held by such Current Employee at such time and (ii) Option Shares held by such
Current Employee at such time, for consideration equal to the independently
determined fair market value of, as applicable, such stock options and/or Option
Shares as of the date of the Put Election, payable at Surviving Corporation's
election in cash or securities of Buyer.
8.5 Credit Support. The Buyer shall make available to the Surviving
Corporation, or otherwise guarantee or provide its credit support so as to
enable the Surviving Corporation to obtain, working capital loans in an amount
not to exceed $7,000,000 in the first year following Closing and an additional
$5,000,000 in the second year following Closing, on customary terms and
conditions.
ARTICLE IX
INDEMNIFICATION
9.1 Indemnification by Company Shareholders; Limitations on
Indemnification.
(a) The Company Shareholders, by virtue of approving this Agreement and
the Merger, agree that, subject to the terms and conditions of this Agreement
(including Section 9.1(b)), all funds in the Reimbursement Account shall be
applied to indemnify, defend, reimburse and hold harmless (collectively the
"Indemnification") Buyer, Merger Sub and/or the Surviving Corporation
(hereinafter referred individually as a "Buyer Indemnified Person" and
collectively as "Buyer Indemnified Persons") from and against any and all
losses, costs, damages, liabilities, Taxes and expenses arising from claims,
demands, actions, causes of action, including, without limitation reasonable
legal fees, net of any recoveries under existing insurance policies, Tax benefit
received by Buyer or Merger Sub or any of their affiliates as a result of such
damages, indemnities from third parties or in the case of third party claims, by
any amount actually recovered by Buyer or Merger Sub or any of their affiliates
pursuant to counterclaims made by any of them directly relating to the facts
giving rise to such third party claims (collectively, "Damages"), arising out of
any misrepresentation or breach of or default in connection with any of the
representations, warranties, covenants and agreements given or made by the
Company in this Agreement.
(i) No Buyer Indemnified Person shall be entitled to
Indemnification under this Article IX from and against any and all Damages until
the aggregate amount of such Damages incurred by all Buyer Indemnified Persons
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exceeds $100,000, in which event all Buyer Indemnified Persons shall be entitled
to Indemnification for the amount of all such Damages including all such Damages
comprising the first $100,000 thereof.
(ii) Notwithstanding anything to the contrary set forth herein,
the aggregate obligations hereunder to Indemnify the Buyer Indemnified Persons
shall not exceed 10% of the Merger Consideration, and shall be satisfied solely
from the funds in the Reimbursement Account without further liability hereunder.
9.2 Claims Generally.
(a) If at any time a Buyer Indemnified Person is entitled to
Indemnification under Article IX or shall become aware of any state of facts
that has resulted or may result in a Claim for Damages, the Buyer Indemnified
Person shall (i) give written notice to the Shareholders Representative pursuant
to and otherwise follow the procedures set forth in the Escrow Agreement and
(ii) follow the procedures set forth in paragraphs (b) through (e) below.
(b) Upon becoming aware of any state of facts that has resulted or may
result in a Claim, the Buyer Indemnified Person shall promptly give written
notice (a "Notice of Claim") to the Shareholders Representative of the discovery
of such potential or actual Claim. The Notice of Claim shall set forth (i) a
description of the nature of the potential or actual Claim, specifying in
reasonable detail the nature of the misrepresentation, breach of warranty or
other claim to which such item is related, and (ii) the total amount of Damages
anticipated (if known) specifying in reasonable detail the individual items of
such Damages included in the amount so stated (including any costs or expenses
which have been or may be reasonably incurred in connection therewith), the date
each such item was paid, or properly accrued or arose. Except for a failure to
deliver a Notice of Claim within the survival period as provided under Section
9.2, a Buyer Indemnified Person's failure to give prompt notice shall constitute
a defense (in whole or in part) to any Claim by the Buyer Indemnified Person for
Indemnification only to the extent that such failure shall have caused or
materially increased such liability or materially and adversely affected the
ability of the Shareholders Representative to defend against or reduce the
amount of Damages.
(c) The Shareholders Representative shall accept or reject any Claim as to
which a Notice of Claim is sent by the Buyer Indemnified Person by giving
written notice of such acceptance or rejection (the "Indemnitor Notice") to the
Buyer Indemnified Person within 30 days after the date of receipt of the Notice
of Claim. Failure of the Shareholders Representative to reject a Claim within 30
days of receipt of the Notice of Claim shall be conclusive evidence of the
Shareholders Representative's acceptance of the Claim and the amount of its
Damages in respect of the Claim.
(d) If the Shareholders Representative elects to reject the Claim, the
Indemnitor Notice shall set forth a brief description of the nature of the basis
for the rejection of such Claim, without limiting the right of the Shareholders
Representative to identify further bases for rejecting
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such Claim in the future.
(e) If the Shareholders Representative elects to accept the Claim or if
the Shareholders Representative and the Buyer Indemnified Person should
otherwise agree on the resolution of the Claim, a memorandum setting forth such
agreement shall be prepared and signed by both parties.
(f) The Parties agree that any controversy or claim arising out of or
relating to this Article IX and the Escrow Agreement shall be settled by
arbitration in accordance with the National Rules of the American Arbitration
Association (the "AAA") in Washington, DC. The Shareholders Representative and
the Buyer each shall appoint an arbitrator who has expertise in the
interpretation of commercial contracts and these two arbitrators shall select a
third neutral arbitrator from the AAA's commercial panel who also shall have
expertise in the interpretation of commercial contracts. In reaching their
decision, the arbitrators shall have no authority to change or modify any
provision of this Agreement. Such arbitrators shall act as the administrators
and exclusive arbitrators with respect to all claims. The Shareholders
Representative and the Buyer each shall be responsible for costs and the costs
of its selected arbitrator, and the costs of the AAA and the third arbitrator
shall be split evenly between the Shareholders Representative, on the one hand,
and Buyer, on the other hand, unless the arbitration determines otherwise. The
funds in the Reimbursement Account shall not be used to pay any costs of the
arbitrators, the AAA or the arbitration. The decision of the arbitrators as to
the validity of the Claim and amount of Damages in respect to such Claim shall
be binding and conclusive upon the Parties and may be entered in any court
having jurisdiction thereover, and if applicable, shall be provided to the
Escrow Agent for purposes of the Escrow Agreement.
(g) Notwithstanding anything to the contrary set forth herein, nothing in
this Agreement shall limit the liability of any Party in connection with any
claims, actions or suits based upon fraud, willful misconduct or intentional
misrepresentation.
9.3 Third-Party Claims. In addition to any other procedural requirements
set forth in Section 9.2, if the Buyer becomes aware of a third-party Claim,
Buyer shall promptly notify the Company and the Shareholders Representative of
such claim, and the Shareholders Representative shall be entitled, at its
expense, to participate in any defense of such Claim. Buyer shall have the right
to settle any such claim only with the prior written consent of the Shareholders
Representative, which consent shall not be unreasonably withheld. For purposes
of the preceding sentence, it shall be reasonable to withhold such consent if
the terms of any such settlement do not include the full release of the
Indemnification obligation with respect to such Claim. Following notice of any
Claim, Buyer shall notify the Shareholders Representative of any discussions,
negotiations or other material developments affecting such Claim and, to the
extent commercially reasonable, permit the Shareholders Representative to
participate in any such discussions or negotiations.
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ARTICLE X
MISCELLANEOUS
10.1 Certain Definitions. For purposes of this Agreement, any reference to
any event, change, condition or effect being "material" with respect to any
entity or group of entities means any material event, change, condition or
effect related to the financial condition, properties, assets (including
intangible assets), liabilities, business, operations, results of operations or
business prospects of such entity or group of entities. In this Agreement, any
reference to a Party's knowledge means such Party's actual knowledge after
reasonable inquiry of officers, directors and other employees of such Party
reasonably likely to have knowledge of such matters.
10.2 No Third Party Beneficiaries. Except as expressly contemplated herein
in respect to the Shareholders Representative, this Agreement shall not confer
any rights or remedies upon any person other than the Parties, and their
respective successors and permitted assigns.
10.3 Entire Agreement; Incorporation of Schedules and Other Agreements.
This Agreement and the Schedules appended hereto, the Escrow Agreement and the
Loan Agreement, constitute the entire agreement among the Parties and supersede
any prior understandings, agreements (including the Letter Agreement) or
representations by or among the Parties, written or oral, with respect to the
subject matter hereof and thereof. The Schedules (and all documents, or
instruments attached thereto) are incorporated herein by reference and made a
part hereof.
10.4 Succession. This Agreement shall be binding upon and inure to the
benefit of the Parties named herein and their respective successors and assigns.
The Company may not assign its rights or obligations hereunder. Each of the
Buyer and Merger Sub may assign its rights and obligations hereunder to any
entity under common control with Buyer and Merger Sub.
10.5 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
10.6 Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
10.7 Notices.
All notices, requests, demands, claims, and other communications hereunder
shall be in writing. Any notice, request, demand, claim, or other communication
hereunder shall be deemed duly delivered two business days after it is sent by
registered or certified mail, return receipt requested, postage prepaid, or one
Business Day after it is sent via a reputable nationwide overnight courier
service or sent via facsimile (with acknowledgment of complete transmission)
with a confirmation copy by registered or certified mail, in each case to the
intended recipient as set forth
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below:
If to the Company, prior to Closing:
MEI Software Systems, Inc.
11720 Sunrise Valley Drive
Reston, VA 20191
Attn: Hank S. Firey, President
Fax No.: 703-620-4858
Copy to:
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
12021 Sunset Hills Road
Suite 310
Attn: Mark J. Wishner, Esquire
Fax No.: 703-464-4895
and to
Edison Venture Fund II-PA, L.P.
Shareholders Representative
c/o Mid-Atlantic Venture Fund
Suite 203
Reston, VA 20130
Attn: Thomas A. Smith
Fax No.: 703-904-4124
If to Buyer or Merger Sub (or the Company after
Closing):
E2Enet, Inc.
800 Connecticut Avenue, N.W.
Suite 1111
Washington, D.C. 20006
Attn: Robert J. Smith, Chief Executive Officer
Fax No.: 202-261-6030
Copy to:
Verner, Liipfert, Bernhard, McPherson & Hand,
Chartered
901 15th Street, N.W.
Suite 700
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<PAGE>
Washington, D.C. 20005-2301
Attn: Harold Freilich, Esquire
Gene Schleppenbach, Esquire
Fax No.: 202-371-6279
Any Party and/or the Shareholder's Representative may give any notice,
request, demand, claim, or other communication hereunder using any other means
(including personal delivery, expedited courier, messenger service, telecopy,
ordinary mail or electronic mail), but no such notice, request, demand, claim,
or other communication shall be deemed to have been duly given unless and until
it actually is received by the Party and/or the Shareholder's Representative for
whom it is intended. Any Party and/or the Shareholder's Representative may
change the address to which notices, requests, demands, claims and other
communications hereunder are to be delivered by giving the other Parties and/or
the Shareholder's Representative, notice in the manner herein set forth.
10.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of Delaware, without giving
effect to any choice of law or conflict of law rules or provisions (whether of
the State of Delaware or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the State of Delaware.
10.9 Amendments and Waivers. The Parties may mutually amend any provision
of this Agreement at any time prior to the Closing Date. No amendment of any
provision of this Agreement shall be valid unless the same shall be in writing
and signed by all of the Parties. No waiver by any Party of any default,
misrepresentation or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation or breach of warranty or covenant hereunder or affect
in any way any rights arising by virtue of any prior or subsequent default,
misrepresentation, breach of such warranty or covenant.
10.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction. If the final judgment of a court of
competent jurisdiction declares that any term or provision hereof is invalid or
unenforceable, the Parties agree that the court making the determination of
invalidity or unenforceability shall have the power to reduce the scope,
duration, or area of the term or provision, to delete specific words or phrases,
or to replace any invalid or unenforceable term or provision with a term or
provision that is valid and enforceable and that comes closest to expressing the
intention of the invalid or unenforceable term or provision, and this Agreement
shall be enforceable as so modified after the expiration of the time within
which the judgment may be appealed, provided that this Agreement shall not then
substantially deprive any Party of the bargained-for performance of any other
Party.
10.11 Other Remedies. Except as otherwise provided herein, any and all
remedies herein
47
<PAGE>
expressly conferred upon a Party will be deemed cumulative with, and not
exclusive of, any other remedy conferred hereby or by law or equity upon such
party, and the exercise by a Party of any one remedy will not preclude the
exercise of any other remedy.
10.12 Specific Performance. The Parties acknowledge and agree that damages
would be an inadequate remedy for any breach of the provisions of this Agreement
and agree that the obligations of the Parties hereunder shall be specifically
enforced in accordance with the terms of this Agreement. The prevailing Party in
any such action shall be entitled to recover from the other Party its attorneys'
fees, costs and expenses incurred in connection with regard to such action.
10.13 Construction. The Parties agree that they have been represented by
counsel during the negotiation, preparation and execution of this Agreement and,
therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document. Any
reference to any federal, state, local, or foreign statute or law shall be
deemed also to refer to all rules and regulations promulgated thereunder, unless
the context requires otherwise.
ARTICLE XI
DEFINITIONS
For purposes of this Agreement, including the recitals hereto, the
following terms used in this Agreement with initial capital letters have the
meanings specified or referred to in this Article XI:
"AAA" has the meaning ascribed to such term in Section 9.2.
"Affiliates" has the meaning ascribed to such term in Section 3.20.
"Agreement" means this Agreement, as such term is defined in the preamble.
"Audited Financial Statements" has the meaning ascribed to such term in
Section 3.5(a).
"Board" means the Board of Directors of the subject corporation.
"Business Day" means any day, other than a Saturday, Sunday or legal
holiday in the Commonwealth of Virginia.
"Buyer" has the meaning ascribed to such term in the preamble.
"Buyer Indemnified Person" has the meaning ascribed to such term in Section
9.1(a).
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<PAGE>
"Bylaws" means the Bylaws as in effect of the subject corporation.
"CERCLA" means the Comprehensive Environmental Compensation, Liability and
Response Act of 1980.
"Certificate of Incorporation" means the Certificate of Incorporation as in
effect of the subject corporation.
"Certificate of Merger" has the meaning ascribed to such term in Section
1.6(b).
"Claims" means all claims for Damages by or on behalf of a Buyer
Indemnified Person in accordance with Article IX.
"Closing" has the meaning ascribed to such term in Section 1.6(a).
"Closing Date" has the meaning ascribed to such term in Section 1.6(a).
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means shares of the Company's authorized common stock, par
value $.01 per share.
"Company" has the meaning ascribed to such term in the preamble.
"Company Shareholders" means, as the context requires, the holders of all
issued and outstanding shares of capital stock of the Company and of all Vested
Options.
"Contingent Benefits" has the meaning ascribed to such term in Section
3.23(j).
"Current Employee" has the meaning ascribed to such term in Section 8.4(a).
"Damages" has the meaning ascribed to such term in Section 9.1(a).
"DGCL" means the Delaware General Corporation Law, as amended and in effect
from time to time.
"Dissenting Shares" means issued and outstanding shares of capital stock in
the Company held by any person who has elected in accordance with the DGCL to
exercise dissenters rights of appraisal in respect to the Merger.
"Effective Time" has the meaning ascribed to such term in Section 1.6(b).
49
<PAGE>
"Employee Benefit Plan" has the meaning ascribed to such term in Section
3.23(a).
"Environmental Law" has the meaning ascribed to such term in Section
3.25(a).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" has the meaning ascribed to such term in Section 3.23(a).
"Esch Agreement" has the meaning ascribed to such term in Section 3.19.
"Esch Fees" means all fees and reimburseable expenses payable in accordance
with the Esch Agreement.
"Escrow Agent" has the meaning ascribed to such term in Section 2.2(a).
"Escrow Agreement" has the meaning ascribed to such term in Section 2.2.
"Escrow Amount"has the meaning ascribed to such term in Section 2.2(a).
"Excess Professional Costs" means the amount by which all Professional
Costs incurred by the Company for the period commencing September 1, 1999 and
payable by the Company in relation to the Merger exceeds $50,000.
"Extraordinary Bonuses" has the meaning ascribed to such term in Section
3.23(j).
"GAAP" means United States generally accepted accounting principles.
"Governmental Entity" has the meaning ascribed to such term in Section 3.3.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"Immediate Payment Account" has the meaning ascribed to such term in
Section 2.2(a)(ii).
"Immediate Payment Funds" has the meaning ascribed to such term in Section
2.2(a)(ii).
"Indemnitor Notice" has the meaning ascribed to such term in Section
9.2(c).
"Intellectual Property" has the meaning ascribed to such term in Section
3.14(a).
"Interim Financial Statements" has the meaning ascribed to such term in
Section 3.5(a).
50
<PAGE>
"Letter Agreement" means the Letter Agreement, dated August 20, 1999, by
and between the Company and the Buyer.
"Loan Agreement" means the Loan Agreement dated as of the date hereof by
and between Buyer and the Company.
"Material Adverse Effect" with respect to any entity or group of entities
means any event, change or effect that, either individually or in the aggregate,
is materially adverse to the financial condition, properties, assets,
liabilities, business, operations, results of operations or business prospects
of such entity.
"Materials of Environmental Concern" has the meaning ascribed to such term
in Section 3.25(b).
"MEI Option Plan" has the meaning ascribed to such term in Section 2.3(a).
"Merger" has the meaning ascribed to such term in the recitals to this
Agreement.
"Merger Consideration" means an amount in immediately available funds equal
to the sum of (i) $24,000,000, less (ii) the sum of (a) the amount by which the
liabilities of the Company (other than liabilities resulting from income or any
other revenue liability account) determined from the June 30, 1999 Audited
Financial Statements by an independent certified public accounting firm selected
by Buyer exceeds the liabilities reflected on the balance sheet as of June 30,
1999, included with the Interim Financial Statements, plus (b) the Excess
Professional Costs, plus (c) the aggregate exercise price of Warrants
outstanding as of the date hereof that have not, as of the Effective Time, been
exercised to acquire shares of Common Stock.
"Merger Consideration Per Share" means, as the context requires, when used
in respect to (i) an issued and outstanding share of Common Stock, Vested Option
or Warrant, an amount in immediately available funds equal to the quotient
obtained by dividing (a) the sum of (1) the Merger Consideration, minus (2) the
fees owing by the Company pursuant to the Esch Agreement and the aggregate
liquidation preference payable upon all shares of Preferred Stock issued and
outstanding at Closing, by (b) 21,051,949 (less the number of shares of Common
Stock, if any, issuable upon conversion of shares of Preferred Stock) with
appropriate adjustments made among the holders of shares of Common Stock, Vested
Options and Warrants to account for the respective excercise prices for Vested
Options and Warrants, it being understood that such excercise prices will be
deducted from the amount payable to the holders of such Vested Options and
Warrants, or (ii) an issued and outstanding share of Preferred stock, an amount
in immediately available funds equal to the respective liquidation preference
payable thereof in accordance with the Company's Certificate of Incorporation.
"Merger Sub" means MEI Merger Company, Inc., a Delaware corporation.
51
<PAGE>
"Millennial Dates" has the meaning ascribed to such term in Section
3.14(f).
"Notice of Claim" has the meaning ascribed to such term in Section 9.2(b).
"Option Shares" has the meaning ascribed to such term in Section 8.4(a).
"Ordinary Course of Business" has the meaning ascribed to such term in
Section 3.3.
"Party" and "Parties" have the meaning ascribed to such terms in the
preamble.
"Permits" has the meaning ascribed to such term in Section 3.26.
"Phoenix" means Phoenix Solutions, Inc., a California corporation.
"PNC Bank" means PNC Bank, N.A. which is the issuer of the Company's
currently outstanding line of credit.
"PNC Loan Agreement" means the Loan Agreement between PNC Bank and the
Company dated March 12, 1998, as amended, and described in Section 3.9.
"PNC Security Agreement" means that certain Security Agreement between PNC
Bank and the Company dated March 12, 1998, as amended, as described in Section
3.9.
"Preferred Stock" means the Series A, B and/or C Preferred Stock.
"Professional Costs" has the meaning ascribed to such term in Section
3.5(b).
"Put Election" has the meaning ascribed to such term in Section 8.4.
"Qualifying Escrow Agent" means (i) a bank or trust company subject to
supervision or examination by federal, state or District of Columbia banking
authorities, with a total capital and surplus of not less than $250,000,000, or
(ii) such other company agreed by the Buyer and the Company.
"Registration Statement" has the meaning ascribed to such term in Section
1.6(a).
"Reimbursement Account" has the meaning ascribed to such term in Section
2.2(a)(iii).
"SEC" means the United States Securities and Exchange Commission.
52
<PAGE>
"Security Interest" has the meaning ascribed to such term in Section 3.3.
"Series A Preferred Stock" means shares of the Company's Series A
Convertible Preferred Stock, par value $.10 per share.
"Series B Preferred Stock" means shares of the Company's Series B
Convertible Preferred Stock, par value $.10 per share.
"Series C Preferred Stock" means shares of the Company's Series C
Convertible Preferred Stock, par value $.10 per share.
"Shareholders Representative" has the meaning ascribed to such term in
Section 2.2(e).
"Stock" means, collectively, all of the Common Stock and Preferred Stock.
"Stockholders' Agreement" has the meaning ascribed to such term in Section
3.13(i).
"Surviving Corporation" has the meaning ascribed to such term in Section
1.2.
"Tax Returns" means all reports, returns, declarations, statements or other
information required to be supplied to a taxing authority in connection with
Taxes.
"Taxes" has the meaning ascribed to such term in Section 3.12(a)(i).
"Third Party Intellectual Property" has the meaning ascribed to such term
in Section 3.14(a)(iii).
"Unvested Option Holders" has the meaning ascribed to such term in Section
3.4(d).
"Vested Options" has the meaning ascribed to such term in Section 2.3(a).
"Warrants" means warrants to purchase up to 1,135,054 shares of Common
Stock, which warrants have been issued by the Company and are outstanding as the
date hereof.
[Signatures begin on following page]
53
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Merger Agreement
as of the date first above written.
E2ENET, INC.
By: /s/ Steven J. Quamme
----------------------------
Name: S. J. Quamme
----------------------
Title: Senior Vice President
----------------------
MEI SOFTWARE SYSTEMS, INC.
By: /s/ Henry S. Firey
-----------------------------
Name: Henry S. Firey
-----------------------
Title: President
-----------------------
MEI MERGER COMPANY, INC.
By: /s/ Steven J. Quamme
-----------------------------
Name: Steven J. Quamme
-----------------------
Title: Vice President
-----------------------
<PAGE>
EXHIBIT 10.2
LOAN AGREEMENT
THIS LOAN AGREEMENT (this "Agreement") is entered into as of September 16,
1999 (the "Effective Date") by and between E2ENET, INC., a Delaware corporation
("E2E"), and MEI SOFTWARE SYSTEMS, INC., a Delaware corporation (the "Company").
E2E and the Company are sometimes referred to collectively herein as the
"Parties" and individually as a "Party".
WITNESSETH:
WHEREAS, E2E and the Company entered into that certain Letter of Intent
dated August 20, 1999 (the "LOI") wherein, among other things, E2E committed to
loan to the Company $1,000,000 in accordance with the terms of the LOI ("Loan
A");
WHEREAS, on August 26, 1999 (the "Initial Disbursement Date"), E2E advanced
to the Company $400,000 (the "Initial Loan Proceeds") and the Company executed
and delivered to E2E a secured promissory note in the principal amount of
$1,000,000 ("Note A");
WHEREAS, E2E, MEI Merger Company, Inc. and the Company, have entered into
that certain Agreement and Plan of Merger, dated the date hereof (the "Merger
Agreement") and, under the terms of the LOI, such event triggers the obligation
of E2E to loan to the Company up to an additional $1,200,000 in accordance with
the terms of the LOI ("Loan B"); and
WHEREAS, the Parties desire to consolidate the terms of Loan A and Loan B
so that the Parties have one loan agreement whereby E2E agrees to make a loan
(the "Loan") to the Company, in accordance with the terms hereof, in the maximum
principal amount of $2,200,000.
NOW, THEREFORE, in consideration of the foregoing, the terms hereof and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Parties agree as follows.
1. Short Term Loan.
---------------
(a) The Initial Loan Proceeds, together with the Additional Loan Proceeds
(as hereafter defined), are sometimes hereinafter jointly referred to as the
"Loan Amount". Subject to the terms hereof: E2E (i) shall make available to the
Company additional funds (the "Additional Loan Proceeds") of up to $1,800,000,
and (ii) agrees that, unless (A) the Company fails to provide its president's
certificate as required in this Section 1, (B) the Company is in default of any
of the terms of this Agreement, the Note (as hereinafter defined) or the Merger
Agreement, or (C) E2E receives a notice from the Company's president requesting
E2E to delay making a disbursement or reduce the amount of any
<PAGE>
disbursement of the Additional Loan Proceeds, E2E will automatically make
disbursements of the Additional Loan Proceeds to the Company in an aggregate
amount not to exceed $1,600,000 as follows:
(1) a disbursement in the amount of $300,000 on September 27, 1999;
(2) a disbursement in the amount of $400,000 on October 11, 1999;
(3) a disbursement in the amount of $300,000 on October 25, 1999;
(4) a disbursement in the amount of $300,000 on November 8, 1999; and
(5) a disbursement in the amount of $300,000 on November 22, 1999.
(b) If E2E elects, in accordance with the terms of Section 1.6(a) of the
Merger Agreement, to extend the Closing Date (as such term is defined in the
Merger Agreement) beyond November 30, 1999, E2E agrees to make the balance of
the Additional Loan Proceeds, in the amount of $200,000, available to the
Company, upon the Company's written request, at any time between November 30,
1999 and December 31, 1999; provided that (i) the Company provides its
president's certificate as required in this Section 1 and (ii) the Company is
not in default of any of the terms of this Agreement, the Note (as hereafter
defined) or the Merger Agreement.
(c) Each disbursement of the Additional Loan Proceeds shall be conditioned
upon E2E's receipt from the Company of a certificate executed by its president
updating the truth, accuracy and completeness of all of the representations,
warranties and covenants set forth on Exhibit A, subject to changes in such
------- -
representation and warranties which are disclosed to E2E in writing prior to
each disbursement and do not have a material adverse affect on the Company or
its operations and prospects.
2. Use of Proceeds. The Company will apply all Initial Loan Proceeds and
----------------
Additional Loan Proceeds solely for general working capital purposes and no
disbursement of the Loan shall be required to be made, nor shall any such
disbursement proceeds be used, for purposes of paying any indebtedness of the
Company to PNC Bank N.A.
3. Promissory Note. The Loan shall be evidenced by the Company's
---------------
execution and delivery of a secured convertible promissory note, dated as of the
Initial Disbursement Date, in the form of Exhibit B hereof (the "Note"), in the
---------
amount of $2,200,000. Contemporaneously with the Company's delivery of the Note
to E2E, E2E will deliver Note A to the Company marked "CANCELLED".
4. Interest. Beginning on the Initial Disbursement Date, all amounts
---------
outstanding under the Loan shall bear interest at a rate of ten per cent (10%)
per annum.
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<PAGE>
5. Security. Payment of the indebtedness evidenced by the Note and all
--------
other sums which shall become due hereunder shall be secured by a security
interest in the assets of the Company.
6. Representations, Warranties and Covenants of the Company. The Company
--------------------------------------------------------
hereby makes the representations, warranties and covenants to E2E as set forth
on Exhibit A attached hereto.
------- -
7. E2E Breach in Making Required Disbursement. If, in breach of its
------------------------------------------
obligations under this Agreement, E2E fails to make any required disbursement of
any advance under the Loan (a "Required Disbursement"), the Company shall have
the right to give E2E written notice that E2E is in breach of the terms of this
Agreement by failing to make the Required Disbursement and, if E2E fails to make
such Required Disbursement within five (5) Business Days after receipt of such
notice, the Company shall within ten (10) Business Days have the option to
convert any outstanding principal and interest due under the Loan (the "Amount
Due") to the same number of shares of Common Stock as the Series D Preferred
Stock (as such term is defined in the Note), had it been issued for the Amount
Due, would have been convertible into and, upon such conversion, this Agreement
shall terminate. The Company's option to convert the Amount Due in accordance
with the preceding sentence shall terminate on expiration of such ten (10)
Business Day Period. Except as expressly provided in this Section 7, the Company
shall have no other right or remedy against E2E or any of its affiliates under
this Agreement in the event E2E fails to make a Required Disbursement. As used
herein, the term "Business Day" means any day other than a Saturday, Sunday or
other legal holiday in the Commonwealth of Virginia.
8. Miscellaneous.
-------------
8.1 No Third Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any person other than the Parties, and their respective
successors and permitted assigns.
8.2 Entire Agreement; Incorporation of Schedules and Other Agreements.
This Agreement, the Exhibits appended hereto and the documents, instruments and
other agreements between the Parties specifically identified in this Agreement
constitute the entire agreement between the Parties and supersede any prior
understandings, agreements or representations (including the LOI, which is
terminated) by or between the Parties, written or oral, with respect to the
subject matter hereof (other than the Merger Agreement). The Exhibits and the
documents, instruments and other agreements between the Parties specifically
identified in this Agreement are incorporated herein by reference and made a
part hereof.
8.3 Succession. This Agreement shall be binding upon and inure to the
benefit of the Parties named herein and their respective successors and assigns.
The Company may not assign its rights or obligations hereunder.
3
<PAGE>
8.4 Counterparts. This Agreement may be executed in two counterparts,
each of which shall be deemed an original but both of which together shall
constitute one and the same instrument.
8.5 Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
8.6 Notices. All notices, requests, demands, claims, and other
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly delivered two
Business Days after it is sent by registered or certified mail, return receipt
requested, postage prepaid, or one business day after it is sent via a reputable
nationwide overnight courier service or sent via facsimile (with acknowledgment
of complete transmission) with a confirmation copy by registered or certified
mail, in each case to the intended recipient as set forth below:
If to E2E:
E2Enet, Inc.
800 Connecticut Avenue, N.W.
Suite 1111
Washington, D.C. 20006
Attn: Robert J. Smith, Chief Executive Officer
Fax No.: 202/261-6030
Copy to:
Verner, Liipfert, Bernhard, McPherson & Hand, Chartered
901 15/th/ Street, N.W.
Suite 700
Washington, D.C. 20005-2301
Attn: Harold Freilich, Esquire
Gene Schleppenbach, Esquire
Fax No.: 202/371-6279
If to the Company:
MEI Software Systems, Inc.
11720 Sunrise Valley Drive
Reston, Virginia 20190
Fax No.: 703/620-4858
4
<PAGE>
Copy to:
Mintz Levin Cohn Ferris Glovinsky and Popeo PC
12021 Sunset Hills Road
Suite 310
Reston, Virginia 20190
Attn: Mark Wishner, Esquire
Fax No.: 703/464-4895
Any Party may give any notice, request, demand, claim, or other
communication hereunder using any other means (including personal delivery,
expedited courier, messenger service, telecopy, ordinary mail or electronic
mail), but no such notice, request, demand, claim, or other communication shall
be deemed to have been duly given unless and until it actually is received by
the party for whom it is intended. Any Party may change the address to which
notices, requests, demands, claims and other communications hereunder are to be
delivered by giving the other Parties notice in the manner herein set forth.
8.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws (and not the law of conflicts) of the State of
Delaware.
8.8 Amendments and Waivers. The Parties may mutually amend any provision
of this Agreement at any time. No amendment or waiver of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by both
of the Parties. No waiver by either Party of any default, misrepresentation or
breach of warranty or covenant hereunder, whether intentional or not, shall be
deemed to extend to any prior or subsequent default, misrepresentation or breach
of warranty or covenant hereunder or affect in any way any rights arising by
virtue of any prior or subsequent default, misrepresentation, breach of such
warranty or covenant.
8.9 Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction. If the final judgment of a court of
competent jurisdiction declares that any term or provision hereof is invalid or
unenforceable, the Parties agree that the court making the determination of
invalidity or unenforceability shall have the power to reduce the scope,
duration, or area of the term or provision, to delete specific words or phrases,
or to replace any invalid or unenforceable term or provision with a term or
provision that is valid and enforceable and that comes closest to expressing the
intention of the invalid or unenforceable term or provision, and this Agreement
shall be enforceable as so modified after the expiration of the time within
which the
5
<PAGE>
judgment may be appealed, provided that this Agreement shall not then
substantially deprive either Party of the bargained-for performance of the other
Party.
8.10 Other Remedies. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a Party will be deemed cumulative with,
and not exclusive of, any other remedy conferred hereby or by law or equity upon
such party, and the exercise by a Party of any one remedy will not preclude the
exercise of any other remedy. The prevailing Party in any such action shall be
entitled to recover from the other Party its attorneys' fees, costs and expenses
incurred in connection with regard to such action.
8.11 Time of the Essence. Time is of the essence in this Agreement.
8.12 Construction. The Parties agree that they have been represented by
counsel during the negotiation, preparation and execution of this Agreement and,
therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document. Any
reference to any federal, state, local, or foreign statute or law shall be
deemed also to refer to all rules and regulations promulgated thereunder, unless
the context requires otherwise.
* * * * * * * * * * * * * * *
[Signatures on Next Page]
6
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Loan Agreement as
of the date first above written.
E2ENET, INC.
By:/s/Steven J. Quamme
---------------------------------
Steven J. Quamme, Senior Vice President and Chief
Financial Officer
MEI SOFTWARE SYSTEMS, INC.
By:/s/Henry S. Firey
---------------------------------
Henry S. Firey, President
7
<PAGE>
Exhibit 10.3
THIS NOTE AND THE SECURITIES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY
NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT
OR AN OPINION OF COUNSEL SATISFACTORY TO THE MAKER THAT SUCH REGISTRATION IS NOT
REQUIRED UNDER SUCH ACT AND ALL APPLICABLE STATE SECURITIES LAWS.
REPLACEMENT CONVERTIBLE PROMISSORY NOTE
$2,200,000
September 16, 1999
FOR VALUE RECEIVED, MEI Software Systems, Inc. (the "Maker"), a Delaware
corporation, hereby promises to pay to the order of E2Enet, Inc. (together with
its successors or assigns, the "Holder" or "E2E"), a Delaware corporation, at
its principal place of business at 800 Connecticut Ave., N.W., Suite 1111,
Washington, DC 20006, or at such other place as the Holder may from time to time
designate, the principal sum of Two Million Two Hundred Thousand Dollars
($2,200,000.00), or so much thereof as has been advanced to the Maker by the
Holder hereunder from time to time and remains unpaid, plus interest on the
unpaid principal amount hereof from time to time at the rate of ten percent
(10.0%) per annum, as set forth herein.
1. Repayment. The unpaid principal amount of this Note, together with
---------
interest thereon at the rate provided above, shall be payable on the earlier of
(a) the date of any written demand on the Maker made by the Holder in the event
of any Default (as defined in Section 7) and (b) August 26, 2000.
2. Computation of Interest. Interest on the unpaid principal amount of
-----------------------
this Note shall accrue and be computed on a daily basis, assuming a year of 360
days consisting of 12 months each of 30 days, from and including August 26, 1999
until the date of payment of all amounts due hereunder (or conversion of such
amounts into Series D Preferred Stock, as defined below).
3. Method and Application of Payment. All payments under this Note shall
---------------------------------
be made by wire transfer of immediately available funds to the Holder at such
bank account as the Holder has most recently specified in writing to the Maker.
Whenever any date for payment under this Note shall fall on any day that is not
a business day, the payment due on such date shall be made on the next
succeeding business day.
<PAGE>
4. Prepayment. The Maker may not prepay this Note in whole or in part at
----------
any time without the written consent of the Holder.
5. General. This Note is issued in accordance with and is subject to
-------
Loan Agreement, dated as of the date hereof by and between the Maker and the
Holder (the "Loan Agreement") and replaces a Convertible Promissory Note dated
August 26, 1999 issued by the Maker to the Holder.
6. Conversion.
----------
(a) Terms for Conversion.
--------------------
(1) Holder, MEI Merger Company, Inc. and Maker have entered into
an Agreement and Plan of Merger dated the date hereof (the "Merger
Agreement"). If Holder fails to consummate the Merger (as such term is
defined in the Merger Agreement) on or before November 30, 1999 (or, if the
Holder so elects in accordance with Section 1.6(a) of the Merger Agreement,
such later date to which such consummation may be extended) or such later
date approved by the Maker, amounts outstanding under this Note will
(unless there exists any material breach of any representation or warranty
------
by the Company set forth on Exhibit A of the Loan Agreement or a breach of
------- -
any covenant of the Maker in the Loan Agreement which the Maker has not
cured within 15 days following written notice from Holder (any such breach
of said representations, warranties or covenants is hereinafter referred to
as a "Loan Agreement Breach"), upon the Maker's option exercised on or
before March 31, 2000, convert into that number of fully paid and
nonassessable shares of the Maker's newly authorized Series D Convertible
Preferred Stock, par value $.10 (the "Series D Preferred Stock"), as equals
the unpaid principal amount plus accrued and unpaid interest due hereunder
divided by $1.06 per share (the "Conversion Price"), and (ii) this Note
shall thereafter evidence only the right to receive such shares, which
shall be issued in the name of the Holder upon surrender of this Note duly
endorsed at the office of the Maker.
(2) Notwithstanding paragraph (1) above, no amount due under this
Note shall convert into Series D Preferred Stock if on the date set for
such conversion there exists any Loan Agreement Breach, unless the Holder
elects in its discretion, at any time after such Loan Agreement Breach and
prior to maturity, to convert all of such outstanding amounts into Series D
Preferred Stock under the terms previously stated. If this Note does not
convert in accordance with the terms of this Section 6, there will be no
conversion of this Note to equity of the Maker unless Maker and Holder
agree in writing.
(3) The Series D Preferred Stock shall have substantially similar
rights and privileges as the Maker's issued and outstanding Preferred
Stock; provided, however, that in addition to having such substantially
similar rights, the Series D Preferred Stock
2
<PAGE>
shall specifically have the following rights, preferences and privileges:
(a) the right to appoint Robert J. Smith, or such other person reasonably
acceptable to Maker, as a director on the Maker's board, (b) a liquidation
preference of $1.06 per share (as adjusted for stock splits, stock
dividends and the like) plus, in the case of each share, an amount equal to
all Accruing Dividends (as such term is defined in the Certificate of
Amendment to the Certificate of Incorporation of MEI Software Systems, Inc.
dated December 28, 1998, as filed with the Office of the Secretary of State
for the State of Delaware (the "Certificate of Amendment")) attributable to
the Series D Preferred, (c) an Accruing Dividend in the amount of $.0636
per share and (d) a right to convert into such number of fully paid and
nonassessable shares of Common Stock as is obtained by (i) multiplying the
number of shares of Series D Convertible Preferred Stock so to be converted
by $1.06 and (ii) dividing the result by the Conversion Price (as such
conversion price shall be adjusted from time to time in accordance with
adjustment terms that are identical to the Preferred Stock as described in
the Certificate of Amendment.
(b) Mechanics of Conversion.
-----------------------
(1) To convert this Note into shares of Series D Preferred Stock,
the Holder shall surrender this Note duly endorsed, at the office of the
Maker, together with written notice of the Holder's election to convert the
same and the name or names in which the certificate or certificates for
shares of Series D Preferred Stock are to be issued. The Maker shall,
within one business day after receipt of such notice, issue and deliver to
the Holder, or to its nominee(s), a certificate or certificates for the
aggregate number of shares of Series D Preferred Stock issuable pursuant to
such conversion. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of
this Note, and the person or persons entitled to receive the shares of
Series D Preferred Stock issuable upon such conversion shall be treated for
all purposes as the record holder(s) of such shares of Series D Preferred
Stock as of such date.
(c) Stock Split, Combination. While this Note is outstanding, the
------------------------
Maker will not effect a subdivision of its outstanding Common Stock or Preferred
Stock.
(d) Mergers; Consolidations; Recapitalizations; Sale of Assets. While
----------------------------------------------------------
this Note is outstanding, the Maker will not merge or consolidate with or into
another corporation or entity (other than to the Holder or any affiliate of the
Holder), or effect the sale, conveyance or other disposition of all or
substantially all of its assets.
(e) No Fractional Shares. No fractional shares shall be issued upon
--------------------
conversion of this Note and the number of shares of Series D Preferred Stock to
be issued hereunder shall be rounded up to the nearest whole share.
3
<PAGE>
(f) Securities Act of 1933. Upon conversion of this Note, the Holder
----------------------
may be required to execute and deliver to the Maker an instrument, in form
reasonably satisfactory to the Maker, representing that the shares of Series D
Preferred Stock issuable upon conversion hereof are being acquired for
investment and not with a view to distribution within the meaning of the
Securities Act of 1933, as amended.
7. Default.
-------
(a) Events of Default. The occurrence and continuation of any of the
-----------------
following events or circumstances shall constitute a"Default" hereunder:
(1) the Maker fails to pay when due any principal of or interest
on any of its indebtedness (other than under this Note) exceeding $50,000
and such failure shall continue beyond the grace period, if any, applicable
thereto; or a default occurs under any agreement or instrument evidencing
or under which the Maker has outstanding at the time any such indebtedness
and such default continues beyond the grace period, if any, applicable
thereto, if such default has resulted in the acceleration of, or the
maturity of, such indebtedness;
(2) any material representation or warranty made by the Maker in
the Loan Agreement or the Merger Agreement or in any certificate, document
or financial or other statement delivered by or on behalf of the Maker in
accordance with the Loan Agreement, the Merger Agreement or this Note
proves to have been incorrect in any material respect when made;
(3) the Maker fails to comply with or perform any material
agreement or covenant set forth in the Loan Agreement, the Merger Agreement
or this Note and does not cure such failure within 15 days following
written notice from Holder;
(4) any filing with or consent or approval of any governmental
authority necessary for authorization of the Series D Preferred Stock fails
to be effected or given or is withdrawn or ceases to remain in full force
and effect;
(5) the Loan Agreement or this Note at any time for any reason
ceases to be in full force and effect, or is declared to be void, or the
validity or enforceability of the Loan Agreement, the Merger Agreement or
this Note or any financing statement is at any time repudiated or contested
by the Maker;
(6) any financing statement relating to the indebtedness
evidenced by this Note ceases to be in full force and effect, or is
declared to be void, or ceases to provide the respective liens, rights,
titles, remedies, powers, or privileges intended to be created thereby;
4
<PAGE>
(7) The Maker (i) applies for, or consents to the appointment of,
a receiver, trustee, custodian, intervenor or liquidator of itself or of
all or a substantial part of its assets, (ii) files a voluntary petition in
bankruptcy or winding up, admits in writing that it is unable to pay its
debts as they become due or generally fails to pay its debts as they become
due, (iii) makes a general assignment for the benefit of creditors, (iv)
files a petition or answer seeking reorganization or arrangement with
creditors or to take advantage of any bankruptcy or insolvency laws or
other laws providing any relief from indebtedness, or (v) files an answer
admitting the material allegations of, or consents to, or defaults in
answering, a petition filed against it in any bankruptcy, reorganization or
insolvency or other similar proceeding where such action or failure to act
will result in a determination of bankruptcy, winding up or insolvency
against it;
(8) without its application, approval or consent, a proceeding is
instituted in any court or tribunal of competent jurisdiction or by or
before any government or governmental agency of competent jurisdiction,
seeking in respect of the Maker, adjudication in bankruptcy,
reorganization, dissolution, winding up, liquidation, a composition or
arrangement with creditors, a readjustment of indebtedness, the appointment
of a trustee, receiver, liquidator or the like of it or of all or any
substantial part of its property or assets, or other like relief in respect
of it under any bankruptcy, reorganization, insolvency or other similar law
providing any kind of relief from indebtedness; or
(9) any final judgment or judgments for the payment of money in
an aggregate amount in excess of $100,000 is rendered against the Maker and
such judgment or judgments is not satisfied, discharged or appealed with a
stay of execution within 10 days of entry.
(b) Certain Remedies. Upon the occurrence of a Default, (i) the
----------------
obligations of the Holder under the Loan Agreement to make further advances to
the Maker hereunder shall automatically terminate and (ii) unless waived in
writing by the Holder, all amounts unpaid hereunder, together with interest
accrued thereon, shall immediately mature and become due and payable, without
any other presentment, demand, diligence, protest, notice of acceleration, or
other notice of any kind, all of which the Maker hereby expressly waives.
8. No Rights as Shareholder. Nothing contained in this Note shall be
------------------------
construed as conferring upon the Holder or its transferees, prior to the
conversion of the amounts due under this Note into shares of Series D Preferred
Stock, the right to vote or to receive dividends or to consent or to receive
notice as a shareholder in respect of any meeting of shareholders for the
election of directors of the Maker or of any other matter, or any rights
whatsoever as a shareholder of the Maker.
5
<PAGE>
9. No Impairment. The Maker will not, by amendment of its charter or
-------------
through reorganization, consolidation, merger, dissolution, sale of assets or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of this Note, but will at all times in good faith assist in
the carrying out of all such terms and in the taking of all such action as may
be necessary or appropriate in order to protect the rights of the Holder against
impairment.
10. Note Register.
-------------
(a) Note Register. The Maker shall keep at its principal executive
-------------
office a register in which, at its expense the Maker shall provide for the
registration and transfer of this Note.
(b) Surrender. Whenever this Note shall be surrendered at the
---------
principal executive office of the Maker for transfer or exchange, accompanied by
a written instrument of transfer in form reasonably satisfactory to the Maker
duly executed by the Holder or its attorney duly authorized in writing, the
Maker shall execute and deliver in exchange therefor a new Note, in the same
aggregate unpaid principal amount and payable on the same terms as the Note so
surrendered; each such new Note shall be dated as of the date hereof, shall be
in the principal amount hereof, and shall be registered in such name or names as
the Holder may designate in writing.
(c) Lost Note. Upon receipt by the Maker of evidence reasonably
---------
satisfactory to it of the loss, theft, destruction or mutilation of this Note
and of indemnity reasonably satisfactory to it, and upon reimbursement to the
Maker of all reasonable expenses incidental thereto, and upon surrender and
cancellation of this Note (in case of mutilation), the Maker will make and
deliver to the Holder in lieu of this Note a new Note of like tenor and unpaid
principal amount and dated as of the date hereof.
11. Termination of Merger Agreement. If the Merger Agreement is
--------------------------------
terminated by the Maker in accordance with its terms (the date of such
termination being referred to as the "Termination Date"), on the 120th day after
the Termination Date (provided that such day is a business day and, if it is
not, then on the next business day) all amounts outstanding hereunder
(including, without limitation, all principal and accrued but not paid interest)
shall, at the Maker's election exercised within 15 days of the Termination Date,
unless there exists any Loan Agreement Breach, either automatically convert to
Series D Preferred Stock in accordance with the terms hereof or become
immediately due and payable.
6
<PAGE>
12. General.
-------
(a) Successors and Assigns. This Note, and the obligations and rights
----------------------
of the Maker hereunder, shall be binding upon and inure to the benefit of the
Maker, the Holder and their respective successors and assigns.
(b) Changes. Changes in or additions to this Note may be made or
-------
compliance with any term, covenant, agreement, condition or provision set forth
herein may be omitted or waived (either generally or in a particular instance
and either retroactively or prospectively), only upon written consent of the
Maker and the Holder.
(c) Currency. All payments shall be made in such coin or currency of
--------
the United States of America as at the time of payment shall be legal tender
therein for the payment of public and private debts.
(d) Notices. All notices, requests, consents and demands shall be
-------
made in writing and shall be mailed postage prepaid, or delivered by hand or
facsimile, to the Maker or to the Holder at their respective addresses set forth
below or to such other address as may be furnished in writing to the other:
If to the Holder: E2Enet, Inc.
800 Connecticut Ave., N.W.
Suite 1111
Washington, DC 20006
Facsimile: (202) 261-6030
Attention: President
If to the Maker: MEI Software Systems, Inc.
11720 Sunrise Valley Drive
Reston, Virginia 20190
Facsimile: (703) 620-4858
Attention: President
(e) Saturdays, Sundays, Holidays. If any date specified in this Note
----------------------------
as a date for any action under this Note, including the making of any payment of
principal or interest under this Note or for conversion of this Note into
Series D Preferred Stock, shall fall on a Saturday, Sunday or on a day which in
the Commonwealth of Virginia shall be a legal holiday, then the date for the
taking of such action shall be the next subsequent day which is not a Saturday,
Sunday or legal holiday.
7
<PAGE>
(f) Governing Law. Except to the extent that mandatory provisions of
-------------
other law apply, this Note shall be construed and enforced in accordance with,
and the rights of the parties shall be governed by, the laws of the State of
Delaware, without regard to choice of law principles.
(g) Waivers. The Maker hereby waives diligence, demand, presentment,
-------
notice of nonpayment and protest, and assents to extensions of the time of
payment or forbearance or other indulgence without notice.
(h) Expenses. In the event of default in any payment due hereunder
--------
and the placing of this Note in the hands of an attorney or other agent for
collection, the Maker agrees to pay all costs and expenses, including reasonable
attorneys' fees, related to the collection of all or any part of amounts due
under this Note.
(i) Delay in Exercise of Right. No delay or omission on the part of
--------------------------
the Holder in exercising any right hereunder shall operate as a waiver of any
right under this Note.
[Signature on the following page]
8
<PAGE>
IN WITNESS WHEREOF, the Maker has caused this Replacement Convertible
Promissory Note to be executed by its duly authorized officer this 16th day of
September, 1999.
MEI SOFTWARE SYSTEMS, INC.
By: /s/ Henry S. Firey
----------------------------
Name: Henry S. Firey
Title: President
<PAGE>
Exhibit 10.4
SENIOR MANAGEMENT AGREEMENT
---------------------------
(Smith)
THIS SENIOR MANAGEMENT AGREEMENT (this "Agreement") is made as of May
---------
14, 1999, between E2Enet.com, Inc. a Delaware corporation (the "Company"), and
-------
Robert J. Smith ("Executive").
---------
The parties hereto agree as follows:
1. Employment. The Company agrees to employ Executive and Executive
----------
accepts such employment for the period beginning as of the date hereof and
ending on the second anniversary of the date hereof or upon Executive's earlier
separation pursuant to Section 1(d) hereof (the "Employment Period"); provided,
------------ -----------------
however, that the Employment Period shall automatically be renewed for an
additional two year period commencing on the second anniversary of the date
hereof unless either the Company or the Executive gives the other at least 60
days written notice prior to the Expiration of the Employment Period of its
desire to terminate this Agreement.
(a) Position and Duties. During the Employment Period, Executive
-------------------
shall serve as the President and Chief Executive Officer of the Company and
shall have the normal duties, responsibilities and authority of the President
and Chief Executive Officer, subject to the power of the Chairman or the
Company's Board of Directors (the "Board") to reasonably expand or limit such
-----
duties, responsibilities and authority and to override actions of the President
and Chief Executive Officer. Executive shall report to the Board and Executive
shall devote his best efforts and his full business time and attention to the
business and affairs of the Company and its Subsidiaries. On or before the IPO
Date (as defined below), the Company shall cause the Executive to be elected as
a member of the Board to remain as a Director during the Employment Period or
until a successor has been duly appointed or elected in accordance with the by-
laws of the Company. Executive's principal place of employment shall be in the
Washington, D.C. metropolitan area, subject to such reasonable travel as the
rendering of the services hereunder may require. Notwithstanding the foregoing
provisions of this Section 1(a) and subject to the limitations contained in
------------
Section 3(a) of this Agreement, the Executive may participate in charitable,
- ------------
civic, political, social, trade, or other non-profit organizations to the extent
such participation does not materially interfere with the performance of his
duties hereunder, and may, with the consent of the Board, serve as a non-
management director of business corporations (or in a like capacity in other
for-profit organizations) so long as it does not materially interfere with the
Executive's obligations hereunder.
(b) Salary, Bonus and Benefits. Commencing on the earlier of the
--------------------------
effective date (the "IPO Date") of the Company's initial public offering
--------
pursuant to an underwritten registration statement on Form S-1 declared
effective by the Securities and Exchange Commission (the "IPO"), if any, or (ii)
---
that date on which the Board passes a resolution (based on the prior receipt of
the approval of a majority of the Company's shareholders) to commence
compensating the Executive
<PAGE>
in accordance with the terms of this Section 1(b) notwithstanding that the IPO
------------
Date has not theretofore occurred, the Company will pay Executive a base salary
of $215,000 per annum, payable on a bi-weekly basis or in accordance with the
Company's normal payroll practices (the "Annual Base Salary"), subject
------------------
to any annual increase during the Employment Period as determined by the
Board based upon the Company's achievements of budgetary and other objectives to
be set by the Board and communicated to the Executive within ninety (90) days of
the date hereof but no later than thirty (30) days after the IPO Date and as
revised thereafter on or about the commencement of each fiscal year of the
Company and in connection with the budget process for each fiscal year of the
Company. Executive shall also receive a monthly automobile (or car lease)
allowance of seven hundred and fifty dollars ($750.00). In addition, Executive
shall be eligible to receive an annual bonus (commencing with the Company's
fiscal year ending December 31, 1999) of up to fifty percent (50%) of the Annual
Base Salary based upon the Company's achievement of budgetary and other
objectives set by the Board. Executive's Annual Base Salary and bonus for any
partial year will be prorated based upon the number of days elapsed in such
year. In addition, during the Employment Period, Executive will be entitled to
such other benefits approved by the Board and made available to the Company's
senior executives, including four (4) weeks vacation time per annum,
contributory and non-contributory Company welfare and benefit plans, medical,
death benefit, disability and life insurance plans and reimbursement of
reasonable business expenses.
(c) Issuance of Stock and Stock Options. Executive shall also be
-----------------------------------
eligible to purchase 432,500 shares of the Company's common stock (the "Common
------
Stock") at a purchase price of $0.01 per share (an aggregate purchase price of
- -----
$4,325). The Executive shall pay the purchase price for such 432,500 shares of
Common Stock by paying cash therefor or by issuing a note to the Company with
the Board's consent. In addition, Executive shall also receive options (which
options shall be incentive stock options to the extent possible under applicable
law) for the purchase of 275,000 shares of the Common Stock upon implementation
of the Company's employee stock option plan on the IPO Date at a price no
greater than the IPO offering price. The options will vest as follows: the
first 1/4 of the options (or 68,750 options) will vest on the first anniversary
of the IPO Date. The remaining 3/4 of the options (or 206,250 options) shall
vest at the rate of 1/36 per month thereafter (or 5,729.17 options per month).
All options granted in accordance with the foregoing provisions of this
Agreement shall be fully vested no later than the fourth anniversary of the IPO
Date. Executive will be eligible for grants of additional options during the
Employment Period approved by the Board based on Executive's and the Company's
performance. All shares and options issued to Executive shall be made through
stock purchase agreements or options agreements, as appropriate, based on the
Company's standard form for its executives.
2
<PAGE>
(d) Separation.
----------
(i) Pre-IPO Separation. In the event that (y) prior to
------------------
the IPO Date, Executive resigns (whether or not for Good Reason) or is
disabled or dies or Executive's employment is terminated by the Board (with
or without Cause), or (z) the IPO Date has not occurred on or prior to
December 31, 1999 (in either case, a "Pre-IPO Separation"), the Employment
------------------
Period shall terminate upon any such event and Executive shall not be
entitled to any severance or other separation payments or benefits under
this Agreement.
(ii) Post-IPO Separation. Following the IPO Date,
-------------------
Executive's employment by the Company during the Employment Period will
continue until Executive's resignation at any time or until Executive's
disability or death or until the Board terminates Executive's employment at
any time during the Employment Period, as follows:
(A) Effective Date of Separation. If the Employment
----------------------------
Period is terminated by the Executive without Good Reason, then the
termination will be effective sixty (60) days after the date of
delivery of written notice of termination. If the Employment Period is
terminated by the Board without Cause or by the Executive with Good
Reason, then the termination will be effective thirty (30) days after
the date of delivery of written notice of termination. If the
Employment Period is terminated by the Board with Cause, termination
will be effective as of the date of notice of termination.
(B) Separation With Cause or Not For Good Reason. If
--------------------------------------------
the Employment Period is terminated by the Board with Cause or by the
Executive without Good Reason, then the Executive shall be entitled to
only receive his Annual Base Salary, bonuses and his fringe benefits
pro rated through the effective date of termination.
(C) Separation Without Cause or For Good Reason. If
-------------------------------------------
the Employment Period is terminated by the Board without Cause or by
the Executive with Good Reason, then (1) all options granted to the
Executive as of the date thereof shall vest immediately and (2) the
Executive shall be entitled to receive on such effective date of
termination (x) a pro rata bonus payment through the date of
termination equal to the pro rated portion of the greater of (i) the
prior year's annual bonus received by the Executive or (ii) $107,500,
provided, however, that for the period commencing on the date hereof
and ending on December 31, 1999, the Executive shall be entitled to a
pro rata share of an annual bonus of one hundred seven thousand five
hundred dollars ($107,500), (y) his Annual Base Salary then in effect
for a period equal to the longer of the unexpired Employment Period
3
<PAGE>
(not including any renewals thereof) or twelve (12) months and in
accordance with normal payroll practices and (z) his life, medical and
disability insurance benefits, if any, for one year from the effective
date of such termination, and with respect to subclauses (2)(x), (y)
----------------- ---
and (z) hereof, with no duty to mitigate. Subject to the requirement
---
of applicable law, in the event of a separation without Cause or for
Good Reason, the Executive shall have a period of one year in which to
exercise options acquired hereunder.
(D) Separation Due to Death. If the Employment
-----------------------
Period is terminated due to death of the Executive, then all options
to acquire shares issued to the Executive as of the date hereof shall
vest immediately and the Executive's heirs, executors, administrators,
conservators or personal representatives (in such capacity) of
Executive (the "Executive's Estate") shall be entitled to receive (1)
the Annual Base Salary through the next full calendar month following
the month in which the Executive died, (2) medical insurance and
disability insurance benefits, if any, and (3) a pro rata bonus
payment through the date of death if more than six months of the
current fiscal year have passed. Subject to the requirement of
applicable law, in the event of a separation due to death, the
Executive's Estate shall have a period of six (6) months in which to
exercise options acquired hereunder.
(E) Separation Due to Disability. If the Employment
----------------------------
Period is terminated due to Disability, then the Annual Base Salary,
prorated annual bonus, medical insurance and disability insurance will
be continued until the last day of the six-month period following the
termination date due to a Disability; provided, however, that such
Annual Base Salary shall be reduced by the amount of any disability
income payments made to the Executive during such six-month period
from any insurance or other policies provided by the Company; and,
provided, further, however, that option vesting as provided in Section
-------
1(c) above shall continue during the six-month period following the
----
termination date due to a Disability, and subject to applicable law,
in the event of a separation due to Disability, the Executive shall
have a period of three (3) months following the end of such additional
six-month vesting period (i.e., a total of nine (9) months following
the termination date due to a Disability) in which to exercise options
acquired hereunder.
2. Confidential Information.
------------------------
(a) Executive acknowledges that the Company is engaged in the
business of and in actively investing in, creating, managing and providing
management services to its Subsidiaries or other Internet, Internet-related,
interactive media business and technology companies and/or businesses
4
<PAGE>
(collectively, the "Business"). Executive further acknowledges that the
--------
Business and its continued success depend upon the use and protection of a large
body of confidential and proprietary information, and that he holds a position
of trust and confidence by virtue of which he necessarily possesses, has access
to and, as a consequence of his signing this Agreement, will continue to possess
and have access to, highly valuable, confidential and proprietary information of
the Company and its Subsidiaries not known to the public in general, and that it
would be improper for him to make use of this information for the benefit of
himself and others. All of such confidential and proprietary information now
existing or to be developed in the future will be referred to in this Agreement
as "Confidential Information." This includes, without specific limitation,
------------------------
information relating to the nature and operation of the Business or any other
business conducted by the Company's Subsidiaries (the "Subsidiary Business"),
-------------------
the persons, firms and corporations which are customers or active prospects of
the Company or the Subsidiary Business during Executive's employment by the
Company, the Company's and the Subsidiary Business' development, transition and
transformation plans, methodology and methods of doing business, strategic,
acquisition, marketing and expansion plans, including plans regarding planned
and potential acquisitions and sales, financial and business plans, employee
lists, numbers and location of sales representatives, new and existing programs
and services (and those under development), prices and terms, customer service,
integration processes requirements, costs of providing service, support and
equipment and equipment maintenance costs. Confidential Information shall not
include any information that has become generally known to and available for use
by the public other than as a result of Executive's improper acts or omissions.
(b) Disclosure of any Confidential Information of the Company shall
not be prohibited if such disclosure is directly pursuant to a valid and
existing order of a court or other governmental body or agency within the United
States; provided, however, that (i) Executive shall have made reasonable
attempts to first have given prompt notice to the Company of any such possible
or prospective order (or proceeding pursuant to which any such order may result)
and (ii) Executive shall afford the Company a reasonable opportunity to prevent
or limit any such disclosure (if same is reasonably possible under the
circumstances).
(c) During the Employment Period and for a period of two (2) years
thereafter, Executive will preserve and protect as confidential all of the
Confidential Information known to Executive or at any time in Executive's
possession. In addition, during the Employment Period and at all times
thereafter, Executive will not disclose to any unauthorized person or use for
his own account any of such Confidential Information without the Board's written
consent. Executive agrees to deliver to the Company at a separation for any
reason, or at any other time the Company may request in writing, all memoranda,
notes, plans, records, reports and other documents (and copies thereof)
containing or otherwise relating to any of the Confidential Information
(including, without limitation, all acquisition prospects, lists and contact
information) which he may then possess or
5
<PAGE>
have under his control. Executive acknowledges that all such memoranda, notes,
plans, records, reports and other documents are and at all times will be and
remain the property of the Company.
(d) Executive will fully comply with any agreement reasonably
required by any of the Company's Subsidiaries, business partners, suppliers or
contractors with respect to the protection of the confidential and proprietary
information of such entities, all to the extent not inconsistent with
Executive's obligations under this Agreement.
3. Noncompetition and Nonsolicitation. Executive acknowledges that
----------------------------------
in the course of his employment with the Company he will become familiar with
the Confidential Information concerning the Company and such Subsidiaries and
that his services will be of special, unique and extraordinary value to the
Company. Executive agrees that the Company has a protectable interest in the
Confidential Information acquired by Executive during the course of his
employment with the Company. Therefore, Executive agrees that:
(a) Noncompetition. So long as Executive is employed or affiliated
--------------
with the Company or any Subsidiary and for an additional one (1) year thereafter
(the "Noncompete Period"), he shall not, anywhere in the United States, directly
-----------------
or indirectly own, manage, control, participate in, consult with, render
services for, or in any manner engage in the Business; provided, however, that
notwithstanding the foregoing, Executive may (i) be the owner, directly or
indirectly, of less than five percent (5%) of the outstanding capital stock of
any publicly traded corporation engaged in the Business, and (ii) participate in
or own interests in mutual funds that invest in Internet-related and
interactive-media businesses, and (iii) serve as an independent director of a
public company following notice to and approval by the Board (which shall not be
unreasonably withheld).
(b) Nonsolicitation. During the Noncompete Period, Executive shall
---------------
not directly or indirectly through another entity (i) knowingly induce or
attempt to induce any employee of the Company or any of its Subsidiaries to
leave the employ of the Company or such Subsidiary, or in any way interfere in a
deleterious manner with the relationship between the Company or any of its
Subsidiaries and any employee thereof, (ii) knowingly hire any person who was an
employee of the Company or any of its Subsidiaries within 180 days prior to the
time such employee was hired by the Executive, (iii) knowingly induce or
attempt to induce any owner of a site location, customer, supplier, licensee or
other business relation of the Company or any of its Subsidiaries to cease doing
business with the Company or such Subsidiary or in any way interfere with the
relationship between any such site location, customer, supplier, licensee or
business relation and the Company or any of its Subsidiaries or (iv) knowingly
directly or indirectly acquire or attempt to acquire an interest in any business
entity relating to the business of the Company or any of its Subsidiaries and
with which, to Executive's knowledge, the Company
6
<PAGE>
or any of its Subsidiaries has entertained discussions or has requested and
received information relating to the acquisition of such business by the Company
or any of its Subsidiaries in the one-year period immediately preceding a
separation.
(c) Exception. Notwithstanding anything to the contrary in this
---------
Agreement, the provisions of paragraph (a) of this Section 3 shall not apply to
---------
restrict Executive's ability to compete against the Business during the
Noncompete Period where the following three statements are true: (i) a Pre-IPO
Separation has occurred under Section 1(d)(i), (ii) Executive has not, prior to
---------------
such separation, received any compensation from the Company under Section 1(b),
------------
and (iii) the Internet or interactive media business (a "Competing Business") in
------------------
which Executive wishes to directly or indirectly own, manage, control,
participate in, consult with, render services for or otherwise engage in a
business which (A) Executive was the primary referral source for such Competing
Business to the Company and (B) the Company did not invest, or has expressed its
decision not to invest in, the Competing Business, in either case due to lack of
readily available capital to make such an investment.
(d) Enforcement. If, at the time of enforcement of Section 2 or
----------- ---------
Section 3 of this Agreement, a court holds that the restrictions stated herein
- ---------
are unreasonable under circumstances then existing, the parties hereto agree
that the maximum duration, scope or geographical area reasonable under such
circumstances shall be substituted for the stated period, scope or area and that
the court shall be allowed to revise the restrictions contained herein to cover
the maximum duration, scope and area permitted by law. Because Executive's
services are unique and because Executive has access to Confidential
Information, the parties hereto agree that money damages would be an inadequate
remedy for any breach of this Agreement. Therefore, in the event of a breach or
threatened breach of Section 2 or Section 3 of this Agreement, the Company or
--------- ---------
any of its successors or assigns shall, in addition to other rights and remedies
existing in its favor, be entitled to specific performance and/or injunctive or
other relief in order to enforce, or prevent any violations of, the provisions
of Section 2 or Section 3 from any court of competent jurisdiction.
--------- ---------
(e) Additional Acknowledgments. Executive acknowledges that the
--------------------------
provisions of this Section are in consideration of: (i) employment with the
Company and (ii) additional good and valuable consideration as set forth in this
Agreement. Executive expressly agrees and acknowledges that the restrictions
contained in Sections 2 and Section 3 do not preclude Executive from earning a
---------- ---------
livelihood, nor does it unreasonably impose limitations on Executive's ability
to earn a living. In addition, Executive agrees and acknowledges that the
potential harm to the Company of its non-enforcement outweighs any harm to the
Executive of its enforcement by injunction or otherwise. Executive acknowledges
that he has carefully read this Agreement and has given careful consideration to
the restraints imposed upon the Executive by this Agreement, and is in full
accord as to their
7
<PAGE>
necessity for the reasonable and proper protection of the Confidential
Information. Executive expressly acknowledges and agrees that each and every
restraint imposed by this Agreement is reasonable with respect to subject
matter, time period and geographical area.
4. Executive's Representations and Warranties. Executive represents
------------------------------------------
and warrants that he has full right and authority to enter into this Agreement
and fully perform his obligations hereunder, that he is not subject to any non-
competition agreement that would prevent or restrict him in any way from
rendering the services hereunder anywhere in the world, and that his past,
present and anticipated future activities have not and will not infringe on the
proprietary rights of others. Executive further represents and warrants that he
is not obligated under any contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any judgment,
decree or order of any court or administrative agency which would conflict with
his obligation to use his best efforts to promote the interests of the Company
or which would conflict with the Company's business as conducted or proposed to
be conducted. Neither the execution nor delivery of this Agreement, nor the
carrying on of the Company's business as an officer, director or employee by
Executive, will conflict with or result in a breach of the terms, conditions or
provisions of or constitute a default under any contract, covenant or instrument
under which Executive is now obligated.
GENERAL PROVISIONS
5. Definitions.
-----------
"Cause" means (i) the commission of a felony or a crime involving
-----
moral turpitude or the intentional commission of any other act or omission
involving dishonesty or fraud with respect to the Company or any of its
Subsidiaries or any of their customers or suppliers, (ii) conduct which brings
the Company or any of its Subsidiaries into substantial public disgrace or
disrepute, (iii) substantial and repeated failure to perform duties of the
office held by Executive as reasonably directed by the Board not cured within
ten (10) business days after written notice thereof, (iv) gross negligence or
willful misconduct with respect to the Company or any of its Subsidiaries; (v)
any intentional breach of Section 2 or Section 3 of this Agreement by Executive
--------- ---------
not cured within ten (10) business days after written notice thereof from the
Company or (vi) a material breach of any of the Executive's representations and
warranties contained in Section 4 above not cured within fifteen (15) days after
---------
receipt of written notice by the Executive. Any election by the Company not to
renew the Employment Period on the second anniversary of the date hereof shall
be deemed to be a termination by the Company without Cause. The failure of the
Company or the Executive to achieve budgetary or other operational objectives
established by the Board of Directors shall not in and of itself constitute
Cause.
8
<PAGE>
"Disability" means any disability as defined under the Company's
----------
applicable insurance policy, or in the absence of such policy, any physical or
mental disability or incapacity that renders the Executive incapable of
performing the services required of him in accordance with the obligations of
Section 1 of this Agreement for a continuous period of at least four (4) months
- ---------
or for such shorter periods that when aggregated exceed six (6) months in any
twelve (12) month period. Any dispute as to the Executive's Disability shall be
referred to and resolved by a licensed physician selected and approved by the
Company and the Executive.
"Good Reason" means (i) Executive's resignation within 30 days after
-----------
his discovery of any material breach of this Agreement by the Company which is
not cured within ten (10) business days after written notice thereof from
Executive, (ii) without Executive's written consent, any requirement by the
Company to move Executive's place of business by more than one hundred (100)
miles from the Washington, D.C. metropolitan area in order to perform the
services required hereunder or (iii) a material reduction in the Executive's
duties, responsibilities or functions contained herein such that the Executive
is no longer an executive officer of the Company.
"Person" means an individual, a partnership, a limited liability
------
company, a corporation, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Subsidiary" means any corporation, limited liability company or
----------
partnership of which any percentage of the securities (or other equity or
ownership interest) having ordinary voting power in electing the board of
directors (or board of managers or similar governing body) are, at the time as
of which any determination is being made, owned by the Company either directly
or through one or more Subsidiaries. The term Subsidiary shall also include any
joint venture-type business entity between the Company and any other entity.
6. Notices. Any notice provided for in this Agreement must be in
-------
writing and must be either personally delivered, mailed by first class mail
(postage prepaid and return receipt requested) or sent by reputable overnight
courier service (charges prepaid) to the recipient at the address below
indicated:
9
<PAGE>
If to the Company:
E2Enet.com, Inc.
800 Connecticut Avenue, N.W.
Suite 1111
Washington, DC 20006
Attention: Steven J. Quamme
Senior Vice President
Tel: (202) 261-6000
Fax: (202) 261-6020
with a copy to:
Hogan & Hartson L.L.P.
555 13th Street, N.W.
Washington, D.C. 20004
Attention: J. Hovey Kemp
Tel: (202) 637-5600
Fax: (202) 637-5910
If to the Executive:
Robert J. Smith
16 Abbotsford Drive
Vienna, VA 22181
Tel: (703) 319-0121
Fax: (703) 319-0511
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when so delivered
or sent or, if mailed, five days after deposit in the U.S. mail.
7. General Provisions.
------------------
(a) Severability. Whenever possible, each provision of this
------------
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(b) Complete Agreement. This Agreement, those documents expressly
------------------
referred to herein and other documents of even date herewith embody the
10
<PAGE>
complete agreement and understanding among the parties and supersede and preempt
any prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
(c) Counterparts; Facsimile Transmission. This Agreement may be
------------------------------------
executed in separate counterparts, each of which is deemed to be an original and
all of which taken together constitute one and the same agreement, and
transmitted to the other party by facsimile transmission as evidence of such
party's intention to be bound hereby, with originals to be exchanged in due
course.
(d) Successors and Assigns. Except as otherwise provided herein,
----------------------
this Agreement shall bind and inure to the benefit of and be enforceable by
Executive and the Company and their respective successors and assigns.
(e) Choice of Law. All questions concerning the construction,
-------------
validity and interpretation of this Agreement and the exhibits hereto will be
governed by and construed in accordance with the internal laws of the State of
Delaware, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of Delaware or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
State of Delaware.
(f) Remedies. Each of the parties to this Agreement will be entitled
--------
to enforce its rights under this Agreement specifically, to recover damages and
costs (including attorney's fees) caused by any breach of any provision of this
Agreement and to exercise all other rights existing in its favor. The parties
hereto agree and acknowledge that money damages may not be an adequate remedy
for any breach of the provisions of this Agreement and that any party may in its
sole discretion apply to any court of law or equity of competent jurisdiction
(without posting any bond or deposit) for specific performance and/or other
injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement.
(g) Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended and waived only with the prior written consent of the Company and the
Executive.
(h) Business Days. If any time period for giving notice or taking
-------------
action hereunder expires on a day which is a Saturday, Sunday or holiday in the
state in which the Company's principal place of business is located, the time
period shall be automatically extended to the business day immediately following
such Saturday, Sunday or holiday.
(i) Termination. This Agreement (except for the provisions of
-----------
Sections 1(a), 1(b) and 1(c)) shall survive a separation and shall remain in
- ------------- ---- ----
full force and effect after such separation until any terms contained in any
specific provision of this Agreement expires as therein provided.
