<PAGE>
As filed with the Securities and Exchange Commission on October 6, 1999
Registration No. 333-84011
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
DATA RETURN CORPORATION
(Exact name of registrant as specified in its charter)
--------------
<TABLE>
<S> <C> <C>
Texas 7379 75-2725988
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
222 West Las Colinas Boulevard, Suite 450
Irving, Texas 75039
(972) 869-0770
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------
Sunny C. Vanderbeck
Chairman and Chief Executive Officer
Data Return Corporation
222 West Las Colinas Boulevard, Suite 450
Irving, Texas 75039
(972) 869-0770
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copies to:
<TABLE>
<S> <C>
Stephen B. Norris Jorge del Calvo
Mark C. Gunnin Stanton D. Wong
William D. Howell Gabriella A. Lombardi
Thompson & Knight L.L.P. Christine F. Nakagawa
801 Cherry Street, Suite 1600 Pillsbury Madison & Sutro LLP
Fort Worth, Texas 76102 2550 Hanover Street
(817) 347-1700 Palo Alto, California 94304
(650) 233-4500
</TABLE>
--------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary 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 becomes effective. This +
+preliminary prospectus is not an offer to sell these securities nor a +
+solicitation of an offer to buy these securities in any jurisdiction where +
+the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 5, 1999
PRELIMINARY PROSPECTUS
6,250,000 Shares
[LOGO OF DATA RETURN APPEARS HERE]
Common Stock
-------------
This is an initial public offering of 6,250,000 shares of common stock of Data
Return Corporation. We are selling all of the shares of common stock under this
prospectus.
It is currently estimated that the initial public offering price will be
between $10.00 and $12.00 per share. We have applied to have our common stock
approved for listing on the Nasdaq National Market under the symbol "DRTN."
Microsoft Corporation has agreed to purchase directly from us $5.0 million of
our common stock, in a private placement that will occur on the earlier of the
day after the pricing of this offering and December 12, 1999. The price per
share which Microsoft will pay us will be the lesser of the midpoint of the
lowest filing range and the price to public.
See "Risk Factors" beginning on page 6 about the risks you should consider
before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
-------------
<TABLE>
<CAPTION>
Per
Share Total
------ ------
<S> <C> <C>
Public offering price......................................... $ $
Underwriting discounts and commissions........................ $ $
Proceeds, before expenses, to us.............................. $ $
</TABLE>
-------------
The underwriters may purchase up to an additional 937,500 shares of common
stock from us at the initial public offering price less the underwriting
discount to cover over-allotments.
The underwriters expect to deliver the shares against payment in New York, New
York on , 1999.
-------------
Bear, Stearns & Co. Inc.
CIBC World Markets
Thomas Weisel Partners LLC
Wit Capital Corporation
The date of this prospectus is , 1999.
<PAGE>
Outside of gate fold
An image of half a globe with images of some of our customers' web pages
surrounding the globe above its surface is centered along the right side of the
page.
To the left of the globe is the text "A WORLD OF OPPORTUNITY" above the Data
Return logo and the slogan "Hosting The Back Office for E-Business."
Left page of inside of gate fold
The inside front cover of the prospectus has a caption centered at the top of
the page in large text that reads "Hosting the Back Office for E-Business."
An image of a half globe with images of some our customers' web pages
surrounding the globe above its surface is centered along the right side of the
page.
To the left of this image are three circular frames with images inside. The
left one contains an image of clustered hosting diagram. The text "Multi-Server
Clustered Solutions" appears below the frame. The middle frame contains an
image of a portion of the world, including the United States, with a network
diagram drawn on it. The text "State-of-the-Art Infrastructure" appears below
the frame. The right frame contains an image of a man looking at file folders.
The text "Extensive Microsoft Expertise" appears below this frame.
Right page of inside of gate fold
In the right half of the page, there are three sets of images: the first is a
screen for Microsoft Exchange with the text "Microsoft Exchange"; the second
set is a series of folders with icons representing applications with the text
"Application Hosting"; and the third set is a sample web page with the text
"Advanced Web Hosting."
An image of the other half of the globe with images of some other customers web
pages surrounding the globe above its surface is centered along the left side
of the page.
At the bottom of the page is the Data Return logo and the slogan "Hosting The
Back Office for E-Business."
<PAGE>
Prospective investors may rely only on the information contained in this
prospectus. Neither Data Return Corporation nor any underwriter has authorized
anyone to provide prospective investors with different or additional
information. This prospectus is not an offer to sell nor is it seeking an offer
to buy these securities in any jurisdiction where the offer or sale is not
permitted. The information contained in this prospectus is correct only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or any sale of these securities.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 6
Forward-Looking Statements and
Associated Risks................... 16
Use of Proceeds..................... 17
Dividend Policy..................... 17
Capitalization...................... 18
Dilution............................ 19
Selected Financial Data............. 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 22
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business......................... 31
Management....................... 48
Principal Shareholders........... 55
Certain Transactions............. 56
Description of Capital Stock..... 58
Shares Eligible for Future Sale.. 63
Underwriting..................... 65
Legal Matters.................... 68
Experts.......................... 68
Where You Can Find More
Information..................... 68
Index to Financial Statements.... F-1
</TABLE>
-------------------
Until , 1999 (25 days after the date of this prospectus), 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.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights the key information contained in this prospectus.
Because it is a summary, it does not contain all the information you should
consider before making an investment decision. You should read the entire
prospectus carefully, including the section titled "Risk Factors" and the
financial statements and the notes relating to those statements.
Data Return
Our Company
Data Return provides advanced Internet hosting services based on technologies
developed by Microsoft Corporation. Our advanced hosting services include the
hardware, software and network technologies necessary to support complex web
sites and web-based applications. We focus primarily on customers that are
deploying sophisticated high-end web-based applications, including electronic
commerce, through which they can conduct transactions and manage information
worldwide over the Internet. We believe that hosting on the Microsoft platform
offers a greater opportunity than hosting on other platforms. According to
International Data Corp., Microsoft Windows NT will be the key engine for
growth within the worldwide server market.
We provide high quality, high performance advanced hosting services, which
are comprised of:
. advanced managed services, whereby we configure, install, operate and
maintain the hardware, software and network technologies necessary to
implement and support our customers' complex, business-critical web
sites and web-based applications.
. a scalable deployment architecture, which allows us to quickly and cost-
effectively expand and enhance our customers' web sites; and
. high performance content delivery, which improves overall performance
through increased speed and reliability.
As of August 31, 1999, we hosted over 1,600 web sites for more than 800
customers across many industries. Our customers range in size from large
Fortune 500 companies to smaller businesses, both conventional and web-based.
Our top five customers based on revenue during fiscal 1999 were Executive
Software, First USA, BlueStreak.com, Silicon Channels and Honeywell.
Level 3 Communications, Inc. and Compaq Computer Corporation are shareholders
of our company, and Microsoft has agreed to invest in our company. In addition
to their investments in our common stock, we have entered into strategic
agreements with each of these companies. We are currently Level 3's only
preferred provider of Microsoft-based advanced hosting solutions. Pursuant to
our agreement, we will train and team with Level 3's sales force to generate
new business opportunities. Further, we will be able to locate our servers and
related equipment in any of Level 3's existing or future U.S. facilities, or
gateways. In doing so, we expect to avoid the significant cost of constructing
additional data centers of our own. In addition, we will be able to utilize
Level 3's personnel to install our equipment at these gateways. Under our
agreement with Microsoft, we will license proprietary installation tools for
third-party hosted applications to Microsoft and train Microsoft's employees
and customers in the use of those tools. In exchange, Microsoft will provide us
technical consulting and marketing services. We also have a server purchase
agreement with Compaq which we believe strengthens our relationship with this
key vendor. We believe these relationships enhance our credibility with
potential customers and provide us with early access to new products, superior
technical services, training and new business development opportunities.
1
<PAGE>
We were incorporated in Texas in August 1997 by three former Microsoft
product support engineers and have achieved an average quarterly revenue growth
rate of 50% since October 1, 1997. However, we experienced net losses of
approximately $1.3 million for the year ended March 31, 1999, and we anticipate
continuing and increasing losses. We believe the following are among the key
factors that have distinguished our company and our offerings and that will
continue to drive our growth:
. a full range of hosting services pre-packaged with defined pricing and
feature sets;
. our exclusive focus and technical expertise on the Microsoft platform;
. high availability, high performance web hosting solutions which we
believe will increasingly involve the clustering of multiple web,
database and applications servers in order to securely and efficiently
distribute web site content and related data across multiple and
sometimes geographically distributed servers;
. an advanced and highly secure network architecture that since mid-August
has delivered network performance faster on average in the United States
than the single fastest backbone provider as measured by an independent
third party (Keynote Systems) through its 65 United States measurement
agents dispersed across various cities;
. an integrated information system which automates our work flows and our
service deployment processes;
. our exclusive focus on hosting, which allows us to avoid direct
competition with software developers and systems integrators; and
. our commitment to building and maintaining strong relationships with
members of the Microsoft developer community, many of whom have proven
to be valuable sources of customers referrals.
Our Market Opportunity
According to Forrester Research, the hosting market will grow from $0.9
billion in 1998 to $14.6 billion in 2003, a 76% compound annual growth rate. In
addition to the general expansion of the Internet, we believe that growth in e-
commerce will drive demand for outsourced advanced hosting services such as
ours because sites with e-commerce capabilities tend to be more complex.
Forrester Research projects that e-commerce will generate over $3.2 trillion in
revenue by 2003. In addition, we believe that the trend toward outsourcing the
hosting of web sites will continue as businesses increase the complexity of
their web sites and require greater reliability and interactivity for end
users. We also believe that these sites will increasingly be based on Microsoft
Internet technologies. According to IDC, Windows NT's market share will grow at
a compound annual growth rate of 25% from 1998 to 2003.
Our Strategy
Our goal is to take advantage of the growth in Internet usage, e-commerce and
the outsourcing of hosting services to become the leading provider of advanced
hosting services. Our strategy to achieve this goal contains the following key
elements:
. maintain focus on advanced hosting on the Microsoft platform;
. offer a full range of highly scalable advanced hosting services;
. maintain non-capital intensive business model;
. enhance our marketing and sales programs;
. capitalize on key relationships;
. provide superior customer service;
. expand our data center presence; and
. expand into new hosting markets.
2
<PAGE>
Our Address and Telephone Number
The address of our principal executive offices is 222 West Las Colinas
Boulevard, Suite 450, Irving, Texas 75039, and our telephone number is (972)
869-0770.
-------------------
Data Return is our service mark. This prospectus also contains trademarks and
tradenames of other companies.
THE OFFERING
<TABLE>
<C> <S>
Common stock offered by Data Return........ 6,250,000 shares
Common stock to be outstanding after the
offering.................................. 34,460,504 shares
Use of proceeds............................ We intend to use the net proceeds
from this offering to fund our
capital expenditures, and for
working capital and other general
corporate purposes. See "Use of
Proceeds" on page 17 for a more
detailed description of our use
of proceeds.
Proposed Nasdaq National Market symbol..... DRTN
</TABLE>
- -------
Includes an assumed 454,546 shares of common stock to be issued to Microsoft
before the closing of the offering.
Excludes 937,500 shares to be sold by Data Return if the underwriters' over-
allotment option is exercised in full, as described in "Underwriting."
The number of shares outstanding excludes:
. 6,559,296 shares of common stock issuable upon exercise of options
outstanding at a weighted average exercise price of $0.29 per share;
. 3,313,004 shares of common stock reserved for issuance under our stock
option plans; and
. a warrant to purchase an assumed 340,910 shares at the lesser of the
midpoint of the lowest filing range and the price to public.
-------------------
Conventions That Apply to This Prospectus
All information in this prospectus reflects a 269 for one stock split
effected on September 10, 1999.
Except as otherwise indicated, the information in this prospectus assumes
that the underwriters' over-allotment option is not exercised.
3
<PAGE>
SUMMARY FINANCIAL INFORMATION
In the following table, we provide you with summary historical financial data
of Data Return. We have prepared this information using the financial
statements of Data Return for the period from September 22, 1997 (inception) to
March 31, 1998, the year ended March 31, 1999 and the three month periods ended
June 30, 1998 and 1999. The financial statements for the period from September
22, 1997 (inception) to March 31, 1998 and the year ended March 31, 1999 have
been audited by Ernst & Young LLP, independent auditors. The financial
statements for the three month periods ended June 30, 1998 and 1999 have not
been audited. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, which Data Return considers necessary
for a fair presentation of its financial position and the results of its
operations for these periods.
When you read this summary historical financial data, it is important that
you read it in conjunction with the historical financial statements and related
notes contained later in this prospectus, as well as "Management's Discussion
and Analysis of Financial Condition and Results of Operations," also contained
later in this prospectus.
<TABLE>
<CAPTION>
Period from Three Months Ended June
September 22, 1997 30,
(inception) to Year Ended ------------------------
March 31, 1998 March 31, 1999 1998 1999
------------------ -------------- ----------- -----------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C>
Statements of Operations
Data:
Revenues................ $ 336 $ 1,889 $ 281 $ 1,228
Costs and expenses:
Cost of revenue....... 198 1,105 205 489
General and
administrative....... 231 1,063 213 866
Marketing and sales .. 39 663 105 384
Stock based
compensation......... 61 349 85 140
----------- ----------- ----------- -----------
Total costs and
expenses............... 529 3,180 608 1,879
----------- ----------- ----------- -----------
Loss from operations.... (193) (1,291) (327) (651)
Other income (expense).. 2 7 5 16
----------- ----------- ----------- -----------
Net loss................ $ (191) $ (1,284) $ (322) $ (635)
=========== =========== =========== ===========
Net loss per common
share.................. $ (0.01) $ (0.07) $ (0.02) $ (0.03)
=========== =========== =========== ===========
Shares used in per share
computation............ 15,882,326 18,371,300 17,592,600 22,272,804
=========== =========== =========== ===========
Other Financial Data:
EBITDA(1)............... $ (118) $ (813) $ (222) $ (400)
Net cash provided by
(used in) operating
activities............. 1 (644) (243) (282)
Net cash used in
investing activities... (55) (939) (79) (696)
Net cash provided by
financing activities... 528 1,952 502 3,251
Purchases of property
and equipment.......... 55 814 79 696
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
----------------------------------
Pro Forma
Actual Pro Forma(2) As Adjusted(3)
------ ------------ --------------
(In thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Working capital............................ $2,291 $8,291 $76,089
Total assets............................... 6,011 12,011 79,757
Notes payable and capital lease
obligations--long-term.................... 140 140 --
Total shareholders' equity................. 4,024 10,024 77,962
</TABLE>
4
<PAGE>
(1) EBITDA consists of loss from operations plus depreciation and amortization,
including amortization of unearned stock based compensation. EBITDA does
not represent funds available for management's discretionary use and is not
intended to represent cash flow from operations as measured under generally
accepted accounting principles. EBITDA should not be considered as an
alternative to net loss or net cash used in operating activities, but may
be useful to investors as an indication of operating performance. Our
calculations of EBITDA may not be consistent with calculations of EBITDA
used by other companies.
(2) On a pro forma basis to reflect private sales of 4,296,468 shares of our
common stock between June 30, 1999 and the date of this prospectus.
(3) On a pro forma as adjusted basis to give effect to the sale of an assumed
454,546 shares of our common stock at an assumed price of $11.00 per share
to Microsoft and the sale of 6,250,000 shares of common stock we are
offering under this prospectus, at an assumed initial public offering price
of $11.00 per share (based upon the midpoint of the filing range), after
deducting the estimated underwriting discounts and commissions and
estimated offering expenses that we will pay and the application of the
estimated net proceeds from this offering as described under "Use of
Proceeds," including repayment of the long term portion of notes payable.
5
<PAGE>
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the risks and uncertainties described below before you
purchase any of our common stock. While we have described all risks and
uncertainties that we believe are material to our business, other risks and
uncertainties that affect our business operations may arise or become material
in the future.
If we cannot address the following risks and uncertainties effectively, our
business, financial condition or results of operations could be materially and
adversely affected. In this event, the trading price of our common stock could
decline and you could lose all or a part of your investment.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of several factors,
including the risks and uncertainties described below and elsewhere in this
prospectus.
Our business and prospects are difficult to evaluate because we have a limited
operating history and our business model is still evolving.
We were incorporated in August 1997 and commenced operations in September of
that year with a focus on advanced hosting services. As a result, we have a
limited operating history and our business model is evolving. We may not be
able to successfully implement our business plan or adapt it to changes in the
market. If we are not able to do so, our business, results of operations and
financial condition will be adversely affected.
We have a history of substantial losses, and we anticipate continuing and
increasing losses.
We have experienced operating losses and negative cash flows from operations
in each quarterly and annual period since incorporating in 1997. We experienced
net losses of approximately $635,000, or 52% of revenues, for the three month
period ended June 30, 1999, and $1.3 million, or 68% of revenues, for the year
ended March 31, 1999. As of June 30, 1999, we had an accumulated deficit of
approximately $2.1 million. We expect our operating expenses to increase
significantly as we attempt to expand our business. We believe that we will
need to hire over 150 additional personnel in all areas of our business over
the next 12 months. We are also required to purchase $800,000 dollars of co-
location and bandwidth services from Level 3 during the first year of our
agreement with them. In addition, although we do not have any specific plans,
we expect to incur significant expenses to develop our distribution channel,
fund greater levels of research and development, support and improve our
operational and financial systems and broaden customer service and support. We
cannot assure you that we will ever be profitable on a quarterly or annual
basis, or that if we achieve profitability, it will be sustainable.
Our quarterly and annual results may fluctuate, resulting in fluctuations in
the price of our common stock.
Our operating results may fluctuate significantly in the future on a
quarterly and annual basis. Because of these fluctuations, comparisons of our
operating results from period to period are not necessarily meaningful and
should not be relied upon as an indicator of future performance. We expect to
continue to experience significant fluctuations as a result of a variety of
factors, many of which are outside of our control. The following factors could
affect our operating results:
. size and timing of customer installations and related payments;
. fluctuations in data and voice communications costs;
. timing and magnitude of capital expenditures;
. costs relating to the expansion of operations;
. customer discounts and credits;
6
<PAGE>
. changes in our pricing policies or those of our competitors; and
. economic conditions specific to the hosting industry, as well as general
economic conditions.
We plan to increase our operating expenses to develop our business. If our
revenues do not increase as quickly as our expenses, our operating results will
suffer.
For these and other reasons, in future periods our operating results may fall
below the expectations of securities analysts or investors, which could result
in widely varying stock prices and negatively affect the market price of our
common stock.
We rely on our strategic relationship with Level 3, and if this relationship is
terminated or deteriorates our business will suffer.
We recently entered into a strategic relationship with Level 3. Level 3 is a
communications and information services company that is building an advanced
facilities-based communications network through which it provides co-location,
Internet connectivity and other services. We are currently Level 3's only
preferred provider of Microsoft-based advanced hosting solutions. Our ability
to increase demand for our services depends in part upon Level 3's referrals of
new customers to us. This relationship is non-exclusive, and our marketing
agreement can be terminated by Level 3 if we default on our obligations under
this agreement or are acquired by a competitor of Level 3. If Level 3 fails to
refer new customers to us or refers potential customers to our competitors or
if our relationship with Level 3 deteriorates or is terminated for any reason,
we may not be able to increase our customer base and, therefore, our revenues
as rapidly as we anticipate and our business would suffer. If we fail to train
Level 3's sales personnel, or fail to train them adequately, we will not
realize some of the benefits that we believe we will receive under this
arrangement, including customer referrals. As part of our relationship, we have
committed to purchase a fixed amount of services from Level 3, including, among
other things, bandwidth, co-location space, installation and maintenance
services, over the next five years. We will incur these expenses even if
anticipated increases in sales do not materialize or, in some circumstances, if
the agreement is terminated. We have also agreed that if Level 3 is capable of
providing the services we request, and if we determine that those services meet
our then-current performance criteria, we will purchase 75% of these services
from Level 3 from July 2000 through December 2000 and 90% of these services
from Level 3 from January 2001 through the remainder of our agreement with
Level 3. We are required to purchase these services from Level 3 even if these
services are available at lower prices from alternative vendors. We route the
network traffic of our customers through multiple backbone providers to
increase network performance. To enable us to do this, we obtain Internet
connectivity through a number of providers, and Level 3 may not be able to
provide all of the connectivity services that we require. As a result, we may
purchase less than the applicable percentages of these services from Level 3.
Our relationship with Level 3 also entitles us to offer our services from all
existing and future U.S. Level 3 data centers. We currently rely on Level 3 to
provide most of the data center capacity that we need to provide our hosting
services, and in the future we will be required to purchase most of our data
center capacity from Level 3. Further, Level 3 will provide personnel at these
data centers to install equipment and assist with support as necessary for us
to deliver service in these facilities. If Level 3 fails to perform these
services in a timely or effective manner, or at all, we would be required to
make alternate arrangements, possibly including hiring additional
implementation engineers. In addition, if our relationship with Level 3 is
terminated or if Level 3 does not provide the data center capacity that we
need, we would be required to seek arrangements with other data center
providers or construct our own data centers. We cannot be certain that
alternate data center capacity will be available on commercially reasonably
terms or at all. We currently rely, and for the foreseeable future will
continue to rely, on Level 3 to provide bandwidth and other networking
services. If we are unable to obtain these services from Level 3, we would be
required to seek arrangements with other providers of these services, and we
cannot be certain that alternate services will be available on commercially
reasonable terms or at all.
7
<PAGE>
Our success depends on Microsoft's continued success, and the loss or
deterioration of our relationship with Microsoft could harm our business and
have an adverse impact on our revenues.
We focus on advanced hosting services for Microsoft-based Internet
technologies. If these technologies are not widely used building blocks for
advanced Internet sites in the future, the demand for our services would
decrease and our business would be adversely affected.
Our relationship with Microsoft is informal. We believe this relationship
provides us with access to developments in Microsoft products before they are
generally available, which allows us to maintain and enhance our technical
expertise. If our relationship with Microsoft deteriorates or if we lose some
of the status or privileges we currently enjoy, our technical expertise could
be adversely affected. Our ability to market our services as a provider of
advanced hosting services for Microsoft-based Internet technologies would also
be adversely affected if Microsoft does not continue to confer certifications
and designations on us, or changes our current certifications or designations.
We do not have a written agreement with Microsoft relating to these
certifications or designations. Some of our competitors also have received
these certifications and designations. For example, we are aware of seven other
businesses that have been designated as Microsoft Advanced Hosting Partners.
These certifications and the number of businesses holding them are described on
page 41 under the heading "Microsoft." Microsoft confers these certifications
unilaterally and in its sole discretion and could change them at any time.
Thus, we cannot be certain that we will continue to enjoy them.
If we are unable to expand our network infrastructure to meet increasing
demand, we could lose customers and our operating results could suffer.
We must continue to expand and adapt our network infrastructure to
accommodate the increasing number of customers, the amount of information they
wish to transmit and their changing requirements. We face risks related to our
network's ability to be scaled to meet increasing customer levels while
maintaining acceptable performance levels. The expansion and adaptation of our
networking and hosting facility infrastructure will require substantial
financial, operational and management resources as we negotiate bandwidth
capacity with existing and other network infrastructure suppliers. If we are
required to expand our network significantly and rapidly due to increased
usage, additional stress will be placed upon our network hardware, traffic
management systems and hosting facilities as well as our financial, operational
and management resources. Due to the limited deployment of our services to
date, the ability of our network to support a substantially larger number of
customers at high transmission speeds is unknown.
If the network providers upon which we rely fail to provide reliability,
capacity and performance for our network, we could lose customers and our
operating results could suffer.
Our success partly depends upon the capacity, reliability and security of our
network infrastructure, including the capacity leased from our network
suppliers. Our network currently delivers service through Level 3, MCI
WorldCom, Inc., including UUNET Technologies, Inc., e.spire Communications,
Inc., Sprint Corporation, Digex, Incorporated, Cable & Wireless plc and SAVVIS
Communications Enterprises, LLC. Some of these suppliers are also our
competitors. In the future, we will be required to purchase most of our network
capacity from Level 3 to the extent they meet our then-current performance and
capacity requirements. We depend on these companies to provide uninterrupted
and error-free service through their telecommunications networks. As our
customers' usage of telecommunications capacity increases, we will need to make
additional investments in our infrastructure to maintain adequate data
transmission speeds, the availability of which may be limited or the cost of
which may be significant. Our average utilization of our network capacity was
17.7% during the last year. We monitor all network links to prevent their being
utilized in excess of their recommended capacity. If capacity is not available
to us as our customers' usage increases, our network may not be able to achieve
or maintain sufficiently high data transmission capacity, reliability or
performance. In addition, our business would suffer if our network suppliers
increased the prices for their
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<PAGE>
services and we were unable to pass along any increased costs to our customers.
Any failure on our part or the part of our third-party suppliers to achieve or
maintain high data transmission capacity, reliability or performance could
significantly reduce customer demand for our services and damage our business.
We may not be able to deliver our services and our business may suffer if our
third-party suppliers do not provide us with key components of our network
infrastructure.
We depend on other companies to supply key components of our network
infrastructure. Any failure to obtain needed products or services in a timely
fashion or at an acceptable cost could adversely affect our business. We buy
servers, routers and switches on an as-needed basis and therefore do not carry
significant inventories of them. We also have no guaranteed supply arrangements
with our vendors. We currently only use servers from Compaq and rely on Compaq
to provide us with access to Compaq technical personnel. We recently entered
into an agreement with Compaq under which we have agreed for the next three
years to purchase from Compaq the lesser of 2,000 servers or the number of
servers reasonably necessary to adequately operate our business consistent with
our business plan. Our requirement to purchase these servers is contingent upon
Compaq providing financing for the servers on competitive terms, upon the
price, performance and quality of the Compaq servers being reasonably
satisfactory to us and upon Compaq's commitment to deliver these servers on the
schedule we request. In addition, we rely on Cisco Systems, Inc. and Alteon Web
Systems, Inc. to supply equipment critical to our network, but we do not have a
supply agreement with either of them. If this equipment were to become
unavailable on terms acceptable to us, we would be forced to find alternative
equipment. The inability to obtain equipment or technical services from Compaq,
Cisco or Alteon on terms acceptable to us would force us to spend time and
money selecting and obtaining new equipment, training our personnel to use
different equipment and deploying alternative components needed to integrate
the new equipment, and as a result our business could be adversely affected.
Because we operate in a new and evolving market with uncertain prospects for
growth, we may be unable to sustain growth in our customer base and our
operating results may suffer.
Our market is new and rapidly evolving. Growth in demand for and acceptance
of advanced hosting services are highly uncertain. Businesses may not be aware
of the potential benefits of outsourcing or may find it cheaper, more secure or
otherwise preferable to host their web sites internally. Internet technologies,
such as e-commerce applications, which require advanced hosting, may not grow
as rapidly as we expect. If the market for advanced hosting services fails to
grow or grows more slowly than we anticipate, our business, operating results
and financial condition will be adversely affected. Growth in the demand for
our products and services may be inhibited, and we may be unable to sustain
growth in our customer base, for a number of reasons, including:
. our inability to market our products and services in a cost-effective
manner to new customers;
. the inability of customers to differentiate the products and services we
offer from those of our competitors;
. the termination of our customer contracts, which can generally be
canceled on 30 days' notice;
. our inability to strengthen awareness of our brand; and
. reliability, quality or compatibility problems with our services.
We may not be able to adapt to evolving technologies and customer demands,
which could cause our business to suffer.
Our market is characterized by rapidly changing technology, evolving industry
standards and frequent new product announcements. These characteristics are
magnified by the recent growth of the Internet and the intense competition in
our industry. We are also subject to risks from technological changes in the
way hosting solutions are marketed and delivered. To be successful, we must
adapt to our rapidly changing market by
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<PAGE>
continually improving the performance, features and reliability of our services
and modifying our business strategies accordingly. We could also incur
substantial costs if we need to modify our services or infrastructure in order
to adapt to these changes. Our business would suffer if we fail to respond to
these changes in a timely and cost-effective manner or at all.
Our business will suffer if Internet usage does not continue to increase or if
the Internet fails to perform reliably.
Use of the Internet for retrieving, sharing and transferring information
among businesses, consumers, suppliers and partners has recently begun to
increase rapidly. Our success depends in large part on continued growth in the
use of the Internet, and we would be adversely affected if Internet usage does
not continue to grow. Internet usage and growth may be inhibited for a number
of reasons, such as:
. inadequate network infrastructure;
. security concerns;
. uncertainty of legal and regulatory issues concerning the use of the
Internet;
. inconsistent quality of service;
. lack of availability of cost-effective, reliable, high-speed service;
and
. failure of Internet use to expand internationally.
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by this growth, or its performance and
reliability may decline. For example, web sites have experienced interruptions
in service as a result of outages and other delays occurring throughout the
Internet network infrastructure. If these outages or delays occur frequently,
use of the Internet as a commercial or business medium could in the future grow
more slowly or decline, which would adversely affect our business.
Failure of our operating and financial systems to keep pace with the
anticipated growth in our business could result in customer dissatisfaction,
operating inefficiencies and lost revenue opportunities.
The rapid growth of our business and our service offerings has placed, and is
likely to continue to place, a significant strain on our operating and
financial resources. Our future performance will partly depend on our ability
to manage our growth effectively, which will require that we further develop
our operating and financial system capabilities and controls. We are in the
process of implementing new billing and other management information systems.
If our information systems, including the systems that we are currently
implementing, and other infrastructure are unable to support the demands placed
on them by the rapid growth in our business, we may be forced to implement new
systems. If we fail to improve our operational systems or to expand our
customer service capabilities to keep pace with the growth of our business, we
could experience customer dissatisfaction, cost inefficiencies and lost revenue
opportunities, which could harm our operating results. We may not be able to
successfully implement these systems when needed or they may not perform
reliably.
We may not be able to successfully sustain our growth if we are unable to
attract and retain additional highly skilled personnel.
We are currently experiencing rapid growth and intend to continue expanding.
Since incorporating in August 1997, we had grown from five to 124 employees as
of September 30, 1999. We believe that we will need to hire over 150 additional
personnel in all areas of our business over the next 12 months. If we do not
succeed in attracting and retaining new, qualified personnel and/or retaining
our current personnel, our business could suffer.
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We must expand our direct and indirect sales operations to increase market
awareness of our products and generate increased revenues. We cannot be certain
that we will be successful in these efforts. We plan to increase our sales
force significantly in the second half of 1999. Newly-hired employees will
require training and it will take time for them to achieve full productivity.
Also, through our relationship with Level 3, we intend to begin training their
sales force to sell our products and services in October 1999. We cannot be
certain that we will be able to hire enough qualified individuals in the
future, that newly-hired employees will achieve necessary levels of
productivity or that our Level 3 relationship will result in increased sales.
We may need additional capital to fund our operations and finance our growth,
and we may not be able to obtain it on terms acceptable to us or at all.
We believe that our existing capital resources, including the anticipated
proceeds of this offering, will enable us to maintain our current and planned
operations for at least the next 12 months. However, we may require additional
funds during or after that 12-month period. Any required financing may not be
available or may be available only on terms that are not favorable to us.
Further, if additional funds are raised through the issuance of additional
equity securities, the percentage ownership of our shareholders would be
diluted. Any new equity securities may have rights, preferences or privileges
senior to those of our common stock.
We could experience system failures which could harm our business and
reputation.
To succeed, we must be able to operate our network management infrastructure
around the clock without interruption. Our operations depend upon our ability
to protect our network infrastructure, equipment and customer files against
damage from human error, fire, earthquakes, hurricanes, floods, power loss,
telecommunications failures, sabotage, intentional acts of vandalism and
similar events. Our servers and network infrastructure are located in the
Dallas and Fort Worth, Texas metropolitan area. Even though we have attempted
to minimize risk through redundant systems, we do not have a comprehensive
disaster recovery plan and the occurrence of a natural disaster or other
unanticipated problems at any of our data centers could result in interruptions
in the services we provide to our customers.
Although we have attempted to build redundancy into our network and hosting
infrastructure, we have experienced interruptions in service in the past. We
have experienced partial system failures due to routing problems, hard drive
failures, database corruption and other computer failures. Our network is
subject to various points of failure, and a problem with our routers, switches
or other equipment could cause an interruption in the services we provide to
some of our customers. Any future interruptions could:
. cause customers or end users to seek damages for losses incurred;
. require us to replace existing equipment or add redundant facilities;
. damage our reputation for reliable service;
. cause existing customers to cancel their contracts; or
. make it more difficult for us to attract new customers.
Any of these results could damage our business.
Disruption of our services caused by unknown software defects could harm our
business and reputation.
Our service offerings depend on complex software, including software licensed
from third parties and our proprietary software tools. Complex software often
contains defects, particularly when first introduced or when new versions are
released. We may not discover software defects that affect our new or current
services or enhancements until after they are deployed. Although we have not
experienced any material software defects to
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<PAGE>
date, it is possible that defects may occur in the software. These defects
could cause service interruptions, which could damage our reputation or
increase our service costs, cause us to lose revenue, delay market acceptance
or divert our development resources.
Our business and reputation will suffer if we do not prevent security breaches.
Despite our design and implementation of a variety of network security
measures, unauthorized access, computer viruses, accidents, misconduct
resulting in disruptions and other disruptions could occur. In addition, we may
incur significant costs to prevent breaches in security or to alleviate
problems caused by breaches. We rely on third-party suppliers such as Level 3
to protect our equipment and hardware against breaches in security. We cannot
be certain that they will provide adequate security. While we have experienced
no material security breaches in the past, any breaches that may occur could
result in liability to us, loss of existing customers or the deterrence of
future customers.
Our limited ability or failure to protect our intellectual property may
adversely affect our ability to compete.
Third parties may infringe or misappropriate our technology or proprietary
rights, which could have an adverse effect on our business, results of
operations or financial condition. In addition, our competitors or potential
competitors may independently develop technologies that are equivalent or
superior to our technology. We rely on a combination of copyright, trademark,
service mark and trade secret laws to protect our intellectual property. We are
in the process of filing federal registrations for the trademark "Data Return,"
as well as other service and trademarks which incorporate the Data Return name.
We also have internally developed software and other tools that are important
to our business for which we rely on copyright protection. We have entered into
some contractual arrangements with our employees and contractors as well as
suppliers, distributors and some of our key customers in order to limit access
to, and any disclosure of, our proprietary information. The steps we have taken
to protect our intellectual property may be insufficient. We may need to take
legal action to protect our intellectual property rights, which could be costly
and divert the attention of our technical and management personnel.
We may be accused of infringing the proprietary rights of others, which could
subject us to costly and time consuming litigation.
In addition to the technologies we develop or have developed, we license
certain technologies from third parties and may license additional technologies
in the future. Although we have not been accused of infringing the proprietary
rights of others in the past, we could become subject to infringement actions
based upon our internally developed technologies or technologies licensed from
third parties. Any of these claims, with or without merit, could subject us to
costly litigation and divert the attention of our technical and management
personnel. In addition, third parties may change the terms of their license
agreements in ways that would prevent us from using technologies licensed from
them on commercially reasonable terms or that would prevent us from using them
at all. We may not be able to replace those technologies with technologies that
have the same features or functionality on commercially reasonable terms or at
all.
If we do not adequately address Year 2000 issues, we may incur significant
costs and our business could suffer.
Currently, many computer 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' software and computer systems may need to
be upgraded or replaced in order to comply with Year 2000 requirements. We
cannot predict whether our Year 2000 compliance issues will require us to
upgrade or replace our systems and equipment. Should we be required to
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<PAGE>
upgrade or replace our systems and equipment, it could represent a significant
cost to us. If we are not successful in identifying and planning for Year 2000
issues, our business operations could be materially and adversely affected.
Additionally, we cannot evaluate our customers' Year 2000 readiness. Some of
our customers' sites may fail due to Year 2000 issues and any failures may
affect other customers' sites or our network. Also, to the extent that a
customer's site is not functioning correctly and it is not possible to
determine that the malfunction is caused by the customer's software, the
customer may request service credits or we might otherwise have a difficult
time realizing the expected revenues from that customer. Level 3 has indicated
that they are Year 2000 compliant. However, we have not undertaken any
independent assessment of Level 3's Year 2000 compliance and any failure of
Level 3's network due to Year 2000 issues could cause a disruption in our
services, which could cause us to lose customers.
The worst-case scenario related to the Year 2000 issue would be an overall
failure of the Internet, the telecommunications infrastructure and the
electrical grid. If this happened, we would be unable to service our customers
for an uncertain period of time. Any widespread disruption to these systems
would have unpredictable and potentially severe impacts on our business and
financial condition. We currently have no contingency plan to deal with this
worst-case scenario.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--The Year 2000."
Regulatory and legal uncertainties could result in significant costs or
otherwise harm our business.
The success of our business depends on the growth of the Internet. Laws and
regulations directly applicable to commerce or communications over the Internet
are becoming increasingly prevalent. However, the law of the Internet remains
largely unsettled. The adoption or modification of laws or regulations relating
to the Internet could adversely affect our business if they impose a direct
cost on us or if they curtail the growth of the Internet. If liability for
materials carried on or disseminated through their systems is imposed on
service providers, we would make efforts to implement measures to reduce our
exposure to such liability. Such measures could require us to expend
substantial resources or discontinue certain product or service offerings. In
addition, increased attention to liability issues, as a result of lawsuits,
legislation and legislative proposals, could divert management attention,
result in unanticipated expenses and harm our business. If legislation that
makes transacting business over the Internet, such as e-commerce, less
favorable or otherwise curtails the growth of the Internet is adopted in the
U.S. or internationally, our business would suffer. See "Business--Government
Regulation."
The loss of key personnel including our Chairman and Chief Executive Officer or
our President and Chief Operating Officer could harm our business.
We depend on the continued service of our key technical, sales and senior
management personnel, including Sunny C. Vanderbeck, our Chairman and Chief
Executive Officer, and Michelle R. Chambers, our President and Chief Operating
Officer. We have entered into three-year employment agreements with
Mr. Vanderbeck and Ms. Chambers, but any of our officers or employees can quit
at any time. Losing one or more of our key employees could harm our business.
We operate in an extremely competitive market, and our business would suffer if
we are unable to compete effectively.
The market for hosting and Internet services is highly competitive. There are
few substantial barriers to entry to keep new competitors from entering this
market. We expect that we will face additional competition from existing
competitors and new market entrants in the future. Many of our competitors have
substantially
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<PAGE>
greater financial, technical and marketing resources, larger customer bases,
longer operating histories, greater name recognition and more established
relationships in the industry than we do. As a result, some of these
competitors may be able to:
. develop and expand their network infrastructures and service offerings
more rapidly;
. adapt to new or emerging technologies and changes in customer
requirements more quickly;
. take advantage of acquisition and other opportunities more readily;
. devote greater resources to the marketing and sales of their services;
and
. adopt more aggressive pricing policies.
In addition, some of our competitors have entered and will likely continue to
enter into joint ventures or other arrangements to provide additional services
competitive with those provided by us. We believe that the market in which we
compete is likely to experience consolidation in the near future, which could
result in increased competition on price and other factors that could adversely
affect our business.
In an effort to gain market share, some of our competitors have offered
hosting services similar to ours at prices lower than ours or with incentives
not matched by us. In addition, some of our competitors may be able to provide
customers with additional benefits that could reduce the overall costs of their
services relative to ours. We may not be able to reduce the pricing of our
services or offer incentives in response to the actions of our competitors
without an adverse impact on our business.
See "Business--Competition."
Because we have customers internationally, our business may be adversely
affected by foreign political and economic conditions.
In fiscal 1999, approximately 8% of our revenues were derived from our
customers located in Europe and Asia. In addition, we expect to begin operating
from Level 3's data center in London, England by the end of 1999. Our success
depends in part on expanding our customer base internationally and our ability
to successfully operate from data centers in foreign markets. Because our
international sales are denominated in U.S. dollars, currency fluctuations may
deter foreign customers from purchasing our services. In addition, we face
risks in operating and servicing customers in foreign markets, such as:
. different Internet access fees;
. different technology standards;
. different privacy, censorship and service provider liability standards
and regulations; and
. less protective intellectual property laws.
Any of these risks could adversely affect our ability to operate or expand
internationally, which would limit the growth of our business.
We currently do not have plans for the proceeds from this offering, and our use
of proceeds may not yield a favorable return.
We intend generally to use approximately $38.2 million of the net proceeds
from this offering to fund our capital expenditures and pay off and cancel a
term loan with Bank One of Texas, N.A. We intend to use the balance of the net
proceeds for working capital and other general corporate purposes. We may also
acquire or make investments in other businesses, products, services or
technologies and, if we do, we may not be able to make those acquisitions or
investments on commercially acceptable terms or we could have difficulty
assimilating and integrating any acquired businesses, technologies, services or
products. We have not yet
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<PAGE>
determined the actual expected expenditures and thus cannot estimate the
amounts to be used for each specified purpose. The actual amounts and timing of
these expenditures will vary significantly depending on a number of factors
including, but not limited to, the amount of cash generated by our operations
and the market response to the introduction of any new service offerings.
Depending on future developments and circumstances, we may use some of the
proceeds for uses other than those described above. Our management will have
significant flexibility in applying the net proceeds of this offering. We
cannot be certain that our use of the proceeds will yield a favorable return.
See "Use of Proceeds."
Our principal shareholders, directors and executive officers will own
approximately 76% of our common stock, which may allow them to exert influence
over us or to prevent a change of control.
After this offering our shareholders who currently own over 5% of our common
stock, our directors and our executive officers will beneficially own
approximately 76% of our outstanding common stock. These shareholders will be
able to exercise significant influence over all matters requiring shareholder
approval, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may also delay or
prevent a change in control of us even if beneficial to our shareholders.
Some provisions of our articles, bylaws and rights plan and of Texas law could
delay or prevent a change of control which could adversely affect our stock
price.
Our articles of incorporation and bylaws contain provisions that could make
it more difficult for a third party to acquire us, even if doing so would be
beneficial to our shareholders. These provisions could limit the price that
investors might be willing to pay in the future for shares of our common stock.
Some of these provisions:
. authorize the issuance of preferred stock which can be created and
issued by our board of directors without prior shareholder approval,
commonly referred to as "blank check" preferred stock, with rights
senior to those of common stock;
. prohibit certain shareholder actions by written consent;
. establish advance notice requirements for submitting nominations for
election to our board of directors and for proposing matters that can be
acted upon by shareholders at a meeting; and
. provide for a classified board of directors with staggered three-year
terms.
We are also subject to certain provisions of Texas law which could delay,
deter or prevent a change in control of us.
In September 1999, we adopted a shareholder rights plan. This plan entitles
our shareholders to rights to acquire additional shares of our common stock
when a third party acquires 15% of our common stock or commences or announces
its intent to commence a tender offer for at least 15% of our common stock.
This plan could delay, deter or prevent a change in control of us.
You will suffer immediate and substantial dilution.
The initial public offering price of our common stock is expected to be
substantially higher than the net tangible book value of our common stock.
Therefore, if you purchase our common stock in this offering, you will incur
immediate dilution of approximately $8.74 in the net tangible book value per
share of common stock from the price per share that you pay for such common
stock (based upon an assumed initial public offering price of $11.00 per
share). You will also experience additional dilution upon the exercise of
outstanding stock options at prices below the initial public offering price.
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<PAGE>
Future sales of our common stock could cause our stock price to decline.
After this offering is completed, 34,460,504 shares of our common stock will
be issued and outstanding, assuming no exercise of the underwriters' over-
allotment option. All of the shares of our common stock sold in this offering
will be freely tradable unless purchased by our "affiliates." In connection
with this offering, our officers, directors and shareholders not purchasing in
the offering who together own approximately 28,210,504 shares of our common
stock agreed to refrain from selling any shares of our common stock for a
period of 180 days after the date of this prospectus. However, these
restrictions may be waived in some circumstances. We cannot be sure what
effect, if any, future sales of our common stock or the availability of shares
for future sale will have on the market price of our common stock. The market
price of our common stock could drop due to sales of a large number of shares
of our common stock in the market after this offering or the perception that
these sales could occur. These factors could also make it more difficult to
raise funds through future offerings of our common stock. There will be
34,460,504 shares outstanding upon the completion of this offering, of which
20,551,600 shares will become available for sale to the public 180 days from
the date of this prospectus, subject in some cases to volume limitations.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Some of the information in this prospectus contains forward-looking
statements. These statements include, among others, statements relating to
expenditure levels, the adequacy of capital resources and plans for expansion
of our marketing and sales efforts, risk factors, use of proceeds, liquidity,
strategy, sales and technology and network operations. These statements may be
found under Prospectus Summary, Risk Factors, Management's Discussion and
Analysis of Financial Condition and Results of Operations and Business.
Forward-looking statements are typically identified by the use of terms such as
"may," "will," "expect," "intend," "anticipate," "estimate" and similar words,
although some forward-looking statements are expressed differently. You should
be aware that our actual results could differ materially from those contained
in the forward-looking statements due to a number of factors, including without
limitation, changes in external competitive market factors, changes in our
business strategy or an inability to execute our strategy, unanticipated
changes in the hosting industry, the economy in general and changes in the use
of the Internet. We cannot guarantee future results, levels of activity,
performance or achievements. You should also consider carefully the statements
under "Risk Factors" and other sections of this prospectus, which address
additional factors that could cause our actual results to differ from those set
forth in the forward-looking statements.
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<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of 6,250,000 shares of common
stock we are offering will be approximately $62.9 million at an assumed initial
public offering price of $11.00 per share and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, we estimate that the
net proceeds will be approximately $72.5 million.
We currently intend to use approximately $38.0 million of the net proceeds to
fund capital expenditures, consisting of the purchase of servers and other
hardware. We also intend to use $192,000 to pay off and cancel a term loan with
Bank One of Texas, N.A. that we entered into in July 1998 in connection with
the purchase of equipment. We intend to use the balance of the net proceeds, or
approximately $24.7 million, for working capital and other general corporate
purposes. In addition, we may use some of the proceeds for strategic
investments and acquisitions. However, we have no current plans, agreements or
commitments with respect to any acquisition or investments of this type. Our
management will have significant flexibility in applying the net proceeds of
this offering and may spend the proceeds from this offering in ways which the
shareholders may not deem desirable.
The timing and amount of our actual expenditures will be based on many
factors, including cash flows from operations and the growth of our business.
Until we use the net proceeds of this offering for the above purposes, we
intend to invest the funds in short-term, investment grade, interest-bearing
securities. We cannot predict whether the proceeds invested will yield a
favorable return.
DIVIDEND POLICY
We have never paid any cash dividends on our capital stock. We anticipate
that we will retain earnings to support operations and to finance the growth
and development of our business. Therefore, we do not expect to pay cash
dividends in the foreseeable future.
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CAPITALIZATION
The following table sets forth our capitalization on June 30, 1999:
. on an actual basis;
. on a pro forma basis to reflect the net proceeds from private sales of
4,296,468 shares of our common stock to Level 3, Compaq and ZeroDotNet,
Inc. between June 30, 1999 and the date of this prospectus; see "Certain
Transactions" on page 56 for a description of these transactions; and
. on a pro forma as adjusted basis to give effect to the sale of an
assumed 454,546 shares of our common stock to Microsoft at an assumed
price of $11.00 per share and the sale of the shares of common stock we
are offering, at an assumed initial public offering price of $11.00 per
share (based upon the midpoint of the filing range), after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses that we will pay and the application of the estimated net
proceeds as described under "Use of Proceeds," including repayment of
the notes payable, including the current portion of $52,000.