11
<PAGE>
(j) Dispute Resolution. Any controversy, claim or dispute arising
------------------
out of or relating to this Agreement, the breach thereof, or Executive's
employment by the Company shall be settled by arbitration with three
arbitrators. The arbitration will be administered by the American Arbitration
Association in accordance with its applicable arbitration rules. The arbitration
proceeding shall be confidential, and judgment on the award rendered by the
arbitrator may be entered in any court having jurisdiction. Any such arbitration
shall take place in the Washington, D.C. metropolitan area, or in any other
mutually agreeable location. In the event any judicial action is necessary to
enforce the arbitration provisions of this Agreement, sole jurisdiction shall be
in Washington, D.C. Any request for interim injunctive relief or other
provisional remedies or opposition thereto shall not be deemed to be a waiver of
the right or obligation to arbitrate hereunder. Subject to the terms of this
Section 7(j), the parties waive the right to a jury trial with respect to any
- -------
controversy or claim between the parties hereto, including those arising out of
or relating to this Agreement and any claim based on or arising from an alleged
tort.
(k) Third-Party Beneficiaries. Each party hereto intends that this
-------------------------
Agreement shall not benefit nor confer any rights or remedies on any Person
other than the parties hereto and their respective heirs, successors and legal
representatives, provided, however, that each of the Company's Subsidiaries are
intended beneficiaries of Executive's applicable covenants and undertakings made
hereunder.
[The rest of this page left blank intentionally]
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Senior
Management Agreement on the date first written above.
E2Enet.com, Inc.
By: /s/ Steven J. Quamme
__________________________________
Name: Steven J. Quamme
Its: Senior Vice President,
Chief Financial Officer and
Secretary
/s/ Robert J. Smith
_______________________________________
Robert J. Smith
13
<PAGE>
Exhibit 10.5
SENIOR MANAGEMENT AGREEMENT
---------------------------
(Wheeler)
THIS SENIOR MANAGEMENT AGREEMENT (this "Agreement") is made as of May
---------
14, 1999, between E2Enet.com, Inc. a Delaware corporation (the "Company"), and
-------
Michael Wheeler ("Executive").
---------
The parties hereto agree as follows:
1. Employment. The Company agrees to employ Executive and Executive
----------
accepts such employment for the period beginning as of the date hereof and
ending on the second anniversary of the date hereof or upon Executive's earlier
separation pursuant to Section 1(d) hereof (the "Employment Period"); provided,
------------ -----------------
however, that the Employment Period shall automatically be renewed for an
additional two year period commencing on the second anniversary of the date
hereof unless either the Company or the Executive gives the other at least 60
days written notice prior to the Expiration of the Employment Period of its
desire to terminate this Agreement.
(a) Position and Duties. During the Employment Period, Executive
-------------------
shall serve as the Senior Vice President of the Company and shall have the
normal duties, responsibilities and authority of the Senior Vice President,
subject to the power of the Company's President and Chief Executive Officer
(the "CEO") or Chairman or the Company's Board of Directors (the "Board") to
-----
reasonably expand or limit such duties, responsibilities and authority and to
override actions of the Senior Vice President. Executive shall report to the CEO
and the Board and Executive shall devote his best efforts and his full business
time and attention to the business and affairs of the Company and its
Subsidiaries. On or before the IPO Date (as defined below), the Company shall
cause the Executive to be elected as a member of the Board to remain as a
Director during the Employment Period or until a successor has been duly
appointed or elected in accordance with the by-laws of the Company. Executive's
principal place of employment shall be in the New York City metropolitan area,
subject to such reasonable travel as the rendering of the services hereunder may
require. Notwithstanding the foregoing provisions of this Section 1(a) and
subject to the limitations contained in Section 3(a) of this Agreement, the
------------
Executive may participate in charitable, civic, political, social, trade, or
other non-profit organizations to the extent such participation does not
materially interfere with the performance of his duties hereunder, and may, with
the consent of the Board, serve as a non-management director of business
corporations (or in a like capacity in other for-profit organizations) so long
as it does not materially interfere with the Executive's obligations hereunder.
(b) Salary, Bonus and Benefits. Commencing on the earlier of (i) the
--------------------------
effective date (the "IPO Date") of the Company's initial public offering
--------
pursuant to an underwritten registration statement on Form S-1 declared
effective by the Securities and Exchange Commission (the "IPO"), if any, or (ii)
---
that date on which the Board passes a resolution (based on the prior receipt of
the approval of a majority of the Company's shareholders) to commence
compensating the Executive
<PAGE>
in accordance with the terms of this Section 1(b) notwithstanding that the IPO
------------
Date has not theretofore occurred, the Company will pay Executive a base salary
of $215,000 per annum, payable on a bi-weekly basis or in accordance with the
Company's normal payroll practices (the "Annual Base Salary"), subject to any
--------------------
annual increase during the Employment Period as determined by the Board based
upon the Company's achievements of budgetary and other objectives to be set by
the Board and communicated to the Executive within ninety (90) days of the date
hereof but no later than thirty (30) days after the IPO Date and as revised
thereafter on or about the commencement of each fiscal year of the Company and
in connection with the budget process for each fiscal year of the Company.
Executive shall also receive a monthly automobile (or car lease) allowance of
seven hundred and fifty dollars ($750.00). In addition, Executive shall be
eligible to receive an annual bonus (commencing with the Company's fiscal year
ending December 31, 1999) of up to fifty percent (50%) of the Annual Base Salary
based upon the Company's achievement of budgetary and other objectives set by
the Board. Executive's Annual Base Salary and bonus for any partial year will be
prorated based upon the number of days elapsed in such year. In addition, during
the Employment Period, Executive will be entitled to such other benefits
approved by the Board and made available to the Company's senior executives,
including four (4) weeks vacation time per annum, contributory and non-
contributory Company welfare and benefit plans, medical, death benefit,
disability and life insurance plans and reimbursement of reasonable business
expenses.
(c) Issuance of Stock and Stock Options. Executive shall also be
-----------------------------------
eligible to purchase 345,000 shares of the Company's common stock (the "Common
------
Stock") at a purchase price of $0.01 per share (an aggregate purchase price of
- -----
$3,450). The Executive shall pay the purchase price for such 345,000 shares of
Common Stock by paying cash therefor or by issuing a note to the Company with
the Board's consent. In addition, Executive shall also receive options (which
options shall be incentive stock options to the extent possible under applicable
law) for the purchase of 275,000 shares of the Common Stock upon implementation
of the Company's employee stock option plan on the IPO Date at a price no
greater than the IPO offering price. The options will vest as follows: the
first 1/4 of the options (or 68,750 options) will vest on the first anniversary
of the IPO Date. The remaining 3/4 of the options (or 206,250 options) shall
vest at the rate of 1/36 per month thereafter (or 5,729.17 options per month).
All options granted in accordance with the foregoing provisions of this
Agreement shall be fully vested no later than the fourth anniversary of the IPO
Date. Executive will be eligible for grants of additional options during the
Employment Period approved by the Board based on Executive's and the Company's
performance. All shares and options issued to Executive shall be made through
stock purchase agreements or options agreements, as appropriate, based on the
Company's standard form for its executives.
2
<PAGE>
(d) Separation.
----------
(i) Pre-IPO Separation. In the event that (y) prior to the IPO
------------------
Date, Executive resigns (whether or not for Good Reason) or is disabled or dies
or Executive's employment is terminated by the Board (with or without Cause), or
(z) the IPO Date has not occurred on or prior to December 31, 1999 (in either
case, a "Pre-IPO Separation"), the Employment Period shall terminate upon any
------------------
such event and Executive shall not be entitled to any severance or other
separation payments or benefits under this Agreement .
(ii) Post-IPO Separation. Following the IPO Date, Executive's
-------------------
employment by the Company during the Employment Period will continue until
Executive's resignation at any time or until Executive's disability or death or
until the Board terminates Executive's employment at any time during the
Employment Period, as follows:
(A) Effective Date of Separation. If the Employment
----------------------------
Period is terminated by the Executive without Good Reason, then the
termination will be effective sixty (60) days after the date of delivery of
written notice of termination. If the Employment Period is terminated by
the Board without Cause or by the Executive with Good Reason, then the
termination will be effective thirty (30) days after the date of delivery
of written notice of termination. If the Employment Period is terminated by
the Board with Cause, termination will be effective as of the date of
notice of termination.
(B) Separation With Cause or Not For Good Reason. If the
--------------------------------------------
Employment Period is terminated by the Board with Cause or by the Executive
without Good Reason, then the Executive shall be entitled to only receive
his Annual Base Salary, bonuses and his fringe benefits pro rated through
the effective date of termination.
(C) Separation Without Cause or For Good Reason. If the
-------------------------------------------
Employment Period is terminated by the Board without Cause or by the
Executive with Good Reason, then (1) all options granted to the Executive
as of the date thereof shall vest immediately and (2) the Executive shall
be entitled to receive on such effective date of termination (x) a pro rata
bonus payment through the date of termination equal to the pro rated
portion of the greater of (i) the prior year's annual bonus received by the
Executive or (ii) $107,500 provided, however, that for the period
commencing on the date hereof and ending on December 31, 1999, the
Executive shall be entitled to a pro rata share of an annual bonus of one
hundred seven thousand and five hundred dollars ($107,500), (y) his Annual
Base Salary then in effect for a period equal to the longer of the
unexpired Employment
3
<PAGE>
Period (not including any renewals thereof) or twelve (12) months and in
accordance with normal payroll practices and (z) his life, medical and
disability insurance benefits, if any, for one year from the effective date
of such termination, and with respect to subclauses (2)(x), (y) and (z)
---------- ------- --- ---
hereof, with no duty to mitigate. Subject to the requirement of applicable
law, in the event of a separation without Cause or for Good Reason, the
Executive shall have a period of one year in which to exercise options
acquired hereunder.
(D) Separation Due to Death. If the Employment Period is
-----------------------
terminated due to death of the Executive, then all options to acquire
shares issued to the Executive as of the date hereof shall vest immediately
and the Executive's heirs, executors, administrators, conservators or
personal representatives (in such capacity) of Executive (the "Executive's
Estate") shall be entitled to receive (1) the Annual Base Salary through
the next full calendar month following the month in which the Executive
died, (2) medical insurance and disability insurance benefits, if any, and
(3) a pro rata bonus payment through the date of death if more than six
months of the current fiscal year have passed. Subject to the requirement
of applicable law, in the event of a separation due to death, the
Executive's Estate shall have a period of six (6) months in which to
exercise options acquired hereunder.
(E) Separation Due to Disability. If the Employment
----------------------------
Period is terminated due to Disability, then the Annual Base Salary, pro-
rated annual bonus, medical insurance and disability insurance will be
continued until the last day of the six-month period following the
termination date due to a Disability; provided, however, that such Annual
Base Salary shall be reduced by the amount of any disability income
payments made to the Executive during such six-month period from any
insurance or other policies provided by the Company; and, provided,
further, however, that option vesting as provided in Section 1(c) above
------------
shall continue during the six-month period following the termination date
due to a Disability, and subject to applicable law, in the event of a
separation due to Disability, the Executive shall have a period of three
(3) months following the end of such additional six-month vesting period
(i.e., a total of nine (9) months following the termination date due to a
Disability) in which to exercise options acquired hereunder.
2. Confidential Information.
------------------------
(a) Executive acknowledges that the Company is engaged in the business
of and in actively investing in, creating, managing and providing management
services to its Subsidiaries and other Internet, Internet-related, interactive
media business and technology companies and/or businesses
4
<PAGE>
(collectively, the "Business"). Executive further acknowledges that the Business
--------
and its continued success depend upon the use and protection of a large body of
confidential and proprietary information, and that he holds a position of trust
and confidence by virtue of which he necessarily possesses, has access to and,
as a consequence of his signing this Agreement, will continue to possess and
have access to, highly valuable, confidential and proprietary information of the
Company and its Subsidiaries not known to the public in general, and that it
would be improper for him to make use of this information for the benefit of
himself and others. All of such confidential and proprietary information now
existing or to be developed in the future will be referred to in this Agreement
as "Confidential Information." This includes, without specific limitation,
------------------------
information relating to the nature and operation of the Business or any other
business conducted by the Company's Subsidiaries (the "Subsidiary Business"),
-------------------
the persons, firms and corporations which are customers or active prospects of
the Company or the Subsidiary Business during Executive's employment by the
Company, the Company's and the Subsidiary Business' development, transition and
transformation plans, methodology and methods of doing business, strategic,
acquisition, marketing and expansion plans, including plans regarding planned
and potential acquisitions and sales, financial and business plans, employee
lists, numbers and location of sales representatives, new and existing programs
and services (and those under development), prices and terms, customer service,
integration processes requirements, costs of providing service, support and
equipment and equipment maintenance costs. Confidential Information shall not
include any information that has become generally known to and available for use
by the public other than as a result of Executive's improper acts or omissions.
(b) Disclosure of any Confidential Information of the Company shall
not be prohibited if such disclosure is directly pursuant to a valid and
existing order of a court or other governmental body or agency within the United
States; provided, however, that (i) Executive shall have made reasonable
attempts to first have given prompt notice to the Company of any such possible
or prospective order (or proceeding pursuant to which any such order may result)
and (ii) Executive shall afford the Company a reasonable opportunity to prevent
or limit any such disclosure (if same is reasonably possible under the
circumstances).
(c) During the Employment Period and for a period of two (2) years
thereafter, Executive will preserve and protect as confidential all of the
Confidential Information known to Executive or at any time in Executive's
possession. In addition, during the Employment Period and at all times
thereafter, Executive will not disclose to any unauthorized person or use for
his own account any of such Confidential Information without the Board's written
consent. Executive agrees to deliver to the Company at a separation for any
reason, or at any other time the Company may request in writing, all memoranda,
notes, plans, records, reports and other documents (and copies thereof)
containing or otherwise relating to any of the Confidential Information
(including, without limitation, all
5
<PAGE>
acquisition prospects, lists and contact information) which he may then possess
or have under his control. Executive acknowledges that all such memoranda,
notes, plans, records, reports and other documents are and at all times will be
and remain the property of the Company.
(d) Executive will fully comply with any agreement reasonably
required by any of the Company's Subsidiaries, business partners, suppliers or
contractors with respect to the protection of the confidential and proprietary
information of such entities, all to the extent not inconsistent with
Executive's obligations under this Agreement.
3. Noncompetition and Nonsolicitation. Executive acknowledges that in the
----------------------------------
course of his employment with the Company he will become familiar with the
Confidential Information concerning the Company and such Subsidiaries and that
his services will be of special, unique and extraordinary value to the Company.
Executive agrees that the Company has a protectable interest in the Confidential
Information acquired by Executive during the course of his employment with the
Company. Therefore, Executive agrees that:
(a) Noncompetition. Subject to paragraph (d) below, so long as
-------------- -------------
Executive is employed or affiliated with the Company or any Subsidiary and for
an additional one (1) year thereafter (the "Noncompete Period"), he shall not,
-----------------
anywhere in the United States, directly or indirectly own, manage, control,
participate in, consult with, render services for, or in any manner engage in
the Business; provided, however, that notwithstanding the foregoing, Executive
may (i) be the owner, directly or indirectly, of less than five percent (5%) of
the outstanding capital stock of any publicly traded corporation engaged in the
Business, (ii) participate in or own interests in mutual funds that invest in
Internet-related and interactive-media businesses, and (iii) serve as an
independent director of a public company following notice to and approval by the
Board (which shall not be unreasonably withheld).
(b) Nonsolicitation. During the Noncompete Period, Executive shall
---------------
not directly or indirectly through another entity (i) knowingly induce or
attempt to induce any employee of the Company or any of its Subsidiaries to
leave the employ of the Company or such Subsidiary, or in any way interfere in a
deleterious manner with the relationship between the Company or any of its
Subsidiaries and any employee thereof, (ii) knowingly hire any person who was an
employee of the Company or any of its Subsidiaries within 180 days prior to the
time such employee was hired by the Executive, (iii) knowingly induce or
attempt to induce any owner of a site location, customer, supplier, licensee or
other business relation of the Company or any of its Subsidiaries to cease doing
business with the Company or such Subsidiary or in any way interfere with the
relationship between any such site location, customer, supplier, licensee or
business relation and the Company or any of its Subsidiaries or (iv) knowingly
directly or indirectly acquire or attempt to
6
<PAGE>
acquire an interest in any business entity relating to the business of the
Company or any of its Subsidiaries and with which, to Executive's knowledge, the
Company or any of its Subsidiaries has entertained discussions or has requested
and received information relating to the acquisition of such business by the
Company or any of its Subsidiaries in the one-year period immediately preceding
a separation.
(c) Exception. Notwithstanding anything to the contrary in this
---------
Agreement, the provisions of paragraph (a) of this Section 3 shall not apply to
---------
restrict Executive's ability to compete against the Business during the
Noncompete Period where the following three statements are true: (i) a Pre-IPO
Separation has occurred under Section 1(d)(i), (ii) Executive has not, prior to
---------------
such separation, received any compensation from the Company under Section 1(b),
------------
and (iii) the Internet or interactive media business (a "Competing Business") in
------------------
which Executive wishes to directly or indirectly own, manage, control,
participate in, consult with, render services for or otherwise engage in a
business which (A) Executive was the primary referral source for such Competing
Business to the Company and (B) the Company did not invest, or has expressed its
decision not to invest in, the Competing Business, in either case due to lack of
readily available capital to make such an investment.
(d) Enforcement. If, at the time of enforcement of Section 2 or
----------- ---------
Section 3 of this Agreement, a court holds that the restrictions stated herein
- ---------
are unreasonable under circumstances then existing, the parties hereto agree
that the maximum duration, scope or geographical area reasonable under such
circumstances shall be substituted for the stated period, scope or area and that
the court shall be allowed to revise the restrictions contained herein to cover
the maximum duration, scope and area permitted by law. Because Executive's
services are unique and because Executive has access to Confidential
Information, the parties hereto agree that money damages would be an inadequate
remedy for any breach of this Agreement. Therefore, in the event of a breach or
threatened breach of Section 2 or Section 3 of this Agreement, the Company or
--------- ---------
any of its successors or assigns shall, in addition to other rights and remedies
existing in its favor, be entitled to specific performance and/or injunctive or
other relief in order to enforce, or prevent any violations of, the provisions
of Section 2 or Section 3 from any court of competent jurisdiction.
--------- ---------
(e) Additional Acknowledgments. Executive acknowledges that the
--------------------------
provisions of this Section are in consideration of: (i) employment with the
Company and (ii) additional good and valuable consideration as set forth in this
Agreement. Executive expressly agrees and acknowledges that the restrictions
contained in Sections 2 and Section 3 do not preclude Executive from earning a
---------- ---------
livelihood, nor does it unreasonably impose limitations on Executive's ability
to earn a living. In addition, Executive agrees and acknowledges that the
potential harm to the Company of its non-enforcement outweighs any harm to the
Executive of its enforcement by injunction or otherwise. Executive acknowledges
that he has
7
<PAGE>
carefully read this Agreement and has given careful consideration to the
restraints imposed upon the Executive by this Agreement, and is in full accord
as to their necessity for the reasonable and proper protection of the
Confidential Information. Executive expressly acknowledges and agrees that each
and every restraint imposed by this Agreement is reasonable with respect to
subject matter, time period and geographical area.
4. Executive's Representations and Warranties. Executive represents and
------------------------------------------
warrants that he has full right and authority to enter into this Agreement and
fully perform his obligations hereunder, that he is not subject to any non-
competition agreement that would prevent or restrict him in any way from
rendering the services hereunder anywhere in the world, and that his past,
present and anticipated future activities have not and will not infringe on the
proprietary rights of others. Executive further represents and warrants that he
is not obligated under any contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any judgment,
decree or order of any court or administrative agency which would conflict with
his obligation to use his best efforts to promote the interests of the Company
or which would conflict with the Company's business as conducted or proposed to
be conducted. Neither the execution nor delivery of this Agreement, nor the
carrying on of the Company's business as an officer, director or employee by
Executive, will conflict with or result in a breach of the terms, conditions or
provisions of or constitute a default under any contract, covenant or instrument
under which Executive is now obligated.
GENERAL PROVISIONS
5. Definitions.
-----------
"Cause" means (i) the commission of a felony or a crime involving
-----
moral turpitude or the intentional commission of any other act or omission
involving dishonesty or fraud with respect to the Company or any of its
Subsidiaries or any of their customers or suppliers, (ii) conduct which brings
the Company or any of its Subsidiaries into substantial public disgrace or
disrepute, (iii) substantial and repeated failure to perform duties of the
office held by Executive as reasonably directed by the Board not cured within
ten (10) business days after written notice thereof, (iv) gross negligence or
willful misconduct with respect to the Company or any of its Subsidiaries; (v)
any intentional breach of Section 2 or Section 3 of this Agreement by Executive
--------- ---------
not cured within ten (10) business days after written notice thereof from the
Company or (vi) a material breach of any of the Executive's representations and
warranties contained in Section 4 above not cured within fifteen (15) days after
---------
receipt of written notice by the Executive. Any election by the Company not to
renew the Employment Period on the second anniversary of the date hereof shall
be deemed to be a termination by the Company without Cause. The failure of the
Company or the Executive to achieve budgetary or other
8
<PAGE>
operational objectives established by the Board of Directors shall not in and of
itself constitute Cause.
"Disability" means any disability as defined under the Company's
----------
applicable insurance policy, or in the absence of such policy, any physical or
mental disability or incapacity that renders the Executive incapable of
performing the services required of him in accordance with the obligations of
Section 1 of this Agreement for a continuous period of at least four (4) months
- ---------
or for such shorter periods that when aggregated exceed six (6) months in any
twelve (12) month period. Any dispute as to the Executive's Disability shall be
referred to and resolved by a licensed physician selected and approved by the
Company and the Executive.
"Good Reason" means (i) Executive's resignation within 30 days after
-----------
his discovery of any material breach of this Agreement by the Company which is
not cured within ten (10) business days after written notice thereof from
Executive, (ii) without Executive's written consent, any requirement by the
Company to move Executive's place of business from the New York City
metropolitan areas in order to perform the services required hereunder or (iii)
a material reduction in the Executive's duties, responsibilities or functions
contained herein such that the Executive is no longer an executive officer of
the Company.
"Person" means an individual, a partnership, a limited liability
------
company, a corporation, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Subsidiary" means any corporation, limited liability company or
----------
partnership of which any percentage of the securities (or other equity or
ownership interest) having ordinary voting power in electing the board of
directors (or board of managers or similar governing body) are, at the time as
of which any determination is being made, owned by the Company either directly
or through one or more Subsidiaries. The term Subsidiary shall also include any
joint venture-type business entity between the Company and any other entity.
6. Notices. Any notice provided for in this Agreement must be in writing
-------
and must be either personally delivered, mailed by first class mail (postage
prepaid and return receipt requested) or sent by reputable overnight courier
service (charges prepaid) to the recipient at the address below indicated:
9
<PAGE>
If to the Company:
E2Enet.com, Inc.
800 Connecticut Avenue, N.W.
Suite 1111
Washington, DC 20006
Attention: Steven J. Quamme
Senior Vice President
Tel: (202) 261-6000
Fax: (202) 261-6020
with a copy to:
Hogan & Hartson L.L.P.
555 13th Street, N.W.
Washington, D.C. 20004
Attention: J. Hovey Kemp
Tel: (202) 637-5600
Fax: (202) 637-5910
If to the Executive:
Michael Wheeler
8 Tory Hole Road
Darien, CT 06820-6027
Tel: (203) 655-8179
Fax: (203) 656-2043
with a copy to:
Franklin, Weinrib, Rudell & Vassallo, P.C.
488 Madison Avenue
New York, NY 10022-5761
Attention: Neil J. Rosini
Tel: (212) 935-5500
Fax: (212) 308-0642
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when so delivered
or sent or, if mailed, five days after deposit in the U.S. mail.
7. General Provisions.
------------------
10
<PAGE>
(a) Severability. Whenever possible, each provision of this
------------
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(b) Complete Agreement. This Agreement, those documents expressly
------------------
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
(c) Counterparts; Facsimile Transmission. This Agreement may be
------------------------------------
executed in separate counterparts, each of which is deemed to be an original and
all of which taken together constitute one and the same agreement, and
transmitted to the other party by facsimile transmission as evidence of such
party's intention to be bound hereby, with originals to be exchanged in due
course.
(d) Successors and Assigns. Except as otherwise provided herein,
----------------------
this Agreement shall bind and inure to the benefit of and be enforceable by
Executive and the Company and their respective successors and assigns.
(e) Choice of Law. All questions concerning the construction,
-------------
validity and interpretation of this Agreement and the exhibits hereto will be
governed by and construed in accordance with the internal laws of the State of
Delaware, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of Delaware or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
State of Delaware.
(f) Remedies. Each of the parties to this Agreement will be entitled
--------
to enforce its rights under this Agreement specifically, to recover damages and
costs (including attorney's fees) caused by any breach of any provision of this
Agreement and to exercise all other rights existing in its favor. The parties
hereto agree and acknowledge that money damages may not be an adequate remedy
for any breach of the provisions of this Agreement and that any party may in its
sole discretion apply to any court of law or equity of competent jurisdiction
(without posting any bond or deposit) for specific performance and/or other
injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement.
(g) Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended and waived only with the prior written consent of the Company and the
Executive.
11
<PAGE>
(h) Business Days. If any time period for giving notice or taking
-------------
action hereunder expires on a day which is a Saturday, Sunday or holiday in the
state in which the Company's principal place of business is located, the time
period shall be automatically extended to the business day immediately following
such Saturday, Sunday or holiday.
(i) Termination. This Agreement (except for the provisions of
-----------
Sections 1(a), 1(b) and 1(c)) shall survive a separation and shall remain in
- ------------- ---- ----
full force and effect after such separation until any terms contained in any
specific provision of this Agreement expires as therein provided.
(j) Dispute Resolution. Any controversy, claim or dispute arising
------------------
out of or relating to this Agreement, the breach thereof, or Executive's
employment by the Company shall be settled by arbitration with three
arbitrators. The arbitration will be administered by the American Arbitration
Association in accordance with its applicable arbitration rules. The arbitration
proceeding shall be confidential, and judgment on the award rendered by the
arbitrator may be entered in any court having jurisdiction. Any such arbitration
shall take place in the Washington, D.C. metropolitan area, or in any other
mutually agreeable location. In the event any judicial action is necessary to
enforce the arbitration provisions of this Agreement, sole jurisdiction shall be
in either Washington, D.C. or New York City. Any request for interim injunctive
relief or other provisional remedies or opposition thereto shall not be deemed
to be a waiver of the right or obligation to arbitrate hereunder. Subject to the
terms of this Section 7(j), the parties waive the right to a jury trial with
------------
respect to any controversy or claim between the parties hereto, including those
arising out of or relating to this Agreement and any claim based on or arising
from an alleged tort .
(k) Third-Party Beneficiaries. Each party hereto intends that this
-------------------------
Agreement shall not benefit nor confer any rights or remedies on any Person
other than the parties hereto and their respective heirs, successors and legal
representatives, provided, however, that each of the Company's Subsidiaries are
intended beneficiaries of Executive's applicable covenants and undertakings made
hereunder.
[The rest of this page left blank intentionally]
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Senior
Management Agreement on the date first written above.
E2Enet.com, Inc.
By: /s/ Steven J. Quamme
--------------------------------------------
Name: Steven J. Quamme
Its: Senior Vice President, Chief Financial
Officer, and Secretary
/s/ Michael Wheeler
--------------------------------------------
Michael Wheeler
13
<PAGE>
Exhibit 10.6
SENIOR MANAGEMENT AGREEMENT
---------------------------
(Quamme)
THIS SENIOR MANAGEMENT AGREEMENT (this "Agreement") is made as of May
---------
14, 1999, between E2Enet.com, Inc. a Delaware corporation (the "Company"), and
-------
Steven J. Quamme ("Executive").
---------
The parties hereto agree as follows:
1. Employment. The Company agrees to employ Executive and Executive
----------
accepts such employment for the period beginning as of an effective date of and
ending on the second anniversary of the date hereof or upon Executive's earlier
separation pursuant to Section 1(d) hereof (the "Employment Period"); provided,
------------ -----------------
however, that the Employment Period shall automatically be renewed for an
additional two year period commencing on the second anniversary of the date
hereof unless either the Company or the Executive gives the other at least 60
days written notice prior to the Expiration of the Employment Period of its
desire to terminate this Agreement.
(a) Position and Duties. During the Employment Period, Executive
-------------------
shall serve as the Senior Vice President, Chief Financial Officer and Secretary
of the Company and shall have the normal duties, responsibilities and authority
of the Senior Vice President, Chief Financial Officer and Secretary, subject to
the power of the Company's President and Chief Executive Officer ("CEO") or
Chairman or the Company's Board of Directors (the "Board") to reasonably expand
-----
or limit such duties, responsibilities and authority and to override actions of
the Senior Vice President, Chief Financial Officer and Secretary. Executive
shall report to the CEO and the Board and Executive shall devote his best
efforts and his full business time and attention to the business and affairs of
the Company and its Subsidiaries. Executive's principal place of employment
shall be in the Washington, D.C. metropolitan area, subject to such reasonable
travel as the rendering of the services hereunder may require. Notwithstanding
the foregoing provisions of this Section 1(a) and subject to the limitations
------------
contained in Section 3(a) of this Agreement, the Executive may participate in
------------
charitable, civic, political, social, trade, or other non-profit organizations
to the extent such participation does not materially interfere with the
performance of his duties hereunder, and may, with the consent of the Board,
serve as a non-management director of business corporations (or in a like
capacity in other for-profit organizations) so long as it does not materially
interfere with the Executive's obligations hereunder.
(b) Salary, Bonus and Benefits. Commencing on the earlier of the
--------------------------
effective date (the "IPO Date") of the Company's initial public offering
--------
pursuant to an underwritten registration statement on Form S-1 declared
effective by the Securities and Exchange Commission (the "IPO"), if any, or (ii)
---
that date on which the Board passes a resolution (based on the prior receipt of
the approval of a majority of the Company's shareholders) to commence
compensating the Executive in accordance with the terms of this Section 1(b)
------------
notwithstanding that the IPO Date
<PAGE>
has not theretofore occurred, the Company will pay Executive a base salary of
$180,000 per annum, payable on a bi-weekly basis or in accordance with the
Company's normal payroll practices (the "Annual Base Salary"),
------------------
subject to any annual increase during the Employment Period as determined by the
Board based upon the Company's achievements of budgetary and other objectives to
be set by the Board and communicated to the Executive within ninety (90) days of
the date hereof but no later than thirty (30) days after the IPO Date and as
revised thereafter on or about the commencement of each fiscal year of the
Company and in connection with the budget process for each fiscal year of the
Company. Executive shall receive a monthly automobile (or car lease) allowance
of seven hundred and fifty dollars ($750.00). In addition, Executive shall be
eligible to receive an annual bonus (commencing with the Company's fiscal year
ending December 31, 1999) of up to fifty percent (50%) of the Annual Base Salary
based upon the Company's achievement of budgetary and other objectives set by
the Board. Executive's Annual Base Salary and bonus for any partial year will be
prorated based upon the number of days elapsed in such year. In addition, during
the Employment Period, Executive will be entitled to such other benefits
approved by the Board and made available to the Company's senior executives,
including four (4) weeks vacation time per annum, contributory and non-
contributory Company welfare and benefit plans, medical, death benefit,
disability and life insurance plans and reimbursement of reasonable business
expenses.
(c) Issuance of Stock and Stock Options. Executive shall also be
-----------------------------------
eligible to purchase 216,000 shares of the Company's common stock (the "Common
------
Stock") at a purchase price of $0.01 per share (an aggregate purchase price of
- -----
$2,160). The Executive shall pay the purchase price for such 216,000 shares of
Common Stock by paying cash therefor or by issuing a note to the Company with
the Board's consent. In addition, Executive shall also receive options (which
options shall be incentive stock options to the extent possible under applicable
law) for the purchase of 175,000 shares of the Common Stock upon implementation
of the Company's employee stock option plan on the IPO Date at a price no
greater than the IPO offering price. The options will vest as follows: the
first 1/4 of the options (or 43,750 options) will vest on the first anniversary
of the IPO Date. The remaining 3/4 of the options (or 131,250 options) shall
vest at the rate of 1/36 per month thereafter (or 3,645.83 options per month).
All options granted in accordance with the foregoing provisions of this
Agreement shall be fully vested no later than the fourth anniversary of the IPO
Date. Executive will be eligible for grants of additional options during the
Employment Period approved by the Board based on Executive's and the Company's
performance. All shares and options issued to Executive shall be made through
stock purchase agreements or options agreements, as appropriate, based on the
Company's standard form for its executives.
2
<PAGE>
(d) Separation.
----------
(i) Pre-IPO Separation. In the event that (y) prior to the IPO
------------------
Date, Executive resigns (whether or not for Good Reason) or is disabled or
dies or Executive's employment is terminated by the Board (with or without
Cause), or (z) the IPO Date has not occurred on or prior to December 31,
1999 (in either case, a "Pre-IPO Separation"), the Employment Period shall
-------------------
terminate upon any such event and Executive shall not be entitled to any
severance or other separation payments or benefits under this Agreement.
(ii) Post-IPO Separation. Following the IPO Date, Executive's
-------------------
employment by the Company during the Employment Period will continue until
Executive's resignation at any time or until Executive's disability or
death or until the Board terminates Executive's employment at any time
during the Employment Period, as follows:
(A) Effective Date of Separation. If the Employment Period
----------------------------
is terminated by the Executive without Good Reason, then the
termination will be effective sixty (60) days after the date of
delivery of written notice of termination. If the Employment Period
is terminated by the Board without Cause or by the Executive with Good
Reason, then the termination will be effective thirty (30) days after
the date of delivery of written notice of termination. If the
Employment Period is terminated by the Board with Cause, termination
will be effective as of the date of notice of termination.
(B) Separation With Cause or Not For Good Reason. If the
--------------------------------------------
Employment Period is terminated by the Board with Cause or by the
Executive without Good Reason, then the Executive shall be entitled to
only receive his Annual Base Salary, bonuses and his fringe benefits
pro rated through the effective date of termination.
(C) Separation Without Cause or For Good Reason. If the
-------------------------------------------
Employment Period is terminated by the Board without Cause or by the
Executive with Good Reason, then (1) all options granted to the
Executive as of the date thereof shall vest immediately and (2) the
Executive shall be entitled to receive on such effective date of
termination (x) a pro rata bonus payment through the date of
termination equal to the pro rated portion of the greater of (i) the
prior year's annual bonus received by the Executive or (ii) $90,000,
provided, however, that for the period commencing on the date hereof
and ending on December 31, 1999, the Executive shall be entitled to a
pro rata share of an annual bonus of ninety thousand dollars
($90,000), (y) his Annual Base Salary then in effect for a period
equal to the longer of the unexpired Employment Period (not including
any renewals thereof)
3
<PAGE>
or twelve (12) months and in accordance with normal payroll practices
and (z) his life, medical and disability insurance benefits, if any,
for one year from the effective date of such termination, and with
respect to subclauses (2)(x), (y) and (z) hereof, with no duty to
----------------- --- ---
mitigate. Subject to the requirement of applicable law, in the event
of a separation without Cause or for Good Reason, the Executive shall
have a period of one year in which to exercise options acquired
hereunder.
(D) Separation Due to Death. If the Employment Period is
-----------------------
terminated due to death of the Executive, then all options to acquire
shares issued to the Executive as of the date hereof shall vest
immediately and the Executive's heirs, executors, administrators,
conservators or personal representatives (in such capacity) of
Executive (the "Executive's Estate") shall be entitled to receive (1)
the Annual Base Salary through the next full calendar month following
the month in which the Executive died, (2) medical insurance and
disability insurance benefits, if any, and (3) a pro rata bonus
payment through the date of death if more than six months of the
current fiscal year have passed. Subject to the requirement of
applicable law, in the event of a separation due to death, the
Executive's Estate shall have a period of six (6) months in which to
exercise options acquired hereunder.
(E) Separation Due to Disability. If the Employment Period
----------------------------
is terminated due to Disability, then the Annual Base Salary, prorated
annual bonus, medical insurance and disability insurance will be
continued until the last day of the six-month period following the
termination date due to a Disability; provided, however, that such
Annual Base Salary shall be reduced by the amount of any disability
income payments made to the Executive during such six-month period
from any insurance or other policies provided by the Company; and,
provided, further, however, that option vesting as provided in Section
-------
1(c) above shall continue during the six-month period following the
----
termination date due to a Disability, and subject to applicable law,
in the event of a separation due to Disability, the Executive shall
have a period of three (3) months following the end of such additional
six-month vesting period (i.e., a total of nine (9) months following
the termination date due to a Disability) in which to exercise options
acquired hereunder.
2. Confidential Information.
------------------------
(a) Executive acknowledges that the Company is engaged in the business
of and in actively investing in, creating, managing and providing management
services to its Subsidiaries or other Internet, Internet-related, interactive
media business and technology companies and/or businesses (collectively, the
"Business"). Executive further acknowledges that the Business and its continued
- ---------
success depend upon the use and protection of a large body of
4
<PAGE>
confidential and proprietary information, and that he holds a position of trust
and confidence by virtue of which he necessarily possesses, has access to and,
as a consequence of his signing this Agreement, will continue to possess and
have access to, highly valuable, confidential and proprietary information of the
Company and its Subsidiaries not known to the public in general, and that it
would be improper for him to make use of this information for the benefit of
himself and others. All of such confidential and proprietary information now
existing or to be developed in the future will be referred to in this Agreement
as "Confidential Information." This includes, without specific limitation,
------------------------
information relating to the nature and operation of the Business or any other
business conducted by the Company's Subsidiaries (the "Subsidiary Business"),
-------------------
the persons, firms and corporations which are customers or active prospects of
the Company or the Subsidiary Business during Executive's employment by the
Company, the Company's and the Subsidiary Business' development, transition and
transformation plans, methodology and methods of doing business, strategic,
acquisition, marketing and expansion plans, including plans regarding planned
and potential acquisitions and sales, financial and business plans, employee
lists, numbers and location of sales representatives, new and existing programs
and services (and those under development), prices and terms, customer service,
integration processes requirements, costs of providing service, support and
equipment and equipment maintenance costs. Confidential Information shall not
include any information that has become generally known to and available for use
by the public other than as a result of Executive's improper acts or omissions.
(b) Disclosure of any Confidential Information of the Company shall
not be prohibited if such disclosure is directly pursuant to a valid and
existing order of a court or other governmental body or agency within the United
States; provided, however, that (i) Executive shall have made reasonable
attempts to first have given prompt notice to the Company of any such possible
or prospective order (or proceeding pursuant to which any such order may result)
and (ii) Executive shall afford the Company a reasonable opportunity to prevent
or limit any such disclosure (if same is reasonably possible under the
circumstances).
(c) During the Employment Period and for a period of two (2) years
thereafter, Executive will preserve and protect as confidential all of the
Confidential Information known to Executive or at any time in Executive's
possession. In addition, during the Employment Period and at all times
thereafter, Executive will not disclose to any unauthorized person or use for
his own account any of such Confidential Information without the Board's written
consent. Executive agrees to deliver to the Company at a separation for any
reason, or at any other time the Company may request in writing, all memoranda,
notes, plans, records, reports and other documents (and copies thereof)
containing or otherwise relating to any of the Confidential Information
(including, without limitation, all acquisition prospects, lists and contact
information) which he may then possess or have under his control. Executive
acknowledges that all such memoranda, notes,
5
<PAGE>
plans, records, reports and other documents are and at all times will be and
remain the property of the Company.
(d) Executive will fully comply with any agreement reasonably required
by any of the Company's Subsidiaries, business partners, suppliers or
contractors with respect to the protection of the confidential and proprietary
information of such entities, all to the extent not inconsistent with
Executive's obligations under this Agreement.
3. Noncompetition and Nonsolicitation. Executive acknowledges that in
----------------------------------
the course of his employment with the Company he will become familiar with the
Confidential Information concerning the Company and such Subsidiaries and that
his services will be of special, unique and extraordinary value to the Company.
Executive agrees that the Company has a protectable interest in the Confidential
Information acquired by Executive during the course of his employment with the
Company. Therefore, Executive agrees that:
(a) Noncompetition. Subject to paragraph (d) below, so long as
-------------- -------------
Executive is employed or affiliated with the Company or any Subsidiary and for
an additional one (1) year thereafter (the "Noncompete Period"), he shall not,
-----------------
anywhere in the United States, directly or indirectly own, manage, control,
participate in, consult with, render services for, or in any manner engage in
the Business; provided, however, that notwithstanding the foregoing, Executive
may (i) be the owner, directly or indirectly, of less than five percent (5%) of
the outstanding capital stock of any publicly traded corporation engaged in the
Business, (ii) participate in or own interests in mutual funds that invest in
Internet-related and interactive-media businesses, and (iii) serve as an
independent director of a public company following notice to and approval by the
Board (which shall not be unreasonably withheld).
(b) Nonsolicitation. During the Noncompete Period, Executive shall
---------------
not directly or indirectly through another entity (i) knowingly induce or
attempt to induce any employee of the Company or any of its Subsidiaries to
leave the employ of the Company or such Subsidiary, or in any way interfere in a
deleterious manner with the relationship between the Company or any of its
Subsidiaries and any employee thereof, (ii) knowingly hire any person who was an
employee of the Company or any of its Subsidiaries within 180 days prior to the
time such employee was hired by the Executive, (iii) knowingly induce or
attempt to induce any owner of a site location, customer, supplier, licensee or
other business relation of the Company or any of its Subsidiaries to cease doing
business with the Company or such Subsidiary or in any way interfere with the
relationship between any such site location, customer, supplier, licensee or
business relation and the Company or any of its Subsidiaries or (iv) knowingly
directly or indirectly acquire or attempt to acquire an interest in any business
entity relating to the business of the Company or any of its Subsidiaries and
with which, to Executive's knowledge, the Company
6
<PAGE>
or any of its Subsidiaries has entertained discussions or has requested and
received information relating to the acquisition of such business by the Company
or any of its Subsidiaries in the one-year period immediately preceding a
separation.
(c) Exception. Notwithstanding anything to the contrary in this
---------
Agreement, the provisions of paragraph (a) of this Section 3 shall not apply to
---------
restrict Executive's ability to compete against the Business during the
Noncompete Period where the following three statements are true: (i) a Pre-IPO
Separation has occurred under Section 1(d)(i), (ii) Executive has not, prior to
---------------
such separation, received any compensation from the Company under Section 1(b),
------------
and (iii) the Internet or interactive media business (a "Competing Business") in
------------------
which Executive wishes to directly or indirectly own, manage, control,
participate in, consult with, render services for or otherwise engage in a
business which (A) Executive was the primary referral source for such Competing
Business to the Company and (B) the Company did not invest, or has expressed its
decision not to invest in, the Competing Business, in either case due to lack of
readily available capital to make such an investment.
(d) Enforcement. If, at the time of enforcement of Section 2 or
----------- ---------
Section 3 of this Agreement, a court holds that the restrictions stated herein
- ---------
are unreasonable under circumstances then existing, the parties hereto agree
that the maximum duration, scope or geographical area reasonable under such
circumstances shall be substituted for the stated period, scope or area and that
the court shall be allowed to revise the restrictions contained herein to cover
the maximum duration, scope and area permitted by law. Because Executive's
services are unique and because Executive has access to Confidential
Information, the parties hereto agree that money damages would be an inadequate
remedy for any breach of this Agreement. Therefore, in the event of a breach or
threatened breach of Section 2 or Section 3 of this Agreement, the Company or
--------- ---------
any of its successors or assigns shall, in addition to other rights and remedies
existing in its favor, be entitled to specific performance and/or injunctive or
other relief in order to enforce, or prevent any violations of, the provisions
of Section 2 or Section 3 from any court of competent jurisdiction.
--------- ---------
(e) Additional Acknowledgments. Executive acknowledges that the
--------------------------
provisions of this Section are in consideration of: (i) employment with the
Company and (ii) additional good and valuable consideration as set forth in this
Agreement. Executive expressly agrees and acknowledges that the restrictions
contained in Sections 2 and Section 3 do not preclude Executive from earning a
---------- ---------
livelihood, nor does it unreasonably impose limitations on Executive's ability
to earn a living. In addition, Executive agrees and acknowledges that the
potential harm to the Company of its non-enforcement outweighs any harm to the
Executive of its enforcement by injunction or otherwise. Executive acknowledges
that he has carefully read this Agreement and has given careful consideration to
the restraints imposed upon the Executive by this Agreement, and is in full
accord as to their
7
<PAGE>
necessity for the reasonable and proper protection of the Confidential
Information. Executive expressly acknowledges and agrees that each and every
restraint imposed by this Agreement is reasonable with respect to subject
matter, time period and geographical area.
4. Executive's Representations and Warranties. Executive represents
------------------------------------------
and warrants that he has full right and authority to enter into this Agreement
and fully perform his obligations hereunder, that he is not subject to any non-
competition agreement that would prevent or restrict him in any way from
rendering the services hereunder anywhere in the world, and that his past,
present and anticipated future activities have not and will not infringe on the
proprietary rights of others. Executive further represents and warrants that he
is not obligated under any contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any judgment,
decree or order of any court or administrative agency which would conflict with
his obligation to use his best efforts to promote the interests of the Company
or which would conflict with the Company's business as conducted or proposed to
be conducted. Neither the execution nor delivery of this Agreement, nor the
carrying on of the Company's business as an officer, director or employee by
Executive, will conflict with or result in a breach of the terms, conditions or
provisions of or constitute a default under any contract, covenant or instrument
under which Executive is now obligated.
GENERAL PROVISIONS
5. Definitions.
-----------
"Cause" means (i) the commission of a felony or a crime involving
-----
moral turpitude or the intentional commission of any other act or omission
involving dishonesty or fraud with respect to the Company or any of its
Subsidiaries or any of their customers or suppliers, (ii) conduct which brings
the Company or any of its Subsidiaries into substantial public disgrace or
disrepute, (iii) substantial and repeated failure to perform duties of the
office held by Executive as reasonably directed by the Board not cured within
ten (10) business days after written notice thereof, (iv) gross negligence or
willful misconduct with respect to the Company or any of its Subsidiaries; (v)
any intentional breach of Section 2 or Section 3 of this Agreement by Executive
--------- ---------
not cured within ten (10) business days after written notice thereof from the
Company or (vi) a material breach of any of the Executive's representations and
warranties contained in Section 4 above not cured within fifteen (15) days after
---------
receipt of written notice by the Executive. Any election by the Company not to
renew the Employment Period on the second anniversary of the date hereof shall
be deemed to be a termination by the Company without Cause. The failure of the
Company or the Executive to achieve budgetary or other operational objectives
established by the Board of Directors shall not in and of itself constitute
Cause.
8
<PAGE>
"Disability" means any disability as defined under the Company's
----------
applicable insurance policy, or in the absence of such policy, any physical or
mental disability or incapacity that renders the Executive incapable of
performing the services required of him in accordance with the obligations of
Section 1 of this Agreement for a continuous period of at least four (4) months
- ---------
or for such shorter periods that when aggregated exceed six (6) months in any
twelve (12) month period. Any dispute as to the Executive's Disability shall be
referred to and resolved by a licensed physician selected and approved by the
Company and the Executive.
"Good Reason" means (i) Executive's resignation within 30 days after
-----------
his discovery of any material breach of this Agreement by the Company which is
not cured within ten (10) business days after written notice thereof from
Executive, (ii) without Executive's written consent, any requirement by the
Company to move Executive's place of business by more than one hundred (100)
miles from the Washington, D.C. metropolitan area in order to perform the
services required hereunder or (iii) a material reduction in the Executive's
duties, responsibilities or functions contained herein such that the Executive
is no longer an executive officer of the Company.
"Person" means an individual, a partnership, a limited liability
------
company, a corporation, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Subsidiary" means any corporation, limited liability company or
----------
partnership of which any percentage of the securities (or other equity or
ownership interest) having ordinary voting power in electing the board of
directors (or board of managers or similar governing body) are, at the time as
of which any determination is being made, owned by the Company either directly
or through one or more Subsidiaries. The term Subsidiary shall also include any
joint venture-type business entity between the Company and any other entity.
6. Notices. Any notice provided for in this Agreement must be in writing
-------
and must be either personally delivered, mailed by first class mail (postage
prepaid and return receipt requested) or sent by reputable overnight courier
service (charges prepaid) to the recipient at the address below indicated:
If to the Company:
E2Enet.com, Inc.
800 Connecticut Avenue, N.W.
Suite 1111
Washington, DC 20006
Attention: President
Tel: (202) 261-6000
9
<PAGE>
Fax: (202) 261-6020
with a copy to:
Hogan & Hartson L.L.P.
555 13th Street, N.W.
Washington, D.C. 20004
Attention: J. Hovey Kemp
Tel: (202) 637-5600
Fax: (202) 637-5910
If to the Executive:
Steven J. Quamme
5126 Tilden Street, N.W.
Washington, DC 20016
Tel: (202) 966-8235
Fax: (202) 966-4610
with a copy to:
James A. Baker IV
Baker & Botts
1299 Pennsylvania Avenue, N.W.
Washington, DC 20004
Tel: (202) 639-7700
Fax: (202) 639-7832
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when so delivered
or sent or, if mailed, five days after deposit in the U.S. mail.
7. General Provisions.
------------------
(a) Severability. Whenever possible, each provision of this Agreement
------------
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(b) Complete Agreement. This Agreement, those documents expressly
------------------
referred to herein and other documents of even date herewith embody the
10
<PAGE>
complete agreement and understanding among the parties and supersede and preempt
any prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
(c) Counterparts; Facsimile Transmission. This Agreement may be
------------------------------------
executed in separate counterparts, each of which is deemed to be an original and
all of which taken together constitute one and the same agreement, and
transmitted to the other party by facsimile transmission as evidence of such
party's intention to be bound hereby, with originals to be exchanged in due
course.
(d) Successors and Assigns. Except as otherwise provided herein, this
----------------------
Agreement shall bind and inure to the benefit of and be enforceable by Executive
and the Company and their respective successors and assigns.
(e) Choice of Law. All questions concerning the construction,
-------------
validity and interpretation of this Agreement and the exhibits hereto will be
governed by and construed in accordance with the internal laws of the State of
Delaware, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of Delaware or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
State of Delaware.
(f) Remedies. Each of the parties to this Agreement will be entitled
--------
to enforce its rights under this Agreement specifically, to recover damages and
costs (including attorney's fees) caused by any breach of any provision of this
Agreement and to exercise all other rights existing in its favor. The parties
hereto agree and acknowledge that money damages may not be an adequate remedy
for any breach of the provisions of this Agreement and that any party may in its
sole discretion apply to any court of law or equity of competent jurisdiction
(without posting any bond or deposit) for specific performance and/or other
injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement.
(g) Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended and waived only with the prior written consent of the Company and the
Executive.
(h) Business Days. If any time period for giving notice or taking
-------------
action hereunder expires on a day which is a Saturday, Sunday or holiday in the
state in which the Company's principal place of business is located, the time
period shall be automatically extended to the business day immediately following
such Saturday, Sunday or holiday.
(i) Termination. This Agreement (except for the provisions of
-----------
Sections 1(a), 1(b) and 1(c)) shall survive a separation and shall remain in
- ------------- ---- ----
full force and effect after such separation until any terms contained in any
specific provision of this Agreement expires as therein provided.
11
<PAGE>
(j) Dispute Resolution. Any controversy, claim or dispute arising out
------------------
of or relating to this Agreement, the breach thereof, or Executive's employment
by the Company shall be settled by arbitration with three arbitrators. The
arbitration will be administered by the American Arbitration Association in
accordance with its applicable arbitration rules. The arbitration proceeding
shall be confidential, and judgment on the award rendered by the arbitrator may
be entered in any court having jurisdiction. Any such arbitration shall take
place in the Washington, D.C. metropolitan area, or in any other mutually
agreeable location. In the event any judicial action is necessary to enforce
the arbitration provisions of this Agreement, sole jurisdiction shall be in
Washington, D.C. Any request for interim injunctive relief or other provisional
remedies or opposition thereto shall not be deemed to be a waiver of the right
or obligation to arbitrate hereunder. Subject to the terms of this Section
-------
7(j), the parties waive the right to a jury trial with respect to any
controversy or claim between the parties hereto, including those arising out of
or relating to this Agreement and any claim based on or arising from an alleged
tort.
(k) Third-Party Beneficiaries. Each party hereto intends that this
-------------------------
Agreement shall not benefit nor confer any rights or remedies on any Person
other than the parties hereto and their respective heirs, successors and legal
representatives, provided, however, that each of the Company's Subsidiaries are
intended beneficiaries of Executive's applicable covenants and undertakings made
hereunder.
[The rest of this page left blank intentionally]
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Senior
Management Agreement on the date first written above.
E2Enet.com, Inc.
By: /s/ David Ledecky
__________________________________
Name: David Ledecky
Its: Senior Vice President and
Assistant Secretary
/s/ Steven J. Quamme
_______________________________________
Steven J. Quamme
13
<PAGE>
Exhibit 10.7
MANAGEMENT AGREEMENT
--------------------
THIS SENIOR MANAGEMENT AGREEMENT (this "Agreement") is made as of
---------
September __, 1999, between E2Enet, Inc., a Delaware corporation (the
"Company"), and James Smith ("Executive").
------- ---------
The parties hereto agree as follows:
1. Employment. The Company agrees to employ Executive and Executive
----------
accepts such employment for the period beginning as of an effective date of
October 4, 1999 and ending on the second anniversary of the date hereof or upon
Executive's earlier separation pursuant to Section 1(d) hereof (the "Employment
------------ ----------
Period"). The Company and the Executive agree to meet and discuss this
- ------
employment agreement at least 60 days prior to the Expiration of the Employment
Period and determine the Company's desire to terminate, renew, or renegotiate
this Agreement for an additional period.
(a) Position and Duties. During the Employment Period, Executive
-------------------
shall serve as the Senior Vice President and Chief Technology Officer of the
Company, and shall have the normal duties, responsibilities and authority of
such positions, subject to the power of the Company's Chief Executive Officer or
the Company's Board of Directors (the "Board") to reasonably expand or limit
such duties, responsibilities and authority and to override actions of the
Senior Vice President and Chief Technology Officer. Executive shall report to
the Chief Executive Officer of the Company and shall devote his best efforts and
his full business time and attention to the business and affairs of the Company
and its Subsidiaries. Executive's principal place of employment shall be in the
Washington, D.C. metropolitan area, subject to such reasonable travel as the
rendering of the services hereunder may require except as otherwise set forth
herein. Notwithstanding the foregoing provisions of this Section 1(a) and
------------
subject to the limitations contained in Section 3(a) of this Agreement, the
------------
Executive may participate in charitable, civic, political, social, trade, or
other non-profit organizations to the extent such participation does not
materially interfere with the performance of his duties hereunder.
(b) Salary, Bonus and Benefits. Commencing on October 4, 1999, the
--------------------------
Company will pay Executive a base salary of $215,000 per annum, payable on a bi-
weekly basis or in accordance with the Company's normal payroll practices (the
"Annual Base Salary"), subject to any annual increase during the Employment
- -------------------
Period as determined by the Board based upon the Company's achievements of
budgetary and other objectives to be set by the Board and communicated to the
Executive within ninety (90) days of the date hereof. Upon his relocation to
the Washington DC metropolitan area, Executive shall receive a monthly
automobile allowance of seven hundred and fifty dollars ($750.00). In addition,
Executive shall be eligible to receive an annual bonus (commencing with the
Company's fiscal year ending December 31, 1999) of up to fifty percent (50%) of
the Annual Base Salary based upon the Company's achievement of budgetary and
other objectives set by the
1
<PAGE>
Board. Executive will receive a signing bonus of $200,000 payable on the
consummation of the initial public offering. Provided that it shall not have any
adverse impact on the Company, at the Executive's option the signing bonus can
be held by E2E for up to 18 months and paid directly to an agent or company for
the purchase of a residence, or to Executive directly at the date of choosing if
a residence is not purchased. The Company will also reimburse reasonable moving
expenses, which shall include: broker/agent costs in selling and closing on
existing residence in Charlotte, moving expenses and temporary storage of
belongings (not to go beyond June 30, 2000), hotel stay for transit and
transactions costs associated with purchasing a residence in the Washington DC
area. In the event Executive does not relocate his primary residence prior to
the commencement of employment with the Company, the Company will cover
commuting expenses for a period not to go beyond June 30, 2000. Commuting
expenses will include living accommodations (furnished apartment),
transportation expenses (airfare, rental car, taxi) and incidentals. All such
travel reimbursements will be in keeping with the Company travel policy for
Senior Executives. Executive's Annual Base Salary and bonus for any partial year
will be prorated based upon the number of days elapsed in such year. In
addition, during the Employment Period, Executive will be entitled to such other
benefits approved by the Board and made available to the Company's senior
executives, including four (4) weeks vacation time per annum, contributory and
non-contributory Company welfare and benefit plans, medical, death benefit,
disability and life insurance plans and reimbursement of reasonable business
expenses.
(c) Issuance of Stock and Stock Options. Executive shall receive
-----------------------------------
options (which options shall be incentive stock options to the extent possible
under applicable law) for the purchase of 275,000 shares of the Common Stock
upon implementation of the Company's employee stock option plan at a price of
$10 per share. The options will vest as follows: the first 100,000 options will
vest upon the completion of the Company's Initial Public Offering. The
remaining options shall vest at the rate of 1/42 per month thereafter. All
options granted in accordance with the foregoing provisions of this Agreement
shall be fully vested no later than the fourth anniversary of the date
Executive's employment commences. Executive will be eligible for grants of
additional options during the Employment Period approved by the Board based on
Executive's and the Company's performance. All shares and options issued to
Executive shall be made through stock purchase agreements or options agreements,
as appropriate, based on the Company's standard form for its executives
(d) Separation.
----------
(i) Executive's employment by the Company during the
Employment Period will continue until Executive's resignation at any time
or until Executive's disability or death or until the Board terminates
Executive's employment at any time during the Employment Period, as
follows:
(A) Effective Date of Separation. If the Employment
----------------------------
Period is terminated by the Executive without Good Reason, then the
termination will be effective sixty (60) days after the date of
delivery of written notice of termination. If the Employment Period
is terminated by the Company without Cause or by the
2
<PAGE>
Executive with Good Reason, then the termination will be effective
thirty (30) days after the date of delivery of written notice of
termination. If the Employment Period is terminated by the Company
with Cause, termination will be effective as of the date of notice of
termination.
(B) Separation With Cause or Not For Good Reason. If the
--------------------------------------------
Employment Period is terminated by the Company with Cause or by the
Executive without Good Reason, then the Executive shall be entitled to
only receive his Annual Base Salary, bonuses and his fringe benefits
pro rated through the effective date of termination. In addition, in
the event the Employment Period is terminated by the Company with
Cause or by the Executive without Good Reason, Executive hereby agrees
to repay in full the $200,000 signing bonus (in the event the signing
bonus has been paid).
(C) Separation Without Cause or For Good Reason or Non-
--------------------------------------------------
renewal of Executive Contract by the Company. If the Employment
--------------------------------------------
Period is terminated by the Company without Cause or by the Executive
with Good Reason or the Company does not renew the Executive contract,
then (1) all options granted to the Executive as of the date thereof
shall vest immediately and (2) the Executive shall be entitled to
receive on such effective date of termination (x) a pro rata bonus
payment through the date of termination equal to the pro rated portion
of the greater of (i) the prior year's annual bonus received by the
Executive or (ii) $100,000, provided, however, that for the period
commencing on the date hereof and ending on December 31, 1999, the
Executive shall be entitled to a pro rata share of an annual bonus of
one hundred thousand dollars ($100,000), (y) his Annual Base Salary
then in effect for a period equal to the longer of the unexpired
Employment Period (not including any renewals thereof) or twelve (12)
months and in accordance with normal payroll practices and (z) his
life, medical and disability insurance benefits, if any, for one year
from the effective date of such termination, and with respect to
subclauses (2)(x), (y) and (z) hereof, with no duty to mitigate.
----------------- --- ---
Subject to the requirement of applicable law, in the event of a
separation without Cause or for Good Reason, the Executive shall have
a period of one year in which to exercise options acquired hereunder.
(D) Separation Due to Death. If the Employment Period is
-----------------------
terminated due to death of the Executive, then all options to acquire
shares issued to the Executive as of the date hereof shall vest
immediately and the Executive's heirs, executors, administrators,
conservators or personal representatives (in such capacity) of
Executive (the "Executive's Estate") shall be entitled to receive (1)
the Annual Base Salary through the next full calendar month following
the month in which the Executive died, (2) medical insurance and
disability insurance benefits, if any, and (3) a pro rata bonus
payment through the date of death if more than six months of the
current fiscal year have passed. Subject to the requirement of
applicable law, in the event of a separation due to death, the
3
<PAGE>
Executive's Estate shall have a period of six (6) months in which to
exercise options acquired hereunder.
(E) Separation Due to Disability. If the Employment Period
----------------------------
is terminated due to Disability, then the Annual Base Salary, prorated
annual bonus, medical insurance and disability insurance will be
continued until the last day of the six-month period following the
termination date due to a Disability; provided, however, that such
Annual Base Salary shall be reduced by the amount of any disability
income payments made to the Executive during such six-month period
from any insurance or other policies provided by the Company; and,
provided, further, however, that option vesting as provided in Section
-------
1(c) above shall continue during the six-month period following the
----
termination date due to a Disability, and subject to applicable law,
in the event of a separation due to Disability, the Executive shall
have a period of three (3) months following the end of such additional
six-month vesting period (i.e., a total of nine (9) months following
the termination date due to a Disability) in which to exercise options
acquired hereunder.
2. Confidential Information.
------------------------
(a) Executive acknowledges that the Company is engaged in the business
of investing in, creating, managing and providing management services to its
Subsidiaries or other Internet, Internet-related, interactive media business and
technology companies and/or businesses (collectively, the "Business").
--------
Executive further acknowledges that the Business and its continued success
depend upon the use and protection of a large body of confidential and
proprietary information, and that he holds a position of trust and confidence by
virtue of which he necessarily possesses, has access to and, as a consequence of
his signing this Agreement, will continue to possess and have access to, highly
valuable, confidential and proprietary information of the Company and its
Subsidiaries not known to the public in general, and that it would be improper
for him to make use of this information for the benefit of himself and others.
All of such confidential and proprietary information now existing or to be
developed in the future will be referred to in this Agreement as "Confidential
------------
Information." This includes, without specific limitation, information relating
- -----------
to the nature and operation of the Business or any other business conducted by
the Company's Subsidiaries and affiliates (the "Subsidiary Business"), the
-------------------
persons, firms and corporations which are customers or active prospects of the
Company or the Subsidiary Business during Executive's employment by the Company,
the Company's and the Subsidiary Business' development, transition and
transformation plans, methodology and methods of doing business, strategic,
acquisition, marketing and expansion plans, including plans regarding planned
and potential acquisitions and sales, financial and business plans, employee
lists, numbers and location of sales representatives, new and existing programs
and services (and those under development), prices and terms, customer service,
integration processes requirements, costs of providing service, support and
equipment and equipment maintenance costs. Confidential Information shall not
include any information that has become generally known to and available for use
by the public other than as a result of Executive's improper acts or omissions.
4
<PAGE>
(b) Disclosure of any Confidential Information of the Company shall
not be prohibited if such disclosure is directly pursuant to a valid and
existing order of a court or other governmental body or agency within the United
States; provided, however, that (i) Executive shall have made reasonable
attempts to first have given prompt notice to the Company of any such possible
or prospective order (or proceeding pursuant to which any such order may result)
and (ii) Executive shall afford the Company a reasonable opportunity to prevent
or limit any such disclosure (if same is reasonably possible under the
circumstances).
(c) During the Employment Period and for a period of two (2) years
thereafter, Executive will preserve and protect as confidential all of the
Confidential Information known to Executive or at any time in Executive's
possession. In addition, during the Employment Period and at all times
thereafter, Executive will not disclose to any unauthorized person or use for
his own account any of such Confidential Information without the Board's written
consent. Executive agrees to deliver to the Company at a separation for any
reason, or at any other time the Company may request in writing, all memoranda,
notes, plans, records, reports and other documents (and copies thereof)
containing or otherwise relating to any of the Confidential Information
(including, without limitation, all acquisition prospects, lists and contact
information) which he may then possess or have under his control. Executive
acknowledges that all such memoranda, notes, plans, records, reports and other
documents are and at all times will be and remain the property of the Company.
(d) Executive will fully comply with any agreement reasonably required
by any of the Company's Subsidiaries, business partners, suppliers or
contractors with respect to the protection of the confidential and proprietary
information of such entities, all to the extent not inconsistent with
Executive's obligations under this Agreement.
3. Noncompetition and Nonsolicitation. Executive acknowledges that in
----------------------------------
the course of his employment with the Company he will become familiar with the
Confidential Information concerning the Company and such Subsidiaries and that
his services will be of special, unique and extraordinary value to the Company.
Executive agrees that the Company has a protectable interest in the Confidential
Information acquired by Executive during the course of his employment with the
Company. Therefore, Executive agrees that:
(a) Noncompetition. Subject to paragraph (d) below, so long as
-------------- -------------
Executive is employed or affiliated with the Company or any Subsidiary and for
an additional one (1) year thereafter (the "Noncompete Period"), he shall not,
-----------------
anywhere in the United States, directly or indirectly own, manage, control,
participate in, consult with, render services for, or in any manner engage in
the Business; provided, however, that notwithstanding the foregoing, Executive
may (i) be the owner, directly or indirectly, of less than five percent (5%) of
the outstanding capital stock of any publicly traded corporation engaged in the
Business, (ii) participate in or own interests in mutual funds that invest in
Internet-related and interactive-media businesses, and (iii) serve as an
independent director of a public company following notice to and approval by the
Board (which shall not be unreasonably withheld).
5
<PAGE>
(b) Nonsolicitation. During the Noncompete Period, Executive shall
---------------
not directly or indirectly through another entity (i) knowingly induce or
attempt to induce any employee of the Company or any of its Subsidiaries to
leave the employ of the Company or such Subsidiary, or in any way interfere in a
deleterious manner with the relationship between the Company or any of its
Subsidiaries and any employee thereof, (ii) knowingly hire any person who was an
employee of the Company or any of its Subsidiaries within 180 days prior to the
time such employee was hired by the Executive, (iii) knowingly induce or
attempt to induce any owner of a site location, customer, supplier, licensee or
other business relation of the Company or any of its Subsidiaries to cease doing
business with the Company or such Subsidiary or in any way interfere with the
relationship between any such site location, customer, supplier, licensee or
business relation and the Company or any of its Subsidiaries or (iv) knowingly
directly or indirectly acquire or attempt to acquire an interest in any business
entity relating to the business of the Company or any of its Subsidiaries and
with which, to Executive's knowledge, the Company or any of its Subsidiaries has
entertained discussions or has requested and received information relating to
the acquisition of such business by the Company or any of its Subsidiaries in
the one-year period immediately preceding a separation.
(c) Enforcement. If, at the time of enforcement of Section 2 or
Section 3 of this Agreement, a court holds that the restrictions stated herein
are unreasonable under circumstances then existing, the parties hereto agree
that the maximum duration, scope or geographical area reasonable under such
circumstances shall be substituted for the stated period, scope or area and that
the court shall be allowed to revise the restrictions contained herein to cover
the maximum duration, scope and area permitted by law. Because Executive's
services are unique and because Executive has access to Confidential
Information, the parties hereto agree that money damages would be an inadequate
remedy for any breach of this Agreement. Therefore, in the event of a breach or
threatened breach of Section 2 or Section 3 of this Agreement, the Company or
--------- ---------
any of its successors or assigns shall, in addition to other rights and remedies
existing in its favor, be entitled to specific performance and/or injunctive or
other relief in order to enforce, or prevent any violations of, the provisions
of Section 2 or Section 3 from any court of competent jurisdiction.
--------- ---------
(e) Additional Acknowledgments. Executive acknowledges that the
--------------------------
provisions of this Section are in consideration of: (i) employment with the
Company and (ii) additional good and valuable consideration as set forth in this
Agreement. Executive expressly agrees and acknowledges that the restrictions
contained in Sections 2 and Section 3 do not preclude Executive from earning a
---------- ---------
livelihood, nor does it unreasonably impose limitations on Executive's ability
to earn a living. In addition, Executive agrees and acknowledges that the
potential harm to the Company of its non-enforcement outweighs any harm to the
Executive of its enforcement by injunction or otherwise. Executive acknowledges
that he has carefully read this Agreement and has given careful consideration to
the restraints imposed upon the Executive by this Agreement, and is in full
accord as to their necessity for the reasonable and proper protection of the
Confidential Information. Executive expressly acknowledges and agrees that each
and every restraint imposed by this Agreement is reasonable with respect to
subject matter, time period and geographical area.
6
<PAGE>
4. Executive's Representations and Warranties. Executive represents and
------------------------------------------
warrants that he has full right and authority to enter into this Agreement and
fully perform his obligations hereunder, that he is not subject to any non-
competition agreement that would prevent or restrict him in any way from
rendering the services hereunder anywhere in the world, and that his past,
present and anticipated future activities have not and will not infringe on the
proprietary rights of others. Executive further represents and warrants that he
is not obligated under any contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any judgment,
decree or order of any court or administrative agency which would conflict with
his obligation to use his best efforts to promote the interests of the Company
or which would conflict with the Company's business as conducted or proposed to
be conducted. Neither the execution nor delivery of this Agreement, nor the
carrying on of the Company's business as an officer, director or employee by
Executive, will conflict with or result in a breach of the terms, conditions or
provisions of or constitute a default under any contract, covenant or instrument
under which Executive is now obligated.
GENERAL PROVISIONS
5. Definitions.
-----------
"Cause" means (i) the commission of a felony or a crime involving
-----
moral turpitude or the intentional commission of any other act or omission
involving dishonesty or fraud with respect to the Company or any of its
Subsidiaries or any of their customers or suppliers, (ii) conduct which brings
the Company or any of its Subsidiaries into substantial public disgrace or
disrepute, (iii) substantial and repeated failure to perform duties of the
office held by Executive as reasonably directed by the Board not cured within
ten (10) business days after written notice thereof, (iv) gross negligence or
willful misconduct with respect to the Company or any of its Subsidiaries; (v)
any intentional breach of Section 2 or Section 3 of this Agreement by Executive
--------- ---------
not cured within ten (10) business days after written notice thereof from the
Company or (vi) a material breach of any of the Executive's representations and
warranties contained in Section 4 above not cured within fifteen (15) days after
---------
receipt of written notice by the Executive. Any election by the Company not to
renew the Employment Period on the second anniversary of the date hereof shall
be deemed to be a termination by the Company without Cause. The failure of the
Company or the Executive to achieve budgetary or other operational objectives
established by the Board of Directors shall not in and of itself constitute
Cause.
"Disability" means any disability as defined under the Company's
----------
applicable insurance policy, or in the absence of such policy, any physical or
mental disability or incapacity that renders the Executive incapable of
performing the services required of him in accordance with the obligations of
Section 1 of this Agreement for a continuous period of at least four (4) months
- ---------
or for such shorter periods that when aggregated exceed six (6) months in any
twelve (12) month period. Any dispute as to the Executive's Disability shall be
referred to and resolved by a licensed physician selected and approved by the
Company and the Executive.
"Good Reason" means (i) Executive's resignation within 30 days after
-----------
his discovery of any material breach of this Agreement by the Company which is
not
7
<PAGE>
cured within ten (10) business days after written notice thereof from Executive,
(ii) without Executive's written consent, any requirement by the Company to move
Executive's place of business by more than fifty (50) miles from the Washington,
D.C. metropolitan area in order to perform the services required hereunder or
(iii) a material reduction in the Executive's duties, responsibilities or
functions contained herein such that the Executive is no longer an executive
officer of the Company.
"Person" means an individual, a partnership, a limited liability
------
company, a corporation, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Subsidiary" means any corporation, limited liability company or
----------
partnership of which any percentage of the securities (or other equity or
ownership interest) having ordinary voting power in electing the board of
directors (or board of managers or similar governing body) are, at the time as
of which any determination is being made, owned by the Company either directly
or through one or more Subsidiaries. The term Subsidiary shall also include any
joint venture-type business entity between the Company and any other entity.
6. Notices. Any notice provided for in this Agreement must be in writing
-------
and must be either personally delivered, mailed by first class mail (postage
prepaid and return receipt requested) or sent by reputable overnight courier
service (charges prepaid) to the recipient at the address below indicated:
If to the Company:
E2Enet, Inc.
800 Connecticut Ave., NW
Suite 1111
Washington, DC 20006
Attention: Chairman
Tel: (202) 261-6000
Fax: (202) 261-6020
with a copy to:
Hogan & Hartson L.L.P.
555 13th Street, N.W.
Washington, D.C. 20004
Attention: J. Hovey Kemp
Tel: (202) 637-5600
Fax: (202) 637-5910
If to the Executive:
James Smith
12012 Old Timber Road
Charlotte, NC 29269
Tel: (704) 595-9839
8
<PAGE>
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when so delivered
or sent or, if mailed, five days after deposit in the U.S. mail.
7. General Provisions.
------------------
(a) Severability. Whenever possible, each provision of this Agreement
------------
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(b) Complete Agreement. This Agreement, those documents expressly
------------------
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
(c) Counterparts; Facsimile Transmission. This Agreement may be
------------------------------------
executed in separate counterparts, each of which is deemed to be an original and
all of which taken together constitute one and the same agreement, and
transmitted to the other party by facsimile transmission as evidence of such
party's intention to be bound hereby, with originals to be exchanged in due
course.
(d) Successors and Assigns. Except as otherwise provided herein, this
----------------------
Agreement shall bind and inure to the benefit of and be enforceable by Executive
and the Company and their respective successors and assigns.
(e) Choice of Law. All questions concerning the construction,
-------------
validity and interpretation of this Agreement and the exhibits hereto will be
governed by and construed in accordance with the internal laws of the State of
Delaware, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of Delaware or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
State of Delaware.