This table should be read in conjunction with the audited financial
statements and the notes relating to those statements included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
June 30, 1999
-----------------------------
Pro Pro Forma
Actual Forma As Adjusted
------- ------- -----------
(In thousands, except share
and per share data)
<S> <C> <C> <C>
Cash............................................. $ 3,116 $ 9,116 $ 76,986
Restricted cash.................................. 125 125 --
------- ------- --------
Total cash....................................... $ 3,241 $ 9,241 $ 76,986
======= ======= ========
Notes payable and capital lease obligations--long
term............................................ $ 140 $ 140 $ --
Shareholders' equity:
Preferred stock; $.001 par value, 20,000,000
shares authorized; none issued or outstanding,
actual, pro forma and pro forma as adjusted... -- -- --
Common stock; $.001 par value; 100,000,000
shares authorized, 23,459,490 shares issued
and outstanding, actual; 27,755,958 shares
issued and outstanding, pro forma; 34,460,504
shares issued and outstanding, pro forma as
adjusted...................................... 24 28 34
Additional paid-in capital..................... 8,039 19,035 86,966
Receivable from shareholder.................... -- (5,000) (5,000)
Deferred stock compensation.................... (1,930) (1,930) (1,930)
Accumulated deficit............................ (2,109) (2,109) (2,109)
------- ------- --------
Total shareholders' equity..................... 4,024 10,024 77,962
------- ------- --------
Total capitalization............................. $ 4,164 $10,164 $ 77,962
======= ======= ========
</TABLE>
The number of shares of common stock outstanding does not include:
. 5,924,725 shares of common stock issuable at June 30, 1999 upon exercise
of options outstanding at a weighted average exercise price of $0.14 per
share;
. 3,947,575 shares of common stock reserved for future issuance under our
stock option plans; and
. a warrant to purchase an assumed 340,910 shares at the lesser of the
midpoint of the lowest filing range and the price to public.
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DILUTION
Our net tangible book value on June 30, 1999, was approximately $4,024,300 or
$0.17 per share. "Net tangible book value" is total assets minus the sum of
liabilities and intangible assets. "Net tangible book value per share" is net
tangible book value divided by the total number of shares outstanding.
After giving effect to adjustments relating to the offering described below,
our pro forma net tangible book value on June 30, 1999, would have been
$77,961,800 or $2.26 per share. The adjustments made to determine pro forma net
tangible book value per share are the following:
. an increase in total assets to reflect the net proceeds from private
sales of 4,751,014 shares of our common stock, including an increase in
total assets to reflect the net proceeds from the sale of an assumed
454,546 shares to Microsoft (assuming a price to Microsoft of $11.00 per
share);
. an increase in total assets to reflect the estimated net proceeds from
the sale of 6,250,000 shares in the offering as described under "Use of
Proceeds" (assuming an initial public offering price of $11.00 per
share, based upon the midpoint of the filing range); and
. the addition of the number of shares offered by this prospectus and by
private sales of shares to the number of shares outstanding.
The following table illustrates the pro forma increase in net tangible book
value of $1.90 per share and the dilution (the difference between the offering
price per share and net tangible book value per share) to new investors.
Dilution per share in the table below does not include dilution from the
exercise of options outstanding at June 30, 1999, to purchase 5,924,725 shares
of common stock at a weighted average exercise price of $0.14 per share. If
these options are exercised, new investors will experience additional dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $11.00
Pro forma net tangible book value per share at June 30, 1999.... $0.36
Increase in net tangible book value per share attributable to
new investors.................................................. 1.90
-----
Pro forma net tangible book value per share after offering........ 2.26
------
Dilution per share to new investors............................... $ 8.74
======
</TABLE>
The following table summarizes the differences between the number of shares
of common stock purchased from Data Return, the aggregate cash consideration
paid and the average price per share paid by existing shareholders and new
investors purchasing shares of common stock in this offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders.......... 28,210,504 81.9% $16,641,895 19.5% $ 0.59
New investors.................. 6,250,000 18.1 68,750,000 80.5 11.00
---------- ----- ----------- -----
Total........................ 34,460,504 100.0% 85,391,895 100.0%
========== ===== =========== =====
</TABLE>
19
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
financial statements, related notes and other financial information contained
later in this prospectus. You should also read "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contained later in
this prospectus. The Statements of Operations data for the period from
September 22, 1997 (inception) to March 31, 1998 and the year ended March 31,
1999 and the balance sheet data as of March 31, 1998 and 1999 are derived from
the financial statements of Data Return that have been audited by Ernst & Young
LLP, independent auditors. The financial data for the three month periods ended
June 30, 1998 and 1999 are derived from unaudited financial statements. The
unaudited financial statements include all adjustments, consisting of normal
recurring accruals, which Data Return considers necessary for a fair
presentation of its financial position and the results of its operations for
these periods. The results of operations for the three month period ended June
30, 1999 are not necessarily indicative of the results of operations to be
expected for the full year.
<TABLE>
<CAPTION>
Period from Three Months Ended June
September 22, 1997 30,
(inception) to Year Ended ------------------------
March 31, 1998 March 31, 1999 1998 1999
------------------ -------------- ----------- -----------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C>
Statements of Operations
Data:
Revenues................ $ 336 $ 1,889 $ 281 $ 1,228
Costs and expenses:
Cost of revenue....... 198 1,105 205 489
General and
administrative....... 231 1,063 213 866
Marketing and sales... 39 663 105 384
Stock based
compensation......... 61 349 85 140
----------- ----------- ----------- -----------
Total costs and
expenses............... 529 3,180 608 1,879
----------- ----------- ----------- -----------
Loss from operations.... (193) (1,291) (327) (651)
Other income (expense).. 2 7 5 16
----------- ----------- ----------- -----------
Net loss................ $ (191) $ (1,284) $ (322) $ (635)
=========== =========== =========== ===========
Net loss per common
share.................. $ (0.01) $ (0.07) $ (0.02) $ (0.03)
=========== =========== =========== ===========
Shares used in per share
computation............ 15,882,326 18,371,300 17,592,600 22,272,804
=========== =========== =========== ===========
Other Financial Data:
EBITDA (1).............. $ (118) $ (813) $ (222) $ (400)
Net cash provided by
(used in) operating
activities............. 1 (644) (243) (282)
Net cash used in
investing activities... (55) (939) (79) (696)
Net cash provided by
financing activities... 528 1,952 502 3,251
Purchases of property
and equipment.......... 55 814 79 696
</TABLE>
<TABLE>
<CAPTION>
March 31, June 30, 1999
------------- ------------------------------
Pro Pro Forma
1998 1999 Actual Forma(2) As Adjusted(3)
------ ------ ------ -------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital.................. $ 321 $ 561 $2,291 $8,291 $76,089
Total assets..................... 734 2,214 6,011 12,011 79,757
Notes payable and capital lease
obligations--long-term.......... 36 166 140 140 --
Total shareholders' equity....... 430 1,245 4,024 10,024 77,962
</TABLE>
20
<PAGE>
(1) EBITDA consists of loss from operations plus depreciation and amortization,
including amortization of unearned stock based compensation. EBITDA does
not represent funds available for management's discretionary use and is not
intended to represent cash flow from operations as measured under generally
accepted accounting principles. EBITDA should not be considered as an
alternative to net loss or net cash used in operating activities, but may
be useful to investors as an indication of operating performance. Our
calculations of EBITDA may not be consistent with calculations of EBITDA
used by other companies.
(2) On a pro forma basis to reflect the private sales of 4,296,468 shares of
our common stock between June 30, 1999 and the date of this prospectus.
(3) On a pro forma as adjusted basis to give effect to the sale of an assumed
454,546 shares of our common stock at an assumed price of $11.00 per share
to Microsoft and the sale of 6,250,000 shares of common stock we are
offering under this prospectus, at an assumed initial public offering price
of $11.00 per share (based upon the midpoint of the filing range), after
deducting the estimated underwriting discounts and commissions and
estimated offering expenses that we will pay and the application of the
estimated net proceeds from this offering as described under "Use of
Proceeds," including repayment of the long term portion of notes payable.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with the financial
statements and other financial information included in this prospectus. This
prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those projected in
the forward-looking statements. Please see "Forward-Looking Statements and
Associated Risks" elsewhere in this prospectus. Our fiscal year ends on March
31.
Overview
Data Return provides advanced Internet hosting services based on Microsoft
technologies. We provide these services to businesses seeking to outsource the
deployment, maintenance and support of their complex web sites. Our services
include providing, configuring, operating and maintaining the hardware,
software and network technologies necessary to implement and support these web
sites.
Our business is rapidly evolving and we have a limited operating history. As
a result, we believe that period-to-period comparisons of our revenue and
operating results, including our cost of revenue and other operating expenses
as a percentage of total revenue, are not meaningful and should not be relied
upon as indicators of future performance. We do not believe that our historical
growth rates are indicative of future results. See "Risk Factors" beginning on
page 6 for a discussion of risks related to buying shares of our common stock.
Currently, we derive substantially all of our revenues from advanced hosting
services. We also derive a nominal amount of revenue from technical reviews and
the resale of software and other products. Currently, most of our advanced
hosting revenues are generated from recurring monthly fees. The remainder are
derived from one-time set-up fees for installation. Revenues are billed on a
monthly basis and are recognized as the service is performed. Most of our
customer agreements may be canceled on 30 days' notice.
Our expenses are comprised of:
. cost of revenue, which consists primarily of compensation and related
expenses for technical operations, bandwidth expenses, space in data
centers and depreciation of equipment;
. general and administrative, which consists primarily of compensation and
related expenses and occupancy costs;
. marketing and sales, which consists primarily of advertising and
compensation and related expenses; and
. stock based compensation, which relates to employee options granted at
prices less than fair market value.
We have incurred significant losses since our inception and, as of June 30,
1999, had an accumulated deficit of approximately $2.1 million. We intend to
invest heavily in marketing and sales and the continued development of our
network infrastructure and technology. We expect to expand our operations and
workforce, including our network operations, technical support, sales,
marketing and administrative resources. In particular, we intend to expand our
existing inside sales force and create an outside sales force to develop new
sales channels and relationships. We expect to continue to incur substantial
losses for the foreseeable future. We may not be able to successfully execute
our expansion plans.
22
<PAGE>
Results of Operations
The following table sets forth selected financial data for the period from
September 22, 1997 (inception) to March 31, 1998, the year ended March 31, 1999
and the three month periods ended June 30, 1998 and 1999.
<TABLE>
<CAPTION>
% of Revenue
----------------------------------------------------
Three Months
Period from Ended
September 22, 1997 June 30,
(inception) to Year Ended ------------------
March 31, 1998 March 31, 1999 1998 1999
------------------ -------------- -------- --------
<S> <C> <C> <C> <C>
Revenues.................. 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenue......... 58.9 58.5 73.0 39.9
General and
administrative......... 68.5 56.3 75.9 70.5
Marketing and sales..... 11.6 35.1 37.4 31.3
Stock based
compensation........... 18.2 18.5 30.1 11.4
----- ----- ------ -----
Loss from operations...... (57.2) (68.4) (116.4) (53.1)
Other income (expense):
Interest income......... 0.7 1.1 2.2 1.9
Interest expense........ (0.1) (0.7) (0.4) (0.5)
----- ----- ------ -----
Net loss................ (56.6)% (68.0)% (114.6)% (51.7)%
===== ===== ====== =====
</TABLE>
Comparison of three month periods ended June 30, 1998 and 1999
Revenues
Our revenues increased $946,700 to $1,227,500 for the three month period
ended June 30, 1999 from $280,800 for the three month period ended June 30,
1998. The increase was primarily due to the addition of new customers that
generated higher average monthly revenues. We increased our marketing and sales
personnel from two at June 30, 1998 to 12 at June 30, 1999.
Cost of revenue
Our cost of revenue increased $284,600 to $489,500, or 39.9% of revenue,
during the three month period ended June 30, 1999 from $204,900, or 73% of
revenue, during the three month period ended June 30, 1998. The increase in
cost of revenue over the two periods was due primarily to increases in
personnel and related costs, depreciation and bandwidth. Personnel and related
expenses increased approximately $128,500 to $225,200, or 46% of cost of
revenue, for the three month period ended June 30, 1999 from $96,700 for the
three month period ended June 30, 1998, as we increased our systems and
customer support personnel from 11 at June 30, 1998 to 25 at June 30, 1999.
Depreciation expense increased approximately $70,600 to $75,300 for the three
month period ended June 30, 1999 as we added approximately $1.4 million in
computer and related equipment since June 30, 1998. Our bandwidth expenses
increased $65,100 to approximately $145,200 for the three month period ended
June 30, 1999 from $80,100 for the three month period ended June 30, 1998, to
support our increased business activities. We expect our cost of revenue to
continue to increase in conjunction with the growth of our overall business.
General and administrative
General and administrative expense increased $652,400 to $865,600, or 70.5%
of revenue, during the three month period ended June 30, 1999 from $213,200, or
75.9% of revenue, for the three month period ended June 30, 1998. The increase
is primarily due to increases in personnel and related expenses and employee
recruiting fees. Personnel and related expenses increased $355,500 to $450,700,
or 52.1% of general and administrative expenses, for the three month period
ended June 30, 1999 from $95,200 for the three month period ended June 30,
1998. We increased our number of employees in general and administrative
functions
23
<PAGE>
from five employees at June 30, 1998 to 13 employees at June 30, 1999.
Recruiting fees increased approximately $64,500 to $65,500 for the three month
period ended June 30, 1999 from $1,000 in the comparable period in 1998.
Marketing and sales
Marketing and sales expense increased $279,500 to $384,500, or 31.3% of
revenues, during the three month period ended June 30, 1999 from $105,000, or
37.4% of revenues, during the three month period ended June 30, 1998. The
increase was due primarily to an increase in marketing and sales personnel and
related expenses and increased advertising costs. Personnel and related
expenses increased $191,500 to $244,700, or 63.6% of marketing and sales
expense, from $53,200 for the three month period ended June 30, 1998.
Advertising costs increased $88,000 to $139,800 for the three month period
ended June 30, 1999 from $51,800 for the three month period ended June 30,
1998. We increased our marketing and sales personnel from two at June 30, 1998
to 12 at June 30, 1999. We intend to significantly increase our marketing and
sales expenditures during the remainder of fiscal 2000.
Stock based compensation
Deferred stock compensation was recorded in connection with the grant of
employee stock options below fair value. Amortization of stock based
compensation totaled $84,600 for the three month period ended June 30, 1998 and
$139,500 for the three month period ended June 30, 1999. The amortization of
stock based compensation is based on the vesting schedule of stock options held
by the Company's employees. We recorded deferred stock compensation of $874,100
during the three month period ended June 30, 1999.
Other income (expense)
Other income (expense) consists primarily of interest income on our cash
balances and interest expense on our outstanding notes payable and capital
lease obligations. Interest earned on our cash and cash equivalents increased
$16,700 to $22,900 for the three month period ended June 30, 1999 from $6,200
for the three month period ended June 30, 1998. This increase was due primarily
to the closing of private placements of equity securities in May 1998 and
February 1999, which resulted in larger cash balances available for investment.
During the three month period ended June 30, 1998 and 1999, we incurred
interest expense in the amount of $1,100 and $6,100, respectively.
Income taxes
No provision for federal income taxes has been recorded as we have incurred
net operating losses since our inception. We have recorded a valuation reserve
against all of our net deferred tax asset, which is primarily attributable to
net opening loss carryforwards, due to uncertainty that we will generate
sufficient taxable income during the carryforward period to realize the benefit
of our net deferred tax asset.
Net losses
Our net loss increased $313,000 to $634,800 for the three month period ended
June 30, 1999 from $321,800 for the three month period ended June 30, 1998. Our
net losses increased primarily as a result of a $652,400 increase in general
and administrative expense, a $279,500 increase in marketing and sales expense
and a $284,600 increase in cost of revenue, from the three month period ended
June 30, 1998. These increases were partially offset by an increase in our
revenue of $946,700 to $1,227,500 for the three month period ended June 30,
1999 from $280,800 for the three month period ended June 30, 1998.
Comparison of the period from September 22, 1997 (inception) to March 31, 1998
and fiscal 1999
Revenues
Our revenues increased $1,552,900 to $1,889,000 during fiscal 1999 from
$336,100 for the period from September 22, 1997 (inception) to March 31, 1998.
This increase was primarily due to our generating revenues
24
<PAGE>
for a full year during fiscal 1999 and the growth of our business activities.
Approximately 41% of our fiscal 1999 revenue was recognized in the fourth
quarter, due in part to the addition of two sales people in the third quarter.
Cost of revenue
Our cost of revenue increased $907,300 to $1,105,300, or 58.5% of revenue,
during fiscal 1999 from $198,000, or 58.9% of revenue, during the period from
September 22, 1997 (inception) to March 31, 1998. This increase was due
primarily to a full year of operations in fiscal 1999 and the growth of our
business and related expenses, including increasing our systems and customer
support personnel from six at March 31, 1998 to 20 at March 31, 1999. We expect
our cost of revenue to continue to increase in conjunction with the growth of
our overall business.
General and administrative
General and administrative expense increased $832,800 to $1,063,000, or 56.3%
of revenue, during fiscal 1999 from $230,200, or 68.5% of revenue, for the
period from September 22, 1997 (inception) to March 31, 1998. This increase was
due primarily to a full year of operations in fiscal 1999 and an increase in
the number of general and administrative personnel. We increased our number of
employees in this area from four employees at March 31, 1998 to eight employees
at March 31, 1999. We expect to significantly increase our general and
administrative expenditures. The decrease as a percentage of revenues was due
to revenues increasing at a more rapid rate than general and administrative
expenses.
Marketing and sales
Marketing and sales expense increased $623,800 to $662,800, or 35.1% of
revenues, during fiscal 1999 from $39,000, or 11.6% of revenues, during the
period from September 22, 1997 (inception) to March 31, 1998. This increase was
due primarily to a full year of operations in fiscal 1999 and an increase in
the number of marketing and sales personnel. We increased our marketing and
sales personnel from one to six in fiscal 1999. We intend to significantly
increase our marketing and sales expenditures during fiscal 2000.
Stock based compensation
Deferred stock compensation was recorded in connection with the grant of
employee stock options below fair value. Amortization of stock based
compensation totaled $61,300 for the period from September 22, 1997 (inception)
through March 31, 1998 and $348,800 for the year ended March 31, 1999. The
amortization of stock based compensation is based on the scheduled vesting of
stock options held by several employees. We recorded deferred stock
compensation of $1,277,000 in the period from September 22, 1997 (inception) to
March 31, 1998 and $328,000 during fiscal 1999.
Other income (expense)
Other income (expense) consists primarily of interest income on our cash
balances and interest expense on our outstanding notes payable and capital
lease obligations. Interest earned on our cash and cash equivalents increased
$17,700 to $19,900 during fiscal 1999 from $2,200 during the period from
September 22, 1997 (inception) to March 31, 1998. This increase was due
primarily to the closing of private placements of equity securities in May 1998
and February 1999, which resulted in cash balances available for investment.
During fiscal 1999, we incurred interest expense in the amount of $12,700.
Income taxes
No provision for federal income taxes has been recorded as we have incurred
net operating losses from inception through March 31, 1999. As of March 31,
1999, we had approximately $980,000 of federal net
25
<PAGE>
operating loss carryforwards available to offset future taxable income which
expire in varying amounts beginning in 2013. We have recorded a valuation
reserve for all of our net deferred tax benefit for the period ended March 31,
1999 due to uncertainty that we will generate sufficient taxable income during
the carryforward period to realize the benefit of our net deferred tax asset.
In addition, after this offering, we may experience a change in control under
Section 382 of the Internal Revenue Code, which would limit our use of these
net operating loss carryforwards.
Net losses
Our net loss increased $1,093,000 to $1,284,000 during fiscal 1999 from
$191,000 for the period from September 22, 1997 (inception) to March 31, 1998.
Our net loss increased primarily as a result of a $907,300 increase in cost of
revenue, a $832,800 increase in general and administrative expense, and a
$623,800 increase in marketing and sales expense in fiscal 1999 from the period
from September 22, 1997 (inception) to March 31, 1998. These increases were
partially offset by an increase in revenue of $1,552,900 to $1,889,000 for
fiscal 1999 from $336,100 for the period from September 22, 1997 (inception) to
March 31, 1998.
Selected Quarterly Operating Results
The following table sets forth certain unaudited statement of operations data
for each of the five quarters in the period ended June 30, 1999, as well as the
percentage of our revenue represented by each item. This data has been derived
from unaudited interim financial statements prepared on the same basis as the
audited financial statements contained in this prospectus. The interim
financial statements include all adjustments, consisting of normal recurring
adjustments, that we consider necessary for a fair presentation of such
information when read in conjunction with our financial statements and notes
thereto appearing elsewhere in this prospectus. The operating results for any
quarter should not be considered indicative of the results for any future
period.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------
June 30, September 30, December 31, March 31, June 30,
1998 1998 1998 1999 1999
-------------- -------------- -------------- -------------- ----------------
(Dollars in thousands)
% of % of % of % of % of
$ Revenue $ Revenue $ Revenue $ Revenue $ Revenues
----- ------- ----- ------- ----- ------- ----- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 281 100.0% $ 366 100.0% $ 467 100.0% $ 775 100.0% $1,228 100.0%
Costs and expenses:
Cost of revenue........ 205 73.0 243 66.4 280 60.0 377 48.6 490 39.9
General and
administrative........ 213 75.8 211 57.7 243 52.0 396 51.1 866 70.5
Marketing and sales.... 105 37.4 165 45.1 163 34.9 230 29.7 384 31.3
Stock based
compensation.......... 85 30.2 86 23.5 86 18.4 92 11.9 140 11.4
----- ------ ----- ----- ----- ----- ----- ----- ------ -----
Total costs and
expenses............... 608 216.4 705 192.7 772 165.3 1,095 141.3 1,880 153.1
----- ------ ----- ----- ----- ----- ----- ----- ------ -----
Loss from operations.... (327) (116.4) (339) (92.7) (305) (65.3) (320) (41.3) (652) (53.1)
Other income (expense):
Interest income........ 6 2.1 5 1.4 3 0.6 6 0.8 23 1.9
Interest expense....... (1) (0.3) (3) (0.8) (4) (0.8) (5) (0.7) (6) (0.5)
----- ------ ----- ----- ----- ----- ----- ----- ------ -----
Net loss................ $(322) (114.6)% $(337) (92.1)% $(306) (65.5)% $(319) (41.2)% $ (635) (51.7)%
===== ====== ===== ===== ===== ===== ===== ===== ====== =====
</TABLE>
Revenues increased 30.2% during the quarter ended September 30, 1998, 27.6%
during the quarter ended December 31, 1998, 66.0% during the quarter ended
March 31, 1999 and 58.5% for the quarter ended June 30, 1999, as the size and
number of new customer orders rose significantly during each quarter. Cost of
revenue increased in each quarter, but decreased as a percentage of revenue.
General and administrative expense and marketing and sales expense generally
increased quarter over quarter primarily due to the addition of personnel as
our business increased.
Liquidity and Capital Resources
We have historically financed our operations primarily through private
placements of equity. Our cash increased by approximately $2,272,900 during the
three months ended June 30, 1999 to $3,115,700. This net
26
<PAGE>
change is partially a result of our raising approximately $3,275,000 from the
sale of equity securities offset by approximately $282,100 used to fund
operating activities. In addition, our investment in property and equipment
increased approximately $696,300 during the three month period ended June 30,
1999. Installation of network infrastructure equipment and purchases of
furniture and equipment for new employees accounted for this increase.
Total borrowings under our notes payable as of June 30, 1999 were
approximately $205,000. We intend to repay the amounts outstanding under these
agreements with a portion of the proceeds of this offering. Our credit
agreements and capital lease obligations contain no provisions that would limit
our future borrowing ability.
Since June 30, 1999, we completed additional rounds of common stock financing
through the issuance of approximately 2,343,528 shares for gross cash proceeds
of $6.0 million. In addition, in July 1999, Level 3 purchased 1,952,940 shares
of common stock in exchange for a $5.0 million credit to be used against future
purchases of bandwidth in excess of our quarterly purchase commitment. In
addition, Microsoft has agreed to purchase $5.0 million of our common stock for
a per share price equal to the lesser of the midpoint of the lowest filing
range and the price to public.
We believe that our current cash balances, proceeds from the private equity
financings closed since June 30, 1999 and the proceeds of this offering will be
sufficient to meet our working capital and capital expenditure requirements for
at least the next 12 months. If the offering is not consummated, we believe
that we could support operating and capital outlays for at least the next 12
months. However, on a long-term basis, we may require additional external
financing for working capital and capital expenditures. If additional funds are
raised through the issuance of equity or convertible securities, the percentage
ownership of our stockholders will be reduced and our stockholders may
experience additional dilution. Under our agreement with Level 3, we are
required to purchase at least $10.0 million of bandwidth and co-location
services over the next five years. Our quarterly commitment is $200,000 in the
first year, $300,000 in the second year, $400,000 in the third year, $600,000
in the fourth year and $1.0 million in the fifth year of the agreement. We
anticipate that further expansion of our operations will cause us to incur
negative cash flows on a short-term basis, and therefore require us to use our
cash and other liquid resources to support our growth. Our operating and
investing activities on a long-term basis may require us to obtain additional
equity or debt financing. We have no present understandings, commitments or
agreements with respect to any acquisition of other businesses, products,
services or technologies. However, we may evaluate potential acquisitions of
other businesses, products and technologies from time to time. In order to
consummate potential acquisitions, we may need additional equity or debt
financings in the future.