(f) Remedies. Each of the parties to this Agreement will be entitled
--------
to enforce its rights under this Agreement specifically, to recover damages and
costs (including attorney's fees) caused by any breach of any provision of this
Agreement and to exercise all other rights existing in its favor. The parties
hereto agree and acknowledge that money damages may not be an adequate remedy
for any breach of the provisions of this Agreement and that any party may in its
sole discretion apply to any court of law or equity of competent jurisdiction
(without posting any bond or deposit) for specific performance and/or other
injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement.
9
<PAGE>
(g) Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended and waived only with the prior written consent of the Company and the
Executive.
(h) Business Days. If any time period for giving notice or taking
-------------
action hereunder expires on a day which is a Saturday, Sunday or holiday in the
state in which the Company's principal place of business is located, the time
period shall be automatically extended to the business day immediately following
such Saturday, Sunday or holiday.
(i) Termination. This Agreement (except for the provisions of
-----------
Sections 1(a), 1(b) and 1(c)) shall survive a separation and shall remain in
- ------------- ---- ----
full force and effect after such separation until any terms contained in any
specific provision of this Agreement expires as therein provided.
(j) Dispute Resolution. Any controversy, claim or dispute arising out
------------------
of or relating to this Agreement, the breach thereof, or Executive's employment
by the Company shall be settled by arbitration with three arbitrators. The
arbitration will be administered by the American Arbitration Association in
accordance with its applicable arbitration rules. The arbitration proceeding
shall be confidential, and judgment on the award rendered by the arbitrator may
be entered in any court having jurisdiction. Any such arbitration shall take
place in the Washington, D.C. metropolitan area, or in any other mutually
agreeable location. In the event any judicial action is necessary to enforce
the arbitration provisions of this Agreement, sole jurisdiction shall be in
Washington, D.C. Any request for interim injunctive relief or other provisional
remedies or opposition thereto shall not be deemed to be a waiver of the right
or obligation to arbitrate hereunder. Subject to the terms of this Section
-------
7(j), the parties waive the right to a jury trial with respect to any
- ----
controversy or claim between the parties hereto, including those arising out of
or relating to this Agreement and any claim based on or arising from an alleged
tort.
(k) Third-Party Beneficiaries. Each party hereto intends that this
-------------------------
Agreement shall not benefit nor confer any rights or remedies on any Person
other than the parties hereto and their respective heirs, successors and legal
representatives, provided, however, that each of the Company's Subsidiaries and
other affiliates, including E2Enet, are intended beneficiaries of Executive's
applicable covenants and undertakings made hereunder.
[The rest of this page left blank intentionally]
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Senior
Management Agreement on the date first written above.
E2Enet, Inc.
By: /s/ Robert Smith
__________________________________
Name: Robert Smith
Its:
/s/ James Smith
__________________________________________
James Smith
11
<PAGE>
Exhibit 10.8
SENIOR MANAGEMENT AGREEMENT
---------------------------
(Lewyn)
THIS SENIOR MANAGEMENT AGREEMENT (this "Agreement") is made as of May
---------
14, 1999, between E2Enet.com, Inc. a Delaware corporation (the "Company"), and
-------
Mark Lewyn ("Executive").
---------
The parties hereto agree as follows:
1. Employment. The Company agrees to employ Executive and Executive
----------
accepts such employment for the period beginning as of the date hereof and
ending on the second anniversary of the date hereof or upon Executive's earlier
separation pursuant to Section 1(d) hereof (the "Employment Period"); provided,
------------ -----------------
however, that the Employment Period shall automatically be renewed for an
additional two year period commencing on the second anniversary of the date
hereof unless either the Company or the Executive gives the other at least 60
days written notice prior to the Expiration of the Employment Period of its
desire to terminate this Agreement.
(a) Position and Duties. During the Employment Period, Executive
-------------------
shall serve as the Senior Vice President of the Company and shall have the
normal duties, responsibilities and authority of the Senior Vice President,
subject to the power of the Company's President and Chief Executive Officer
("CEO") or Chairman or the Company's Board of Directors (the "Board") to
-----
reasonably expand or limit such duties, responsibilities and authority and to
override actions of the Senior Vice President. Executive shall report to the
CEO and the Board and Executive shall devote his best efforts and his full
business time and attention to the business and affairs of the Company and its
Subsidiaries. Executive's principal place of employment shall be in the
Washington, D.C. metropolitan area, subject to such reasonable travel as the
rendering of the services hereunder may require. Notwithstanding the foregoing
provisions of this Section 1(a) and subject to the limitations contained in
------------
Section 3(a) of this Agreement, the Executive may participate in charitable,
- ------------
civic, political, social, trade, or other non-profit organizations to the extent
such participation does not materially interfere with the performance of his
duties hereunder, and may, with the consent of the Board, serve as a non-
management director of business corporations (or in a like capacity in other
for-profit organizations) so long as it does not materially interfere with the
Executive's obligations hereunder.
(b) Salary, Bonus and Benefits. Commencing on the earlier of the
--------------------------
effective date (the "IPO Date") of the Company's initial public offering
--------
pursuant to an underwritten registration statement on Form S-1 declared
effective by the Securities and Exchange Commission (the "IPO"), if any, or (ii)
---
that date on which the Board passes a resolution (based on the prior receipt of
the approval of a majority of the Company's shareholders) to commence
compensating the Executive in accordance with the terms of this Section 1(b)
------------
notwithstanding that the IPO Date has not theretofore occurred, the Company will
pay Executive a base salary of $180,000 per annum, payable on a bi-weekly basis
or in accordance with the
<PAGE>
Company's normal payroll practices (the "Annual Base Salary"), subject to any
------------------
annual increase during the Employment Period as determined by the Board based
upon the Company's achievements of budgetary and other objectives to be set by
the Board and communicated to the Executive within ninety (90) days of the date
hereof but no later than thirty (30) days after the IPO Date and as revised
thereafter on or about the commencement of each fiscal year of the Company and
in connection with the budget process for each fiscal year of the Company.
Executive shall receive a monthly automobile (or car lease) allowance of seven
hundred and fifty dollars ($750.00). In addition, Executive shall be eligible to
receive an annual bonus (commencing with the Company's fiscal year ending
December 31, 1999) of up to fifty percent (50%) of the Annual Base Salary based
upon the Company's achievement of budgetary and other objectives set by the
Board. Executive's Annual Base Salary and bonus for any partial year will be
prorated based upon the number of days elapsed in such year. In addition, during
the Employment Period, Executive will be entitled to such other benefits
approved by the Board and made available to the Company's senior executives,
including four (4) weeks vacation time per annum, contributory and non-
contributory Company welfare and benefit plans, medical, death benefit,
disability and life insurance plans and reimbursement of reasonable business
expenses.
(c) Issuance of Stock and Stock Options. Executive shall also be
-----------------------------------
eligible to purchase 216,000 shares of the Company's common stock (the "Common
------
Stock") at a purchase price of $0.01 per share (an aggregate purchase price of
- -----
$2,160). The Executive shall pay the purchase price for such 216,000 shares of
Common Stock by paying cash therefor or by issuing a note to the Company with
the Board's consent. In addition, Executive shall also receive options (which
options shall be incentive stock options to the extent possible under applicable
law) for the purchase of 175,000 shares of the Common Stock upon implementation
of the Company's employee stock option plan on the IPO Date at a price no
greater than the IPO offering price. The options will vest as follows: the
first 1/4 of the options (or 43,750 options) will vest on the first anniversary
of the IPO Date. The remaining 3/4 of the options (or 131,250 options) shall
vest at the rate of 1/36 per month thereafter (or 3,645.83 options per month).
All options granted in accordance with the foregoing provisions of this
Agreement shall be fully vested no later than the fourth anniversary of the IPO
Date. Executive will be eligible for grants of additional options during the
Employment Period approved by the Board based on Executive's and the Company's
performance. All shares and options issued to Executive shall be made through
stock purchase agreements or options agreements, as appropriate, based on the
Company's standard form for its executives.
(d) Separation.
----------
(i) Pre-IPO Separation. In the event that (y) prior to the
------------------
IPO Date, Executive resigns (whether or not for Good Reason) or is disabled
or dies or Executive's employment is terminated by the Board (with
2
<PAGE>
or without Cause), or (z) the IPO Date has not occurred on or prior to
December 31, 1999 (in either case, a "Pre-IPO Separation"), the Employment
------------------
Period shall terminate upon any such event and Executive shall not be
entitled to any severance or other separation payments or benefits under
this Agreement.
(ii) Post-IPO Separation. Following the IPO Date,
-------------------
Executive's employment by the Company during the Employment Period will
continue until Executive's resignation at any time or until Executive's
disability or death or until the Board terminates Executive's employment at
any time during the Employment Period, as follows:
(A) Effective Date of Separation. If the Employment
----------------------------
Period is terminated by the Executive without Good Reason, then the
termination will be effective sixty (60) days after the date of
delivery of written notice of termination. If the Employment Period is
terminated by the Board without Cause or by the Executive with Good
Reason, then the termination will be effective thirty (30) days after
the date of delivery of written notice of termination. If the
Employment Period is terminated by the Board with Cause, termination
will be effective as of the date of notice of termination.
(B) Separation With Cause or Not For Good Reason. If
--------------------------------------------
the Employment Period is terminated by the Board with Cause or by the
Executive without Good Reason, then the Executive shall be entitled to
only receive his Annual Base Salary, bonuses and his fringe benefits
pro rated through the effective date of termination.
(C) Separation Without Cause or For Good Reason. If
-------------------------------------------
the Employment Period is terminated by the Board without Cause or by
the Executive with Good Reason, then (1) all options granted to the
Executive as of the date thereof shall vest immediately and (2) the
Executive shall be entitled to receive on such effective date of
termination (x) a pro rata bonus payment through the date of
termination equal to the pro rated portion of the greater of (i) the
prior year's annual bonus received by the Executive or (ii) $90,000,
provided, however, that for the period commencing on the date hereof
and ending on December 31, 1999, the Executive shall be entitled to a
pro rata share of an annual bonus of ninety thousand dollars
($90,000), (y) his Annual Base Salary then in effect for a period
equal to the longer of the unexpired Employment Period (not including
any renewals thereof) or twelve (12) months and in accordance with
normal payroll practices and (z) his life, medical and disability
insurance benefits, if any, for one year from the effective date of
such termination, and with respect to subclauses (2)(x), (y) and (z)
----------------- --- ---
hereof, with no duty to mitigate.
3
<PAGE>
Subject to the requirement of applicable law, in the event of a
separation without Cause or for Good Reason, the Executive shall have
a period of one year in which to exercise options acquired hereunder.
(D) Separation Due to Death. If the Employment Period
-----------------------
is terminated due to death of the Executive, then all options to
acquire shares issued to the Executive as of the date hereof shall
vest immediately and the Executive's heirs, executors, administrators,
conservators or personal representatives (in such capacity) of
Executive (the "Executive's Estate") shall be entitled to receive (1)
the Annual Base Salary through the next full calendar month following
the month in which the Executive died, (2) medical insurance and
disability insurance benefits, if any, and (3) a pro rata bonus
payment through the date of death if more than six months of the
current fiscal year have passed. Subject to the requirement of
applicable law, in the event of a separation due to death, the
Executive's Estate shall have a period of six (6) months in which to
exercise options acquired hereunder.
(E) Separation Due to Disability. If the Employment
----------------------------
Period is terminated due to Disability, then the Annual Base Salary,
prorated annual bonus, medical insurance and disability insurance will
be continued until the last day of the six-month period following the
termination date due to a Disability; provided, however, that such
Annual Base Salary shall be reduced by the amount of any disability
income payments made to the Executive during such six-month period
from any insurance or other policies provided by the Company; and,
provided, further, however, that option vesting as provided in Section
-------
1(c) above shall continue during the six-month period following the
----
termination date due to a Disability, and subject to applicable law,
in the event of a separation due to Disability, the Executive shall
have a period of three (3) months following the end of such additional
six-month vesting period (i.e., a total of nine (9) months following
the termination date due to a Disability) in which to exercise options
acquired hereunder.
2. Confidential Information.
------------------------
(a) Executive acknowledges that the Company is engaged in the
business of and in actively investing in, creating, managing and providing
management services to its Subsidiaries or other Internet, Internet-related,
interactive media business and technology companies and/or businesses
(collectively, the "Business"). Executive further acknowledges that the Business
--------
and its continued success depend upon the use and protection of a large body of
confidential and proprietary information, and that he holds a position of trust
and confidence by virtue of which he necessarily possesses, has access to and,
as a consequence of his signing this Agreement, will continue to possess and
have access to, highly valuable, confidential and proprietary information of the
Company and
4
<PAGE>
its Subsidiaries not known to the public in general, and that it would be
improper for him to make use of this information for the benefit of himself and
others. All of such confidential and proprietary information now existing or to
be developed in the future will be referred to in this Agreement as
"Confidential Information." This includes, without specific limitation,
- -------------------------
information relating to the nature and operation of the Business or any other
business conducted by the Company's Subsidiaries (the "Subsidiary Business"),
-------------------
the persons, firms and corporations which are customers or active prospects of
the Company or the Subsidiary Business during Executive's employment by the
Company, the Company's and the Subsidiary Business' development, transition and
transformation plans, methodology and methods of doing business, strategic,
acquisition, marketing and expansion plans, including plans regarding planned
and potential acquisitions and sales, financial and business plans, employee
lists, numbers and location of sales representatives, new and existing programs
and services (and those under development), prices and terms, customer service,
integration processes requirements, costs of providing service, support and
equipment and equipment maintenance costs. Confidential Information shall not
include any information that has become generally known to and available for use
by the public other than as a result of Executive's improper acts or omissions.
(b) Disclosure of any Confidential Information of the Company shall
not be prohibited if such disclosure is directly pursuant to a valid and
existing order of a court or other governmental body or agency within the United
States; provided, however, that (i) Executive shall have made reasonable
attempts to first have given prompt notice to the Company of any such possible
or prospective order (or proceeding pursuant to which any such order may result)
and (ii) Executive shall afford the Company a reasonable opportunity to prevent
or limit any such disclosure (if same is reasonably possible under the
circumstances).
(c) During the Employment Period and for a period of two (2) years
thereafter, Executive will preserve and protect as confidential all of the
Confidential Information known to Executive or at any time in Executive's
possession. In addition, during the Employment Period and at all times
thereafter, Executive will not disclose to any unauthorized person or use for
his own account any of such Confidential Information without the Board's written
consent. Executive agrees to deliver to the Company at a separation for any
reason, or at any other time the Company may request in writing, all memoranda,
notes, plans, records, reports and other documents (and copies thereof)
containing or otherwise relating to any of the Confidential Information
(including, without limitation, all acquisition prospects, lists and contact
information) which he may then possess or have under his control. Executive
acknowledges that all such memoranda, notes, plans, records, reports and other
documents are and at all times will be and remain the property of the Company.
(d) Executive will fully comply with any agreement reasonably required
by any of the Company's Subsidiaries, business partners, suppliers or
5
<PAGE>
contractors with respect to the protection of the confidential and proprietary
information of such entities, all to the extent not inconsistent with
Executive's obligations under this Agreement.
3. Noncompetition and Nonsolicitation. Executive acknowledges that
----------------------------------
in the course of his employment with the Company he will become familiar with
the Confidential Information concerning the Company and such Subsidiaries and
that his services will be of special, unique and extraordinary value to the
Company. Executive agrees that the Company has a protectable interest in the
Confidential Information acquired by Executive during the course of his
employment with the Company. Therefore, Executive agrees that:
(a) Noncompetition. Subject to paragraph (d) below, so long as
-------------- -------------
Executive is employed or affiliated with the Company or any Subsidiary and for
an additional one (1) year thereafter (the "Noncompete Period"), he shall not,
-----------------
anywhere in the United States, directly or indirectly own, manage, control,
participate in, consult with, render services for, or in any manner engage in
the Business; provided, however, that notwithstanding the foregoing, Executive
may (i) be the owner, directly or indirectly, of less than five percent (5%) of
the outstanding capital stock of any publicly traded corporation engaged in the
Business, (ii) participate in or own interests in mutual funds that invest in
Internet-related and interactive-media businesses, and (iii) serve as an
independent director of a public company following notice to and approval by the
Board (which shall not be unreasonably withheld).
(b) Nonsolicitation. During the Noncompete Period, Executive
---------------
shall not directly or indirectly through another entity (i) knowingly induce or
attempt to induce any employee of the Company or any of its Subsidiaries to
leave the employ of the Company or such Subsidiary, or in any way interfere in a
deleterious manner with the relationship between the Company or any of its
Subsidiaries and any employee thereof, (ii) knowingly hire any person who was an
employee of the Company or any of its Subsidiaries within 180 days prior to the
time such employee was hired by the Executive, (iii) knowingly induce or attempt
to induce any owner of a site location, customer, supplier, licensee or other
business relation of the Company or any of its Subsidiaries to cease doing
business with the Company or such Subsidiary or in any way interfere with the
relationship between any such site location, customer, supplier, licensee or
business relation and the Company or any of its Subsidiaries or (iv) knowingly
directly or indirectly acquire or attempt to acquire an interest in any business
entity relating to the business of the Company or any of its Subsidiaries and
with which, to Executive's knowledge, the Company or any of its Subsidiaries has
entertained discussions or has requested and received information relating to
the acquisition of such business by the Company or any of its Subsidiaries in
the one-year period immediately preceding a separation.
6
<PAGE>
(c) Exception. Notwithstanding anything to the contrary in this
---------
Agreement, the provisions of paragraph (a) of this Section 3 shall not apply to
---------
restrict Executive's ability to compete against the Business during the
Noncompete Period where the following three statements are true: (i) a Pre-IPO
Separation has occurred under Section 1(d)(i), (ii) Executive has not, prior to
---------------
such separation, received any compensation from the Company under Section 1(b),
------------
and (iii) the Internet or interactive media business (a "Competing Business") in
------------------
which Executive wishes to directly or indirectly own, manage, control,
participate in, consult with, render services for or otherwise engage in a
business which (A) Executive was the primary referral source for such Competing
Business to the Company and (B) the Company did not invest, or has expressed its
decision not to invest in, the Competing Business, in either case due to lack of
readily available capital to make such an investment.
(d) Enforcement. If, at the time of enforcement of Section 2 or
----------- ---------
Section 3 of this Agreement, a court holds that the restrictions stated herein
- ---------
are unreasonable under circumstances then existing, the parties hereto agree
that the maximum duration, scope or geographical area reasonable under such
circumstances shall be substituted for the stated period, scope or area and that
the court shall be allowed to revise the restrictions contained herein to cover
the maximum duration, scope and area permitted by law. Because Executive's
services are unique and because Executive has access to Confidential
Information, the parties hereto agree that money damages would be an inadequate
remedy for any breach of this Agreement. Therefore, in the event of a breach or
threatened breach of Section 2 or Section 3 of this Agreement, the Company or
--------- ---------
any of its successors or assigns shall, in addition to other rights and remedies
existing in its favor, be entitled to specific performance and/or injunctive or
other relief in order to enforce, or prevent any violations of, the provisions
of Section 2 or Section 3 from any court of competent jurisdiction.
--------- ---------
(e) Additional Acknowledgments. Executive acknowledges that the
--------------------------
provisions of this Section are in consideration of: (i) employment with the
Company and (ii) additional good and valuable consideration as set forth in this
Agreement. Executive expressly agrees and acknowledges that the restrictions
contained in Sections 2 and Section 3 do not preclude Executive from earning a
---------- ---------
livelihood, nor does it unreasonably impose limitations on Executive's ability
to earn a living. In addition, Executive agrees and acknowledges that the
potential harm to the Company of its non-enforcement outweighs any harm to the
Executive of its enforcement by injunction or otherwise. Executive acknowledges
that he has carefully read this Agreement and has given careful consideration to
the restraints imposed upon the Executive by this Agreement, and is in full
accord as to their necessity for the reasonable and proper protection of the
Confidential Information. Executive expressly acknowledges and agrees that each
and every restraint imposed by this Agreement is reasonable with respect to
subject matter, time period and geographical area.
7
<PAGE>
4. Executive's Representations and Warranties. Executive represents
------------------------------------------
and warrants that he has full right and authority to enter into this Agreement
and fully perform his obligations hereunder, that he is not subject to any non-
competition agreement that would prevent or restrict him in any way from
rendering the services hereunder anywhere in the world, and that his past,
present and anticipated future activities have not and will not infringe on the
proprietary rights of others. Executive further represents and warrants that he
is not obligated under any contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any judgment,
decree or order of any court or administrative agency which would conflict with
his obligation to use his best efforts to promote the interests of the Company
or which would conflict with the Company's business as conducted or proposed to
be conducted. Neither the execution nor delivery of this Agreement, nor the
carrying on of the Company's business as an officer, director or employee by
Executive, will conflict with or result in a breach of the terms, conditions or
provisions of or constitute a default under any contract, covenant or instrument
under which Executive is now obligated.
GENERAL PROVISIONS
5. Definitions.
-----------
"Cause" means (i) the commission of a felony or a crime involving
-----
moral turpitude or the intentional commission of any other act or omission
involving dishonesty or fraud with respect to the Company or any of its
Subsidiaries or any of their customers or suppliers, (ii) conduct which brings
the Company or any of its Subsidiaries into substantial public disgrace or
disrepute, (iii) substantial and repeated failure to perform duties of the
office held by Executive as reasonably directed by the Board not cured within
ten (10) business days after written notice thereof, (iv) gross negligence or
willful misconduct with respect to the Company or any of its Subsidiaries; (v)
any intentional breach of Section 2 or Section 3 of this Agreement by Executive
--------- ---------
not cured within ten (10) business days after written notice thereof from the
Company or (vi) a material breach of any of the Executive's representations and
warranties contained in Section 4 above not cured within fifteen (15) days after
---------
receipt of written notice by the Executive. Any election by the Company not to
renew the Employment Period on the second anniversary of the date hereof shall
be deemed to be a termination by the Company without Cause. The failure of the
Company or the Executive to achieve budgetary or other operational objectives
established by the Board of Directors shall not in and of itself constitute
Cause.
"Disability" means any disability as defined under the Company's
----------
applicable insurance policy, or in the absence of such policy, any physical or
mental disability or incapacity that renders the Executive incapable of
performing the services required of him in accordance with the obligations of
Section 1 of this Agreement for a continuous period of at least four (4) months
- ---------
or for such shorter
8
<PAGE>
periods that when aggregated exceed six (6) months in any twelve (12) month
period. Any dispute as to the Executive's Disability shall be referred to and
resolved by a licensed physician selected and approved by the Company and the
Executive.
"Good Reason" means (i) Executive's resignation within 30 days after
-----------
his discovery of any material breach of this Agreement by the Company which is
not cured within ten (10) business days after written notice thereof from
Executive, (ii) without Executive's written consent, any requirement by the
Company to move Executive's place of business by more than one hundred (100)
miles from the Washington, D.C. metropolitan area in order to perform the
services required hereunder or (iii) a material reduction in the Executive's
duties, responsibilities or functions contained herein such that the Executive
is no longer an executive officer of the Company.
"Person" means an individual, a partnership, a limited liability
------
company, a corporation, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Subsidiary" means any corporation, limited liability company or
----------
partnership of which any percentage of the securities (or other equity or
ownership interest) having ordinary voting power in electing the board of
directors (or board of managers or similar governing body) are, at the time as
of which any determination is being made, owned by the Company either directly
or through one or more Subsidiaries. The term Subsidiary shall also include any
joint venture-type business entities between the Company and any other entity.
6. Notices. Any notice provided for in this Agreement must be in
-------
writing and must be either personally delivered, mailed by first class mail
(postage prepaid and return receipt requested) or sent by reputable overnight
courier service (charges prepaid) to the recipient at the address below
indicated:
If to the Company:
E2Enet.com, Inc.
800 Connecticut Avenue, N.W.
Suite 1111
Washington, DC 20006
Attention: Steven J. Quamme
Senior Vice President
Tel: (202) 261-6000
Fax: (202) 261-6020
9
<PAGE>
with a copy to:
Hogan & Hartson L.L.P.
555 13th Street, N.W.
Washington, D.C. 20004
Attention: J. Hovey Kemp
Tel: (202) 637-5600
Fax: (202) 637-5910
If to the Executive:
Mark Lewyn
3032 O Street, N.W.
Washington, DC 20007
Tel: (310) 493-5368
Fax: (202) 338-2818
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when so delivered
or sent or, if mailed, five days after deposit in the U.S. mail.
7. General Provisions.
------------------
(a) Severability. Whenever possible, each provision of this
------------
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(b) Complete Agreement. This Agreement, those documents expressly
------------------
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
(c) Counterparts; Facsimile Transmission. This Agreement may be
------------------------------------
executed in separate counterparts, each of which is deemed to be an original and
all of which taken together constitute one and the same agreement, and
transmitted to the other party by facsimile transmission as evidence of such
party's intention to be bound hereby, with originals to be exchanged in due
course.
10
<PAGE>
(d) Successors and Assigns. Except as otherwise provided herein,
----------------------
this Agreement shall bind and inure to the benefit of and be enforceable by
Executive and the Company and their respective successors and assigns.
(e) Choice of Law. All questions concerning the construction,
-------------
validity and interpretation of this Agreement and the exhibits hereto will be
governed by and construed in accordance with the internal laws of the State of
Delaware, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of Delaware or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
State of Delaware.
(f) Remedies. Each of the parties to this Agreement will be
--------
entitled to enforce its rights under this Agreement specifically, to recover
damages and costs (including attorney's fees) caused by any breach of any
provision of this Agreement and to exercise all other rights existing in its
favor. The parties hereto agree and acknowledge that money damages may not be an
adequate remedy for any breach of the provisions of this Agreement and that any
party may in its sole discretion apply to any court of law or equity of
competent jurisdiction (without posting any bond or deposit) for specific
performance and/or other injunctive relief in order to enforce or prevent any
violations of the provisions of this Agreement.
(g) Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended and waived only with the prior written consent of the Company and the
Executive.
(h) Business Days. If any time period for giving notice or taking
-------------
action hereunder expires on a day which is a Saturday, Sunday or holiday in the
state in which the Company's principal place of business is located, the time
period shall be automatically extended to the business day immediately following
such Saturday, Sunday or holiday.
(i) Termination. This Agreement (except for the provisions of
-----------
Sections 1(a), 1(b) and 1(c)) shall survive a separation and shall remain in
- ------------- ---- ----
full force and effect after such separation until any terms contained in any
specific provision of this Agreement expires as therein provided.
(j) Dispute Resolution. Any controversy, claim or dispute arising
------------------
out of or relating to this Agreement, the breach thereof, or Executive's
employment by the Company shall be settled by arbitration with three
arbitrators. The arbitration will be administered by the American Arbitration
Association in accordance with its applicable arbitration rules. The arbitration
proceeding shall be confidential, and judgment on the award rendered by the
arbitrator may be entered in any court having jurisdiction. Any such arbitration
shall take place in the Washington, D.C. metropolitan area, or in any other
mutually agreeable location. In the event any judicial action is necessary to
enforce the arbitration provisions of this Agreement, sole jurisdiction shall be
in Washington, D.C. Any
11
<PAGE>
request for interim injunctive relief or other provisional remedies or
opposition thereto shall not be deemed to be a waiver of the right or obligation
to arbitrate hereunder. Subject to the terms of this Section 7(j), the parties
------------
waive the right to a jury trial with respect to any controversy or claim between
the parties hereto, including those arising out of or relating to this Agreement
and any claim based on or arising from an alleged tort.
(k) Third-Party Beneficiaries. Each party hereto intends that this
-------------------------
Agreement shall not benefit nor confer any rights or remedies on any Person
other than the parties hereto and their respective heirs, successors and legal
representatives, provided, however, that each of the Company's Subsidiaries are
intended beneficiaries of Executive's applicable covenants and undertakings made
hereunder.
[The rest of this page left blank intentionally]
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Senior
Management Agreement on the date first written above.
E2Enet.com, Inc.
By: /s/ Steven J. Quamme
__________________________________
Name: Steven J. Quamme
Its: Senior Vice President,
Chief Financial Officer and
Secretary
/s/ Mark Lewyn
__________________________________________
Mark Lewyn
13
<PAGE>
Exhibit 10.9
RESTRICTED STOCK AGREEMENT
--------------------------
THIS RESTRICTED STOCK AGREEMENT (this "Agreement") is made as of
---------
September 15, 1999, between E2Enet, Inc. a Delaware corporation (the "Company"),
-------
and Robert J. Smith ("Executive").
---------
Recitals
--------
A. Executive purchased 432,500 shares of the Company's common stock
(the "Common Stock") at a purchase price of $0.01 per share (an aggregate
------------
purchase price of $.01) (the "Executive Stock). Executive's purchase of the
----------------
Executive Stock was memorialized by a subscription agreement between the Company
and Executive dated May 14, 1999 (the "Subscription Agreement").
------------ ---------
B. Without disturbing the integrity of the Subscription Agreement,
the parties now desire to modify their understanding with respect to the
issuance of the Executive Stock
C. Certain terms with initial capital letters used herein are defined
in Section 6 of this Agreement.
---------
Agreement
---------
In consideration of the mutual covenants contained herein and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties to this Agreement, intending to be legally bound,
hereby agree as follows:
1. Restrictions on Transfer.
------------------------
(a)(i) Executive agrees that from the date of this Agreement until
the IPO Date, Executive shall have no right to Transfer the Executive Stock,
except for a Permitted Transfer or otherwise as may be permitted under that
certain Stockholders Agreement dated as of May 14, 1999 between the Company and
its shareholders (including Executive).
(ii) Executive further agrees that without the prior written
consent of the Company, Executive will not during the period commencing on the
IPO Date and ending twelve (12) months after such date ("Initial Lock-Up
---------------
Period") Transfer the Executive Stock, except for a Permitted Transfer.
- ------
<PAGE>
(iii) Pursuant to Section 1.(c) below and after the date on which
-------------
the Initial Lock-Up Period has expired (the "Expiration Date"), Executive may
---------------
Transfer up to fifty percent (50%) of the Executive Stock. Six (6) months after
the Expiration Date, Executive may Transfer up to seventy-five percent (75%) of
the Executive Stock. Executive may Transfer all of the Executive Stock twelve
(12) months after the Expiration Date.
(iv) The Company may assign its rights under this Section 1 during
---------
the Initial Lock-up Period to any underwriter retained by the Company in
connection with the Company's initial public offering (the "IPO") and such
---
underwriter may enforce this provision directly against the Executive upon the
Company's assignment.
(v) Notwithstanding anything to the contrary in this Agreement,
if on or before May 14, 2000, (A) the IPO Date has not occurred or (B) the
current registration statement on Form S-1 which the Company has filed with the
Securities and Exchange Commission ("SEC") is (1) withdrawn by the Company or
---
(2) not declared effective by the SEC, then in the case of (A) and/or (B) the
post-IPO Date Transfer restrictions set forth in Sections 1.(a)(ii) and (iii),
------------------ -----
and the Company's rights to assign the enforceability thereof to any underwriter
as contemplated by Section 1.(a)(iv), shall terminate and expire and no longer
-----------------
be binding in respect of the Executive Stock.
(b) The Executive Stock constitutes Restricted Securities (as
defined below) and is transferable, subject to Section 1.(a) above, only
pursuant to (i) public offerings registered under the Securities Act of 1933, as
amended, (the "Securities Act") (ii) Rule 144 of the Securities and Exchange
Commission (or any similar rule then in force) if such rule is available and
(iii) subject to the conditions specified in Section 1.(c) below, any other
-------------
legally available means of transfer.
(c) In connection with the Transfer of any Restricted Securities
(other than a Transfer described in Section 1.(b)(i) or (ii) above, or a
------------------------
Transfer in connection with a merger or other business combination involving the
Company), the Executive will deliver written notice to the Company describing
the Transfer or proposed Transfer, together with an opinion of counsel which (to
the Company's reasonable satisfaction) is knowledgeable in securities law
matters, to the effect that such Transfer of Restricted Securities may be
effected without registration of such Restricted Securities under the Securities
Act. In addition, if the Executive holding the Restricted Securities delivers
to the Company an opinion of counsel that no subsequent Transfer of such
Restricted Securities will require registration under the Securities Act, the
Company will promptly deliver new certificates for such Restricted Securities
which do not bear a restrictive Securities Act legend. If the Company is not
required to deliver such new certificates for such Restricted Securities, the
Executive will not Transfer the same Securities (other than in connection with a
Transfer described in the first parenthetical of the first sentence of this
Section 1(c)) until the prospective transferee has confirmed to the Company in
- ------------
writing its agreement to be bound by the conditions contained in this paragraph.
-2-
<PAGE>
(d) For the purposes of this Agreement, "Restricted Securities" means
---------------------
the Executive Stock and any securities issued with respect thereto by way of a
stock dividend or stock split or in connection with a combination of shares,
recapitalization, stock exchange, consolidation or other reorganization. As to
any particular Restricted Securities, such securities will cease to be
Restricted Securities when they have (i) been effectively registered under the
Securities Act and disposed of in accordance with the registration statement
covering them, (ii) become eligible for sale and have actually been sold to the
public or to a market maker pursuant to Rule 144 (or any similar provision then
in force) under the Securities Act or (iii) been otherwise transferred and new
certificates for them not bearing the Securities Act legend set forth in the
Subscription Agreement have been delivered by the Company in accordance with
Section 1.(c) hereof. Whenever any particular securities cease to be Restricted
- -------------
Securities, the Executive will be entitled to receive from the Company, without
expense, new securities of like tenor not bearing a restrictive Securities Act
legend.
2. Company's Repurchase Option.
---------------------------
(a) In the event that (i) Executive's employment is terminated with
Cause or Executive terminates his employment without Good Reason (as those terms
are defined in Executive's Senior Management Agreement dated May 14, 1999) prior
to the IPO Date (a "Pre-IPO Termination") or (ii) Executive's employment is
-------------------
terminated with Cause or Executive terminates his employment without Good Reason
(as those terms are defined in Executive's Senior Management Agreement dated May
14, 1999) prior to the expiration of the Transfer restrictions on 100% of the
Executive Stock pursuant to the lock-up provisions of Section 1.(a)(ii) and
---------------------
(iii) (a "Post-IPO Termination"), then the Executive Stock will be subject to
- ----- --------------------
repurchase by the Company at $.01 per share (the "Repurchase Option") pursuant
-----------------
to the terms and conditions set forth in this Section 2; provided, however, that
---------
in the event that the IPO Date has not occurred on or before May 14, 2000, the
Executive Stock shall not be subject to repurchase by the Company in the event
of a termination of Executive's employment after such date, notwithstanding the
provisions of this Section 2.(a).
-------------
(b) In the event of a Pre-IPO Termination, then all of the Executive
Stock shall be subject to the Repurchase Option (subject, however, to the
operation of the final proviso of Section 2.(a)). In the event of a Post-IPO
-------------
Termination, then only those shares of Executive Stock that remain non-
Transferable pursuant to the lock-up provisions of Section 1.(a)(ii) and (iii)
---------------------------
above will be subject to the Repurchase Option.
(c) The Board of Directors of the Company (the "Board") may elect to
-----
purchase all or any portion of the Executive Stock subject to the Repurchase
Option (the "Repurchase Shares") by delivering written notice (the "Repurchase
----------------- ----------
Notice") to the holder or holders of the Executive Stock within 30 days after
- ------
Termination. The Repurchase Notice will set forth the number of Repurchase
Shares to be acquired
-3-
<PAGE>
from each holder, the aggregate consideration to be paid for such shares and the
time and place for the closing of the transaction.
(d) The closing of the purchase of the Repurchase Shares pursuant to
the Repurchase Option shall take place on the date designated by the Company in
the Repurchase Notice, which date shall not be more than 10 days after the
delivery of the Repurchase Notice. The Company will pay for the Repurchase
Shares by first offsetting amounts outstanding under any bona fide debts owed by
the Company to Executive. The Company will be entitled to receive customary
representations and warranties (as to ownership and absence of liens, claims and
encumbrances) from the sellers regarding such sale.
(e) Notwithstanding anything to the contrary contained in this
Agreement, all purchases of Repurchase Shares shall be subject to any customary
restrictions contained in applicable corporate and securities laws and in the
Company's financing agreements. If any such restrictions prohibit the
repurchase of the Repurchase Shares hereunder which the Company is otherwise
entitled or required to make, the Company may make such repurchases as soon as
it is permitted to do so under such restrictions.
(g) Upon the dissolution or liquidation of the Company or upon a
merger, consolidation, or reorganization of the Company with one or more other
entities in which the Company is not the surviving entity, or upon a sale of
substantially all of the assets of the Company to another entity, or upon any
transaction (including, without limitation, a merger or reorganization in which
the Company is the surviving entity) completed after the IPO and approved by the
Board that results in any person or entity (or person or entities acting as a
group or otherwise in concert), acquiring ownership of fifty percent (50%) or
more of the combined voting power of all classes of securities of the Company),
the restrictions on Transfer imposed by Section 1.(a) shall be deemed to have
-------------
lapsed, immediately prior to the occurrence of such event. The Board shall send
written notice of an event that will result in such a termination to the
Executive not later than the time at which the Company gives notice thereof to
its stockholders; provided, however, that failure to send such notice shall not
affect the lapse of such restrictions.
3. Parachute Limitation. If Executive is a "disqualified individual"
--------------------
(as defined in Section 280G(c) of the Code), any non-Transferable share pursuant
to Section 1.(a) shall not become Transferable by operation of the terms of
-------------
Section 2 (i) to the extent that the right to any payment or benefit, taking
- ---------
into account all other rights, payments or benefits to or for Executive, would
cause any payment or benefit to Executive under this Agreement to be considered
a "parachute payment" within the meaning of Section 280G(b)(2) of the Code as
then in effect (a "Parachute Payment") and (ii) if, as a result of receiving a
--------- ------- ---
Parachute Payment, the aggregate after-tax amounts, received by Executive from
the Company under this Agreement, and all other rights, payments or benefits to
or for Executive would be less than the maximum after-tax amount that could be
received by Executive without
-4-
<PAGE>
causing the payment or benefit to be considered a Parachute Payment. In the
event that, but for the provisions of this Section 3, Executive would be
---------
considered to have received a Parachute Payment under this Agreement that would
have the effect of decreasing the after-tax amount received by Executive as
described in clause (ii) of the preceding sentence, then Executive shall
designate the rights, payments or benefits under this Agreement and any benefit
arrangements to be reduced or eliminated (in such manner as Executive may
determine, in his sole discretion) so as to avoid having the payment or benefit
to Executive under this Agreement to be deemed a Parachute Payment.
4. Certificates. Concurrent with the execution of this Agreement,
------------
Executive shall surrender his stock certificate representing the Executive Stock
to the Company. The Company will mark this certificate "Cancelled," and file
the cancelled certificate in the Company's minute book. The Company will then
contemporaneously issue a new stock certificate representing the Executive Stock
to Executive, which certificate shall contain the following restrictive legend
(in addition to any other required legends in respect of (i) the underlying
shares having not been registered under federal or state securities laws or (ii)
the underlying shares being subject to existing subscription, shareholder or
other agreements to which Executive and the Company are a party):
THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO THE
TRANSFER RESTRICTIONS AND OTHER TERMS
OF A RESTRICTED STOCK AGREEMENT DATED
EFFECTIVE AS OF SEPTEMBER 15, 1999,
AMONG THE COMPANY AND THE HOLDER
HEREOF AND MAY NOT BE TRANSFERRED
EXCEPT IN ACCORDANCE WITH SUCH
AGREEMENT. A COPY OF SUCH AGREEMENT
IS ON FILE AT THE PRINCIPAL OFFICE OF THE
COMPANY AND WILL BE FURNISHED UPON
REQUEST TO THE HOLDER OF RECORD OF THE
SECURITIES REPRESENTED BY THIS
CERTIFICATE.
5. Effect on Employment Relationship. As a condition hereto,
---------------------------------
Executive acknowledges and agrees that neither the issuance of the Executive
Stock nor any provision contained herein shall entitle Executive to remain in
the employment of the Company.
6. Definitions.
-----------
(a) "Family Members" with respect to an individual, means such
--------------
individual's spouse, parents, siblings, children and grandchildren.
-5-
<PAGE>
(b) "IPO Date" means the effective date of the Company's initial
--------
public offering pursuant to an underwritten registration statement on Form S-1
as declared effective by the Securities and Exchange Commission.
(c) "Permitted Transfer" means any Transfer of shares of Common Stock
------------------
by Executive to (a) Jonathan J. Ledecky and/or Northwood Ventures, LLC and
Northwood Capital Partners, LLC, (b) one or more Family Members of Executive or
(c) a trust solely for the benefit of one or more Family Members of Executive;
provided that, prior to any such Transfer under (b) or (c), each transferee
shall agree in writing, pursuant to a Joinder Agreement or in another form
satisfactory to the Company, that such transferee shall receive and hold such
Common Stock subject to the provisions of this Agreement. Any transferee
receiving Common Stock pursuant to a Permitted Transfer shall be included within
the definition of "Executive" for purposes of this Agreement.
(d) "Person" means an individual, a partnership, a limited liability
------
company, a corporation, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
(e) "Subsidiary" means any corporation, limited liability company or
----------
partnership of which any percentage of the securities (or other equity or
ownership interest) having ordinary voting power in electing the board of
directors (or board of managers or similar governing body) are, at the time as
of which any determination is being made, owned by the Company either directly
or through one or more Subsidiaries. The term Subsidiary shall also include any
joint venture-type business entity between the Company and any other entity.
(f) "Transfer" means any actual or proposed disposition of all or a
--------
portion of an interest (legal or equitable) by any means, direct or indirect,
absolute or conditional, voluntary or involuntary, including, but not limited
to, by sale, assignment, put, transfer, pledge, hypothecation, mortgage or other
encumbrance, court order, operation of law, distribution, settlement, exchange,
waiver, abandonment, gift, alienation, bequest or disposal.
7. Notices. Any notice provided for in this Agreement must be in
-------
writing and must be either personally delivered, mailed by first class mail
(postage prepaid and return receipt requested) or sent by reputable overnight
courier service (charges prepaid) to the recipient at the address below
indicated:
-6-
<PAGE>
If to the Company:
E2Enet, Inc.
800 Connecticut Avenue, N.W.
Suite 1111
Washington, DC 20006
Attention: President
Tel: (202) 261-6000
Fax: (202) 261-6020
with a copy to:
Hogan & Hartson L.L.P.
555 13th Street, N.W.
Washington, D.C. 20004
Attention: J. Hovey Kemp
Tel: (202) 637-5600
Fax: (202) 637-5910
If to the Executive:
Robert J. Smith
8621 Redwood Drive
Vienna, VA 22180
Tel: (703) 204-3688
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when so delivered
or sent or, if mailed, five days after deposit in the U.S. mail.
8. Severability. Whenever possible, each provision of this Agreement
------------
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
9. Complete Agreement. This Agreement, together with those documents
------------------
expressly referred to herein embody the complete agreement and understanding
between the parties and supersede and preempt any prior understandings,
agreements or representations by or between the parties, written or oral, which
may have related to the subject matter hereof in any way.
-7-
<PAGE>
10. Counterparts; Facsimile Transmission. This Agreement may be
------------------------------------
executed in separate counterparts, each of which is deemed to be an original and
all of which taken together constitute one and the same agreement, and
transmitted to the other party by facsimile transmission as evidence of such
party's intention to be bound hereby, with originals to be exchanged in due
course.
11. Successors and Assigns. Except as otherwise provided herein,
----------------------
this Agreement shall bind and inure to the benefit of and be enforceable by
Executive and the Company and their respective successors and assigns.
12. Choice of Law. All questions concerning the construction,
-------------
validity and interpretation of this Agreement and the exhibits hereto will be
governed by and construed in accordance with the internal laws of the State of
Delaware, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of Delaware or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
State of Delaware.
13. Remedies. Each of the parties to this Agreement will be entitled
--------
to enforce its rights under this Agreement specifically, to recover damages and
costs (including attorney's fees) caused by any breach of any provision of this
Agreement and to exercise all other rights existing in its favor. The parties
hereto agree and acknowledge that money damages may not be an adequate remedy
for any breach of the provisions of this Agreement and that any party may in its
sole discretion apply to any court of law or equity of competent jurisdiction
(without posting any bond or deposit) for specific performance and/or other
injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement.
14. Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended and waived only with the prior written consent of the Company and the
Executive.
15. Business Days. If any time period for giving notice or taking
-------------
action hereunder expires on a day which is a Saturday, Sunday or holiday in the
state in which the Company's principal place of business is located, the time
period shall be automatically extended to the business day immediately following
such Saturday, Sunday or holiday.
16. Termination. This Agreement shall survive a termination of
-----------
Executive's employment and shall remain in full force and effect after such
separation until any terms contained in any specific provision of this Agreement
expires as therein provided.
17. Dispute Resolution. Any controversy, claim or dispute arising
------------------
out of or relating to this Agreement or the breach thereof shall be settled by
arbitration with three arbitrators. The arbitration will be administered by the
American Arbitration Association in accordance with its applicable arbitration
rules. The arbitration proceeding shall be confidential, and judgment on the
-8-
<PAGE>
award rendered by the arbitrators may be entered in any court having
jurisdiction. Any such arbitration shall take place in the Washington, D.C.
metropolitan area, or in any other mutually agreeable location. In the event
any judicial action is necessary to enforce the arbitration provisions of this
Agreement, sole jurisdiction shall be in Washington, D.C. Any request for
interim injunctive relief or other provisional remedies or opposition thereto
shall not be deemed to be a waiver of the right or obligation to arbitrate
hereunder. Subject to the terms of this Section 17, the parties waive the right
----------
to a jury trial with respect to any controversy or claim between the parties
hereto arising out of or relating to this Agreement.
18. Third-Party Beneficiaries. Each party hereto intends that this
--- -------------------------
Agreement shall not benefit nor confer any rights or remedies on any Person
other than the parties hereto and their respective heirs, successors and legal
representatives, provided, however, that each of the Company's Subsidiaries are
intended beneficiaries of Executive's applicable covenants and undertakings made
hereunder.
[EXECUTION PAGE FOLLOWS]
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Restricted
Stock Agreement on the date first written above.
E2ENET, INC.:
By: /s/ Steven J. Quamme
--------------------------------------
Name: Steven J. Quamme
Its: Chief Financial Officer, Senior
Vice President and Secretary
EXECUTIVE:
By: /s/ Robert J. Smith
--------------------------------------
Robert J. Smith
-10-
<PAGE>
Exhibit 10.10
RESTRICTED STOCK AGREEMENT
--------------------------
THIS RESTRICTED STOCK AGREEMENT (this "Agreement") is made as of
---------
September 15, 1999, between E2Enet, Inc. a Delaware corporation (the "Company"),
-------
and Michael C. Wheeler ("Executive").
---------
Recitals
--------
A. Executive purchased 345,000 shares of the Company's common stock
(the "Common Stock") at a purchase price of $0.01 per share (an aggregate
------------
purchase price of $.01) (the "Executive Stock). Executive's purchase of the
----------------
Executive Stock was memorialized by a subscription agreement between the Company
and Executive dated May 14, 1999 (the "Subscription Agreement").
------------ ---------
B. Without disturbing the integrity of the Subscription Agreement,
the parties now desire to modify their understanding with respect to the
issuance of the Executive Stock
C. Certain terms with initial capital letters used herein are defined
in Section 6 of this Agreement.
---------
Agreement
---------
In consideration of the mutual covenants contained herein and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties to this Agreement, intending to be legally bound,
hereby agree as follows:
1. Restrictions on Transfer.
------------------------
(a)(i) Executive agrees that from the date of this Agreement until the
IPO Date, Executive shall have no right to Transfer the Executive Stock, except
for a Permitted Transfer or otherwise as may be permitted under that certain
Stockholders Agreement dated as of May 14, 1999 between the Company and its
shareholders (including Executive).
(ii) Executive further agrees that without the prior written consent
of the Company, Executive will not during the period commencing on the IPO Date
and ending twelve (12) months after such date ("Initial Lock-Up Period")
----------------------
Transfer the Executive Stock, except for a Permitted Transfer.
<PAGE>
(iii) Pursuant to Section 1.(c) below and after the date on which the
-------------
Initial Lock-Up Period has expired (the "Expiration Date"), Executive may
---------- ----
Transfer up to fifty percent (50%) of the Executive Stock. Six (6) months after
the Expiration Date, Executive may Transfer up to seventy-five percent (75%) of
the Executive Stock. Executive may Transfer all of the Executive Stock twelve
(12) months after the Expiration Date.
(iv) The Company may assign its rights under this Section 1 during
---------
the Initial Lock-up Period to any underwriter retained by the Company in
connection with the Company's initial public offering (the "IPO") and such
---
underwriter may enforce this provision directly against the Executive upon the
Company's assignment.
(v) Notwithstanding anything to the contrary in this Agreement, if
on or before May 14, 2000, (A) the IPO Date has not occurred or (B) the current
registration statement on Form S-1 which the Company has filed with the
Securities and Exchange Commission ("SEC") is (1) withdrawn by the Company
---
or (2) not declared effective by the SEC, then in the case of (A) and/or
(B) the post-IPO Date Transfer restrictions set forth in Sections 1.(a)(ii)
------------------
and (iii), and the Company's rights to assign the enforceability thereof to
----
any underwriter as contemplated by Section 1.(a)(iv), shall terminate and
-----------------
expire and no longer be binding in respect of the Executive Stock.
(b) The Executive Stock constitutes Restricted Securities (as defined
below) and is transferable, subject to Section 1.(a) above, only pursuant to (i)
public offerings registered under the Securities Act of 1933, as amended, (the
"Securities Act") (ii) Rule 144 of the Securities and Exchange Commission (or
any similar rule then in force) if such rule is available and (iii) subject to
the conditions specified in Section 1.(c) below, any other legally available
-------------
means of transfer.
(c) In connection with the Transfer of any Restricted Securities
(other than a Transfer described in Section 1.(b)(i) or (ii) above, or a
------------------------
Transfer in connection with a merger or other business combination involving the
Company), the Executive will deliver written notice to the Company describing
the Transfer or proposed Transfer, together with an opinion of counsel which (to
the Company's reasonable satisfaction) is knowledgeable in securities law
matters, to the effect that such Transfer of Restricted Securities may be
effected without registration of such Restricted Securities under the Securities
Act. In addition, if the Executive holding the Restricted Securities delivers
to the Company an opinion of counsel that no subsequent Transfer of such
Restricted Securities will require registration under the Securities Act, the
Company will promptly deliver new certificates for such Restricted Securities
which do not bear a restrictive Securities Act legend. If the Company is not
required to deliver such new certificates for such Restricted Securities, the
Executive will not Transfer the same Securities (other than in connection with a
Transfer described in the first parenthetical of the first sentence of this
-2-
<PAGE>
Section 1(c)) until the prospective transferee has confirmed to the Company in
- ------------
writing its agreement to be bound by the conditions contained in this paragraph.
(d) For the purposes of this Agreement, "Restricted Securities" means
---------------------
the Executive Stock and any securities issued with respect thereto by way of a
stock dividend or stock split or in connection with a combination of shares,
recapitalization, stock exchange, consolidation or other reorganization. As to
any particular Restricted Securities, such securities will cease to be
Restricted Securities when they have (i) been effectively registered under the
Securities Act and disposed of in accordance with the registration statement
covering them, (ii) become eligible for sale and have actually been sold to the
public or to a market maker pursuant to Rule 144 (or any similar provision then
in force) under the Securities Act or (iii) been otherwise transferred and new
certificates for them not bearing the Securities Act legend set forth in the
Subscription Agreement have been delivered by the Company in accordance with
Section 1.(c) hereof. Whenever any particular securities cease to be Restricted
- -------------
Securities, the Executive will be entitled to receive from the Company, without
expense, new securities of like tenor not bearing a restrictive Securities Act
legend.
2. Company's Repurchase Option.
---------------------------
(a) In the event that (i) Executive's employment is terminated with
Cause or Executive terminates his employment without Good Reason (as those terms
are defined in Executive's Senior Management Agreement dated May 14, 1999) prior
to the IPO Date (a "Pre-IPO Termination") or (ii) Executive's employment is
-------------------
terminated with Cause or Executive terminates his employment without Good Reason
(as those terms are defined in Executive's Senior Management Agreement dated May
14, 1999) prior to the expiration of the Transfer restrictions on 100% of the
Executive Stock pursuant to the lock-up provisions of Section 1.(a)(ii) and
---------------------
(iii) (a "Post-IPO Termination"), then the Executive Stock will be subject to
- ----- --------------------
repurchase by the Company at $.01 per share (the "Repurchase Option") pursuant
-----------------
to the terms and conditions set forth in this Section 2; provided, however, that
---------
in the event that the IPO Date has not occurred on or before May 14, 2000, the
Executive Stock shall not be subject to repurchase by the Company in the event
of a termination of Executive's employment after such date, notwithstanding the
provisions of this Section 2.(a).
-------------
(b) In the event of a Pre-IPO Termination, then all of the Executive
Stock shall be subject to the Repurchase Option (subject, however, to the
operation of the final proviso of Section 2.(a)). In the event of a Post-IPO
-------------
Termination, then only those shares of Executive Stock that remain non-
Transferable pursuant to the lock-up provisions of Section 1.(a)(ii) and (iii)
---------------------------
above will be subject to the Repurchase Option.
(c) The Board of Directors of the Company (the "Board") may elect to
-----
purchase all or any portion of the Executive Stock subject to the Repurchase
Option (the "Repurchase Shares") by delivering written notice (the "Repurchase
----------------- ----------
Notice") to the holder or holders of the Executive Stock within 30 days after
- ------
-3-
<PAGE>
Termination. The Repurchase Notice will set forth the number of Repurchase
Shares to be acquired from each holder, the aggregate consideration to be paid
for such shares and the time and place for the closing of the transaction.
(d) The closing of the purchase of the Repurchase Shares pursuant to
the Repurchase Option shall take place on the date designated by the Company in
the Repurchase Notice, which date shall not be more than 10 days after the
delivery of the Repurchase Notice. The Company will pay for the Repurchase
Shares by first offsetting amounts outstanding under any bona fide debts owed by
the Company to Executive. The Company will be entitled to receive customary
representations and warranties (as to ownership and absence of liens, claims and
encumbrances) from the sellers regarding such sale.
(e) Notwithstanding anything to the contrary contained in this
Agreement, all purchases of Repurchase Shares shall be subject to any customary
restrictions contained in applicable corporate and securities laws and in the
Company's financing agreements. If any such restrictions prohibit the
repurchase of the Repurchase Shares hereunder which the Company is otherwise
entitled or required to make, the Company may make such repurchases as soon as
it is permitted to do so under such restrictions.
(g) Upon the dissolution or liquidation of the Company or upon a
merger, consolidation, or reorganization of the Company with one or more other
entities in which the Company is not the surviving entity, or upon a sale of
substantially all of the assets of the Company to another entity, or upon any
transaction (including, without limitation, a merger or reorganization in which
the Company is the surviving entity) completed after the IPO and approved by the
Board that results in any person or entity (or person or entities acting as a
group or otherwise in concert), acquiring ownership of fifty percent (50%) or
more of the combined voting power of all classes of securities of the Company),
the restrictions on Transfer imposed by Section 1.(a) shall be deemed to have
-------------
lapsed, immediately prior to the occurrence of such event. The Board shall send
written notice of an event that will result in such a termination to the
Executive not later than the time at which the Company gives notice thereof to
its stockholders; provided, however, that failure to send such notice shall not
affect the lapse of such restrictions.
3. Parachute Limitation. If Executive is a "disqualified individual"
--------------------
(as defined in Section 280G(c) of the Code), any non-Transferable share pursuant
to Section 1.(a) shall not become Transferable by operation of the terms of
-------------
Section 2 (i) to the extent that the right to any payment or benefit, taking
- ---------
into account all other rights, payments or benefits to or for Executive, would
cause any payment or benefit to Executive under this Agreement to be considered
a "parachute payment" within the meaning of Section 280G(b)(2) of the Code as
then in effect (a "Parachute Payment") and (ii) if, as a result of receiving a
--------- ------- ---
Parachute Payment, the aggregate after-tax amounts, received by Executive from
the Company under this Agreement, and all other rights, payments or benefits to
-4-
<PAGE>
or for Executive would be less than the maximum after-tax amount that could be
received by Executive without causing the payment or benefit to be considered a
Parachute Payment. In the event that, but for the provisions of this Section 3,
---------
Executive would be considered to have received a Parachute Payment under this
Agreement that would have the effect of decreasing the after-tax amount received
by Executive as described in clause (ii) of the preceding sentence, then
Executive shall designate the rights, payments or benefits under this Agreement
and any benefit arrangements to be reduced or eliminated (in such manner as
Executive may determine, in his sole discretion) so as to avoid having the
payment or benefit to Executive under this Agreement to be deemed a Parachute
Payment.
4. Certificates. Concurrent with the execution of this Agreement,
------------
Executive shall surrender his stock certificate representing the Executive Stock
to the Company. The Company will mark this certificate "Cancelled," and file
the cancelled certificate in the Company's minute book. The Company will then
contemporaneously issue a new stock certificate representing the Executive Stock
to Executive, which certificate shall contain the following restrictive legend
(in addition to any other required legends in respect of (i) the underlying
shares having not been registered under federal or state securities laws or (ii)
the underlying shares being subject to existing subscription, shareholder or
other agreements to which Executive and the Company are a party):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
THE TRANSFER RESTRICTIONS AND OTHER TERMS OF A RESTRICTED STOCK
AGREEMENT DATED EFFECTIVE AS OF SEPTEMBER 15, 1999, AMONG THE
COMPANY AND THE HOLDER HEREOF AND MAY NOT BE TRANSFERRED EXCEPT
IN ACCORDANCE WITH SUCH AGREEMENT. A COPY OF SUCH AGREEMENT IS
ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY AND WILL BE
FURNISHED UPON REQUEST TO THE HOLDER OF RECORD OF THE
SECURITIES REPRESENTED BY THIS CERTIFICATE.
5. Effect on Employment Relationship. As a condition hereto,
---------------------------------
Executive acknowledges and agrees that neither the issuance of the Executive
Stock nor any provision contained herein shall entitle Executive to remain in
the employment of the Company.
6. Definitions.
-----------
(a) "Family Members" with respect to an individual, means such
--------------
individual's spouse, parents, siblings, children and grandchildren.
-5-
<PAGE>
(b) "IPO Date" means the effective date of the Company's initial
--------
public offering pursuant to an underwritten registration statement on Form S-1
as declared effective by the Securities and Exchange Commission.
(c) "Permitted Transfer" means any Transfer of shares of Common Stock
------------------
by Executive to (a) Jonathan J. Ledecky and/or Northwood Ventures, LLC and
Northwood Capital Partners, LLC, (b) one or more Family Members of Executive or
(c) a trust solely for the benefit of one or more Family Members of Executive;
provided that, prior to any such Transfer under (b) or (c), each transferee
shall agree in writing, pursuant to a Joinder Agreement or in another form
satisfactory to the Company, that such transferee shall receive and hold such
Common Stock subject to the provisions of this Agreement. Any transferee
receiving Common Stock pursuant to a Permitted Transfer shall be included within
the definition of "Executive" for purposes of this Agreement.
(d) "Person" means an individual, a partnership, a limited liability
------
company, a corporation, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
(e) "Subsidiary" means any corporation, limited liability company or
----------
partnership of which any percentage of the securities (or other equity or
ownership interest) having ordinary voting power in electing the board of
directors (or board of managers or similar governing body) are, at the time
as of which any determination is being made, owned by the Company either
directly or through one or more Subsidiaries. The term Subsidiary shall
also include any joint venture-type business entity between the Company and
any other entity.
(f) "Transfer" means any actual or proposed disposition of all or a
--------
portion of an interest (legal or equitable) by any means, direct or indirect,
absolute or conditional, voluntary or involuntary, including, but not limited
to, by sale, assignment, put, transfer, pledge, hypothecation, mortgage or other
encumbrance, court order, operation of law, distribution, settlement, exchange,
waiver, abandonment, gift, alienation, bequest or disposal.
7. Notices. Any notice provided for in this Agreement must be in
-------
writing and must be either personally delivered, mailed by first class mail
(postage prepaid and return receipt requested) or sent by reputable overnight
courier service (charges prepaid) to the recipient at the address below
indicated:
-6-
<PAGE>
If to the Company:
E2Enet, Inc.
800 Connecticut Avenue, N.W.
Suite 1111
Washington, DC 20006
Attention: President
Tel: (202) 261-6000
Fax: (202) 261-6020
with a copy to:
Hogan & Hartson L.L.P.
555 13th Street, N.W.
Washington, D.C. 20004
Attention: J. Hovey Kemp
Tel: (202) 637-5600
Fax: (202) 637-5910
If to the Executive:
Michael C. Wheeler
8 Tory Hole Road
Darien, CT 06820
Tel: (203) 656-2043
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when so delivered
or sent or, if mailed, five days after deposit in the U.S. mail.
8. Severability. Whenever possible, each provision of this Agreement
------------
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
9. Complete Agreement. This Agreement, together with those documents
------------------
expressly referred to herein embody the complete agreement and understanding
between the parties and supersede and preempt any prior understandings,
agreements or representations by or between the parties, written or oral, which
may have related to the subject matter hereof in any way.
-7-
<PAGE>
10. Counterparts; Facsimile Transmission. This Agreement may be
------------------------------------
executed in separate counterparts, each of which is deemed to be an original and
all of which taken together constitute one and the same agreement, and
transmitted to the other party by facsimile transmission as evidence of such
party's intention to be bound hereby, with originals to be exchanged in due
course.
11. Successors and Assigns. Except as otherwise provided herein,
----------------------
this Agreement shall bind and inure to the benefit of and be enforceable by
Executive and the Company and their respective successors and assigns.
12. Choice of Law. All questions concerning the construction,
-------------
validity and interpretation of this Agreement and the exhibits hereto will be
governed by and construed in accordance with the internal laws of the State of
Delaware, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of Delaware or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
State of Delaware.
13. Remedies. Each of the parties to this Agreement will be entitled
--------
to enforce its rights under this Agreement specifically, to recover damages and
costs (including attorney's fees) caused by any breach of any provision of this
Agreement and to exercise all other rights existing in its favor. The parties
hereto agree and acknowledge that money damages may not be an adequate remedy
for any breach of the provisions of this Agreement and that any party may in its
sole discretion apply to any court of law or equity of competent jurisdiction
(without posting any bond or deposit) for specific performance and/or other
injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement.
14. Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended and waived only with the prior written consent of the Company and the
Executive.
15. Business Days. If any time period for giving notice or taking
-------------
action hereunder expires on a day which is a Saturday, Sunday or holiday in the
state in which the Company's principal place of business is located, the time
period shall be automatically extended to the business day immediately following
such Saturday, Sunday or holiday.
16. Termination. This Agreement shall survive a termination of
-----------
Executive's employment and shall remain in full force and effect after such
separation until any terms contained in any specific provision of this Agreement
expires as therein provided.
17. Dispute Resolution. Any controversy, claim or dispute arising
------------------
out of or relating to this Agreement or the breach thereof shall be settled by
arbitration with three arbitrators. The arbitration will be administered by the
American Arbitration Association in accordance with its applicable arbitration
rules. The arbitration proceeding shall be confidential, and judgment on the
-8-
<PAGE>
award rendered by the arbitrators may be entered in any court having
jurisdiction. Any such arbitration shall take place in the Washington, D.C.
metropolitan area, or in any other mutually agreeable location. In the event
any judicial action is necessary to enforce the arbitration provisions of this
Agreement, sole jurisdiction shall be in Washington, D.C. Any request for
interim injunctive relief or other provisional remedies or opposition thereto
shall not be deemed to be a waiver of the right or obligation to arbitrate
hereunder. Subject to the terms of this Section 17, the parties waive the right
----------
to a jury trial with respect to any controversy or claim between the parties
hereto arising out of or relating to this Agreement.
18. Third-Party Beneficiaries. Each party hereto intends that this Agreement
- --- -------------------------
shall not benefit nor confer any rights or remedies on any Person other than the
parties hereto and their respective heirs, successors and legal representatives,
provided, however, that each of the Company's Subsidiaries are intended
beneficiaries of Executive's applicable covenants and undertakings made
hereunder.
[EXECUTION PAGE FOLLOWS]
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Restricted
Stock Agreement on the date first written above.
E2ENET, INC.:
By: /s/ Steven J. Quamme
--------------------------------------
Name: Steven J. Quamme
Its: Chief Financial Officer, Senior
Vice President and Secretary
EXECUTIVE:
By: /s/ Michael C. Wheeler
---------------------------------------
Michael C. Wheeler
<PAGE>
Exhibit 10.11
RESTRICTED STOCK AGREEMENT
--------------------------
THIS RESTRICTED STOCK AGREEMENT (this "Agreement") is made as of
---------
September 15, 1999, between E2Enet, Inc. a Delaware corporation (the "Company"),
-------
and Steven J. Quamme ("Executive").
---------
Recitals
--------
A. Executive purchased 216,000 shares of the Company's common stock
(the "Common Stock") at a purchase price of $0.01 per share (an aggregate
------------
purchase price of $.01) (the "Executive Stock) effective May 7, 1999.
----------------
Executive's purchase of the Executive Stock was memorialized by a subscription
agreement between the Company and Executive dated May 14, 1999 (the
"Subscription Agreement").
- ------------- ---------
B. Without disturbing the integrity of the Subscription Agreement,
the parties now desire to modify their understanding with respect to the
issuance of the Executive Stock
C. Certain terms with initial capital letters used herein are defined
in Section 6 of this Agreement.
---------
Agreement
---------
In consideration of the mutual covenants contained herein and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties to this Agreement, intending to be legally bound,
hereby agree as follows:
1. Restrictions on Transfer.
------------------------
(a)(i) Executive agrees that from the date of this Agreement until the
IPO Date, Executive shall have no right to Transfer the Executive Stock, except
for a Permitted Transfer or otherwise as may be permitted under that certain
Stockholders Agreement dated as of May 14, 1999 between the Company and its
shareholders (including Executive).
(ii) Executive further agrees that without the prior written consent
of the Company, Executive will not during the period commencing on the IPO Date
and ending twelve (12) months after such date ("Initial Lock-Up Period")
----------------------
Transfer the Executive Stock, except for a Permitted Transfer.
<PAGE>
(iii) Pursuant to Section 1.(c) below and after the date on which the
-------------
Initial Lock-Up Period has expired (the "Expiration Date"), Executive may
---------- ----
Transfer up to fifty percent (50%) of the Executive Stock. Six (6) months after
the Expiration Date, Executive may Transfer up to seventy-five percent (75%) of
the Executive Stock. Executive may Transfer all of the Executive Stock twelve
(12) months after the Expiration Date.
(iv) The Company may assign its rights under this Section 1 during
---------
the Initial Lock-up Period to any underwriter retained by the Company in
connection with the Company's initial public offering (the "IPO") and such
---
underwriter may enforce this provision directly against the Executive upon the
Company's assignment.
(v) Notwithstanding anything to the contrary in this Agreement, if
on or before May 14, 2000, (A) the IPO Date has not occurred or (B) the current
registration statement on Form S-1 which the Company has filed with the
Securities and Exchange Commission ("SEC") is (1) withdrawn by the Company
---
or (2) not declared effective by the SEC, then in the case of (A) and/or
(B) the post-IPO Date Transfer restrictions set forth in Sections 1.(a)(ii)
------------------
and (iii), and the Company's rights to assign the enforceability thereof to
-----
any underwriter as contemplated by Section 1.(a)(iv), shall terminate and
-----------------
expire and no longer be binding in respect of the Executive Stock.
(b) The Executive Stock constitutes Restricted Securities (as defined
below) and is transferable, subject to Section 1.(a) above, only pursuant to (i)
public offerings registered under the Securities Act of 1933, as amended, (the
"Securities Act") (ii) Rule 144 of the Securities and Exchange Commission (or
any similar rule then in force) if such rule is available and (iii) subject to
the conditions specified in Section 1.(c) below, any other legally available
-------------
means of transfer.
(c) In connection with the Transfer of any Restricted Securities
(other than a Transfer described in Section 1.(b)(i) or (ii) above, or a
------------------------
Transfer in connection with a merger or other business combination involving the
Company), the Executive will deliver written notice to the Company describing
the Transfer or proposed Transfer, together with an opinion of counsel which (to
the Company's reasonable satisfaction) is knowledgeable in securities law
matters, to the effect that such Transfer of Restricted Securities may be
effected without registration of such Restricted Securities under the Securities
Act. In addition, if the Executive holding the Restricted Securities delivers
to the Company an opinion of counsel that no subsequent Transfer of such
Restricted Securities will require registration under the Securities Act, the
Company will promptly deliver new certificates for such Restricted Securities
which do not bear a restrictive Securities Act legend. If the Company is not
required to deliver such new certificates for such Restricted Securities, the
Executive will not Transfer the same Securities (other than in connection with a
Transfer described in the first parenthetical of the first sentence of this
-2-
<PAGE>
Section 1(c)) until the prospective transferee has confirmed to the Company in
- ------------
writing its agreement to be bound by the conditions contained in this paragraph.
(d) For the purposes of this Agreement, "Restricted Securities" means
---------------------
the Executive Stock and any securities issued with respect thereto by way of a
stock dividend or stock split or in connection with a combination of shares,
recapitalization, stock exchange, consolidation or other reorganization. As to
any particular Restricted Securities, such securities will cease to be
Restricted Securities when they have (i) been effectively registered under the
Securities Act and disposed of in accordance with the registration statement
covering them, (ii) become eligible for sale and have actually been sold to the
public or to a market maker pursuant to Rule 144 (or any similar provision then
in force) under the Securities Act or (iii) been otherwise transferred and new
certificates for them not bearing the Securities Act legend set forth in the
Subscription Agreement have been delivered by the Company in accordance with
Section 1.(c) hereof. Whenever any particular securities cease to be Restricted
- -------------
Securities, the Executive will be entitled to receive from the Company, without
expense, new securities of like tenor not bearing a restrictive Securities Act
legend.
2. Company's Repurchase Option.
---------------------------
(a) In the event that (i) Executive's employment is terminated with
Cause or Executive terminates his employment without Good Reason (as those terms
are defined in Executive's Senior Management Agreement dated May 14, 1999) prior
to the IPO Date (a "Pre-IPO Termination") or (ii) Executive's employment is
-------------------
terminated with Cause or Executive terminates his employment without Good Reason
(as those terms are defined in Executive's Senior Management Agreement dated May
14, 1999) prior to the expiration of the Transfer restrictions on 100% of the
Executive Stock pursuant to the lock-up provisions of Section 1.(a)(ii) and
---------------------
(iii) (a "Post-IPO Termination"), then the Executive Stock will be subject to
- ----- --------------------
repurchase by the Company at $.01 per share (the "Repurchase Option") pursuant
-----------------
to the terms and conditions set forth in this Section 2; provided, however, that
---------
in the event that the IPO Date has not occurred on or before May 14, 2000, the
Executive Stock shall not be subject to repurchase by the Company in the event
of a termination of Executive's employment after such date, notwithstanding the
provisions of this Section 2.(a).
-------------
(b) In the event of a Pre-IPO Termination, then all of the Executive
Stock shall be subject to the Repurchase Option (subject, however, to the
operation of the final proviso of Section 2.(a)). In the event of a Post-IPO
-------------
Termination, then only those shares of Executive Stock that remain non-
Transferable pursuant to the lock-up provisions of Section 1.(a)(ii) and (iii)
---------------------------
above will be subject to the Repurchase Option.
(c) The Board of Directors of the Company (the "Board") may elect to
-----
purchase all or any portion of the Executive Stock subject to the Repurchase
Option (the "Repurchase Shares") by delivering written notice (the "Repurchase
----------------- ----------
Notice") to the holder or holders of the Executive Stock within 30 days after
- ------
-3-
<PAGE>
Termination. The Repurchase Notice will set forth the number of Repurchase
Shares to be acquired from each holder, the aggregate consideration to be paid
for such shares and the time and place for the closing of the transaction.
(d) The closing of the purchase of the Repurchase Shares pursuant to
the Repurchase Option shall take place on the date designated by the Company in
the Repurchase Notice, which date shall not be more than 10 days after the
delivery of the Repurchase Notice. The Company will pay for the Repurchase
Shares by first offsetting amounts outstanding under any bona fide debts owed by
the Company to Executive. The Company will be entitled to receive customary
representations and warranties (as to ownership and absence of liens, claims and
encumbrances) from the sellers regarding such sale.
(e) Notwithstanding anything to the contrary contained in this
Agreement, all purchases of Repurchase Shares shall be subject to any customary
restrictions contained in applicable corporate and securities laws and in the
Company's financing agreements. If any such restrictions prohibit the
repurchase of the Repurchase Shares hereunder which the Company is otherwise
entitled or required to make, the Company may make such repurchases as soon as
it is permitted to do so under such restrictions.
(g) Upon the dissolution or liquidation of the Company or upon a
merger, consolidation, or reorganization of the Company with one or more other
entities in which the Company is not the surviving entity, or upon a sale of
substantially all of the assets of the Company to another entity, or upon any
transaction (including, without limitation, a merger or reorganization in which
the Company is the surviving entity) completed after the IPO and approved by the
Board that results in any person or entity (or person or entities acting as a
group or otherwise in concert), acquiring ownership of fifty percent (50%) or
more of the combined voting power of all classes of securities of the Company),
the restrictions on Transfer imposed by Section 1.(a) shall be deemed to have
-------------
lapsed, immediately prior to the occurrence of such event. The Board shall send
written notice of an event that will result in such a termination to the
Executive not later than the time at which the Company gives notice thereof to
its stockholders; provided, however, that failure to send such notice shall not
affect the lapse of such restrictions.
3. Parachute Limitation. If Executive is a "disqualified individual"
--------------------
(as defined in Section 280G(c) of the Code), any non-Transferable share pursuant
to Section 1.(a) shall not become Transferable by operation of the terms of
-------------
Section 2 (i) to the extent that the right to any payment or benefit, taking
- ---------
into account all other rights, payments or benefits to or for Executive, would
cause any payment or benefit to Executive under this Agreement to be considered
a "parachute payment" within the meaning of Section 280G(b)(2) of the Code as
then in effect (a "Parachute Payment") and (ii) if, as a result of receiving a
--------- ------- ---
Parachute Payment, the aggregate after-tax amounts, received by Executive from
the Company under this Agreement, and all other rights, payments or benefits to
-4-
<PAGE>
or for Executive would be less than the maximum after-tax amount that could be
received by Executive without causing the payment or benefit to be considered a
Parachute Payment. In the event that, but for the provisions of this Section 3,
---------
Executive would be considered to have received a Parachute Payment under this
Agreement that would have the effect of decreasing the after-tax amount received
by Executive as described in clause (ii) of the preceding sentence, then
Executive shall designate the rights, payments or benefits under this Agreement
and any benefit arrangements to be reduced or eliminated (in such manner as
Executive may determine, in his sole discretion) so as to avoid having the
payment or benefit to Executive under this Agreement to be deemed a Parachute
Payment.
4. Certificates. Concurrent with the execution of this Agreement,
------------
Executive shall surrender his stock certificate representing the Executive Stock
to the Company. The Company will mark this certificate "Cancelled," and file
the cancelled certificate in the Company's minute book. The Company will then
contemporaneously issue a new stock certificate representing the Executive Stock
to Executive, which certificate shall contain the following restrictive legend
(in addition to any other required legends in respect of (i) the underlying
shares having not been registered under federal or state securities laws or (ii)
the underlying shares being subject to existing subscription, shareholder or
other agreements to which Executive and the Company are a party):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
THE TRANSFER RESTRICTIONS AND OTHER TERMS OF A RESTRICTED STOCK
AGREEMENT DATED EFFECTIVE AS OF SEPTEMBER 15, 1999, AMONG THE
COMPANY AND THE HOLDER HEREOF AND MAY NOT BE TRANSFERRED EXCEPT
IN ACCORDANCE WITH SUCH AGREEMENT. A COPY OF SUCH AGREEMENT IS
ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY AND WILL BE
FURNISHED UPON REQUEST TO THE HOLDER OF RECORD OF THE
SECURITIES REPRESENTED BY THIS CERTIFICATE.
5. Effect on Employment Relationship. As a condition hereto,
---------------------------------
Executive acknowledges and agrees that neither the issuance of the Executive
Stock nor any provision contained herein shall entitle Executive to remain in
the employment of the Company.
6. Definitions.
-----------
(a) "Family Members" with respect to an individual, means such
--------------
individual's spouse, parents, siblings, children and grandchildren.
-5-
<PAGE>
(b) "IPO Date" means the effective date of the Company's initial
--------
public offering pursuant to an underwritten registration statement on Form S-1
as declared effective by the Securities and Exchange Commission.
(c) "Permitted Transfer" means any Transfer of shares of Common
------------------
Stock by Executive to (a) Jonathan J. Ledecky and/or Northwood Ventures, LLC and
Northwood Capital Partners, LLC, (b) one or more Family Members of Executive or
(c) a trust solely for the benefit of one or more Family Members of Executive;
provided that, prior to any such Transfer under (b) or (c), each transferee
shall agree in writing, pursuant to a Joinder Agreement or in another form
satisfactory to the Company, that such transferee shall receive and hold such
Common Stock subject to the provisions of this Agreement. Any transferee
receiving Common Stock pursuant to a Permitted Transfer shall be included within
the definition of "Executive" for purposes of this Agreement.
(d) "Person" means an individual, a partnership, a limited liability
------
company, a corporation, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
(e) "Subsidiary" means any corporation, limited liability company
----------
or partnership of which any percentage of the securities (or other equity or
ownership interest) having ordinary voting power in electing the board of
directors (or board of managers or similar governing body) are, at the time
as of which any determination is being made, owned by the Company either
directly or through one or more Subsidiaries. The term Subsidiary shall
also include any joint venture-type business entity between the Company and
any other entity.
(f) "Transfer" means any actual or proposed disposition of all or a
--------
portion of an interest (legal or equitable) by any means, direct or indirect,
absolute or conditional, voluntary or involuntary, including, but not limited
to, by sale, assignment, put, transfer, pledge, hypothecation, mortgage or other
encumbrance, court order, operation of law, distribution, settlement, exchange,
waiver, abandonment, gift, alienation, bequest or disposal.
7. Notices. Any notice provided for in this Agreement must be in
-------
writing and must be either personally delivered, mailed by first class mail
(postage prepaid and return receipt requested) or sent by reputable overnight
courier service (charges prepaid) to the recipient at the address below
indicated:
-6-
<PAGE>
If to the Company:
E2Enet, Inc.
800 Connecticut Avenue, N.W.
Suite 1111
Washington, DC 20006
Attention: President
Tel: (202) 261-6000
Fax: (202) 261-6020
with a copy to:
Hogan & Hartson L.L.P.
555 13th Street, N.W.
Washington, D.C. 20004
Attention: J. Hovey Kemp
Tel: (202) 637-5600
Fax: (202) 637-5910
If to the Executive:
Steven J. Quamme
5126 Tilden Street, N.W.
Washington, DC 20016
Tel: (202) 966-8235
Fax: (202) 966-4610
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when so delivered
or sent or, if mailed, five days after deposit in the U.S. mail.
8. Severability. Whenever possible, each provision of this Agreement
------------
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
9. Complete Agreement. This Agreement, together with those documents
------------------
expressly referred to herein embody the complete agreement and understanding
between the parties and supersede and preempt any prior understandings,
agreements or representations by or between the parties, written or oral, which
may have related to the subject matter hereof in any way.
-7-
<PAGE>
10. Counterparts; Facsimile Transmission. This Agreement may be
------------------------------------
executed in separate counterparts, each of which is deemed to be an original and
all of which taken together constitute one and the same agreement, and
transmitted to the other party by facsimile transmission as evidence of such
party's intention to be bound hereby, with originals to be exchanged in due
course.
11. Successors and Assigns. Except as otherwise provided herein,
----------------------
this Agreement shall bind and inure to the benefit of and be enforceable by
Executive and the Company and their respective successors and assigns.
12. Choice of Law. All questions concerning the construction,
-------------
validity and interpretation of this Agreement and the exhibits hereto will be
governed by and construed in accordance with the internal laws of the State of
Delaware, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of Delaware or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
State of Delaware.
13. Remedies. Each of the parties to this Agreement will be entitled
--------
to enforce its rights under this Agreement specifically, to recover damages and
costs (including attorney's fees) caused by any breach of any provision of this
Agreement and to exercise all other rights existing in its favor. The parties
hereto agree and acknowledge that money damages may not be an adequate remedy
for any breach of the provisions of this Agreement and that any party may in its
sole discretion apply to any court of law or equity of competent jurisdiction
(without posting any bond or deposit) for specific performance and/or other
injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement.
14. Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended and waived only with the prior written consent of the Company and the
Executive.
15. Business Days. If any time period for giving notice or taking
-------------
action hereunder expires on a day which is a Saturday, Sunday or holiday in the
state in which the Company's principal place of business is located, the time
period shall be automatically extended to the business day immediately following
such Saturday, Sunday or holiday.
16. Termination. This Agreement shall survive a termination of
-----------
Executive's employment and shall remain in full force and effect after such
separation until any terms contained in any specific provision of this Agreement
expires as therein provided.
17. Dispute Resolution. Any controversy, claim or dispute arising
------------------
out of or relating to this Agreement or the breach thereof shall be settled by
arbitration with three arbitrators. The arbitration will be administered by the
American Arbitration Association in accordance with its applicable arbitration
rules. The arbitration proceeding shall be confidential, and judgment on the
-8-
<PAGE>
award rendered by the arbitrators may be entered in any court having
jurisdiction. Any such arbitration shall take place in the Washington, D.C.
metropolitan area, or in any other mutually agreeable location. In the event
any judicial action is necessary to enforce the arbitration provisions of this
Agreement, sole jurisdiction shall be in Washington, D.C. Any request for
interim injunctive relief or other provisional remedies or opposition thereto
shall not be deemed to be a waiver of the right or obligation to arbitrate
hereunder. Subject to the terms of this Section 17, the parties waive the right
----------
to a jury trial with respect to any controversy or claim between the parties
hereto arising out of or relating to this Agreement.
18. Third-Party Beneficiaries. Each party hereto intends that this Agreement
-------------------------
shall not benefit nor confer any rights or remedies on any Person other than the
parties hereto and their respective heirs, successors and legal representatives,
provided, however, that each of the Company's Subsidiaries are intended
beneficiaries of Executive's applicable covenants and undertakings made
hereunder.
[EXECUTION PAGE FOLLOWS]
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Restricted
Stock Agreement on the date first written above.
E2ENET, INC.:
By: /s/ Robert J. Smith
--------------------------------------------
Name: Robert J. Smith
Its: President and Chief Executive Officer
EXECUTIVE:
By: /s/ Steven J. Quamme
--------------------------------------------
Steven J. Quamme
<PAGE>
Exhibit 10.12
RESTRICTED STOCK AGREEMENT
--------------------------
THIS RESTRICTED STOCK AGREEMENT (this "Agreement") is made as of
---------
September 15, 1999, between E2Enet, Inc. a Delaware corporation (the "Company"),
-------
and Mark Lewyn ("Executive").
---------
Recitals
--------
A. Executive purchased 216,000 shares of the Company's common stock
(the "Common Stock") at a purchase price of $0.01 per share (an aggregate
------------
purchase price of $.01) (the "Executive Stock) effective May 7, 1999.
----------------
Executive's purchase of the Executive Stock was memorialized by a subscription
agreement between the Company and Executive dated May 14, 1999 (the
"Subscription Agreement").
- ------------- ---------
B. Without disturbing the integrity of the Subscription Agreement,
the parties now desire to modify their understanding with respect to the
issuance of the Executive Stock
C. Certain terms with initial capital letters used herein are defined
in Section 6 of this Agreement.
---------
Agreement
---------
In consideration of the mutual covenants contained herein and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties to this Agreement, intending to be legally bound,
hereby agree as follows:
1. Restrictions on Transfer.
------------------------
(a)(i) Executive agrees that from the date of this Agreement until the
IPO Date, Executive shall have no right to Transfer the Executive Stock, except
for a Permitted Transfer or otherwise as may be permitted under that certain
Stockholders Agreement dated as of May 14, 1999 between the Company and its
shareholders (including Executive).
(ii) Executive further agrees that without the prior written
consent of the Company, Executive will not during the period commencing on the
IPO Date and ending twelve (12) months after such date ("Initial Lock-Up
---------------
Period") Transfer the Executive Stock, except for a Permitted Transfer.
- ------
<PAGE>
(iii) Pursuant to Section 1.(c) below and after the date on which
------------
the Initial Lock-Up Period has expired (the "Expiration Date"), Executive may
---------------
Transfer up to fifty percent (50%) of the Executive Stock. Six (6) months after
the Expiration Date, Executive may Transfer up to seventy-five percent (75%) of
the Executive Stock. Executive may Transfer all of the Executive Stock twelve
(12) months after the Expiration Date.
(iv) The Company may assign its rights under this Section 1 during
---------
the Initial Lock-up Period to any underwriter retained by the Company in
connection with the Company's initial public offering (the "IPO") and such
---
underwriter may enforce this provision directly against the Executive upon the
Company's assignment.
(v) Notwithstanding anything to the contrary in this Agreement, if
on or before May 14, 2000, (A) the IPO Date has not occurred or (B) the current
registration statement on Form S-1 which the Company has filed with the
Securities and Exchange Commission ("SEC") is (1) withdrawn by the Company or
---
(2) not declared effective by the SEC, then in the case of (A) and/or (B) the
post-IPO Date Transfer restrictions set forth in Sections 1.(a)(ii) and (iii),
------------------ -----
and the Company's rights to assign the enforceability thereof to any underwriter
as contemplated by Section 1.(a)(iv), shall terminate and expire and no longer
----------------
be binding in respect of the Executive Stock.
(b) The Executive Stock constitutes Restricted Securities (as defined
below) and is transferable, subject to Section 1.(a) above, only pursuant to (i)
public offerings registered under the Securities Act of 1933, as amended, (the
"Securities Act") (ii) Rule 144 of the Securities and Exchange Commission (or
any similar rule then in force) if such rule is available and (iii) subject to
the conditions specified in Section 1.(c) below, any other legally available
-------------
means of transfer.
(c) In connection with the Transfer of any Restricted Securities
(other than a Transfer described in Section 1.(b)(i) or (ii) above, or a
------------------------
Transfer in connection with a merger or other business combination involving the
Company), the Executive will deliver written notice to the Company describing
the Transfer or proposed Transfer, together with an opinion of counsel which (to
the Company's reasonable satisfaction) is knowledgeable in securities law
matters, to the effect that such Transfer of Restricted Securities may be
effected without registration of such Restricted Securities under the Securities
Act. In addition, if the Executive holding the Restricted Securities delivers
to the Company an opinion of counsel that no subsequent Transfer of such
Restricted Securities will require registration under the Securities Act, the
Company will promptly deliver new certificates for such Restricted Securities
which do not bear a restrictive Securities Act legend. If the Company is not
required to deliver such new certificates for such Restricted Securities, the
Executive will not Transfer the same Securities (other than in connection with a
Transfer described in the first parenthetical of the first sentence of this
-2-
<PAGE>
Section 1(c)) until the prospective transferee has confirmed to the Company in
- ------------
writing its agreement to be bound by the conditions contained in this paragraph.
(d) For the purposes of this Agreement, "Restricted Securities" means
---------------------
the Executive Stock and any securities issued with respect thereto by way of a
stock dividend or stock split or in connection with a combination of shares,
recapitalization, stock exchange, consolidation or other reorganization. As to
any particular Restricted Securities, such securities will cease to be
Restricted Securities when they have (i) been effectively registered under the
Securities Act and disposed of in accordance with the registration statement
covering them, (ii) become eligible for sale and have actually been sold to the
public or to a market maker pursuant to Rule 144 (or any similar provision then
in force) under the Securities Act or (iii) been otherwise transferred and new
certificates for them not bearing the Securities Act legend set forth in the
Subscription Agreement have been delivered by the Company in accordance with
Section 1.(c) hereof. Whenever any particular securities cease to be Restricted
- -------------
Securities, the Executive will be entitled to receive from the Company, without
expense, new securities of like tenor not bearing a restrictive Securities Act
legend.
2. Company's Repurchase Option.
---------------------------
(a) In the event that (i) Executive's employment is terminated with
Cause or Executive terminates his employment without Good Reason (as those terms
are defined in Executive's Senior Management Agreement dated May 14, 1999) prior
to the IPO Date (a "Pre-IPO Termination") or (ii) Executive's employment is
-------------------
terminated with Cause or Executive terminates his employment without Good Reason
(as those terms are defined in Executive's Senior Management Agreement dated May
14, 1999) prior to the expiration of the Transfer restrictions on 100% of the
Executive Stock pursuant to the lock-up provisions of Section 1.(a)(ii) and
---------------------
(iii) (a "Post-IPO Termination"), then the Executive Stock will be subject to
- ----- --------------------
repurchase by the Company at $.01 per share (the "Repurchase Option") pursuant
-----------------
to the terms and conditions set forth in this Section 2; provided, however, that
---------
in the event that the IPO Date has not occurred on or before May 14, 2000, the
Executive Stock shall not be subject to repurchase by the Company in the event
of a termination of Executive's employment after such date, notwithstanding the
provisions of this Section 2.(a).
-------------
(b) In the event of a Pre-IPO Termination, then all of the Executive
Stock shall be subject to the Repurchase Option (subject, however, to the
operation of the final proviso of Section 2.(a)). In the event of a Post-IPO
-------------
Termination, then only those shares of Executive Stock that remain non-
Transferable pursuant to the lock-up provisions of Section 1.(a)(ii) and (iii)
---------------------------
above will be subject to the Repurchase Option.
(c) The Board of Directors of the Company (the "Board") may elect to
-----
purchase all or any portion of the Executive Stock subject to the Repurchase
Option (the "Repurchase Shares") by delivering written notice (the "Repurchase
----------------- ----------
Notice") to the holder or holders of the Executive Stock within 30 days after
- ------
-3-
<PAGE>
Termination. The Repurchase Notice will set forth the number of Repurchase
Shares to be acquired from each holder, the aggregate consideration to be paid
for such shares and the time and place for the closing of the transaction.
(d) The closing of the purchase of the Repurchase Shares pursuant to
the Repurchase Option shall take place on the date designated by the Company in
the Repurchase Notice, which date shall not be more than 10 days after the
delivery of the Repurchase Notice. The Company will pay for the Repurchase
Shares by first offsetting amounts outstanding under any bona fide debts owed by
the Company to Executive. The Company will be entitled to receive customary
representations and warranties (as to ownership and absence of liens, claims and
encumbrances) from the sellers regarding such sale.
(e) Notwithstanding anything to the contrary contained in this
Agreement, all purchases of Repurchase Shares shall be subject to any customary
restrictions contained in applicable corporate and securities laws and in the
Company's financing agreements. If any such restrictions prohibit the
repurchase of the Repurchase Shares hereunder which the Company is otherwise
entitled or required to make, the Company may make such repurchases as soon as
it is permitted to do so under such restrictions.
(g) Upon the dissolution or liquidation of the Company or upon a
merger, consolidation, or reorganization of the Company with one or more other
entities in which the Company is not the surviving entity, or upon a sale of
substantially all of the assets of the Company to another entity, or upon any
transaction (including, without limitation, a merger or reorganization in which
the Company is the surviving entity) completed after the IPO and approved by the
Board that results in any person or entity (or person or entities acting as a
group or otherwise in concert), acquiring ownership of fifty percent (50%) or
more of the combined voting power of all classes of securities of the Company),
the restrictions on Transfer imposed by Section 1.(a) shall be deemed to have
-------------
lapsed, immediately prior to the occurrence of such event. The Board shall send
written notice of an event that will result in such a termination to the
Executive not later than the time at which the Company gives notice thereof to
its stockholders; provided, however, that failure to send such notice shall not
affect the lapse of such restrictions.
3. Parachute Limitation. If Executive is a "disqualified individual"
--------------------
(as defined in Section 280G(c) of the Code), any non-Transferable share pursuant
to Section 1.(a) shall not become Transferable by operation of the terms of
-------------
Section 2 (i) to the extent that the right to any payment or benefit, taking
- ---------
into account all other rights, payments or benefits to or for Executive, would
cause any payment or benefit to Executive under this Agreement to be considered
a "parachute payment" within the meaning of Section 280G(b)(2) of the Code as
then in effect (a "Parachute Payment") and (ii) if, as a result of receiving a
--------- ------- ---
Parachute Payment, the aggregate after-tax amounts, received by Executive from
the Company under this Agreement, and all other rights, payments or benefits to
-4-
<PAGE>
or for Executive would be less than the maximum after-tax amount that could be
received by Executive without causing the payment or benefit to be considered a
Parachute Payment. In the event that, but for the provisions of this Section 3,
---------
Executive would be considered to have received a Parachute Payment under this
Agreement that would have the effect of decreasing the after-tax amount received
by Executive as described in clause (ii) of the preceding sentence, then
Executive shall designate the rights, payments or benefits under this Agreement
and any benefit arrangements to be reduced or eliminated (in such manner as
Executive may determine, in his sole discretion) so as to avoid having the
payment or benefit to Executive under this Agreement to be deemed a Parachute
Payment.
4. Certificates. Concurrent with the execution of this Agreement,
------------
Executive shall surrender his stock certificate representing the Executive Stock
to the Company. The Company will mark this certificate "Cancelled," and file
the cancelled certificate in the Company's minute book. The Company will then
contemporaneously issue a new stock certificate representing the Executive Stock
to Executive, which certificate shall contain the following restrictive legend
(in addition to any other required legends in respect of (i) the underlying
shares having not been registered under federal or state securities laws or (ii)
the underlying shares being subject to existing subscription, shareholder or
other agreements to which Executive and the Company are a party):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO THE TRANSFER RESTRICTIONS AND OTHER TERMS
OF A RESTRICTED STOCK AGREEMENT DATED EFFECTIVE AS
OF SEPTEMBER 15, 1999, AMONG THE COMPANY AND THE
HOLDER HEREOF AND MAY NOT BE TRANSFERRED EXCEPT
IN ACCORDANCE WITH SUCH AGREEMENT. A COPY OF SUCH
AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE
COMPANY AND WILL BE FURNISHED UPON REQUEST TO THE
HOLDER OF RECORD OF THE SECURITIES REPRESENTED BY
THIS CERTIFICATE.
5. Effect on Employment Relationship. As a condition hereto,
---------------------------------
Executive acknowledges and agrees that neither the issuance of the Executive
Stock nor any provision contained herein shall entitle Executive to remain in
the employment of the Company.
6. Definitions.
-----------
(a) "Family Members" with respect to an individual, means such
--------------
individual's spouse, parents, siblings, children and grandchildren.
-5-
<PAGE>
(b) "IPO Date" means the effective date of the Company's initial
--------
public offering pursuant to an underwritten registration statement on Form S-1
as declared effective by the Securities and Exchange Commission.
(c) "Permitted Transfer" means any Transfer of shares of Common Stock
------------------
by Executive to (a) Jonathan J. Ledecky and/or Northwood Ventures, LLC and
Northwood Capital Partners, LLC, (b) one or more Family Members of Executive or
(c) a trust solely for the benefit of one or more Family Members of Executive;
provided that, prior to any such Transfer under (b) or (c), each transferee
shall agree in writing, pursuant to a Joinder Agreement or in another form
satisfactory to the Company, that such transferee shall receive and hold such
Common Stock subject to the provisions of this Agreement. Any transferee
receiving Common Stock pursuant to a Permitted Transfer shall be included within
the definition of "Executive" for purposes of this Agreement.
(d) "Person" means an individual, a partnership, a limited liability
------
company, a corporation, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
(e) "Subsidiary" means any corporation, limited liability company or
----------
partnership of which any percentage of the securities (or other equity or
ownership interest) having ordinary voting power in electing the board of
directors (or board of managers or similar governing body) are, at the time as
of which any determination is being made, owned by the Company either directly
or through one or more Subsidiaries. The term Subsidiary shall also include any
joint venture-type business entity between the Company and any other entity.
(f) "Transfer" means any actual or proposed disposition of all or a
--------
portion of an interest (legal or equitable) by any means, direct or indirect,
absolute or conditional, voluntary or involuntary, including, but not limited
to, by sale, assignment, put, transfer, pledge, hypothecation, mortgage or other
encumbrance, court order, operation of law, distribution, settlement, exchange,
waiver, abandonment, gift, alienation, bequest or disposal.
7. Notices. Any notice provided for in this Agreement must be in
-------
writing and must be either personally delivered, mailed by first class mail
(postage prepaid and return receipt requested) or sent by reputable overnight
courier service (charges prepaid) to the recipient at the address below
indicated:
-6-
<PAGE>
If to the Company:
E2Enet, Inc.
800 Connecticut Avenue, N.W.
Suite 1111
Washington, DC 20006
Attention: President
Tel: (202) 261-6000
Fax: (202) 261-6020
with a copy to:
Hogan & Hartson L.L.P.
555 13th Street, N.W.
Washington, D.C. 20004
Attention: J. Hovey Kemp
Tel: (202) 637-5600
Fax: (202) 637-5910
If to the Executive:
Mark Lewyn
3032 O Street, N.W.
Washington, DC 20007
Tel: (202) 338-2818
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when so delivered
or sent or, if mailed, five days after deposit in the U.S. mail.
8. Severability. Whenever possible, each provision of this Agreement
------------
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
9. Complete Agreement. This Agreement, together with those documents
------------------
expressly referred to herein embody the complete agreement and understanding
between the parties and supersede and preempt any prior understandings,
agreements or representations by or between the parties, written or oral, which
may have related to the subject matter hereof in any way.
-7-
<PAGE>
10. Counterparts; Facsimile Transmission. This Agreement may be
------------------------------------
executed in separate counterparts, each of which is deemed to be an original and
all of which taken together constitute one and the same agreement, and
transmitted to the other party by facsimile transmission as evidence of such
party's intention to be bound hereby, with originals to be exchanged in due
course.
11. Successors and Assigns. Except as otherwise provided herein,
----------------------
this Agreement shall bind and inure to the benefit of and be enforceable by
Executive and the Company and their respective successors and assigns.
12. Choice of Law. All questions concerning the construction,
-------------
validity and interpretation of this Agreement and the exhibits hereto will be
governed by and construed in accordance with the internal laws of the State of
Delaware, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of Delaware or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
State of Delaware.
13. Remedies. Each of the parties to this Agreement will be entitled
--------
to enforce its rights under this Agreement specifically, to recover damages and
costs (including attorney's fees) caused by any breach of any provision of this
Agreement and to exercise all other rights existing in its favor. The parties
hereto agree and acknowledge that money damages may not be an adequate remedy
for any breach of the provisions of this Agreement and that any party may in its
sole discretion apply to any court of law or equity of competent jurisdiction
(without posting any bond or deposit) for specific performance and/or other
injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement.
14. Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended and waived only with the prior written consent of the Company and the
Executive.
15. Business Days. If any time period for giving notice or taking
-------------
action hereunder expires on a day which is a Saturday, Sunday or holiday in the
state in which the Company's principal place of business is located, the time
period shall be automatically extended to the business day immediately following
such Saturday, Sunday or holiday.
16. Termination. This Agreement shall survive a termination of
-----------
Executive's employment and shall remain in full force and effect after such
separation until any terms contained in any specific provision of this Agreement
expires as therein provided.
17. Dispute Resolution. Any controversy, claim or dispute arising
------------------
out of or relating to this Agreement or the breach thereof shall be settled by
arbitration with three arbitrators. The arbitration will be administered by the
American Arbitration Association in accordance with its applicable arbitration
rules. The arbitration proceeding shall be confidential, and judgment on the
-8-
<PAGE>
award rendered by the arbitrators may be entered in any court having
jurisdiction. Any such arbitration shall take place in the Washington, D.C.
metropolitan area, or in any other mutually agreeable location. In the event
any judicial action is necessary to enforce the arbitration provisions of this
Agreement, sole jurisdiction shall be in Washington, D.C. Any request for
interim injunctive relief or other provisional remedies or opposition thereto
shall not be deemed to be a waiver of the right or obligation to arbitrate
hereunder. Subject to the terms of this Section 17, the parties waive the right
----------
to a jury trial with respect to any controversy or claim between the parties
hereto arising out of or relating to this Agreement.
18. Third-Party Beneficiaries. Each party hereto intends that this
--- -------------------------
Agreement shall not benefit nor confer any rights or remedies on any Person
other than the parties hereto and their respective heirs, successors and legal
representatives, provided, however, that each of the Company's Subsidiaries are
intended beneficiaries of Executive's applicable covenants and undertakings made
hereunder.
[EXECUTION PAGE FOLLOWS]
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Restricted
Stock Agreement on the date first written above.
E2ENET, INC.:
By: /s/ Steven J. Quamme
------------------------------------------
Name: Steven J. Quamme
Its: Chief Financial Officer, Senior
Vice President and Secretary
EXECUTIVE:
By: /s/ Mark Lewyn
------------------------------------------
Mark Lewyn
-10-
<PAGE>
Exhibit 10.13
LOCK-UP AGREEMENT
-----------------
THIS LOCK-UP AGREEMENT (this "Agreement") is made as of September 11,
---------
1999, between E2Enet, Inc. a Delaware corporation (the "Company"), and Jonathan
-------
J. Ledecky ("Holder").
------
Recitals
--------
A. Holder purchased 1,300,000 shares of the Company's common stock
(the "Common Stock") (the "Holder Stock") effective May 7, 1999. Holder's
------------ ------------
purchase of the Holder Stock was memorialized by a subscription agreement
between the Company and Holder dated May 14, 1999 (the "Subscription
------------
Agreement").
- ---------
B. Without disturbing the integrity of the Subscription Agreement,
the parties now desire to modify their understanding with respect to the
issuance of the Holder Stock.
C. Certain definitions are set forth in Section 3 of this Agreement.
---------
1. Restrictions on Transfer.
------------------------
(a) Holder agrees that from the date of this agreement until the IPO
Date, Holder shall have no right to Transfer (as that term is defined in the
Stockholders Agreement by and among the Company and certain stockholders of the
Company dated May 14, 1999 and effective May 7, 1999 (the "Stockholders
------------
Agreement") the Holder Stock, except for a Permitted Transfer (as that term is
- ---------
defined in the Stockholders Agreement). Holder further agrees that without the
prior written consent of the Company, Holder will not during the period
commencing on the IPO Date and ending twelve (12) months after such date
("Initial Lock-Up Period") offer, sell, contract to sell, or otherwise transfer
- ------------------------
or dispose of, directly or indirectly, any Holder Stock; provided, however, that
notwithstanding the foregoing, Holder is expressly permitted to pledge the
Restricted Securities, buy and sell puts and calls or derivatives affecting the
Restricted Securities, and Margin the Restricted Securities. Pursuant to
Section 1.(c) below and after the Initial Lock-Up Period has expired (the
- -------------
"Expiration Date"), Holder may transfer up to fifty percent (50%) of the Holder
- ----------- ----
Stock. Six (6) months after the Expiration Date, Holder may transfer up to
seventy-five percent (75%) of the Holder Stock. Holder may transfer all of its
Holder Stock (12) months after the Expiration Date. The Company may assign its
rights under this Section 1.(a) during the Initial Lock-up Period to any
-------------
underwriter retained by the Company in connection with the Company's initial
public offering (the "IPO")
---
<PAGE>
and such underwriter may enforce this provision directly against the Holder upon
the Company's assignment.
(b) The Holder Stock constitutes Restricted Securities (as defined
below) and is transferable, subject to Section 1.(a) above, only pursuant to (i)
public offerings registered under the Securities Act, (ii) Rule 144 of the
Securities and Exchange Commission (or any similar rule then in force) if such
rule is available and (iii) subject to the conditions specified in Section 1.(c)
-------------
below, any other legally available means of transfer.
(c) In connection with the transfer of any Restricted Securities
(other than a transfer described in Section 1.(b)(i) or (ii) above), the Holder
------------------------
thereof will deliver written notice to the Company describing the transfer or
proposed transfer, together with an opinion of counsel which (to the Company's
reasonable satisfaction) is knowledgeable in securities law matters, to the
effect that such transfer of Restricted Securities may be effected without
registration of such Restricted Securities under the Securities Act. In
addition, if the Holder holding the Restricted Securities delivers to the
Company an opinion of counsel that no subsequent transfer of such Restricted
Securities will require registration under the Securities Act, the Company will
promptly upon such contemplated transfer deliver new certificates for such
Restricted Securities which do not bear a restrictive Securities Act legend. If
the Company is not required to deliver such new certificates for such Restricted
Securities, the Holder will not transfer the same until the prospective
transferee has confirmed to the Company in writing its agreement to be bound by
the conditions contained in this paragraph.
(d) For the purposes of this Agreement, "Restricted Securities" means
---------------------
the Holder Stock and any securities issued with respect thereto by way of a
stock dividend or stock split or in connection with a combination of shares,
recapitalization, stock exchange, consolidation or other reorganization. As to
any particular Restricted Securities, such securities will cease to be
Restricted Securities when they have (i) been effectively registered under the
Securities Act and disposed of in accordance with the registration statement
covering them, (ii) become eligible for sale and have actually been sold to the
public pursuant to Rule 144 (or any similar provision then in force) under the
Securities Act or (iii) been otherwise transferred and new certificates for them
not bearing the Securities Act legend set forth in the Subscription Agreement
have been delivered by the Company in accordance with Section 1.(c) hereof.
-------------
Whenever any particular securities cease to be Restricted Securities, the Holder
will be entitled to receive from the Company, without expense, new securities of
like tenor not bearing a restrictive Securities Act legend.
2. Certificates. Concurrent with the execution of this Agreement, Holder shall
------------
forfeit his stock certificate representing the Holder Stock to the Company. The
Company will mark this certificate "Cancelled," and file the cancelled
certificate in
<PAGE>
the Company's minute book. The Company will then issue a new stock certificate
to Holder, which certificate shall contain the following restrictive legend (in
addition to any other required legends in respect of (i) the underlying shares
having not been registered under federal or state securities laws or (ii) the
underlying shares being subject to existing subscription, shareholder or other
agreements to which Holder and the Company are a party):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
THE TRANSFER RESTRICTIONS AND OTHER TERMS OF A LOCK-UP
AGREEMENT DATED EFFECTIVE AS OF SEPTEMBER __, 1999, AMONG THE
COMPANY AND THE HOLDER HEREOF AND MAY NOT BE TRANSFERRED EXCEPT
IN ACCORDANCE WITH SUCH AGREEMENT. A COPY OF SUCH AGREEMENT IS
ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY AND WILL BE
FURNISHED UPON REQUEST TO THE HOLDER OF RECORD OF THE
SECURITIES REPRESENTED BY THIS CERTIFICATE.
3. Definitions.
-----------
(a) "IPO Date" means the effective date of the Company's initial
--------
public offering pursuant to an underwritten registration statement on Form S-1
as declared effective by the Securities and Exchange Commission.
(b) "Person" means an individual, a partnership, a limited liability
------
company, a corporation, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
(c) "Subsidiary" means any corporation, limited liability company or
----------
partnership of which any percentage of the securities (or other equity or
ownership interest) having ordinary voting power in electing the board of
directors (or board of managers or similar governing body) are, at the time as
of which any determination is being made, owned by the Company either directly
or through one or more Subsidiaries. The term Subsidiary shall also include any
joint venture-type business entity between the Company and any other entity.
4. Complete Agreement. This Agreement, those documents expressly referred to
------------------
herein embody the complete agreement and understanding among the parties and
supersede and preempt any prior understandings, agreements or representations by
or among the parties, written or oral, which may have related to the subject
matter hereof in any way.
<PAGE>
5. Counterparts; Facsimile Transmission. This Agreement may be executed in
------------------------------------
separate counterparts, each of which is deemed to be an original and all of
which taken together constitute one and the same agreement, and transmitted to
the other party by facsimile transmission as evidence of such party's intention
to be bound hereby, with originals to be exchanged in due course.
6. Successors and Assigns. Except as otherwise provided herein, this Agreement
----------------------
shall bind and inure to the benefit of and be enforceable by Holder and the
Company and their respective successors and assigns.
7. Choice of Law. All questions concerning the construction, validity and
-------------
interpretation of this Agreement and the exhibits hereto will be governed by and
construed in accordance with the internal laws of the State of Delaware, without
giving effect to any choice of law or conflict of law provision or rule (whether
of the State of Delaware or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the State of Delaware.
8. Amendment and Waiver. The provisions of this Agreement may be amended and
--------------------
waived only with the prior written consent of the Company and the Holder.
9. Business Days. If any time period for giving notice or taking action
-------------
hereunder expires on a day which is a Saturday, Sunday or holiday in the state
in which the Company's principal place of business is located, the time period
shall be automatically extended to the business day immediately following such
Saturday, Sunday or holiday.
10. Third-Party Beneficiaries. Each party hereto intends that this Agreement
-------------------------
shall not benefit nor confer any rights or remedies on any Person other than the
parties hereto and their respective heirs, successors and legal representatives,
provided, however, that each of the Company's Subsidiaries are intended
beneficiaries of Holder's applicable covenants and undertakings made hereunder.
[The rest of this page left blank intentionally]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Lock-Up
Agreement on the date first written above.
E2Enet, Inc.
By: /s/ Steven J. Quamme
-----------------------------------
Name: Steven J. Quamme
Its: Chief Financial Officer, Senior
Vice President and Secretary
Holder
By: /s/ Jonathan J. Ledecky
-----------------------------------
Jonathan J. Ledecky
<PAGE>
Exhibit 10.14
CONVERTIBLE NOTE AND WARRANT PURCHASE AGREEMENT
THIS CONVERTIBLE NOTE AND WARRANT PURCHASE AGREEMENT (the "Agreement")
is entered into as of this 10th day of September, 1999 by and between E2Enet,
Inc., a Delaware corporation having a principal place of business located at 800
Connecticut Ave., N.W., Suite 1111, Washington, D.C. 20006 (the "Company"), and
Northwood Ventures LLC, a New York limited liability company having a principal
place of business located at 485 Underhill Boulevard, Suite 205, Syosset, NY
11791 ("Northwood Ventures") and Northwood Capital Partners LLC, a New York
limited liability company having a principal place of business located at 485
Underhill Boulevard, Suite 205, Syosset, NY 11791 ("Northwood Capital")
(Northwood Ventures and Northwood Capital are each referred to as an "Investor"
and together as the "Investors").
Recital
-------
The Investors have agreed to purchase, and the Company has agreed to
sell, certain convertible notes and warrants of the Company, all upon and
subject to the terms and conditions set forth below.
Agreement
---------
In consideration of the foregoing, and of the mutual representations,
warranties, covenants and conditions set forth herein, and for other good and
valuable consideration, the parties to this Agreement, intending to be legally
bound hereby, agree as follows:
1. Capitalization; the Notes and Warrants. The Company proposes
--------------------------------------
to issue and sell (i) the aggregate principal amount of $4,000,000 (four million
US dollars) Convertible Notes (the "Notes"), and (ii) warrants (the "Warrants")
to purchase an aggregate amount of 400,000 shares of Common Stock of the
Company, $.01 par value ("Common Stock"), as specified in Schedule 1, for the
----------
respective prices specified in Schedule 1.
----------
2. Sale and Purchase of Notes and Warrants. Subject to the terms
---------------------------------------
and conditions hereof and in reliance upon the representations and warranties
contained herein, the Company agrees to issue and sell to each Investor and each
Investor agrees to purchase the Note in the principal amount and the Warrant to
purchase such number of shares of Common Stock, as set forth opposite the
Investor's name in Schedule 1 at the prices therein specified, for an aggregate
----------
purchase price of $4,000,000 (four million US dollars) (the "Purchase Price").
3. Closing.
-------
<PAGE>
3.1. Closing; Closing Date. The sale and purchase of the Notes
---------------------
and the Warrants to be issued and sold pursuant to this Agreement (the
"Closing") shall take place at the offices of Hogan & Hartson LLP, 555 13th
Street, NW, Washington, DC 20004 at 2:00 P.M. local time on September 10, 1999,
or such later date or other time as may be agreed upon by the Investors and the
Company (the "Closing Date").
3.2. Transactions at Closing. At the Closing the Company will
-----------------------
deliver to each Investor (i) a single Note, in the form attached hereto as
Exhibit A, in the principal amount specified in Schedule 1 and (ii) a single
- --------- ----------
Warrant, in the form attached hereto as Exhibit B, for the purchase of such
---------
number of shares of Common Stock, as specified in Schedule 1, for the respective
----------
prices specified in Schedule 1, in each case duly registered in the Investor's
----------
name, against payment of the Purchase Price by check or immediately available
wire transfer payable to the order of the Company.
4. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants that:
4.1. Organization, Standing. The Company is a corporation duly
----------------------
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite corporate power and authority to enter into this
Agreement and to perform its obligations hereunder and to consummate the
transactions set forth herein. Attached hereto as Schedule 4.1A is a complete
-------------
and correct copy of the Certificate of Incorporation of the Company, and all
amendments thereto, substantially as the Certificate of Incorporation, as
amended, will be in effect at the Closing Date, and attached hereto as Schedule
--------
4.1B is a complete and correct copy of the Bylaws of the Company as they will be
- ----
in effect at the Closing Date.
4.2. Capitalization. The Company has authorized capital stock as
--------------
set forth on Schedule 4.2A. All of the outstanding shares of capital stock of
-------------
the Company (as listed in Schedule 4.2A) have been duly authorized and validly
-------------
issued and are fully paid and nonassessable. Attached hereto as Schedule 4.2B
-------------
is a complete and correct list of the present stockholders of the Company,
showing the class, series and number of shares of capital stock held or to be
held by each stockholder. No option, warrant or other right for the purchase of
any shares of capital stock of the Company is presently outstanding and no
authorization therefor is presently in effect, except as described in Schedule
--------
4.2C.
- ----
4.3. Subsidiaries. The Company has no Subsidiary (defined as any
------------
corporation or other business entity, a majority of the voting stock (or other
beneficial interests) of which, entitled to vote for the election of directors
or similar governing body, is at any time owned by the Company or one or more
Subsidiaries).
2
<PAGE>
4.4. Agreement Authorization. This Agreement and the Ancillary
-----------------------
Agreements (as defined below) have been duly executed and delivered by the
Company and, assuming the due authorization, execution and delivery by
Investors, constitute legal, valid and binding obligations of the Company,
enforceable in accordance with their respective terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium and other similar laws of general applicability relating to or
affecting creditors' rights generally and by the application of general
principles of equity.
4.5. Authorization and Legality of the Notes and the Warrants .
---------------------------------------------------------
The issuance and sale of the Notes and the Warrants to the Investors pursuant to
this Agreement have been duly authorized by the Board of Directors of the
Company. There are no preemptive rights or similar rights on the part of the
holders of shares of the Company's capital stock, which have not been waived.
No further approval or authorization of the stockholders of the Company will be
required for the issuance and sale of the Notes and the Warrants as contemplated
herein. When delivered to the Investors upon conversion of the Notes or
exercise of the Warrants, respectively, the Common Stock will be validly issued
and outstanding and fully paid and nonassessable.
4.6. Governmental Approval. No consent, approval, authorization
---------------------
or order of or qualification, designation, declaration or filing with any court
or governmental agency or other person or entity on the part of the Company is
required in connection with the conduct of the Company's business or in
connection with the execution, delivery and performance by the Company of this
Agreement or the offer, issue, sale and delivery of the Notes and the Warrants
pursuant hereto or the consummation of any other transactions herein (other than
appropriate filings in the State of Delaware of the amendment to the Certificate
of Incorporation included as part of Schedule 4.1A).
-------------
4.7. Title to Securities in Portfolio Companies. Except as
------------------------------------------
described in Schedule 4.7A, the Company has good and marketable title to all of
-------------
the securities set forth in Schedule 4.7B, free and clear of any mortgage,
-------------
pledge, lien, security interest, lease, charge or encumbrance.
4.8. Litigation, etc. There is no action, proceeding or
---------------
investigation pending or, to the Company's knowledge, threatened, that questions
the validity of this Agreement, the Notes, or the Warrants or any action taken
or to be taken pursuant hereto or contemplated hereby, or that might result,
either in any case or in the aggregate, in any material adverse change in the
business, prospects, operations, affairs or condition of the Company or in any
of its properties or assets, or in any material liability on the part of the
Company.
4.9. Compliance with other Instruments, etc. The execution and
--------------------------------------
delivery by the Company of this Agreement and the Ancillary Agreements and
3
<PAGE>
the consummation by the Company of the transactions contemplated hereby and
thereby, and the performance by the Company of its obligations hereunder and
thereunder, do not and will not conflict with or result in the violation of or
default under any provision of any governing document of the Company or any
material agreement or instrument to which the Company is a party or by which the
Company or any of its properties is bound, or any material license, permit,
franchise, judgment, order, writ, decree, statute, rule or regulation applicable
to the Company or its businesses or properties.
4.10. Disclosure. To the Company's knowledge, the Registration
----------
Statement on Form S-1 attached hereto as Schedule 4.10, does not contain 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.
4.11. Brokers. No finder, broker, agent, financial adviser or
-------
other intermediary has acted on behalf of the Company in connection with the
offering of the Notes and the Warrants to be issued and sold pursuant to this
Agreement or the negotiation or consummation of this Agreement or any of the
transactions contemplated hereby.
4.12. Registration Rights. Except as provided for in this
-------------------
Agreement and the Registration Rights Agreement attached as Exhibit C hereto,
---------
the Company is not under any obligation to register under the United States
Securities Act of 1933, as amended (the "Securities Act") or state securities
laws, any of its presently outstanding securities or any of its securities that
may subsequently be issued.
5. Representations and Warranties of the Investors. Each Investor
-----------------------------------------------
hereby represents and warrants to the Company as follows:
5.1. Organization, Standing, etc. Investor is duly organized, validly
---------------------------
existing and, to the extent applicable to the jurisdiction of its formation, in
good standing under the laws of the jurisdiction of its formation.
5.2. Authorization and Binding Effect. Investor has the necessary
--------------------------------
power and authority to enter into this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement by Investor and the consummation by Investor of
the transactions contemplated hereby have been duly and validly authorized by
all necessary action, and no other proceedings on the part of Investor are
necessary for Investor to authorize this Agreement or for Investor to consummate
the transactions contemplated hereby. This Agreement has been duly executed and
delivered by Investor and, assuming the due authorization, execution and
delivery by the Company, constitutes a legal, valid and binding obligation of
4
<PAGE>
Investor, enforceable in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium and other similar laws of general applicability relating to or
affecting creditors' rights generally and by the application of general
principles of equity.
5.3. Compliance with Laws and Other Instruments. The execution and
------------------------------------------
delivery by Investor of this Agreement, the consummation by Investor of the
transactions contemplated hereby, and the performance by Investor of its
obligations hereunder, do not and will not conflict with or result in the
violation of or default under any provision of any governing document of
Investor or any material agreement or instrument to which Investor is a party or
by which Investor or any of its properties is bound, or any material license,
permit, franchise, judgment, order, writ, decree, statute, rule or regulation
applicable to Investor or its business or properties. No consent, approval,
authorization or order of or notification to or filing with any court or
governmental agency or other person or entity is required by Investor in
connection with the execution and delivery of this Agreement by Investor and the
consummation of the transactions contemplated hereby. Investor's investment in
the Note and Warrant, and in the shares of common stock, par value US$.01 per
share, of the Company ("Common Stock") into which the Note is convertible and
the Warrant is exercisable (such shares of Common Stock, the Note and the
Warrant are collectively referred to as the "Securities") is permitted by all
applicable laws.
5.4. Investment Representations.
--------------------------
(a) Investor is a limited liability company, not formed for the
specific purpose of acquiring the Securities, with total assets in excess of
US$5,000,000. For Northwood Ventures Only: The Investor was formed in 1983 and
has total assets (based on carrying value) of approximately US$100,000,000. For
Northwood Capital Only: The Investor was formed in 1992 and has total assets
(based on carrying value) of approximately US$14,000,000.
(b) Investor is acquiring the Securities for investment purposes only,
solely for Investor's own account and not with a view to, or for resale in
connection with, the distribution or other disposition thereof.
(c) Investor's knowledge and experience in financial and business
matters are such that Investor is capable of evaluating the merits and risks of
its investment in the Securities, and has made its own independent valuation
with respect to the value of the Securities; Investor understands that the
Securities are a speculative investment which involves a high degree of risk of
loss of the investment therein; Investor's financial condition is such that
Investor can afford to bear the economic risk of holding the Securities acquired
by Investor hereunder for an indefinite period of time; Investor has adequate
means for providing for Investor's current needs and contingencies and can
afford to suffer the complete loss
5
<PAGE>
of the investment in the Securities. For Northwood Ventures Only: Investor has
previously invested in non-publicly traded securities of more than 50 companies,
and the aggregate amount invested in those investments exceeds US$50,000,000.
Managers of the Investor serve on boards of directors of approximately 15
companies. For Northwood Capital Only: Investor has previously invested in non-
publicly traded securities of more than 15 companies, and the aggregate amount
invested in those investments is approximately US$15,000,000. Managers of the
Investor serve on boards of directors of approximately 15 companies.
(d) Investor and Investor's financial, tax, legal and other advisers,
have carefully reviewed all documents furnished to them in connection with the
investment in the Securities, and Investor understands and has taken cognizance
of all the risk factors related to such investment, and, except as set forth in
this Agreement, no representations or warranties have been made to Investor or
Investor's representatives concerning such investment or the Company, its
prospects or other matters.
(e) Investor and Investor's representatives have been given the
opportunity to examine all documents and to ask questions of, and to receive
answers from, the Company and its representatives concerning the terms and
conditions of the acquisition of the Securities and the business of the Company
and to obtain any additional information which Investor or Investor's
representatives deem necessary to verify the accuracy of the information that
has been provided to Investor in order for Investor to evaluate the merits and
risk of the investment in the Securities.
(f) Investor understands that no United States federal agency
(including the United States Securities and Exchange Commission), state agency
or foreign agency has made or will make any finding or determination as to the
fairness of an investment in the Securities (including as to the purchase
price).
5.5. Transfer Restrictions.
---------------------
(a) Investor understands that the offer and sale of the Securities
will not be registered under the Securities Act, by virtue of Section 4(2) of
the Securities Act, or under the securities laws of any state of the United
States or of any foreign jurisdiction.
(b) Investor understands that no resales of the Securities may be
effected unless the resale of such Securities is registered under the Securities
Act or an exemption therefrom is available and all applicable state and foreign
securities laws are complied with.
(c) Investor understands that there is no established public, private
or other market for the Securities proposed to be acquired by Investor hereunder
6
<PAGE>
and it is not anticipated that there will be any public, private or other market
for such Securities in the foreseeable future.
(d) Investor understands that Rule 144 promulgated under the
Securities Act is not currently available with respect to the sale of any
securities of the Company.
(e) Investor understands that the following restrictive legend (or a
legend of like effect) shall be placed on the certificates representing the
Securities acquired by Investor hereunder:
NEITHER THE NOTE/WARRANT NOR THE SHARES ISSUABLE UPON CONVERSION OR
EXERCISE HEREOF, NOR THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR STATE SECURITIES LAWS AND CANNOT BE OFFERED,
SOLD, OR TRANSFERRED IN THE ABSENCE OF REGISTRATION OR EXEMPTION FROM
REGISTRATION UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS AND
REGULATIONS PROMULGATED THEREUNDER. THE SECURITIES REPRESENTED BY
THIS CERTIFICATE HAVE BEEN ACQUIRED BY THE REGISTERED OWNER HEREOF FOR
INVESTMENT AND NOT WITH A VIEW TO OR FOR SALE IN CONNECTION WITH ANY
DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES ACT. THE
SHARES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT IN A
TRANSACTION WHICH IS EXEMPT UNDER THE PROVISIONS OF THE SECURITIES ACT
OR ANY APPLICABLE STATE SECURITIES LAWS, OR PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT OR IN A TRANSACTION OTHERWISE IN COMPLIANCE
WITH APPLICABLE FEDERAL AND STATE SECURITIES LAWS.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED
UNLESS SUCH TRANSFER COMPLIES WITH THE TERMS AND CONDITIONS SET FORTH
IN AN AMENDED AND RESTATED STOCKHOLDERS AGREEMENT, DATED AS OF
SEPTEMBER 10, 1999, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF
THE
7
<PAGE>
CORPORATION AND WHICH WILL BE FURNISHED BY THE CORPORATION TO THE
HOLDER HEREOF UPON WRITTEN REQUEST. NO TRANSFER OF SUCH SECURITIES
WILL BE MADE ON THE BOOKS OF THE CORPORATION UNLESS ACCOMPANIED BY
EVIDENCE OF COMPLIANCE WITH THE TERMS OF SUCH AGREEMENT.
(f) Investor understands that a notation shall be made in the
appropriate records of the Company, indicating that the Securities are subject
to restrictions on transfer and, if the Company should at some time in the
future engage the services of a securities transfer agent, appropriate stop-
transfer instructions will be issued to such transfer agent with respect to the
Securities.
5.6. No Brokers. No broker, finder or investment banker or other
----------
person is directly or indirectly entitled to any brokerage, finder's or other
fee or commission or any similar charge in connection with the transactions
contemplated by this Agreement or the Ancillary Agreements based upon
arrangements made by or on behalf of Investor or any of its affiliates.
5.7. Litigation. There is no suit, action, investigation or other
----------
proceeding pending or, to the Investor's knowledge, threatened against Investor
that questions the validity of this Agreement or any action taken or to be taken
pursuant to this Agreement.
5.8. Repayment of the Ledecky Note. Investor acknowledges that the
-----------------------------
Company has funded several investments with money borrowed by the Company from
Jonathan J. Ledecky ("Ledecky") under the Amended and Restated Promissory Note
between Ledecky and the Company dated May 14, 1999 (the "Ledecky Note"),
including $250,000 recently invested by the Company in Buyline.net, Inc. and
$400,000 recently invested by the Company in MEI Software Systems, Inc. The
Investor acknowledges and agrees that the Company intends to use $650,000 of the
proceeds from the investment under this Agreement to reimburse Ledecky for the
investments in Buyline.net, Inc. and MEI Software Systems, Inc. by the Company's
repayment of the Ledecky Note in the amount of $650,000.
6. Conditions of Investors' Obligations. The Investors'
------------------------------------
obligation to purchase and pay for the Notes and Warrants to be delivered to the
Investors at the Closing is subject to the fulfillment to the Investors'
reasonable satisfaction, before or at the Closing, of the following conditions
(which conditions may be waived in whole or in part by the Investors, and which
waiver shall be at the sole discretion of the Investors):
8
<PAGE>
6.1. Representations and Warranties Correct. The representations
--------------------------------------
and warranties of the Company made or contained herein shall be correct in all
material respects at and as of the Closing Date as if made on and as of the
Closing Date, except as affected by the transactions contemplated hereby.
6.2. Performance. The Company shall have performed and complied
-----------
with all agreements and conditions contained herein required to be performed or
complied with by it before or at the Closing.
6.3. Articles of Incorporation, as Amended. The Articles of
-------------------------------------
Incorporation of the Company, and the amendments thereto, substantially in the
form of Schedule 4.1A hereto, shall have been duly filed in the office of the
-------------
Secretary of State of Delaware.
6.4. Documents. The Investors or the Investors' counsel shall
---------
have received:
(a) This Agreement, executed by an authorized officer of the Company;
(b) The Notes, in the form of Exhibit A, executed by an authorized
---------
officer of the Company;
(c) The Warrants, in the form of Exhibit B, executed by an authorized
---------
officer of the Company;
(d) The Registration Rights Agreement, in the form of Exhibit C,
---------
executed by an authorized officer of the Company;
(e) The Pledge Agreement, in the form of Exhibit D (the "Pledge
---------
Agreement"), executed by an authorized officer of the Company and by Ledecky;
and
(f) The Amended Stockholders Agreement, in the form of Exhibit E (the
---------
"Amended Stockholders Agreement")(collectively, the Notes, the Warrants, the
Registration Rights Agreement, the Pledge Agreement and the Amended Stockholders
Agreement are referred to as the "Ancillary Agreements"), executed by an
authorized officer of the Company and by all other parties thereto (other than
the Investors).
6.5. Compliance Certificate. The Investors shall have received
----------------------
an Officers' Certificate, dated the Closing Date, certifying that the conditions
specified in Sections 6.1 to 6.4, inclusive, have been fulfilled.
-------------------
9
<PAGE>
6.6. Opinion of Company Counsel. The Investors shall have
--------------------------
received from Hogan & Hartson L.L.P., counsel for the Company, an opinion, dated
the Closing Date in the form set forth in Schedule 6.6 or in a form reasonably
------------
satisfactory to the Investors and the Investors' counsel.
7. Condition of Company's Obligations. The Company's obligation
----------------------------------
to sell and issue the Notes and Warrants at the Closing is subject to the
fulfillment to the Company's reasonable satisfaction, before or at the Closing,
of the following conditions (which conditions may be waived in whole or in part
by the Company, and which waiver shall be at the sole discretion of the
Company):
7.1 Payment. The Company shall have received from the Investors
-------
the full amount of the Purchase Price.
7.2 Representations and Warranties Correct. The representations
--------------------------------------
and warranties of the Investors made or contained herein being correct in all
material respects at and as of the Closing Date as if made on and as of the
Closing Date, except as affected by the transactions contemplated hereby (which
condition may be waived in whole or in part by the Company, and which waiver
shall be at the sole discretion of the Company).
8. Deleted.
-------
9. Use of Proceeds; Accounting; Financial Statements
-------------------------------------------------
and Other Information.
---------------------
9.1 Use of Proceeds. The Company shall use the proceeds of the
---------------
issuance and sale of the Notes to fund investments and loans and for working
capital, substantially as provided in Schedule 9.1, it being understood that the
------------
Company may use the proceeds for other purposes, subject to the prior written
consent of the Investors.
9.2. Financial Statements; Annual Budget. As soon as practicable
-----------------------------------
(and in any event not later than 90 days after each fiscal year and 45 days
after each other fiscal quarter), the Company shall furnish to Investors annual
audited and quarterly unaudited consolidated financial statements. The Company
shall furnish a copy of its annual budget to the Investors at least thirty (30)
days prior to the first day of the year covered by such budget.
9.3. Other Information; Inspection. The Company will also
-----------------------------
furnish such other information regarding the financial condition of the Company,
and the condition and operations of the Company as Investors may reasonably
request from time to time. The Company will permit the Investors or any
authorized representatives of the Investors at Investors' expense, to visit and
inspect any of the properties of the Company including its books of account, and
to discuss its affairs,
10
<PAGE>
finances and accounts with its officers, all at such reasonable times and upon
reasonable notice. The rights set forth in this Section 9.3 shall be exercised
-----------
solely in furtherance of the proper interests of the Investors as investors in
the Company.
9.4. Confidentiality. Each Investor agrees that any information
---------------
obtained by it or its representatives pursuant to Sections 9.2 and 9.3 will not
--------------------
be disclosed without the prior written consent of the Company, except to such
Investor's accountants or legal counsel (provided that they have been informed
--------
by such Investor of the confidential nature of the information and the
confidentiality obligations herein); provided that, in connection with periodic
--------
reports to its members, the Investor may, without first obtaining such written
consent, make general statements, not containing technical or other confidential
information, regarding the nature and progress of the Company's business; and
provided further, that the Investor may provide summary information regarding
- --------
the Company's financial information in its reports to its members, but may not
annex to such reports the full financial information to be provided hereunder by
the Company without the Company's prior written consent, which consent shall not
be unreasonably withheld.
9.5. Termination of Rights. The Company's obligation to deliver
---------------------
the financial statements and other information under Sections 9.2 and 9.3 shall
--------------------
terminate and shall be of no further force or effect upon the earliest of (a)
the closing of the Company's initial underwritten public offering of shares of
its Common Stock pursuant to an effective registration statement under the
Securities Act (the "IPO"), (b) such time as the Investors sell or otherwise
transfer Common Stock representing more than fifty percent (50%) of the Common
Stock of the Company issuable upon conversion of the Notes (calculated on an as-
converted basis and as adjusted for stock splits and consolidation and for the
issuance of stock dividends), or (c) repayment in full of the Notes.
10. Board of Advisers; Observer to Board of Directors.
-------------------------------------------------
10.1 Investor Representative on the Board of Advisers. Until
------------------------------------------------
such time as the earlier of (a) Investors sell or otherwise transfer Common
Stock representing more than fifty percent (50%) of the Common Stock of the
Company issuable upon conversion of the Notes (calculated on an as-converted
basis and as adjusted for stock splits and consolidations and for the issuance
of stock dividends), or (b) repayment in full of the Notes, the Investors, based
on the principal amounts of their respective Notes, together shall be entitled
to designate from time to time a person to serve as a member of the Board of
Advisers of the Company. So long as a representative of the Investors serves as
a member of the Board of Advisers of the Company, the Company shall reimburse
the Investors' representative on the Board of Advisers of
11
<PAGE>
the Company for his or her reasonable travel expenses incurred by virtue of
attendance at meetings of the Board of Advisers of the Company. So long as a
representative of the Investors serves as a member of the Board of Advisers of
the Company, at such time as the Company issues Common Stock or options to
purchase Common Stock to all other members of the Board of Advisers, the
Investors together (on a pro rata basis, based on the Investors' holdings in the
Company on an as-converted to Common Stock basis) shall be entitled to receive
Common Stock or options to purchase Common Stock, as the case may be, in an
amount and on terms and conditions comparable to the Common Stock or options, as
the case may be, issued at that time to each of the other members of the Board
of Advisers.
10.2 Investor Representative as Observer on the Board of
---------------------------------------------------
Directors. Until such time as the earliest of (a) Investors sell or otherwise
- ---------
transfer Common Stock representing more than fifty percent (50%) of the Common
Stock of the Company issuable upon conversion of the Notes (calculated on an as-
converted basis and as adjusted for stock splits and consolidation and for the
issuance of stock dividends), (b) the closing of the IPO, or (c) repayment in
full of the Notes, the Investors, based on the principal amounts of their
respective Notes, together shall be entitled to designate from time to time a
person to attend (including the right to participate in telephonic meetings)
meetings of the Board of Directors of the Company as an observer, who shall have
all of the privileges and benefits of a director of the Company except voting
rights; provided, however, that such designee shall undertake, in writing to use
only for purposes of monitoring its investment in or loans to the Company and to
the hold in confidence (except as to his or her co-managers of the relevant
Investor, provided that such co-managers agree to hold such information in
confidence and to use the information only as provided above), all information
received by him or her during the meeting of the Board or otherwise provided to
him or her by the Company. The Company shall reimburse such designee for his or
her reasonable travel expenses incurred by virtue of attendance at meetings of
the Board of Directors of the Company.
10.3 Initial Designee. The Investors' initial designee for the
----------------
Board of Advisers and observer to the Board of Directors is Peter G. Schiff.
11. Events of Default; Remedies.
---------------------------
11.1 Events of Default. The occurrence and continuance of any
-----------------
one or more of the following events (whether or not in the control of the
Company) shall constitute an Event of Default:
(a) Nonpayment. The Company shall fail to make, on or before the due
----------
date, in the manner required, any payment of principal, interest or
any other sums due under either of the Notes or under the Second
Amended and Restated Promissory Note issued by the Company to Ledecky
dated September 10, 1999 (the "Second Amended Ledecky Note"), and
continuance of such failure for more than five (5)
12
<PAGE>
business days after written notice thereof from the holder of the
relevant Note.
(b) Other Defaults; Cure Period. The Company shall fail to observe or
---------------------------
perform any of its covenants contained in this Agreement, other than
the covenants and provisions relating to payments in Section 11.1(a)
---------------
above, and the Company shall have not remedied such default within
thirty (30) days after such default.
(c) Representation or Warranty. Any representation, warranty or
--------------------------
statement made or deemed to be made by the Company herein or in any
document given hereunder shall prove to have been untrue in any
material respect as of the time made.
(d) Insolvency. The Company shall generally not pay its debts as such
----------
debts become due, or shall admit in writing its inability to pay its
debts generally, or shall make a general assignment for the benefit of
creditors; or (i) the Company shall commence any voluntary bankruptcy
proceeding, or (ii) there shall be commenced against the Company by
another party any such case, proceeding or other action in bankruptcy
which remains unstayed, undismissed or undischarged for a period of 60
days.
(e) Cross-Default. An Event of Default shall have occurred and be
-------------
continuing under any of the Notes, the Second Amended Ledecky Note or
the First Amendment to Loan and Pledge Agreement between the Company
and Ledecky dated September 10, 1999.
11.2 Notice. The Company shall notify the Investors in writing
------
promptly upon the occurrence of any Event of Default hereunder or any event that
would become an Event of Default upon notice or the lapse of time, or both.
11.3 Acceleration. If an Event of Default shall have occurred
------------
and be continuing, there shall immediately be due and payable to the holders of
the Notes the aggregate principal amount of the Notes then outstanding, plus
accrued interest, without presentment, demand, protest and all other notices of
any kind, all of which are hereby expressly waived by the Company, and the
Investors shall have no further obligation to advance funds to the Company
pursuant to the Notes.
11.4 Remedies Upon Event of Default.
------------------------------
(a) General. Subject to Section 11.4(b) below, if any Event of
------- ---------------
Default shall have occurred and be continuing, the holders of the Notes may
proceed to protect and enforce their rights as holders of the Notes, either by
suit in equity or by action at law, or both, whether for the specific
performance of any covenant or
13
<PAGE>
agreement contained in this Agreement or in aid of the exercise of any power
granted in this Agreement, and may proceed to enforce the payment of all amounts
due upon the Notes, and such further amounts as shall be sufficient to cover the
costs and expenses of collection (including, without limitation, reasonable
counsel fees and disbursements), or to enforce any other legal or equitable
right of the holders of the Notes. In addition, each holder of the Notes shall
have all the rights of a pledgee in possession of the Pledged Securities (as
defined in the Pledge Agreement) under the applicable provisions of law and of
the Uniform Commercial Code as in effect in the District of Columbia, and any
other jurisdiction where any of the Pledged Securities is located, and all
rights and remedies provided in the Pledge Agreement or at law or in equity or
otherwise.
(b) Remedies for Non-Payment. If an Event of Default pursuant to
------------------------
Section 11.1 shall have occurred and be continuing, the holders of the Notes
- ------------
shall have the sole option to pursue their rights under Section 11.4(a).
---------------
(c) Remedies Cumulative. No remedy conferred in this Agreement or the
-------------------
Notes is intended to be exclusive of any other remedy and each and every such
remedy shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or otherwise.
(d) Remedies Not Waived. No course of dealing between the Company and
-------------------
the holders of the Notes, and no delay or failure in exercising any rights
hereunder or under the Notes in respect thereof, shall operate as a waiver of
any of the rights of the holders of the Notes.
12. Expenses. Subject to the occurrence of the Closing, the
--------
Company shall, at or promptly following the Closing, reimburse the Investors for
the reasonable, properly documented and customary fees and expenses incurred and
paid by Investors in connection with the transaction under this Agreement,
provided that the maximum amount of such reimbursement shall be $25,000
- --------
(excluding the out-of-pocket expenses incurred by legal counsel to the Investors
and paid by the Investors). Except as otherwise expressly provided herein, each
party shall bear its own costs and expenses (including those of its accountants,
advisers or other agents or representatives) in connection the negotiation,
preparation, execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby.
13. Survival of Representations and Warranties, etc. All
-----------------------------------------------
agreements, representations and warranties contained herein or made in writing
by an Investor or on behalf of the Company in connection with the transactions
contemplated hereby shall survive the execution and delivery of this Agreement,
the sale and purchase of the Notes and Warrants and payment therefor; provided
--------
that no action based upon a breach of any such representation or warranty shall
- ----
be commenced more than 3 years after the date of this Agreement.
14
<PAGE>
14. Notices. All notices, requests, consents and other
-------
communications hereunder (except as stated in the last sentence of this Section
-------
14) shall be in writing and shall be mailed by first-class registered or
- --
certified mail, postage prepaid, (a) if to an Investor, at the Investor's
address as set forth at the beginning of this Agreement, marked for attention as
there indicated, or at such other address as may have been furnished to the
Company by the Investor in writing, or (b) if to any other holder of any Note or
Warrant, at such address as may have been furnished to the Company in writing by
such holder, or, until any such other holder furnishes to the Company an
address, then to, and at the address of, the last holder of such Note or Warrant
who has so furnished an address to the Company or (c) if to the Company, at 800
Connecticut Ave., N.W., Suite 1111, Washington, D.C. 20006, or at such other
address as may have been furnished to the Investors in writing by the Company.
For purposes of computing the time periods set forth in Section 9, the date of
---------
mailing in accordance with this Section shall be deemed to be the delivery date.
The financial statements and other reports required by Section 9 may be mailed
---------
by first-class regular mail.
15. Amendments and Waivers. Except as otherwise provided herein,
----------------------
neither this Agreement nor any term hereof may be changed, waived, discharged or
terminated orally or in writing, except that any term of this Agreement may be
amended and the observance of any such term may be waived (either generally or
in a particular instance and either retroactively or prospectively) with (but
only with) the written consent of the Company and the holders of at least 75% of
the Common Stock issued or issuable on conversion of the Notes.
16. Miscellaneous.
-------------
(a) Governing Law. This Agreement shall be construed and enforced in
-------------
accordance with the laws of Delaware without giving effect to its principles of
choice of laws.
(b) Binding Effect; Assignment of Rights. All the terms of this
------------------------------------
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the respective successors and assigns of the parties hereto, whether so
expressed or not, and, in particular, shall inure to the benefit of and be
enforceable by any holder or holders at the time of the Notes. No Investor
shall assign this Agreement or the rights herein, absent the prior written
consent of the Company, except to the members of the Investor, pro rata on the
basis of the members' limited liability company interests in the Investor.
(c) Entire Agreement. This Agreement (with the Exhibits and Schedules
----------------
annexed hereto) embodies the entire agreement and understanding
15
<PAGE>
between the Investors and the Company and supersedes all prior agreements and
understandings relating to the subject matter hereof.
(d) Headings. The headings in this Agreement are for convenience of
--------
reference only, and shall not limit or otherwise affect the meaning hereof.
(e) Counterparts; Facsimile Signatures. This Agreement may be
----------------------------------
executed in two or more counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same instrument and
executed signature pages sent to the other party by facsimile transmission shall
be binding as evidence of such party's agreement hereto and acceptance hereof.
[Execution Page Follows]
16
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Convertible Note
and Warrant Purchase Agreement as of the date first above written.
E2Enet, Inc.
By: /s/ Steven J. Quamme
------------------------------
Title: SVP-CFO
---------------------------
Northwood Ventures LLC
By: /s/ Peter J. Schiff
------------------------------
Title: Manager
Northwood Capital Partners LLC
By: /s/ Peter J. Schiff
------------------------------
Title: Manager
17
<PAGE>
LIST OF SCHEDULES
Schedule 1: Investors
Schedule 4.1A: Certificate of Incorporation
Schedule 4.1B: Bylaws
Schedule 4.2A: Authorized Capital Stock
Schedule 4.2B: Present Stockholders
Schedule 4.2C: Options, Warrants, etc.
Schedule 4.7A: Securities Interests
Schedule 4.7B: Securities
Schedule 4.10: Form S-1
Schedule 6.6: Form of Opinion of Counsel
Schedule 9.1: Use of Proceeds
18
<PAGE>
EXHIBIT 10.15
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE SECURITIES LAWS.
THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED AND THE
SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT CANNOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE WARRANT OR
STOCK UNDER SUCH ACT AND APPLICABLE LAWS OR SOME OTHER EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF SUCH ACT AND APPLICABLE LAWS OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED.
THE EXERCISE AND TRANSFER OF THIS WARRANT ARE RESTRICTED BY THE PROVISIONS OF
(S)3.
Warrant No. 1
WARRANT
to Purchase Common Stock of
E2Enet, Inc.
Expiring at the end of the Option Period (defined below)
This Is To Certify That Northwood Ventures LLC or registered assigns, is
entitled to purchase from E2Enet, Inc., a Delaware corporation (the "Company"),
at any time commencing on the earlier of (i) the closing of an underwritten
public offering of Common Stock of the Company pursuant to a registration
statement on Form S-1 under the Securities Act of 1933, as amended (the "Act")
or (ii) March 31, 2000 and ending on the earlier of (i) 5 P.M. Eastern Time, on
September 10, 2006, or (ii) 5 P.M. Eastern Time on the date five years from the
closing of an underwritten public offering pursuant to a registration statement
on Form S-1 under the Act, in which the Company received aggregate gross
proceeds in excess of $50,000,000 (prior to deduction of underwriters'
commissions and expenses) (the "Option Period") but not thereafter, at an
exercise price per share as set forth below, 350,000 fully paid and non-
assessable shares of Common Stock of the Company, $.01 par value ("Common
Stock") subject to adjustment as hereinafter provided.
<PAGE>
This Warrant is one of two warrants of the same form and having the same
terms (except as to the number of shares of Common Stock purchasable thereunder)
as this Warrant, entitling the holders thereof to purchase up to an aggregate of
400,000 shares of Common Stock, all issued pursuant to the Convertible Note and
Warrant Purchase Agreement, dated as of September 10, 1999, between the Company
and the initial holder of the Warrant (the "Agreement"). Pursuant to the
Agreement, the initial holder of this Warrant was also issued a Convertible
Secured Note (the "Note"). Capitalized terms used herein that are defined in
the Agreement are so used as therein defined.
(S)1. Exercise of Warrant.
-------------------
(a) Exercise by Payment. To exercise this Warrant in whole or in part,
-------------------
the holder hereof shall deliver to the Company at its principal office in
Washington, D.C., (a) a written notice, in substantially the form of the
Subscription Notice appearing at the end of this Warrant, of such holder's
election to exercise this Warrant, which notice shall specify the number of
shares of Common Stock to be purchased, (b) a certified check drawn on, or
official bank check, payable to the Company in an amount equal to the multiple
of the Exercise Price (as adjusted) and the number of shares of Common Stock
being purchased, and (c) this Warrant. The Company shall as promptly as
practicable, and in any event within 20 days thereafter, execute and deliver or
cause to be executed and delivered, in accordance with such notice, a
certificate or certificates representing the aggregate number of shares of
Common Stock specified in such notice. The stock certificate or certificates so
delivered shall be in the denomination of 100 shares each or such lesser or
greater denomination as may be specified in such notice and shall be issued in
the name of such holder or such other name as shall be designated in such
notice. Such certificate or certificates shall be deemed to have been issued and
such holder or any other person so designated to be named therein shall be
deemed for all purposes to have become a holder of record of such shares as of
the date such notice is received by the Company as aforesaid. If this Warrant
shall have been exercised only in part, the Company shall, at the time of
delivery of said certificate or certificates, deliver to such holder a new
Warrant evidencing the rights of such holder to purchase the remaining shares of
Common Stock called for by this Warrant, which new Warrant shall in all other
respects be identical to this Warrant, or, at the request of such holder,
appropriate notation may be made on this Warrant and the same returned to such
holder. The Company shall pay all expenses, taxes and other charges payable in
connection with the preparation, issue and delivery of such stock certificates
and new Warrants, except that, in case such stock certificates or new Warrants
shall be registered in a name or names other than the name of the holder of this
Warrant, funds sufficient to pay all stock transfer taxes that are payable upon
the issuance of such stock
2
<PAGE>
certificate or certificates or new Warrants shall be paid by the holder hereof
at the time of delivering the notice of exercise mentioned above.