Recent Accounting Pronouncements
On March 4, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AICPA) issued Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires computer software
costs related to internal software that are incurred in the preliminary project
stage to be expensed as incurred. Once the capitalization criteria of SOP 98-1
have been met, external direct costs of materials and services consumed in
developing or obtaining internal-use computer software; payroll and payroll-
related costs for employees who are directly associated with and who devote
time to the internal-use computer software project (to the extent of the time
spent directly on the project); and interest costs incurred when developing
computer software for internal use should be capitalized. SOP 98-1 is effective
for financial statements for fiscal years beginning after December 15, 1998.
Accordingly, we will adopt SOP 98-1 in our financial statements for the year
ending March 31, 2000. We do not expect SOP 98-1 to have a material impact on
our financial statements.
In April of 1998, the AICPA issued Statement of Position No. 98-5, "Reporting
on the Costs of Start-up Activities", which requires that costs related to such
activities be expensed as incurred. SOP 98-5 is effective for financial
statements for fiscal years beginning after December 15, 1998. Accordingly, we
will adopt SOP 98-5 in our financial statements for the year ending March 31,
2000. We do not expect SOP 98-5 to have a material impact on our financial
statements.
27
<PAGE>
The Year 2000
Impact of the Year 2000
Currently, many computer and software products are coded to accept 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' software and computer systems will need to be
upgraded or replaced to comply with Year 2000 requirements. Failure to make
such upgrades or replacements could result in system failure or erroneous
calculations, causing disruptions of operations, such as an inability to
process transactions, send invoices and engage in other normal business
activities. We recognize the need to ensure that our operations are not
adversely impacted by Year 2000 software and computer system failures. We are
not currently aware of any Year 2000 compliance problems relating to our
computer systems that would have a significant negative effect on our business,
operating results or financial condition.
Project Plan and State of Readiness
We have made a preliminary assessment of the Year 2000 readiness of our
computer systems and software, including the hardware and software that enable
us to provide and deliver our solutions. We plan to continue our Year 2000
readiness efforts by:
. testing our internal systems for Year 2000 compliance;
. contacting third-party suppliers, vendors and licensors of material
hardware, software and systems that are both directly and indirectly
related to the delivery of our solutions to our customers;
. assessing repair and replacement requirements;
. implementing repair and replacement requirements; and
. creating contingency plans for potential Year 2000 failures.
We have initiated a four-phase plan for addressing Year 2000 issues with the
following estimated dates of completion:
<TABLE>
<CAPTION>
Phase Estimated Date of Completion
----- ----------------------------
<C> <S> <C>
I. Preparation and Information Gathering.... April 30, 1999
II. Develop Project Plan..................... August 31, 1999
III. Execution of Project Plan................ October 31, 1999
IV. Full Compliance.......................... November 30, 1999
</TABLE>
Some elements of the project plan are not dependent upon completion of other
elements. Therefore, we may execute elements of the project plan while there
may be outstanding tasks associated with other elements of the plan.
Phase I - Preparation and Information Gathering. In this phase we determined
our Year 2000 risk. We inventoried our hardware and software and determined
what replacements and modifications were required for our systems and networks
to function properly after December 31, 1999. Upon review of hardware and
software data gathered during the inventory, we gathered Year 2000 compliance
information from our vendors via web site visits, phone calls or
correspondence. Although we have received information from the majority of our
key hardware and software component vendors that the products they supply to us
are currently Year 2000 compliant, we cannot be certain that any representation
made to us by any vendor is complete or accurate. In addition, we cannot be
sure that we have not overlooked critical systems. As we acquire new hardware
and software, we intend to use the same procedures to determine Year 2000
compliance.
We primarily rely on four key hardware and software vendors: Microsoft,
Compaq, Cisco and Alteon. We have tested the Year 2000 compliance of the
products supplied by these vendors. For Microsoft products, the software is
considered Year 2000 compliant if it will function through the end of year
2035. We have identified remedial action that we need to perform on some of our
vendors' products. These upgrades are available, and we intend to install them
by October 31, 1999.
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<PAGE>
Our internal systems are based upon the same key vendor hardware and software
product families described above. We have been advised by the vendor that our
customer relationship management package is Year 2000 compliant. In 1998, we
upgraded our internal accounting software with a package that, according to the
vendor, would make the system Year 2000 compliant. We are currently installing
a new phone system, and the vendor has informed us that it is Year 2000
compliant. We have contacted all of our significant vendors and third-party
providers to obtain assurance as to their Year 2000 compliance. All of these
vendors and providers have responded to our inquiries by directing us to their
Year 2000 compliance statements on their web sites. The web sites of our
significant vendors indicate that all software products are Year 2000 compliant
and all hardware is currently Year 2000 compliant or is being updated to become
Year 2000 compliant. We have not independently investigated these vendors' Year
2000 compliance.
Phase II - Develop Project Plan. We have a project plan that identifies the
hardware and software replacements and/or modifications discovered during Phase
I. We have assigned departments and resources for completing the project plan
during this phase. While significant achievements were made in identifying
critical Year 2000 issues regarding information technology and non-information
technology related functions, we cannot assure you that critical equipment has
not been overlooked. Some Microsoft products may require additional service
packs and/or patches to make them Year 2000 compliant. In addition, some Compaq
servers have required revisions. We expect that hardware and software
revisions, such as applying updates, service packs and patches, will be
minimal.
Phase III - Execution of Project Plan. We intend to accomplish the hardware
and software replacements and/or modifications identified in Phase I and
execute the project plan created in Phase II. During this phase we are
continuing to test and monitor Year 2000 compliance and the effect of any non-
compliance of our internal systems, vendors, service providers, clients and
their respective systems and monitor the effect of any non-compliance on our
business. We intend to re-evaluate the Year 2000 compliance of our hardware and
software components that have been replaced or modified. We intend to give
priority to those applications or processes posing the greatest threat of
failure and greatest potential impact on our business.
While we believe that we have substantially completed our plan for achieving
Year 2000 compliance, the discovery of additional systems requiring remediation
could have a negative effect on the current plan and the resources required to
implement the plan.
Phase IV - Full Compliance. We intend to be Year 2000 compliant by October
31, 1999 on all components critical to our business. However, we rely upon
hardware and software vendors and do not control the accuracy, timeliness or
completeness of their Year 2000 efforts. In addition, because our ability to
provide services depends on the networks and systems of other carriers, to the
extent that these networks and systems are adversely impacted by Year 2000
problems our ability to provide services to our customers may be adversely
impacted.
Costs
To date we have not incurred any material expenditures in connection with
identifying or evaluating Year 2000 compliance issues. We continue to collect
information and make the necessary revisions to our systems in an ongoing
effort to maintain Year 2000 compliance. We are not aware of any critical
third-party software application which requires replacement. In the event we
are required to make such a replacement, we do not anticipate that such
expenses will be substantial. However, such expenses, if higher than
anticipated, could harm our business and operating results.
Risks and Contingencies
Although we are not currently aware of any Year 2000 compliance problems
relating to our computer systems that would have a material negative impact on
our business, operating results or financial condition, we cannot assure you
that we will not discover Year 2000 compliance problems in our software and
systems that will require substantial revisions or expenditures or replacement.
In addition, we cannot be certain that we will not need to modify or replace
third-party software or hardware incorporated into our computer systems, which
could be time consuming and expensive. If an oversight were to occur by us or
one of our vendors and we or a
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<PAGE>
vendor failed to correct a material Year 2000 problem, we could experience an
interruption in or a failure of normal business activities or operations, such
as interruptions in our ability to provide services to our customers, an
inability to market our services to potential new customers and the loss of
customers. Any of these results could have a negative effect on our business.
Moreover, if we fail to adequately address Year 2000 compliance issues, it
could result in claims of mismanagement, misrepresentation or breach of
contract and related litigation, and any of these claims would likely be costly
and time-consuming to defend. In addition, we cannot assure you that government
agencies, utility companies, telecommunications companies, Internet service
providers, third-party service providers, hardware or software manufacturers
and others outside of our control will be Year 2000 compliant. The failure by
such entities to be Year 2000 compliant could result in systemic failures
beyond our control. Prolonged Internet, telecommunications, electrical or other
failures could decrease the demand for our services and the use of the Internet
or prevent users from accessing the web sites of our customers. This would
materially harm our business.
Year 2000 issues may also impact the interaction of our systems with the
software, hardware or systems of our suppliers. Furthermore, our ability to
provide services to our customers depends on the networks and systems of other
carriers. Any failures or problems experienced by the networks and systems of
those carriers may adversely impact our ability to provide services to our
customers. In addition, because we rely on our web site as a marketing and
sales tool, any failures or problems affecting the Internet or our web site
could hinder our marketing and sales efforts. We are not evaluating the Year
2000 compliance of our customers' web sites.
Each of the following events must be included in a consideration of the worst
case scenario, which is an overall failure of the Internet, the
telecommunications infrastructure and the electrical grid: widespread failure
of communications carriers, public utilities, unavailability of transit for
staff, suppliers and clients; disruption of our ability to gain access to, and
continue operating in, office buildings and other facilities; the failure of
significant portions of our critical computer systems and their respective
components, including both internal business systems and systems controlling
operational facilities such as electrical generation, transmission and
distribution systems; and the failure of outside entities' systems, including
systems related to banking and finance.
We provide our hosting services through a combination of skilled labor,
hardware and software products and services from major vendors within the
computer and telecommunications industries. Because our ability to provide our
services depends on the performance of each of these components, the Year 2000
problem has introduced many risks and uncertainties, and the Year 2000
compliance of many of these components, such as the supply chain, utility
companies and our customers' systems, is beyond our control and in some case
beyond our ability to test. Because of these uncertainties, we are unable to
determine whether the consequences of Year 2000 failures will have a material
impact on our business.
If we cannot operate effectively after December 31, 1999, we could, among
other things, face substantial claims by customers, including for lost profits,
or loss of revenue due to service interruptions, inability to fulfill
contractual obligations or bill customers accurately and on a timely basis, and
increased expenses associated with litigation, stabilization of operations
following critical system failures and the execution of contingency plans. We
could also experience an inability by customers and others to pay us on a
timely basis or at all. Under these circumstances, the adverse effects,
although not quantifiable at this time, would be material.
We are continuing to gather information and evaluate the possible impact of
the Year 2000 on our business and to develop contingency plans to implement if
any of our systems are not Year 2000 compliant.
Quantitative and Qualitative Disclosures About Market Risk
All our customer contracts are currently denominated in United States
dollars, and we do not currently invest in derivative financial instruments.
However, we invest our excess cash balances in cash equivalents and are
therefore subject to market risk related to changes in interest rates. We
believe, but cannot be certain, that the effect on our financial position,
results of operation and cash flows of any reasonably likely changes in
interest rates would not be material.
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<PAGE>
BUSINESS
Our Company
Data Return provides advanced Microsoft-based Internet hosting services to
businesses, web site developers and other organizations. Our advanced Microsoft
hosting services enable our customers to establish and maintain sophisticated
e-commerce and other applications through which they can conduct transactions
and manage information on a worldwide basis over the Internet. Our hosting
services, which are based on the Microsoft platform, provide support for
software such as Windows NT, Internet Information Server, Active Server Pages,
SQL Server and Site Server Commerce Edition. According to IDC, Microsoft
Windows NT will be the key engine for growth within the worldwide server market
and Windows NT's market share will grow at a compound annual growth rate of 25%
from 1998 to 2003.
We provide our services to companies across many industries. As of August 31,
1999, we hosted over 1,600 web sites for more than 800 customers.
Our advanced hosting services are designed for customers deploying
sophisticated, high-end Internet applications that require a professionally-
managed environment incorporating high performance network access, advanced
system monitoring and technical support in highly secure, fault-tolerant
facilities. We believe that we are well positioned to take advantage of the
rapidly growing demand for advanced hosting which is being driven by the growth
in user access to the Internet, e-commerce and the outsourcing of web services.
We were incorporated in August 1997 by three former Microsoft product support
engineers. We believe that our exclusive focus on the Microsoft platform and
our approach to offering pre-packaged hosting services have been the major
contributors to our growth. We believe the following are among the key factors
that have distinguished our company and our offerings and that will continue to
drive our growth:
. a full range of pre-packaged hosting services supported by advanced
managed services for fixed monthly prices;
. high availability and high performance clustering solutions for web
servers and database servers;
. an advanced and secure network architecture that has delivered faster
network performance compared to the single fastest backbone provider;
. automated work flows and service deployment processes;
. avoiding competition with software developers and systems integrators;
and
. a commitment to serving members of the Microsoft developer community,
who are valuable sources of customer referrals.
Level 3 and Compaq have invested in our company, and Microsoft has agreed to
purchase shares of our common stock. We believe our relationships with these
companies enhance our credibility with potential customers and provide us with
early access to new products, superior technical services, training and new
business development opportunities. In July 1999, we entered into a five-year
agreement with Level 3 under which:
. Level 3 has designated us as a preferred provider of advanced Microsoft
hosting services;
. we will train Level 3's sales personnel to identify and refer potential
customers to us on a commission basis;
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<PAGE>
. we are entitled to offer our services from the 17 existing and all
future Level 3 gateways in the U.S. enabling us, we believe, to avoid
the significant costs of building our own data centers;
. Level 3 will provide assistance as needed in the installation and
support of our equipment located in their gateways; and
. Level 3 has acquired shares of our common stock in exchange for $5.0
million in credit for future bandwidth purchases in excess of our
purchase commitment.
Also in July 1999, we entered into a three-year agreement with Compaq. Under
that agreement, Compaq has agreed to include Data Return in any program under
which it approves for recommendation to its customers a specified group of
application service providers. Although Compaq is not required to develop such
a program, it will include us in any such program that it does establish at the
highest level for which we qualify. In addition, Compaq has purchased shares of
our common stock for a purchase price of $3.0 million.
In September 1999, we entered into an agreement with Microsoft under which we
will license proprietary installation tools for third-party hosted applications
to Microsoft and train Microsoft's employees and customers in the use of those
tools. Under that agreement, Microsoft will provide technical consulting and
writing services, and we will co-market the tools with Microsoft. Microsoft has
also agreed to invest $5.0 million in our common stock.
Industry Background
Growth of the Internet and Electronic Commerce
The market for advanced hosting services has been driven by the growth of the
Internet. The Internet has emerged as a new medium for communicating,
exchanging information and transacting business. IDC projects that the number
of Internet users will grow from approximately 159 million at the end of 1998
to over 410 million at the end of 2002. Forrester Research projects that during
the next five years U.S. online business-to-business trade will exceed $1.0
trillion. Forrester Research also projects that e-commerce will generate over
$3.2 trillion in worldwide revenue by 2003. We believe businesses and other
organizations will attempt to take advantage of this growth by establishing new
web sites or upgrading existing web sites. We further believe that many of
these sites, particularly those used for electronic commerce, will be
increasingly complex and have high traffic volume requirements.
Outsourcing of Web Hosting
As businesses attempt to take advantage of the revenue potential presented by
the growth of the Internet and e-commerce by establishing web sites that
interact with customers, vendors and employees, we believe that they will
increasingly outsource the hosting of their web sites. To support e-commerce
applications, these sites must be capable of reliably and securely completing
financial transactions. The process of establishing a web site includes:
. specification of site requirements, including the associated business
work flows and processes;
. development and testing of software consistent with the specifications;
. acquisition and installation of hardware, software and network access in
a controlled environment; and
. physical implementation of the web site onto the Internet.
Once a web site is implemented, it requires monitoring, maintenance and
management provided by knowledgeable personnel. While some businesses currently
choose to operate and maintain their web sites in-house, we believe that many
businesses, even those with relatively large and sophisticated information
technology departments, will find outsourcing the hosting of their web sites
attractive due to the following factors:
. rapid changes in the various complex technologies involved;
. difficulty of deploying highly sophisticated web applications;
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<PAGE>
. challenge of hiring and retaining experienced and qualified personnel;
. lack of the infrastructure needed to deploy, expand, upgrade and
maintain essential applications on the Internet around the clock; and
. potential cost savings associated with personnel and system
infrastructure requirements.
We believe that the trend toward outsourcing the hosting of web sites will
continue as businesses increase the complexity of their web sites and require
greater interactivity for end users. We believe that these web sites will
increasingly be based on Microsoft Internet technologies. IDC projects that
Windows NT will be the key engine for growth within the worldwide server market
and Windows NT's market share will grow at a compound annual growth rate of 25%
from 1998 to 2003.
The Outsourcing of Packaged Application Hosting
For many of the above reasons, companies are seeking to outsource the
management of important software applications that can be accessed over the
Internet. We believe that many of these applications will also be based on
Microsoft Internet technologies. These applications govern business processes
such as e-mail, sales force automation, human resource management, decision
support, supply chain management, core financials and overall enterprise
resource management. We believe that the potential benefits of outsourcing
these applications include significant improvements in application availability
and reduced ongoing management costs. According to IDC, information systems
outsourcing, which includes data center, client/server and help desk
applications, is the fastest growing segment of the market, and spending in
this area will increase at a 12.2% compound annual growth rate through 2003.
Further, IDC projects that spending on worldwide outsourcing services will
increase from $99.0 billion in 1998 to more than $151.0 billion by 2003.
Our Market Opportunity
The Advanced Hosting Opportunity
Advanced hosting is distinguished from basic hosting by requirements for:
. more bandwidth;
. more complex system architectures, including support for extranets and
intranets;
. more complex software technologies;
. a higher level of technical expertise to support these complex systems;
and
. higher system performance and reliability.
Advanced hosting is used to support highly interactive web sites on which
real-time transactions and full-featured e-commerce applications are
implemented. These sites provide users with the ability to interact with
databases and require a high level of expertise for implementation and
maintenance support. For higher volumes of user traffic and transactions,
multiple servers may be required.
As e-commerce becomes increasingly important to businesses worldwide, we
believe that many businesses will outsource the hosting and maintenance of
their high-volume, transactional web sites. Further, beyond e-commerce, we
believe that the hosting market will be driven by a demand for the outsourcing
of other enterprise-wide, business unit and information technology department
functions. According to Forrester Research, the hosting market will grow from
$0.9 billion in 1998 to $14.6 billion in 2003, a 76% compound annual growth
rate.
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Hosting on the Microsoft Platform
We believe that the market for advanced hosting on the Microsoft platform
offers a greater opportunity than the market for hosting on other platforms,
such as Unix. Microsoft is the dominant provider of operating systems for
personal computers. We believe that many developers are writing web
applications for the Microsoft platform because of previous experience gained
in the Microsoft architecture, including experience with Basic, Visual Basic
and Active Server Pages. According to Microsoft, more than two million
developers participate in Microsoft's Developer Network and Site Builder
Network programs. We believe that, as businesses demand applications that are
capable of operating on the Internet, developers are increasingly responding by
producing Microsoft-based solutions that require hosting on Microsoft
platforms. For example, IDC reports that Microsoft 32-bit Windows offerings
have the leading position in terms of operating environment license revenues
and license shipments for client operating environments. Additionally, we
believe the momentum toward the Microsoft platform is driven by market demand
for shortened development cycles, lower development costs and lower operating
costs.
Our Solution
Data Return is an advanced hosting provider dedicated to delivering scalable,
reliable and high performance hosting services on the Microsoft platform. By
combining our expertise in managing Microsoft-based Internet technologies, a
scalable deployment architecture and high performance content delivery, we have
developed a family of services that addresses a wide range of customer needs.
Advanced Managed Services
Managing the deployment of business-critical web applications requires an in-
depth understanding of all underlying software, hardware and network
technologies. We use our expertise in Microsoft technologies to provide
management services for our customers' hosting needs which include:
. consultation and recommendations on standardized system architecture;
. installation, configuration and stress testing of hardware and software;
. ongoing maintenance of hardware and software including content back-ups
and system upgrades;
. a broad array of system and network monitoring and reporting services
provided 24 hours a day; and
. advanced technical support designed to respond to both simple and
complex system issues.
Scalable Deployment Architecture
Our customers require system architecture that is flexible and can be
expanded over time to meet increasing demand. Data Return has developed a
scalable deployment architecture for the Microsoft platform that enables
customers to begin with cost effective shared solutions and then migrate to
dedicated services and high-end multi-server clustered solutions as their site
traffic grows. The flexibility of this architecture allows us to offer a wide
range of hosting solutions to our customers.
High Performance Content Delivery
Overall application performance is an essential component to deploying an
Internet-based application successfully. There are many factors that contribute
to overall performance including the configuration and architecture for
hardware, software and Internet access. Our private networking architecture
bypasses the congested public exchange points, such as the Metropolitan Area
Exchanges and Network Access Points, increasing speed and reliability. By
taking a comprehensive approach to optimizing application performance, since
mid-August we have delivered network performance faster on average in the
United States than the single fastest backbone provider as measured by Keynote
Systems.
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Pre-Packaged Solutions for Advanced Hosting
We have standardized our services into packages with defined pricing and
feature sets. We believe these pre-packaged solutions simplify the sales
process and customer support compared to co-location. Co-location arrangements
typically involve a vendor supplying space for the server and Internet
connections and the customer being responsible for defining and implementing
the deployment architecture. Our pre-packaged solutions enable our customers to
outsource these responsibilities to us for their Internet, extranet or intranet
applications.
Our Strategy
Our goal is to take advantage of the growth in Internet usage, e-commerce and
the outsourcing of hosting services to become the leading provider of advanced
hosting services. Our strategy for accomplishing this goal contains the
following key elements:
Maintain Focus on Advanced Hosting on the Microsoft Platform. We intend to
maintain our exclusive focus on Microsoft-based advanced hosting, which enables
us to concentrate our expertise. We believe that we are better able to attract
customers because we have targeted the Microsoft platform, which we believe is
significantly underserved. By focusing on one platform, we are not required to
duplicate systems and operations costs which would be necessary to support
multiple platforms. In addition, by focusing exclusively on advanced hosting
and not engaging in web site development or systems integration services
ourselves, we are able to maintain close relationships with developers and
systems integrators, who serve as a valuable source of referrals.
Offer a Full Range of Highly Scalable Advanced Hosting Services. We attract
customers by offering a full range of Microsoft-based hosting services from
shared and dedicated services to complex, clustered solutions. We intend to
continue working with Microsoft and other technology partners to remain at the
forefront of packaging new technologies into advanced hosting services. We
believe that our advanced hosting customers view their web applications as an
important part of their business strategy and are seeking a growing number of
services. We target larger customers with substantial and complex requirements.
However, our broad range of service offerings also attracts customers with
lower volume requirements who can migrate to more powerful service offerings as
their needs evolve. We believe that our broad range of service offerings
attracts customers who are likely to be long-term customers.
Maintain Non-Capital Intensive Business Model. We deploy our hosting services
within third-party data centers to avoid the high capital expenditures
associated with building our own data centers. Rather than investing in data
centers and other capital intensive assets, we invest in internally developed
and third-party software and other tools. We believe this increases our
financial flexibility by reducing fixed costs. We also believe this allows us
to increase customer satisfaction because we believe the internally developed
and third-party software and other tools in which we invest increase network
performance and reliability. Specifically, we are able to add value and
generate a competitive advantage by continuing to develop best practices,
standardized service offerings and automated processes that improve operational
efficiency.
Enhance Our Marketing and Sales Programs. Through the packaging of our
offerings, we believe we have substantially reduced the complexity of
purchasing advanced hosting services. We intend to substantially increase our
advertising efforts to further promote awareness of the Data Return brand and
our advanced Microsoft-based hosting offerings. To date, our sales have been
made through our inside sales force, which has focused on responding to leads
and other inquiries generated from advertising and referrals. In parallel with
the expansion of our inside sales force, we intend to establish an outside
sales force to proactively seek larger
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opportunities. Additionally, we intend to train Level 3's sales force, as
contemplated by our agreement with Level 3, and to further formalize our
partner programs with developers and systems integrators to identify and refer
their leads for advanced Microsoft-based hosting services to Data Return.