(b) Exercise on Net Issuance Basis Following the IPO. At any time
------------------------------------------------
following the closing of the initial underwritten public offering of the Common
Stock of the Company pursuant to a registration statement on Form S-1 under the
Act (an "IPO"), in lieu of payment to the Company as set forth in Section 1(a)
------------
above, the holder hereof may convert this Warrant, in whole and in parts of
40,000 or more shares of Common Stock covered hereby (as adjusted for stock
splits and consolidations and the issuance of stock dividends), into the number
of shares of Common Stock determined by dividing (i) the aggregate Fair Market
Value of the shares of Common Stock issuable upon exercise of this Warrant minus
the aggregate Exercise Price of such shares of Common Stock by (ii) the Fair
Market Value of one share of Common Stock. "Fair Market Value" shall mean the
average of the closing prices of the Common Stock reported for the five business
days immediately before the holder hereof delivers its Notice of Exercise to the
Company, or if there have been no sales on any such business day, the average of
the highest bid and lowest asked prices at the end of such business day.
(c) All shares of Common Stock issued upon the exercise of this Warrant
shall be validly issued, fully paid and nonassessable and, if the Common Stock
is then listed on a national securities exchange, shall be duly listed thereon.
(d) The exercise price per share of Common Stock (the "Exercise Price")
shall be as follows: (i) the price per share, not taking into effect the
underwriter's commission, of the IPO, or (ii) in the event that there has not
been an IPO, $8.71 (Eight and Seventy-Eight One-Hundredths U.S. Dollars),
subject to adjustment as set forth in Section 8 below.
(e) The Company shall not be required upon any exercise of this Warrant
to issue a certificate representing any fraction of a share of Common Stock,
but, in lieu thereof, shall pay to the holder of this Warrant cash in an amount
equal to a corresponding fraction (calculated to the nearest 1/100 of a share)
of the market value of one share of Common Stock as of the date of receipt by
the Company of notice of exercise of this Warrant, as determined in good faith
by the Board of Directors of the Company.
(S)2. Transfer, Division and Combination.
----------------------------------
The Company agrees to maintain at its principal office in Washington, D.C.,
books for the registration and transfer of the Warrants, and, subject to the
provisions of (S)3 hereof, this Warrant and all rights hereunder are
transferable, in whole or in two parts, on such books at such office, upon
surrender of this Warrant at such office, together with a written assignment of
this Warrant duly executed by the holder hereof or his agent or attorney and
funds sufficient to pay any stock
3
<PAGE>
transfer taxes payable upon the making of such transfer. Upon such surrender and
payment the Company shall execute and deliver a new Warrant or Warrants in the
name of the assignee or assignees and in the denominations specified in such
instrument of assignment, and this Warrant shall promptly be canceled. If and
when this Warrant is assigned in blank, the Company may (but shall not be
obliged to) treat the bearer hereof as the absolute owner of this Warrant for
all purposes and the Company shall not be affected by any notice to the
contrary. A Warrant may be exercised by a new holder for the purchase of shares
of Common Stock without having a new Warrant issued.
This Warrant may be divided or combined with other Warrants upon
presentation hereof at such principal office in Washington, D.C., together with
a written notice specifying the names and denominations in which new Warrants
are to be issued, signed by the holder hereof or his agent or attorney. Subject
to compliance with the preceding paragraph as to any transfer that may be
involved in such division or combination, the Company shall execute and deliver
a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided
or combined in accordance with such notice.
The Company shall pay all expenses, taxes (other than stock transfer taxes)
and other charges payable in connection with the preparation, issue and delivery
of Warrants hereunder.
(S)3. Restrictions on Exercise and Transfer of Warrants and Common Stock.
------------------------------------------------------------------
This Warrant shall be exercisable (1) only under circumstances such that
the issue of Common Stock issuable upon such exercise is exempt from the
requirements of registration under the Securities Act of 1933, as amended (or
any similar statute then in effect) and any applicable state securities law or
(2) upon registration of such Common Stock in compliance therewith. This
Warrant shall be transferable only under circumstances such that the transfer is
exempt from the requirements of registration under the Securities Act of 1933,
as amended (or any similar statute then in effect) and any applicable state
securities law.
Before any transfer or attempted transfer of all or any part of this
Warrant or such Common Stock, the holder hereof or thereof shall give the
Company written notice of its intention so to do describing briefly the manner
of any such proposed transfer, and if the circumstances set forth in clause (y)
of the following paragraph are relevant, so stating and describing briefly the
offeror and the price so offered. Promptly after receiving such written notice,
the Company shall present copies thereof to Company counsel and to any special
counsel designated by the holder. If, in the opinion of counsel for the Company
and counsel, if any, for the holder, the proposed transfer may be effected
without registration under the Securities Act of 1933, as amended (or any
similar statute then in effect) and any applicable state securities law of any
such securities, the Company, as promptly as practicable, shall
4
<PAGE>
notify the holder of such opinion, whereupon the securities proposed to be
transferred may be transferred in accordance with the terms of such notice
subject, however, to the provisions of the next following paragraph. The Company
shall not be required to effect any such transfer before the receipt of such
favorable opinion or opinions or the effectiveness of registration.
(S)4. Certain Covenants.
-----------------
The Company covenants and agrees that:
(a) it will at all times reserve and set apart and have, free from
preemptive rights, a number of shares of authorized but unissued Common
Stock sufficient to enable it at any time to fulfill all its obligations
hereunder; and
(b) before taking any action that would cause an adjustment reducing
the Exercise Price below the then par value of the shares of Common Stock
issuable upon exercise of the Warrants, the Company will take any corporate
action that may be necessary in order that the Company may validly and
legally issue fully paid and nonassessable shares of such Common Stock at
such adjusted Exercise Price.
(S)5. Notices.
-------
In case the Company proposes
(a) to pay any dividend payable in stock (of any class or classes)
or in Convertible Securities upon its Common Stock or make any distribution
(other than ordinary cash dividends) to the holders of its Common Stock, or
(b) to grant to the holders of its Common Stock generally any rights
or options, or
(c) to effect any capital reorganization or reclassification of
capital stock of the Company, or
(d) to consolidate with, or merge into, any other corporation or to
transfer its property as an entirety or substantially as an entirety, or
(e) to effect the liquidation, dissolution or winding up of the
Company,
then the Company shall cause notice of any such intended action to be given to
all holders of record of outstanding Warrants not less than 30 days before the
date on which the transfer books of the Company shall close or a record be taken
for such
5
<PAGE>
stock dividend, distribution or granting of rights or options, or the date when
such capital reorganization, reclassification, consolidation, merger, transfer,
liquidation, dissolution or winding up shall be effective, as the case may be.
Any notice or other document required or permitted to be given or delivered
to holders of record of Warrants shall be mailed first-class postage prepaid to
each such holder at the last address shown on the books of the Company
maintained for the registry and transfer of the Warrants. Any notice or other
document required or permitted to be given or delivered to holders of record of
Common Stock issued pursuant to Warrants shall be mailed first-class postage
prepaid to each such holder at such holder's address as the same appears on the
stock records of the Company. Any notice or other document required or
permitted to be given or delivered to the Company shall be mailed first class
postage prepaid to the principal office of the Company, at 800 Connecticut Ave.,
N.W., Suite 1111, Washington, D.C. 20006, or delivered to the office of one of
the Company's executive officers at such address, or such other address within
the United States of America as shall have been furnished by the Company to the
holders of record of such Warrants and the holders of record of such Common
Stock.
(S)6. Limitation of Liability; Not Stockholders.
-----------------------------------------
No provision of this Warrant shall be construed as conferring upon the
holder hereof the right to vote or to consent or to receive dividends or to
receive notice as a stockholder in respect of meetings of stockholders for the
election of directors of the Company or any other matter whatsoever as
stockholders of the Company. No provision hereof, in the absence of affirmative
action by the holder hereof to purchase shares of Common Stock, and no mere
enumeration herein of the rights or privileges of the holder hereof, shall give
rise to any liability of such holder for the purchase price or as a stockholder
of the Company, whether such liability is asserted by the Company, creditors of
the Company or others.
(S)7. Loss, Destruction, etc, of Warrants.
-----------------------------------
Upon receipt of evidence reasonably satisfactory to the Company of the
loss, theft, mutilation or destruction of any Warrant, and in the case of any
such loss, theft or destruction upon delivery of a bond of indemnity in such
form and amount as shall be reasonably satisfactory to the Company, or in the
event of such mutilation upon surrender and cancellation of the Warrant, the
Company will make and deliver a new Warrant, of like tenor, in lieu of such
lost, stolen, destroyed or mutilated Warrant. Any Warrant issued under the
provisions of this Section 7 in lieu of any Warrant alleged to be lost,
destroyed or stolen, or of any mutilated Warrant, shall constitute an original
contractual obligation on the part of the Company.
6
<PAGE>
(S)8. Adjustment.
----------
The Exercise Price shall be subject to adjustment from time to time
or upon exercise as provided in this Section 8.
(a) Split, Subdivision or Consolidation of Shares. If the Company shall
---------------------------------------------
split, subdivide or combine the securities as to which purchase rights exist
under this Warrant, into a different number of securities of the same class, the
Exercise Price after such consolidation or subdivision will be increased or
reduced, as the case may be, such increase or decrease, as the case may be, to
become effective immediately after the opening of business on the day following
the day upon which such subdivision or combination becomes effective. The
holder hereof will not be entitled to receive a fraction of a share of Common
Stock.
(b) Stock Dividends. In the event that the holders of the securities as
---------------
to which purchase rights under this Warrant exist shall have received or become
entitled to receive, without payment therefor, other or additional stock or
securities or property (other than cash) of the Company by way of dividend, then
in each case, the Exercise Price shall be adjusted so that this Warrant shall
represent the right to acquire, in addition to the number of shares of Common
Stock indicated in the caption of this Warrant, and without payment of any
additional consideration therefor, the amount of such other securities or
property (other than cash) of the Company to which the holder hereof would have
been entitled had this Warrant been exercised prior to the distribution of the
dividend and had thereafter such holder retained such shares and/or all other
additional stock available to it during the period prior to the exercise of this
Warrant, giving effect to all adjustments called for in this Section 8.
(c) Adjustment of Exercise Price Upon Issuance of Additional Shares of
------------------------------------------------------------------
Common. In the event that prior to the exercise of this Warrant, the Company
- ------
shall issue Additional Shares of Common (as defined below) (including Additional
Shares of Common deemed to be issued pursuant to Section 8(d)) without
------------
consideration or for a consideration per share less than the Exercise Price in
effect on the date of and immediately prior to such issue (the "New Issue
Price"), then and in such event, the Exercise Price shall be reduced,
concurrently with such issue, to a price equal to the New Issue Price, subject
to the provisions of Section 8(k).
------------
(d) Issue of Securities Deemed Issue of Additional Shares of Common --
------------------------------------------------------------------
Options and Convertible Securities. In the event that prior to the exercise of
- ----------------------------------
this Warrant, the Company shall issue any Options or Convertible Securities (as
those terms are defined below) (other than Options or Convertible Securities
which are not Additional Shares of Common) or shall fix a record date for the
determination of holders of any class of securities entitled to receive any such
Options or Convertible Securities, then the shares of Common issuable upon the
exercise of such Options or, in the case of Convertible Securities and Options
therefor, the conversion or
7
<PAGE>
exchange of such Convertible Securities, shall be deemed to be Additional Shares
of Common issued as of the time of such issue or, in case such a record date
shall have been fixed, as of the close of business on such record date;
provided, that in any such case in which Additional Shares of Common are deemed
to be issued:
(i) no further adjustment in the Exercise Price shall be made upon
the subsequent issue of Convertible Securities or shares of Common upon the
exercise of such Options or conversion or exchange of such Convertible
Securities;
(ii) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase in the
consideration payable to the Company, or decreases in the number of shares of
Common issuable, upon the exercise, conversion or exchange thereof, the Exercise
Price computed upon the original issue thereof (or upon the occurrence of a
record date with respect thereto), and any subsequent adjustments based thereon,
shall, provided that no shares of Common have theretofore been issued with
--------
respect to such Options or Convertible Securities, upon any such increase or
decrease becoming effective, be recomputed to reflect such increase or decrease
insofar as it affects such Options or the rights of conversion or exchange under
such Convertible Securities;
(iii) no readjustment pursuant to clause (ii) above shall have the
effect of increasing the Exercise Price to an amount which exceeds the lower of
(1) such Exercise Price on the original adjustment date with respect to such
deemed issuance of Additional Shares of Common, or (2) such Exercise Price that
would have resulted from any issuance of Additional Shares of Common between
such original adjustment date and such readjustment date; and
(iv) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any decrease in the
consideration payable to the Company upon the exercise, conversion or exchange
thereof, the Exercise Price computed upon the original issue thereof (or upon
the occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such decrease becoming effective, be
recomputed to reflect such decrease insofar as it affects such Options or the
rights of conversion or exchange under such Convertible Securities.
(e) Special Definitions. For purposes of Sections 8(c) through (h), the
------------------- -------------------------
following definitions shall apply:
(i) "Option" shall mean rights, options or warrants to subscribe
--------
for, purchase or otherwise acquire either Common or Convertible Securities.
(ii) "Common" shall mean (i) the Company's presently authorized
--------
Common Stock as such class exists on the date of issuance of this Warrant, (ii)
securities issued upon conversion of the Notes issued under the Agreement (the
8
<PAGE>
"Northwood Notes"), and (iii) stock of the Company of any class thereafter
authorized that ranks, or is entitled to a participation, as to assets or
dividends, substantially on a parity with Common Stock.
(iii) "Convertible Securities" shall mean any evidences of
----------------------
indebtedness, shares or other securities directly or indirectly convertible into
or exchangeable for Common.
(iv) "Additional Shares of Common" shall mean all shares of Common
---------------------------
issued (or, pursuant to Section 8(d), deemed to be issued) by the Company after
------------
the date hereof and prior to the exercise of this Warrant, other than shares of
Common Stock issued or issuable:
(A) upon conversion of the Northwood Notes or upon conversion
of notes containing substantially the same terms and conditions as the Northwood
Notes, or upon exercise of warrants issued to holders of notes containing
substantially the same terms and conditions as the Warrants;
(B) to officers and employees of the Company or its
Subsidiaries under any stock option, stock purchase, stock appreciation, or
bonus plan adopted by the stockholders of the Company and shares of Common Stock
issued to such officers and employees pursuant to such stock options or rights,
or to members of the Company's Board of Directors or Board of Advisers;
provided, however, that any shares covered by such options or rights plus any
- -------- -------
such shares issued (without duplication as to shares issued under options) in
excess of 250,000 shares of Common Stock as constituted on the date of issuance
of this Warrant (as adjusted pursuant to anti-dilution provisions contained in
such stock options or rights) shall be deemed to be Additional Shares of Common;
(C) as a dividend or distribution on Common Stock or any event
for which adjustment is made pursuant to Sections 8(a) and (b) hereof; or
---------------------
(D) by way of dividend or other distribution on (1) shares
excluded from the definition of Additional Shares of Common by the foregoing
clauses (A) through (C) of this clause (D) or (2) shares of Common so excluded
under this clause (D).
(f) No Adjustment of Exercise Price. No adjustment in the Exercise Price
-------------------------------
shall be made in respect of the issuance of Additional Shares of Common unless
the consideration per share for an Additional Share of Common issued or deemed
to be issued by the Company is less than the Exercise Price in effect on the
date of, and immediately prior to, the issue of such Additional Share of Common.
(g) Effect of "Split-up or "Split-down" on "deemed issued" shares. Upon
-------------------------------------------------------------
the effective or record date for any subdivision or combination of the Common
Stock
9
<PAGE>
of the character described in Section 8(a), including the issuance of a stock
------------
dividend which is treated as such a subdivision under Section 8(b), the number
------------
of the shares of Common Stock which are at the time deemed to have been issued
by virtue of Section 8(d), but have not actually been issued, shall be deemed to
------------
be increased or decreased proportionately.
(h) Computation of Consideration. For the purposes of this Section 8:
---------------------------- ---------
(i) The consideration received by the Company upon the actual issuance
of Additional Shares of Common shall be deemed to be the sum of the amount of
cash and the fair value of property (as determined in good faith by resolution
of the Board of Directors of the Company as at the time of issue or "deemed
issue" in the case of the following paragraph (ii)) received or receivable by
the Company as the consideration or part of the consideration (v) at the time of
issuance of the Common, (w) for the issuance of any rights or options upon the
exercise of which such Common was issued, (x) for the issuance of any rights or
options to purchase Convertible Securities upon the conversion of which such
Common was issued, (y) for the issuance of the Convertible Securities upon
conversion of which such Common was issued, and (z) at the time of the actual
exercise of such rights, options or conversion privileges upon the exercise of
which such Common was issued, in each case without deduction for commissions and
expenses incurred by the Company for any underwriting of, or otherwise in
connection with the issue or sale of, such rights, options, Convertible
Securities or Common, but after deduction of any sums paid by the Company in
cash upon the exercise of, and pursuant to, such rights, options or conversion
privileges in respect of fractional shares of Common; and
(ii) The consideration deemed to have been received by the Company for
Additional Shares of Common deemed to be issued pursuant to rights, options and
conversion privileges by reason of transactions of the character described in
Section 8(d) shall be the consideration (determined as provided in the foregoing
- ------------
paragraph (i)) that would be received or receivable by the Company at or before
the actual issue of such shares of Common so deemed to be issued, if all rights,
options and conversion privileges necessary to effect the actual issue of the
number of shares deemed to have been issued had been exercised (successively
exercised in the case of rights or options to purchase Convertible Securities),
and the minimum consideration received or receivable by the Company upon such
exercise had been received; all computed without regard to the possible future
effect of anti-dilution provisions on such rights, options and/or conversion
privileges.
(i) Statement of Adjustment. Whenever the Exercise Price is adjusted
-----------------------
pursuant to any of the foregoing provisions of this Section 8, the Company shall
---------
promptly prepare a written statement signed by the President of the Company,
setting forth the adjustment, determined as provided in this Section, and in
reasonable detail the facts requiring such adjustment and the calculation
thereof.
10
<PAGE>
Such statement shall be filed among the permanent records of the Company and a
copy thereof shall be furnished to the holder of this Warrant without request
and shall at all reasonable times during business hours be open to inspection by
holders of the Warrants.
(j) Determination by the Board of Directors. All determinations by the
---------------------------------------
Board of Directors of the Company under the provisions of this Section 8 shall
---------
be made in good faith.
(k) Minimum Exercise Price after IPO or Conversion. Notwithstanding the
----------------------------------------------
provisions of Section 8(c), following the earlier of (i) the closing of the IPO
------------
or (ii) the conversion of the Note issued under the Agreement, the Exercise
Price shall not be reduced below $8.71, as adjusted for stock splits and
consolidations and for the issuance of stock dividends.
(l) Effect of IPO on Exercise Price. For the avoidance of doubt, it is
-------------------------------
acknowledged that if, prior to the IPO, the Exercise Price has been adjusted
pursuant to Section 8(c), upon the closing of the IPO, the Exercise Price shall
------------
become the price per share, not taking into effect the underwriter's commission,
of the IPO.
(m) Termination of Certain Adjustment Provisions. The provisions of
--------------------------------------------
Sections 8(c) through (e) shall terminate upon the earlier of (i) the second
- -------------------------
anniversary after the closing of the IPO or (ii) the second anniversary of the
conversion of the Note issued under the Agreement.
(S)9. Governing Law.
-------------
This Warrant shall be governed by the laws of the State of Delaware,
without giving effect to the rules respecting conflict of law.
(S)10. Entire Agreement; Modification; Waiver. This Warrant constitutes
--------------------------------------
the entire agreement between the parties pertaining to the subject matter
herein, and supersedes all prior and contemporaneous agreements,
representations, and understandings of the parties. No supplement,
modification, or amendment of this Warrant shall be binding unless executed in
writing by the parties hereto. No waiver of any of the provisions of this
Warrant shall be deemed, or shall constitute, a waiver of any other provision,
whether or not similar, nor shall any waiver constitute a continuing waiver.
11
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in its
name by a duly authorized officer.
Dated: September 10, 1999
E2Enet, Inc.
By /s/ Steven J. Quamme
_______________________
Title SVP-CFO
______________________
12
<PAGE>
EXHIBIT 10.16
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE SECURITIES LAWS.
THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED AND THE
SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT CANNOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE WARRANT OR
STOCK UNDER SUCH ACT AND APPLICABLE LAWS OR SOME OTHER EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF SUCH ACT AND APPLICABLE LAWS OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED.
THE EXERCISE AND TRANSFER OF THIS WARRANT ARE RESTRICTED BY THE PROVISIONS OF
(S)3.
Warrant No. 2
WARRANT
to Purchase Common Stock of
E2Enet, Inc.
Expiring at the end of the Option Period (defined below)
This Is To Certify That Northwood Capital Partners LLC or registered
assigns, is entitled to purchase from E2Enet, Inc., a Delaware corporation (the
"Company"), at any time commencing on the earlier of (i) the closing of an
underwritten public offering of Common Stock of the Company pursuant to a
registration statement on Form S-1 under the Securities Act of 1933, as amended
(the "Act") or (ii) March 31, 2000 and ending on the earlier of (i) 5 P.M.
Eastern Time, on September 10, 2006, or (ii) 5 P.M. Eastern Time on the date
five years from the closing of an underwritten public offering pursuant to a
registration statement on Form S-1 under the Act, in which the Company received
aggregate gross proceeds in excess of $50,000,000 (prior to deduction of
underwriters' commissions and expenses) (the "Option Period") but not
thereafter, at an exercise price per share as set forth below, 50,000 fully paid
and non-assessable shares of Common Stock of the Company, $.01 par value
("Common Stock") subject to adjustment as hereinafter provided.
<PAGE>
This Warrant is one of two warrants of the same form and having the same
terms (except as to the number of shares of Common Stock purchasable thereunder)
as this Warrant, entitling the holders thereof to purchase up to an aggregate of
400,000 shares of Common Stock, all issued pursuant to the Convertible Note and
Warrant Purchase Agreement, dated as of September 10, 1999, between the Company
and the initial holder of the Warrant (the "Agreement"). Pursuant to the
Agreement, the initial holder of this Warrant was also issued a Convertible
Secured Note (the "Note"). Capitalized terms used herein that are defined in
the Agreement are so used as therein defined.
(S)1. Exercise of Warrant.
-------------------
(a) Exercise by Payment. To exercise this Warrant in whole or in part,
-------------------
the holder hereof shall deliver to the Company at its principal office in
Washington, D.C., (a) a written notice, in substantially the form of the
Subscription Notice appearing at the end of this Warrant, of such holder's
election to exercise this Warrant, which notice shall specify the number of
shares of Common Stock to be purchased, (b) a certified check drawn on, or
official bank check, payable to the Company in an amount equal to the multiple
of the Exercise Price (as adjusted) and the number of shares of Common Stock
being purchased, and (c) this Warrant. The Company shall as promptly as
practicable, and in any event within 20 days thereafter, execute and deliver or
cause to be executed and delivered, in accordance with such notice, a
certificate or certificates representing the aggregate number of shares of
Common Stock specified in such notice. The stock certificate or certificates so
delivered shall be in the denomination of 100 shares each or such lesser or
greater denomination as may be specified in such notice and shall be issued in
the name of such holder or such other name as shall be designated in such
notice. Such certificate or certificates shall be deemed to have been issued and
such holder or any other person so designated to be named therein shall be
deemed for all purposes to have become a holder of record of such shares as of
the date such notice is received by the Company as aforesaid. If this Warrant
shall have been exercised only in part, the Company shall, at the time of
delivery of said certificate or certificates, deliver to such holder a new
Warrant evidencing the rights of such holder to purchase the remaining shares of
Common Stock called for by this Warrant, which new Warrant shall in all other
respects be identical to this Warrant, or, at the request of such holder,
appropriate notation may be made on this Warrant and the same returned to such
holder. The Company shall pay all expenses, taxes and other charges payable in
connection with the preparation, issue and delivery of such stock certificates
and new Warrants, except that, in case such stock certificates or new Warrants
shall be registered in a name or names other than the name of the holder of this
Warrant, funds sufficient to pay all stock transfer taxes that are payable upon
the issuance of such stock certificate or
2
<PAGE>
certificates or new Warrants shall be paid by the holder hereof at the time of
delivering the notice of exercise mentioned above.
(b) Exercise on Net Issuance Basis Following the IPO. At any time
------------------------------------------------
following the closing of the initial underwritten public offering of the Common
Stock of the Company pursuant to a registration statement on Form S-1 under the
Act (an "IPO"), in lieu of payment to the Company as set forth in Section 1(a)
------------
above, the holder hereof may convert this Warrant, in whole and in parts of
40,000 or more shares of Common Stock covered hereby (as adjusted for stock
splits and consolidations and the issuance of stock dividends), into the number
of shares of Common Stock determined by dividing (i) the aggregate Fair Market
Value of the shares of Common Stock issuable upon exercise of this Warrant minus
the aggregate Exercise Price of such shares of Common Stock by (ii) the Fair
Market Value of one share of Common Stock. "Fair Market Value" shall mean the
average of the closing prices of the Common Stock reported for the five business
days immediately before the holder hereof delivers its Notice of Exercise to the
Company, or if there have been no sales on any such business day, the average of
the highest bid and lowest asked prices at the end of such business day.
(c) All shares of Common Stock issued upon the exercise of this Warrant
shall be validly issued, fully paid and nonassessable and, if the Common Stock
is then listed on a national securities exchange, shall be duly listed thereon.
(d) The exercise price per share of Common Stock (the "Exercise Price")
shall be as follows: (i) the price per share, not taking into effect the
underwriter's commission, of the IPO, or (ii) in the event that there has not
been an IPO, $8.71 (Eight and Seventy-Eight One-Hundredths U.S. Dollars),
subject to adjustment as set forth in Section 8 below.
(e) The Company shall not be required upon any exercise of this Warrant to
issue a certificate representing any fraction of a share of Common Stock, but,
in lieu thereof, shall pay to the holder of this Warrant cash in an amount equal
to a corresponding fraction (calculated to the nearest 1/100 of a share) of the
market value of one share of Common Stock as of the date of receipt by the
Company of notice of exercise of this Warrant, as determined in good faith by
the Board of Directors of the Company.
(S)2. Transfer, Division and Combination.
----------------------------------
The Company agrees to maintain at its principal office in Washington, D.C.,
books for the registration and transfer of the Warrants, and, subject to the
provisions of (S)3 hereof, this Warrant and all rights hereunder are
transferable, in whole or in two parts, on such books at such office, upon
surrender of this Warrant at such office, together with a written assignment of
this Warrant duly executed by the holder hereof or his agent or attorney and
funds sufficient to pay any stock
3
<PAGE>
transfer taxes payable upon the making of such transfer. Upon such surrender and
payment the Company shall execute and deliver a new Warrant or Warrants in the
name of the assignee or assignees and in the denominations specified in such
instrument of assignment, and this Warrant shall promptly be canceled. If and
when this Warrant is assigned in blank, the Company may (but shall not be
obliged to) treat the bearer hereof as the absolute owner of this Warrant for
all purposes and the Company shall not be affected by any notice to the
contrary. A Warrant may be exercised by a new holder for the purchase of shares
of Common Stock without having a new Warrant issued.
This Warrant may be divided or combined with other Warrants upon
presentation hereof at such principal office in Washington, D.C., together with
a written notice specifying the names and denominations in which new Warrants
are to be issued, signed by the holder hereof or his agent or attorney. Subject
to compliance with the preceding paragraph as to any transfer that may be
involved in such division or combination, the Company shall execute and deliver
a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided
or combined in accordance with such notice.
The Company shall pay all expenses, taxes (other than stock transfer taxes)
and other charges payable in connection with the preparation, issue and delivery
of Warrants hereunder.
(S)3. Restrictions on Exercise and Transfer of Warrants and Common Stock.
------------------------------------------------------------------
This Warrant shall be exercisable (1) only under circumstances such that
the issue of Common Stock issuable upon such exercise is exempt from the
requirements of registration under the Securities Act of 1933, as amended (or
any similar statute then in effect) and any applicable state securities law or
(2) upon registration of such Common Stock in compliance therewith. This
Warrant shall be transferable only under circumstances such that the transfer is
exempt from the requirements of registration under the Securities Act of 1933,
as amended (or any similar statute then in effect) and any applicable state
securities law.
Before any transfer or attempted transfer of all or any part of this
Warrant or such Common Stock, the holder hereof or thereof shall give the
Company written notice of its intention so to do describing briefly the manner
of any such proposed transfer, and if the circumstances set forth in clause (y)
of the following paragraph are relevant, so stating and describing briefly the
offeror and the price so offered. Promptly after receiving such written notice,
the Company shall present copies thereof to Company counsel and to any special
counsel designated by the holder. If, in the opinion of counsel for the Company
and counsel, if any, for the holder, the proposed transfer may be effected
without registration under the Securities Act of 1933, as amended (or any
similar statute then in effect) and any applicable state securities law of any
such securities, the Company, as promptly as practicable, shall
4
<PAGE>
notify the holder of such opinion, whereupon the securities proposed to be
transferred may be transferred in accordance with the terms of such notice
subject, however, to the provisions of the next following paragraph. The Company
shall not be required to effect any such transfer before the receipt of such
favorable opinion or opinions or the effectiveness of registration.
(S)4. Certain Covenants.
-----------------
The Company covenants and agrees that:
(a) it will at all times reserve and set apart and have, free from
preemptive rights, a number of shares of authorized but unissued Common
Stock sufficient to enable it at any time to fulfill all its obligations
hereunder; and
(b) before taking any action that would cause an adjustment reducing
the Exercise Price below the then par value of the shares of Common Stock
issuable upon exercise of the Warrants, the Company will take any corporate
action that may be necessary in order that the Company may validly and
legally issue fully paid and nonassessable shares of such Common Stock at
such adjusted Exercise Price.
(S)5. Notices.
-------
In case the Company proposes
(a) to pay any dividend payable in stock (of any class or classes)
or in Convertible Securities upon its Common Stock or make any distribution
(other than ordinary cash dividends) to the holders of its Common Stock, or
(b) to grant to the holders of its Common Stock generally any rights
or options, or
(c) to effect any capital reorganization or reclassification of
capital stock of the Company, or
(d) to consolidate with, or merge into, any other corporation or to
transfer its property as an entirety or substantially as an entirety, or
(e) to effect the liquidation, dissolution or winding up of the
Company,
then the Company shall cause notice of any such intended action to be given to
all holders of record of outstanding Warrants not less than 30 days before the
date on which the transfer books of the Company shall close or a record be taken
for such
5
<PAGE>
stock dividend, distribution or granting of rights or options, or the date when
such capital reorganization, reclassification, consolidation, merger, transfer,
liquidation, dissolution or winding up shall be effective, as the case may be.
Any notice or other document required or permitted to be given or delivered
to holders of record of Warrants shall be mailed first-class postage prepaid to
each such holder at the last address shown on the books of the Company
maintained for the registry and transfer of the Warrants. Any notice or other
document required or permitted to be given or delivered to holders of record of
Common Stock issued pursuant to Warrants shall be mailed first-class postage
prepaid to each such holder at such holder's address as the same appears on the
stock records of the Company. Any notice or other document required or
permitted to be given or delivered to the Company shall be mailed first class
postage prepaid to the principal office of the Company, at 800 Connecticut Ave.,
N.W., Suite 1111, Washington, D.C. 20006, or delivered to the office of one of
the Company's executive officers at such address, or such other address within
the United States of America as shall have been furnished by the Company to the
holders of record of such Warrants and the holders of record of such Common
Stock.
(S)6. Limitation of Liability; Not Stockholders.
-----------------------------------------
No provision of this Warrant shall be construed as conferring upon the
holder hereof the right to vote or to consent or to receive dividends or to
receive notice as a stockholder in respect of meetings of stockholders for the
election of directors of the Company or any other matter whatsoever as
stockholders of the Company. No provision hereof, in the absence of affirmative
action by the holder hereof to purchase shares of Common Stock, and no mere
enumeration herein of the rights or privileges of the holder hereof, shall give
rise to any liability of such holder for the purchase price or as a stockholder
of the Company, whether such liability is asserted by the Company, creditors of
the Company or others.
(S)7. Loss, Destruction, etc, of Warrants.
-----------------------------------
Upon receipt of evidence reasonably satisfactory to the Company of the
loss, theft, mutilation or destruction of any Warrant, and in the case of any
such loss, theft or destruction upon delivery of a bond of indemnity in such
form and amount as shall be reasonably satisfactory to the Company, or in the
event of such mutilation upon surrender and cancellation of the Warrant, the
Company will make and deliver a new Warrant, of like tenor, in lieu of such
lost, stolen, destroyed or mutilated Warrant. Any Warrant issued under the
provisions of this Section 7 in lieu of any Warrant alleged to be lost,
destroyed or stolen, or of any mutilated Warrant, shall constitute an original
contractual obligation on the part of the Company.
6
<PAGE>
(S)8. Adjustment.
----------
The Exercise Price shall be subject to adjustment from time to time
or upon exercise as provided in this Section 8.
(a) Split, Subdivision or Consolidation of Shares. If the Company shall
---------------------------------------------
split, subdivide or combine the securities as to which purchase rights exist
under this Warrant, into a different number of securities of the same class, the
Exercise Price after such consolidation or subdivision will be increased or
reduced, as the case may be, such increase or decrease, as the case may be, to
become effective immediately after the opening of business on the day following
the day upon which such subdivision or combination becomes effective. The
holder hereof will not be entitled to receive a fraction of a share of Common
Stock.
(b) Stock Dividends. In the event that the holders of the securities as
---------------
to which purchase rights under this Warrant exist shall have received or become
entitled to receive, without payment therefor, other or additional stock or
securities or property (other than cash) of the Company by way of dividend, then
in each case, the Exercise Price shall be adjusted so that this Warrant shall
represent the right to acquire, in addition to the number of shares of Common
Stock indicated in the caption of this Warrant, and without payment of any
additional consideration therefor, the amount of such other securities or
property (other than cash) of the Company to which the holder hereof would have
been entitled had this Warrant been exercised prior to the distribution of the
dividend and had thereafter such holder retained such shares and/or all other
additional stock available to it during the period prior to the exercise of this
Warrant, giving effect to all adjustments called for in this Section 8.
(c) Adjustment of Exercise Price Upon Issuance of Additional Shares of
------------------------------------------------------------------
Common. In the event that prior to the exercise of this Warrant, the Company
- ------
shall issue Additional Shares of Common (as defined below) (including Additional
Shares of Common deemed to be issued pursuant to Section 8(d)) without
------------
consideration or for a consideration per share less than the Exercise Price in
effect on the date of and immediately prior to such issue (the "New Issue
Price"), then and in such event, the Exercise Price shall be reduced,
concurrently with such issue, to a price equal to the New Issue Price, subject
to the provisions of Section 8(k).
------------
(d) Issue of Securities Deemed Issue of Additional Shares of Common --
------------------------------------------------------------------
Options and Convertible Securities. In the event that prior to the exercise of
- ----------------------------------
this Warrant, the Company shall issue any Options or Convertible Securities (as
those terms are defined below) (other than Options or Convertible Securities
which are not Additional Shares of Common) or shall fix a record date for the
determination of holders of any class of securities entitled to receive any such
Options or Convertible Securities, then the shares of Common issuable upon the
exercise of such Options or, in the case of Convertible Securities and Options
therefor, the conversion or
7
<PAGE>
exchange of such Convertible Securities, shall be deemed to be Additional Shares
of Common issued as of the time of such issue or, in case such a record date
shall have been fixed, as of the close of business on such record date;
provided, that in any such case in which Additional Shares of Common are deemed
to be issued:
(i) no further adjustment in the Exercise Price shall be made upon
the subsequent issue of Convertible Securities or shares of Common upon the
exercise of such Options or conversion or exchange of such Convertible
Securities;
(ii) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase in the
consideration payable to the Company, or decreases in the number of shares of
Common issuable, upon the exercise, conversion or exchange thereof, the Exercise
Price computed upon the original issue thereof (or upon the occurrence of a
record date with respect thereto), and any subsequent adjustments based thereon,
shall, provided that no shares of Common have theretofore been issued with
--------
respect to such Options or Convertible Securities, upon any such increase or
decrease becoming effective, be recomputed to reflect such increase or decrease
insofar as it affects such Options or the rights of conversion or exchange under
such Convertible Securities;
(iii) no readjustment pursuant to clause (ii) above shall have the
effect of increasing the Exercise Price to an amount which exceeds the lower of
(1) such Exercise Price on the original adjustment date with respect to such
deemed issuance of Additional Shares of Common, or (2) such Exercise Price that
would have resulted from any issuance of Additional Shares of Common between
such original adjustment date and such readjustment date; and
(iv) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any decrease in the
consideration payable to the Company upon the exercise, conversion or exchange
thereof, the Exercise Price computed upon the original issue thereof (or upon
the occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such decrease becoming effective, be
recomputed to reflect such decrease insofar as it affects such Options or the
rights of conversion or exchange under such Convertible Securities.
(e) Special Definitions. For purposes of Sections 8(c) through (h), the
------------------- -------------------------
following definitions shall apply:
(i) "Option" shall mean rights, options or warrants to subscribe
------
for, purchase or otherwise acquire either Common or Convertible Securities.
(ii) "Common" shall mean (i) the Company's presently authorized
------
Common Stock as such class exists on the date of issuance of this Warrant, (ii)
securities issued upon conversion of the Notes issued under the Agreement (the
8
<PAGE>
"Northwood Notes"), and (iii) stock of the Company of any class thereafter
authorized that ranks, or is entitled to a participation, as to assets or
dividends, substantially on a parity with Common Stock.
(iii) "Convertible Securities" shall mean any evidences of
----------------------
indebtedness, shares or other securities directly or indirectly convertible into
or exchangeable for Common.
(iv) "Additional Shares of Common" shall mean all shares of Common
---------------------------
issued (or, pursuant to Section 8(d), deemed to be issued) by the Company after
------------
the date hereof and prior to the exercise of this Warrant, other than shares of
Common Stock issued or issuable:
(A) upon conversion of the Northwood Notes or upon conversion
of notes containing substantially the same terms and conditions as the Northwood
Notes, or upon exercise of warrants issued to holders of notes containing
substantially the same terms and conditions as the Warrants;
(B) to officers and employees of the Company or its
Subsidiaries under any stock option, stock purchase, stock appreciation, or
bonus plan adopted by the stockholders of the Company and shares of Common Stock
issued to such officers and employees pursuant to such stock options or rights,
or to members of the Company's Board of Directors or Board of Advisers;
provided, however, that any shares covered by such options or rights plus any
- -------- -------
such shares issued (without duplication as to shares issued under options) in
excess of 250,000 shares of Common Stock as constituted on the date of issuance
of this Warrant (as adjusted pursuant to anti-dilution provisions contained in
such stock options or rights) shall be deemed to be Additional Shares of Common;
(C) as a dividend or distribution on Common Stock or any event
for which adjustment is made pursuant to Sections 8(a) and (b) hereof; or
---------------------
(D) by way of dividend or other distribution on (1) shares
excluded from the definition of Additional Shares of Common by the foregoing
clauses (A) through (C) of this clause (D) or (2) shares of Common so excluded
under this clause (D).
(f) No Adjustment of Exercise Price. No adjustment in the Exercise Price
-------------------------------
shall be made in respect of the issuance of Additional Shares of Common unless
the consideration per share for an Additional Share of Common issued or deemed
to be issued by the Company is less than the Exercise Price in effect on the
date of, and immediately prior to, the issue of such Additional Share of Common.
(g) Effect of "Split-up or "Split-down" on "deemed issued" shares. Upon
-------------------------------------------------------------
the effective or record date for any subdivision or combination of the Common
Stock
9
<PAGE>
of the character described in Section 8(a), including the issuance of a stock
------------
dividend which is treated as such a subdivision under Section 8(b), the number
------------
of the shares of Common Stock which are at the time deemed to have been issued
by virtue of Section 8(d), but have not actually been issued, shall be deemed to
------------
be increased or decreased proportionately.
(h) Computation of Consideration. For the purposes of this Section 8:
---------------------------- ---------
(i) The consideration received by the Company upon the actual issuance
of Additional Shares of Common shall be deemed to be the sum of the amount of
cash and the fair value of property (as determined in good faith by resolution
of the Board of Directors of the Company as at the time of issue or "deemed
issue" in the case of the following paragraph (ii)) received or receivable by
the Company as the consideration or part of the consideration (v) at the time of
issuance of the Common, (w) for the issuance of any rights or options upon the
exercise of which such Common was issued, (x) for the issuance of any rights or
options to purchase Convertible Securities upon the conversion of which such
Common was issued, (y) for the issuance of the Convertible Securities upon
conversion of which such Common was issued, and (z) at the time of the actual
exercise of such rights, options or conversion privileges upon the exercise of
which such Common was issued, in each case without deduction for commissions and
expenses incurred by the Company for any underwriting of, or otherwise in
connection with the issue or sale of, such rights, options, Convertible
Securities or Common, but after deduction of any sums paid by the Company in
cash upon the exercise of, and pursuant to, such rights, options or conversion
privileges in respect of fractional shares of Common; and
(ii) The consideration deemed to have been received by the Company for
Additional Shares of Common deemed to be issued pursuant to rights, options and
conversion privileges by reason of transactions of the character described in
Section 8(d) shall be the consideration (determined as provided in the foregoing
- ------------
paragraph (i)) that would be received or receivable by the Company at or before
the actual issue of such shares of Common so deemed to be issued, if all rights,
options and conversion privileges necessary to effect the actual issue of the
number of shares deemed to have been issued had been exercised (successively
exercised in the case of rights or options to purchase Convertible Securities),
and the minimum consideration received or receivable by the Company upon such
exercise had been received; all computed without regard to the possible future
effect of anti-dilution provisions on such rights, options and/or conversion
privileges.
(i) Statement of Adjustment. Whenever the Exercise Price is adjusted
-----------------------
pursuant to any of the foregoing provisions of this Section 8, the Company shall
---------
promptly prepare a written statement signed by the President of the Company,
setting forth the adjustment, determined as provided in this Section, and in
reasonable detail the facts requiring such adjustment and the calculation
thereof.
10
<PAGE>
Such statement shall be filed among the permanent records of the Company and a
copy thereof shall be furnished to the holder of this Warrant without request
and shall at all reasonable times during business hours be open to inspection by
holders of the Warrants.
(j) Determination by the Board of Directors. All determinations by the
---------------------------------------
Board of Directors of the Company under the provisions of this Section 8 shall
---------
be made in good faith.
(k) Minimum Exercise Price after IPO or Conversion. Notwithstanding the
----------------------------------------------
provisions of Section 8(c), following the earlier of (i) the closing of the IPO
------------
or (ii) the conversion of the Note issued under the Agreement, the Exercise
Price shall not be reduced below $8.71, as adjusted for stock splits and
consolidations and for the issuance of stock dividends.
(l) Effect of IPO on Exercise Price. For the avoidance of doubt, it is
------------------------------
acknowledged that if, prior to the IPO, the Exercise Price has been adjusted
pursuant to Section 8(c), upon the closing of the IPO, the Exercise Price shall
------------
become the price per share, not taking into effect the underwriter's commission,
of the IPO.
(m) Termination of Certain Adjustment Provisions. The provisions of
--------------------------------------------
Sections 8(c) through (e) shall terminate upon the earlier of (i) the second
- -------------------------
anniversary after the closing of the IPO or (ii) the second anniversary of the
conversion of the Note issued under the Agreement.
(S)9. Governing Law.
-------------
This Warrant shall be governed by the laws of the State of Delaware,
without giving effect to the rules respecting conflict of law.
(S)10. Entire Agreement; Modification; Waiver. This Warrant constitutes
--------------------------------------
the entire agreement between the parties pertaining to the subject matter
herein, and supersedes all prior and contemporaneous agreements,
representations, and understandings of the parties. No supplement,
modification, or amendment of this Warrant shall be binding unless executed in
writing by the parties hereto. No waiver of any of the provisions of this
Warrant shall be deemed, or shall constitute, a waiver of any other provision,
whether or not similar, nor shall any waiver constitute a continuing waiver.
11
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in its
name by a duly authorized officer.
Dated: September 10, 1999
E2Enet, Inc.
By /s/ Steven J. Quamme
_______________________
Title SVP-CFO
_____________________
12
<PAGE>
EXHIBIT 10.17
NEITHER THIS NOTE NOR THE SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE
SECURITIES LAWS.
THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED AND THE
SHARES ISSUABLE UPON CONVERSION OF THIS NOTE CANNOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE NOTE OR
STOCK UNDER SUCH ACT AND APPLICABLE LAWS OR SOME OTHER EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF SUCH ACT AND APPLICABLE LAWS OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED.
E2Enet, Inc.
Convertible Secured Note
Due on the Maturity Date (as defined below)
$3,500,000 September 10, 1999
FOR VALUE RECEIVED, the undersigned, E2ENET, INC., a Delaware corporation
(the "Borrower" or the "Company") promises to pay to Northwood Ventures LLC
("Note Holder"), the principal sum of Three Million Five Hundred Thousand
Dollars ($3,500,000), with interest on the unpaid principal balance from the
date hereof, until paid, at the per annum percentage rate equal to the Prime
Rate as established from time to time during the term hereof by J.P. Morgan &
Co. Principal and interest shall be payable to Note Holder at such place as
Note Holder may designate in writing, all in accordance with the terms of that
certain Convertible Note and Warrant Purchase Agreement dated September 10, 1999
between the Borrower and the Note Holder (the "Note Agreement"). Unless this
Note is converted pursuant to Section 2 below, principal and accrued interest
---------
owed under this Note shall be due and payable in full on the earlier of (i) that
date which is five (5) business days following the closing of the Borrower's
initial public offering pursuant to an effective registration statement under
the Securities Act of 1933, as amended (the "Act"), or (ii) December 31, 2000
(the "Maturity Date"). Borrower
<PAGE>
may prepay all or any portion of the unpaid principal amount, together with
accrued interest thereon, at any time prior to the Maturity Date without
penalty.
This Note is one of an authorized issue of the Company's Convertible
Secured Notes, Due on the Maturity Date (herein collectively called the
"Notes"), issued pursuant to the Note Agreement, in varying denominations,
numbered consecutively and limited to the aggregate principal amount of Four
Million Dollars ($4,000,000). All rights and priorities of the registered owner
of this Note and the indebtedness evidenced hereby shall rank pari passu in all
----------
respects with the rights and priorities accorded the registered owners of the
Notes and the indebtedness evidenced thereby. Capitalized terms used herein
that are defined in the Note Agreement are so used as therein defined.
1. Application of Payments Payments received for application to this Note
-----------------------
shall be applied first to the payment of accrued interest at the penalty rate
specified below, if any; second, to the payment of accrued interest at the rate
specified above; and, finally, the balance to reduce the principal amount
hereof. All payments of interest and principal shall be made in lawful money of
the United States of America.
2. Conversion
----------
(a) Automatic Conversion. In the event of the closing of an underwritten
--------------------
public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended (the "Act"), covering the offer and sale of
Common Stock (whether for the account of the Company or for the account of one
or more shareholders of the Company) of the Company to the public in which the
aggregate gross cash proceeds to the Company are equal to or exceed $50,000,000
(fifty million dollars) (a "Qualified Public Offering"), the outstanding
principal and accrued interest thereon of this Note shall automatically convert
(the "Automatic Conversion") into such number of fully paid and nonassessable
shares of Common Stock, $.01 par value per share, of the Company (the "Common
Stock"), as is determined by dividing the outstanding principal and accrued
interest thereon of this Note by the Conversion Price, determined as hereinafter
provided, in effect at the time of conversion.
(b) Optional Conversion. The registered owner of this Note shall be
-------------------
entitled, at its option, at any time, to convert all or any portion of this Note
into such number of fully paid and nonassessable shares of Common Stock, as is
determined by dividing the outstanding principal and accrued interest thereon of
this Note that such registered owner desires to convert by the Conversion Price,
determined as hereinafter provided, in effect at the time of conversion.
2
<PAGE>
(c) Initial Conversion Price. The initial Conversion Price shall be $8.71
------------------------
per share of Common Stock. The Conversion Price shall be subject to adjustment
as hereinafter provided.
(d) Procedure for Conversion.
------------------------
(i) In order to effect an optional conversion (an "Optional
Conversion"), the registered owner shall surrender this Note to the Company at
its main office, accompanied by written notice to the Company that such owner
elects to convert the entire or some designated portion of this Note. Such
notice shall also state the name or names (with addresses) in which the
certificate or certificates for shares of Common Stock issuable upon such
conversion shall be issued.
(ii) As promptly as practicable after the receipt of such notice and
surrender of this Note as aforesaid, or in the case of an Automatic Conversion,
as promptly as is practicable after the closing of the Qualified Public
Offering, the Company shall issue and deliver to the registered owner, or as
otherwise specified on his written order, a certificate or certificates for the
number of full shares of Common Stock issuable upon the conversion of this Note
(or, in the case of an Optional Conversion, specified portion hereof). In the
event of a Conversion, the Borrower will not be obligated to make any cash
payment of outstanding principal or interest hereunder.
(iii) An Optional Conversion shall be deemed to have been effected at
the close of business on the date on which such notice shall have been received
by the Company and this Note shall have been surrendered as aforesaid. If this
Note is converted in part only, upon such conversion the Company shall execute
and deliver to the Note Holder, at the expense of the Company, a new Note of
authorized denominations in principal amount equal to the unconverted portion of
this Note.
(iv) In the event of Automatic Conversion upon a Qualified Public
Offering, the conversion shall be deemed to have occurred automatically at the
closing of such Qualified Public Offering.
(v) No fractional shares shall be issued upon conversion of any Note
and any portion of the principal hereof that would otherwise be convertible into
a fractional share shall be paid in cash equal to the fair market value of such
fraction on the date of conversion (as determined by the Board of Directors).
3. Adjustment to Conversion Price.
------------------------------
(a) Effect of "Split-ups" and "Split-downs"; Stock Dividends. If at any
--------------------------------------------------------
time or from time to time prior to the conversion of the entire outstanding
principal of
3
<PAGE>
the Note, the Company shall subdivide as a whole, by reclassification, by the
issuance of a stock dividend on the Common Stock payable in Common Stock, or
otherwise, the number of shares of Common Stock, with or without par value, the
Conversion Price shall be reduced proportionately as of the effective or record
date of such action. The issuance of such a stock dividend shall be treated as a
subdivision of the whole number of shares of Common Stock outstanding
immediately before the record date for such dividend into a number of shares
equal to such whole number of shares so outstanding plus the number of shares
issued as a stock dividend. In case at any time or from time to time the Company
shall combine as a whole, by reclassification or otherwise, the number of shares
of Common Stock then outstanding into a lesser number of shares of Common Stock,
with or without par value, the Conversion Price shall be increased
proportionately as of the effective date of such action.
(b) Effect of Certain Dividends. If on any date prior to the conversion
---------------------------
of the entire outstanding principal of the Note, the Company makes a
distribution to holders of its Common Stock (including any such distribution
made in connection with a consolidation or merger in which the Company is the
continuing corporation) of evidences of its indebtedness or assets, the
Conversion Price shall be adjusted as at the close of business on said date by
subtracting from the Conversion Price immediately prior to such distribution,
the fair market value (as determined in good faith by the Board of Directors of
the Company) of the portion of the assets or evidences of indebtedness so to be
distributed to one share of Common Stock.
(c) Reorganization and Reclassification. In case of any capital
-----------------------------------
reorganization or any reclassification of the capital stock of the Company
(except as provided in Section 3(a)) while any principal of this Note remains
------------
outstanding, the holder of the Note shall thereafter be entitled to acquire
pursuant to the conversion of the remaining outstanding principal of the Note
(in lieu of the number of shares of Common Stock that the Note Holder would have
been entitled to acquire immediately before such reorganization or
reclassification) the shares of stock of any class or classes or other
securities or property to which such number of shares of Common Stock issuable
upon conversion of the remaining outstanding principal of the Note would have
been entitled if such shares of Common Stock had been acquired immediately
before such reorganization or reclassification. In case of any such
reorganization or reclassification, appropriate provision (as determined by
resolution of the Board of Directors of the Company) shall be made with respect
to the rights and interests thereafter of the holder of the Note, to the end
that all the provisions of the Note (including adjustment provisions) shall
thereafter be applicable, as nearly as reasonably practicable, in relation to
such stock or other securities or property.
(d) Adjustment of Conversion Price Upon Issuance of Additional Shares of
--------------------------------------------------------------------
Common. In the event that prior to the conversion of the entire outstanding
- ------
principal of the Note, the Company shall issue Additional Shares of Common (as
4
<PAGE>
defined below) (including Additional Shares of Common deemed to be issued
pursuant to Section 3(e)) without consideration or for a consideration per share
------------
less than the Conversion Price in effect on the date of and immediately prior to
such issue (the "New Issue Price"), then and in such event, the Conversion Price
shall be reduced, concurrently with such issue, to a price equal to the New
Issue Price.
(e) Issue of Securities Deemed Issue of Additional Shares of Common --
------------------------------------------------------------------
Options and Convertible Securities. In the event that prior to the conversion
- ----------------------------------
of the entire outstanding principal of the Note, the Company shall issue any
Options or Convertible Securities (as those terms are defined below) (other than
Options or Convertible Securities which are not Additional Shares of Common) or
shall fix a record date for the determination of holders of any class of
securities entitled to receive any such Options or Convertible Securities, then
the shares of Common issuable upon the exercise of such Options or, in the case
of Convertible Securities and Options therefor, the conversion or exchange of
such Convertible Securities, shall be deemed to be Additional Shares of Common
issued as of the time of such issue or, in case such a record date shall have
been fixed, as of the close of business on such record date; provided, that in
any such case in which Additional Shares of Common are deemed to be issued:
(i) no further adjustment in the Conversion Price shall be made upon
the subsequent issue of Convertible Securities or shares of Common upon the
exercise of such Options or conversion or exchange of such Convertible
Securities;
(ii) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase in the
consideration payable to the Company, or decreases in the number of shares of
Common issuable, upon the exercise, conversion or exchange thereof, the
Conversion Price computed upon the original issue thereof (or upon the
occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, provided that no shares of Common have
--------
theretofore been issued with respect to such Options or Convertible Securities,
upon any such increase or decrease becoming effective, be recomputed to reflect
such increase or decrease insofar as it affects such Options or the rights of
conversion or exchange under such Convertible Securities;
(iii) no readjustment pursuant to clause (ii) above shall have the
effect of increasing the Conversion Price to an amount which exceeds the lower
of (1) such Conversion Price on the original adjustment date with respect to
such deemed issuance of Additional Shares of Common, or (2) such Conversion
Price that would have resulted from any issuance of Additional Shares of Common
between such original adjustment date and such readjustment date; and
(iv) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any decrease in the
consideration payable to the Company upon the exercise, conversion or exchange
thereof, the Conversion
5
<PAGE>
Price computed upon the original issue thereof (or upon the occurrence of a
record date with respect thereto), and any subsequent adjustments based thereon,
shall, upon any such decrease becoming effective, be recomputed to reflect such
decrease insofar as it affects such Options or the rights of conversion or
exchange under such Convertible Securities.
(f) Special Definitions. For purposes of Sections 3(d) through (i), the
------------------- -------------------------
following definitions shall apply:
(i) "Option" shall mean rights, options or warrants to subscribe
------
for, purchase or otherwise acquire either Common or Convertible Securities.
(ii) "Common" shall mean (i) the Company's presently authorized
------
Common Stock as such class exists on the date of this Note, (ii) securities
issued upon conversion of the Notes, and (iii) stock of the Company of any class
thereafter authorized that ranks, or is entitled to a participation, as to
assets or dividends, substantially on a parity with Common Stock.
(iii) "Convertible Securities" shall mean any evidences of
----------------------
indebtedness, shares or other securities directly or indirectly convertible into
or exchangeable for Common.
(iv) "Additional Shares of Common" shall mean all shares of Common
---------------------------
issued (or, pursuant to Section 3(e), deemed to be issued) by the Company after
------------
the date hereof and prior to the conversion of the entire outstanding principal
of the Note, other than shares of Common Stock issued or issuable:
(A) upon conversion of the Notes or upon conversion of notes
containing substantially the same terms and conditions as the Notes, or upon
exercise of warrants issued to holders of notes containing substantially the
same terms and conditions as the warrants issued to the holders of the Notes;
(B) to officers and employees of the Company or its
Subsidiaries under any stock option, stock purchase, stock appreciation, or
bonus plan adopted by the stockholders of the Company and shares of Common Stock
issued to such officers and employees pursuant to such stock options or rights
or to members of the Company's Board of Directors or Board of Advisers;
provided, however, that any shares covered by such options or rights plus any
- -------- -------
such shares so issued (without duplication as to shares issued under options) in
excess of 250,000 shares of Common Stock as constituted on the date hereof (as
adjusted pursuant to anti-dilution provisions contained in such stock options or
rights) shall be deemed to be Additional Shares of Common;
(C) as a dividend or distribution on Common Stock or any event
for which adjustment is made pursuant to Sections 3(a) through (c) hereof;
-------------------------
6
<PAGE>
(D) by way of dividend or other distribution on (1) shares
excluded from the definition of Additional Shares of Common by the foregoing
clauses (A) through (C) of this clause (iv) or (2) shares of Common so excluded
under this clause (D).
(g) No Adjustment of Conversion Price. No adjustment in the Conversion
---------------------------------
Price shall be made in respect of the issuance of Additional Shares of Common
unless the consideration per share for an Additional Share of Common issued or
deemed to be issued by the Company is less than the Conversion Price in effect
on the date of, and immediately prior to, the issue of such Additional Share of
Common.
(h) Effect of "Split-up or "Split-down" on "deemed issued" shares. Upon
-------------------------------------------------------------
the effective or record date for any subdivision or combination of the Common
Stock of the character described in Section 3(a), including the issuance of a
------------
stock dividend which is treated as such a subdivision under Section 3(b), the
------------
number of the shares of Common Stock which are at the time deemed to have been
issued by virtue of Section 3(e), but have not actually been issued, shall be
------------
deemed to be increased or decreased proportionately.
(i) Computation of Consideration. For the purposes of this Section 3:
---------------------------- ---------
(i) The consideration received by the Company upon the actual issuance
of Additional Shares of Common shall be deemed to be the sum of the amount of
cash and the fair value of property (as determined in good faith by resolution
of the Board of Directors of the Company as at the time of issue or "deemed
issue" in the case of the following paragraph (ii)) received or receivable by
the Company as the consideration or part of the consideration (v) at the time of
issuance of the Common, (w) for the issuance of any rights or options upon the
exercise of which such Common was issued, (x) for the issuance of any rights or
options to purchase Convertible Securities upon the conversion of which such
Common was issued, (y) for the issuance of the Convertible Securities upon
conversion of which such Common was issued, and (z) at the time of the actual
exercise of such rights, options or conversion privileges upon the exercise of
which such Common was issued, in each case without deduction for commissions and
expenses incurred by the Company for any underwriting of, or otherwise in
connection with the issue or sale of, such rights, options, Convertible
Securities or Common, but after deduction of any sums paid by the Company in
cash upon the exercise of, and pursuant to, such rights, options or conversion
privileges in respect of fractional shares of Common;
(ii) The consideration deemed to have been received by the Company for
Additional Shares of Common deemed to be issued pursuant to rights, options and
conversion privileges by reason of transactions of the character
7
<PAGE>
described in Section 3(e) shall be the consideration (determined as provided in
------------
the foregoing paragraph (i)) that would be received or receivable by the Company
at or before the actual issue of such shares of Common so deemed to be issued,
if all rights, options and conversion privileges necessary to effect the actual
issue of the number of shares deemed to have been issued had been exercised
(successively exercised in the case of rights or options to purchase Convertible
Securities), and the minimum consideration received or receivable by the Company
upon such exercise had been received; all computed without regard to the
possible future effect of anti-dilution provisions on such rights, options
and/or conversion privileges.
(j) Adjustment in Event of Certain Registration. In the event that prior
-------------------------------------------
to the conversion of the entire outstanding principal of the Note, the Company
shall sell shares of Common Stock in an underwritten public offering pursuant to
a registration statement under the Act at a price per share, not taking into
effect any underwriter's commission, below $13 per share (subject to adjustment
for subdivisions or consolidations of Common Stock or the issuance of stock
dividends on Common Stock) (the "Designated Offering"), then in such event, the
Conversion Price shall be reduced, concurrently with such event, to a price
equal to 67% of the price per share of the Designated Offering. No adjustment
in the Conversion Price shall be made under this Section 3(j) unless the
------------
Conversion Price resulting from the operation of this Section 3(j) is less than
------------
the Conversion Price in effect on the date of, and immediately prior to the
Designated Offering.
(k) Statement of Adjustment. Whenever the Conversion Price is adjusted
-----------------------
pursuant to any of the foregoing provisions of this Section 3, the Company shall
---------
promptly prepare a written statement signed by the President of the Company,
setting forth the adjustment, determined as provided in this Section, and in
reasonable detail the facts requiring such adjustment and the calculation
thereof. Such statement shall be filed among the permanent records of the
Company and a copy thereof shall be furnished to the Note Holder without
request, and to any other holder of the Note requesting the same, and shall at
all reasonable times during business hours be open to inspection by such
holders.
(l) Determination by the Board of Directors. All determinations by the
---------------------------------------
Board of Directors of the Company under the provisions of this Section 3 shall
---------
be made in good faith.
4. Reservation of Common Stock. The Company shall at all times reserve and
---------------------------
keep available a number of its authorized but unissued shares of Common Stock
sufficient to permit the exercise in full by the registered owner of the Note of
the conversion rights hereunder.
5. Securities Laws
---------------
8
<PAGE>
(a) Neither this Note nor the shares of Common Stock issuable upon
exercise of the conversion rights herein have been registered under the Act or
under the securities laws of any state. Neither this Note nor any such shares,
when issued, may be sold, transferred, pledged or hypothecated in the absence of
(1) an effective registration statement for this Note, or the shares, as the
case may be, under the Act, and such registration or qualification as may be
necessary under the securities laws of any state, or (2) an opinion of counsel
in form and substance reasonably satisfactory to the Company that such
registration or qualification is not required. The Company may cause the
certificate or certificates evidencing all or any of the shares issued upon
exercise of the conversion rights contained in this Note before such
registration and qualification of such shares to bear the following legend:
"The shares evidenced by this certificate have not been registered
under the Securities Act of 1933, as amended, or under the securities laws
of any state. The shares may not be sold, transferred, pledged or
hypothecated in the absence of an effective registration statement under
the Securities Act of 1933, as amended, and such registration or
qualification as may be necessary under the securities laws of any state,
or an opinion of counsel reasonably satisfactory to the Company that such
registration or qualification is not required."
(b) This Note shall be registered on books of the Company that shall be
kept at its principal office for that purpose, and shall be transferable only on
such books by the registered owner hereof in person or by duly authorized
attorney upon surrender of this Note properly endorsed, and only in compliance
with the next preceding paragraph hereof.
6. Security
--------
This Note is secured by certain collateral as described in and pursuant to
the terms and conditions of the Pledge Agreement dated September 10, 1999
between the Borrower, the initial Note Holder and the other parties named
therein (the "Pledge Agreement").
7. Default
-------
(a) The occurrence and continuance of any one or more of the following
events (whether or not in the control of the Borrower) shall constitute an event
of default ("Event of Default") hereunder:
(i) Failure to pay, when due, the principal, any interest, or any
other sum payable hereunder, and continuance of such failure for more than five
(5) business days after written notice thereof from Note Holder;
9
<PAGE>
(ii) The failure of Borrower generally to pay its debts as such
debts become due, the admission by Borrower in writing of its inability to pay
its debts as such debts become due, or the making by Borrower of any general
assignment for the benefit of creditors;
(iii) The commencement by Borrower of any case, proceeding, or
other action seeking reorganization, arrangement, adjustment, liquidation,
dissolution, or composition of its debts under any law relating to bankruptcy,
insolvency, or reorganization, or relief of debtors, or seeking appointment of a
receiver, trustee, custodian, or other similar official for it or for all or any
substantial part of its property;
(iv) The commencement of any case, proceeding, or other action
against Borrower seeking to have any order for relief entered against Borrower
as debtor, or seeking reorganization, arrangement, adjustment, liquidation,
dissolution, or composition of Borrower or its debts under any law relating to
bankruptcy, insolvency, reorganization, or relief of debtors, or seeking
appointment of a receiver, trustee, custodian, or other similar official for
Borrower or for all or any substantial part of the property of Borrower, and (i)
Borrower shall, by any act or omission, indicate its consent to, approval of, or
acquiescence in such case, proceeding, or action, or (ii) such case, proceeding,
or action results in the entry of an order for relief which is not fully stayed
within sixty (60) days after the entry thereof, or (iii) such case, proceeding,
or action remains undismissed for a period of sixty (60) days or more; or
(v) An Event of Default shall have occurred and be continuing under
any of the other Notes, the Note Agreement, the Second Amended Ledecky Note, or
the First Amendment to Loan and Pledge Agreement between the Company and Ledecky
dated September 10, 1999.
(b) Upon the occurrence and continuance of any such Event of Default
hereunder, the entire principal amount hereof, and all accrued and unpaid
interest thereon, shall be accelerated, and shall be immediately due and
payable, at the option of the Note Holder, without demand or notice, and in
addition thereto, and not in substitution therefor, Note Holder shall be
entitled to exercise any one or more of the rights and remedies provided under
the Pledge Agreement and/or by applicable law. Failure to exercise said option
or to pursue such other remedies shall not constitute a waiver of such option or
such other remedies or of the right to exercise any of the same in the event of
any subsequent Event of Default hereunder.
(c) In the event that the principal amount hereof, any interest or any
other sum due hereunder is not paid when due and payable, the whole of the
unpaid principal amount evidenced hereby and all unpaid accrued interest thereon
shall, from the date when such payment was due and payable until the date of
payment in full thereof, bear interest at the highest rate per annum allowed
under applicable
10
<PAGE>
law, which rate, if applicable, shall commence on the sixth (6th) business day
following the date when said payment was due and payable. Note Holder shall be
entitled to collect all reasonable costs and expenses of collection and/or suit,
including, but not limited to, reasonable attorney's fees.
8. Waivers
-------
(a) Borrower and all other makers, sureties, guarantors and endorsers
hereof hereby waive presentment, protest, demand, notice or dishonor, and all
other notices, and all defenses and pleas on the grounds of any extension or
extensions of the time of payments or the due dates of this Note, in whole or in
part, before or after maturity, with or without notice. No renewal or extension
of this Note, no release or surrender of any collateral given as security for
this Note (if any), and no delay in enforcement of this Note or in exercising
any right or power hereunder, shall affect the liability of Borrower.
(b) No single or partial exercise by Note Holder of any right hereunder,
shall preclude any other or further exercise thereof or the exercise of any
other rights. No delay or omission on the part of Note Holder in exercising any
right hereunder shall operate as a waiver of such right or of any other right
under this Note.
9. Miscellaneous
-------------
(a) In the event any one or more of the provisions contained in this Note
shall for any reason be held invalid, illegal, or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provision of this Note and this Note shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein.
(b) Any notice to Borrower provided for in this Note shall be in writing
and shall be given and be effective upon (i) delivery to Borrower, (ii) receipt
if sent by facsimile transmission (with confirmation of such receipt by the
sender) or (iii) mailing such notice by certified mail, return receipt
requested, addressed to Borrower at the Borrower's address stated below, or to
such other address as Borrower may designate by written notice to Note Holder.
Any notice to Note Holder shall be in writing and shall be given and be
effective upon (i) delivery to Note Holder, (ii) receipt if sent by facsimile
transmission (with confirmation of such receipt by the sender) or (iii) by
mailing such notice by certified mail, return receipt requested, to Note Holder
at the address stated in the first paragraph of this Note, or to such other
address as Note Holder may designate by written notice to Borrower.
(c) This Note may not be modified, amended, waived, extended, changed,
discharged or terminated orally or by any act or failure to act on the part of
11
<PAGE>
Borrower, but only by an agreement in writing signed by the party against whom
enforcement of any modification, amendment, waiver, extension, change, discharge
or termination is sought.
(d) The rights and obligations of the Borrower and the Note Holder shall be
binding upon and benefit the successors of the parties.
(e) This Note shall be governed by the laws of the Delaware without giving
effect to its principles of choice of laws, and shall be binding upon the
successors and assigns of the Borrower and shall inure to the benefit of Note
Holder and its successors and assigns. This Note shall not be assigned or
transferred absent the prior written consent of the Company, except to the
members of the Note Holder, pro rata on the basis of the members' limited
liability company interests in the Note Holder.
(f) Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of this Note, and (in case of
loss, theft or destruction) of indemnity reasonably satisfactory to it, and upon
reimbursement to the Company of all reasonable expenses incidental thereto, and
upon surrender and cancellation of any Note, if mutilated, the Company will make
and deliver a new Note of like tenor in the principal amount of this Note then
outstanding in lieu of such Note. Any Note so made and delivered shall be dated
as of the date to which interest shall have been paid on the Note lost, stolen,
destroyed or mutilated.
IN WITNESS WHEREOF, E2Enet, Inc., a Delaware corporation, has caused this
Note to be signed in its corporate name by its officer, by authority duly given,
all as of the day and year first above written.
E2Enet, Inc.
By /s/ Steven J. Quamme
_______________________
Title: SVP-CFO
12
<PAGE>
Exhibit 10.18
NEITHER THIS NOTE NOR THE SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE
SECURITIES LAWS.
THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED AND THE
SHARES ISSUABLE UPON CONVERSION OF THIS NOTE CANNOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE NOTE OR
STOCK UNDER SUCH ACT AND APPLICABLE LAWS OR SOME OTHER EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF SUCH ACT AND APPLICABLE LAWS OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED.
E2Enet, Inc.
Convertible Secured Note
Due on the Maturity Date (as defined below)
$500,000 September 10, 1999
FOR VALUE RECEIVED, the undersigned, E2ENET, INC., a Delaware corporation
(the "Borrower" or the "Company") promises to pay to Northwood Capital Partners
LLC ("Note Holder"), the principal sum of Five Hundred Thousand Dollars
($500,000), with interest on the unpaid principal balance from the date hereof,
until paid, at the per annum percentage rate equal to the Prime Rate as
established from time to time during the term hereof by J.P. Morgan & Co.
Principal and interest shall be payable to Note Holder at such place as Note
Holder may designate in writing, all in accordance with the terms of that
certain Convertible Note and Warrant Purchase Agreement dated September 10, 1999
between the Borrower and the Note Holder (the "Note Agreement"). Unless this
Note is converted pursuant to Section 2 below, principal and accrued interest
---------
owed under this Note shall be due and payable in full on the earlier of (i) that
date which is five (5) business days following the closing of the Borrower's
initial public offering pursuant to an effective registration statement under
the Securities Act of 1933, as amended (the "Act"), or (ii) December 31, 2000
(the "Maturity Date"). Borrower
<PAGE>
may prepay all or any portion of the unpaid principal amount, together with
accrued interest thereon, at any time prior to the Maturity Date without
penalty.
This Note is one of an authorized issue of the Company's Convertible
Secured Notes, Due on the Maturity Date (herein collectively called the
"Notes"), issued pursuant to the Note Agreement, in varying denominations,
numbered consecutively and limited to the aggregate principal amount of Four
Million Dollars ($4,000,000). All rights and priorities of the registered owner
of this Note and the indebtedness evidenced hereby shall rank pari passu in all
----------
respects with the rights and priorities accorded the registered owners of the
Notes and the indebtedness evidenced thereby. Capitalized terms used herein
that are defined in the Note Agreement are so used as therein defined.
1. Application of Payments Payments received for application to this Note
-----------------------
shall be applied first to the payment of accrued interest at the penalty rate
specified below, if any; second, to the payment of accrued interest at the rate
specified above; and, finally, the balance to reduce the principal amount
hereof. All payments of interest and principal shall be made in lawful money of
the United States of America.
2. Conversion
----------
(a) Automatic Conversion. In the event of the closing of an underwritten
--------------------
public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended (the "Act"), covering the offer and sale of
Common Stock (whether for the account of the Company or for the account of one
or more shareholders of the Company) of the Company to the public in which the
aggregate gross cash proceeds to the Company are equal to or exceed $50,000,000
(fifty million dollars) (a "Qualified Public Offering"), the outstanding
principal and accrued interest thereon of this Note shall automatically convert
(the "Automatic Conversion") into such number of fully paid and nonassessable
shares of Common Stock, $.01 par value per share, of the Company (the "Common
Stock"), as is determined by dividing the outstanding principal and accrued
interest thereon of this Note by the Conversion Price, determined as hereinafter
provided, in effect at the time of conversion.
(b) Optional Conversion. The registered owner of this Note shall be
-------------------
entitled, at its option, at any time, to convert all or any portion of this Note
into such number of fully paid and nonassessable shares of Common Stock, as is
determined by dividing the outstanding principal and accrued interest thereon of
this Note that such registered owner desires to convert by the Conversion Price,
determined as hereinafter provided, in effect at the time of conversion.
2
<PAGE>
(c) Initial Conversion Price. The initial Conversion Price shall be $8.71
------------------------
per share of Common Stock. The Conversion Price shall be subject to adjustment
as hereinafter provided.
(d) Procedure for Conversion.