Capitalize on Key Relationships. We have relationships with Level 3, Compaq,
Microsoft and Alteon that we believe provide us with early access to new
products, superior technical services, training and new business development
opportunities. In some cases, these partners have provided us with direct and
indirect funding. We believe that our association with industry leaders
enhances our credibility with potential customers. We intend to strengthen our
existing relationships and to seek additional strategic arrangements when
appropriate.
Provide Superior Customer Service. We intend to continue to provide high-
quality customer service by maintaining a high level of technological expertise
in our customer support and sales organizations and by proactively monitoring
the performance of our customers' web sites. We believe that our
standardization of hardware and software solutions, which results in efficient
training, documentation and overall logistics and operations, allows us to
deliver high-quality customer service. We intend to continue leveraging our
relationships with Compaq, Microsoft and Alteon to receive the technical
training and support necessary to provide high levels of customer support
during both installation and ongoing maintenance.
Expand Our Data Center Presence. The servers we use in offering our hosting
services are located in data centers, which are secure facilities with multiple
Internet connections, multiple power sources and other features designed to
minimize the possibility of service interruptions. We currently operate from
data centers in Fort Worth and Dallas, and our agreement with Level 3 allows us
to establish data centers in the 17 current and all future Level 3 gateways
located in the U.S. We intend to offer services from Level 3's data centers in
San Francisco and London by the end of 1999. We also intend to provide services
through Level 3's network, which is currently planned to be composed of local
networks in approximately 50 cities, over the next five years. Additionally,
our relationship with Level 3 will provide us with access to bandwidth and
personnel to assist in the installation and implementation of our equipment in
their gateways. These capabilities position us to offer nationwide points of
presence for shared, dedicated, clustered and geographically dispersed
clustered hosting services.
Expand into New Hosting Markets. We believe that the execution of the above
elements of our strategy will enable us to address new hosting markets as they
develop. In particular, we believe that we are positioned to expand into the
emerging application service provider market without significant changes to our
operations or business model. We believe that our Microsoft-based hosting
services will be a desirable platform for electronic distribution in the
emerging software rental market. Additionally, we believe that software
companies whose products either draw upon Microsoft technologies or whose
products typically interface to the large installed base of Microsoft systems
will find our hosting services attractive. We have recently begun offering
hosting services for Microsoft Exchange, which is an advanced messaging
service.
Our Services
We have made an extensive effort to package our hosting services into
standardized, definable product offerings. Our services are designed to be
comprehensive in terms of feature sets and to address customers' outsourcing
needs for a wide variety of requirements, including:
. customers accessing public web sites on the Internet;
. employees accessing private web sites through intranets; and
. partners and other designated user groups accessing private or public
web sites through extranets.
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Offerings
Our advanced Microsoft hosting platform allows us to support the Internet,
intranets and extranets for both commercially developed applications and custom
developed applications. To address this wide variety of customer requirements,
Data Return has developed three distinct categories within our service family.
During the three month period ended June 30, 1999, excluding set-up fees, 50.6%
of our revenues was derived from our shared services, 38.2% was derived from
dedicated services and 11.2% was from clustered hosting services.
Shared Hosting Services. Shared hosting services are entry level service
plans designed for customers with complex requirements but relatively low
volumes of traffic. We have designed our shared hosting packages to
minimize the cost for customers by providing these services on a server
shared by multiple customers. Our service plans include many standard
features and options for database support, commerce support, media services
and extensive e-mail support.
Dedicated Hosting Services. Dedicated hosting services are designed for
customers with more complex requirements, high traffic volumes and who are
seeking greater control over management of their servers. Our dedicated
service plans provide each customer with its own server. These service
plans offer a number of advantages to our customers in addition to those
received in our shared hosting packages, including:
. improved service reliability and content delivery by limiting each
server to a single developer environment;
. greater flexibility in configuration of the specific server
environment; and
. complete server control by providing customers with console-level
server access.
We offer several dedicated service options that range from entry-level web
servers to high performance, multi-processor database servers.
Clustered Hosting Services. For customers that deploy e-commerce enabled
or other business-critical applications or expect very high user traffic
volumes, we have developed a family of clustered hosting services,
including geographically dispersed clusters. Our clustered service plans
distribute content and functionality across multiple servers, which allows
our customers' applications to scale beyond a single server. Additionally,
our clustering services are designed to allow our customers' business-
critical applications to continue operating in the event a server fails.
These services are designed to provide significantly enhanced system
performance and system reliability for application and database services.
These services require specialized hardware and software which we include
in our pre-packaged solutions. We believe that customers will increasingly
require the type of services supported by clustered solutions and therefore
our sales volumes in this category will increase.
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Pricing
We bill for our services on a monthly basis and for a one-time initial setup
fee at the time the server is configured. In addition to our pre-packaged
product offerings, we also work with customers to develop custom configurations
that are based on our standard hosting architecture. Our product offerings and
prices for new installations as of October 1, 1999 are generally described in
the table below.
<TABLE>
<CAPTION>
Service Type Service Level Set-up Fee Monthly Fee
------------ ------------- ---------- -----------
<S> <C> <C> <C>
Shared Hosting Services Shared Level 1.............. $ 100 $ 100
Shared Level 2.............. 150 200
Shared Level 3.............. 200 400
Dedicated Hosting Services Enterprise Dedicated I...... 2,000 1,500
Enterprise Dedicated II..... 2,500 2,000
Enterprise Dedicated III.... 5,000 3,500
Clustered Hosting Services Level I--Configuration 1.... 5,000 4,900
Configuration 2.......... 7,500 6,800
Configuration 3.......... 10,000 8,100
Level II--Configuration 1... 15,000 9,800
Configuration 2......... 20,000 12,800
Configuration 3......... 22,500 17,000
</TABLE>
To further simplify the purchasing process for our customers, all service
plans, including features and pricing, are described on our web site. This
enables our customers to evaluate the various service offerings before
contacting one of our sales representatives, which in turn can shorten our
selling cycle, reduce our customer acquisition costs and ultimately enhance
customer satisfaction by making readily available the necessary technical and
business information for choosing the appropriate service level. We intend to
continually upgrade our web site to provide more product information and
enhanced purchasing capabilities for our existing and prospective customers.
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Customers
We provide hosting services to end user businesses, web site development
firms and other organizations. Our customers are located primarily in North
America and Europe. As of August 31, 1999, we hosted over 1,600 web sites for
more than 800 customers ranging from small- and medium-sized businesses to
Fortune 500 companies. Our top customers based on revenue in fiscal 1999
include:
<TABLE>
<S> <C>
</TABLE>
Executive Software Crazy Protocol Communications
First USA Bank DSS Research
Blue Streak.com Financial Profiles, Inc.
Silicon Channels Corporation Headliner Entertainment Group
Honeywell Inc. Delta-V
Telezoo.com Winsoft Corporation
Microsoft Webidia Design, Inc.
Secure Link, Inc. PrimaPath
Ericsson Inc. Kinetic Corporation
The Financial Ad Trader Third Coast Media
The Trane Company Esmerk Limited
Palo Alto Software, Inc. Kidspeace Corporation
Dynamic Net, Inc. Classic Car Source, Inc.
Web for Success I2 Technologies
Tudor Publishing Company CartoonBank
Key Relationships
Level 3
We entered into a five-year relationship with Level 3 in July 1999 and are
currently Level 3's only preferred provider of advanced hosting services for
the Microsoft platform. Our strategic relationship with Level 3 allows us to
leverage our advanced hosting and managed application services with their sales
force and U.S. data center infrastructure. Level 3 provides us with segregated
rack space capacity and environment controls for up to 6,000 servers in its
Dallas gateway and access to the 17 existing and all future U.S. Level 3
gateways. In addition, Level 3 will provide personnel at these data centers to
install equipment and assist with support as necessary for us to deliver
service in these facilities. This reduces the number of implementation
engineers we require to deploy and support solutions for our customers in these
locations. We believe that these benefits, coupled with geographic and network
proximity to our customers, will become a marketing and technological advantage
in the immediate future. We have also agreed that if Level 3 is capable of
providing the services we request, and if we determine that those services meet
our then-current performance criteria, we will purchase 75% of these services
from Level 3 from July 2000 through December 2000 and 90% of these services
from Level 3 from January 2001 through the remainder of our agreement with
Level 3. We route the network traffic of our customers through multiple
backbone providers to increase network performance. To enable us to do this, we
obtain Internet connectivity through a number of providers, and Level 3 may not
be able to provide all of the connectivity services that we require. As a
result, we may purchase less than the applicable percentages of these services
from Level 3. We have also made a purchase commitment to Level 3 of $800,000 in
the first year, $1.2 million in the second year, $1.6 million in the third
year, $2.4 million in the fourth year and $4.0 million in the fifth year for a
total minimum commitment for the term of the contract of $10.0 million. The
prices which we will pay Level 3 for the services over the term of our
agreement are based upon Level 3's then-current prices to other companies
purchasing similar quantities. Level 3 can terminate this agreement for a
default by us which is not cured within 30 days of notice or a change of
control that results in Data Return being owned by a competitor of Level 3.
We will train Level 3's sales personnel to identify potential customers for
our advanced hosting services and refer them to us. Level 3 will be paid a
commission equal to 30% of the first month's monthly recurring revenue on all
leads that become our customers. As we train Level 3's sales force at a
particular data center, we intend to deploy our own outside sales force in that
region to work with Level 3 to develop and close joint
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sales leads. To date, our growth has been driven primarily by our inside sales
force. We believe that the lead generation of Level 3's sales force, combined
with our future outside sales force, positions us to substantially increase our
rate of growth. Level 3 has acquired shares of our common stock in exchange for
$5.0 million in credit for future bandwidth purchases in excess of our
quarterly purchase commitment.
Compaq
We use Compaq servers exclusively to provide the hardware platform for our
advanced hosting services. Our relationship provides direct contact with
product development engineers and marketing management at multiple levels
within the Compaq organization. We recently entered into a three-year agreement
with Compaq under which we will purchase from Compaq the lesser of 2,000
servers or the number of servers reasonably necessary to adequately operate our
business consistent with our business plan. We are required to purchase these
servers only if Compaq provides financing for the servers on competitive terms,
if the price, performance and quality of the Compaq servers is reasonably
satisfactory to us and if Compaq commits to deliver these servers on the
schedule we request. Also as part of our strategic relationship with Compaq,
Compaq has agreed to include Data Return in any program under which it approves
for recommendation to its customers a specified group of application service
providers. Although Compaq is not required to develop such a program, it will
include us in any such program that it does establish at the highest level for
which we qualify. Compaq has also purchased $3.0 million of our common stock.
We work collaboratively with the Compaq engineering and product marketing
teams on the Distributed Internet Server Array (DISA) architecture to develop
enhanced offerings for multiple server configurations (clustered web and SQL
server solutions). We are also currently working on a Compaq co-funded print
campaign featuring our use of Compaq servers in a clustered environment. We are
also a Compaq Solutions Alliance SELECT Partner. The SELECT Partner designation
is the highest attainable level in this program and provides us with a wide
variety of information, tools, services and networking opportunities.
Microsoft
We recently entered into a licensing agreement with Microsoft. Under this
agreement we will license proprietary installation tools for third-party hosted
applications to Microsoft. We will also train Microsoft's employees and
customers in the use of those tools. Microsoft will, in return, provide us with
technical consulting and writing services during the development of the tools.
Microsoft has also agreed to co-market the tools with us in a manner that is
mutually acceptable to both parties. Microsoft has also agreed to purchase $5.0
million of our common stock.
We are recognized by Microsoft as one of the leading providers of advanced
hosting services on the Microsoft platform. We have received the Microsoft
Advanced Hosting Partner and Application Service Provider Partner designations
and have achieved a high level of integration at all levels within Microsoft.
We believe that one of our key competitive advantages is the level of customer
service and support that we can provide as a result of this enhanced
relationship. However, we do not have an agreement with Microsoft to provide
this level of support and integration or to continue to confer these
certifications and designations. Microsoft could discontinue its relationship
with us at any time. Our expertise in deploying and managing the Microsoft
Internet platform is also an important factor in our business relationship with
Microsoft. Our status with Microsoft provides us with the following:
. access to a local, field-based Microsoft representative;
. a corporate-based business development manager;
. designated points of contact in the customer units and product groups;
. escalated technical support;
. advance product notification;
. advance product releases;
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. participation in beta programs;
. joint marketing programs; and
. leads and new business development opportunities generated by Microsoft.
Following are some of the Microsoft designations, certifications and related
agreements that Data Return currently has:
. We are one of eight Microsoft Advanced Hosting Partners. This status
signifies our ability to provide database integration, full back-end
transaction processing and advanced content management.
. We are one of ten designated Microsoft Application Service Providers,
defined by Microsoft as being able to provide superior infrastructure,
service and performance for hosted applications on the Microsoft
platform.
. We are one of 11 Microsoft Commerce Hosting Services providers. This
signifies our ability to provide customers with an advanced e-commerce
hosting infrastructure.
. We are a Microsoft Windows Media Service Provider. This status signifies
our ability to deploy and maintain audio and video streaming media
solutions.
. We participate in rapid deployment programs for various Microsoft
products. As such, we are responsible for providing feedback on
Microsoft products in the advanced hosting and managed application
markets prior to release, and by doing so we are able to provide
services and gain expertise on these products before the general market.
. We are a Microsoft Certified Solution Provider at the Partner level. The
Partner designation is the highest attainable level in this program. We
believe this designation provides us with preferred access to a broad
range of Microsoft resources and is a distinguishing factor for
development firms and systems integrators looking to identify sources
for advanced hosting.
. We have acquired Microsoft Premier Support, which provides the most
direct, fastest and highest formal escalation path for resolution of
product-related problems within Microsoft, including a technical account
manager at Microsoft who is responsible for ensuring that Microsoft
product support provides timely and accurate resolutions to problems we
or our customers may encounter.
Alteon
Alteon manufactures state-of-the-art switching products capable of supporting
millions of concurrent connections with load balancing and fail-over for
clustered server configurations. We believe we were the first commercial
installation of the Alteon server switching platform for the Microsoft Internet
platform. Our Chairman and Chief Executive Officer, Sunny Vanderbeck, is an
advisory board member of Alteon. The advisory board assists management in
product, marketing and distribution planning. Additionally, we are using the
Alteon WebOS application programming interface to enhance clustered solutions.
These enhanced clustered solutions deliver real-time performance data to the
hardware platforms, providing increased functionality, reliability and
scalability in high-volume and complex deployments.
Marketing and Sales
Our marketing strategy has initially been focused on our product packaging.
We have made an extensive effort to package our hosting services in
standardized, definable product offerings that are competitive in terms of
features, functions and prices. We have made our services easy to purchase by
presenting these packages in detail on our web site, including all set-up and
monthly charges. We believe that this packaging and standardization shortens
our selling cycle and enhances customer satisfaction by making available to
decision makers the technical and business information necessary to choose a
service level.
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We intend to substantially increase our marketing expenditures to help build
awareness of our brand and to further generate sales. We have a customer
tracking system that provides us with timely reports as to which marketing
activities are producing the greatest return, which enables us to better
allocate our marketing resources. We currently have a diversified marketing
effort for demand generation. Primarily we market through advertising in
magazines targeted at developers and information service professionals. We also
advertise online, through direct mail and at trade shows and conferences.
Additionally, many web sites of our customers and partners have direct links to
our web site. We intend to increase our spending in all of these areas, and in
particular focus on direct mail because we believe it will significantly help
our outside sales force in their business generation efforts.
Our sales have predominantly been generated by developer and customer
referrals. We believe that a distinguishing characteristic of our company is
that we do not provide application development services and, therefore, do not
compete with any of our development focused customers. We believe that as more
development companies make the decision to outsource the hosting of their
clients' applications, Data Return will be an attractive alternative to hosting
providers that also offer development services.
Our inside sales force responds to inquiries, which typically have been
generated by advertising and referrals from customers, strategic partners and
developers. We intend to significantly increase our inside sales force during
the second half of 1999 to respond to the inquiries that we believe will be
generated by our increased marketing efforts. Concurrently, we are developing
an outside sales force to proactively seek potential customers. Each outside
salesperson's territory will include one or more Level 3 U.S. gateways. The
outside sales force will work in conjunction with Level 3's sales force to
provide training and ongoing sales support. Both our inside and outside sales
force will be responsible for following up on leads generated by Level 3's
sales force. We intend to continue to add outside salespeople as Level 3 builds
out its U.S. gateways.
We have recently implemented a sales incentive program that we believe has
increased sales productivity and enhanced pre-sales customer service. Our sales
force is paid a commission for each sale that they complete based upon the
customer's first month of recurring revenue. To encourage our sales force to
pursue long-term revenue generating business, we adjust the commission paid to
the sales person if the customer does not use our service for a minimum period
of time. In addition to paying commissions to our inside and outside sales
personnel, we will pay commissions to Level 3's sales force for all sales based
on leads they refer to us. We believe this commission structure will create a
high level of cooperation in the field between Data Return's and Level 3's
sales forces.
Customer Support
We believe a critical element of our customer service is providing a high
level of technical expertise within both our customer support and systems
organizations. Our technical support engineers are expected to be proficient in
at least:
. one major network operating system;
. two applications from our supported product list; and
. either one programming language or one database application.
Further, we require all of our support and systems technicians to become
Microsoft Certified Systems Engineers or Microsoft Certified Professionals.
All systems are monitored and maintained on a 24 hours a day, seven days a
week, or 24x7, basis. We provide standard customer support from 9AM-8PM Central
time Monday through Friday and 12PM-5PM Saturday via both telephone and
electronic request forms. We provide business-critical customer support on a
24x7 basis. We strive to respond within 15 minutes or less for business-
critical problems. Response times for all severity levels are published on our
support web site and are prioritized according to our customers' assessment of
severity levels.
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Our customer care system provides support personnel with timely online
information regarding the status of all set-up and support incidents.
Additionally, support personnel have access to information regarding the sales
history and current sales activities for each customer account. This
integration of support and sales systems enables us to allocate resources with
a full knowledge of both new business opportunities and any customer support
issues. We believe that this system will support substantially greater
economies of scale and quality of service.
Infrastructure
We use a platform which is comprised mostly of Internet-related software
products running on Microsoft's Windows NT operating system and Compaq servers.
We use Alteon clustering switches along with Cisco switches and routers to
connect our servers to the Internet. Using our standard platform, we have
gained efficiency and effectiveness in terms of training, documentation, spare
parts, overall support and system performance. We also maintain some legacy
hosting services running on the Unix platform. In addition, our customers
benefit from our ability to support application level services such as SQL
Server, Active Server Pages and Site Server Commerce Edition. Specifically, our
infrastructure consists of the following key elements:
. highly secure, carrier-class data centers;
. a scalable server platform;
. automated deployment processes;
. comprehensive and centralized monitoring and systems management;
. fault-tolerant clustered servers; and
. an advanced, high performance network.
Highly Secure, Carrier-Class Data Centers
Our first data center is located in a facility in downtown Fort Worth. The
facility is a Bellcore standard Class A facility, which is an industry term
indicating that the facility has redundant systems to prevent down-time caused
by system failures at the facility. Security for the data center is provided
with a 24x7 armed guard and entry restriction via card key access. Power to the
building is provided by redundant connections from separate transformers. The
data center is also equipped with FM200 gas fire suppressant systems,
environmental control systems and redundant networking hardware.
In January 1999, we established our second data center within Level 3's
Dallas gateway. The Level 3 facility, which is also a Bellcore standard Class A
facility, provides us with environmental resources similar to the Fort Worth
data center, but on a much larger scale. In addition to providing greater
capacity for server racks and associated environmental support, the Level 3
facility provides us with access to Level 3's worldwide IP network. The Level 3
relationship provides us with access to the 17 current and all future gateways
in the U.S. This provides us with the ability to expand not only bandwidth
resources, but also the ability to open new data centers in major cities across
the U.S. on relatively short notice and with relatively little investment by
us. All of Level 3's highly secure, carrier-class facilities are designed for
scalability and include advanced security features that may include biometric
palm readers, video monitoring and card key access, and fault-tolerant power
systems, such as multiple power grids, facilities-based AC/DC battery back-up
and diesel generators. We intend to offer services from Level 3's London,
England and San Francisco data centers by the end of 1999.
A Scalable Server Platform
Our standard platform for service delivery uses Compaq servers. These servers
generally run the Windows NT or Windows 2000 operating system, along with
various application software such as Microsoft SQL Server
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or Microsoft Internet Information server. Compaq's Distributed Internet Server
Array (DISA) architecture leverages the clustering and load balancing features
of Windows NT Server, Enterprise Edition with Internet Information Server. This
architecture enables us to support scalable, highly-available Internet-enabled
applications. In addition, our standard hardware configuration allows us to
maintain standby hardware for use in the event of hardware failure. While these
servers use a standard hardware and software platform, we apply our expertise
in their configuration and tuning.
Automated Deployment Processes
We configure and test our hardware and software through the use of both
commercially available and internally built tools. The software installation
process consists of a series of unattended scripts and batch files providing a
fast, consistent and repeatable configuration. As the server is provisioned
with user accounts, web sites and file transfer protocol sites, the automated
script also tests each step to verify that the server is functioning correctly.
We also manually test the installation process to further evaluate the quality
and integrity of the installation.
Comprehensive and Centralized Monitoring and Systems Management
We combine commercial tools and internally built applications to provide
comprehensive and centralized monitoring, analysis and reporting of
application, service and hardware performance on a 24x7 basis. Proactive
hardware and application monitoring maximizes service performance levels and
reliability. Systems administration and management is remotely performed using
an interface which encrypts all client-server communication with a 64-bit
encryption algorithm for added security. Additionally, we offer a customer
control panel, which provides a standard user interface that allows them to
perform the most commonly performed web site administrative tasks. The customer
control panel also allows the customer to electronically submit support
requests to our service and support group for the more advanced administrative
tasks and support issues. This approach to monitoring and systems management
allows us to use the same methodologies and processes across all of our data
centers regardless of geographic location.
Fault-Tolerant Clusters
We currently offer two levels of clustered solutions: level one clustered
application services and level two clustered application and database services.
Level one clustered solutions utilize products from Alteon to provide high
availability and traffic load balancing for application resources, such as web
servers and application servers. In the event of an application server failure,
all traffic is redirected from the failed server to the remaining available
application servers to protect against service outage. Level two clustered
solutions provide enhanced application availability by adding clustered
database services, which are well suited for the clustering of transactional
data resources including Microsoft SQL Server. These solutions are based on
Fibre Channel storage systems from Compaq and the Microsoft Cluster Service. We
also offer geographically dispersed solutions which allows us to load balance
and fail-over applications between data centers.
Advanced High Performance Network
We have based our network hardware on Cisco and Alteon technologies. Our
highly secure network consists of multiple, diverse connections to the Internet
which currently provide us with local access to seven leading backbone
providers. These multiple connections allow us to increase both performance and
reliability by routing traffic over private connections, bypassing congested
public exchange points such as the Metropolitan Area Exchanges and Network
Access Points. By taking a comprehensive approach to optimizing application
performance, since mid-August we have delivered network performance faster in
the United States on average than the single fastest backbone provider as
measured by Keynote Systems. In addition to increased performance, our network
architecture reduces our dependency on any one network provider,
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increasing network availability for our customers. Further, we have our own IP
addresses, which reduces our dependence on specific network providers or other
third parties. Our network security solutions include firewalls, encryption
techniques, virtual private networks and other security technologies and
techniques. To date in 1999, we are one of the top three issuers of Verisign
certificates, which enable secure e-commerce.
Competition
The markets in which we operate are highly competitive, and competition is
increasing because few apparent substantial barriers to entry exist in the
Internet hosting market. Although it is impossible to quantify our relative
competitive position in our market, many of our competitors have substantially
greater financial, technical and marketing resources, larger customer bases,
longer operating histories, greater name recognition and more established
relationships in the industry than we have. We expect that we will face
competition from existing competitors as well as new market entrants in the
future. The primary competitive factors in our market are:
. technical expertise in developing advanced web hosting solutions;
. quality of service, including network capability, scalability, reliability
and functionality;
. customer service and support;
. variety of services and products offered;
. price;
. brand name recognition;
. Internet system engineering and technical expertise;
. timing of introductions of value-added services and products;
. network security;
. financial resources; and
. conformity with industry standards.