------------------------
(i) In order to effect an optional conversion (an "Optional
Conversion"), the registered owner shall surrender this Note to the Company at
its main office, accompanied by written notice to the Company that such owner
elects to convert the entire or some designated portion of this Note. Such
notice shall also state the name or names (with addresses) in which the
certificate or certificates for shares of Common Stock issuable upon such
conversion shall be issued.
(ii) As promptly as practicable after the receipt of such notice and
surrender of this Note as aforesaid, or in the case of an Automatic Conversion,
as promptly as is practicable after the closing of the Qualified Public
Offering, the Company shall issue and deliver to the registered owner, or as
otherwise specified on his written order, a certificate or certificates for the
number of full shares of Common Stock issuable upon the conversion of this Note
(or, in the case of an Optional Conversion, specified portion hereof). In the
event of a Conversion, the Borrower will not be obligated to make any cash
payment of outstanding principal or interest hereunder.
(iii) An Optional Conversion shall be deemed to have been effected
at the close of business on the date on which such notice shall have been
received by the Company and this Note shall have been surrendered as aforesaid.
If this Note is converted in part only, upon such conversion the Company shall
execute and deliver to the Note Holder, at the expense of the Company, a new
Note of authorized denominations in principal amount equal to the unconverted
portion of this Note.
(iv) In the event of Automatic Conversion upon a Qualified Public
Offering, the conversion shall be deemed to have occurred automatically at the
closing of such Qualified Public Offering.
(v) No fractional shares shall be issued upon conversion of any Note
and any portion of the principal hereof that would otherwise be convertible into
a fractional share shall be paid in cash equal to the fair market value of such
fraction on the date of conversion (as determined by the Board of Directors).
3. Adjustment to Conversion Price.
------------------------------
(a) Effect of "Split-ups" and "Split-downs"; Stock Dividends. If at any
--------------------------------------------------------
time or from time to time prior to the conversion of the entire outstanding
principal of
3
<PAGE>
the Note, the Company shall subdivide as a whole, by reclassification, by the
issuance of a stock dividend on the Common Stock payable in Common Stock, or
otherwise, the number of shares of Common Stock, with or without par value, the
Conversion Price shall be reduced proportionately as of the effective or record
date of such action. The issuance of such a stock dividend shall be treated as a
subdivision of the whole number of shares of Common Stock outstanding
immediately before the record date for such dividend into a number of shares
equal to such whole number of shares so outstanding plus the number of shares
issued as a stock dividend. In case at any time or from time to time the Company
shall combine as a whole, by reclassification or otherwise, the number of shares
of Common Stock then outstanding into a lesser number of shares of Common Stock,
with or without par value, the Conversion Price shall be increased
proportionately as of the effective date of such action.
(b) Effect of Certain Dividends. If on any date prior to the conversion of
---------------------------
the entire outstanding principal of the Note, the Company makes a distribution
to holders of its Common Stock (including any such distribution made in
connection with a consolidation or merger in which the Company is the continuing
corporation) of evidences of its indebtedness or assets, the Conversion Price
shall be adjusted as at the close of business on said date by subtracting from
the Conversion Price immediately prior to such distribution, the fair market
value (as determined in good faith by the Board of Directors of the Company) of
the portion of the assets or evidences of indebtedness so to be distributed to
one share of Common Stock.
(c) Reorganization and Reclassification. In case of any capital
-----------------------------------
reorganization or any reclassification of the capital stock of the Company
(except as provided in Section 3(a)) while any principal of this Note remains
------------
outstanding, the holder of the Note shall thereafter be entitled to acquire
pursuant to the conversion of the remaining outstanding principal of the Note
(in lieu of the number of shares of Common Stock that the Note Holder would have
been entitled to acquire immediately before such reorganization or
reclassification) the shares of stock of any class or classes or other
securities or property to which such number of shares of Common Stock issuable
upon conversion of the remaining outstanding principal of the Note would have
been entitled if such shares of Common Stock had been acquired immediately
before such reorganization or reclassification. In case of any such
reorganization or reclassification, appropriate provision (as determined by
resolution of the Board of Directors of the Company) shall be made with respect
to the rights and interests thereafter of the holder of the Note, to the end
that all the provisions of the Note (including adjustment provisions) shall
thereafter be applicable, as nearly as reasonably practicable, in relation to
such stock or other securities or property.
(d) Adjustment of Conversion Price Upon Issuance of Additional Shares of
--------------------------------------------------------------------
Common. In the event that prior to the conversion of the entire outstanding
- ------
principal of the Note, the Company shall issue Additional Shares of Common (as
4
<PAGE>
defined below) (including Additional Shares of Common deemed to be issued
pursuant to Section 3(e)) without consideration or for a consideration per share
------------
less than the Conversion Price in effect on the date of and immediately prior to
such issue (the "New Issue Price"), then and in such event, the Conversion Price
shall be reduced, concurrently with such issue, to a price equal to the New
Issue Price.
(e) Issue of Securities Deemed Issue of Additional Shares of Common --
------------------------------------------------------------------
Options and Convertible Securities. In the event that prior to the conversion
- ----------------------------------
of the entire outstanding principal of the Note, the Company shall issue any
Options or Convertible Securities (as those terms are defined below) (other than
Options or Convertible Securities which are not Additional Shares of Common) or
shall fix a record date for the determination of holders of any class of
securities entitled to receive any such Options or Convertible Securities, then
the shares of Common issuable upon the exercise of such Options or, in the case
of Convertible Securities and Options therefor, the conversion or exchange of
such Convertible Securities, shall be deemed to be Additional Shares of Common
issued as of the time of such issue or, in case such a record date shall have
been fixed, as of the close of business on such record date; provided, that in
any such case in which Additional Shares of Common are deemed to be issued:
(i) no further adjustment in the Conversion Price shall be made
upon the subsequent issue of Convertible Securities or shares of Common upon the
exercise of such Options or conversion or exchange of such Convertible
Securities;
(ii) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase in the
consideration payable to the Company, or decreases in the number of shares of
Common issuable, upon the exercise, conversion or exchange thereof, the
Conversion Price computed upon the original issue thereof (or upon the
occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, provided that no shares of Common have
--------
theretofore been issued with respect to such Options or Convertible Securities,
upon any such increase or decrease becoming effective, be recomputed to reflect
such increase or decrease insofar as it affects such Options or the rights of
conversion or exchange under such Convertible Securities;
(iii) no readjustment pursuant to clause (ii) above shall have the
effect of increasing the Conversion Price to an amount which exceeds the lower
of (1) such Conversion Price on the original adjustment date with respect to
such deemed issuance of Additional Shares of Common, or (2) such Conversion
Price that would have resulted from any issuance of Additional Shares of Common
between such original adjustment date and such readjustment date; and
(iv) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any decrease in the
consideration payable to the Company upon the exercise, conversion or exchange
thereof, the Conversion
5
<PAGE>
Price computed upon the original issue thereof (or upon the occurrence of a
record date with respect thereto), and any subsequent adjustments based thereon,
shall, upon any such decrease becoming effective, be recomputed to reflect such
decrease insofar as it affects such Options or the rights of conversion or
exchange under such Convertible Securities.
(f) Special Definitions. For purposes of Sections 3(d) through (i), the
------------------- -------------------------
following definitions shall apply:
(i) "Option" shall mean rights, options or warrants to subscribe for,
------
purchase or otherwise acquire either Common or Convertible Securities.
(ii) "Common" shall mean (i) the Company's presently authorized Common
------
Stock as such class exists on the date of this Note, (ii) securities issued upon
conversion of the Notes, and (iii) stock of the Company of any class thereafter
authorized that ranks, or is entitled to a participation, as to assets or
dividends, substantially on a parity with Common Stock.
(iii) "Convertible Securities" shall mean any evidences of
----------------------
indebtedness, shares or other securities directly or indirectly convertible into
or exchangeable for Common.
(iv) "Additional Shares of Common" shall mean all shares of Common
---------------------------
issued (or, pursuant to Section 3(e), deemed to be issued) by the Company after
------------
the date hereof and prior to the conversion of the entire outstanding principal
of the Note, other than shares of Common Stock issued or issuable:
(A) upon conversion of the Notes or upon conversion of notes
containing substantially the same terms and conditions as the Notes, or upon
exercise of warrants issued to holders of notes containing substantially the
same terms and conditions as the warrants issued to the holders of the Notes;
(B) to officers and employees of the Company or its Subsidiaries under
any stock option, stock purchase, stock appreciation, or bonus plan adopted by
the stockholders of the Company and shares of Common Stock issued to such
officers and employees pursuant to such stock options or rights or to members of
the Company's Board of Directors or Board of Advisers; provided, however, that
-------- -------
any shares covered by such options or rights plus any such shares so issued
(without duplication as to shares issued under options) in excess of 250,000
shares of Common Stock as constituted on the date hereof (as adjusted pursuant
to anti-dilution provisions contained in such stock options or rights) shall be
deemed to be Additional Shares of Common;
(C) as a dividend or distribution on Common Stock or any event for
which adjustment is made pursuant to Sections 3(a) through (c) hereof;
-------------------------
6
<PAGE>
(D) by way of dividend or other distribution on (1) shares excluded
from the definition of Additional Shares of Common by the foregoing clauses (A)
through (C) of this clause (iv) or (2) shares of Common so excluded under this
clause (D).
(g) No Adjustment of Conversion Price. No adjustment in the Conversion
---------------------------------
Price shall be made in respect of the issuance of Additional Shares of Common
unless the consideration per share for an Additional Share of Common issued or
deemed to be issued by the Company is less than the Conversion Price in effect
on the date of, and immediately prior to, the issue of such Additional Share of
Common.
(h) Effect of "Split-up or "Split-down" on "deemed issued" shares. Upon
-------------------------------------------------------------
the effective or record date for any subdivision or combination of the Common
Stock of the character described in Section 3(a), including the issuance of a
------------
stock dividend which is treated as such a subdivision under Section 3(b), the
------------
number of the shares of Common Stock which are at the time deemed to have been
issued by virtue of Section 3(e), but have not actually been issued, shall be
------------
deemed to be increased or decreased proportionately.
(i) Computation of Consideration. For the purposes of this Section 3:
---------------------------- ---------
(i) The consideration received by the Company upon the actual issuance
of Additional Shares of Common shall be deemed to be the sum of the amount of
cash and the fair value of property (as determined in good faith by resolution
of the Board of Directors of the Company as at the time of issue or "deemed
issue" in the case of the following paragraph (ii)) received or receivable by
the Company as the consideration or part of the consideration (v) at the time of
issuance of the Common, (w) for the issuance of any rights or options upon the
exercise of which such Common was issued, (x) for the issuance of any rights or
options to purchase Convertible Securities upon the conversion of which such
Common was issued, (y) for the issuance of the Convertible Securities upon
conversion of which such Common was issued, and (z) at the time of the actual
exercise of such rights, options or conversion privileges upon the exercise of
which such Common was issued, in each case without deduction for commissions and
expenses incurred by the Company for any underwriting of, or otherwise in
connection with the issue or sale of, such rights, options, Convertible
Securities or Common, but after deduction of any sums paid by the Company in
cash upon the exercise of, and pursuant to, such rights, options or conversion
privileges in respect of fractional shares of Common;
(ii) The consideration deemed to have been received by the Company for
Additional Shares of Common deemed to be issued pursuant to rights, options and
conversion privileges by reason of transactions of the character
7
<PAGE>
described in Section 3(e) shall be the consideration (determined as provided in
-----------
the foregoing paragraph (i)) that would be received or receivable by the Company
at or before the actual issue of such shares of Common so deemed to be issued,
if all rights, options and conversion privileges necessary to effect the actual
issue of the number of shares deemed to have been issued had been exercised
(successively exercised in the case of rights or options to purchase Convertible
Securities), and the minimum consideration received or receivable by the Company
upon such exercise had been received; all computed without regard to the
possible future effect of anti-dilution provisions on such rights, options
and/or conversion privileges.
(j) Adjustment in Event of Certain Registration. In the event that prior
-------------------------------------------
to the conversion of the entire outstanding principal of the Note, the Company
shall sell shares of Common Stock in an underwritten public offering pursuant to
a registration statement under the Act at a price per share, not taking into
effect any underwriter's commission, below $13 per share (subject to adjustment
for subdivisions or consolidations of Common Stock or the issuance of stock
dividends on Common Stock) (the "Designated Offering"), then in such event, the
Conversion Price shall be reduced, concurrently with such event, to a price
equal to 67% of the price per share of the Designated Offering. No adjustment
in the Conversion Price shall be made under this Section 3(j) unless the
------------
Conversion Price resulting from the operation of this Section 3(j) is less than
------------
the Conversion Price in effect on the date of, and immediately prior to the
Designated Offering.
(k) Statement of Adjustment. Whenever the Conversion Price is adjusted
-----------------------
pursuant to any of the foregoing provisions of this Section 3, the Company shall
---------
promptly prepare a written statement signed by the President of the Company,
setting forth the adjustment, determined as provided in this Section, and in
reasonable detail the facts requiring such adjustment and the calculation
thereof. Such statement shall be filed among the permanent records of the
Company and a copy thereof shall be furnished to the Note Holder without
request, and to any other holder of the Note requesting the same, and shall at
all reasonable times during business hours be open to inspection by such
holders.
(l) Determination by the Board of Directors. All determinations by the
---------------------------------------
Board of Directors of the Company under the provisions of this Section 3 shall
---------
be made in good faith.
4. Reservation of Common Stock. The Company shall at all times reserve and
---------------------------
keep available a number of its authorized but unissued shares of Common Stock
sufficient to permit the exercise in full by the registered owner of the Note of
the conversion rights hereunder.
5. Securities Laws
---------------
8
<PAGE>
(a) Neither this Note nor the shares of Common Stock issuable upon exercise
of the conversion rights herein have been registered under the Act or under the
securities laws of any state. Neither this Note nor any such shares, when
issued, may be sold, transferred, pledged or hypothecated in the absence of (1)
an effective registration statement for this Note, or the shares, as the case
may be, under the Act, and such registration or qualification as may be
necessary under the securities laws of any state, or (2) an opinion of counsel
in form and substance reasonably satisfactory to the Company that such
registration or qualification is not required. The Company may cause the
certificate or certificates evidencing all or any of the shares issued upon
exercise of the conversion rights contained in this Note before such
registration and qualification of such shares to bear the following legend:
"The shares evidenced by this certificate have not been registered
under the Securities Act of 1933, as amended, or under the securities laws
of any state. The shares may not be sold, transferred, pledged or
hypothecated in the absence of an effective registration statement under
the Securities Act of 1933, as amended, and such registration or
qualification as may be necessary under the securities laws of any state,
or an opinion of counsel reasonably satisfactory to the Company that such
registration or qualification is not required."
(b) This Note shall be registered on books of the Company that shall be
kept at its principal office for that purpose, and shall be transferable only on
such books by the registered owner hereof in person or by duly authorized
attorney upon surrender of this Note properly endorsed, and only in compliance
with the next preceding paragraph hereof.
6. Security
--------
This Note is secured by certain collateral as described in and pursuant to
the terms and conditions of the Pledge Agreement dated September 10, 1999
between the Borrower, the initial Note Holder and the other parties named
therein (the "Pledge Agreement").
7. Default
-------
(a) The occurrence and continuance of any one or more of the following
events (whether or not in the control of the Borrower) shall constitute an event
of default ("Event of Default") hereunder:
(i) Failure to pay, when due, the principal, any interest, or any
other sum payable hereunder, and continuance of such failure for more than five
(5) business days after written notice thereof from Note Holder;
9
<PAGE>
(ii) The failure of Borrower generally to pay its debts as such
debts become due, the admission by Borrower in writing of its inability to pay
its debts as such debts become due, or the making by Borrower of any general
assignment for the benefit of creditors;
(iii) The commencement by Borrower of any case, proceeding, or
other action seeking reorganization, arrangement, adjustment, liquidation,
dissolution, or composition of its debts under any law relating to bankruptcy,
insolvency, or reorganization, or relief of debtors, or seeking appointment of a
receiver, trustee, custodian, or other similar official for it or for all or any
substantial part of its property;
(iv) The commencement of any case, proceeding, or other action
against Borrower seeking to have any order for relief entered against Borrower
as debtor, or seeking reorganization, arrangement, adjustment, liquidation,
dissolution, or composition of Borrower or its debts under any law relating to
bankruptcy, insolvency, reorganization, or relief of debtors, or seeking
appointment of a receiver, trustee, custodian, or other similar official for
Borrower or for all or any substantial part of the property of Borrower, and (i)
Borrower shall, by any act or omission, indicate its consent to, approval of, or
acquiescence in such case, proceeding, or action, or (ii) such case, proceeding,
or action results in the entry of an order for relief which is not fully stayed
within sixty (60) days after the entry thereof, or (iii) such case, proceeding,
or action remains undismissed for a period of sixty (60) days or more; or
(v) An Event of Default shall have occurred and be continuing under
any of the other Notes, the Note Agreement, the Second Amended Ledecky Note, or
the First Amendment to Loan and Pledge Agreement between the Company and Ledecky
dated September 10, 1999.
(b) Upon the occurrence and continuance of any such Event of Default
hereunder, the entire principal amount hereof, and all accrued and unpaid
interest thereon, shall be accelerated, and shall be immediately due and
payable, at the option of the Note Holder, without demand or notice, and in
addition thereto, and not in substitution therefor, Note Holder shall be
entitled to exercise any one or more of the rights and remedies provided under
the Pledge Agreement and/or by applicable law. Failure to exercise said option
or to pursue such other remedies shall not constitute a waiver of such option or
such other remedies or of the right to exercise any of the same in the event of
any subsequent Event of Default hereunder.
(c) In the event that the principal amount hereof, any interest or any
other sum due hereunder is not paid when due and payable, the whole of the
unpaid principal amount evidenced hereby and all unpaid accrued interest thereon
shall, from the date when such payment was due and payable until the date of
payment in full thereof, bear interest at the highest rate per annum allowed
under applicable
10
<PAGE>
law, which rate, if applicable, shall commence on the sixth (6th) business day
following the date when said payment was due and payable. Note Holder shall be
entitled to collect all reasonable costs and expenses of collection and/or suit,
including, but not limited to, reasonable attorney's fees.
8. Waivers
-------
(a) Borrower and all other makers, sureties, guarantors and endorsers
hereof hereby waive presentment, protest, demand, notice or dishonor, and all
other notices, and all defenses and pleas on the grounds of any extension or
extensions of the time of payments or the due dates of this Note, in whole or in
part, before or after maturity, with or without notice. No renewal or extension
of this Note, no release or surrender of any collateral given as security for
this Note (if any), and no delay in enforcement of this Note or in exercising
any right or power hereunder, shall affect the liability of Borrower.
(b) No single or partial exercise by Note Holder of any right hereunder,
shall preclude any other or further exercise thereof or the exercise of any
other rights. No delay or omission on the part of Note Holder in exercising any
right hereunder shall operate as a waiver of such right or of any other right
under this Note.
9. Miscellaneous
-------------
(a) In the event any one or more of the provisions contained in this Note
shall for any reason be held invalid, illegal, or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provision of this Note and this Note shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein.
(b) Any notice to Borrower provided for in this Note shall be in writing
and shall be given and be effective upon (i) delivery to Borrower, (ii) receipt
if sent by facsimile transmission (with confirmation of such receipt by the
sender) or (iii) mailing such notice by certified mail, return receipt
requested, addressed to Borrower at the Borrower's address stated below, or to
such other address as Borrower may designate by written notice to Note Holder.
Any notice to Note Holder shall be in writing and shall be given and be
effective upon (i) delivery to Note Holder, (ii) receipt if sent by facsimile
transmission (with confirmation of such receipt by the sender) or (iii) by
mailing such notice by certified mail, return receipt requested, to Note Holder
at the address stated in the first paragraph of this Note, or to such other
address as Note Holder may designate by written notice to Borrower.
(c) This Note may not be modified, amended, waived, extended, changed,
discharged or terminated orally or by any act or failure to act on the part of
11
<PAGE>
Borrower, but only by an agreement in writing signed by the party against whom
enforcement of any modification, amendment, waiver, extension, change, discharge
or termination is sought.
(d) The rights and obligations of the Borrower and the Note Holder shall
be binding upon and benefit the successors of the parties.
(e) This Note shall be governed by the laws of the Delaware without giving
effect to its principles of choice of laws, and shall be binding upon the
successors and assigns of the Borrower and shall inure to the benefit of Note
Holder and its successors and assigns. This Note shall not be assigned or
transferred absent the prior written consent of the Company, except to the
members of the Note Holder, pro rata on the basis of the members' limited
liability company interests in the Note Holder.
(f) Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of this Note, and (in case of
loss, theft or destruction) of indemnity reasonably satisfactory to it, and upon
reimbursement to the Company of all reasonable expenses incidental thereto, and
upon surrender and cancellation of any Note, if mutilated, the Company will make
and deliver a new Note of like tenor in the principal amount of this Note then
outstanding in lieu of such Note. Any Note so made and delivered shall be dated
as of the date to which interest shall have been paid on the Note lost, stolen,
destroyed or mutilated.
IN WITNESS WHEREOF, E2Enet, Inc., a Delaware corporation, has caused this
Note to be signed in its corporate name by its officer, by authority duly given,
all as of the day and year first above written.
E2Enet, Inc.
By /s/ Steven J. Quamme
____________________
Title: SVP-CFO
12
<PAGE>
Exhibit 10.19
LOAN AND PLEDGE AGREEMENT
-------------------------
This LOAN AND PLEDGE AGREEMENT (this "Agreement") is made as of May
14, 1999, by and among E2Enet.com, Inc., a Delaware corporation (formerly,
IRONBOUND PARTNERS, LLC), a Delaware limited liability company (the "Company"),
and Jonathan J. Ledecky ("LEDECKY").
Recital
-------
1. The Company has requested Ledecky to lend it up to $10 million
and Ledecky is willing to provide the loan, which loan is to be evidenced by an
Amended and Restated Promissory Note secured by a pledge of the capital stock of
certain Internet-related companies and businesses in which the Company has
invested or will invest using the proceeds of such loans, all subject to the
terms and conditions stated herein.
Agreement
---------
In consideration of the agreements and covenants contained herein,
together with other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as follows:
Section 1. Terms of the Loans
------------------
1.1. The Loans. Ledecky agrees, on the terms and conditions
---------
hereinafter set forth, to make loans to the Company in the aggregate principal
amount of Ten Million Dollars ($10,000,000) (the "Loans"). The Loans shall be
disbursed to the Company on an "as required" basis pursuant to requests by the
Company for same. The proceeds of the Loans shall be used by the Company for
the funding of the Company's start-up phase, to enable the Company to make
certain investments in Internet-related companies and businesses, and for
general working capital purposes.
1.2. The Note. The Loans shall be evidenced by an Amended and
--------
Restated Promissory Note dated the date hereof (the "Note"), representing the
obligation of the Company to repay the Loans, together with interest thereon.
The Note shall effectively amend and restate that certain $500,000 Promissory
Note which the Company's predecessor in interest by merger, Ironbound, issued
effective as of December 23, 1998, to Ledecky. A form of the Note is attached
hereto as Exhibit A. The Company authorizes Ledecky to endorse the date and
---------
amount of the Loans and any prepayment on the schedule annexed to and
constituting a part of the Note, which endorsement shall constitute prima facia
evidence of the accuracy of the information, in the absence of manifest error.
The failure to record any such amount or any error in recording shall not,
however, limit or otherwise affect the obligations of the Company to repay the
principal amount of the Loans together with all interest accruing thereon.
<PAGE>
1.3. Repayment of Principal. Subject to Section 1.5, the principal
---------------------- -----------
amount of the Loans shall be repaid to Ledecky on the earlier of (i) five (5)
business days following the date on which the Company's Registration Statement
filed in connection with its proposed initial public offering is declared
effective by the Securities and Exchange Commission, (ii) December 31, 1999 and
(iii) demand by Ledecky (the "Termination Date"); provided, however, the Company
may prepay the Loan, in whole or part, at any time without penalty or premium.
All payments of principal and interest shall be made in U.S. Dollars and payable
by check mailed to the following address (unless the Company is otherwise
notified in writing by Ledecky): Jonathan J. Ledecky, 800 Connecticut Avenue,
N.W., Suite 1111, Washington, DC 20006.
1.4. Interest. Interest shall accrue on an annual compounded basis on
--------
the unpaid principal amount of the Loans at the Prime Rate as established from
time to time during the term hereof by J.P. Morgan & Co. (the "Interest Rate").
All computations of interest shall be made on the basis of a three hundred and
sixty-five (365) day year.
1.5. Best Efforts. The Company agrees to use its best efforts
------------
(including without limitation the sale of assets or refinancing the Loans) to
repay the principal amount of the Loans in full, together with all accrued and
unpaid interest, on or prior to the Termination Date.
1.6. Penalty Interest. Any amount due hereunder which is not paid
----------------
when due shall bear interest thereafter at a rate per annum equal to the
Interest Rate plus two percent (2%), payable on demand.
1.7. Interest Rate Limitation. Notwithstanding any provisions of this
------------------------
Agreement, the Note or the Collateral Agreements (as defined in Section 3.2
-----------
below) in no event shall the amount of interest paid or agreed to be paid by the
Company exceed an amount computed at the highest rate of interest permissible
under applicable law. If, from any circumstances whatsoever, fulfillment of any
provision of this Agreement or the Note at the time performance of such
provision shall be due, shall involve exceeding the interest rate limitation
validly prescribed by law which a court of competent jurisdiction may deem
applicable hereto, then the obligations to be fulfilled shall be reduced to an
amount computed at the highest rate of interest permissible under applicable
law, and if for any reason whatsoever Ledecky shall ever receive as interest an
amount which would be deemed unlawful under such applicable law such interest
shall be automatically applied to the payment of principal of the Note
outstanding hereunder (whether or not then due and payable), without prepayment
charge, premium or penalty, and not to the payment of interest, or shall be
refunded to the Company if such principal and all other obligations of the
Company to Ledecky have been paid in full.
Section 2. Conditions Precedent
--------------------
2.1. Documents Required for Closing. The obligation of Ledecky to
------------------------------
make the Loans is subject to the conditions precedent that the Company shall
have delivered to Ledecky prior to the disbursement of the Loans the following:
-2-
<PAGE>
(a) This Agreement. This Agreement, duly executed by an
--------------
authorized officer of the Company and Ledecky.
(b) The Note. The Note, duly executed by an authorized officer
--------
of the Company.
(c) Additional Matters. All other documents in connection with
------------------
the transactions contemplated hereby reasonably requested by Ledecky.
Section 3. Pledge and Security Agreements
------------------------------
3.1. Security Interest and Pledge. As security for the prompt and
----------------------------
complete satisfaction of all obligations of the Company under this Agreement and
the Note, whether for principal, interest, expenses or otherwise, the Company
hereby grants, transfers and assigns and pledges to Ledecky all of its
respective right, title and interest in and grants Ledecky a security interest
in the shares of capital stock of those certain Internet-related companies and
businesses in which the Company has invested using the proceeds of the Loans, as
such shares are described on Schedule 1 attached hereto and as Schedule 1 is
----------
amended from time to time as additional Loans and investments occur (the
"Pledged Shares").
3.2 Delivery of Pledged Shares. Upon the execution of this
--------------------------
Agreement, Company shall deliver to Ledecky the certificate(s) representing the
Pledged Shares, together with duly executed forms of assignment sufficient to
transfer title thereto to Ledecky.
3.3 Voting Rights; Cash Dividends. Notwithstanding anything to the
-----------------------------
contrary contained herein, during the term of this Agreement until such time as
there exists a default in the payment of principal or interest on the Note or
any other default under the Note or hereunder, the Company shall be entitled to
all voting rights with respect to the Pledged Shares and shall be entitled to
receive all cash dividends paid in respect of the Pledged Shares. Upon the
occurrence of and during the continuance of any such default, the Company shall
no longer be able to vote the Pledged Shares and Ledecky shall retain all such
cash dividends payable on the Pledged Shares as additional security hereunder.
3.4 Stock Dividends; Distributions, etc. If, while this Agreement is
------------------------------------
in effect, the Company becomes entitled to receive or receives any securities or
other property in addition to, in substitution of, or in exchange for any of the
Pledged Shares (whether as a distribution in connection with any
recapitalization, reorganization or reclassification, a stock dividend or
otherwise), the Company shall accept such securities or other property on behalf
of and for the benefit of Ledecky as additional security for the Company's
obligations under the Note and shall promptly deliver such additional security
to Ledecky together with duly executed forms of assignment, and such additional
security shall be deemed to be part of the Pledged Shares hereunder.
-3-
<PAGE>
3.5 Default. If the Company defaults in the payment of the principal
-------
or interest under the Note when it becomes due (whether upon demand,
acceleration or otherwise) or any other event of default under the Note or this
Agreement occurs (including the bankruptcy or insolvency of the Company),
Ledecky may exercise any and all the rights, powers and remedies of any owner of
the Pledged Shares (including the right to vote the shares and receive dividends
and distributions with respect to such shares) and shall have and may exercise
without demand any and all the rights and remedies granted to a secured party
upon default under the Uniform Commercial Code of the District of Columbia or
otherwise available to Ledecky under applicable law. Without limiting the
foregoing, Ledecky is authorized to sell, assign and deliver at its discretion,
from time to time, all or any part of the Pledged Shares at any private sale or
public auction, on not less than ten days written notice to the Company, at such
price or prices and upon such terms as Ledecky may deem advisable. the Company
shall have no right to redeem the Pledged Shares after any such sale or
assignment. At any such sale or auction, Ledecky may bid for, and become the
purchaser of, the whole or any part of the Pledged Shares offered for sale. In
case of any such sale, after deducting the costs, attorneys' fees and other
expenses of sale and delivery, the remaining proceeds of such sale shall be
applied to the principal of and accrued interest on the Note; provided that
after payment in full of the indebtedness evidenced by the Note, the balance of
the proceeds of sale then remaining shall be paid to the Company and the Company
shall be entitled to the return of any of the Pledged Shares remaining in the
hands of Ledecky. The Company shall be liable for any deficiency if the
remaining proceeds are insufficient to pay the indebtedness under the Note in
full, including the fees of any attorneys employed by Ledecky to collect such
deficiency.
3.6 Costs and Attorneys' Fees. All costs and expenses (including
-------------------------
reasonable attorneys' fees) incurred in exercising any right, power or remedy
conferred by this Agreement or in the enforcement thereof, shall become part of
the indebtedness secured hereunder and shall be paid by the Company or repaid
from the proceeds of the sale of the Pledged Shares hereunder.
3.7 Payment of Indebtedness and Release of Pledged Shares. Upon
-----------------------------------------------------
payment in full of the indebtedness evidenced by the Note, Ledecky shall
surrender the Pledged Shares (and any dividends held as security) to the Company
together with all forms of assignment.
3.8 No Other Liens; No Sales or Transfers. The Company hereby
-------------------------------------
represents and warrants that he has good and valid title to all of the Pledged
Shares, free and clear of all liens, security interests and other encumbrances,
and the Company hereby covenants that, until such time as all of the outstanding
principal of and interest on the Note has been repaid, the Company shall not (i)
create, incur, assure or suffer to exist any pledge, security interest,
encumbrance, lien or charge of any kind against the Pledged Shares or the
Company's rights or a holder thereof, other than pursuant to this Agreement, or
(ii) sell or otherwise transfer any Pledged Shares or any interest therein.
3.9 Further Assurances. The Company agrees that at any time and from
------------------
time to time upon the written request of Ledecky, the Company shall execute and
deliver such further documents (including UCC financing statements) and do such
further acts and things as Ledecky may reasonably request in order to effect the
purposes of this Agreement.
-4-
<PAGE>
Section 4. Representations and Warranties. In addition to the
------------------------------
representations and warranties contained in Section 3.8 above, in order to
-----------
induce Ledecky to enter into this Agreement, the Company represents and warrants
to Ledecky that:
4.1. Due Organization, Good Standing and Authority. The Company is
---------------------------------------------
duly organized, validly existing and in good standing under the laws of the
state of Delaware and is qualified to do business in every jurisdiction where
necessary in light of its business and properties, except where the failure to
be so qualified would not have a material adverse effect on the business or
financial condition of the Company. The Company has full power, authority and
legal right (a) to own or lease its assets and properties and to conduct its
business as now being conducted, and (b) to incur its obligations under and to
perform the terms of this Agreement and the Note.
4.2. Due Authorization; Non-contravention. The execution and delivery
------------------------------------
by the Company of this Agreement and the Note and all ancillary instruments
issued hereunder, and the performance of the terms hereof and thereof will not
be, or result in, a violation, breach or default of any law, agreement or
instrument to which the Company is a party.
4.3. Validity. This Agreement and the Note when delivered will be,
--------
legal, valid and binding obligations of the Company, enforceable against the
Company in accordance with their respective terms.
4.4. Litigation. There is no action, suit or proceeding, by or before
----------
any governmental or regulatory authority, court, arbitral tribunal or other body
now pending (or, to the best knowledge of the Company, threatened) against or
affecting the Company or any of its properties, rights, or assets or which may
effect the legality or enforceability of this Agreement and the Note.
Section 5. Covenants. In addition to the covenants contained in
---------
Section 3.8 above, the Company covenants and agrees that, from the date hereof
- -----------
until the Termination Date and for so long as the Loans remain outstanding and
unpaid, in whole or in part, or any other amount is owing to Ledecky under this
Agreement, unless Ledecky shall otherwise consent in writing:
5.1. Notice to Ledecky. The Company will promptly give notice to
-----------------
Ledecky as soon as it becomes aware of (a) any Event of Default (as defined in
Section 6) or (b) any other matter, event or thing that has had or could
- ---------
reasonably have a material adverse effect on the Company or its financial
condition.
5.2. Financial Statements, Monthly Reports and the Financial
-------------------------------------------------------
Information. As soon as practicable (and in any event not later than 90 days
- -----------
after each fiscal year and 45 days after each other fiscal quarter), the Company
shall furnish to Ledecky annual unaudited and quarterly unaudited consolidated
financial statements. The Company will also furnish such other information
regarding the financial condition of the Company, and the condition and
operations of the Company as Ledecky may reasonably request from time to time.
-5-
<PAGE>
5.3. Maintenance of Existence. The Company will preserve and maintain
------------------------
its legal existence and all of its rights and privileges necessary for the
proper conduct of its business and will become and remain qualified to do
business in each jurisdiction where necessary in light of its businesses and
properties, except where the failure to be so qualified would not have a
material adverse effect on the business or financial condition of the Company.
5.4. Taxes. The Company shall pay all federal, state and local taxes
-----
imposed on it or on any of its property prior to the date on which any penalties
attach and all lawful claims which, if unpaid, might become a lien upon any of
the Collateral. The Company shall have the right, however, to contest in good
faith the validity or amount of any such taxes by proper proceedings timely
instituted, and may permit the taxes so contested to remain unpaid during the
period of such contest if it diligently prosecutes such contest and such contest
does not involve any material risk of the sale, forfeiture or loss of any part
of the Collateral.
5.5. Books and Records; Right of Audit and Inspection. The Company
------------------------------------------------
shall keep proper books of record in accordance with generally accepted
accounting principles and permit representatives of Ledecky, to visit and
inspect the Company's properties, to examine the books and records and to
discuss the affairs, finances and accounts of the Company with the Company's
principal officers, engineers and independent accountants, all at such
reasonable times and at such intervals as Ledecky may desire.
Section 6. Events of Default and Remedies
------------------------------
6.1. Events of Default. The occurrence and continuance of any one or
-----------------
more of the following events (whether or not in the control of the Company)
shall constitute an Event of Default:
(a) Nonpayment. The Company shall fail to make, on or before the due
----------
date, in the manner required, any payment of principal, interest or any other
sums due under this Agreement.
(b) Other Defaults; Cure Period. The Company shall fail to observe or
---------------------------
perform any of its covenants contained in this Agreement, other than the
covenants and provisions relating to payments in paragraph (a) above, and the
-------------
Company shall have not remedied such default within thirty (30) business days
after such default.
(c) Representation or Warranty. Any representation, warranty or
--------------------------
statement made or deemed to be made by the Company herein or in any document
given hereunder shall prove to have been untrue in any material respect as of
the time made.
(d) Insolvency. The Company shall generally not pay its debts as such
----------
debts become due, or shall admit in writing its inability to pay its debts
generally, or shall make a general assignment for the benefit of creditors; or
(i) the Company shall commence any voluntary bankruptcy proceeding, or (ii)
their shall be commenced against the Company by another party
-6-
<PAGE>
any such case, proceeding or other action in bankruptcy which remains unstayed,
undismissed or undischarged for a period of 60 days.
6.2. Acceleration. On the Date of Default, there shall immediately be
------------
due and payable to Ledecky the amount of the Loans outstanding, plus accrued
interest and all other amounts owed by the Company pursuant to this Agreement.
All amounts under this Section 6 are due and payable without presentment,
---------
demand, protest and all other notices of any kind are hereby expressly waived by
the Company.
6.3. Remedies Upon Event of Default.
------------------------------
(a) General. Subject to Section 6.3(b) below, if any Event of
------- -------------
Default shall have occurred and be continuing, Ledecky may proceed to protect
and enforce his rights as holder of the Note, either by suit in equity or by
action at law, or both, whether for the specific performance of any covenant or
agreement contained in this Agreement or in aid of the exercise of any power
granted in this Agreement, and may proceed to enforce the payment of all amounts
due upon the Note, and such further amounts as shall be sufficient to cover the
costs and expenses of collection (including, without limitation, reasonable
counsel fees and disbursements), or to enforce any other legal or equitable
right of the holder of the Note. In addition, Ledecky shall have all the rights
of a pledgee in possession of the Pledged Shares under the applicable provisions
of law and of the Uniform Commercial Code as in effect in the District of
Columbia, and any other jurisdiction where any of the Collateral is located, and
all rights and remedies provided in Section 3 of this Agreement or at law or in
---------
equity or otherwise.
(b) Remedies for Non-Payment. If an Event of Default pursuant
------------------------
to Section 6.1(a) shall have occurred, Ledecky shall have the sole option to
--------------
either (i) pursue his rights under Section 6.3(a) above or (ii) extend the terms
--------------
of the Note for an additional three (3) months, in which case the Note would not
be in default but would continue to accrue interest at the non-default rate
under the Note.
(c) Remedies Cumulative. No remedy conferred in this Agreement or
-------------------
the Note upon Ledecky is intended to be exclusive of any other remedy and each
and every such remedy shall be cumulative and shall be in addition to every
other remedy given hereunder or now or hereafter existing at law or in equity or
otherwise.
(d) Remedies Not Waived. No course of dealing between the Company
-------------------
and Ledecky, and no delay or failure in exercising any rights hereunder or under
the Note in respect thereof, shall operate as a waiver of any of the rights of
Ledecky.
Section 7. Miscellaneous
-------------
7.1. Notices. All notices, demands or other communications in
-------
connection with this Agreement shall be in writing and shall be delivered by
hand, sent by registered or certified mail or by facsimile addressed to the
parties as set forth below (or to such other address as the parties may
designate by notice):
-7-
<PAGE>
If to Ledecky:
Jonathan J. Ledecky
800 Connecticut Avenue, N.W.
Suite 1111
Washington, DC 20006
Tel: (202) 261-6000
Fax: (202) 261-6020
If to the Company to:
E2Enet.com, Inc.
800 Connecticut Avenue, N.W.
Suite 1111
Washington, D.C. 20006
Attention: Steven J. Quamme
Tel: (202) 261-6000
Fax: (202) 261-6020
With a copy to:
Hogan & Hartson L.L.P.
555 13th Street, N.W.
Washington, D.C. 20004
Attention: J. Hovey Kemp
Tel: (202) 637-5623
Fax: (202) 637-5910
A notice delivered by hand to a party shall be deemed received when delivered.
A notice sent by mail shall be deemed received on the fifth business day after
mailing. A notice sent by facsimile shall be deemed received upon receipt of
the relevant confirmation or answerback.
7.2. Amendments, etc. No amendment or waiver of any provision of this
---------------
Agreement or the Note, nor consent to any departure by the Company therefrom,
shall be effective unless the same shall be in writing and signed by the
parties, and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
7.3. Costs and Expenses. The Company agrees to pay on demand all
------------------
losses, costs and expenses, if any (including reasonable counsel fees and
expenses), in connection with any collection or enforcement actions taken by
Ledecky under this Agreement, the Note and the
Collateral Agreements.
7.4. Indemnification. The Company will indemnify and hold harmless
---------------
Ledecky and his agents, representatives and employees against any and all costs,
claims, losses
-8-
<PAGE>
and expenses (including reasonable attorneys' fees) sustained or incurred as a
consequence of, arising from or related to the negotiation, execution and
performance of this Agreement, the Note and the Collateral Agreements.
7.5. Binding Effect; Assignment of Rights. This Agreement shall
------------------------------------
become effective when it has been executed by the parties and thereafter shall
be binding upon and inure to the benefit of the Company and Ledecky and their
respective successors, transferees and assigns, except that the Company shall
not have the right to transfer or assign any of its rights or obligations
hereunder without the prior written consent of Ledecky.
7.6. Governing Law. This agreement shall be governed in accordance
-------------
with the laws of the state of California, without giving effect to its choice of
law principles.
7.7. Counterparts; Facsimile Signatures. This Agreement may be
----------------------------------
executed in counterparts and executed signature pages sent to the other party by
facsimile transmission shall be binding as evidence of such party's agreement
hereto and acceptance hereof.
7.8. Entire Agreement. This Agreement and the other documents
----------------
referred to herein, constitute the entire agreement between Ledecky and the
Company and no other agreements, promises, representations and warranties
(express or implied), except those expressly set forth herein have been relied
upon by the Company or have been made by Ledecky.
[THIS SPACE INTENTIONALLY LEFT BLANK]
-9-
<PAGE>
IN WITNESS WHEREOF, each of the undersigned has caused this Agreement
to be duly executed and delivered by its respective duly authorized officers as
of the day and year first above written.
COMPANY:
-------
E2Enet.com, Inc.
By: /s/ Steven J. Quamme
----------------------------
Name: Steven J. Quamme
Title: Senior Vice President and Secretary
/s/ Jonathan J. Ledecky
--------------------------------
Jonathan J. Ledecky
-10-
<PAGE>
FIRST AMENDMENT TO LOAN AND PLEDGE AGREEMENT
--------------------------------------------
This FIRST AMENDMENT TO LOAN AND PLEDGE AGREEMENT (this "Amendment")
is made as of September 10, 1999, by and among E2Enet, Inc. (formerly known as
E2Enet.com, Inc.), a Delaware corporation (the "Company"), and Jonathan J.
Ledecky ("Ledecky").
Recital
-------
A. The Company and Ledecky entered into a Loan and Pledge Agreement
dated May 14, 1999 (the "May Loan Agreement"; together with this Amendment, the
"Loan Agreement"), under which Ledecky has, as of the date of this Amendment,
made loans to the Company in an aggregate principal amount of $4,185,462.27,
which loans are evidenced by an Amended and Restated Promissory Note secured by
a pledge of the capital stock of certain Internet-related companies and
businesses in which the Company had invested or would invest using the proceeds
of such loans (the "First Amended Note");
B. The Company, Northwood Ventures LLC ("Northwood Ventures") and
Northwood Capital Partners LLC ("Northwood Capital") are entering into a
Convertible Note and Warrant Purchase Agreement (the "Northwood Note Purchase
Agreement"), under which Northwood Ventures and Northwood Capital have agreed to
invest an aggregate of $4,000,000 in the Company, evidenced by the issuance of
convertible secured notes by the Company to Northwood Ventures and Northwood
Capital dated as of the date hereof (the "Northwood Notes")(collectively, the
Northwood Note Purchase Agreement and the Northwood Notes are referred to as the
"Northwood Agreements");
C. The Company, Northwood Ventures, Northwood Capital and Ledecky and
J. Hovey Kemp as trustee (the "Trustee") are entering into a Pledge Agreement
(the "Pledge Agreement") and an Intercreditor Agreement (the "Intercreditor
Agreement")(collectively, the Pledge Agreement and the Intercreditor Agreement
are referred to as the "Ledecky/Northwood Agreements"); and
D. The Company and Ledecky desire to enter into this Amendment and to
amend the First Amended Note in connection with the Pledge Agreement and the
Northwood Agreements.
Agreement
---------
In consideration of the agreements and covenants contained herein,
together with other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as follows:
<PAGE>
1. Subject to the execution by the Company of the Second Amended
Note, Section 1.2 of the May Loan Agreement is amended, in part, by replacing
the form of the Note attached thereto as Exhibit A with the form of Note
---------
attached hereto as Exhibit A1 (the "Second Amended Note").
----------
2. Subject to the execution by the Company of the Second Amended Note
and the Pledge Agreement attached as Exhibit B hereto (the "Pledge Agreement"),
---------
Section 3 and Schedule 1 of the May Loan Agreement are amended by deleting them
in their entirety. This Loan Agreement and the Second Amended Note are secured
by certain collateral as described in and pursuant to the Pledge Agreement.
3. Subject to the execution by the Company of the Pledge Agreement,
the May Loan Agreement is amended throughout by substituting the phrase "Pledged
Securities" for the phrase "Pledged Shares".
4. Amendment of Section 6. Section 6.1 of the May Loan Agreement is
----------------------
amended, in part, as follows:
4.1 Section 6.1(a) is replaced in its entirety with the following:
"(a) Nonpayment. The Company shall fail to make, on or before
----------
the due date, in the manner required, any payment of principal, interest or any
other sums due under this Agreement, the Second Amended Note or the Northwood
Notes, and continuance of such failure for more than five (5) business days
after written notice thereof from Ledecky or the holder of the relevant Note, as
the case may be."
4.2 Section 6.1(b) is amended by striking the word "business" in
the fourth line.
4.3 The following Section 6.1(e) is added:
"(e) An Event of Default under any of the Northwood Agreements or
the Second Amended Note shall have occurred and be continuing."
4.4 Section 6.2 is amended by substituting the words "If an Event
of Default shall have occurred and be continuing" for the words "On the Date of
Default" at the beginning of the section.
4.5 Section 6.3(b) is amended by adding the words "and shall be
continuing" after the word "occurred" in the second line.
-2-
<PAGE>
5. Representations and Warranties. In order to induce Ledecky to
------------------------------
enter into this Amendment, the Company represents and warrants to Ledecky that:
5.1. Due Organization, Good Standing and Authority. The Company
---------------------------------------------
is duly organized, validly existing and in good standing under the laws of the
state of Delaware and is qualified to do business in every jurisdiction where
necessary in light of its business and properties, except where the failure to
be so qualified would not have a material adverse effect on the business or
financial condition of the Company. The Company has full power, authority and
legal right (a) to own or lease its assets and properties and to conduct its
business as now being conducted, and (b) to incur its obligations under and to
perform the terms of this Amendment and the Second Amended Note.
5.2. Due Authorization; Non-contravention. The execution and
------------------------------------
delivery by the Company of this Amendment and the Second Amended Note and all
ancillary instruments issued hereunder, and the performance of the terms hereof
and thereof will not be, or result in, a violation, breach or default of any
law, agreement or instrument to which the Company is a party.
5.3. Validity. This Amendment and the Second Amended Note when
--------
delivered will be, legal, valid and binding obligations of the Company,
enforceable against the Company in accordance with their respective terms.
5.4. Litigation. There is no action, suit or proceeding, by or
----------
before any governmental or regulatory authority, court, arbitral tribunal or
other body now pending (or, to the best knowledge of the Company, threatened)
against or affecting the Company or any of its properties, rights, or assets or
which may affect the legality or enforceability of this Amendment and the Second
Amended Note.
6. Partial Repayment. The Company has funded several investments
-----------------
with money borrowed by the Company under the First Amended Note, including
$250,000 recently invested in or lent by the Company to Buyline.net, Inc.
("Buyline") and $400,000 recently invested by the Company in MEI Software
Systems, Inc. ("MEI"). The Company shall reimburse Ledecky, from proceeds
received in connection with the Northwood Agreements, for the prior investment
in Buyline and MEI by the Company's repayment of the Second Amended Note in the
amount of $650,000.
7. Governing Law. This Amendment and the entire Agreement shall be
-------------
governed in accordance with the laws of the state of Delaware, without giving
effect to its choice of law principles.
-3-
<PAGE>
8. May Loan Agreement. Except as expressly provided herein, the
------------------
provisions of the May Loan Agreement remain in full force and effect.
9. Counterparts; Facsimile Signatures. This Amendment may be
----------------------------------
executed in counterparts and executed signature pages sent to the other party by
facsimile transmission shall be binding as evidence of such party's agreement
hereto and acceptance hereof.
[THIS SPACE INTENTIONALLY LEFT BLANK]
-4-
<PAGE>
IN WITNESS WHEREOF, each of the undersigned has caused this Agreement
to be duly executed and delivered by its respective duly authorized officers as
of the day and year first above written.
COMPANY:
-------
E2Enet, Inc.
By: /s/ Steven J. Quamme
_________________________________
Name: Steven J. Quamme
Title: Senior Vice President and
Secretary
/s/ Jonathan J. Ledecky
_______________________________________
Jonathan J. Ledecky
-5-
<PAGE>
EXHIBIT 10.20
SECOND AMENDED AND RESTATED
PROMISSORY NOTE
$10,000,000 September 10, 1999
FOR VALUE RECEIVED, the undersigned, E2ENET, INC., a Delaware
corporation (formerly known as E2Enet.com, Inc.) (the "Borrower") and successor
in interest by merger to IRONBOUND PARTNERS LLC, a Delaware limited liability
company ("Ironbound"), promises to pay to Jonathan J. Ledecky ("Note Holder"),
the aggregate amount of principal advanced hereunder of up to Ten Million
Dollars ($10,000,000) with interest on the unpaid principal balance from the
date on which it was advanced, until paid, at the per annum percentage rate
equal to the Prime Rate as established from time to time during the term hereof
by J.P. Morgan & Co. Principal and interest shall be payable to Note Holder at
800 Connecticut Avenue NW, Suite 1111, Washington, D.C. 20006, or such other
place as Note Holder may designate in writing, all in accordance with the terms
of that certain Loan and Pledge Agreement of even date hereof between the
Borrower, as amended September 10, 1999 (the "Loan Agreement"). Principal and
accrued interest owed under this Note shall be due and payable in full on the
earlier of (i) that date which is five (5) business days following the closing
of the Borrower's initial public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, or (ii) December 31,
2000 (the "Maturity Date"). Borrower may prepay all or any portion of the
unpaid principal amount, together with accrued interest thereon, at any time
prior to the Maturity Date without penalty.
This Second Amended and Restated Promissory Note is an amendment and
restatement of, and not a prepayment of, that certain Amended and Restated
Promissory Note dated May 14, 1999 in the aggregate principal amount of up to
$10,000,000 and of that certain Promissory Note dated May 7, 1999 but effective
as of December 23, 1998, in the aggregate principal amount of $500,000, which
was executed by Ironbound in favor of the Note Holder. This Second Amended and
Restated Promissory Note is issued pursuant to the Loan Agreement and is
entitled to the benefits of the Loan Agreement and may be prepaid or accelerated
as set forth therein or herein, and the provisions of the Loan Agreement are
hereby incorporated herein by reference with the same effect as if they were set
forth in full. The Borrower agrees with the Note Holder that it will perform
and discharge each of the applicable covenants and agreements contained in the
Loan Agreement as from time to time amended or supplemented.
<PAGE>
All loans made by the Note Holder to the Borrower under the Loan
Agreement and this Note and all payments of principal with respect thereto shall
be recorded by the Note Holder and endorsed on the schedule attached hereto
which is part of this Note, which endorsement shall constitute prima facie
evidence of the accuracy of the information endorsed absent manifest error;
provided, however, that the failure of the Note Holder to make any such
endorsement or to make such endorsement correctly shall not affect the
obligation of the Borrower to repay any loan made by the Note Holder to the
Borrower.
Payments received for application to this Note shall be applied first
to the payment of accrued interest at the penalty rate specified below, if any;
second, to the payment of accrued interest at the rate specified above; and,
finally, the balance to reduce the principal amount hereof. All payments of
interest and principal shall be made in lawful money of the United States of
America.
The occurrence and continuance of any one or more of the following
events (whether or not in the control of the Borrower) shall constitute an event
of default ("Event of Default") hereunder:
(1) Failure to pay, when due, the principal, any interest, or any
other sum payable hereunder, and continuance of such failure for more than five
(5) business days after written notice thereof from Note Holder;
(2) The failure of Borrower generally to pay its debts as such debts
become due, the admission by Borrower in writing of its inability to pay its
debts as such debts become due, or the making by Borrower of any general
assignment for the benefit of creditors;
(3) The commencement by Borrower of any case, proceeding, or other
action seeking reorganization, arrangement, adjustment, liquidation,
dissolution, or composition of its debts under any law relating to bankruptcy,
insolvency, or reorganization, or relief of debtors, or seeking appointment of a
receiver, trustee, custodian, or other similar official for it or for all or any
substantial part of its property;
(4) The commencement of any case, proceeding, or other action against
Borrower seeking to have any order for relief entered against Borrower as
debtor, or seeking reorganization, arrangement, adjustment, liquidation,
dissolution, or composition of Borrower or its debts under any law relating to
bankruptcy, insolvency, reorganization, or relief of debtors, or seeking
appointment of a receiver, trustee, custodian, or other similar official for
Borrower or for all or any substantial part of the property of Borrower, and (i)
Borrower shall, by any act or omission, indicate its consent to, approval of, or
acquiescence in such case, proceeding, or action, or (ii) such case, proceeding,
or action results in the entry of an order for relief which is not fully stayed
within sixty (60) days after the entry
-2-
<PAGE>
thereof, or (iii) such case, proceeding, or action remains undismissed for a
period of sixty (60) days or more;
(5) An Event of Default under any of the Loan Agreement, the
Convertible Secured Notes issued by the Borrower to Northwood Ventures LLC and
Northwood Capital Partners LLC dated as of the date hereof or the Convertible
Note and Warrant Purchase Agreement among the Borrower, Northwood Ventures LLC
and Northwood Capital Partners LLC dated as of September 10, 1999 shall have
occurred and be continuing.
Upon the occurrence and continuance of any such Event of Default
hereunder, the entire principal amount hereof, and all accrued and unpaid
interest thereon, shall be accelerated, and shall be immediately due and
payable, at the option of the Note Holder, without demand or notice, and in
addition thereto, and not in substitution therefor, Note Holder shall be
entitled to exercise any one or more of the rights and remedies provided under
the Loan Agreement and/or by applicable law. Failure to exercise said option or
to pursue such other remedies shall not constitute a waiver of such option or
such other remedies or of the right to exercise any of the same in the event of
any subsequent Event of Default hereunder.
In the event that the principal amount hereof, any interest or any
other sum due hereunder is not paid when due and payable, the whole of the
unpaid principal amount evidenced hereby and all unpaid accrued interest thereon
shall, from the date when such payment was due and payable until the date of
payment in full thereof, bear interest at the highest rate per annum allowed
under applicable law, which rate, if applicable, shall commence on the sixth
(6th) business day following the date when said payment was due and payable.
Note Holder shall be entitled to collect all reasonable costs and expenses of
collection and/or suit, including, but not limited to, reasonable attorney's
fees.
Borrower and all other makers, sureties, guarantors and endorsers
hereof hereby waive presentment, protest, demand, notice or dishonor, and all
other notices, and all defenses and pleas on the grounds of any extension or
extensions of the time of payments or the due dates of this Note, in whole or in
part, before or after maturity, with or without notice. No renewal or extension
of this Note, no release or surrender of any collateral given as security for
this Note (if any), and no delay in enforcement of this Note or in exercising
any right or power hereunder, shall affect the liability of Borrower.
No single or partial exercise by Note Holder of any right hereunder,
shall preclude any other or further exercise thereof or the exercise of any
other rights. No delay or omission on the part of Note Holder in exercising any
right hereunder shall operate as a waiver of such right or of any other right
under this Note.
-3-
<PAGE>
In the event any one or more of the provisions contained in this Note
shall for any reason be held invalid, illegal, or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provision of this Note and this Note shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein.
Any notice to Borrower provided for in this Note shall be in writing
and shall be given and be effective upon (i) delivery to Borrower, (ii) receipt
if sent by facsimile transmission (with confirmation of such receipt by the
sender) or (iii) mailing such notice by certified mail, return receipt
requested, addressed to Borrower at the Borrower's address stated below, or to
such other address as Borrower may designate by written notice to Note Holder.
Any notice to Note Holder shall be in writing and shall be given and be
effective upon (i) delivery to Note Holder, (ii) receipt if sent by facsimile
transmission (with confirmation of such receipt by the sender) or (iii) by
mailing such notice by certified mail, return receipt requested, to Note Holder
at the address stated in the first paragraph of this Note, or to such other
address as Note Holder may designate by written notice to Borrower.
This Note may not be modified, amended, waived, extended, changed,
discharged or terminated orally or by any act or failure to act on the part of
Borrower, but only by an agreement in writing signed by the party against whom
enforcement of any modification, amendment, waiver, extension, change, discharge
or termination is sought.
This Note shall be governed by the laws of the District of Columbia
without giving effect to its principles of choice of laws, and shall be binding
upon the successors and assigns of the Borrower and shall inure to the benefit
of Note Holder and its successors and assigns.
[Execution Page Follows]
-4-
<PAGE>
IN WITNESS WHEREOF, the Borrower has duly executed this Note as of the
date first above written.
BORROWER:
E2Enet, Inc.
/s/ Steven J. Quamme
By:_______________________________________
Steven J. Quamme
Senior Vice President and Secretary
Address:
800 Connecticut Avenue, N.W.
Suite 1111
Washington, D.C. 20006
Tel: (202) 261-6000
Fax: (202) 261-6020
-5-
<PAGE>
EXHIBIT 10.21
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS AGREEMENT (the "Agreement") is made as of September 10, 1999, by
and among E2Enet, Inc., a Delaware corporation (the "Company"), and each Person
listed on the Schedule of Holders attached hereto as Exhibit A (together the
------------------- ---------
"Securityholders"). Unless otherwise provided in this Agreement, capitalized
terms used herein shall have the meanings set forth in Section 9 hereof.
---------
Recitals:
--------
A. The Company was founded by Securityholders listed in Part I of
Exhibit A.
- ----------
B. The Company and certain Securityholders listed in Part I of
Exhibit A entered into employment agreements whereby such Securityholders
- ---------
purchased shares of the Company's common stock (the "Common Stock").
C. The Company and certain Securityholders listed in Part I of
Exhibit A are parties to certain Stock Purchase Agreements (the "Stock Purchase
- --------
Agreements") pursuant to which such Securityholders received shares of the
Common Stock. In order to induce such Securityholders to enter into the Stock
Purchase Agreements, the Company agreed to provide the registration rights set
forth in this Agreement.
D. The Securityholders listed in Part II of Exhibit A entered into
---------
Convertible Note and Warrant Purchase Agreements with the Company, pursuant to
which they agreed to invest in the Company, evidenced by the issuance by the
Company of notes convertible into Common Stock, and received warrants
exercisable for Common Stock. In order to induce such Securityholders to enter
into such Convertible Note and Warrant Purchase Agreements, the Company agreed
to provide the registration rights set forth in this Agreement.
E. Any other Persons who purchase or receive capital stock or notes
convertible into capital stock of the Company may, with the consent of the
Company's Board of Directors become parties to this Agreement by executing the
Joinder Agreement attached hereto as Exhibit B (a substantially identical form
---------
of which Joinder Agreement was attached to the Stock Purchase Agreements as
Exhibit F thereto).
- ---------
F. It is the Company's intention that all of the existing
stockholders of the Company be parties to this Agreement.
<PAGE>
Agreement
---------
In consideration of the premises and mutual covenants set forth
herein, the receipt and adequacy of which are hereby acknowledged, the parties
hereto agree as follows:
1. Piggyback Registrations.
-----------------------
(a) Right to Piggyback. Subject to any applicable lock-up and
------------------
transfer restrictions contained in any Equity Subscription Agreement,
Subscription Agreement, Employment Agreement or Stock Purchase Agreement
pursuant to which the Securityholders acquired their respective shares of Common
Stock, whenever the Company proposes to register any of its securities under the
Securities Act (other than pursuant to a registration on Form S-4, Form S-8 or
any successor form) and the registration form to be used may be used for the
registration of Registrable Securities (a "Piggyback Registration"), the Company
shall give prompt written notice to all holders of Registrable Securities of its
intention to effect such a registration. The Company shall include in such
registration all Registrable Securities with respect to which the Company has
received written requests for inclusion therein within 10 days after the receipt
of the Company's notice. Notwithstanding the foregoing, the Company's initial
public offering under the Securities Act shall not be a Piggyback Registration
without the consent of the Company's Board of Directors.
(b) Priority on Primary Registrations. If a Piggyback
---------------------------------
Registration is an underwritten primary registration on behalf of the Company,
and the managing underwriters advise the Company in writing that in their
opinion the number of securities requested to be included in such registration
exceeds the number which can be sold in an orderly manner in such offering
within a price range acceptable to the Company, the Company shall include in
such registration: (i) first, the securities the Company proposes to sell; (ii)
second, the Registrable Securities requested to be included in such
registration, pro rata among the holders of such Registrable Securities on the
basis of the number of shares owned by such holders; and (iii) third, other
securities requested to be included in such registration, pro rata among the
holders thereof on the basis of the number of their securities requested to be
included therein.
Priority on Secondary Registrations. If a Piggyback
-----------------------------------
Registration is an underwritten secondary registration on behalf of the Company
or holders of the Company's securities and the managing underwriters advise the
Company in writing that in their opinion the number of securities requested to
be included in such registration exceeds the number which can be sold in an
orderly manner in such offering within a price range acceptable to the Company,
or, in the case of registrations under Sections 2 or 3 below, the holders
---------------
requesting such registration, the Company shall include in such registration:
(i) first, the securities the Company proposes to sell and the securities
requested to be included therein by the holders requesting such registration;
(ii) second, the Registrable Securities requested to be included in such
registration, pro rata among the holders of such Registrable Securities on the
basis of the number of shares owned by such holders; and (iii) third, other
securities requested to be included in such
-2-
<PAGE>
registration, pro rata among the holders thereof on the basis of the number of
their securities requested to be included therein.
2. Demand Registrations
--------------------
(a) At any time following the six month year anniversary of the
closing of the Company's Qualified IPO, the Initiating Holders may request in
writing that all or part of the Convertible Note Registrable Securities shall be
registered for sale under the Securities Act. Within 20 days after receipt of
any such request, the Company shall give written notice of such request to the
other holders of Convertible Note Registrable Securities, and shall include in
such registration all Convertible Note Registrable Securities held by all such
holders who wish to participate in such demand registration and provide the
Company with written requests for inclusion therein within 15 days after the
receipt of the Company's notice. Thereupon, the Company shall effect the
registration of all Convertible Note Registrable Securities as to which it has
received requests for registration for sale.
(b) The Company shall not be required to effect more than two (2)
registrations under Section 2(a), provided, however, that any registration
------------
proceeding begun pursuant to Section 2(a) that is subsequently withdrawn at the
------------
request of the Initiating Holders shall count toward the two registration
statements which the holders of Convertible Note Registrable Securities have the
right to cause to effect pursuant to Section 2(a) unless the Initiating Holders
------------
reimburse the Company for all out-of-pocket expenses incurred by the Company in
connection with such withdrawn registration.
(c) Notwithstanding any other provision of this Section 2, if any such
---------
registration contemplates an underwritten offering and if the managing
underwriter advises the Initiating Holders in writing that in the managing
underwriter's opinion the number of securities requested to be included in such
registration exceeds the number that can be sold in such offering without
adversely affecting such underwriter's ability to effect an orderly distribution
of such securities, the Company will include in such registration the number of
Convertible Note Registrable Securities requested to be included that, in the
opinion of such underwriters, can be sold, pro rata, among the holders of such
--- -----
securities on the basis of the number of Convertible Note Registrable Securities
then owned by each holder thereof.
(d) The Company shall be entitled to include in any registration
statement referred to in this Section 2, for sale in accordance with the method
---------
of disposition specified by the Initiating Holders, shares of Common Stock to be
sold by the Company for its own account, except as and to the extent that, in
the opinion of the managing underwriter (if such method of disposition shall be
an underwritten public offering), such inclusion would adversely affect the
marketing of the Registrable Securities to be sold.
(e) Notwithstanding anything to the contrary in this Agreement, the
Company shall not be obligated to file and cause to become effective any
registration statement under this Section 2 or under Section 3 below (i) within
--------- ---------
a period of 180 days after the effective date of any registration statement of
the Company (other than any registration statement on Form S-4 (or any successor
form) or relating to any employee stock option or stock purchase or similar
-3-
<PAGE>
plan or relating to any dividend reinvestment plan) under the Securities Act;
(ii) if the Company provides notice to the Initiating Holder(s) within 15 days
of the request for a registration that the Company is engaged in pursuing an
underwritten public offering of its stock (the "Competing Offering") in which
the Initiating Holders may include Registrable Securities pursuant to Section 1
---------
hereof; provided, however, the Company's obligation to file and cause to become
effective a registration statement under this Section 2 or under Section 3 below
--------- ---------
shall be reinstated if the Company does not file a registration statement with
respect to the Competing Offering with the Securities and Exchange Commission
within 90 days after it so notifies the Initiating Holder(s); (iii) during any
period in which the Company would be required under the Securities Act to effect
a special audit of its financial statements for inclusion in such registration
statement (unless the participating holders bear the cost of such special
audit); or (iv) if the Company provides to the Initiating Holders a certificate
signed by the Chief Executive Officer of the Company stating that, in the good
faith judgment of the Company's Board of Directors, it would not be in the best
interests of the Company and its stockholders for a prospectus or registration
statement (as applicable) to be filed at such time and it is therefore
appropriate to defer the filing of such prospectus or registration statement, in
which case the Company may direct that such request for a registration be
delayed for a period not in excess of 180 days, provided that such right to
delay a request may be exercised by the Company no more than once in any twelve
month period.
(f) Following the effectiveness of a registration statement (and the
filings with any state securities commissions) filed under this Section 2 or
---------
under Section 3 below, the Company may direct a holder of Registrable Securities
---------
to suspend sales of the Registrable Securities for such times as the Company
reasonably may determine is necessary and advisable, for any event for which
disclosure may be required under the securities laws, including the following
events (a "Suspension Event"), (i) an underwritten primary offering by the
Company where the Company is advised by the underwriters for such offering that
sale of Registrable Securities under the registration statement would have a
material adverse effect on the primary offering, or (ii) pending negotiations
relating to, or consummation of, a transaction or the occurrence of an event (x)
that would require additional disclosure of material information by the Company
in the registration statement (or such filings), (y) as to which the Company has
a bona fide business purpose for preserving confidentiality or (z) which renders
the Company unable to comply with Securities and Exchange Commission
requirements, or (iii) the continued effectiveness of a registration statement
would have a material adverse effect on any proposed or pending acquisition,
merger, business combination or other material transaction involving the
Company, in each case under circumstances that would make it impractical or
inadvisable to cause the registration statement (or such filings) to become
effective or to promptly amend or supplement the registration statement on a
post-effective basis, as applicable.
(g) In the case of an event which causes the Company to suspend the
effectiveness of a registration statement filed under Section 2 or under Section
--------- -------
3, the Company may give notice (a "Suspension Notice") to the holders of
- -
Registrable Securities to suspend sales of the Registrable Securities so that
the Company may correct or update the registration statement (or such filings).
Each holder of Registrable Securities agrees that it will not effect any sales
of the Registrable Securities pursuant to such registration statement (or such
filings) at any time after it has received a Suspension Notice from the Company.
If so directed by the
-4-
<PAGE>
Company, each holder of Registrable Securities will deliver to the Company all
copies of the prospectus covering the Registrable Securities held by it at the
time of receipt of the Suspension Notice. The holders of Registrable Securities
may recommence effecting sales of the Registrable Securities pursuant to the
registration statement (or such filings) following further notice to such effect
(an "End of Suspension Notice") from the Company, which End of Suspension Notice
shall be given by the Company following the conclusion of any Suspension Event
and the effectiveness of any required amendment or supplement to the
registration statement. The period of effectiveness of the registration that is
subject to suspension under this Section shall be extended for a period equal to
the length of the suspension.
3. S-3 Registration Rights
-----------------------
Following a Qualified IPO, from such time as the Company becomes
eligible to file a registration statement on Form S-3, the Company shall, at the
request of the Initiating Holders that the Company effect a registration on Form
S-3 with respect to Convertible Note Registrable Securities, within twenty (20)
days after receipt of any such request, give written notice of the proposed
registration to all other holders of Convertible Note Registrable Securities,
and include in such registration all Convertible Note Registrable Securities
held by all such holders who wish to participate in such registration and
provide the Company with written requests for inclusion therein within 15 days
after the receipt of the Company's notice. Thereupon, the Company shall effect
such registration as may be so requested and as would permit or facilitate the
sale and distribution of all such Initiating Holders' Convertible Note
Registrable Securities as are specified in such request, together with all or
such portion of the Convertible Note Registrable Securities of any other
holder(s) thereof joining in such request as are specified in a written request
given within fifteen (15) days after receipt of such written notice from the
Company; provided, however, that the Company shall not be obligated to effect
-------- -------
any such registration pursuant to this Section 3 if Form S-3 is not available
---------
for such offering by the Initiating Holders. The Company may require that any
registration of Registrable Securities constituting more than 1% of the total
number of shares of capital stock then outstanding be firmly underwritten.
4. Holdback Agreement. Each holder of Registrable Securities shall not
------------------
effect any public sale or distribution (including sales pursuant to Rule 144) of
equity securities of the Company, or any securities convertible into or
exchangeable or exercisable for such securities, during the seven days prior to
and for such period as requested by the underwriter managing any Piggyback
Registration beginning on the effective date of any underwritten Piggyback
Registration in which Registrable Securities are included (except as part of
such underwritten registration), up to a maximum of 180 days in the case of the
Company's initial public offering, and up to a maximum of 90 days in the case of
any other Piggyback Registration.
5. Registration Procedures. Whenever the holders of Registrable
-----------------------
Securities have requested that any Registrable Securities be registered pursuant
to this Agreement, the Company shall use its reasonable best efforts to effect
the registration and the sale of such Registrable Securities in accordance with
the intended method of disposition thereof, and pursuant thereto the Company
shall as expeditiously as possible:
-5-
<PAGE>
(a) prepare and file with the Securities and Exchange Commission a
registration statement with respect to such Registrable Securities and use its
reasonable best efforts to cause such registration statement to become
effective;
(b) notify each holder of Registrable Securities of the effectiveness
of each registration statement filed hereunder and prepare and file with the
Securities and Exchange Commission such amendments and supplements to such
registration statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective for a period of not less
than 90 days and comply with the provisions of the Securities Act with respect
to the disposition of all securities covered by such registration statement
during such period in accordance with the intended methods of disposition by the
sellers thereof set forth in such registration statement; provided, however,
that if the Company is eligible to use Form S-3, the holders of Registrable
Securities may require the Company to keep such registration effective as a
"shelf registration" for a period of up to 2 years, subject to the provisions of
Sections 2(f) and (g) above;
- ---------------------
(c) furnish to each seller of Registrable Securities such number of
copies of such registration statement, each amendment and supplement thereto,
the prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as such seller may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such seller;
(d) use its reasonable best efforts to register or qualify such
Registrable Securities under such other securities or blue sky laws of such
jurisdictions as any seller reasonably requests and do any and all other acts
and things which may be reasonably necessary or advisable to enable such seller
to consummate the disposition in such jurisdictions of the Registrable
Securities owned by such seller; provided that the Company shall not be required
to: (i) qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this subparagraph; (ii) subject itself
to taxation in any such jurisdiction; or (iii) consent to general service of
process in any such jurisdiction;
(e) notify each seller of such Registrable Securities, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement contains an untrue statement
of a material fact or omits any fact necessary to make the statements therein
not misleading, and, at the request of any such seller, the Company shall
prepare a supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus
shall not contain an untrue statement of a material fact or omit to state any
fact necessary to make the statements therein not misleading;
(f) cause all such Registrable Securities to be listed or quoted on
each securities exchange or market on which similar securities issued by the
Company are then listed; provided, however, that if the Company's securities are
not listed or quoted on a securities exchange or market, the Stockholders will
not have the right to a registration under Section 2 or Section 3 of this
--------- ----------
Agreement;
-6-
<PAGE>
(g) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement;
(h) enter into such customary agreements (including underwriting
agreements in customary form) in order to expedite or facilitate the disposition
of such Registrable Securities;
(i) make available for inspection by any underwriter participating in
any disposition pursuant to such registration statement, and any attorney,
accountant or other agent retained by any such underwriter, all financial and
other records, pertinent corporate documents and properties of the Company, and
cause the Company's officers, directors, employees and independent accountants
to supply all information reasonably requested by any such underwriter,
attorney, accountant or agent in connection with such registration statement;
(j) otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the Securities and Exchange Commission, and
make available to its security holders, as soon as reasonably practicable, an
earnings statement covering the period of at least 12 months beginning with the
first day of the Company's first full calendar quarter after the effective date
of the registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act and Rule 158 thereunder;
(k) in the event of the issuance of any stop order suspending the
preventing the use of any related prospectus or suspending the qualification of
any Common Stock included in such registration statement for sale in any
jurisdiction, the Company shall use its reasonable best efforts promptly to
obtain the withdrawal of such order;
(l) subject to Section 5(d) above, use its reasonable best efforts to
------------
cause any Registrable Securities covered by such registration statement to be
registered with or approved by such other governmental agencies or authorities
as may be necessary to enable the sellers thereof to consummate the disposition
of such Registrable Securities;
(m) if the offering is underwritten, use its reasonable best efforts
to furnish on the date that Registrable Securities are delivered to the
underwriters for sale pursuant to such registration, an opinion dated such date
of counsel representing the Company for the purposes of such registration and a
"comfort letter" from the Company's independent accountants, addressed to the
underwriters covering such issues as are reasonably required by such
underwriters; and
(n) notwithstanding anything in the foregoing to the contrary, the
Company may delay the effectiveness of any registration statement, or suspend
offers and sales under any effective registration statement, at any time for an
aggregate of up to 90 days in any 12-month period if the Company's Board of
Directors determines, in good faith, that such delay or suspension would be in
the best interests of the Company.