Our current and potential competitors vary by size, product offering and by
geographic region and may elect to partner with each other or with focused
companies like us to deliver service on the Microsoft platform. They include:
. Microsoft advanced hosting providers, such as Digex, MCI WorldCom
(including UUNET), GTE Internetworking and USWeb/CKS Group;
. web and application hosting service providers, such as Interliant,
Navisite and USinternetworking;
. application-specific hosting service providers, such as Critical Path;
. co-location providers, such as AboveNet, Exodus, Digital Island and
Frontier GlobalCenter;
. local, regional and international Internet service providers, such as
AppliedTheory, Concentric, Globix, MindSpring, Verio and PSINet;
. local, regional and international telecommunications companies, such as
AT&T, British Telecommunications, Cable & Wireless, Telecom Italia,
Nippon Telegraph and Telephone, Qwest and the regional Bell operating
companies such as Bell Atlantic and U S WEST;
. systems integrators and large information technology outsourcing
companies, such as IBM, EDS, Oracle, Andersen Consulting,
PricewaterhouseCoopers and others;
. multimedia hosting companies, such as broadcast.com; and
. other hardware, software and technology companies.
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We believe that our expertise and exclusive focus on the advanced hosting
segment of the Internet services market enables us to differentiate ourselves
from our competitors. We also believe that our expertise and focus on
Microsoft-based Internet technologies, our customer support and our ability to
maintain a service delivery infrastructure that is designed to parallel or
surpass the performance provided by Internet backbone providers and other
telecommunications carriers will further differentiate us from our competitors.
Additionally, our marketing and sales methodologies are focused on enabling
customers to easily select and deploy solutions based on packaged service
offerings, which can shorten our selling cycle, reduce our customer acquisition
costs and ultimately enhance customer satisfaction.
Intellectual Property Rights
We rely on a combination of copyright, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect certain
proprietary rights in our data, applications and services. We are in the
process of filing Federal registrations for the trademark "Data Return," as
well as other service and trademarks which incorporate the Data Return name.
Government Regulation
We are not currently subject to direct federal, state or local government
regulation, other than regulations applicable to businesses generally. There is
currently only a small body of laws and regulations directly applicable to
access to e-commerce on the Internet.
Congress recently enacted the "Digital Millennium Copyright Act," which
became effective in October 1998. The Digital Millennium Copyright Act provides
a limitation on liability of online service providers for copyright
infringement for transmitting, routing or providing connections, transient
storage, caching or storage at the direction of a user, if the service provider
had no knowledge or awareness that the transmitted or stored material was
infringing and meets certain other conditions. Since this law is new and does
not apply outside of the United States, we are unsure of how it will be applied
to limit any liability we may face in the future for any possible copyright
infringement or copyright-related issues. This new law also requires service
providers to follow "notice and take-down" procedures and to meet other
conditions in order to be able to take advantage of the limitation on
liability. We have not yet implemented such procedures, met such conditions or
evaluated the cost of complying with them. However, our customers are subject
to an acceptable use policy which prohibits them from transmitting, storing or
distributing material on or through any of our services which, in our sole
judgment is (1) in violation of any United States local, state or federal law
or regulation, (2) fraudulent online marketing or sales practices or (3)
fraudulent customer information, including identification and payment
information. Although this policy is designed to promote the security,
reliability and privacy of our systems and network, we cannot be certain that
our policy will accomplish this goal or effectively limit our liability.
Despite enactment of the Digital Millennium Copyright Act, the law relating
to the liability of online services companies and Internet access providers for
information carried on or disseminated through their networks remains largely
unsettled. It is possible claims could be made against online services
companies and Internet access providers under both United States and foreign
law for defamation, obscenity, negligence, copyright or trademark infringement,
or other theories based on the nature and content of the materials disseminated
through their networks. Several private lawsuits seeking to impose such
liability upon online services companies and Internet access providers are
currently pending.
Although sections of the Communications Decency Act of 1996 that proposed to
impose criminal penalties on anyone distributing indecent material to minors
over the Internet were held to be unconstitutional by the U.S. Supreme Court,
similar laws may be proposed, adopted and upheld. The nature of future
legislation and the manner in which it may be interpreted and enforced cannot
be fully determined and, therefore, legislation similar to the Communications
Decency Act could subject us and/or our customers to potential liability, which
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in turn could harm our business. The adoption of any of these types of laws or
regulations might decrease the growth of the Internet, which in turn could
decrease the demand for our services or increase our cost of doing business or
in some other manner harm our business.
Due to the increasing popularity and use of the Internet, it is likely that a
number of additional laws and regulations may be adopted at the federal, state
and local levels with respect to the Internet, covering issues, such as user
privacy, freedom of expression, pricing, characteristics and quality of
products and services, taxation, advertising, intellectual property rights,
information security, access fees and the convergence of traditional
telecommunications services with Internet communications. The adoption of any
of these laws or regulations might decrease the growth of the Internet, which
in turn could decrease the demand for our services or increase the cost of
doing business or in some other manner harm our business, results of operations
or financial condition. In addition, applicability to the Internet of existing
laws governing issues such as property ownership, copyrights and other
intellectual property issues, taxation, libel, obscenity and personal privacy
is uncertain. The vast majority of such laws were adopted prior to the advent
of the Internet and related technologies and, as a result, do not contemplate
or address the unique issues of the Internet and related technologies.
Employees
As of September 30, 1999, we had 124 employees. None of our employees are
covered by collective bargaining agreements. We believe that our relations with
our employees are good.
Facilities
Our corporate headquarters are currently located in Irving, Texas and consist
of approximately 23,000 square feet of office space that is leased until
October 31, 2001. We also have an office in Arlington, Texas, consisting of
5,000 square feet of office space that is leased until March 31, 2000.
Legal Proceedings
We do not believe that we are subject to any pending or threatened legal
proceedings.
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MANAGEMENT
Executive Officers and Directors
The following sets forth, as of August 31, 1999, the name, age and position
of our executive officers and directors and nominees to our board:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Sunny C. Vanderbeck..................... 26 Chairman of the Board and Chief Executive
Officer
Michelle R. Chambers.................... 31 President, Chief Operating Officer and
Director
Michael S. Shiff........................ 45 Senior Vice President - Marketing, Sales
and Business Development
Mark A. Bowles.......................... 38 Vice President - Advanced Technology
Deployment
Scott W. Brewer......................... 35 Vice President - Technical Services
Kenneth S. Garber....................... 46 Vice President - Sales
Jason A. Lochhead....................... 27 Vice President - Research and Product
Development and Director
J. Todd Steitle......................... 34 Vice President - Marketing
Stuart A. Walker........................ 34 Vice President - Chief Financial Officer,
Treasurer and Secretary
Nathan Landow........................... 67 Director
T. Geir Ramleth......................... 40 Nominee for Director
</TABLE>
Sunny C. Vanderbeck, a co-founder of our company, has served as Chairman and
Chief Executive Officer since our incorporation in August 1997. Before founding
Data Return, from July 1996 to January 1997, Mr. Vanderbeck was a technical
product manager and Lead Internet/Intranet Consultant for Software Spectrum, a
reseller of Microsoft products. From May 1995 to June 1996, while employed by
Software Spectrum, Mr. Vanderbeck served as an independent consultant to
Microsoft where he served as a team leader for Microsoft Messaging products and
as a product support engineer. From July 1994 to May 1995, Mr. Vanderbeck was
an independent consultant. From 1990 to 1994, Mr. Vanderbeck served as a
Section Leader in the 2nd Ranger Battalion, a U.S. Army Special Operations
unit. Mr. Vanderbeck is a regional finalist for the Ernst & Young Entrepreneur
of the Year award and is a Microsoft Certified Systems Engineer.
Michelle R. Chambers, a co-founder of our company, has served as President
and a director since our inception and was appointed Chief Operating Officer in
April 1998. Before founding Data Return, from October 1996 to March 1997, Ms.
Chambers was a Consultant at Microsoft, where she was a member of the Microsoft
Consulting team responsible for the design and development of the migration
plan for Audionet's (now broadcast.com) platform conversion from Unix to
Windows NT. Prior thereto, Ms. Chambers served as a product support engineer at
Microsoft from February 1995 to October 1996, and was the Corporate E-mail
Coordinator for Arco Exploration and Production Technology from August 1993 to
February 1995. Ms. Chambers is a Microsoft Certified Systems Engineer. Ms.
Chambers graduated magna cum laude from the University of North Texas with a
Bachelor in Business Administration in Business Computer Information Systems.
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Michael S. Shiff has served as Senior Vice President - Marketing, Sales and
Business Development since June 1999 and previously served as Vice President -
Marketing, Sales and Business Development since March 1998. Mr. Shiff served as
President of MicroVision Medical Systems, a manufacturer of medical imaging
systems, from April 1996 to December 1996. From April 1993 to November 1995,
Mr. Shiff was Vice President of Sales for Kodak Health Imaging Systems, a
manufacturer of medical imaging systems. He also served as Vice President of
Marketing and Sales for Vortech Data, a manufacturer of medical imaging
systems, from March 1989 until Vortech's acquisition by Eastman Kodak in March
1993. Prior thereto, Mr. Shiff was Director of Strategic Sales Development for
Hughes Network Systems, a manufacturer of telecommunications systems, and was
Domestic Marketing Manager for the Satellite Communications Group of M/A-COM
Telecommunications, a manufacturer of telecommunications systems, which was
acquired by Hughes Aircraft. Mr. Shiff graduated with distinction from the
University of Wisconsin with a Bachelor of Science in Education.
Mark A. Bowles has served as Vice President - Advanced Technology Deployment
since June 1999. For the period from March 1998 to May 1999, Mr. Bowles served
as our Director of Service and Support and Executive Director of Technical
Services. Prior to joining Data Return, from February 1997 to March 1998, Mr.
Bowles was a manager of the Advanced Technologies Group at Arthur Andersen LLP,
a public accounting firm. Mr. Bowles also served as a Project Manager at
Interface Teknologies, a systems integration firm, from April 1995 through
February 1997. Mr. Bowles graduated from the University of Texas at Arlington
with a Bachelor of Business Administration.
Scott W. Brewer has served as Vice President - Technical Services since June
1999. Before joining Data Return, Mr. Brewer was with CompuCom Systems, a
technology services company, where he served as Director, Professional Services
from October 1998 to April 1999, General Manager of Houston Sales from May 1998
through October 1998, and Manager, Technical Services, Dallas Sales from
October 1997 through May 1998. Mr. Brewer also served as Manager, Systems
Engineering, Dallas Sales from April 1996 to October 1997 and Consulting
Systems Engineer, Dallas Sales from January 1991 to April 1996 at CompuCom
Systems.
Kenneth S. Garber has served as Vice President - Sales since June 1999. From
March 1996 to May 1999, Mr. Garber was Vice President of Sales and Business
Development for Chroma Vision Medical Systems, Inc., a manufacturer of medical
imaging systems. Prior to that, Mr. Garber served as Vice President and General
Manager of the Imagelink Business Unit for Kodak Health Imaging Systems from
1994 to March 1996. Previously, Mr. Garber held various marketing and sales
positions with Vortech Data, Hughes Network Systems, Satellite Business Systems
and Federal Data Corporation. Mr. Garber graduated from George Washington
University with a Bachelor of Science in Environmental Science.
Jason A. Lochhead, a co-founder of our company, has served as Vice President
- - Research and Product Development and as a director since our inception. From
September 1996 until August 1997, Mr. Lochhead was an independent consultant.
Previously, from September 1995 to September 1996, while employed by Software
Spectrum, Mr. Lochhead served as an independent consultant to Microsoft where
he served as a product support engineer for Microsoft Mail and Microsoft
Exchange. While at Software Spectrum, Mr. Lochhead also served as the Microsoft
Mail Gateway team lead for the period from March 1996 to September 1996. From
July 1993 to September 1995, Mr. Lochhead was a System Administrator at Hughes
Training, a division of Hughes Aircraft. Mr. Lochhead is a Microsoft Certified
Systems Engineer.
J. Todd Steitle has served as Vice President - Marketing since June 1999.
Previously, he served as our Director of Marketing from May 1998 to June 1999.
Before joining Data Return, Mr. Steitle was a sales representative for the
Tools Division of Sybase Corporation, formerly Powersoft Corporation, a
software company, from May 1996 to May 1998. From September 1994 to May 1996,
Mr. Steitle served as Manager of Business Development for Kodak Health Imaging
Systems. Previously, Mr. Steitle held various marketing and sales positions for
Apple Computer Corporation. Mr. Steitle graduated from the University of Texas
in Austin with a Bachelor of Business Administration in Marketing.
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Stuart A. Walker has served as our Chief Financial Officer since March 1999
and as Vice President - Chief Financial Officer, Treasurer and Secretary since
June 1999. Prior to joining Data Return, Mr. Walker was a consultant with
Eubank, Wofford and Nichols, LLP, a public accounting firm, from June 1998. Mr.
Walker served as Vice President and Chief Financial Officer of Aviation Group,
Inc., an aviation services company, from September 1997 to April 1998. He
served as Corporate Controller of Precept Business Products, Inc., a business
products distribution company, from August 1996 to August 1997. He was Vice
President Finance and Controller of DirectNet Corporation, an educational
technology company, from March 1995 to August 1996. Mr. Walker served in
various capacities at Price Waterhouse LLP in the audit, bankruptcy, consulting
and litigation support areas from September 1988 to March 1995. Mr. Walker is a
Certified Public Accountant and graduate from California Polytechnic State
University, San Luis Obispo with a Bachelor of Science in Business
Administration.
Nathan Landow has served as one of our directors since April 1998. Mr. Landow
has been President of Landow Company, a real estate development company, since
1959.
T. Geir Ramleth has agreed to serve as a director of our company upon
completion of this offering. Mr. Ramleth is currently a private investor.
Mr. Ramleth served as the Chief Executive Officer and a director of ZeroDotNet,
Inc., a private equity firm, from April 1999 to August 1999. Mr. Ramleth was
the President and Chief Executive Officer of Genuity, Inc., an Internet service
provider, from December 1995 to November 1998. Prior to that, Mr. Ramleth was
the Manager of Commercial Systems at Bechtel Group, Inc., an engineering firm,
from February 1995 to December 1995, where he was responsible for consolidating
all commercial systems activities. From February 1993 to February 1995, Mr.
Ramleth was the Practice Director at Oracle Corporation, a software company.
Since January 1998, Mr. Ramleth has served as director at UWI.com.
Director Compensation
Our directors receive no remuneration for serving on our board of directors.
Board Composition
We currently have five authorized directors. In accordance with the terms of
our restated articles of incorporation, the terms of office of the directors
are divided into three classes:
. Class I, whose term will expire at the annual meeting of shareholders to
be held in 2000;
. Class II, whose term will expire at the annual meeting of shareholders
to be held in 2001; and
. Class III, whose term will expire at the annual meeting of shareholders
to be held in 2002.
Currently, the Class I directors are Jason A. Lochhead and Nathan Landow, the
Class II director is Michelle R. Chambers and the Class III director is Sunny
C. Vanderbeck. T. Geir Ramleth will serve as a Class II director upon
completion of this offering. As part of an agreement with Level 3, they are
entitled to nominate one of their employees to serve on our board of directors.
Mr. Vanderbeck, Ms. Chambers and Mr. Lochhead have agreed to vote for Level 3's
nominee. This agreement terminates upon a public offering of our common stock.
Level 3 has not exercised its right to nominate a person to serve on our board
of directors. At each annual meeting of shareholders after the initial
classification or special meeting in lieu thereof, the successors to directors
whose terms will then expire will be elected to serve from the time of election
and qualification until the third annual meeting following election or special
meeting held in lieu thereof. The authorized number of directors may be changed
only by resolution of the board of directors or a super-majority vote of the
shareholders. Any additional directorships resulting from an increase in the
number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one third of the directors. This
classification of the board of directors may have the effect of delaying or
preventing changes in control or management of Data Return.
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Board Committees
Within 90 days of the closing of this offering, the board will create an
audit committee that will consist of two independent directors and Ms.
Chambers. The audit committee will review, act on and report to the board of
directors on various auditing and accounting matters, including the
recommendation of our independent auditors, the scope of the annual audits,
fees to be paid to the independent auditors, the performance of our independent
auditors and our accounting practices.
Within 90 days of the closing of this offering, the board will create a
compensation committee that will consist of two independent directors and Ms.
Chambers. The compensation committee will determine the salaries and benefits
for our employees, consultants, directors and other individuals compensated by
our company. The compensation committee will also administer our stock option
plans, including determining the stock option grants for our employees,
consultants, directors and other individuals.
Summary Compensation Table
The following table sets forth the total compensation of our Chief Executive
Officer and each other executive officer whose total salary and bonus for
fiscal 1999 exceeded $100,000 (each a named executive officer, and
collectively, the named executive officers).
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
--------------------------- ------------
Other Shares
Fiscal Annual Underlying
Name and Principal Position Year Salary Bonus Compensation Options
- --------------------------- ------ ------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Sunny C. Vanderbeck............ 1999 $95,000 $5,000 -- --
Chairman and Chief Executive
Officer
Michelle R. Chambers........... 1999 95,000 5,000 -- --
President and Chief Operating
Officer
Michael S. Shiff............... 1999 150,000 8,610 $40,000(1) 3,308,700
Senior Vice President -
Marketing, Sales and
Business Development
</TABLE>
- --------
(1) Other annual compensation for Mr. Shiff consists of deferred salary.
Fiscal 1999 Exercises and Year-End Option Values
The following table sets forth information concerning the value realized upon
exercise of options during fiscal 1999 and the number and value of unexercised
options held by each of the named executive officers at March 31, 1999. The
values set forth in the table have been calculated assuming an initial public
offering price of $11.00 per share, less the per share exercise price,
multiplied by the number of shares underlying the option.
<TABLE>
<CAPTION>
Value of Unexercised
Number of In-the-Money
Shares Unexercised Options Options at
Acquired at March 31, 1999 March 31, 1999
on Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sunny C. Vanderbeck..... -- -- -- -- -- --
Michelle R. Chambers.... -- -- -- -- -- --
Michael S. Shiff........ -- -- 827,175 2,481,525 $9,082,000 $27,248,000
</TABLE>
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Stock Option Plans
1998 Stock Option Plan. Our 1998 Stock Option Plan authorizes the issuance of
up to 3,308,700 shares of our common stock. As of September 1, 1999, we had
granted options to purchase an aggregate of 3,223,696 shares of our common
stock to employees and directors under this plan with a weighted average
exercise price of $0.56 per share. After the completion of this offering, no
further options will be granted under this plan.
The board of directors, or a board committee, has the power to determine the
terms of the options, including the exercise price of the options, the number
of shares subject to each option, the exercisability thereof, and the form of
consideration payable on such exercise, provided that the exercise price must
be at least 100% of fair market value. Incentive stock options granted to any
holder of 10% or more of the combined voting power of all classes of stock must
have an exercise price of not less than 110% of fair market value and be
exercisable for a term of no more than five years.
1999 Long-Term Incentive Plan. Our 1999 Long-Term Incentive Plan was adopted
by our board of directors and shareholders and became effective in July 1999 as
a successor plan to our 1998 Plan. Up to 3,228,000 shares of common stock may
be issued under the 1999 Plan.
The 1999 Plan provides for the discretionary grant of incentive stock
options, within the meaning of Section 422 of the Internal Revenue Code of
1986, to employees and for the grant of nonstatutory stock options, stock
appreciation rights, performance awards, dividend equivalents, stock payments
and restricted stock to employees and consultants. The 1999 Plan provides that
we cannot issue incentive stock options after June 2009.
The 1999 Plan may be administered by the board or a board committee. The
administrator has the power to determine the terms of the options or other
awards granted, including the exercise price of the options or other awards,
the number of shares subject to each option or other award (up to 269,000
shares per year per participant), the exercisability thereof and the form of
consideration payable upon exercise. In addition, the administrator has the
authority to amend, suspend or terminate the 1999 Plan, provided that no such
action may affect any share of common stock previously issued and sold or any
option previously granted under the 1999 Plan without the consent of the
holder.
The exercise price of all incentive stock options granted under the 1999 Plan
must be at least equal to the fair market value of the common stock on the date
of grant. The exercise price of nonstatutory stock options and other awards
granted under the 1999 Plan is determined by the administrator, but the
exercise price of nonstatutory stock options must be at least 50% of the fair
market value of the common stock on the date of grant. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of our outstanding capital stock, the exercise price of any incentive
stock option granted must be at least equal to 110% of the fair market value on
the grant date and the term of such incentive stock option must not exceed five
years. The term of all other options granted under the 1999 Plan may not exceed
ten years.
Options and other awards granted under the 1999 Plan are generally not
transferable by the optionee. Options granted under the 1999 Plan must
generally be exercised within three months after the end of the optionee's
status as an employee, director or consultant, or within one year after such
optionee's termination by disability or death, respectively, but in no event
later than the expiration of the option's term.
The 1999 Plan provides that in the event of a change of control of Data
Return all options and other awards shall be assumed or a substitute option or
award issued by the acquiring company unless the board determines in its sole
discretion to accelerate vesting or remove any restrictions.
Compensation Committee Interlocks and Insider Participation
We currently have no separate compensation or stock option committee or other
board committee performing equivalent functions to determine compensation for
executive officers. These functions are
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<PAGE>
performed by our board of directors, which includes Mr. Vanderbeck and Ms.
Chambers. Within 90 days after we complete this offering, we intend to
establish a compensation committee that will be composed of Ms. Chambers and
two independent directors. No interlocking relationship exists between any
member of our board or our compensation committee and any member of the board
of directors or compensation committee of any other company, and no such
interlocking relationship has existed in the past.
Employment Agreements
Mr. Vanderbeck, Ms. Chambers, Mr. Bowles, Mr. Brewer, Mr. Lochhead and Mr.
Walker have employment agreements expiring on June 30, 2002. These agreements
provide for:
. set base salaries; and
. incentive bonuses determined by the compensation committee or board of
directors.
Each of these executives has agreed not to compete with us during the term of
the agreement and for two years after resignation or termination for cause or
for one year after a termination without cause or any resignation or
termination following a change of control. The employment agreements define
"cause" as an employee committing an immoral crime, materially breaching the
employment agreement or failing to obey written directions of a senior
corporate executive. A "change of control" will be deemed to occur if a
substantial portion of our ownership changes or the constitution of the board
changes during any 15-month period without the approval of our board of
directors or shareholders. If there has not been a change in control, the
agreements provide for the payment of salary for 12 months after any
termination by Data Return other than for cause. Further, if the termination
follows a change of control and is not voluntary, it will be made in a lump sum
equal to the following items, or in the case of Mr. Vanderbeck and Mr. Chambers
three times the following items:
. the highest annualized base salary earned during the employee's
employment with us;
. two times the employee's largest bonus during the last two years;
. any unpaid expense, reimbursement or accrued but unpaid salary or
benefit; and
. the estimated cost of insurance coverage for the next 12 months.
If the termination is following a change of control and is voluntary, the base
salary component of these severance payments will, in the case of Mr.
Vanderbeck, Ms. Chambers and Mr. Walker, equal 75% and, in the case of Mr.
Bowles, Mr. Brewer and Mr. Lochhead equal 25%, of the highest annualized base
salary earned during the employee's employment with us.
In addition, upon a change of control, all outstanding options of Mr.
Vanderbeck, Ms. Chambers and Mr. Walker will vest. That number of the
outstanding options of Mr. Bowles, Mr. Brewer and Mr. Lochhead that would have
vested upon their next annual vesting date will immediately vest upon a change
of control, and, if they are terminated within 24 months of a change of
control, all of their options will immediately vest.
We also have employment agreements with Mr. Shiff, Mr. Garber and Mr.
Steitle. Mr. Shiff's agreement expires on December 31, 2002. His agreement
provides for a set base salary plus deferred salary and a fixed performance
bonus. Mr. Shiff's agreement provides for the payment of all accrued salary and
bonus upon his termination by Data Return. Upon a change of control or an
initial public offering, all of Mr. Shiff's outstanding options will vest
immediately. Mr. Shiff has agreed not to compete with us during the term of his
agreement and for one year after his termination.
Mr. Garber's agreement expires on March 31, 2004. His agreement provides for
a set base salary plus commissions. Upon a termination of his employment by
Data Return without cause, Mr. Garber is entitled to the payment of salary for
12 months and the right to participate in benefit plans and exercise his
outstanding
53
<PAGE>
options for 12 months. Upon a public offering or change of control, 50% of Mr.
Garber's outstanding unvested options vest immediately and the remaining 50%
vest one year later. If Mr. Garber is terminated following a change of control,
he is entitled to 12 months of salary and all of his outstanding options
immediately vest. Mr Garber has agreed not to compete with us during the term
of the agreement and for one year after resignation or termination for cause.
Mr. Steitle's agreement expired on May 3, 1999 and was automatically renewed
for a one year period. His agreement will continue to be renewed automatically
for one year periods unless terminated by either party upon notice at least 15
days prior to a renewal date. Mr. Steitle is entitled to a set base salary.
Upon termination other than for cause, Mr. Steitle is entitled to his accrued
salary. Upon a change of control, or upon an initial public offering or if Mr.
Vanderbeck and Ms. Chambers cease to be executive officers, all of Mr.
Steitle's options immediately vest. Mr. Steitle has agreed not to compete with
us during the term of his agreement and for one year after his agreement.
54
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial ownership
of our common stock as of September 1, 1999, based on 27,755,958 shares
outstanding on that date, and as adjusted to reflect the issuance of additional
shares of common stock in this offering, by the following individuals or
groups:
. each person or entity who is known by us to own beneficially more than
5% of our common stock;
. each director;
. each named executive officer; and
. all of our executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In general, a person who has voting power
and/or investment power with respect to securities is treated as a beneficial
owner of those securities. Shares subject to options, warrants or rights
currently exercisable or exercisable within 60 days of the date of this
prospectus are considered beneficially owned by the person holding such
options, warrants or rights. Unless indicated otherwise, we believe that the
persons named in the table below have sole voting and investment power with
respect to the shares shown.
Unless otherwise indicated, the address for each 5% shareholder listed in the
table is c/o Data Return Corporation, 222 West Las Colinas Boulevard, Suite
450, Irving, Texas 75039. Except as otherwise indicated, and subject to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock held by
them.
To the extent that any shares are issued upon exercise of options or other
rights to acquire capital stock that are presently outstanding or granted in
the future or reserved for future issuance under stock plans, there will be
further dilution to new public investors.
<TABLE>
<CAPTION>
Percentage of
Number of Ownership
Shares --------------------
Beneficially Before After
Beneficial Owner Owned Offering Offering(1)
- ---------------- ------------ -------- -----------
<S> <C> <C> <C>
Sunny C. Vanderbeck (2)..................... 8,106,315 29.2% 23.5%
Michelle R. Chambers (3).................... 6,562,255 23.6 19.0
Nathan Landow (4)........................... 5,135,210 18.5 14.9
Michael S. Shiff (5)........................ 827,175 2.9 8.8
Jason A. Lochhead........................... 772,030 2.8 2.2
T. Geir Ramleth............................. 96,571 * *
Level 3 Communications, Inc. (6)............ 1,952,940 7.0 5.7
DCR Technology Fund I, Ltd (2).............. 8,106,315 29.2 23.5
OHG Technology, Ltd (3)..................... 6,562,255 23.6 19.0
Nathan Landow Family Limited Partnership
(4)........................................ 4,788,200 17.2 13.9
All directors and executive officers as a
group (11 persons)(5)(7)................... 21,560,081 75.3 64.7
</TABLE>
- --------
* Less than 1%.
(1) Includes an assumed 454,546 shares of common stock to be issued to
Microsoft before the closing of the offering.
(2) Consists of 8,106,315 shares of our common stock owned by DCR Technology
Fund I, Ltd., which is controlled by Mr. Vanderbeck.
(3) Consists of 6,562,255 shares of our common stock owned by OHG Technology,
Ltd., which is controlled by Ms. Chambers.
(4) Includes 4,788,200 shares of our common stock owned by the Nathan Landow
Family Limited Partnership, which is controlled by Mr. Landow and 347,010
shares of our common stock owned by Mr. Landow. The address for the Nathan
Landow Family Limited Partnership is 4710 Bethesda Avenue, Bethesda,
Maryland 20814.
(5) Consists of 827,175 shares of our common stock issuable pursuant to options
that are exercisable within 60 days of September 1, 1999. Assumes
beneficial ownership after the offering of an additional 2,481,525 shares
issuable pursuant to options that will be exercisable upon the completion
of this offering.
(6) The address of Level 3 Communications, Inc. is 3555 Farnam Street, Omaha,
Nebraska 68131.
(7) Includes 887,700 shares of common stock issuable pursuant to options that
are exercisable within 60 days of September 1, 1999. Assumes beneficial
ownership after the offering of an additional 3,718,925 shares issuable
pursuant to options that will be exercisable upon the completion of this
offering.
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<PAGE>
CERTAIN TRANSACTIONS
On February 20, 1998, we issued 2,152,000 shares of our common stock to the
Nathan Landow Family Limited Partnership in exchange for $500,000 cash and a
$500,000 promissory note that has been repaid. On December 24, 1998, we issued
2,690,000 shares of our common stock to the Nathan Landow Family Limited
Partnership for $1,000,000. On April 23, 1999, we issued 351,852 shares of our
common stock to the Nathan Landow Family Limited Partnership for $250,000. Mr.
Landow, one of our directors, controls the Nathan Landow Family Limited
Partnership.
On May 14, 1999, we issued 96,571 shares of our common stock to Mr. Ramleth,
one of our nominees for director, for $125,000.
On May 18, 1999, we issued 1,202,968 shares of our common stock to ZeroDotNet
for $2,000,000. Also, on July 26, 1999 we sold 1,171,764 shares of common stock
to ZeroDotNet, Inc. for a purchase price of $3.0 million.
On July 1, 1999, we entered into a Strategic Marketing and Sales Agreement
with Level 3 that contemplates our committing to purchase $10.0 million of
services over the next five years. As part of this agreement, we have agreed to
train Level 3 sales personnel to identify and refer potential customers to us
and to pay those sales personnel a commission on sales resulting from their
referrals. On July 26 1999, Level 3 acquired 1,952,940 shares of our common
stock in exchange for a $5.0 million credit to be applied to the purchase of
future bandwidth services. Pursuant to our Service Credit Agreement dated July
23, 1999 with Level 3, the credit can be applied to bandwidth services in
excess of the minimum purchase under the Strategic Marketing and Sales
Agreement beginning in 2001. We have a right to repurchase the stock in the
event that Level 3 fails to fulfill its obligations under the Service Credit
Agreement or Level 3 does not honor orders submitted by us under the Strategic
Marketing and Sales Agreement. The number of shares subject to this repurchase
right will be reduced pro rata in each quarter of calendar year 2001 by the
greater of the credit applied or 25% of the total shares. In the event that
Level 3 defaults under the Service Credit Agreement and fails to cure within 30
days, Level 3 is required to pay us $750,000 ratably reduced based on the
amount of bandwidth credit used. Level 3 is entitled to one demand and
unlimited "piggyback" registration rights.
Also on July 23, 1999, Data Return, Sunny C. Vanderbeck, Michelle R. Chambers
and Jason A. Lochhead entered into a Voting Agreement with Level 3. Under that
agreement, Level 3 is entitled to nominate one of its employees to serve on our
board of directors. Mr. Vanderbeck, Ms. Chambers and Mr. Lochhead have agreed
to vote for Level 3's nominee. The Voting Agreement terminates upon the
completion of a public offering of our common stock.
On July 29, 1999, we sold 1,171,764 shares of our common stock to Compaq for
an aggregate purchase price of $3.0 million. Compaq is entitled to one demand
and unlimited "piggyback" registration rights. Compaq also has a right of first
refusal that does not include this offering and that terminates upon completion
of this offering. Also on July 23, 1999, we entered into an ASP and Server
Agreement with Compaq. Under that agreement, we have agreed for a three-year
period to purchase from Compaq the lesser of 2,000 servers or the number of
servers reasonably necessary to adequately operate our business plan. Our
requirement to purchase these servers is contingent upon Compaq providing
financing for the servers on competitive terms, upon the price, performance and
quality of the Compaq servers being reasonably satisfactory to us and upon
Compaq's commitment to deliver these servers on the schedule we request. Under
the ASP and Server Agreement, Compaq has agreed to include Data Return in any
program under which it approves for recommendation to its customers a specified
group of application service providers. Although Compaq is not required to
develop such a program, it will include us in any such program that it does
establish at the highest level for which we qualify.
On September 3, 1999, we agreed to sell $5.0 million of our common stock for
a per share purchase price equal to the lesser of the midpoint of the lowest
filing range and the price to public. Microsoft will also acquire a warrant to
purchase $3.75 million of our common stock at the same per share purchase
price. Based on the
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<PAGE>
current filing range, Microsoft would acquire 454,546 shares under the stock
purchase agreement and the warrant would entitle Microsoft to acquire an
additional 340,910 shares at an exercise price of $11.00 per share. Microsoft
is entitled to one demand and unlimited "piggyback" registration rights.
Microsoft also has a right of first refusal that does not include this offering
and that terminates upon completion of this offering. This transaction will
close the earlier of the day after the pricing of this offering and December
12, 1999. In addition, on September 3, 1999, we entered into a five-year
Development, License and Co-Marketing Agreement with Microsoft to grant a non-
exclusive perpetual license to proprietary installation tools for third-party
hosted applications to Microsoft. We will also train Microsoft's employees and
customers in the use of those tools. Microsoft has the sole right to terminate
the agreement if we fail to deliver the tools on a timely basis or if we fail
to correct any errors in the tools on a timely basis. Also as part of the
agreement, Microsoft will provide up to 100 hours of technical consulting and
writing services during the development of the tools.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summaries highlight the material provisions of our articles of
incorporation and bylaws, as amended. Copies of our articles and bylaws are
available from us upon request. See "Where You Can Find More Information."
Authorized Capital Stock
Our authorized capital stock consists of 100,000,000 shares of common stock,
par value $.001 per share, and 20,000,000 shares of preferred stock, par value
$.001 per share. As of September 1, 1999, there were 27,755,958 shares of
common stock issued and outstanding, and no shares of preferred stock issued
and outstanding. No holder of any shares of our stock has any preemptive or
preferential right to acquire or subscribe for any unissued shares of any class
of stock or any authorized securities convertible into or carrying any right,
option or warrant to subscribe for or acquire shares of any class of stock.
Common Stock
Each share of common stock has identical rights and privileges in every
respect. The holders of our common stock are entitled to vote upon all matters
submitted to a vote of our shareholders and are entitled to one vote for each
share of common stock held.
Subject to the prior rights and preferences, if any, applicable to shares of
preferred stock, the holders of common stock are entitled to receive such
dividends, payable in cash, stock or otherwise, as may be declared by our board
out of any funds legally available for the payment of dividends.
If we voluntarily or involuntarily liquidate, dissolve or wind-up, the
holders of common stock will be entitled to receive after distribution in full
of the preferential amounts, if any, to be distributed to the holders of
preferred stock, all of the remaining assets available for distribution ratably
in proportion to the number of shares of common stock held by them. Holders of
common stock have no preferences or any preemptive, conversion or exchange
rights.
Preferred Stock
Our board is authorized to provide for the issuance of shares of preferred
stock in one or more series, and to fix for each series voting rights, if any,
designations, preferences and relative, participating, optional or other
special rights and such qualifications, limitations or restrictions as provided
in a resolution or resolutions adopted by the board. The board may authorize
the issuance of shares of preferred stock with terms and conditions which could
discourage a takeover or other transaction that holders of some or a majority
of shares of common stock might believe to be in their best interests or in
which holders of common stock might receive a premium for their shares over the
then market price.
Warrants
Upon the earlier of the day after the pricing of this offering and December
12, 1999, Microsoft will have a warrant to purchase $3.75 million of our common
stock at a per share exercise price equal to the lesser of the midpoint of the
lowest filing range and the price to public. This warrant will expire five
years after the date of its issuance. Based on the current filing range, this
warrant would entitle Microsoft to acquire an assumed 340,910 shares at an
exercise price of $11.00 per share.
Shareholder Rights Plan
On September 27, 1999, our board of directors approved a rights agreement
with ChaseMellon Shareholder Services, LLC, as rights agent. This summary is
not a full description of the rights agreement or the terms of the rights. For
a more complete description, you should read the rights agreement, dated as of
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September 27, 1999, between Data Return and ChaseMellon Shareholder Service,
LLC.
Rights and Rights Certificates
On September 27, 1999, our board of directors declared a dividend of one
preferred stock purchase right for each share of common stock. Each right
entitles its registered holder to purchase one one-hundredth of a share of
newly designated series A junior participating preferred stock at a purchase
price of $100.00. The terms of the series A junior participating preferred
stock are contained in a statement of resolution that will be filed with the
Secretary of State of Texas.
The rights are attached to and trade with shares of our common stock.
Currently, the rights are not exercisable and there are no separate
certificates representing the rights. If the rights become exercisable, we will
distribute separate rights certificates. Until that time, as long as the rights
remain outstanding, any transfer of shares of our common stock will also
constitute the transfer of the rights associated with those shares of common
stock. The rights will expire on September 27, 2009, unless we redeem or
exchange the rights before that date.
The rights will become exercisable upon the earlier to occur of:
. the public announcement that a person or group of persons has acquired
15% or more of our common stock, except in connection with an offer
approved by the board of directors; or
. the close of business on the tenth business day, or a later date
determined by the board of directors, after the commencement of, or
announcement of an intention to commence, a tender or exchange offer
that would result in a person or group of persons acquiring 15% or more
of our common stock.
Flip-In Right
If any person or group of persons acquires 15% or more of our common stock,
each holder of a right, except the acquiring person, will have the right to
receive the number of shares of our common stock having a market value of two
times the exercise price of the right. For example, if the rights are
triggered, each holder of a right may purchase shares of our common stock worth
$200.00 for $100.00, which is the exercise price of the rights.
The rights agreement excepts Data Return, any subsidiary of Data Return and
any employee benefit plan of Data Return or any of its subsidiaries from
triggering the flip-in rights. In addition, the rights agreement excepts each
of the three largest shareholders of Data Return from triggering the flip-in
rights, unless he acquires additional shares of our common stock, which causes
his percentage ownership of the then-current outstanding shares of our common
stock to be 5% greater than his percentage ownership on the date of the rights
agreement.
Flip-Over Right
In the event the flip-in rights are triggered and we merge or engage in other
business combinations with an acquiring person or 50% or more of our
consolidated assets or earning power are sold to an acquiring person, then each
holder of a right, except the acquiring person, may purchase, upon the exercise
of each right at the exercise price, that number of shares of common stock of
the acquiring or surviving company with a market value equal to two times the
exercise price.
Exchange of Rights
After a person or group of persons acquires 15% of our common stock but
before that person or group of persons beneficially owns 50% or more of our
common stock, we may, at our option, exchange the rights
59
<PAGE>
at an exchange ratio of one share of common stock per right, adjusted to
reflect any stock split, stock dividend or similar transaction involving either
our common stock or preferred stock. Rights held by an acquiring person are not
entitled to these exchange rights. We may only exchange rights if a majority of
the members of our board of directors authorizes the exchange.
Redemption of Rights
We may redeem the rights at any time before the earlier of the date that the
flip-in rights are triggered and the expiration of the rights. We may also
redeem the rights under some circumstances after the flip-in right has been
triggered but before the expiration of any period during which the flip-in
right may be exercised.
The redemption price is $.001 per right. Upon the effective date of the
redemption of the rights, the rights will terminate and rights holders will
only be entitled to receive the redemption price. We may only redeem rights if
a majority of the members of our board of directors authorizes the redemption.
Amendment of Rights Agreement
Our board of directors may amend the terms of the rights agreement without
the consent of the holders of the rights, except that after a person or group
acquires 15% or more of our common stock, no amendment may adversely affect the
interests of the holders of the rights, other than the acquiring person.
Adjustments
If, at any time before the rights are triggered, we split, subdivide, combine
or consolidate our common stock, or declare a dividend on our common stock
payable in common stock, then, to prevent dilution of the rights, we will
adjust either:
. the number of rights associated with each share of common stock
outstanding; or
. the fraction of a share of preferred stock issuable upon exercise of
each right.
In addition, the purchase price payable and the number of shares of preferred
stock or other securities issuable upon exercise of the rights may be adjusted
to prevent dilution upon:
. stock splits, stock dividends, subdivisions, combinations or
reclassifications of the preferred stock;
. below market issuances of preferred stock or rights or warrants to
subscribe for or convert into preferred stock; or
. distributions to holders of the preferred stock of evidence of
indebtedness or assets (excluding regular quarterly cash dividends or
dividends payable in preferred stock) or of subscription rights or
warrants, with some exceptions.
The series A junior participating preferred stock has been structured so that
each preferred share has dividend, liquidation and voting rights equal to those
of 100 shares of our common stock. Because of this, the value of the one one-
hundredth interest in a preferred share purchasable upon exercise of each right
should approximate the value of one share of common stock. The preferred shares
are not redeemable.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, LLC.
60
<PAGE>
Anti-Takeover Effects of Provisions of our Articles of Incorporation and Texas
Law
Restated Articles of Incorporation and Bylaws
Pursuant to our articles, the board may issue additional shares of common
stock or establish one or more series of preferred stock having the number of
shares, designations, relative voting rights, dividend rates,
liquidation and other rights, preferences and limitations that the board may
decide without shareholder approval. Any additional issuance of common stock or
designation of rights, preferences, privileges and limitations with respect to
preferred stock could have the effect of impeding or discouraging the
acquisition of control of Data Return by means of a merger, tender offer, proxy
contest or otherwise (including a transaction in which the shareholders would
receive a premium over the market price for their shares) and thereby protects
the continuity of our management. Specifically, if in the due exercise of its
fiduciary obligations, the board were to determine that a takeover proposal was
not in our best interest, shares could be issued by the board without
shareholder approval in one or more transactions that might prevent or render
more difficult or costly the completion of the takeover by:
. diluting the voting or other rights of the proposed acquiror or
insurgent shareholder group;
. putting a substantial voting block in institutional or other hands that
might undertake to support the incumbent board; or
. effecting an acquisition that might complicate or preclude the takeover.
Our bylaws provide that the board is divided into three classes of one or two
directors each, with each class elected for three-year terms expiring in
successive years. Our articles also allow the board to set the number of
directors in the bylaws with no minimum or maximum number of directors
required. The articles specifically deny cumulative voting in the election of
directors. This could delay or prevent a tender offer or takeover attempt that
a shareholder might consider to be in his or her best interest, including
attempts that might result in a premium over the market price for the shares
held by the shareholders.
Our articles and bylaws provide that special meetings of shareholders
generally can be called only by the president or the board or by holders of at
least 50% of our voting stock and provide for an advance notice procedure for
the nomination, other than by or at the direction of the board or a committee
of the board, of candidates for election as directors as well as for other
shareholder proposals to be considered at annual meetings of shareholders. In
general, we must receive notice of intent to nominate a director or make a
proposal at such meetings no less than 90 days before the meeting. The notice
must contain certain information concerning the person to be nominated or the
matters to be brought before the meeting and concerning the shareholder
submitting the proposal. These provisions of the bylaws:
. may preclude a nomination for the election of directors or preclude the
conduct of business at a particular meeting if the proper procedures are
not followed; and
. may discourage or deter a third party from conducting a solicitation of
proxies to elect its own directors or otherwise attempting to obtain
control of Data Return, even if the conduct of such solicitation or
attempt might be beneficial to us and our shareholders.
Texas Takeover Statute
Subsequent to this offering, we will be subject to Part Thirteen of the Texas
Business Corporation Act. Subject to certain exceptions, Part Thirteen
prohibits a Texas corporation which is an issuing public corporation from
engaging in any business combination with any affiliated shareholder for a
period of three years following the date that such shareholder became an
affiliated shareholder, unless:
. prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
shareholder becoming an affiliated shareholder; or
61
<PAGE>
. the business combination is approved by at least two-thirds of the
outstanding voting shares that are not beneficially owned by the
affiliated shareholder or an affiliate or associate of the affiliated
shareholder at a meeting of shareholders called not less than six months
after the affiliated shareholder's share acquisition date.
In general, Part Thirteen defines an affiliated shareholder as any entity or
person beneficially owning 20% or more of the outstanding voting stock of the
issuing public corporation and any entity or person affiliated with or
controlling or controlled by such entity or person. Part Thirteen defines a
business combination to include, among other similar types of transactions, any
merger, share exchange or conversion of an issuing public corporation involving
an affiliated shareholder.
Part Thirteen may have the effect of inhibiting a non-negotiated merger or
other business combination involving Data Return.
62
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock.
We cannot predict what effect, if any, market sales of shares or the
availability of shares for sale will have on the market price of our common
stock prevailing from time to time. Nevertheless, sales of substantial amounts
of common stock in the public market, or the perception that such sales could
occur, could adversely affect the market price of the common stock and could
impair our future ability to raise capital through the sale of our equity
securities. Upon the closing of this offering, we will have a total of
34,460,504 shares of common stock outstanding, assuming no exercise of the
underwriters' over-allotment option and no exercise of any other stock options.
Of the outstanding 34,460,504 shares, the 6,250,000 shares being sold in this
offering will be freely tradable, except that any shares held by our
"affiliates" may only be sold in compliance with the limitations described
below. The remaining 28,210,504 shares of common stock will be "restricted
securities" that may be sold in the public market only if they are registered
under the Securities Act or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 promulgated under the Securities Act. Subject to
the lock-up agreements described below and the provisions of Rules 144, 144(k)
and 701, additional shares will become available for sale in the public market
as follows:
<TABLE>
<S> <C>
Number of Shares Date
---------------- ----
Upon the date of this prospectus. These
shares are eligible for resale under Rule
144(k) and are not subject to lock-up
-- agreements.
After 90 days from the date of this
prospectus. These additional shares are
eligible for resale under Rules 144 and 701
-- and are not subject to lock-up agreements.
After 180 days from the date of this
prospectus. These additional shares are
eligible for resale under Rules 144 and 701
20,551,600 upon release of lock-up agreements.
</TABLE>
Rule 144
In general, under Rule 144, a person, or persons whose shares are required to
be aggregated, including an affiliate, who has beneficially owned shares for at
least one year is entitled to sell, within any three-month period commencing 90
days after the date of this prospectus, a number of shares that does not exceed
the greater of (i) 1% of the then-outstanding shares of common stock, which
will be approximately 344,605 shares immediately after this offering, or (ii)
the average weekly trading volume of the common stock during the four calendar
weeks preceding the date on which notice of that sale is filed.
Rule 144(k)
Under Rule 144(k), a person who is not considered an affiliate at any time
during the 90 days preceding a sale and who has beneficially owned the shares
proposed to be sold for at least two years is entitled to sell such shares
under Rule 144(k) without regard to the volume limitations described above.
Stock Options
Following the closing of this offering, we intend to file a registration
statement to register for resale the shares of common stock available for
issuance under outstanding stock options. Accordingly, shares issued under
those options will become eligible for resale in the public market from time to
time, subject to the lock-up agreements described below and, in the case of
affiliates, the volume limitations of Rule 144 described above. As of the date
of this prospectus, options to purchase a total of 6,559,296 shares of common
stock are outstanding.
63
<PAGE>
Lock-Up Agreements
Directors, officers and shareholders holding an aggregate of 28,210,504
shares of common stock have agreed that they will not sell, directly or
indirectly, or otherwise dispose of any shares of common stock for a period of
180 days after the date of this prospectus. However, these restrictions may be
waived in some circumstances. Please refer to our discussion in "Underwriting"
for further discussion of these agreements. We have agreed not to sell,
directly or indirectly, or otherwise dispose of any shares of common stock
during the 180-day period following the date of this prospectus, other than the
grant of options under our stock option plans and the issuance of common stock
pursuant thereto, provided the holders of such shares or options agree to the
180-day lock-up agreement.
64
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement between us
and the underwriters named below, who are represented by Bear, Stearns & Co.
Inc., CIBC World Markets Corp., Thomas Weisel Partners LLC and Wit Capital
Corporation, the underwriters have severally agreed to purchase from us the
following respective numbers of shares of common stock at the public offering
price less the underwriting discounts and commissions set forth on the cover of
this prospectus.