6. Registration Expenses.
---------------------
-7-
<PAGE>
(a) Payment of Registration Expenses. All expenses incident to the
--------------------------------
Company's performance of or compliance with this Agreement, including without
limitation all registration and filing fees, fees and expenses of compliance
with securities or blue sky laws, printing expenses, messenger and delivery
expenses, fees and disbursements of custodians, and fees and disbursements of
counsel for the Company and all independent certified public accountants,
underwriters (excluding discounts and commissions) and other Persons retained by
the Company, and reasonable fees for one firm of counsel for the holders of
Registrable Securities (all such expenses being herein called "Registration
Expenses"), shall be borne by the Company. The Company shall, in addition, pay
its internal expenses (including, without limitation, all salaries and expenses
of its officers and employees performing legal or accounting duties), the
expense of any annual audit or quarterly review, the expense of any liability
insurance and the expenses and fees for listing or quoting the securities to be
registered on each securities exchange on which similar securities issued by the
Company are then listed or on the NASD automated quotation system.
(b) Payment of Registration Expenses by Holders of Registrable
----------------------------------------------------------
Securities. To the extent Registration Expenses are not required to be paid by
the Company (including, without limitation, any underwriting discounts or
commissions that are the responsibility of the holders of Registrable
Securities), each holder of securities included in any registration hereunder
shall pay those Registration Expenses allocable to the registration of such
holder's securities so included, and any Registration Expenses not so allocable
shall be payable by all sellers of securities included in such registration in
proportion to the aggregate selling price of the securities to be so registered.
7. Indemnification.
---------------
(a) Indemnification by the Company. The Company agrees to indemnify,
------------------------------
to the extent permitted by law, each holder of Registrable Securities, its
officers and directors and each Person who controls such holder (within the
meaning of the Securities Act) against all losses, claims, damages, liabilities
and expenses caused by any untrue or alleged untrue statement of material fact
contained in any registration statement, prospectus or preliminary prospectus or
any amendment thereof or supplement thereto or any omission or alleged omission
of a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as the same are caused by or
contained in any information furnished in writing to the Company by such holder
expressly for use therein, results from the failure of such holder to provide
information necessary for the registration statement to the Company, or by such
holder's failure to deliver a copy of the registration statement or prospectus
or any amendments or supplements thereto after the Company has furnished such
holder with a sufficient number of copies of the same. In connection with an
underwritten offering, as required by the underwriters, the Company shall
indemnify such underwriters, their officers and directors and each Person who
controls such underwriters (within the meaning of the Securities Act) to the
same extent as provided above with respect to the indemnification of the holders
of Registrable Securities.
-8-
<PAGE>
(b) Indemnification by the Holders of Registrable Securities. In
--------------------------------------------------------
with any registration statement in which a holder of Registrable Securities is
participating, each such holder shall furnish to the Company in writing such
information and affidavits as the Company reasonably requests for use in
connection with any such registration statement or prospectus and, to the extent
permitted by law, shall indemnify the Company, its directors and officers and
each Person who controls the Company (within the meaning of the Securities Act)
against any losses, claims, damages, liabilities and expenses resulting from any
untrue or alleged untrue statement of material fact contained in the
registration statement, prospectus or preliminary prospectus or any amendment
thereof or supplement thereto resulting from such information provided by such
holder or any omission or alleged omission of a material fact required to be
stated therein or necessary to make the statements therein not misleading and
not provided by such holder; provided that the obligation to indemnify shall be
individual, not joint and several, for each holder and shall be limited to the
net amount of proceeds received by such holder from the sale of Registrable
Securities pursuant to such registration statement.
(c) Procedure for Indemnification. Any Person entitled to
-----------------------------
indemnification hereunder shall (i) give prompt written notice to the
indemnifying party of any claim with respect to which it seeks indemnification
(provided that the failure to give prompt notice shall not impair any Person's
right to indemnification hereunder to the extent such failure has not prejudiced
the indemnifying party) and (ii) unless in such indemnified party's reasonable
judgment a conflict of interest between such indemnified and indemnifying
parties may exist with respect to such claim, permit such indemnifying party to
assume the defense of such claim with counsel reasonably satisfactory to the
indemnified party. If such defense is assumed, the indemnifying party shall not
be subject to any liability for any settlement made by the indemnified party
without its consent (but such consent shall not be unreasonably withheld). An
indemnifying party who is not entitled to, or elects not to, assume the defense
of a claim shall not be obligated to pay the fees and expenses of more than one
counsel for all parties indemnified by such indemnifying party with respect to
such claim, unless in the reasonable judgment of any indemnified party a
conflict of interest may exist between such indemnified party and any other of
such indemnified parties with respect to such claim. Notwithstanding anything in
this Section 7(c) to the contrary, in the event the Company determines, in good
------------
faith, that a claim materially affects the interests of the Company, the Company
may solely control the defense of such claim with counsel reasonably
satisfactory to the indemnified holders of Registrable Securities, and the
provisions concerning settlement set forth in the second sentence of this
Section 7(c) shall apply. In the event the Company is an indemnified party
- ------------
pursuant to this Section 7, the indemnifying party may be subject to liability
----------
if the Company settles a claim in good faith and in a reasonable manner.
(d) Subject to applicable law, if the indemnification provided for in
this Section 7 is held by a court of competent jurisdiction to be unavailable to
---------
an indemnified party with respect to any losses, claims, damages or liabilities
referred to herein for reasons of public policy, the indemnifying party, in lieu
of indemnifying such indemnified party hereunder, shall to the extent permitted
by applicable law contribute to the amount paid or payable by such indemnified
party as a result of such loss, claim, damage or liability in such proportion as
is appropriate to reflect the relative fault of the indemnifying party on the
one hand and the indemnified party on the other, in connection with the matters
that resulted in such loss, claim,
-9-
<PAGE>
damage or liability, as well as any other relevant equitable considerations. The
relative fault of the indemnifying party and the indemnified party shall be
determined by a court of law by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
8. Participation in Underwritten Registrations. No Person may
-------------------------------------------
participate in any registration hereunder unless such Person:
(a) in the case of a registration which is underwritten, agrees to
sell such Person's securities on the basis provided in any underwriting
arrangements approved by the Company or the holders initiating such registration
(as applicable for registrations under Sections 2 or 3 above);
---------------
(b) as expeditiously as possible, notifies the Company, at any time
when a prospectus relating to such Person's Registrable Securities is required
to be delivered under the Securities Act, of the happening of any event with
respect to such Person known to such Person as a result of which such prospectus
contains an untrue statement of a material fact or omits any fact necessary to
make the statements therein not misleading;
(c) complies with all reasonable requests made by the Company or its
counsel with respect to the registration of such Person's Registrable
Securities, including, without limitation, providing access to all relevant
books and records; and
(d) completes, executes and delivers all questionnaires, powers of
attorney, indemnities, underwriting agreements and other usual and customary
documents necessary or appropriate with respect to the offering of such Person's
Registrable Securities, and in the case of a registration which is underwritten,
necessary or appropriate under the terms of such underwriting arrangements
(subject to the provision in Section 8(a) above).
------------
9. Definitions.
-----------
(a) The term "Convertible Note Registrable Securities" means (i) all
shares of Common Stock issued or issuable upon conversion of the Convertible
Notes issued by the Company, (ii) all shares of Common Stock issued or issuable
upon exercise of the warrants issued to the holders of the Convertible Notes,
and (iii) all shares of Common Stock issued by the Company in respect of such
shares of Common Stock referred to in clauses (i) or (ii) above, including bonus
shares and share dividends.
(b) The term "Qualified IPO" means the first registered public
offering of the Common Stock by the Company under the Securities Act in which
the aggregate gross cash proceeds to the Company are equal to or exceed
$50,000,000 (fifty million dollars).
(c) The term "Initiating Holders" means holders of fifty percent
(50%) or more of the outstanding Convertible Note Registrable Securities with an
anticipated
-10-
<PAGE>
aggregate offering price, net of underwriting discounts and commissions, of not
less than $5,000,000 (five million dollars).
(d) The term "Person" means any individual, corporation, partnership,
joint venture, association, joint-stock company, limited liability company,
trust or unincorporated organization.
(e) The term "Registration Expenses" has the meaning set forth in
Section 6 above.
- ---------
(f) The term "Registrable Securities" means (i) Convertible Note
Registrable Securities, (ii) any Common Stock issued (A) to the Company's
founders (as noted on the Schedule of Holders), (B) pursuant to the Stock
-------------------
Purchase Agreements, (whether issued before or after the date hereof), (C)
pursuant to an employment agreement with the Company, (D) to a member of the
Company's Board of Directors or (E) to parties who, with the consent of the
Company's Board of Directors, become a party to this Agreement by signing a
Joinder Agreement substantially in the form of Exhibit B, (iii) any other
---------
Common Stock issued or issuable with respect to the securities referred to in
clause (ii) by way of a gift, a stock dividend or stock split or in connection
with an exchange or combination of shares, recapitalization, merger,
consolidation or other reorganization, and (iv) any other shares of Common Stock
held by Persons holding securities described in clauses (i) through (iii),
inclusive, above. As to any particular Registrable Securities, such securities
shall cease to be Registrable Securities when they have been distributed to the
public pursuant to an offering registered under the Securities Act or sold to
the public through a broker, dealer or market maker in compliance with Rule 144
under the Securities Act (or any similar rule then in force).
(g) The term "Securities Act" means the Securities Act of 1933, as
amended, or any similar federal law then in force.
10. Miscellaneous.
-------------
(a) No Inconsistent Agreements. The Company shall not hereafter
--------------------------
enter into any agreement with respect to its securities which is inconsistent
with or violates the rights granted to the holders of Registrable Securities in
this Agreement.
(b) Adjustments Affecting Registrable Securities. The Company shall
--------------------------------------------
not take any action, or permit any change to occur, with respect to its
securities which would adversely affect the ability of the holders of
Registrable Securities to include such Registrable Securities in a registration
undertaken pursuant to this Agreement or which would adversely affect the
marketability of such Registrable Securities in any such registration
(including, without limitation, effecting a stock split or a combination of
shares).
(c) Remedies. Any Person having rights under any provision of this
--------
Agreement shall be entitled to enforce such rights specifically to recover
damages caused by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole
-11-
<PAGE>
discretion apply to any court of law or equity of competent jurisdiction
(without posting any bond or other security) for specific performance and for
other injunctive relief in order to enforce or prevent violation of the
provisions of this Agreement.
(d) Amendments and Waivers. Except as otherwise provided herein, the
----------------------
provisions of this Agreement may be amended or waived only upon the prior
written consent of the Company and holders of at least 51% of the Registrable
Securities (including the holders of at least 51% of the Convertible Note
Registrable Securities).
(e) Successors and Assigns. All covenants and agreements in this
----------------------
Agreement by or on behalf of any of the parties hereto shall bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not. In addition, whether or not any express assignment
has been made, the provisions of this Agreement which are for the benefit of
purchasers or holders of Registrable Securities are also for the benefit of, and
enforceable by, any subsequent holder of Registrable Securities. Upon any
transfer of Registrable Securities, the holder of the Registrable Securities
shall use its best efforts to have the new holder of Registrable Securities sign
the Joinder Agreement attached hereto as Exhibit B.
---------
(f) Severability. Whenever possible, each provision of this
------------
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
(g) Counterparts; Facsimile Transmission. This Agreement may be
------------------------------------
executed simultaneously in two or more counterparts, any one of which need not
contain the signatures of more than one party, but all such counterparts taken
together shall constitute one and the same Agreement. Each party to this
Agreement agrees that it will be bound by its own telecopied signature and that
it accepts the telecopied signature of each other party to this Agreement.
(h) Descriptive Headings. The descriptive headings of this
--------------------
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
(i) Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the domestic laws of the State of Delaware, without giving
effect to any choice of law or conflict of law rules or provisions (whether of
the State of Delaware or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the State of Delaware.
(j) Notices. All notices, demands or other communications to be
-------
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally
to the recipient, sent to the recipient by reputable overnight courier service
(charges prepaid) or 48 hours after deposited in the United States mail, first
class, to the recipient by postage prepaid or by facsimile. Such
-12-
<PAGE>
notices, demands and other communications shall be sent to each Securityholder
at the addresses indicated on the Schedule of Holders and to the Company at the
address of its corporate headquarters or to such other address or to the
attention of such other Person as the recipient party has specified by prior
written notice to the sending party.
(k) Parties. The Persons described in Section 9(f) above may become
------- ------------
parties to this Agreement by either signing this Agreement or by executing a
Joinder Agreement substantially in the form of Exhibit B attached hereto.
---------
(l) New Parties. During the term of this Agreement, the Company may,
-----------
with the consent of the Company's Board of Directors, permit additional Persons
to become parties to this Agreement by executing a Joinder Agreement
substantially in the form of Exhibit B attached hereto, and the Schedule of
--------- -----------
Holders attached hereto as Exhibit A shall be revised and updated accordingly.
- ------- ---------
(m) Termination of Agreement. All rights granted hereunder will
------------------------
expire and this Agreement will be terminated on the earlier of (i) the 4th
anniversary of the date of this Agreement, (ii) for any individual
Securityholder, at such time as such holder is able to sell all of his or her
Registrable Securities pursuant to Rule 144(k) under the Securities Act (or any
similar rule then in force) in one transaction or (iii) at such time as the
Company has registered the Registrable Securities via a shelf registration on
Form S-3 (or a successor form) and has kept such Form S-3 effective for at least
one year. Notwithstanding the foregoing, in the event that a holder of
Registrable Securities is unable to sell all of his or her then-remaining
Registrable Securities pursuant to Rule 144(k) in a single transaction as of the
4th anniversary of the date of this Agreement (where, for example, such holder
is deemed to be an "Affiliate" of the Company, as defined in the Securities
Act), this Agreement shall be extended until the 6th anniversary of the date of
this Agreement only with regard to such holder of Registrable Securities.
[THIS SPACE INTENTIONALLY LEFT BLANK]
-13-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
E2ENET, INC.
/s/ Steven J. Quamme
By: ______________________________________
Name:
Title:
/s/ Jonathan J. Ledecky
______________________________________
Name
Northwood Ventures LLC
By: /s/ Peter J. Schiff
_______________________________________
Name
Northwood Partners LLC
By: /s/ Peter J. Schiff
_______________________________________
Name
-14-
<PAGE>
EXHIBIT 10.22
FORM OF
SUBSCRIPTION AGREEMENT
THIS AGREEMENT is made as of this ____ day of May, 1999, by and
between E2Enet.com, Inc., a corporation incorporated under the laws of the State
of Delaware ("Company"), and _________ (the "Subscriber") with reference to the
following Recitals:
A. The Company was incorporated on February 9, 1999, under the laws
of the State of Delaware.
B. The Company has authority to issue 10,000,000 shares of the Common
Stock, $.01 par value.
C. At the date hereof, the Company has issued less than 10,000,000
shares of its capital stock.
D. The Company and Subscriber have previously agreed to the stock
purchase described herein to be effectively issued as of May 7, 1999, and this
Agreement memorializes this prior oral agreement.
E. The Subscriber desires to purchase ________ shares of the Common
Stock of the Company on the terms hereinafter set forth.
NOW, THEREFORE, the parties hereto, intending to be legally bound
hereby, agree as follows:
1. The Subscriber hereby subscribes for and agrees to purchase from
the Company at the price of $.01 per share, ________ shares of the Common Stock,
$.01 par value, of the Company (the "SHARES"). The Subscriber understands,
however, that this subscription shall not be binding until countersigned by the
Company.
2. The payment for the shares shall be made in cash or promissory
note upon receipt of a certificate or certificates evidencing issue to the
Subscriber of the appropriate number of fully-paid and non-assessable shares of
the Company.
3. In connection with the purchase and sale of the Shares hereunder,
Subscriber represents and warrants to the Company that:
(a) The Shares to be acquired by Subscriber pursuant to this Agreement
will be acquired for Subscriber's own account and not with a view to, or
<PAGE>
intention of, distribution thereof in violation of the Securities Act of 1933,
as amended (the "SECURITIES ACT"), or any applicable state securities laws, and
none of the Shares will be disposed of in contravention of the Securities Act or
any applicable state securities laws.
(b) Subscriber is an accredited investor, as such term is defined in
Rule 501 of Regulation D promulgated under the Securities Act, and Subscriber is
able to evaluate the risks and benefits of the investment in the Shares; if
Subscriber is not an accredited investor as defined above, Subscriber hereby
appoints Jonathan J. Ledecky as Subscriber's purchaser's representative in
connection with Subscriber's receipt of the Shares hereunder.
(c) Subscriber is able to bear the economic risk of such Subscriber's
investment in the Stock for an indefinite period of time because the Shares have
not been registered under the Securities Act and, therefore, cannot be sold
unless subsequently registered under the Securities Act or an exemption from
such registration is available.
(d) Subscriber has had an opportunity to ask questions and receive
answers concerning the terms and conditions of the offering of Shares and has
had full access to such other information concerning the Company as such
Subscriber has requested.
(e) This Agreement constitutes the legal, valid and binding obligation
of Subscriber, enforceable in accordance with its terms, and the execution,
delivery and performance of this Agreement and such other agreements by
Subscriber does not and, to the knowledge of Subscriber, will not conflict with,
violate or cause a breach of any agreement, contract or instrument to which
Subscriber is a party (including, but not limited to, any agreement referred to
in subparagraph 3(f) below) or any judgment, order or decree to which Subscriber
-----------------
is subject and Subscriber further represents and warrants that Subscriber is not
now in breach of any such agreement, contract or instrument to which Subscriber
is a party.
(f) Subscriber is not a party to or bound by any employment agreement,
noncompete agreement or confidentiality agreement that would be breached by
Subscriber's relationship with the Company or any subsidiary of the Company.
(g) Subscriber acknowledges that the Company has provided to
Subscriber adequate disclosure materials (related to the Company) for purposes
of Subscriber's investment in the Common Stock.
4. The Subscriber hereby agrees that certificates representing the
Shares may bear the following legend:
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<PAGE>
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH
SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE
SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH
SHARES UNDER THE SECURITIES ACT OF 1933, UNLESS, IN THE
OPINION (WHICH SHALL BE IN FORM AND SUBSTANCE
SATISFACTORY TO THE CORPORATION) OF COUNSEL SATISFACTORY
TO THE CORPORATION, SUCH REGISTRATION IS NOT REQUIRED.
5. The Subscriber agrees to hold harmless and indemnify the Company
for any and all liabilities resulting to it through violation by the undersigned
of the above representations.
6. The Subscriber agrees that this Subscription Agreement is binding
on the undersigned's heirs, executors and assigns.
7. Simultaneously with the execution of this Subscription Agreement,
the Subscriber agrees to enter into the Stockholders Agreement attached hereto
as Annex I.
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8. This Subscription Agreement shall be governed by the laws of the
State of Delaware applicable to agreements made and entirely to be performed
within such jurisdiction.
9. This Subscription Agreement may be signed in counterparts and
shall be binding on a party if transmitted to the other party by facsimile.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of the
date first above written.
COMPANY
By:___________________________________
Steven J. Quamme
Senior Vice President
SUBSCRIBER
____________________________________
Name:_______________________________
Address:____________________________
____________________________
____________________________
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<PAGE>
Exhibit 10.23
E2ENET, INC.
1999 STOCK OPTION AND INCENTIVE PLAN
<PAGE>
TABLE OF CONTENTS
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1. PURPOSE...................................................................................................... 1
2. DEFINITIONS.................................................................................................. 1
3. ADMINISTRATION OF THE PLAN................................................................................... 5
3.1. Board.................................................................................................. 5
3.2. Committee.............................................................................................. 5
3.3. Awards................................................................................................. 6
3.4. No Liability........................................................................................... 6
4. STOCK SUBJECT TO THE PLAN.................................................................................... 7
5. EFFECTIVE DATE AND TERM OF THE PLAN.......................................................................... 7
5.1. Effective Date......................................................................................... 7
5.2. Term................................................................................................... 7
6. OPTION GRANTS................................................................................................ 8
6.1. Company or Subsidiary Employees; Service Providers; Other
Persons.............................................................................................. 8
6.2. Successive Awards...................................................................................... 8
6.3. Reload Options......................................................................................... 8
7. LIMITATIONS ON GRANTS........................................................................................ 8
7.1. Limitation on Shares of Stock Subject to Grants and Cash
Awards........................................................................................... 8
7.2. Limitations on Incentive Stock Options................................................................. 9
8. AWARD AGREEMENT.............................................................................................. 9
9. OPTION PRICE................................................................................................. 9
10. VESTING, TERM AND EXERCISE OF OPTIONS....................................................................... 10
10.1. Vesting and Option Period............................................................................. 10
10.2. Term.................................................................................................. 10
10.3. Acceleration.......................................................................................... 10
10.4. Termination of Employment or Other Relationship....................................................... 10
10.5. Rights in the Event of Death.......................................................................... 11
10.6. Rights in the Event of Disability..................................................................... 11
10.7. Limitations on Exercise of Option..................................................................... 11
10.8. Method of Exercise.................................................................................... 11
10.9. Delivery of Stock Certificates........................................................................ 12
11. GRANTS TO OUTSIDE DIRECTORS................................................................................. 12
11.1. Initial Grants of Options............................................................................. 12
11.2. Subsequent Grants of Options.......................................................................... 13
12. STOCK APPRECIATION RIGHTS................................................................................... 13
12.1. Right to Payment...................................................................................... 13
12.2. Other Terms........................................................................................... 13
13. TRANSFERABILITY OF OPTIONS.................................................................................. 14
13.1. Transferability of Options............................................................................ 14
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13.2. Family Transfers...................................................................................... 14
14. RESTRICTED STOCK............................................................................................ 14
14.1. Grant of Restricted Stock or Restricted Stock Units................................................... 14
14.2. Restrictions.......................................................................................... 14
14.3. Restricted Stock Certificates......................................................................... 15
14.4. Rights of Holders of Restricted Stock................................................................. 15
14.5. Rights of Holders of Restricted Stock Units........................................................... 15
14.6. Termination of Employment or Other Relationship....................................................... 15
14.7. Rights in the Event of Death.......................................................................... 16
14.8. Rights in the Event of Disability..................................................................... 16
14.9. Delivery of Stock and Payment Therefor................................................................ 16
15. DEFERRED STOCK AWARDS....................................................................................... 17
15.1. Nature of Deferred Stock Awards....................................................................... 17
15.2. Election to Receive Deferred Stock Awards in Lieu of
Compensation..................................................................................... 17
15.3. Rights as a Stockholder............................................................................... 17
15.4. Restrictions.......................................................................................... 17
15.5. Termination........................................................................................... 18
16. UNRESTRICTED STOCK AWARDS................................................................................... 18
16.1. Grant or Sale of Unrestricted Stock................................................................... 18
17. PERFORMANCE STOCK AWARDS.................................................................................... 18
17.1. Nature of Performance Stock Awards.................................................................... 18
17.2. Rights as a Stockholder............................................................................... 18
17.3. Termination........................................................................................... 19
17.4. Acceleration, Waiver, Etc............................................................................. 19
18. DIVIDEND EQUIVALENT RIGHTS.................................................................................. 19
18.1. Dividend Equivalent Rights............................................................................ 19
18.2. Interest Equivalents.................................................................................. 20
18.3. Termination........................................................................................... 20
19. CERTAIN PROVISIONS APPLICABLE TO AWARDS..................................................................... 20
19.1. Stand-Alone, Additional, Tandem, and Substitute Awards................................................ 20
19.2. Term of Awards........................................................................................ 20
19.3. Form and Timing of Payment Under Awards; Deferrals.................................................... 21
19.4. Performance and Annual Incentive Awards............................................................... 21
19.4.1. Performance Conditions........................................................................ 21
19.4.2. Performance Awards Granted to Designated Covered
Employees..................................................................................... 21
19.4.3. Annual Incentive Awards Granted to Designated
Covered Employees............................................................................. 23
19.4.4. Written Determinations........................................................................ 24
19.4.5. Status of Section 19.4.3 and Section 19.4.2 Awards
Under Code Section 162(m)..................................................................... 25
20. REPURCHASE RIGHTS........................................................................................... 25
20.1. Nontransferability of Shares.......................................................................... 25
20.2. Repurchase Rights..................................................................................... 26
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20.3. Installment Payments.................................................................................. 26
20.4. Publicly Traded Stock................................................................................. 27
20.5. Legend................................................................................................ 27
21. PARACHUTE LIMITATIONS....................................................................................... 27
22. REQUIREMENTS OF LAW......................................................................................... 28
22.1. General............................................................................................... 28
22.2. Rule 16b-3............................................................................................ 29
23. AMENDMENT AND TERMINATION OF THE PLAN....................................................................... 29
24. EFFECT OF CHANGES IN CAPITALIZATION......................................................................... 30
24.1. Changes in Stock...................................................................................... 30
24.2. Reorganization in Which the Company Is the Surviving
Entity and in Which No Change of Control Occurs....................................................... 30
24.3. Reorganization, Sale of Assets or Sale of Stock Which
Involves a Change of Control.......................................................................... 30
24.4. Adjustments........................................................................................... 31
24.5. No Limitations on Company............................................................................. 31
25. DISCLAIMER OF RIGHTS........................................................................................ 31
26. NONEXCLUSIVITY OF THE PLAN.................................................................................. 32
27. WITHHOLDING TAXES........................................................................................... 32
28. POOLING..................................................................................................... 33
29. CAPTIONS.................................................................................................... 33
30. OTHER PROVISIONS............................................................................................ 33
31. NUMBER AND GENDER........................................................................................... 33
32. SEVERABILITY................................................................................................ 33
33. GOVERNING LAW............................................................................................... 33
</TABLE>
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<PAGE>
E2ENET, INC.
1999 STOCK OPTION AND INCENTIVE PLAN
E2Enet, Inc., a Delaware corporation (the "Company"), sets forth herein the
terms of its 1999 Stock Option and Incentive Plan (the "Plan") as follows:
1. PURPOSE
The purpose of the Plan is to enhance the Company's ability to attract,
retain, and compensate highly qualified officers, key employees, and other
persons, and to motivate such officers, key employees, and other persons to
serve the Company and its affiliates (as defined herein) and to expend maximum
effort to improve the business results and earnings of the Company, by providing
to such officers, key employees and other persons an opportunity to acquire or
increase a direct proprietary interest in the operations and future success of
the Company and with other financial incentives. To this end, the Plan provides
for the grant of stock options, stock appreciation rights, restricted stock,
restricted stock units, deferred stock awards, unrestricted stock awards,
performance stock awards, dividend equivalent rights, performance awards and
annual incentive awards in accordance with the terms hereof. Stock options
granted under the Plan may be non-qualified stock options or incentive stock
options, as provided herein.
2. DEFINITIONS
For purposes of interpreting the Plan and related documents (including
Award Agreements), the following definitions shall apply:
2.1 "affiliate" of, or person "affiliated" with, a person means any
company or other trade or business that controls, is controlled by or is under
common control with such person within the meaning of Rule 405 of Regulation C
under the Securities Act.
2.2 "Annual Incentive Award" means a conditional right granted to a
Grantee under Section 1943 hereof to receive a cash payment, Stock or other
Award, unless otherwise determined by the Committee, after the end of a
specified fiscal year.
2.3 "Award" means a grant of an Option, Stock Appreciation Right,
Restricted Stock, Restricted Stock Unit, Deferred Stock, Unrestricted Stock,
Performance Stock, Dividend Equivalent Rights, Performance or Annual Incentive
Awards under the Plan.
<PAGE>
2.4 "Award Agreement" means the stock option agreement, stock
appreciation rights agreement, restricted stock agreement, restricted stock unit
agreement, deferred stock award agreement, unrestricted stock award agreement,
performance stock award agreement, dividend equivalent rights agreement,
performance award agreement, annual incentive award agreement or other written
agreement between the Company and a Grantee that evidences and sets out the
terms and conditions of an Award.
2.5 "Benefit Arrangement" shall have the meaning set forth in Section
20 hereof.
2.6 "Board" means the Board of Directors of the Company.
2.7 "Code" means the Internal Revenue Code of 1986, as now in effect
or as hereafter amended.
2.8 "Committee" means a committee of, and designated from time to
time by resolution of, the Board, which shall consist of no fewer than two
members of the Board, none of whom shall be an officer or other salaried
employee of the Company or any affiliate of the Company.
2.9 "Company" means E2Enet, Inc.
2.10 "Covered Employee" means a Grantee who is a Covered Employee
within the meaning of Section 162(m)(3) of the Code.
2.11 "Deferred Stock" means a right, granted to a Grantee under
Section 15 hereof, to receive Stock, cash or a combination thereof at the end of
a specified deferral period.
2.12 "Dividend Equivalent" means a right, granted to a Grantee under
Section 18 hereof, to receive cash, Stock, other Awards or other property equal
in value to dividends paid with respect to a specified number of shares of
Stock, or other periodic payments.
2.13 "Effective Date" means September __ , 1999, the date on which the
Plan was adopted by the Board.
2.14 "Exchange Act" means the Securities Exchange Act of 1934, as now
in effect or as hereafter amended.
2.15 "Family Member" means a person who is a spouse, child, stepchild,
grandchild, parent, stepparent, grandparent, sibling, niece, nephew, mother-in-
law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-
law, including adoptive relationships, of the Grantee, any person sharing the
Grantee's
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<PAGE>
household (other than a tenant or employee), a trust in which these persons have
more than fifty percent of the beneficial interest, a foundation in which these
persons (or the Grantee) control the management of assets, and any other entity
in which these persons (or the Grantee) own more than fifty percent of the
voting interests.
2.16 "Fair Market Value" means the value of a share of Stock,
determined as follows: if on the Grant Date or other determination date the
Stock is listed on an established national or regional stock exchange, is
admitted to quotation on the NASDAQ National Market, or is publicly traded on an
established securities market, the Fair Market Value of a share of Stock shall
be the closing price of the Stock on such exchange or in such market (the
highest such closing price if there is more than one such exchange or market) on
the Grant Date or such other determination date (or if there is no such reported
closing price, the Fair Market Value shall be the mean between the highest bid
and lowest asked prices or between the high and low sale prices on such trading
day) or, if no sale of Stock is reported for such trading day, on the next
preceding day on which any sale shall have been reported. If the Stock is not
listed on such an exchange, quoted on such system or traded on such a market,
Fair Market Value shall be the value of the Stock as determined by the Board in
good faith.
2.17 "Grant" means an award of an Option, Stock Appreciation Right,
Restricted Stock, Restricted Stock Unit, Deferred Stock, Unrestricted Stock,
Performance Stock, or Dividend Equivalent Rights under the Plan.
2.18 "Grant Date" means, as determined by the Board or authorized
Committee, (i) the date as of which the Board or such Committee approves an
Award, (ii) the date on which the recipient of such Award first became an
employee of or otherwise entered into a relationship with the Company or an
affiliate of the Company or (iii) such other date as may be specified by the
Board or such Committee.
2.19 "Grantee" means a person who receives or holds a grant of an
Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit,
Deferred Stock, Unrestricted Stock, Performance Stock, Performance or Annual
Incentive Awards, or Dividend Equivalent Rights under the Plan.
2.20 "Incentive Stock Option" means an "incentive stock option" within
the meaning of Section 422 of the Code, or the corresponding provision of any
subsequently enacted tax statute, as amended from time to time.
2.21 "Option" means an option to purchase one or more shares of Stock
pursuant to the Plan.
2.22 "Option Period" means the period during which Options may be
exercised as set forth in Section 10 hereof.
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<PAGE>
2.23 "Option Price" means the purchase price for each share of Stock
subject to an Option.
2.24 "Other Agreement" shall have the meaning set forth in Section 20
hereof.
2.25 "Outside Director" means a member of the Board who is not an
officer or employee of the Company.
2.26 "Performance Stock Award" means Awards granted pursuant to
Section 17.
2.27 "Plan" means this E2Enet, Inc. 1999 Stock Option and Incentive
Plan.
2.28 "Reporting Person" means a person who is required to file reports
under Section 16(a) of the Exchange Act.
2.29 "Restricted Period" means the period during which Restricted
Stock or Restricted Stock Units are subject to restrictions or conditions
pursuant to Section 142 hereof.
2.30 "Restricted Stock" means shares of Stock, awarded to a Grantee
pursuant to Section 14 hereof, that are subject to restrictions and to a risk of
forfeiture.
2.31 "Restricted Stock Unit" means a unit awarded to a Grantee
pursuant to Section 14 hereof, which represents a conditional right to receive a
share of Stock in the future, and which is subject to restrictions and to a risk
of forfeiture.
2.32 "Securities Act" means the Securities Act of 1933, as now in
effect or as hereafter amended.
2.33 "Service Provider" means a consultant or adviser to the Company,
a manager of the Company's properties or affairs, or other similar service
provider or affiliate of the Company, and employees of any of the foregoing, as
such persons may be designated from time to time by the Board pursuant to
Section 6 hereof.
2.34 "Stock" means the common stock, par value $0.01 per share, of the
Company.
2.35 "Stock Appreciation Rights" or "SAR" means a right granted to a
Grantee under Section 12 hereof.
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<PAGE>
2.36 "Subsidiary" means any "subsidiary corporation" of the Company within
the meaning of Section 424(f) of the Code.
2.37 "Termination Date" shall be the date upon which an Option shall
terminate or expire, as set forth in Section 102 hereof.
2.38 "Unrestricted Stock Award" means any Award granted pursuant to Section
16.
3. ADMINISTRATION OF THE PLAN
3.1. Board
The Board shall have such powers and authorities related to the
administration of the Plan as are consistent with the Company's certificate of
incorporation and by-laws and applicable law. The Board shall have full power
and authority to take all actions and to make all determinations required or
provided for under the Plan, any Award or any Award Agreement, and shall have
full power and authority to take all such other actions and make all such other
determinations not inconsistent with the specific terms and provisions of the
Plan that the Board deems to be necessary or appropriate to the administration
of the Plan, any Award or any Award Agreement. All such actions and
determinations shall be by the affirmative vote of a majority of the members of
the Board present at a meeting or by unanimous consent of the Board executed in
writing in accordance with the Company's articles of incorporation and by-laws
and applicable law. The interpretation and construction by the Board of any
provision of the Plan, any Award or any Award Agreement shall be final and
conclusive. As permitted by law, the Board may delegate its authority under the
Plan to a member of the Board of Directors or an executive officer of the
Company.
3.2. Committee.
The Board from time to time may delegate to a Committee such powers
and authorities related to the administration and implementation of the Plan, as
set forth in Section 3.1 above and in other applicable provisions, as the Board
shall determine, consistent with the certificate of incorporation and by-laws of
the Corporation and applicable law. In the event that the Plan, any Award or
any Award Agreement entered into hereunder provides for any action to be taken
by or determination to be made by the Board, such action may be taken or such
determination may be made by the Committee if the power and authority to do so
has been delegated to the Committee by the Board as provided for in this
Section. Unless otherwise expressly determined by the Board, any such action or
determination by the Committee shall be final, binding and conclusive. As
permitted by law, the Committee may delegate its authority under the Plan to a
member of the Board of Directors or an executive officer of the Company.
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<PAGE>
3.3. Awards
Subject to the other terms and conditions of the Plan, the Board shall
have full and final authority (i) to designate Grantees, (ii) to determine the
type or types of Awards to be made to a Grantee, (iii) to determine the number
of shares of Stock to be subject to an Award, (iv) to establish the terms and
conditions of each Award (including, but not limited to, the exercise price of
any Option, the nature and duration of any restriction or condition (or
provision for lapse thereof) relating to the vesting, exercise, transfer, or
forfeiture of an Award or the shares of Stock subject thereto, and any terms or
conditions that may be necessary to qualify Options as Incentive Stock Options),
(v) to prescribe the form of each Award Agreement evidencing an Award, and (vi)
to amend, modify, or supplement the terms of any outstanding Award. Such
authority specifically includes the authority, in order to effectuate the
purposes of the Plan but without amending the Plan, to modify Awards to eligible
individuals who are foreign nationals or are individuals who are employed
outside the United States to recognize differences in local law, tax policy, or
custom. As a condition to any subsequent Award, the Board shall have the right,
at its discretion, to require Grantees to return to the Company Awards
previously made under the Plan. Subject to the terms and conditions of the
Plan, any such new Award shall be upon such terms and conditions as are
specified by the Board at the time the new Award is made.
3.4. No Liability.
No member of the Board or of the Committee shall be liable for any
action or determination made in good faith with respect to the Plan or any Award
or Award Agreement.
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4. STOCK SUBJECT TO THE PLAN
Subject to adjustment as provided in Section 24 hereof, the number of
shares of Stock available for issuance under the Plan shall be Three Million
(3,000,000); provided, that, no more than Five Hundred Thousand (500,000) of
which may be issued pursuant to awards of other than Options and no more than
Three Million (3,000,000) of which may be issued pursuant to Incentive Stock
Options. Stock issued or to be issued under the Plan shall be authorized but
unissued shares. If any shares covered by a Grant are not purchased or are
forfeited, or if a Grant otherwise terminates without delivery of any Stock
subject thereto, then the number of shares of Stock counted against the
aggregate number of shares available under the Plan with respect to such Grant
shall, to the extent of any such forfeiture or termination, again be available
for making Grants under the Plan.
5. EFFECTIVE DATE AND TERM OF THE PLAN
5.1. Effective Date.
The Plan shall be effective as of the Effective Date, subject to
approval of the Plan within one year of the Effective Date, by a majority of the
votes cast on the proposal at a meeting of shareholders, provided that the total
votes cast represent a majority of all shares entitled to vote. Upon approval
of the Plan by the shareholders of the Company as set forth above, all Awards
made under the Plan on or after the Effective Date shall be fully effective as
if the shareholders of the Company had approved the Plan on the Effective Date.
If the shareholders fail to approve the Plan within one year after the Effective
Date, any Awards made hereunder shall be null and void and of no effect.
5.2. Term.
The Plan has no termination date; however, no Incentive Stock Option
may be granted on or after the tenth anniversary of the Effective Date.
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6. OPTION GRANTS
6.1. Company or Subsidiary Employees; Service Providers; Other Persons
Awards (including Grants of Incentive Stock Options) may be made under the
Plan to: (i) any employee of, or a Service Provider to, the Company or of any
Subsidiary, including any such employee who is an officer or director of the
Company or of any Subsidiary, as the Board shall determine and designate from
time to time, and (ii) any other individual whose participation in the Plan is
determined to be in the best interests of the Company by the Board.
6.2. Successive Awards.
An eligible person may receive more than one Award, subject to such
restrictions as are provided herein.
6.3. Reload Options.
At the discretion of the Board and subject to such restrictions, terms and
conditions as the Board may establish, Options granted under the Plan may
include a "reload" feature pursuant to which a Grantee exercising an Option by
the delivery of a number of shares of Stock in accordance with Section 10.8
hereof would automatically be granted an additional Option (with an exercise
price equal to the Fair Market Value of the Stock on the date the additional
Option is granted and with such other terms as the Board may provide) to
purchase that number of shares of Stock equal to the number delivered to
exercise the original Option with an Option term equal to the remainder of the
original Option term unless the Board otherwise determines in the Option Award
Agreement for the original grant.
7. LIMITATIONS ON GRANTS
7.1. Limitation on Shares of Stock Subject to Grants and Cash Awards.
During any time when the Company has a class of equity security registered
under Section 12 of the Exchange Act, the maximum number of shares of Stock
subject to Options that can be awarded under the Plan to any person eligible for
a Grant under Section 6 hereof is One Million (1,000,000) per year. During any
time when the Company has a class of equity security registered under Section 12
of the Exchange Act, the maximum number of shares that can be awarded under the
Plan, other than pursuant to an Option to any person eligible for a Grant under
Section 6 hereof is One Million (1,000,000) per year. The maximum amount that
may be earned as an Annual Incentive Award or other cash Award in any fiscal
year by any
-8-
<PAGE>
one Grantee shall be $300,000 and the maximum amount that may be earned as a
Performance Award or other cash Award in respect of a performance period by any
one Grantee shall be $900,000.
7.2. Limitations on Incentive Stock Options.
An Option shall constitute an Incentive Stock Option only (i) if the
Grantee of such Option is an employee of the Company or any Subsidiary of the
Company; (ii) to the extent specifically provided in the related Award
Agreement; and (iii) to the extent that the aggregate Fair Market Value
(determined at the time the Option is granted) of the shares of Stock with
respect to which all Incentive Stock Options held by such Grantee become
exercisable for the first time during any calendar year (under the Plan and all
other plans of the Grantee's employer and its affiliates) does not exceed
$100,000. This limitation shall be applied by taking Options into account in the
order in which they were granted.
8. AWARD AGREEMENT
Each Award granted pursuant to the Plan shall be evidenced by an Award
Agreement, to be executed by the Company and by the Grantee, in such form or
forms as the Board shall from time to time determine. Award Agreements granted
from time to time or at the same time need not contain similar provisions but
shall be consistent with the terms of the Plan. Each Award Agreement evidencing
a Grant of Options shall specify whether such Options are intended to be non-
qualified stock options or Incentive Stock Options, and in the absence of such
specification such options shall be deemed non-qualified stock options.
9. OPTION PRICE
The Option Price of each Option shall be fixed by the Board and stated in
the Award Agreement evidencing such Option. The Option Price shall be the
aggregate Fair Market Value on the Grant Date of the shares of Stock subject to
the Option; provided, however, that in the event that a Grantee would otherwise
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be ineligible to receive an Incentive Stock Option by reason of the provisions
of Sections 422(b)(6) and 424(d) of the Code (relating to ownership of more than
ten percent of the Company's outstanding Stock), the Option Price of an Option
granted to such Grantee that is intended to be an Incentive Stock Option shall
be not less than the greater of the par value of a share of Stock or 110 percent
of the Fair Market Value of a share of Stock on the Grant Date. In no case
shall the Option Price of any Option be less than the par value of a share of
Stock.
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10. VESTING, TERM AND EXERCISE OF OPTIONS
10.1. Vesting and Option Period.
Subject to Sections 10.2 and 24.3 hereof, each Option granted under the
Plan shall become exercisable at such times and under such conditions as shall
be determined by the Board and stated in the Award Agreement. For purposes of
this Section 10.1, fractional numbers of shares of Stock subject to an Option
shall be rounded down to the next nearest whole number. The period during which
any Option shall be exercisable shall constitute the "Option Period" with
respect to such Option.
10.2. Term.
Each Option granted under the Plan shall terminate, and all rights to
purchase shares of Stock thereunder shall cease, upon the expiration of ten
years from the date such Option is granted, or under such circumstances and on
such date prior thereto as is set forth in the Plan or as may be fixed by the
Board and stated in the Award Agreement relating to such Option (the
"Termination Date"); provided, however, that in the event that the Grantee would
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otherwise be ineligible to receive an Incentive Stock Option by reason of the
provisions of Sections 422(b)(6) and 424(d) of the Code (relating to ownership
of more than ten percent of the outstanding Stock), an Option granted to such
Grantee that is intended to be an Incentive Stock Option shall not be
exercisable after the expiration of five years from its Grant Date.
10.3. Acceleration.
Any limitation on the exercise of an Option contained in any Award
Agreement may be rescinded, modified or waived by the Board, in its sole
discretion, at any time and from time to time after the Grant Date of such
Option, so as to accelerate the time at which the Option may be exercised.
Notwithstanding any other provision of the Plan, no Option shall be exercisable
in whole or in part prior to the date the Plan is approved by the shareholders
of the Company as provided in Section 5.1 hereof.
10.4. Termination of Employment or Other Relationship.
Upon the termination of a Grantee's employment or other relationship with
the Company other than by reason of death or "permanent and total disability"
(within the meaning of Section 22(e)(3) of the Code), any Option or portion
thereof held by such Grantee that has not vested in accordance with the
provisions of Section 10.1 hereof shall terminate immediately, and any Option or
portion thereof that has vested in accordance with the provisions of Section
10.1 hereof but has not been exercised shall terminate at the close of business
on the 90th day following the Grantee's termination of employment or other
relationship, unless the Board, in its discretion, extends the period during
which the Option may be exercised (which period may not be extended beyond the
original term of the Option). Upon termination of an Option or portion thereof,
the Grantee shall have no further right to
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purchase shares of Stock pursuant to such Option or portion thereof. Whether a
leave of absence or leave on military or government service shall constitute a
termination of employment or other relationship for purposes of the Plan shall
be determined by the Board, which determination shall be final and conclusive.
For purposes of the Plan, a termination of employment, service or other
relationship shall not be deemed to occur if the Grantee is immediately
thereafter a director of the Company.
10.5. Rights in the Event of Death.
If a Grantee dies while employed by or providing services to the Company,
all Options granted to such Grantee shall fully vest on the date of death, and
the executors or Boards or legatees or distributees of such Grantee's estate
shall have the right, at any time within one year after the date of such
Grantee's death (or such longer period as the Board, in its discretion, may
determine prior to the expiration of such one-year period) and prior to
termination of the Option pursuant to Section 10.2 above, to exercise any Option
held by such Grantee at the date of such Grantee's death.
10.6. Rights in the Event of Disability.
Unless otherwise stated in the applicable Award Agreement, if a Grantee
terminates employment or other relationship with the Company by reason of the
"permanent and total disability" (within the meaning of Section 22(e)(3) of the
Code) of such Grantee, such Grantee's Options shall continue to vest, and shall
be exercisable to the extent that they are vested, for a period of one year
after such termination of employment or service (or such longer period as the
Board, in its discretion, may determine prior to the expiration of such one-year
period), subject to earlier termination of the Option as provided in Section
10.2 above. Whether a termination of employment or service is to be considered
by reason of "permanent and total disability" for purposes of the Plan shall be
determined by the Board, which determination shall be final and conclusive.
10.7. Limitations on Exercise of Option.
Notwithstanding any other provision of the Plan, in no event may any Option
be exercised, in whole or in part, prior to the date the Plan is approved by the
shareholders of the Company as provided herein, or after ten years following the
date upon which the Option is granted, or after the occurrence of an event
referred to in Section 24 hereof which results in termination of the Option.
10.8. Method of Exercise.
An Option that is exercisable may be exercised by the Grantee's delivery to
the Company of written notice of exercise on any business day, at the Company's
principal office, addressed to the attention of the Board. Such notice shall
specify the number of shares of Stock with respect to which the Option is being
exercised and shall be accompanied by payment in full of the Option Price of the
shares for which the Option is being exercised. The minimum number of shares of
Stock with respect
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to which an Option may be exercised, in whole or in part, at any time shall be
the lesser of (i) 100 shares or such lesser number set forth in the applicable
Award Agreement and (ii) the maximum number of shares available for purchase
under the Option at the time of exercise. Payment of the Option Price for the
shares purchased pursuant to the exercise of an Option shall be made (i) in cash
or in cash equivalents; (ii) through the tender to the Company of shares of
Stock, which shares, if acquired from the Company, shall have been held for at
least six months and which shall be valued, for purposes of determining the
extent to which the Option Price has been paid thereby, at their Fair Market
Value on the date of exercise; or (iii) by a combination of the methods
described in (i) and (ii). The Board may provide, by inclusion of appropriate
language in an Award Agreement, that payment in full of the Option Price need
not accompany the written notice of exercise provided that the notice of
exercise directs that the certificate or certificates for the shares of Stock
for which the Option is exercised be delivered to a licensed broker acceptable
to the Company as the agent for the individual exercising the Option and, at the
time such certificate or certificates are delivered, the broker tenders to the
Company cash (or cash equivalents acceptable to the Company) equal to the Option
Price for the shares of Stock purchased pursuant to the exercise of the Option
plus the amount (if any) of federal and/or other taxes which the Company may in
its judgment, be required to withhold with respect to the exercise of the
Option. An attempt to exercise any Option granted hereunder other than as set
forth above shall be invalid and of no force and effect. Unless otherwise stated
in the applicable Award Agreement, an individual holding or exercising an Option
shall have none of the rights of a shareholder (for example, the right to
receive cash or dividend payments or distributions attributable to the subject
shares of Stock or to direct the voting of the subject shares of Stock ) until
the shares of Stock covered thereby are fully paid and issued to him. Except as
provided in Section 24 hereof, no adjustment shall be made for dividends,
distributions or other rights for which the record date is prior to the date of
such issuance.
10.9. Delivery of Stock Certificates.
Promptly after the exercise of an Option by a Grantee and the payment in
full of the Option Price, such Grantee shall be entitled to the issuance of a
stock certificate or certificates evidencing his or her ownership of the shares
of Stock subject to the Option.
11. GRANTS TO OUTSIDE DIRECTORS
11.1. Initial Grants of Options.
Each Outside Director who is initially elected to the Board on or after the
Effective Date may, in the sole discretion of the Board, upon the date of his or
her initial election by the Board or the shareholders of the Company, be granted
an
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Option, which shall not be an Incentive Stock Option, to purchase 5,000 shares
of Stock (which amount shall be subject to adjustment as provided in Section
24).
11.2. Subsequent Grants of Options.
Immediately following each Annual Meeting of Stockholders of the Company
held after the Effective Date, each Outside Director then duly elected and
serving (other than an Outside Director initially elected to the Board at such
Annual Meeting of Shareholders) may, in the sole discretion of the Board, be
granted an Option, which shall not be an Incentive Stock Option, to purchase
5,000 shares of Stock (which amount shall be subject to adjustment as provided
in Section 24); provided, however, that no Outside Director shall be eligible to
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receive a grant of Options under this Section 11.2 unless such person attended,
in person or by telephone, at least seventy-five percent of the meetings held by
the Board during the immediately preceding calendar year (or such portion
thereof during which the Outside Director served on the Board).
12. STOCK APPRECIATION RIGHTS
The Board is authorized to grant SARs to Grantees on the following terms
and conditions:
12.1. Right to Payment.
A SAR shall confer on the Grantee to whom it is granted a right to receive,
upon exercise thereof, the excess of (A) the Fair Market Value of one share of
Stock on the date of exercise over (B) the grant price of the SAR as determined
by the Board. The grant price of an SAR shall not be less than the Fair Market
Value of a share of Stock on the date of grant except as provided in Section
19.1.
12.2. Other Terms.
The Board shall determine at the date of grant or thereafter, the time or
times at which and the circumstances under which a SAR may be exercised in whole
or in part (including based on achievement of performance goals and/or future
service requirements), the time or times at which SARs shall cease to be or
become exercisable following termination of employment or upon other conditions,
the method of exercise, method of settlement, form of consideration payable in
settlement, method by or forms in which Stock will be delivered or deemed to be
delivered to Grantees, whether or not a SAR shall be in tandem or in combination
with any other Award, and any other terms and conditions of any SAR. SARs may be
either freestanding or in tandem with other Awards.
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13. TRANSFERABILITY OF OPTIONS
13.1. Transferability of Options
Except as provided in Section 13.2, during the lifetime of an Grantee, only
the Grantee (or, in the event of legal incapacity or incompetency, the Grantee's
guardian or legal representative) may exercise an Option. Except as provided in
Section 13.2, no Option shall be assignable or transferable by the Grantee to
whom it is granted, other than by will or the laws of descent and distribution.
13.2. Family Transfers.
If authorized in the applicable Award Agreement, a Grantee may transfer,
not for value, all or part of an Option which is not an Incentive Option to any
Family Member. For the purpose of this Section 13.2, a "not for value" transfer
is a transfer which is (i) a gift, (ii) a transfer under a domestic relations
order in settlement of marital property rights; or (iii) a transfer to an entity
in which more than fifty percent of the voting interests are owned by Family
Members (or the Grantee) in exchange for an interest in that entity. Following a
transfer under this Section 13.2, any such Option shall continue to be subject
to the same terms and conditions as were applicable immediately prior to
transfer. Subsequent transfers of transferred Options are prohibited except to
Family Members of the original Grantee in accordance with this Section 13.2 or
by will or the laws of descent and distribution. The events of termination of
employment or other relationship of Section 10.4 hereof shall continue to be
applied with respect to the original Grantee, following which the Option shall
be exercisable by the transferee only to the extent, and for the periods
specified in Sections 10.4, 10.5, or 10.6.
14. RESTRICTED STOCK
14.1. Grant of Restricted Stock or Restricted Stock Units.
The Board may from time to time grant Restricted Stock or Restricted Stock
Units to persons eligible to receive Awards under Section 6 hereof, subject to
such restrictions, conditions and other terms as the Board may determine.
14.2. Restrictions.
At the time a Grant of Restricted Stock or Restricted Stock Units is made,
the Board shall establish a period of time (the "Restricted Period") applicable
to such Restricted Stock or Restricted Stock Units. Each Grant of Restricted
Stock or Restricted Stock Units may be subject to a different Restricted Period.
The Board may, in its sole discretion, at the time a Grant of Restricted Stock
or Restricted Stock Units is made, prescribe restrictions in addition to or
other than the expiration of the Restricted Period, including the satisfaction
of corporate or individual performance objectives, which may be applicable to
all or any portion of the Restricted Stock or
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Restricted Stock Units in accordance with Section 19.4.1 and 19.4.2. Neither
Restricted Stock nor Restricted Stock Units may be sold, transferred, assigned,
pledged or otherwise encumbered or disposed of during the Restricted Period or
prior to the satisfaction of any other restrictions prescribed by the Board with
respect to such Restricted Stock or Restricted Stock Units.
14.3. Restricted Stock Certificates.
The Company shall issue, in the name of each Grantee to whom Restricted
Stock has been granted, stock certificates representing the total number of
shares of Restricted Stock granted to the Grantee, as soon as reasonably
practicable after the Grant Date. The Board may provide in an Award Agreement
that either (i) the Secretary of the Company shall hold such certificates for
the Grantee's benefit until such time as the Restricted Stock is forfeited to
the Company or the restrictions lapse, or (ii) such certificates shall be
delivered to the Grantee, provided, however, that such certificates shall bear
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a legend or legends that complies with the applicable securities laws and
regulations and makes appropriate reference to the restrictions imposed under
the Plan and the Award Agreement.
14.4. Rights of Holders of Restricted Stock.
Unless the Board otherwise provides in an Award Agreement, holders of
Restricted Stock shall have the right to vote such Stock and the right to
receive any dividends declared or paid with respect to such Stock. The Board may
provide that any dividends paid on Restricted Stock must be reinvested in shares
of Stock, which may or may not be subject to the same vesting conditions and
restrictions applicable to such Restricted Stock. All distributions, if any,
received by a Grantee with respect to Restricted Stock as a result of any stock
split, stock dividend, combination of shares, or other similar transaction shall
be subject to the restrictions applicable to the original Grant.
14.5. Rights of Holders of Restricted Stock Units.
Unless the Board otherwise provides in an Award Agreement, holders of
Restricted Stock Units shall have no rights as stockholders of the Company. The
Board may provide in an Award Agreement evidencing a Grant of Restricted Stock
Units that the holder of such Restricted Stock Units shall be entitled to
receive, upon the Company's payment of a cash dividend on its outstanding Stock,
a cash payment for each Restricted Stock Unit held equal to the per-share
dividend paid on the Stock. Such Award Agreement may also provide that such cash
payment will be deemed reinvested in additional Restricted Stock Units at a
price per unit equal to the Fair Market Value of a share of Stock on the date
that such dividend is paid.
14.6. Termination of Employment or Other Relationship.
Upon the termination of a Grantee's employment or other relationship with
the Company other than by reason of death or "permanent and total disability"
(within
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the meaning of Section 22(e)(3) of the Code), any Restricted Stock or Restricted
Stock Units held by such Grantee that has not vested, or with respect to which
all applicable restrictions and conditions have not lapsed, shall immediately be
deemed forfeited, unless the Board, in its discretion, determines otherwise.
Upon forfeiture of Restricted Stock or Restricted Stock Units, the Grantee shall
have no further rights with respect to such Grant, including but not limited to
any right to vote Restricted Stock or any right to receive dividends with
respect to shares of Restricted Stock or Restricted Stock Units. Whether a leave
of absence or leave on military or government service shall constitute a
termination of employment or other relationship for purposes of the Plan shall
be determined by the Board, which determination shall be final and conclusive.
For purposes of the Plan, a termination of employment, service or other
relationship shall not be deemed to occur if the Grantee is immediately
thereafter a director of the Company.
14.7. Rights in the Event of Death.
Unless otherwise provided in the Award Agreement, if a Grantee dies while
employed by the Company, all Restricted Stock or Restricted Stock Units granted
to such Grantee shall fully vest on the date of death, and the shares of Stock
represented thereby shall be deliverable in accordance with the terms of the
Plan to the executors, administrators, legatees or distributees of the Grantee's
estate.
14.8. Rights in the Event of Disability.
Unless otherwise provided in the Award Agreement, if a Grantee terminates
employment or other relationship with the Company by reason of the "permanent
and total disability" (within the meaning of Section 22(e)(3) of the Code) of
such Grantee, such Grantee's Restricted Stock or Restricted Stock Units shall
continue to vest in accordance with the applicable Award Agreement for a period
of one year after such termination of employment or service (or such longer
period as the Board, in its discretion, may determine prior to the expiration of
such one-year period), subject to the earlier forfeiture of such Restricted
Stock or Restricted Stock Units in accordance with the terms of the applicable
Award Agreement. Whether a termination of employment or service is to be
considered by reason of "permanent and total disability" for purposes of the
Plan shall be determined by the Board, which determination shall be final and
conclusive.
14.9. Delivery of Stock and Payment Therefor.
Upon the expiration or termination of the Restricted Period and the
satisfaction of any other conditions prescribed by the Board, the restrictions
applicable to shares of Restricted Stock or Restricted Stock Units shall lapse,
and, unless otherwise provided in the Award Agreement, upon payment by the
Grantee to the Company, in cash or by check, of the aggregate par value of the
shares of Stock represented by such Restricted Stock or Restricted Stock Units
(or such other higher purchase price determined by the Board), a stock
certificate for such shares shall be delivered, free of
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all such restrictions, to the Grantee or the Grantee's beneficiary or estate, as
the case may be.
15. DEFERRED STOCK AWARDS
15.1. Nature of Deferred Stock Awards.
A Deferred Stock Award is an Award of phantom Stock units to a Grantee,
subject to restrictions and conditions as the Board may determine at the time of
grant. Conditions may be based on continuing employment (or other business
relationship) and/or achievement of pre-established performance goals and
objectives. The grant of a Deferred Stock Award is contingent on the Grantee
executing the Deferred Stock Award Agreement. The terms and conditions of each
such agreement shall be determined by the Board, and such terms and conditions
may differ among individual Awards and Grantees. At the end of the deferral
period, the Deferred Stock Award, to the extent vested, shall be paid to the
Grantee in the form of shares of Stock.
15.2. Election to Receive Deferred Stock Awards in Lieu of Compensation.
The Board may, in its sole discretion, permit a Grantee to elect to receive
a portion of the cash compensation or Restricted Stock Award otherwise due to
such Grantee in the form of a Deferred Stock Award. Any such election shall be
made in writing and shall be delivered to the Company no later than the date
specified by the Board and in accordance with rules and procedures established
by the Board. The Board shall have the sole right to determine whether and under
what circumstances to permit such elections and to impose such limitations and
other terms and conditions thereon as the Board deems appropriate.
15.3. Rights as a Stockholder.
During the deferral period, a Grantee shall have no rights as a
Stockholder; provided, however, that the Grantee may be credited with Dividend
Equivalent Rights with respect to the phantom Stock units underlying his
Deferred Stock Award, subject to such terms and conditions as the Board may
determine.
15.4. Restrictions.
A Deferred Stock Award may not be sold, assigned, transferred, pledged or
otherwise encumbered or disposed of during the deferral period.
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15.5. Termination.
Except as may otherwise be provided by the Board either in the Award
Agreement or, in writing after the Award Agreement is issued, a Grantee's right
in all Deferred Stock Awards that have not vested shall automatically terminate
upon the Grantee's termination of employment or other relationship with the
Company for any reason.
16. UNRESTRICTED STOCK AWARDS
16.1. Grant or Sale of Unrestricted Stock.
The Board may, in its sole discretion, grant (or sell at par value or
such other higher purchase price determined by the Board) an Unrestricted Stock
Award to any Grantee pursuant to which such Grantee may receive shares of Stock
free of any restrictions ("Unrestricted Stock") under the Plan. Unrestricted
Stock Awards may be granted or sold as described in the preceding sentence in
respect of past services or other valid consideration, or in lieu of any cash
compensation due to such Grantee.
17. PERFORMANCE STOCK AWARDS
17.1. Nature of Performance Stock Awards.
A Performance Stock Award is an Award entitling the recipient to
acquire shares of Stock upon the attainment of specified performance goals. The
Board may make Performance Stock Awards independent of or in connection with the
granting of any other Award under the Plan. The Board in its sole discretion
shall determine whether and to whom Performance Stock Awards shall be made, the
performance goals applicable under each such Award, the periods during which
performance is to be measured, and all other limitations and conditions
applicable to the awarded Performance Stock; provided, however, that the Board
may rely on the performance goals and other standards applicable to other
performance unit plans of the Company in setting the standards for Performance
Stock Awards under the Plan.
17.2. Rights as a Stockholder.
A Grantee receiving a Performance Stock Award shall have the rights of
a Stockholder only as to shares actually received by the Grantee under the Plan
and not with respect to shares subject to the Award but not actually received by
the Grantee. A Grantee shall be entitled to receive a Stock certificate
evidencing the acquisition of Stock under a Performance Stock Award only upon
satisfaction of all
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conditions specified in the written instrument evidencing the Performance Stock
Award (or in a performance plan adopted by the Board).
17.3. Termination.
Except as may otherwise be provided by the Board either in the Award
Agreement in writing after the Award Agreement is issued, a Grantee's rights in
all Performance Stock Awards shall automatically terminate upon the Grantee's
termination of employment or other relationship with the Company and its
Subsidiaries for any reason.
17.4. Acceleration, Waiver, Etc.
At any time prior to the Grantee's termination of employment (or other
business relationship) by the Company and its Subsidiaries, the Board may in its
sole discretion accelerate, waive or amend any or all of the goals, restrictions
or conditions imposed under any Performance Stock Award.
18. DIVIDEND EQUIVALENT RIGHTS
18.1. Dividend Equivalent Rights.
A Dividend Equivalent Right is an Award entitling the recipient to
receive credits based on cash distributions that would have been paid on the
shares of Stock specified in the Dividend Equivalent Right (or other award to
which it relates) if such shares had been issued to and held by the recipient.
A Dividend Equivalent Right may be granted hereunder to any Grantee as a
component of another Award or as a freestanding award. The terms and conditions
of Dividend Equivalent Rights shall be specified in the grant. Dividend
Equivalents credited to the holder of a Dividend Equivalent Right may be paid
currently or may be deemed to be reinvested in additional shares of Stock, which
may thereafter accrue additional equivalents. Any such reinvestment shall be at
Fair Market Value on the date of reinvestment. Dividend Equivalent Rights may
be settled in cash or Stock or a combination thereof, in a single installment or
installments, all determined in the sole discretion of the Board. A Dividend
Equivalent Right granted as a component of another Award may provide that such
Dividend Equivalent Right shall be settled upon exercise, settlement, or payment
of, or lapse of restrictions on, such other award, and that such Dividend
Equivalent Right shall expire or be forfeited or annulled under the same
conditions as such other award. A Dividend Equivalent Right granted as a
component of another Award may also contain terms and conditions different from
such other award.
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18.2. Interest Equivalents.
Any Award under this Plan that is settled in whole or in part in cash
on a deferred basis may provide in the grant for interest equivalents to be
credited with respect to such cash payment. Interest equivalents may be
compounded and shall be paid upon such terms and conditions as may be specified
by the grant.
18.3. Termination.
Except as may otherwise be provided by the Board either in the Award
Agreement or in writing after the Award Agreement is issued, a Grantee's rights
in all Dividend Equivalent Rights or interest equivalents shall automatically
terminate upon the Grantee's termination of employment or other relationship
with the Company and its Subsidiaries for any reason.
19. CERTAIN PROVISIONS APPLICABLE TO AWARDS
19.1. Stand-Alone, Additional, Tandem, and Substitute Awards
Awards granted under the Plan may, in the discretion of the Board, be
granted either alone or in addition to, in tandem with, or in substitution or
exchange for, any other Award or any award granted under another plan of the
Company, any Subsidiary, or any business entity to be acquired by the Company or
a Subsidiary, or any other right of a Grantee to receive payment from the
Company or any Subsidiary. Such additional, tandem, and substitute or exchange
Awards may be granted at any time. If an Award is granted in substitution or
exchange for another Award, the Board shall require the surrender of such other
Award in consideration for the grant of the new Award. In addition, Awards may
be granted in lieu of cash compensation, including in lieu of cash amounts
payable under other plans of the Company or any Subsidiary, in which the value
of Stock subject to the Award is equivalent in value to the cash compensation
(for example, Deferred Stock or Restricted Stock), or in which the exercise
price, grant price or purchase price of the Award in the nature of a right that
may be exercised is equal to the Fair Market Value of the underlying Stock minus
the value of the cash compensation surrendered (for example, Options granted
with an exercise price "discounted" by the amount of the cash compensation
surrendered).
19.2. Term of Awards
The term of each Award shall be for such period as may be determined
by the Board; provided that in no event shall the term of any Option or SAR
exceed a period of ten years (or such shorter term as may be required in respect
of an ISO under Section 422 of the Code).
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19.3. Form and Timing of Payment Under Awards; Deferrals
Subject to the terms of the Plan and any applicable Award Agreement,
payments to be made by the Company or a Subsidiary upon the exercise of an
Option or other Award or settlement of an Award may be made in such forms as the
Board shall determine, including, without limitation, cash, Stock, other Awards
or other property, and may be made in a single payment or transfer, in
installments, or on a deferred basis. The settlement of any Award may be
accelerated, and cash paid in lieu of Stock in connection with such settlement,
in the discretion of the Board or upon occurrence of one or more specified
events. Installment or deferred payments may be required by the Board or
permitted at the election of the Grantee on terms and conditions established by
the Board. Payments may include, without limitation, provisions for the payment
or crediting of a reasonable interest rate on installment or deferred payments
or the grant or crediting of Dividend Equivalents or other amounts in respect of
installment or deferred payments denominated in Stock.
19.4. Performance and Annual Incentive Awards
19.4.1. Performance Conditions
The right of a Grantee to exercise or receive a grant or
settlement of any Award, and the timing thereof, may be subject to such
performance conditions as may be specified by the Board. The Board may use such
business criteria and other measures of performance as it may deem appropriate
in establishing any performance conditions, and may exercise its discretion to
reduce the amounts payable under any Award subject to performance conditions,
except as limited under Sections 19.4.2 and 19.4.3 hereof in the case of a
Performance Award or Annual Incentive Award intended to qualify under Code
Section 162(m). If and to the extent required under Code Section 162(m), any
power or authority relating to a Performance Award or Annual Incentive Award
intended to qualify under Code Section 162(m), shall be exercised by the
Committee and not the Board.
19.4.2. Performance Awards Granted to Designated Covered
Employees
If and to the extent that the Committee determines that a
Performance Award to be granted to a Grantee who is designated by the Committee
as likely to be a Covered Employee should qualify as "performance-based
compensation" for purposes of Code Section 162(m), the grant, exercise and/or
settlement of such Performance Award shall be contingent upon achievement of
preestablished performance goals and other terms set forth in this Section
19.4.2.
(i) Performance Goals Generally. The performance
goals for such Performance Awards shall consist of one or
more
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business criteria and a targeted level or levels of performance with
respect to each of such criteria, as specified by the Committee
consistent with this Section 19.4.2. Performance goals shall be
objective and shall otherwise meet the requirements of Code Section
162(m) and regulations thereunder including the requirement that the
level or levels of performance targeted by the Committee result in the
achievement of performance goals being "substantially uncertain." The
Committee may determine that such Performance Awards shall be granted,
exercised and/or settled upon achievement of any one performance goal
or that two or more of the performance goals must be achieved as a
condition to grant, exercise and/or settlement of such Performance
Awards. Performance goals may differ for Performance Awards granted to
any one Grantee or to different Grantees.
(ii) Business Criteria. One or more of the following
business criteria for the Company, on a consolidated basis, and/or
specified subsidiaries or business units of the Company (except with
respect to the total stockholder return and earnings per share
criteria), shall be used exclusively by the Committee in establishing
performance goals for such Performance Awards: (1) total stockholder
return; (2) such total stockholder return as compared to total return
(on a comparable basis) of a publicly available index such as, but not
limited to, the Standard & Poor's 500 Stock Index; (3) net income; (4)
pretax earnings; (5) earnings before interest expense, taxes,
depreciation and amortization; (6) pretax operating earnings after
interest expense and before bonuses, service fees, and extraordinary
or special items; (7) operating margin; (8) earnings per share; (9)
return on equity; (10) return on capital; (11) return on investment;
(12) operating earnings; (13) working capital; and (14) ratio of debt
to stockholders' equity. One or more of the foregoing business
criteria shall also be exclusively used in establishing performance
goals for Annual Incentive Awards granted to a Covered Employee under
Section 19.4.3 hereof that are intended to qualify as "performance-
based compensation" under Code Section 162(m).
(iii) Performance Period; Timing For Establishing
Performance Goals. Achievement of performance goals in respect of
such Performance Awards shall be measured over a performance period of
up to ten years, as specified by the Committee. Performance goals
shall be established not later than 90 days after the beginning of any
performance period applicable to such Performance Awards, or at such
other date as may be required or permitted for "performance-based
compensation" under Code Section 162(m).
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(iv) Performance Award Pool. The Committee may establish a
Performance Award pool, which shall be an unfunded pool, for purposes
of measuring Company performance in connection with Performance
Awards. The amount of such Performance Award pool shall be based upon
the achievement of a performance goal or goals based on one or more of
the business criteria set forth in Section 19.4.2(ii) hereof during
the given performance period, as specified by the Committee in
accordance with Section 19.4.2(iii) hereof. The Committee may specify
the amount of the Performance Award pool as a percentage of any of
such business criteria, a percentage thereof in excess of a threshold
amount, or as another amount which need not bear a strictly
mathematical relationship to such business criteria.
(v) Settlement of Performance Awards; Other Terms.
Settlement of such Performance Awards shall be in cash, Stock, other
Awards or other property, in the discretion of the Committee. The
Committee may, in its discretion, reduce the amount of a settlement
otherwise to be made in connection with such Performance Awards. The
Committee shall specify the circumstances in which such Performance
Awards shall be paid or forfeited in the event of termination of
employment by the Grantee prior to the end of a performance period or
settlement of Performance Awards.
19.4.3. Annual Incentive Awards Granted to Designated Covered
Employees.
If and to the extent that the Committee determines that an Annual
Incentive Award to be granted to a Grantee who is designated by the Committee as
likely to be a Covered Employee should qualify as "performance-based
compensation" for purposes of Code Section 162(m), the grant, exercise and/or
settlement of such Annual Incentive Award shall be contingent upon achievement
of preestablished performance goals and other terms set forth in this Section
19.4.3.
(i) Annual Incentive Award Pool. The Committee may
establish an Annual Incentive Award pool, which shall be an unfunded
pool, for purposes of measuring Company performance in connection with
Annual Incentive Awards. The amount of such Annual Incentive Award
pool shall be based upon the achievement of a performance goal or
goals based on one or more of the business criteria set forth in
19.4.2(ii) hereof during the given performance period, as specified by
the Committee in accordance with 19.4.2(iii) hereof. The Committee may
specify the amount of the Annual Incentive Award pool as a percentage
of any such business criteria, a percentage thereof in excess
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<PAGE>
of a threshold amount, or as another amount which need not bear a
strictly mathematical relationship to such business criteria.
(ii) Potential Annual Incentive Awards. Not later than the
end of the 90th day of each fiscal year, or at such other date as may
be required or permitted in the case of Awards intended to be
"performance-based compensation" under Code Section 162(m), the
Committee shall determine the Eligible Persons who will potentially
receive Annual Incentive Awards, and the amounts potentially payable
thereunder, for that fiscal year, either out of an Annual Incentive
Award pool established by such date under Section 19.4.3(i) hereof or
as individual Annual Incentive Awards. In the case of individual
Annual Incentive Awards intended to qualify under Code Section 162(m),
the amount potentially payable shall be based upon the achievement of
a performance goal or goals based on one or more of the business
criteria set forth in Section 19.4.2(ii) hereof in the given
performance year, as specified by the Committee; in other cases, such
amount shall be based on such criteria as shall be established by the
Committee. In all cases, the maximum Annual Incentive Award of any
Grantee shall be subject to the limitation set forth in Section 7.1
hereof.
(iii) Payout of Annual Incentive Awards. After the end of
each fiscal year, the Committee shall determine the amount, if any, of
(A) the Annual Incentive Award pool, and the maximum amount of
potential Annual Incentive Award payable to each Grantee in the Annual
Incentive Award pool, or (B) the amount of potential Annual Incentive
Award otherwise payable to each Grantee. The Committee may, in its
discretion, determine that the amount payable to any Grantee as an
Annual Incentive Award shall be reduced from the amount of his or her
potential Annual Incentive Award, including a determination to make no
Award whatsoever. The Committee shall specify the circumstances in
which an Annual Incentive Award shall be paid or forfeited in the
event of termination of employment by the Grantee prior to the end of
a fiscal year or settlement of such Annual Incentive Award.
19.4.4. Written Determinations.
All determinations by the Committee as to the establishment of
performance goals, the amount of any Performance Award pool or potential
individual Performance Awards and as to the achievement of performance goals
relating to Performance Awards under Section 19.4.2, and the amount of any
Annual Incentive Award pool or potential individual Annual Incentive Awards and
the amount of final Annual Incentive Awards under Section 19.4.3, shall be made
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<PAGE>
in writing in the case of any Award intended to qualify under Code Section
162(m). To the extent required to comply with Code Section 162(m), the Committee
may delegate any responsibility relating to such Performance Awards or Annual
Incentive Awards.
19.4.5. Status of Section 19.4.3 and Section 19.4.2 Awards Under
Code Section 162(m)
It is the intent of the Company that Performance Awards and Annual
Incentive Awards under Section 19.4.2 and Section 19.4.3 hereof granted to
persons who are designated by the Committee as likely to be Covered Employees
within the meaning of Code Section 162(m) and regulations thereunder shall, if
so designated by the Committee, constitute "qualified performance-based
compensation" within the meaning of Code Section 162(m) and regulations
thereunder. Accordingly, the terms of Section 19.4.2 and Section 19.4.3,
including the definitions of Covered Employee and other terms used therein,
shall be interpreted in a manner consistent with Code Section 162(m) and
regulations thereunder. The foregoing notwithstanding, because the Committee
cannot determine with certainty whether a given Grantee will be a Covered
Employee with respect to a fiscal year that has not yet been completed, the term
Covered Employee as used herein shall mean only a person designated by the
Committee, at the time of grant of Performance Awards or an Annual Incentive
Award, as likely to be a Covered Employee with respect to that fiscal year. If
any provision of the Plan or any agreement relating to such Performance Awards
or Annual Incentive Awards does not comply or is inconsistent with the
requirements of Code Section 162(m) or regulations thereunder, such provision
shall be construed or deemed amended to the extent necessary to conform to such
requirements.
20. REPURCHASE RIGHTS
20.1. Nontransferability of Shares
Subject to Section 20.4 below, a Grantee (or such other individual
who is entitled to exercise an Option or to hold a Grant under the Plan) shall
not sell, pledge, assign, gift, transfer, or otherwise dispose of any shares of
Stock acquired pursuant to such Grant to any person or entity without first
offering such shares to the Company for purchase on the same terms and
conditions as those offered the proposed transferee. The Company may assign its
right of first refusal under this Section 20.1 in whole or in part, to (1) any
holder of stock or other securities of the Company (a "Stockholder"), (2) any
affiliate or (3) any other person or entity that the Board of Directors of the
Company determines has a sufficient relationship with or interest in the
Company. The Company shall give reasonable written notice to the Grantee of any
such assignment of its rights. The restrictions of this Section 20.1 apply to
any person to whom Stock that was originally
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<PAGE>
acquired pursuant to a Grant is sold, pledged, assigned, bequeathed, gifted,
transferred or otherwise disposed of, without regard to the number of such
subsequent transferees or the manner in which they acquire the Stock, but the
restrictions of this Section 20.1 do not apply to a transfer of Stock that
occurs as a result of the death of the Grantee or of any subsequent transferee
(but shall apply to the executor, the administrator or personal representative,
the estate, and the legatees, beneficiaries and assigns thereof).
20.2. Repurchase Rights.
(a) Subject to Section 20.4 below, upon the termination of a
Grantee's employment or other relationship with the Company or an affiliate
(whether as an employee, a director, an independent contractor providing
services to the Company, a Subsidiary or an affiliate, or otherwise), the
Company shall have the right, for a period of up to twelve months following such
termination, to repurchase any or all of the shares acquired by the individual
pursuant to this Plan under a Grant (including shares that were previously
transferred pursuant to Sections 13 or 20.1 above, unless otherwise specified in
the Award Agreement), at a price equal to the fair market value of such shares
on the date of termination.
(b) Upon the exercise of an Option (or the Grantee's acquisition
of shares pursuant to a Grant other than an Option) following termination of a
Grantee's employment or other relationship with the Company or an affiliate
(whether as an employee, a director, an independent contractor providing
services to the Company, a Subsidiary or any affiliate, or otherwise), the
Company shall have the right, for a period of up to twelve months following such
exercise or other acquisition of shares, to repurchase any or all such shares of
Stock acquired by the Grantee pursuant to such Option or other Grant at a price
that is equal to the fair market value of such shares (including shares that
were previously transferred pursuant to Sections 13 or 20.1 above) on the date
of exercise or other acquisition (or at such other price or the fair market
value on such other date as shall have been specified by the Board at the time
of grant and set out in the appropriate Award Agreement with respect to the
grant).
(c) In the event that the Company determines that it cannot or
will not exercise its rights to purchase Stock under this Section 20.2 and the
applicable Award Agreement, in whole or in part, the Company may assign its
rights, in whole or in part, to (1) any Stockholder (2) any affiliate or (3) any
other person or entity that the Board of Directors of the Company determines has
a sufficient relationship with or interest in the Company. The Company shall
give reasonable written notice to the individual of any assignment of its
rights.
20.3. Installment Payments
In the case of any purchase of Stock or an Option or other Grant
under this Section, the Company or its permitted assignee may pay the Grantee,
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transferee of the Option or other registered owner of the Stock the purchase
price in three or fewer annual installments. Interest shall be credited on the
installments at the applicable federal rate (as determined for purposes of
Section 1274 of the Code) in effect on the date on which the purchase is made.
The Company or its permitted assignee shall pay at least one-third of the total
purchase price each year, plus interest on the unpaid balance, with the first
payment being made on or before the 60th day after the purchase.
20.4. Publicly Traded Stock
If the Stock is listed on an established national or regional
stock exchange or is admitted to quotation on the National Association of
Securities Dealers Automated Quotation System, or is publicly traded in an
established securities market, the foregoing transfer restrictions of Sections
20.1 and 20.2 shall terminate as of the first date that the Stock is so listed,
quoted or publicly traded.
20.5. Legend
In order to enforce the restrictions imposed upon shares of Stock
under this Plan or as provided in an Award Agreement, the Board may cause a
legend or legends to be placed on any certificate representing shares issued
pursuant to this Plan that complies with the applicable securities laws and
regulations and makes appropriate reference to the restrictions imposed under
it.
21. PARACHUTE LIMITATIONS
Notwithstanding any other provision of this Plan or of any other agreement,
contract, or understanding heretofore or hereafter entered into by a Grantee
with the Company or any Subsidiary, except an agreement, contract, or
understanding hereafter entered into that expressly modifies or excludes
application of this paragraph (an "Other Agreement"), and notwithstanding any
formal or informal plan or other arrangement for the direct or indirect
provision of compensation to the Grantee (including groups or classes of
Grantees or beneficiaries of which the Grantee is a member), whether or not such
compensation is deferred, is in cash, or is in the form of a benefit to or for
the Grantee (a "Benefit Arrangement"), if the Grantee is a "disqualified
individual," as defined in Section 280G(c) of the Code, any Option, Restricted
Stock or Restricted Stock Unit held by that Grantee and any right to receive any
payment or other benefit under this Plan shall not become exercisable or vested
(i) to the extent that such right to exercise, vesting, payment, or benefit,
taking into account all other rights, payments, or benefits to or for the
Grantee under this Plan, all Other Agreements, and all Benefit Arrangements,
would cause any payment or benefit to the Grantee under this Plan to be
considered a "parachute payment" within the meaning of Section 280G(b)(2) of the
Code as then in effect (a "Parachute Payment") and (ii) if, as a result of
---
receiving a Parachute Payment, the aggregate after-tax amounts received by the
Grantee from the Company under this Plan, all
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<PAGE>
Other Agreements, and all Benefit Arrangements would be less than the maximum
after-tax amount that could be received by the Grantee without causing any such
payment or benefit to be considered a Parachute Payment. In the event that the
receipt of any such right to exercise, vesting, payment, or benefit under this
Plan, in conjunction with all other rights, payments, or benefits to or for the
Grantee under any Other Agreement or any Benefit Arrangement would cause the
Grantee to be considered to have received a Parachute Payment under this Plan
that would have the effect of decreasing the after-tax amount received by the
Grantee as described in clause (ii) of the preceding sentence, then the Grantee
shall have the right, in the Grantee's sole discretion, to designate those
rights, payments, or benefits under this Plan, any Other Agreements, and any
Benefit Arrangements that should be reduced or eliminated so as to avoid having
the payment or benefit to the Grantee under this Plan be deemed to be a
Parachute Payment.
22. REQUIREMENTS OF LAW
22.1. General.
The Company shall not be required to sell or issue any shares of Stock
under any Award if the sale or issuance of such shares would constitute a
violation by the Grantee, any other individual exercising an Option, or the
Company of any provision of any law or regulation of any governmental authority,
including without limitation any federal or state securities laws or
regulations. If at any time the Company shall determine, in its discretion,
that the listing, registration or qualification of any shares subject to an
Award upon any securities exchange or under any governmental regulatory body is
necessary or desirable as a condition of, or in connection with, the issuance or
purchase of shares hereunder, no shares of Stock may be issued or sold to the
Grantee or any other individual exercising an Option pursuant to such Award
unless such listing, registration, qualification, consent or approval shall have
been effected or obtained free of any conditions not acceptable to the Company,
and any delay caused thereby shall in no way affect the date of termination of
the Award. Specifically, in connection with the Securities Act, upon the
exercise of any Option or the delivery of any shares of Stock underlying an
Award, unless a registration statement under such Act is in effect with respect
to the shares of Stock covered by such Award, the Company shall not be required
to sell or issue such shares unless the Board has received evidence satisfactory
to it that the Grantee or any other individual exercising an Option may acquire
such shares pursuant to an exemption from registration under the Securities
Act. Any determination in this connection by the Board shall be final, binding,
and conclusive. The Company may, but shall in no event be obligated to,
register any securities covered hereby pursuant to the Securities Act. The
Company shall not be obligated to take any affirmative action in order to cause
the exercise of an Option or the issuance of shares of Stock pursuant to the
Plan to comply with any law or regulation of any governmental authority. As to
any jurisdiction that expressly imposes the requirement that an Option shall not
be exercisable until the shares of Stock covered by such Option are registered
or are
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<PAGE>
exempt from registration, the exercise of such Option (under circumstances in
which the laws of such jurisdiction apply) shall be deemed conditioned upon the
effectiveness of such registration or the availability of such an exemption.
22.2. Rule 16b-3.
During any time when the Company has a class of equity security registered
under Section 12 of the Exchange Act, it is the intent of the Company that
Awards pursuant to the Plan and the exercise of Options granted hereunder will
qualify for the exemption provided by Rule 16b-3 under the Exchange Act. To the
extent that any provision of the Plan or action by the Board does not comply
with the requirements of Rule 16b-3, it shall be deemed inoperative to the
extent permitted by law and deemed advisable by the Board, and shall not affect
the validity of the Plan. In the event that Rule 16b-3 is revised or replaced,
the Board may exercise its discretion to modify this Plan in any respect
necessary to satisfy the requirements of, or to take advantage of any features
of, the revised exemption or its replacement.
23. AMENDMENT AND TERMINATION OF THE PLAN
The Board may, at any time and from time to time, amend, suspend, or
terminate the Plan as to any shares of Stock as to which Awards have not been
made; provided, however, that the Board shall not, without approval of the
-------- -------
Company's shareholders, amend the Plan such that it does not comply with the
Code. The Company may retain the right in an Award Agreement to cause a
forfeiture of the gain realized by a Grantee on account of the Grantee taking
actions in "competition with the Company," as defined in the applicable Award
Agreement. Furthermore, the Company may annul an Award if the Grantee is an
employee of the Company or an affiliate and is terminated "for cause" as defined
in the applicable Award Agreement. Except as permitted under this Section 23 or
Section 24 hereof, no amendment, suspension, or termination of the Plan shall,
without the consent of the Grantee, alter or impair rights or obligations under
any Award theretofore awarded under the Plan.
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<PAGE>
24. EFFECT OF CHANGES IN CAPITALIZATION
24.1. Changes in Stock.
If the number of outstanding shares of Stock is increased or decreased or
the shares of Stock are changed into or exchanged for a different number or kind
of shares or other securities of the Company on account of any recapitalization,
reclassification, stock split, reverse split, combination of shares, exchange of
shares, stock dividend or other distribution payable in capital stock, or other
increase or decrease in such shares effected without receipt of consideration by
the Company occurring after the Effective Date, the number and kinds of shares
for which grants of Options and other Awards may be made under the Plan shall be
adjusted proportionately and accordingly by the Company. In addition, the number
and kind of shares for which Awards are outstanding shall be adjusted
proportionately and accordingly so that the proportionate interest of the
Grantee immediately following such event shall, to the extent practicable, be
the same as immediately before such event. Any such adjustment in outstanding
Options shall not change the aggregate Option Price payable with respect to
shares that are subject to the unexercised portion of an Option outstanding but
shall include a corresponding proportionate adjustment in the Option Price per
share.
24.2. Reorganization in Which the Company Is the Surviving Entity and in
Which No Change of Control Occurs.
Subject to Section 24.3 hereof, if the Company shall be the surviving
entity in any reorganization, merger, or consolidation of the Company with one
or more other entities, any Option theretofore granted pursuant to the Plan
shall pertain to and apply to the securities to which a holder of the number of
shares of Stock subject to such Option would have been entitled immediately
following such reorganization, merger, or consolidation, with a corresponding
proportionate adjustment of the Option Price per share so that the aggregate
Option Price thereafter shall be the same as the aggregate Option Price of the
shares remaining subject to the Option immediately prior to such reorganization,
merger, or consolidation. Subject to any contrary language in an Award Agreement
evidencing an Award, any restrictions applicable to such Grant shall apply as
well to any replacement shares received by the Grantee as a result of the
reorganization, merger or consolidation.
24.3. Reorganization, Sale of Assets or Sale of Stock Which Involves a
Change of Control.
Upon the dissolution or liquidation of the Company or upon a merger,
consolidation, or reorganization of the Company with one or more other entities
in which the Company is not the surviving entity, or upon a sale of
substantially all of the assets of the Company to another entity, or upon any
transaction (including, without limitation, a merger or reorganization in which
the Company is the surviving entity) approved by the Board that results in any
person or entity (or person or
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<PAGE>
entities acting as a group or otherwise in concert, owning fifty percent (50%)
or more of the combined voting power of all classes of securities of the
Company), (i) all outstanding shares subject to Grants shall be deemed to have
vested, and all restrictions and conditions applicable to such shares subject to
Grants shall be deemed to have lapsed, immediately prior to the occurrence of
such event, and (ii) all Options outstanding hereunder shall become immediately
exercisable for a period of fifteen days immediately prior to the scheduled
consummation of the event. Any exercise of an Option during such fifteen-day
period shall be conditioned upon the consummation of the event and shall be
effective only immediately before the consummation of the event. Upon
consummation of any such event, the Plan and all outstanding but unexercised
Options shall terminate, except to the extent provision is made in writing in
connection with such transaction for the continuation of the Plan or the
assumption of such Options theretofore granted, or for the substitution for such
Options of new options covering the stock of a successor entity, or a parent or
subsidiary thereof, with appropriate adjustments as to the number and kinds of
shares or units and exercise prices, in which event the Plan and Options
theretofore granted shall continue in the manner and under the terms so
provided. The Board shall send written notice of an event that will result in
such a termination to all individuals who hold Options not later than the time
at which the Company gives notice thereof to its shareholders.
24.4. Adjustments.
Adjustments under this Section 24 related to shares of Stock or securities
of the Company shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive. No fractional shares or other securities
shall be issued pursuant to any such adjustment, and any fractions resulting
from any such adjustment shall be eliminated in each case by rounding downward
to the nearest whole share.
24.5. No Limitations on Company.
The making of Awards pursuant to the Plan shall not affect or limit in any
way the right or power of the Company to make adjustments, reclassifications,
reorganizations, or changes of its capital or business structure or to merge,
consolidate, dissolve, or liquidate, or to sell or transfer all or any part of
its business or assets.
25. DISCLAIMER OF RIGHTS
No provision in the Plan or in any Award or Award Agreement shall be
construed to confer upon any individual the right to remain in the employ or
service of the Company or any affiliate, or to interfere in any way with any
contractual or other right or authority of the Company either to increase or
decrease the compensation or other payments to any individual at any time, or to
terminate any employment or other relationship between any individual and the
Company. In
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addition, notwithstanding anything contained in the Plan to the contrary, unless
otherwise stated in the applicable Award Agreement, no Award granted under the
Plan shall be affected by any change of duties or position of the Grantee, so
long as such Grantee continues to be a director, officer, consultant or employee
of the Company. The obligation of the Company to pay any benefits pursuant to
this Plan shall be interpreted as a contractual obligation to pay only those
amounts described herein, in the manner and under the conditions prescribed
herein. The Plan shall in no way be interpreted to require the Company to
transfer any amounts to a third party trustee or otherwise hold any amounts in
trust or escrow for payment to any Grantee or beneficiary under the terms of the
Plan. No Grantee shall have any of the rights of a shareholder with respect to
the shares of Stock subject to an Option except to the extent the certificates
for such shares of Stock shall have been issued upon the exercise of the Option.
26. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan nor the submission of the Plan to the
shareholders of the Company for approval shall be construed as creating any
limitations upon the right and authority of the Board to adopt such other
incentive compensation arrangements (which arrangements may be applicable either
generally to a class or classes of individuals or specifically to a particular
individual or particular individuals) as the Board in its discretion determines
desirable, including, without limitation, the granting of stock options
otherwise than under the Plan.
27. WITHHOLDING TAXES
The Company or a Subsidiary, as the case may be, shall have the right
to deduct from payments of any kind otherwise due to a Grantee any Federal,
state, or local taxes of any kind required by law to be withheld with respect to
the vesting of or other lapse of restrictions applicable to an Award or upon the
issuance of any shares of Stock upon the exercise of an Option or pursuant to an
Award. At the time of such vesting, lapse, or exercise, the Grantee shall pay
to the Company or the Subsidiary, as the case may be, any amount that the
Company or the Subsidiary may reasonably determine to be necessary to satisfy
such withholding obligation. Subject to the prior approval of the Company or
the Subsidiary, which may be withheld by the Company or the Subsidiary, as the
case may be, in its sole discretion, the Grantee may elect to satisfy such
obligations, in whole or in part, (i) by causing the Company or the Subsidiary
to withhold shares of Stock otherwise issuable to the Grantee or (ii) by
delivering to the Company or the Subsidiary shares of Stock already owned by the
Grantee. The shares of Stock so delivered or withheld shall have an aggregate
Fair Market Value equal to such withholding obligations. The Fair Market Value
of the shares of Stock used to satisfy such withholding obligation shall be
determined by the Company or the Subsidiary as of the date that the amount of
tax to be withheld is to be determined. A Grantee who has made an election
pursuant to this Section 27 may satisfy his or her withholding obligation only
with shares of Stock that are not
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subject to any repurchase, forfeiture, unfulfilled vesting, or other similar
requirements.
28. POOLING
In the event any provision of the Plan or the Award Agreement would prevent
the use of pooling of interests accounting in a corporate transaction involving
the Company and such transaction is contingent upon pooling of interests
accounting, then that provision shall be deemed amended or revoked to the extent
required to preserve such pooling of interests. The Company may require in an
Award Agreement that a Grantee who receives a Grant under the Plan shall, upon
advice from the Company, take (or refrain from taking, as appropriate) all
actions necessary or desirable to ensure that pooling of interests accounting is
available.
29. CAPTIONS
The use of captions in this Plan or any Award Agreement is for the
convenience of reference only and shall not affect the meaning of any provision
of the Plan or such Award Agreement.
30. OTHER PROVISIONS
Each Award granted under the Plan may contain such other terms and
conditions not inconsistent with the Plan as may be determined by the Board, in
its sole discretion.
31. NUMBER AND GENDER
With respect to words used in this Plan, the singular form shall include
the plural form, the masculine gender shall include the feminine gender, etc.,
as the context requires.
32. SEVERABILITY
If any provision of the Plan or any Award Agreement shall be determined to
be illegal or unenforceable by any court of law in any jurisdiction, the
remaining provisions hereof and thereof shall be severable and enforceable in
accordance with their terms, and all provisions shall remain enforceable in any
other jurisdiction.
33. GOVERNING LAW
The validity and construction of this Plan and the instruments evidencing
the Awards granted hereunder shall be governed by the laws of the State of
Delaware (without giving effect to the choice of law provisions thereof).
* * *
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The Plan was duly adopted and approved by the Sole Director of the
Company as of the __ day of September, 1999.
----------------------------------
Secretary
The Plan was duly approved by the stockholders of the Company on the
__ day of September, 1999.
----------------------------------
Secretary
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Exhibit 10.24
===============================================================================
PURCHASE AGREEMENT
BY AND BETWEEN
BUYLINE.NET, INC.
and
E2ENET, INC.
DATED AS OF
AUGUST 10, 1999
===============================================================================
<PAGE>
===============================================================================
CONTENTS
===============================================================================
<TABLE>
<CAPTION>
Page
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<S> <C>
Section 1. Authorization and Initial Closing............. 1
---------------------------------
1A. Authorization of the Stock......................... 1
--------------------------
1B. Purchase and Sale of the Stock..................... 1
------------------------------
1C. Loans.............................................. 2
-----
1D. Closings........................................... 2
--------
Section 2. Deliveries.................................... 2
----------
2A. Deliveries at Initial Closing...................... 3
-----------------------------
2B. Deliveries at Stock Closing........................ 3
---------------------------
3A. Public Disclosures................................. 4
------------------
Section 4. Representations and Warranties of the Company. 4
---------------------------------------------
4A. Organization and Corporate Power................... 4
--------------------------------
4B. Capital Stock and Related Matters.................. 5
---------------------------------
4C. Registration Rights................................ 5
-------------------
4D. Authorization; No Breach........................... 6
------------------------
4E. Subsidiaries; Investments.......................... 6
-------------------------
4F. Tax Matters........................................ 6
------------
4G. Section 83(b) Elections............................ 7
-----------------------
4H. Year 2000 Compliance............................... 7
--------------------
4I. Litigation, etc.................................... 7
----------------
4J. Brokerage.......................................... 8
---------
4K. Governmental Consent, etc.......................... 8
--------------------------
4L. Financial Information.............................. 8
---------------------
4M. Title to Property and Assets; Contracts and Leases. 8
--------------------------------------------------
4N. Related-Party Transactions and Certain Actions..... 9
----------------------------------------------
4O. Employees; Employee Compensation................... 9
--------------------------------
4P. Patents and Trademarks............................. 10
----------------------
4Q. Proprietary Information and Inventions Agreements.. 11
-------------------------------------------------
4R. ERISA.............................................. 11
-----
4S. Compliance with Laws and Insurance................. 11
----------------------------------
4T. Minute Books....................................... 11
------------
4U. Business Plan...................................... 11
-------------
4V. Disclosure......................................... 12
----------
4W. Real Property Holding Company...................... 12
-----------------------------
Section 5. Definitions................................... 12
-----------
Section 6. Miscellaneous.................................. 14
-------------
6A. Remedies........................................... 15
--------
6B. Purchaser's Investment Representations............. 15
--------------------------------------
6C. Consent to Amendments.............................. 16
---------------------
6E. Survival of Representations and Warranties......... 16
------------------------------------------
6F. Indemnification.................................... 16
---------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
6G. Successors and Assigns............................. 17
----------------------
6H. Generally Accepted Accounting Principles........... 18
----------------------------------------
6I. Severability....................................... 18
------------
6J. Counterparts....................................... 18
------------
6K. Descriptive Headings; Interpretation............... 18
------------------------------------
6L. Governing Law...................................... 18
-------------
6M. Notices............................................ 19
-------
6N. Rights............................................. 21
------
6O. Amendments......................................... 21
----------
<CAPTION>
<S> <C> <C>
Schedule 1 N Purchase Schedule
Schedule 2 N Schedule of Exceptions
Exhibit A -- Certificate of Incorporation
Exhibit B -- Bylaws
Exhibit C N Note
Exhibit D -- Registration Agreement
Exhibit E -- Stockholders Agreement
Exhibit F -- Form of Legal Opinion (Initial Closing)
Exhibit G N Co-License Agreement
Exhibit H N Patent License Assignment
Exhibit I N Form of Legal Opinion (Stock Closing)
Exhibit J N Ownership Interests
</TABLE>
-ii-
<PAGE>
===============================================================================
PURCHASE AGREEMENT
===============================================================================
THIS PURCHASE AGREEMENT (this "Agreement") is made as of August 10,
1999, by and among BUYLINE.NET, INC., a Delaware corporation (the "Company") and
E2ENET, INC., a Delaware corporation (together with its successors and permitted
assigns, the "Purchaser"). Except as otherwise indicated herein, capitalized
terms used herein are defined in Section 5 hereof.
---------
In consideration of the mutual covenants contained herein and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties to this Agreement, intending to be legally bound,
hereby agree as follows:
Section 1. Authorization and Initial Closing.
---------------------------------
1A. Authorization of the Stock. The Company has authorized the
--------------------------
issuance and sale to the Purchaser of up to 60,000,000 shares of its Common
Stock, par value $.00001 per share (the "Common Stock"). The Amended and
Restated Certificate of Incorporation of the Company (the "Certificate of
Incorporation") is attached hereto as Exhibit A and the by-laws of the Company
---------
(the "Bylaws") are attached hereto as Exhibit B.
---------
1B. Purchase and Sale of the Stock.
------------------------------
(i) Subject to the terms and conditions of this Agreement, the
Company agrees to sell to the Purchaser, and the Purchaser agrees to
purchase from the Company, upon the consummation of Purchaser's Initial
Public Offering, 60,000,000 shares of Common Stock at a price of $.20 per
share (the "Initial Investment"), such shares to represent 80% of the
Company's Common Stock on a fully diluted basis as of the date of the
Initial Investment; provided, however, that the Purchaser shall have no
-------- -------
right or obligation to make the Initial Investment after November 30, 1999
if the Purchaser's Initial Public Offering shall not have been consummated
on or prior to November 30, 1999; provided, further, however, that the
-------- ------- -------
Purchaser may, in its sole discretion, make the Initial Investment prior to
November 30, 1999 notwithstanding that the Purchaser's Initial Public
Offering shall have been consummated.
(ii) At any time prior to November 30, 1999 and so long as the
Purchaser shall not have already purchased shares of the Company pursuant
Section 1B(i) above, the Purchaser shall have the right, at Purchaser's
-------------
election, to acquire 15,000,000 shares of Common Stock at a price of $.20
per share, such shares representing 51% of the Company's Common Stock on a
fully diluted basis on the date of such purchase (and such purchase of
shares shall be deemed the "Initial Investment" and not the purchase
referred to in Section 1B(i) above). If the Purchaser completes the
-------------
Initial Investment in accordance with this Section 1B(ii), then at any
--------------
time, and from time to time at Purchaser's election until December 31,
2000, the Purchaser shall have the right to
<PAGE>
purchase from the Company, in whole or in part, and the Company shall sell
to the Purchaser upon receipt of notice of Purchaser's exercise of such
right, up to 45,000,000 shares of Common Stock at a price of $.20 per share
(the "Additional Shares" and , together with the Initial Investment, the
"Purchaser Shares").
1C. Loans. Prior to the Initial Investment, subject to the terms and
-----
conditions of this Agreement, the Purchaser shall make one or more loans (each a
"Loan" and, together, the "Loans" to the Company of up to $950,000 in the
aggregate (including the First Loan (as defined below) which was made prior to
the execution of this Agreement). The Loans shall be made in installments as
follows: (i) $50,000, which was made on July 21, 1999 (the "First Loan"); (ii)
$200,000 to be made on the Initial Closing Date (as defined below); (iii) not
less than $100,000 to be made on September 1, 1999, as needed (as mutually
agreed by the Company and the Purchaser); (iv) not less than $100,000 to be made
on October 1, 1999, as needed (as mutually agreed by the Company and the
Purchaser); and (v) not less than $100,000 to be made on November 1, 1999, as
needed (as mutually agreed by the Company and the Purchaser). Each of September
1, October 1, and November 1 of 1999 shall be a "Subsequent Loan Closing Date".
Each Loan shall be evidenced by a note (each a "Note") in the form attached as
Exhibit C hereto.
- ---------
1D. Closings.
--------
(i) Simultaneously with the execution of this Agreement (the
"Initial Closing Date") the second installment of the Loans shall be made
and each of the parties shall deliver the documents and certificates set
forth in Section 2A hereto (the "Initial Closing"). At the Initial
----------
Closing, the Company shall deliver to the Purchaser a duly executed Note in
the amount of $200,000, upon delivery of such amount by the Purchaser by
wire transfer of immediately available funds to such account as is
designated by the Company. The Initial Closing shall take place at the
offices of Hogan & Hartson L.L.P., 555 Thirteenth Street, N.W., Washington,
D.C. 20004-1109.
(ii) On each Subsequent Loan Closing Date and subject to the
conditions set forth on Schedule 1 attached hereto, the Company shall
-------------------
deliver to the Purchaser a duly executed Note in the amount of the Loan to
be made on such Subsequent Loan Closing Date, upon delivery of such amount
by the Purchaser by wire transfer of immediately available funds to such
account as is designated by the Company.
(iii) The date of the consummation of the Initial Investment
(the "Stock Closing") shall be the "Initial Investment Closing Date." On
the Initial Investment Closing Date, the Company shall deliver to the
Purchaser the certificates and other documents set forth in Section 2B
----------
below and all of the outstanding Notes shall be repaid in full.
Section 2. Deliveries.
----------
2A. Deliveries at Initial Closing.
-----------------------------
Simultaneously with the execution of this Agreement, the Company is
delivering to the Purchaser the following:
-2-
<PAGE>
(i) Registration Agreement. A duly executed registration rights
----------------------
agreement in form and substance set forth in Exhibit D attached hereto (the
---------
"Registration Agreement").
(ii) Stockholders Agreement. A stockholders agreement in form
----------------------
and substance set forth in Exhibit E attached hereto (the "Stockholders
---------
Agreement") duly executed by the Company and the Silverman Trust.
(iii) Legal Opinion. A legal opinion from O'Neil, Bragg &
-------------
Staffin, P.C. in the form of Exhibit F attached hereto (the "Legal
---------
Opinion").
(iv) Note. A duly executed Note evidencing the initial Loan.
----
(v) Officer's Certificate. An Officer's Certificate, dated the
---------------------
date of the Initial Closing, stating that the representations and
warranties contained in Section 4 hereof shall be true and correct in all
---------
material respects at and as of the Initial Closing as though then made,
except to the extent of changes caused by the transactions expressly
contemplated herein.
(vi) Board Resolutions. Certified copies of the resolutions duly
-----------------
adopted by the Company's board of directors (its "Board") authorizing the
execution, delivery, and performance of this Agreement, the Registration
Agreement, the Stockholders Agreement and each of the other agreements
contemplated hereby, the filing of the Certificate of Incorporation
referred to in Section 1A, the issuance and sale of the Common Stock, the
----------
incurrence of the Loans and the consummation of all other transactions
contemplated by this Agreement.
(vii) Certificate of Incorporation and Bylaws. Certified copies
---------------------------------------
of (1) the Certificate of Incorporation; and (2) the Company's Bylaws, each
as in effect at the Initial Closing.
(viii) Co-License. A duly executed co-license agreement dated
----------
July 1, 1999 (the "Co-License") among the Company, LightMedia Interactive
Corporation and EC Cubed in the form of Exhibit G attached hereto.
---------
(ix) Patent License and Assignment. A duly executed patent
-----------------------------
license and assignment dated July 23, 1999 (the "Patent License and
Assignment") between Lawrence Silverman and the Company in the form of
Exhibit H attached hereto.
---------
2B. Deliveries at Stock Closing.
---------------------------
At the Stock Closing, the Company will deliver to the Purchaser the
following:
(i) Legal Opinion. A legal opinion from O'Neil, Bragg & Staffin,
-------------
P.C. in the form of Exhibit I attached hereto (the "Legal Opinion").
---------
-3-
<PAGE>
(ii) Stock Certificates. Stock certificates evidencing the
------------------
Common Stock purchased by the Purchaser at the Stock Closing, registered in
the Purchaser's name.
(iii) Officer's Certificate. An Officer's Certificate, dated
---------------------
the date of the Stock Closing, stating that the representations and
warranties contained in Section 4 hereof shall be true and correct in all
---------
material respects at and as of the Stock Closing as though then made,
except to the extent of changes caused by the transactions expressly
contemplated herein.
3A. Public Disclosures. The Company shall not, nor shall it permit
------------------
any of its Subsidiaries or other Affiliates to, disclose any Purchaser's (or its
Affiliates') name or identity as an investor in the Company in any press release
or other public announcement or in any document or material filed with any
governmental entity, without the prior written consent of the Purchaser which
consent shall not be unreasonably withheld or delayed, unless such disclosure is
required by applicable law or governmental regulations or by order of a court of
competent jurisdiction, in which case, before making such disclosure the Company
shall give written notice to the Purchaser describing in reasonable detail the
proposed content of such disclosure and shall permit the Purchaser to review and
comment upon the form and substance of such disclosure.
Section 4. Representations and Warranties of the Company. As a
---------------------------------------------
material inducement to the Purchaser to enter into this Agreement, to make the
Loans and purchase the Purchaser Shares, the Company hereby represents and
warrants to the Purchaser that as of the date of this Agreement and as of the
date of the Initial Closing, each Subsequent Closing and the Stock Closing,
except as set forth on the Schedule of Exceptions attached hereto as Schedule 2
----------------------
and furnished to the Purchaser, specifically identifying the relevant
subparagraph(s) hereof:
4A. Organization and Corporate Power. The Company is a corporation
--------------------------------
duly organized, validly existing, and in good standing under the laws of the
State of Delaware and is qualified to do business in every jurisdiction in which
the failure to so qualify might reasonably be expected to have a material
adverse effect on the financial condition, operating results, assets or
operations of the Company and its Subsidiaries taken as a whole. The Company has
all requisite corporate power and authority and, other than as set forth on
Schedule 2, all material licenses, permits, and authorizations necessary to own
and operate its properties, to carry on its businesses as now conducted, and to
carry out the transactions contemplated by this Agreement. The copies of the
Company's Certificate of Incorporation and Bylaws, and the copies of the
certificate of incorporation and bylaws (or other similar organizational
documents) of each Subsidiary of the Company, which have been furnished to the
Purchaser, reflect all amendments made thereto at any time before the date
hereof and are correct and complete.
4B. Capital Stock and Related Matters.
---------------------------------
(i) The authorized capital stock of the Company consists of 150
million shares of capital stock, all of which are designated as Common
Stock par value $.00001 per share. Immediately prior to the Initial
Closing, the Company had 14,411,675 shares of Common Stock issued and
outstanding. All of the outstanding shares of all
-4-
<PAGE>
classes of capital stock and all securities exercisable for or convertible
into any ownership interest in the Company, and any arrangement pursuant to
which any ownership interest in the Company may be obtained are owned of
record by the parties and in the numbers specified in Exhibit J hereto.
---------
Except for (i) such issued and outstanding shares; (ii) the rights or
securities specified in the preceding sentence (and Exhibit J); and (iii)
---------
8,000,000 shares of common stock reserved for issuance for employee options
pursuant to the Company's Option Plan, of which no options are currently
granted; the Company does not have outstanding any stock or securities
convertible or exchangeable for any shares of its capital stock or
containing any profit participation features, nor does it have outstanding
any rights, arrangements or options to subscribe for, receive or to
purchase its capital stock or any stock or securities convertible into or
exchangeable for its capital stock or any stock appreciation rights or
phantom stock plans other than pursuant to, and as contemplated by, this
Agreement. No stock plan, stock purchase, stock option or other agreement
or understanding between the Company and any holder of any equity
securities of the Company or rights to purchase equity securities of the
Company provides for acceleration or other changes in the vesting
provisions or other terms of such securities, as the result of any merger,
sale of stock or assets, change in control or other similar transaction by
the Company. The Company is not subject to any obligation (contingent or
otherwise) to repurchase or otherwise acquire or retire any shares of its
capital stock or any warrants, options, or other rights to acquire its
capital stock, except pursuant to this Agreement. All of the outstanding
shares of the Company's capital stock are and shall be validly issued,
fully paid, and nonassessable.
(ii) There are no statutory or contractual stockholders
preemptive rights or rights of refusal with respect to the issuance of any
of the Stock hereunder, except as expressly provided herein, and as
expressly provided in the Stockholders Agreement and the Registration
Agreement. Based in part on the investment representations of the
Purchaser in Section 6B hereof, the Company has not violated any applicable
----------
federal or state securities laws in connection with the offer, sale, or
issuance of any of its capital stock, and the offer, sale, and issuance of
the Stock hereunder do not and will not require registration under the
Securities Act or any applicable state securities laws. Except for the
Stockholders Agreement and the Registration Agreement, there are no
agreements between the Company's stockholders with respect to the voting or
transfer of the Company's capital stock or with respect to any other aspect
of the management of the Company's affairs.
4C. Registration Rights. Except as provided in the Registration
-------------------
Agreement, the Company is not presently under any obligation and has not granted
any rights to register under the Securities Act any of its presently outstanding
securities or any of its securities that may be subsequently issued.
4D. Authorization; No Breach. The execution, delivery, and
------------------------
performance of this Agreement, the Registration Agreement, the Stockholders
Agreement and all other agreements contemplated hereby to which the Company is
entering on the date hereof and the filing of the Certificate of Incorporation
have been duly authorized by the Company. This Agreement, the Registration
Agreement, the Stockholders Agreement, the Certificate of Incorporation, and all
other agreements contemplated hereby to which the Company or any
-5-
<PAGE>
Subsidiary is entering on the date hereof each constitutes a valid and binding
obligation of such Person, enforceable in accordance with its terms. The
execution and delivery by the Company of this Agreement, the Registration
Agreement, the Stockholders Agreement and all other agreements contemplated
hereby which the Company is entering on the date hereof, the offering, sale, and
issuance of the Stock hereunder, the amendment to the Certificate of
Incorporation contemplated herein and the fulfillment of and compliance with the
respective terms hereof and thereof by the Company do not and will not: (i)
conflict with or result in a breach of the terms, conditions, or provisions of;
(ii) constitute a default under; (iii) result in the creation of any Lien,
security interest, charge, or encumbrance upon the Company's capital stock or
assets pursuant to; (iv) give any third party the right to modify, terminate, or
accelerate any obligation under; (v) result in a violation of; or (vi) require
any authorization, consent, approval, exemption, or other action by or notice to
any court or administrative or governmental body pursuant to, the Certificate of
Incorporation or Bylaws of the Company, or any law, statute, rule, or regulation
to which the Company is subject, or any agreement, instrument, order, judgment,
or decree to which the Company or any of its Affiliates, or employees is a party
or by which it or any of the foregoing Persons is bound. The Company is not in
violation or default in any respect of any provision of its Certificate of
Incorporation, Bylaws, or in any respect of any instrument, judgment, order,
writ, decree or contract to which it is a party or by which it is bound, or of
any provision of any federal or state statute, rule or regulation applicable to
the Company.
4E. Subsidiaries; Investments. The Company does not own or hold any
-------------------------
shares of stock or any other security or interest in, and does not directly or
indirectly control, any other Person or any rights to acquire any such security
or interest, and the Company has never had any Subsidiary. The Company is not a
participant in any joint venture, partnership or similar arrangement.
4F. Tax Matters. The Company has filed all tax returns (if any) which
-----------
it is required to file under applicable laws and regulations; all such returns
(if any) are complete and correct in all material respects; the Company has paid
all taxes due and owing by it and has withheld and paid over all taxes which it
is obligated to withhold from amounts paid or owing to any employee,
stockholder, creditor or other third party (if any); the Company has not waived
any statute of limitations with respect to taxes or agreed to any extension of
time with respect to a tax assessment or deficiency; the assessment of any
additional taxes for periods for which returns have been filed is not expected;
to the knowledge of the Company, no foreign, federal, state or local tax audits
are pending or being conducted with respect to the Company, no information
related to tax matters has been requested by any foreign, federal, state or
local taxing authority and no notice indicating an intent to open an audit or
other review has been received by the Company from any foreign, federal, state
or local taxing authority; and there are no unresolved questions or claims
concerning the Company's tax liability. The Company has not made an election
under (S)341(f) of the IRC.
4G. Section 83(b) Elections. To the best of the Company's knowledge,
-----------------------
all individuals who have purchased shares of the Company's Common Stock under
agreements that provide for the vesting of such shares have timely filed
elections under Section 83(b) of the IRC and any analogous provision of state
tax laws.
-6-
<PAGE>
4H. Year 2000 Compliance.
--------------------
(i) None of the computer software, computer firmware, computer
hardware (whether general or special purpose) or other similar or related
items of automated, computerized or software systems that are used or
relied on by the Company in the conduct of its business will malfunction,
will cease to function, will generate incorrect data or will produce
incorrect results when processing, providing or receiving (A) date-related
data from, into and between the 20th and 21st centuries or (B) date-related
data in connection with any valid date in the 20th and 21st centuries,
except, in each such case, as would not have a material adverse effect on
the Company.
(ii) None of the products and services sold, licensed, rendered
or otherwise provided by the Company in the conduct of its business will
malfunction, will cease to function, will generate incorrect data or will
produce incorrect results when processing, providing or receiving (A) date-
related data from, into and between the 20th and 21st centuries or (B)
date-related data in connection with any valid date in the 20th and 21st
centuries, except, in each such case, as would not have a material adverse
effect on the Company.
(iii) The Company has not made any other representations or
warranties specifically relating to the ability of any product or service
sold, licensed, rendered, or otherwise provided by the Company in the
conduct of its business to operate without malfunction, to operate without
ceasing to function, to generate correct data or to produce correct results
when processing, providing or receiving (A) date-related data from, into
and between the 20th and 21st centuries and (B) date-related data in
connection with any valid date in the 20th and 21st centuries.
4I. Litigation, etc. There are no actions, suits, proceedings,
---------------
orders, investigations or claims pending or, to the best of the Company's
knowledge, threatened against or affecting the Company (or to the best of the
Company's knowledge, pending or threatened against or affecting any of the
officers, directors or employees of the Company with respect to their business
or proposed business activities) at law or in equity, or before or by any
governmental department, commission, board, bureau, agency or instrumentality
(including, without limitation, any actions, suits, proceedings or
investigations with respect to the transactions contemplated by this Agreement)
which could have a material adverse effect on the financial condition, operating
results, assets or operations of the Company taken as a whole; the Company is
not subject to any arbitration proceedings under collective bargaining
agreements or otherwise or any governmental investigations or inquiries; and,
there is no basis for any of the foregoing. The Company is not subject to any
judgment, order or decree of any court or other governmental agency. The Company
has not received any opinion or memorandum or legal advice from legal counsel to
the effect that it is exposed, from a legal standpoint, to any liability or
claim of the nature described in the preceding sentence which may be material to
its business.
4J. Brokerage. There are no claims for brokerage commissions,
---------
finders' fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement binding
upon the Company. The Company shall pay, and hold the Purchaser harmless
against, any liability, loss or expense (including, without limitation,
attorneys' fees and out-of-pocket expenses) arising in connection with any such
claim.
-7-
<PAGE>
4K. Governmental Consent, etc. No permit, consent, approval or
-------------------------
authorization of, or declaration to or filing with, any governmental authority
is required in connection with the execution, delivery and performance by the
Company of this Agreement or the other agreements contemplated hereby, or the
consummation by the Company of any other transactions contemplated hereby or
thereby, the offer, sale or issuance of the Common Stock by the Company, except:
(i) the filing of the Certificate of Incorporation with the Secretary of State
of the State of Delaware; and (ii) such filings as have been made prior to the
Initial Closing.
4L. Financial Information. As Company has no operating history, the
---------------------
Company possesses neither audited nor unaudited financial statements. In lieu of
financial statements, the Company has delivered to the Purchaser the Business
Plan dated May 27, 1999 (as hereinafter defined) and cash flow projections as of
May 27, 1999 (collectively, the "Financial Information"). Except as disclosed in
the Financial Information, the Company is not a guarantor or indemnitor of any
indebtedness of any other person, firm or corporation. As operations commence,
the Company will maintain a standard system of accounting established and
administered in accordance with generally accepted accounting principles. Since
its formation, there has not been any event or condition of any type that has
materially and adversely affected the business, properties or financial
condition of the Company.
4M. Title to Property and Assets; Contracts and Leases. Except (i) as
--------------------------------------------------
reflected in the Financial Information; (ii) for Liens and current taxes not yet
delinquent; (iii) for Liens imposed by law and incurred by the ordinary course
of business for obligations not past due to carriers, warehousemen, laborers,
materialmen and the like; (iv) for Liens in respect of pledges or deposits under
workers' compensation laws or similar legislation; or (v) for minor defects in
title, none of which, individually or in the aggregate, materially interferes
with the use of such property, the Company has good and marketable title to its
property and assets free and clear of all mortgages, Liens, claims and
encumbrances. With respect to the property and assets it leases, the Company is
in material compliance with such leases and holds a valid leasehold interest
free of any Liens, claims, or encumbrances, subject to clauses (i) through (v)
----------- ---
above. There are no agreements, understandings, instruments, contracts, proposed
transactions, judgments, orders, writs or decrees to which the Company is a
party or by which it is bound that may involve (i) obligations (contingent or
otherwise) of, or payments to the Company, in excess of $25,000, (ii) the
license of any patent, copyright, trade secret or other proprietary right to or
from the Company, (iii) provisions restricting or affecting the development,
manufacture or distributions of the Company's products or services or (iv)
indemnification by the Company with respect to infringements of proprietary
rights. The Company is not a party to and is not bound by any contract,
agreement or instrument, or subject to any restriction under its Certificate of
Incorporation or Bylaws that materially and adversely affects its business as
now conducted or as proposed to be conducted in the Business Plan, its
properties or its financial condition.
4N. Related-Party Transactions and Certain Actions. No employee,
----------------------------------------------
officer, consultant, stockholder or director of the Company or member of his or
her immediate family is indebted to the Company, nor is the Company indebted (or
committed to make loans or guarantee credit) to any of them, other than (i) for
payment of salary for services rendered; (ii) reimbursement for reasonable
expenses incurred on behalf of the Company; and (iii) for other standard
employee benefits made generally available to all employees (including stock
option agreements outstanding under the Option Plan). Other than as set forth on
Schedule 2, to the
-8-
<PAGE>
knowledge of the Company, none of such persons has any direct or indirect
ownership interest in any firm or corporation with which the Company is
affiliated or with which the Company has a business relationship, or any firm or
corporation that competes with the Company, except that employees, stockholders,
officers, or directors of the Company may own stock in publicly traded companies
that may compete with the Company. Other than as set forth on Schedule 2, no
officer, director, consultant or stockholder or any member of their immediate
families is, directly or indirectly, interested in any material contract with
the Company (other than such contracts as relate to any such person's related
ownership of capital stock or other securities of the Company and employment
agreements entered into in the ordinary course). The Company has not (A)
declared or paid any dividends or authorized or made any distributions upon or
with respect to any class or series of its capital stock, (B) incurred any
indebtedness for money borrowed or any other liabilities individually or in
excess of $10,000, (C) made any loans or advances to any person, other than
ordinary advances for travel expenses, or (D) sold, exchanged or otherwise
disposed of any of its assets or rights having a value in excess of $10,000,
other than the sale of its inventory in the ordinary course of business.
4O. Employees; Employee Compensation. To the Company's knowledge,
--------------------------------
there are no strike, labor dispute or union organization activities pending or
threatened between it and its employees. None of the Company's employees belongs
to any union or collective bargaining unit. The Company has materially complied
with all applicable state and federal equal opportunity and other laws related
to employment. To the Company's knowledge, no employee or consultant of the
Company is or will be in material violation of any judgment, decree, or order or
any term of any employment contract, patent disclosure agreement, or other
contract or agreement relating to the relationship of any such employee or
consultant with the Company, or any other party because of the nature of the
business conducted or presently proposed to be conducted by the Company or to
the use by the employee or consultant of his or her efforts with respect to the
Company. The Company is not aware that any officer or key employee, or that any
group of key employees, intends to terminate their employment with the Company,
nor does the Company have a present intention to terminate the employment of any
of the foregoing. Other than as set forth on Schedule 2 and except pursuant to
existing employment agreements, subject to general principles related to
wrongful termination of employees, the employment of each officer and employee
of the Company is terminable at the will of the Company. The consulting
relationship of each consultant to the Company is terminable at the will of the
Company without material liability or obligation to the Company.
4P. Patents and Trademarks. The Company owns or possesses, or will
----------------------
acquire prior to use, sufficient legal rights to all patents, trademarks,
service marks, trade names, copyrights, trade secrets, licenses, information and
proprietary rights and processes necessary for its business as now conducted
(including without limitation its corporate names) and as proposed to be
conducted to the knowledge of the Company without any conflict with, or
infringement of the rights of, others. The Company has no patents or pending
patent applications. Except for agreements with its own employees or
consultants, substantially in the form referenced in Section 4Q below, and
----------
standard end-user license agreements, there are no outstanding options,
licenses, or agreements of any kind relating to the foregoing, nor is the
Company bound by or a party to any options, licenses, or agreements of any kind
with respect to the patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses, information and proprietary rights and processes of any
other person or entity. To the knowledge of the Company, the Company
-9-
<PAGE>
has not violated or, by conducting its business as proposed, would not violate,
any of the patents, trademarks, service marks, trade names, copyrights, trade
secrets or any other proprietary rights or processes of any person or entity. To
the knowledge of the Company, none of its employees is obligated under any
contract (including licenses, covenants, or commitments of any nature) or any
other agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with the use of such employee's best
efforts to promote the interests of the Company or that would conflict with the
Company's business as proposed to be conducted. To the Company's knowledge,
neither the execution nor delivery of this Agreement, nor the carrying on of the
Company's business by the employees of the Company, nor the conduct of the
Company's business as currently conducted, will conflict with or result in a
breach of the terms, conditions or provisions of, or constitute a default under,
any contract, covenant, or instrument under which any of such employees is now
obligated. To the knowledge of the Company, it is not, nor will it be, necessary
for the Company to use any inventions of any of its employees (or persons it
currently intends to hire) made prior to their employment by the Company.
4Q. Proprietary Information and Inventions Agreements. Other than as
-------------------------------------------------
set forth on Schedule 2, each current employee, officer and consultant of the
Company has executed a nondisclosure agreement substantially in the form or
forms which has been delivered to the Purchaser.
4R. ERISA. The Company does not maintain or have any obligation to
-----
contribute to or any other liability with respect to or under (including but not
limited to current or potential withdrawal, liability), nor has it ever
maintained or had any obligation to contribute to or any other liability with
respect to or under: (i) any plan or arrangement whether or not terminated,
which provides medical, health, life insurance or other welfare types benefits
for current or future retired or terminated employees (except for limited
continued medical benefit coverage required to be provided under Section 4980B
of the IRC or as required under applicable state law); (ii) any "multiemployer
plan" (as defined in Section 3(37) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"); (iii) any employee plan which is a tax-
qualified "defined benefit plan" (as defined in Section 3(35) of ERISA), whether
or not terminated; (iv) any employee plan which is tax-qualified "defined
contribution plan" (as defined in Section 3(34) of ERISA), whether or not
terminated; or (v) any other plan or arrangement providing benefits to current
or former employees, including any bonus plan, plan for deferred compensation,
employee health or other welfare benefit plan or other arrangement, whether or
not terminated. For purposes of this Section 5R, the term "Company" includes all
----------
organizations under common control with the Company pursuant to Section 414(b)
or (c) of the IRC.
4S. Compliance with Laws and Insurance. The Company has not violated
----------------------------------
any law or any governmental regulation or requirement which violation would
reasonably be expected to have a material adverse effect upon the financial
condition, operating results, assets, or operations of the Company, and the
Company has not received notice of any such violation. The Company is not
subject to any clean up liability, and the Company has no reason to believe it
may become subject to any clean up liability, under any federal, state or local
environmental law, rule or regulation.
-10-
<PAGE>
4T. Minute Books. The copy of the minute books of the Company
------------
provided to the Purchaser contains minutes of all meetings of directors and
stockholders and all actions by written consent without a meeting by the
directors and stockholders since the date of incorporation and accurately
reflects all actions by the directors (and any committee of directors) and
stockholders with respect to all transactions referred to in such minutes in all
material respects.
4U. Business Plan. The Company's business plan dated May 27, 1999
-------------
delivered to the Purchaser by the Company (the "Business Plan") was prepared in
good faith by the Company and does not, as of the date of this Agreement and to
the best of the Company's knowledge after reasonable investigation, contain any
untrue statement of a material fact nor does it omit to state a material fact
necessary to make the statements therein not misleading, except that with
respect to assumptions, projections and expressions of opinion or predictions
contained in the Business Plan, the Company represents only that such
assumptions, projections, expressions of opinion and projections were made in
good faith and that the Company believes there is a reasonable basis therefor.
4V. Disclosure. Neither this Agreement nor any of the schedules,
----------
other agreements to be entered into by the Company with the Purchaser on the
date hereof, or certificates or other items prepared or supplied to the
Purchaser by or on behalf of the Company, as required pursuant to the provisions
of this Agreement or as required pursuant to the provisions of the Stockholders
Agreement or the Registration Agreement, contain any untrue statement of a
material fact regarding the Company or omit a material fact regarding the
Company necessary to make each statement contained herein or therein not
misleading.
4W. Real Property Holding Company. The Company is not a real property
-----------------------------
holding company within the meaning of Section 897 of the IRC.
Section 5. Definitions. For the purposes of this Agreement, the
-----------
following terms have the meanings set forth below:
"Affiliate" of any particular person or entity means any other person
or entity controlling, controlled by, or under common control with such
particular person or entity.
"Affiliated Group" means an affiliated group as defined in Section
1504 of the IRC (or any analogous combined, consolidated, or unitary group
defined under state, local, or foreign income Tax law).
"Common Stock" means the Company's common stock, par value $.00001 per
share.
"Indebtedness" means all indebtedness for borrowed money (including
purchase money obligations), all indebtedness under revolving credit
arrangements, all capitalized lease obligations, and all guarantees of any of
the foregoing.
"Investment" as applied to any Person means: (i) any direct or
indirect purchase or other acquisition by such Person of any notes, obligations,
instruments, stock, securities, or
-11-
<PAGE>
ownership interest (including partnership interests and joint venture interests)
of any other Person, and; (ii) any capital contribution by such Person to any
other Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and any
reference to any particular IRC section shall be interpreted to include any
revision of or successor to that section regardless of how numbered or
classified.
"Lien" means any mortgage, pledge, security interest, encumbrance,
lien, or charge of any kind (including, without limitation, any conditional sale
or other title retention agreement or lease in the nature thereof), any sale of
receivables with recourse against the Company, any of its Subsidiaries or any of
its Affiliates, any filing or agreement to file a financing statement as debtor
under the Uniform Commercial Code or any similar statute other than to reflect
ownership by a third party of property leased to the Company or any of its
Subsidiaries under a lease which is not in the nature of a conditional sale or
title retention agreement, or any subordination arrangement in favor of another
Person (other than any subordination arising in the ordinary course of
business).
"Officer's Certificate" means a certificate signed by the Company's
President, Chief Operating Officer or its Chief Financial Officer (but without
personal liability), stating that: (i) the officer signing such certificate has
made or has caused to be made such investigations as are necessary in order to
permit him to verify the accuracy of the information set forth in such
certificate; and (ii) such certificate does not misstate any material fact and
does not omit to state any fact necessary to make the certificate not
misleading.
"Person" means an individual, a partnership, a limited liability
company, a corporation, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization, and a governmental entity or any
department, agency, or political subdivision thereof.
"Purchaser's Initial Public Offering" means the first firm commitment
underwritten public offering of shares of common stock of the purchaser pursuant
to an effective registration statement under the Securities Act in which the net
proceeds to the Purchaser are at least $20 million.
"Purchaser Stock" means the Common Stock purchased by the Purchaser
hereunder.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar federal law then in force.
"Securities Exchange Act" means the Securities Exchange Act of 1934,
as amended, or any similar federal law then in force.
"Securities and Exchange Commission" includes any governmental body or
agency succeeding to the functions thereof.
"Silverman Trust" means the Silverman Trust dated November 21, 1991
F/B/O Katharine and Alexander Silverman, William D. Buxton, Jr., Trustee, and
Nancy and Lawrence Silverman, as Co-Administrators.
-12-
<PAGE>
"Stock" means the Company's Common Stock.
"Subsidiary" means, with respect to any Person, any corporation,
limited liability company, partnership, association, or other business entity of
which: (i) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers, or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof; or (ii) if a limited
liability company, partnership, association, or other business entity, a
majority of the member, partnership or other similar ownership interest thereof
is at the time owned or controlled, directly or indirectly, by any Person or one
or more Subsidiaries of that Person or a combination thereof. For purposes
hereof, a Person or Persons shall be deemed to have a majority ownership
interest in a limited liability company, partnership, association, or other
business entity if such Person or Persons shall be allocated a majority of
limited liability company, partnership, association, or other business entity
gains or losses or shall be or control any managing director or general partner
of such limited liability company, partnership, association, or other business
entity. References to a "Subsidiary" of the Company shall be given effect only
at such times as the Company has one or more Subsidiaries.
"Tax" or "Taxes" means any: (i) federal, state, local, or foreign
income, gross receipts, franchise, estimated, alternative minimum, add-on
minimum, sales, use, transfer, registration, value added, excise, natural
resources, severance, stamp, occupation, premium, windfall profit,
environmental, customs, duties, real property, personal property, capital stock,
social security, unemployment, disability, payroll, license, employee or other
withholding, or other tax, of any kind whatsoever, including any interest,
penalties, or additions to tax or additional amounts in respect of the
foregoing; (ii) liability of the Company for the payment of any amounts of the
type described in clause (i) arising as a result of being (or ceasing to be) a
----------
member of any Affiliated Group (or being included (or required to be included)
in any Tax Return relating thereto); and (iii) liability of the Company for the
payment of any amounts of the type described in clause (i) as a result of any
----------
express or implied obligation to indemnify or otherwise assume or succeed to the
liability of any other person (including, but not limited to, as a successor or
transferee).
"Tax Returns" means returns, declarations, reports, claims for refund,
information returns, or other documents (including any related or supporting
schedules, statements, or information) filed or required to be filed in
connection with the determination, assessment, or collection of Taxes of any
party or the administration of any laws, regulations, or administrative
requirements relating to any Taxes.
-13-
<PAGE>
Section 6. Miscellaneous.
-------------
6A. Remedies. Each holder of Stock issued hereunder shall have all
--------
rights and remedies set forth in this Agreement and the Certificate of
Incorporation and all rights and remedies which such holders have been granted
at any time under any other agreement or contract and all of the rights which
such holders have under any law. Any Person having any rights under any
provision of this Agreement shall be entitled to enforce such rights
specifically (without posting a bond or other security), to recover damages by
reason of any breach of any provision of this Agreement, and to exercise all
other rights granted by law.
6B. Purchaser's Investment Representations. The Purchaser hereby
--------------------------------------
represents and warrants to the Company that the Purchaser is acquiring the
Restricted Securities purchased hereunder or acquired pursuant hereto for its
own account with the present intention of holding such securities for purposes
of investment, and that it has no intention of selling such securities in a
public distribution in violation of the federal securities laws or any
applicable state securities laws; provided that nothing contained herein shall
-------- ----
prevent the Purchaser and subsequent holders of Restricted Securities from
transferring such securities in compliance with the provisions of this
Agreement, the Stockholders Agreement and the Registration Agreement. The
Purchaser hereby represents and warrants to the Company that the execution,
delivery, and performance of this Agreement, the Registration Agreement, the
Stockholders Agreement and all other agreements contemplated hereby to which the
Purchaser is entering on the date hereof have been duly authorized by the
Purchaser. This Agreement, the Registration Agreement, the Stockholders
Agreement, and all other agreements contemplated hereby that the Purchaser is
entering on the date hereof each constitutes a valid and binding obligation of
such Person, enforceable in accordance with its terms. The execution and
delivery by the Purchaser of this Agreement, the Registration Agreement, the
Stockholders Agreement and all other agreements contemplated hereby which the
Purchaser is entering on the date hereof, the purchase of the Common Stock
hereunder, and the fulfillment of and compliance with the respective terms
hereof and thereof by the Purchaser do not and will not: (i) conflict with or
result in a breach of the terms, conditions, or provisions of; (ii) constitute a
default under; (iii) result in a violation of; or (iv) require any
authorization, consent, approval, exemption, or other action by or notice to any
court or administrative or governmental body pursuant to, the certificate of
incorporation, certificate of formation, partnership agreement, bylaws or any
similar constitutive document of the Purchaser, or any law, statute, rule, or
regulation to which the Purchaser is subject, or any agreement, instrument,
order, judgment, or decree to which the Purchaser or any of its Affiliates, or
employees is a party or by which it or any of the foregoing Persons is bound.
Each certificate for Restricted Securities shall be imprinted with a legend in
substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE
TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS
SUBJECT TO THE CONDITIONS SPECIFIED IN THE (A) PURCHASE
AGREEMENT, DATED AS OF AUGUST 10, 1999 BETWEEN THE ISSUER
(THE "COMPANY") AND CERTAIN STOCKHOLDERS OF THE COMPANY, AND
(B) THE STOCKHOLDERS AGREEMENT, DATED AS OF AUGUST 10, 1999,
BETWEEN THE COMPANY, AND CERTAIN STOCKHOLDERS THEREOF, AND
THE COMPANY RESERVES THE RIGHT TO REFUSE THE TRANSFER OF SUCH
SECURITIES UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED WITH
RESPECT TO SUCH TRANSFER. A COPY OF THE PURCHASE AGREEMENT
AND THE STOCKHOLDERS AGREEMENT ARE ON FILE AT THE PRINCIPAL
OFFICE OF THE COMPANY AND WILL BE FURNISHED UPON REQUEST TO
THE HOLDER OF RECORD OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE."
-14-
<PAGE>
If the holder of the Restricted Securities delivers to the Company an
opinion of counsel in a form reasonably acceptable to the Company that no
subsequent transfer of such Restricted Securities shall require registration
under the Securities Act, however, the Company shall promptly upon such
contemplated transfer deliver new certificates for such Restricted Securities
which do not bear the Securities Act legend set forth in this Section 6B.
----------
6C. Consent to Amendments. Except as otherwise expressly provided
---------------------
herein, the provisions of this Agreement may be amended and the Company may take
any action herein prohibited, or omit to perform any act herein required to be
performed by it, only if the Company has obtained the written consent of the
Purchaser. No other course of dealing between the Company and the holder of any
Stock or any delay in exercising any rights hereunder or under the Certificate
of Incorporation shall operate as a waiver of any rights of any such holders.
6E. Survival of Representations and Warranties. All representations
------------------------------------------
and warranties contained herein or made in writing by any party in connection
herewith shall survive the execution and delivery of this Agreement and the
consummation of the transactions contemplated by this Agreement until the second
anniversary of the date hereof, regardless of any investigation made by any
Purchaser or on its behalf.
6F. Indemnification.
---------------
(i) Subject to Section 6F(i), the Company shall indemnify the
-------------
Purchaser against and agrees to hold the Purchaser harmless from any and all
claims, damage, loss, liability and expense (including, without limitation,
reasonable expenses of investigation and reasonable attorneys' fees and expenses
in connection with any action, suit or proceeding) (collectively, "Damages")
actually incurred or suffered by the Purchaser on or after the Initial Closing
arising out of any misrepresentation, inaccuracy or breach of any
representation, warranty or covenant by the Company contained in this Agreement
(or in any certificate document, list or schedule expressly required by the
terms of this Agreement, the Stockholders Agreement or the Registration
Agreement to be delivered to the Purchaser by the Company hereunder). The
maximum aggregate liability of the Company under this Section 6F shall be the
----------
aggregate amount of the purchase price paid by the Purchaser for the Common
Stock.
(ii) If the Purchaser shall seek indemnification pursuant to this
Section 6F, the Purchaser shall give prompt notice to the Company of the
- ----------
assertion of any claim, or the commencement of any action, suit or proceeding by
a third party, in each case in respect of which indemnity may be sought
hereunder, but no failure to give such notice shall relieve the Company of any
liability hereunder. The Company may, at its expense, participate in or assume
the defense of any such action, suit or proceeding involving a third party with
counsel reasonably
-15-
<PAGE>
acceptable to the Purchaser, and after notice from the Company of its election
to assume the defense thereof, the Company shall not be liable to the Purchaser
for any legal fees or other expenses subsequently incurred by the latter in
connection with the defense thereof. The Purchaser will have the right to employ
its counsel in any such action, but the fees and expenses of such counsel will
be at the expense of such Purchaser unless (1) the employment of counsel by the
Purchaser has been authorized in writing by the Company, (2) the Purchaser has
reasonably concluded that there may be legal defenses available to it that are
different from or in addition to those available to the Company (in which case
the Company will not have the right to direct the defense of such action on
behalf of the Purchaser) or (3) the Company has not in fact employed counsel to
assume the defense of such action within a reasonable time after receiving
notice of the commencement of the action, in each of which cases the reasonable
fees and expenses of only one counsel will be at the expense of the Company, and
the Company shall reimburse or pay such fees and expenses as they are incurred.
Whether or not the Company chooses to defend or prosecute any claim involving a
third party, all the parties hereto shall cooperate in the defense or
prosecution thereof and shall furnish such records, information and testimony,
and attend such conferences, discovery proceedings, hearings, trials and
appeals, as may be reasonably requested in connection therewith.
(iii) The Company shall not be liable under this Section 6F for
----------
any settlement effected without its consent of any claim, litigation or
proceeding by a third party in respect of which indemnity may be sought
hereunder (which consent shall not be unreasonably withheld), unless the Company
refuses to acknowledge liability for indemnification under this Section 7G
----------
and/or declines to defend the Purchaser in such claim, litigation or proceeding.
6G. Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, all covenants and agreements contained in this Agreement by or on behalf
of any of the parties hereto shall bind and inure to the benefit of the
respective successors and assigns of the parties hereto whether so expressed or
not; provided that this Agreement may not be assigned (i) by the Purchaser
-------- ----
without the prior written consent of the Company or (ii) by the Company without
the prior written consent of the Purchaser. In addition, and whether or not any
express assignment has been made, the provisions of this Agreement which are for
the Purchaser's benefit as the Purchaser or holder of Stock are also for the
benefit of, and enforceable by, any subsequent holder of at least twenty percent
(20%) of such Stock. Notwithstanding the foregoing, the rights and obligations
of Purchaser under this Agreement and the agreements contemplated hereby may be
assigned by Purchaser at any time upon written notice to the Company, in whole
or in part, to any Affiliate of the Purchaser, Jonathan J. Ledecky, or any
investment fund or company managed by Jonathan J. Ledecky or his Affiliates, or
any successor thereto, or to any lender of Purchaser pursuant to a pledge or
security agreement.
6H. Generally Accepted Accounting Principles. Where any accounting
----------------------------------------
determination or calculation is required to be made under this Agreement or the
exhibits hereto, such determination or calculation (unless otherwise provided)
shall be made in accordance with generally accepted accounting principles,
consistently applied, except that, if because of a change in generally accepted
accounting principles the Company would have to alter a previously utilized
accounting method or policy in order to remain in compliance with generally
accepted accounting principles, then such determination or calculation shall
continue to be made in accordance with the Company's previous accounting methods
and policies. All numbers set
-16-
<PAGE>
forth herein which refer to share prices or numbers or amount will be
appropriately adjusted to reflect stock splits, stock dividends, combinations of
shares, and other recapitalizations affecting the subject class of stock.
6I. Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but, if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, then such provision shall be ineffective
only to the extent of such prohibition or invalidity, without invalidating the
remainder of this Agreement.
6J. Counterparts. This Agreement may be executed in two or more
------------
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts taken together shall constitute one and the
same Agreement.
6K. Descriptive Headings; Interpretation. The descriptive headings of
------------------------------------
this Agreement are inserted for convenience only and do not constitute a
substantive part of this Agreement. Whenever required by the context, any
pronoun used in this Agreement shall include the corresponding masculine,
feminine, or neuter forms, and the singular form of nouns, pronouns, and verbs
shall include the plural and vice versa. The use of the word "including" in this
Agreement shall be by way of example rather than by limitation. Reference to any
agreement, document, or instrument means such agreement, document, or instrument
as amended or otherwise modified from time to time in accordance with the terms
thereof, and if applicable hereof. Without limiting the generality of the
immediately preceding sentence, no amendment or other modification to any
agreement, document, or instrument that requires the consent of any Person
pursuant to the terms of this Agreement or any other agreement will be given
effect hereunder unless such Person has consented in writing to such amendment
or modification. The use of the words "or," "either," and "any" shall not be
exclusive.
6L. Governing Law. All questions concerning the construction,
-------------
validity, and interpretation of this Agreement and the exhibits and schedules
hereto shall be governed by and construed in accordance with the internal laws
of the State of New York, without giving effect to any choice of law or conflict
of law provision or rule (whether of the State of New York or any other
jurisdiction) that would cause the application of the laws of any jurisdiction
other than the State of New York.
6M. Notices. All notices, demands, or other communications to be
-------
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally
to the recipient, upon machine-generated acknowledgment of receipt after
transmittal by facsimile, sent to the recipient by reputable express courier
service (charges prepaid) or mailed to the recipient by certified or registered
mail, return receipt requested, and postage prepaid. Such notices, demands, and
other communications shall be sent to the Purchaser and to the Company at the
address indicated below:
-17-
<PAGE>
If to the Company:
Buyline.net, Inc.
7016 Terminal Square
Upper Darby, PA 19082
Attention: Lawrence Silverman
Facsimile: (610) 734-1263
Telephone: (610) 734-1245
with a copy (which shall not constitute notice) to:
O'Neill, Bragg & Staffin, P.C.
531 Plymouth Road, Suite 500
Plymouth Road, Suite 500
Plymouth Meeting, PA 19462
Attention: Gary L. Bragg, Esq.
Facsimile: (610) 941-1060
Telephone: (610) 941-5300
If to Purchaser:
E2Enet, Inc.
800 Connecticut Avenue, N.W.
Suite 1111
Washington, D.C. 20006
Attention: President
Facsimile: (202) 261-6020
Telephone: (202) 331-9000
with a copy (which shall not constitute notice) to:
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004-1109
Attention: Christine M. Pallares, Esq.
Facsimile: (202) 637-5910
Telephone: (202) 637-5600
If to any other Purchaser:
To the Purchaser, together with copies
to such other parties as any the Purchaser shall
specify to the Company in writing.
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
-18-
<PAGE>
6N. Rights. Except as set forth in Section 6F, this Agreement shall
------ ----------
not confer any rights or remedies upon any Person, other than the parties hereto
and their respective heirs, successors, and permitted assigns.
6O. Amendments. Any reference contained herein to any agreement,
----------
instrument, or other document shall include any amendments or modifications made
to such agreement, instrument, or other document made from time to time in
accordance with the terms thereof, and if applicable, hereof.
[THIS SPACE INTENTIONALLY LEFT BLANK]
-19-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Purchase Agreement on the date first written above.
BUYLINE.NET, INC.
By: /s/ Lawrence Silverman
------------------------------------
Name: Lawrence Silverman
----------------------------------
Title: CFO
---------------------------------
E2ENET, INC.
By: /s/ Steven J. Quamme
------------------------------------
Name: Steven J. Quamme
----------------------------------
Title: CFO
---------------------------------
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated May 5, 1999 relating to the financial statements of
E2ENET.COM, INC., which appears in such Registration Statement. We also consent
to the references to us under the headings "Experts" and "Selected Financial
Data" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
McLean, VA
May 14, 1999
<PAGE>
Exhibit 23.8
CONSENT OF DIRECTOR NOMINEE
---------------------------
To E2Enet, Inc.:
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as
amended, I hereby consent to the references in the Registration Statement of
E2Enet, Inc. (the "Company") on Form S-1, and any amendments thereto, which
indicate that I have accepted a nomination to become a director of the Company
following the closing of the Company's initial public offering.
/s/ George J. Mitchell
-----------------------------
George J. Mitchell
Dated: September 8, 1999
<PAGE>
Exhibit 23.9
CONSENT OF DIRECTOR NOMINEE
---------------------------
To E2Enet, Inc.:
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as
amended, I hereby consent to the references in the Registration Statement of
E2Enet, Inc. (the "Company") on Form S-1, and any amendments thereto, which
indicate that I have accepted a nomination to become a director of the Company
following the closing of the Company's initial public offering.
/s/ Jeffrey R. Sechrest
-----------------------------
Jeffrey R. Sechrest
Dated: September 8, 1999
<PAGE>
Exhibit 23.10
CONSENT OF DIRECTOR NOMINEE
---------------------------
To E2Enet, Inc.:
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as
amended, I hereby consent to the references in the Registration Statement of
E2Enet, Inc. (the "Company") on Form S-1, and any amendments thereto, which
indicate that I have accepted a nomination to become a director of the Company
following the closing of the Company's initial public offering.
/s/ Gerald H. Taylor
-------------------------------
Gerald H. Taylor
Dated: September 9, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> SEP-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 100,049
<PP&E> 11,511
<DEPRECIATION> (1,875)
<TOTAL-ASSETS> 9,937,401
<CURRENT-LIABILITIES> 588,998
<BONDS> 0
0
0
<COMMON> 39,262
<OTHER-SE> 33,738,816
<TOTAL-LIABILITY-AND-EQUITY> 9,937,401
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 27,811,009
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,726
<INCOME-PRETAX> (27,839,735)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,839,735)
<EPS-BASIC> (14.39)
<EPS-DILUTED> 0
</TABLE>