<TABLE>
<CAPTION>
Number of
Underwriter: Shares
------------ ---------
<S> <C>
Bear, Stearns & Co. Inc. ........................................
CIBC World Markets Corp..........................................
Thomas Weisel Partners LLC.......................................
Wit Capital Corporation..........................................
---------
Total.......................................................... 6,250,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
to purchase and accept delivery of the shares included in this offering are
subject to approval of legal matters by their counsel and to customary
conditions, including the effectiveness of the registration statement, the
continuing correctness of our representations to them, the receipt of a
"comfort letter" from our accountants, the listing of the common stock on the
Nasdaq National Market and no occurrence of an event that would have a material
adverse effect on our business. The underwriters are obligated to purchase and
accept delivery of all the shares, other than those covered by the over-
allotment option described below, if they purchase any of the shares.
We have granted to the underwriters an option, exercisable for 30 days from
the date of the underwriting agreement, to purchase up to 937,500 additional
shares at the public offering price less the underwriting fees. The
underwriters may exercise the over-allotment option solely to cover over-
allotments, if any, made in connection with this offering. To the extent that
the underwriters exercise the over-allotment option, each underwriter will
become obligated, subject to conditions, to purchase a number of additional
shares approximately proportionate to that underwriter's initial purchase
commitment.
The underwriters propose to initially offer some of the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the shares to dealers at the public offering price less
a concession not in excess of $ per share. The underwriters may allow, and
the dealers may re-allow, a concession not in excess of $ per share on sales
to other dealers. After the initial offering of the shares to the public, the
representatives of the underwriters may change the public offering price and
the amount of the concessions.
65
<PAGE>
The table below shows the items considered to be underwriting compensation
under the rules of the National Association of Securities Dealers, Inc. 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. The underwriting fee will be approximately percent of the public
offering price. The underwriting fee amounts are shown assuming both no
exercise and full exercise of the underwriters' option to purchase additional
shares of the common stock.
<TABLE>
<CAPTION>
Per Share Total
--------------------- -------------------
No Full No Full
Paid by Data Return Exercise Exercise Exercise Exercise
------------------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Underwriting fee................. $ $ $ $
Deemed compensation.............. 0.22 0.19 1,386,713 1,386,713
---------- ---------- --------- ---------
Total........................... $ $ $ $
========== ========== ========= =========
</TABLE>
Individuals employed by CIBC World Markets Corp. are stockholders of Data
Return. In May 1999, these individuals acquired an aggregate of 210,089 shares
of common stock. The shares of common stock will be subject to an agreement
with the National Association of Securities Dealers that restricts the sale,
transfer, pledge, assignment or hypothecation of these shares for three years
from the effective date of this offering. The deemed compensation included in
the table above was computed based on the difference between the maximum
offering price (assuming an initial public offering price of $12.00 per share)
and the price paid for the shares of common stock held by these individuals as
described in the table below.
<TABLE>
<CAPTION>
Number of Shares Price Per Share Price Difference Deemed Compensation
---------------- --------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Common stock............ 210,089 $0.999 $11.001 $1,386,713
</TABLE>
We estimate that the expenses of this offering, excluding underwriting fees,
will be as indicated in the table below.
<TABLE>
<S> <C>
Registration fee-Securities and Exchange Commission.............. $ 23,978
NASD filing fee.................................................. 9,344
Nasdaq National Market listing fee............................... 90,000
Blue sky fees and expenses....................................... 10,000
Accountants' fees and expenses................................... 200,000
Legal fees and expenses.......................................... 200,000
Printing and engraving expenses.................................. 300,000
Transfer agent and registrar fees................................ 30,000
Miscellaneous.................................................... 136,678
----------
Total............................................................ $1,000,000
==========
</TABLE>
In order 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, thereby creating a short
position in the common stock for their own account. 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 the 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.
66
<PAGE>
At our request, the underwriters have reserved for sale at the initial public
offering price up to 312,500 of the shares, or 5%, of our common stock to be
sold in this offering for sale to our employees and directors, friends and
family of our directors, officers and employees and some persons affiliated
with our vendors and service providers. The number of shares available for sale
to the general public will be reduced to the extent that any reserved shares
are purchased. Any reserved shares not purchased will be offered by the
underwriters on the same basis as the other shares offered hereby.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners has been named as a lead or co-manager on
66 filed public offerings of equity securities, of which 35 have been
completed, and has acted as a syndicate member in an additional 32 public
offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with
us pursuant to the underwriting agreement entered into in connection with this
offering.
A prospectus in electronic format is being made available on a web site
maintained by Wit Capital Corporation. Purchases of shares from Wit Capital are
to be made through an account at Wit Capital in accordance with Wit Capital's
procedures for purchasing new issues. In addition, pursuant to an e-Dealer
Agreement, all registered broker-dealers purchasing shares from Wit Capital in
the offering, the e-Dealers, similarly have agreed to make a prospectus in
electronic format available on the web sites that they maintain and to resell
the shares in compliance with procedures required by Wit Capital.
Wit Capital, a member of the National Association of Securities Dealers,
Inc., will participate in the offering as one of the underwriters. The National
Association of Securities Dealers, Inc. approved the membership of Wit Capital
on September 4, 1997. Since that time, Wit Capital has acted as an underwriter,
e-manager or selected dealer in over 130 public offerings. Except for its
participation as a manager in this offering, Wit Capital has no relationship
with Data Return or any of its founders or significant shareholders.
We have agreed to indemnify the underwriters against liabilities specified in
the underwriting agreement, including civil liabilities under the Securities
Act and liabilities arising from breaches of representations and warranties
contained in the underwriting agreement. These indemnity provisions as they
relate to liabilities under the Securities Act may not be enforced by a court
in some circumstances due to public policy concerns.
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.
We have applied to list our common stock on the Nasdaq National Market under
the symbol "DRTN."
Data Return and our directors, officers and substantially all of our current
shareholders have agreed that we, and they, respectively, will not sell,
directly or indirectly, or otherwise dispose of any shares of common stock for
a period of 180 days from the date of this prospectus. However, these
restrictions may be waived in some circumstances. We have agreed that for a
period of 180 days after the date of this prospectus we will not, without the
prior written consent of Bear, Stearns & Co. Inc., sell or otherwise dispose of
any shares of common stock.
Prior to this offering, there has been no public market for our common stock.
Consequently, the initial public offering price for our common stock will be
determined by negotiation among Data Return and the representatives of the
underwriters. The material factors to be considered in determining the public
offering price will be:
. prevailing market conditions;
. our results of operations in recent periods;
67
<PAGE>
. the present stage of our development;
. the market capitalizations and stages of development of generally
comparably companies; and
. estimates of our business potential.
CIBC World Markets Corp. acted as the placement agent for the sale of shares
of Data Return's common stock in May and July 1999. As compensation for its
services, CIBC World Markets Corp. received a fee.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for Data Return by Thompson & Knight L.L.P., Fort Worth, Texas. Pillsbury
Madison & Sutro LLP, Palo Alto, California, is acting as counsel for the
underwriters in connection with various legal matters relating to the shares of
common stock offered by this prospectus.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at March 31, 1998 and 1999 and for the period from September 22,
1997 (inception) through March 31, 1998 and for fiscal 1999 as set forth in
their report. We have included our financial statements in this prospectus in
reliance on Ernst & Young LLP's report given on their authority as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1, including
exhibits, schedules and amendments, under the Securities Act with respect to
the shares of common stock to be sold in this offering. This prospectus does
not contain all the information set forth in the registration statement. For
further information with respect to us and the shares of common stock to be
sold in this offering, reference is made to the registration statement.
Statements contained in this prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. In each
instance reference is made to the copy of that contract, agreement or other
document filed as an exhibit to the registration statement.
You may read and copy all or any portion of the registration statement or any
other information Data Return files at the SEC's public reference room at 450
Fifth Street, N.W., Washington, D.C. 20549. You can request copies of these
documents, upon payment of a duplicating fee, by writing to the SEC. Please
call the SEC at 1-800-SEC-0330 for further information on the operation of the
public reference rooms. Our SEC filings, including the registration statement,
are also available to you on the SEC's web site, which may be found at
http://www.sec.gov.
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act, and, in accordance with
those requirements, will file periodic reports, proxy statements and other
information with the SEC.
This prospectus is part of the registration statement and does not contain
all of the information included in the registration statement. Whenever a
reference is made in this prospectus to any contract or other document of ours,
the reference may not be complete, and you should refer to the exhibits that
are a part of the registration statement for a copy of the contract or
document.
68
<PAGE>
DATA RETURN CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................ F-2
Balance Sheets as of March 31, 1998 and 1999 and June 30, 1999
(unaudited).............................................................. F-3
Statements of Operations for the period from September 22, 1997
(inception) to March 31, 1998, the Year Ended March 31, 1999 and the
Three Months Ended June 30, 1998 and 1999 (unaudited).................... F-4
Statements of Changes in Shareholders' Equity for the period from
September 22, 1997 (inception)
to March 31, 1998, the Year Ended March 31, 1999 and the Three Months
Ended June 30, 1999 (unaudited).......................................... F-5
Statements of Cash Flows for the period from September 22, 1997
(inception) to March 31, 1998,
the Year Ended March 31, 1999 and the Three Months Ended June 30, 1998
and 1999 (unaudited)..................................................... F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Data Return Corporation
We have audited the accompanying balance sheets of Data Return Corporation as
of March 31, 1998 and 1999, and the related statements of operations, changes
in shareholders' equity and cash flows for the period from September 22, 1997
(inception) to March 31, 1998 and the year ended March 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Data Return Corporation at
March 31, 1998 and 1999, and the results of its operations and its cash flows
from September 22, 1997 (inception) to March 31, 1998 and the year ended March
31, 1999 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Dallas, Texas
May 18, 1999, except for Note 9,
as to which the date is September 27, 1999
F-2
<PAGE>
DATA RETURN CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
------------------------ June 30,
1998 1999 1999
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash.................................. $ 473,800 $ 842,800 $ 3,115,700
Restricted cash....................... -- 125,000 125,000
Accounts receivable, net of allowance
for doubtful accounts of $6,800 and
$20,100 at March 31, 1998 and 1999,
respectively and $69,600 at June 30,
1999................................. 91,100 368,400 796,500
Prepaid and other..................... 24,800 28,200 101,100
----------- ----------- -----------
Total current assets.................... 589,700 1,364,400 4,138,300
Property and equipment, net............. 141,400 826,000 1,433,100
Other assets............................ 3,100 23,300 440,000
----------- ----------- -----------
Total assets............................ $ 734,200 $ 2,213,700 $ 6,011,400
=========== =========== ===========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable...................... $ 108,600 $ 288,900 $ 672,100
Accrued expenses...................... 60,500 132,900 561,200
Deferred revenue...................... 76,900 286,100 516,400
Notes payable and capital lease
obligations--current................. 22,500 95,200 97,400
----------- ----------- -----------
Total current liabilities............... 268,500 803,100 1,847,100
Notes payable and capital lease
obligations--long-term................. 36,200 166,000 140,000
Commitments and contingencies........... -- -- --
Shareholders' equity:
Preferred stock, $.001 par value;
20,000,000 shares authorized, none
issued or outstanding................ -- -- --
Common stock, $.001 par value;
100,000,000 shares authorized;
17,592,600, 20,551,600 and 23,459,490
issued and outstanding at March 31,
1998, 1999 and June 30, 1999
respectively......................... 17,600 20,600 23,500
Additional paid-in capital............ 2,318,100 3,893,100 8,039,300
Receivable for shares issued.......... (500,000) -- --
Deferred stock compensation........... (1,215,700) (1,194,900) (1,929,500)
Accumulated deficit................... (190,500) (1,474,200) (2,109,000)
----------- ----------- -----------
Total shareholders' equity.............. 429,500 1,244,600 4,024,300
----------- ----------- -----------
Total liabilities and shareholders'
equity................................. $ 734,200 $ 2,213,700 $ 6,011,400
=========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-3
<PAGE>
DATA RETURN CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from Three Months
September 22, 1997 Ended June 30,
(inception) to Year Ended ------------------------
March 31, 1998 March 31, 1999 1998 1999
------------------ -------------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues................ $ 336,100 $ 1,889,000 $ 280,800 $ 1,227,500
Costs and expenses:
Cost of revenue....... 198,000 1,105,300 204,900 489,500
General and
administrative....... 230,200 1,063,000 213,200 865,600
Marketing and sales... 39,000 662,800 105,000 384,500
Stock based
compensation......... 61,300 348,800 84,600 139,500
----------- ----------- ----------- -----------
Total costs and
expenses............... 528,500 3,179,900 607,700 1,879,100
----------- ----------- ----------- -----------
Loss from operations.... (192,400) (1,290,900) (326,900) (651,600)
Other income (expense):
Interest income....... 2,200 19,900 6,200 22,900
Interest expense...... (300) (12,700) (1,100) (6,100)
----------- ----------- ----------- -----------
Net loss................ $ (190,500) $(1,283,700) $ (321,800) $ (634,800)
=========== =========== =========== ===========
Net loss per common
share:
Basic and diluted..... $ (0.01) $ (0.07) $ (0.02) $ (0.03)
=========== =========== =========== ===========
Shares used in computing
basic and diluted net
loss per share......... 15,882,326 18,371,300 17,592,600 22,272,804
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE>
DATA RETURN CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Receivable Deferred
------------------ Paid-In for Shares Stock Accumulated Shareholders'
Shares Amount Capital Issued Compensation (Deficit) Equity
---------- ------- ---------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--September 22,
1997 (inception)
Initial issuance of
common stock........... 15,440,600 $15,400 $ 43,300 $ -- $ -- $ -- $ 58,700
Issuance of common
stock.................. 2,152,000 2,200 997,800 (500,000) -- -- 500,000
Deferred compensation
related to stock
options................ -- -- 1,277,000 -- (1,277,000) -- --
Amortization of deferred
stock compensation..... -- -- -- -- 61,300 -- 61,300
Net loss................ -- -- -- -- -- (190,500) (190,500)
---------- ------- ---------- --------- ----------- ----------- -----------
Balance--March 31,
1998................... 17,592,600 17,600 2,318,100 (500,000) (1,215,700) (190,500) 429,500
Issuance of common
stock.................. 2,959,000 3,000 1,247,000 500,000 -- -- 1,750,000
Deferred compensation
related to stock
options................ -- -- 328,000 -- (328,000) -- --
Amortization of deferred
stock compensation..... -- -- -- -- 348,800 -- 348,800
Net loss................ -- -- -- -- -- (1,283,700) (1,283,700)
---------- ------- ---------- --------- ----------- ----------- -----------
Balance--March 31,
1999................... 20,551,600 20,600 3,893,100 -- (1,194,900) (1,474,200) 1,244,600
Issuance of common
stock (unaudited)...... 2,907,890 2,900 3,272,100 -- -- -- 3,275,000
Deferred compensation
related to stock
options (unaudited).... -- -- 874,100 -- (874,100) -- --
Amortization of deferred
stock compensation
(unaudited)............ -- -- -- -- 139,500 -- 139,500
Net loss (unaudited).... -- -- -- -- -- (634,800) (634,800)
---------- ------- ---------- --------- ----------- ----------- -----------
Balance--June 30, 1999
(unaudited)............ 23,459,490 $23,500 $8,039,300 $ -- $(1,929,500) $(2,109,000) $ 4,024,300
========== ======= ========== ========= =========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE>
DATA RETURN CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months
Period from Ended
September 22, 1997 Year Ended June 30,
(inception) to March 31, -----------------------
March 31, 1998 1999 1998 1999
------------------ ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net loss................ $ (190,500) $(1,283,700) $(321,800) $ (634,800)
Adjustments to reconcile
net loss to net cash
flows used in operating
activities:
Depreciation and
amortization......... 12,900 129,500 14,100 89,300
Stock based
compensation
expense.............. 61,300 348,800 84,600 139,500
Provision for doubtful
accounts............. 6,800 40,400 4,100 59,900
Changes in operating
assets and
liabilities:
Accounts receivable.. (71,900) (317,700) (37,300) (488,000)
Prepaid and other.... (16,500) (3,200) 7,100 (73,000)
Other assets......... (3,100) (20,200) (4,400) (416,700)
Accounts payable and
accrued expenses.... 125,500 252,700 (8,800) 811,400
Deferred revenue..... 76,900 209,200 19,400 230,300
---------- ----------- --------- ----------
Net cash provided by
(used in) operating
activities............. 1,400 (644,200) (243,000) (282,100)
Investing activities
Purchases of property
and equipment.......... (55,400) (814,200) (79,300) (696,300)
Purchase of certificate
of deposit restricted
as to use.............. -- (125,000) -- --
---------- ----------- --------- ----------
Net cash used in
investing activities... (55,400) (939,200) (79,300) (696,300)
Financing activities
Proceeds from notes
payable................ 11,700 250,000 3,500 --
Payments on notes
payable and capital
leases................. (200) (47,600) (1,200) (23,700)
Net proceeds from
issuance of common
stock.................. 516,300 1,750,000 500,000 3,275,000
---------- ----------- --------- ----------
Net cash provided by
financing activities... 527,800 1,952,400 502,300 3,251,300
---------- ----------- --------- ----------
Net increase in cash.... 473,800 369,000 180,000 2,272,900
Cash at beginning of the
period................. -- 473,800 473,800 842,800
---------- ----------- --------- ----------
Cash at end of period... $ 473,800 $ 842,800 $ 653,800 $3,115,700
========== =========== ========= ==========
Supplemental disclosure
of cash flows
information
Noncash investing and
financing activities:
Deferred
compensation......... $1,277,000 $ 328,000 $ 52,100 $ 874,100
Equipment acquired
under capital
leases............... 38,900 -- -- --
Shares issued for note
receivable........... 500,000 -- -- --
Net assets contributed
for common stock..... 42,400 -- -- --
Cash paid for
interest............. -- 11,400 1,100 7,400
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE>
DATA RETURN CORPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
(Information as of June 30, 1999 and for the three month
periods ended June 30, 1998 and 1999 is unaudited)
1.Organization, Basis of Presentation and Significant Accounting Policies
Organization
Data Return Corporation (the "Company") was incorporated in August 1997 under
the laws of the State of Texas and commenced operations on September 22, 1997
(inception). The Company primarily provides advanced Microsoft Internet hosting
services to businesses, web site developers and other organizations. The
Company's advanced Microsoft hosting services enable its customers to establish
and maintain e-commerce and other applications through which they can conduct
transactions and manage information on a worldwide basis over the Internet.
The Company's computer equipment, principally servers, is primarily located
in separate facilities owned by two of its vendors. The vendors provide data
center facilities and bandwidth connectivity to the Company on a contractual
basis.
Basis of Presentation
The accompanying financial statements of the Company reflect the operations
and financial position of the Company for the period from its inception on
September 22, 1997 to March 31, 1998 and for fiscal 1999. The Company was
formed when its founders contributed net assets, principally computer
equipment, with an approximate fair market value of $42,000 and cash of
approximately $17,000 as consideration for 15,440,600 shares of the Company's
common stock.
The Company does not expect to generate positive cash flow from its
operations for several years. As a result, the Company has obtained and intends
to continue to seek funding from external sources. In addition, the Company
intends to file a registration statement for the initial public offering of the
Company's common stock. The Company contemplates using the proceeds from the
proposed public offering to fund its operations, fund its capital expenditures,
expand its marketing and sales activities, repay its credit facility and for
working capital and other general corporate purposes, including potential
acquisitions and investments and expenses associated with its anticipated move
to a new headquarters facility. Management of the Company believes that the
proceeds from the private issuance of common stock described in Note 9 as well
as the proceeds received, if any, of the proposed public offering will be
sufficient to meet the Company's projected cash needs for at least the next 12
months.
Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Revenue Recognition
Revenues are primarily derived from monthly recurring hosting service fees
and from set-up fees. Basic services, defined as accounts expected to generate
less than $400 monthly, do not require a contract. More
F-7
<PAGE>
DATA RETURN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the three month
periods ended June 30, 1998 and 1999 is unaudited)
1.Organization, Basis of Presentation and Significant Accounting Policies--
(Continued)
complex services require a contract that is generally six months in length.
These contracts generally are cancelable by either party without penalty upon
30 days' notice. Revenues from these contracts are recognized ratably over the
contractual period as service is delivered. Payments received for billings in
advance of providing services are deferred until the period such services are
provided. Set-up fees are separately priced from hosting services and are
recognized at the time a new customer account is created. Therefore, the
customer has no expectation of any future value from set-up fees after the
account is set up and the service is activated. Set-up costs consist primarily
of labor by technical support personnel to activate the new service and are
incurred at the time of set-up. No future set-up costs are incurred. There is
no obligation of the Company to perform any future set-up services, and the
set-up fees are non-refundable. Following expiration of the initial contract
period and upon renewal of the contract by the customer, there are no
additional set-up charges and the renewal prices for hosting services are
generally unchanged from the original contract period.
The Company's accounts receivable are financial instruments that expose the
Company to credit risk, as defined by Statement of Financial Accounting
Standards No. 105, Disclosure of Information About Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk. Accounts receivable are due from commercial entities to whom credit is
extended based on evaluation of the customer's financial condition, and
generally collateral is not required. Anticipated credit losses are provided
for in the financial statements and have been within management's expectations
for all periods presented.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over estimated useful lives of the property and equipment,
generally three years for computer equipment and up to seven years for
furniture and fixtures. Equipment acquired under capital leases is amortized
using the straight-line method over the lesser of the lease term or the
estimated useful life of the asset, generally three years. The cost of license
agreements with software vendors are amortized over the term of the agreements.
Restricted Cash
Restricted cash consists of a certificate of deposit which is pledged as
collateral for the Company's notes payable.
Impairment of Long-Lived Assets
In accordance with Statement on Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, the Company reviews its long-lived assets for impairment when events or
changes in circumstances indicate the carrying value of such assets may not be
recoverable. This review consists of a comparison of the carrying value of the
asset with the asset's expected future undiscounted cash flows without interest
costs. Estimates of expected future cash flows represent management's best
estimate based on reasonable and supportable assumptions and projections. If
the expected future cash flow exceeds the carrying value of the asset, no
impairment indicator is considered present. If the carrying value exceeds the
future cash flow, an impairment indicator is considered present. Such
impairment would be measured and recognized using a discounted cash flow
method.
Financial Instruments
The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate their fair values.
F-8
<PAGE>
DATA RETURN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the three month
periods ended June 30, 1998 and 1999 is unaudited)
1.Organization, Basis of Presentation and Significant Accounting Policies--
(Continued)
Purchase Commitments
The Company has an obligation to acquire certain minimum amounts of co-
location space, technical assistance, broadband service and private line
service. In the event the Company expects to incur a loss in fulfilling its
future obligations, the estimated loss will be accrued at the date the Company
first believes a loss is likely to be incurred.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense
amounted to $25,200 and $296,400 for the period from September 22, 1997
(inception) to March 31, 1998, and the year ended March 31, 1999, respectively.
Stock Based Compensation
The Company accounts for employee stock based compensation in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations, because the alternative fair value
accounting model provided under Statement of Financial Accounting Standards No.
123, Accounting for Stock Based Compensation (SFAS 123) is not required.
Accordingly, in cases where exercise prices equal or exceed fair market value
of the underlying common stock, the Company recognizes no compensation expense.
In cases where exercise prices are less than the fair value, compensation is
recognized over the lesser of the period of performance or vesting period.
Income Taxes
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Comprehensive Income
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income (SFAS 130). SFAS 130 requires that total
comprehensive income (loss) be disclosed with equal prominence as net income
(loss). The Company's comprehensive loss is equal to its net losses for all
periods presented.
Segment Reporting
The Company operated during all periods in a single segment when applying the
management approach defined in Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information.
Recent Accounting Pronouncements
On March 4, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AICPA) issued Statement of
Position No. 98-1, "Accounting for the Costs of Computer
F-9
<PAGE>
DATA RETURN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the three month
periods ended June 30, 1998 and 1999 is unaudited)
1.Organization, Basis of Presentation and Significant Accounting Policies--
(Continued)
Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires
computer software costs related to internal software that are incurred in the
preliminary project stage to be expensed as incurred. Once the capitalization
criteria of SOP 98-1 have been met, external direct costs of materials and
services consumed in developing or obtaining internal-use computer software;
payroll and payroll-related costs for employees who are directly associated
with and who devote time to the internal-use computer software project (to the
extent of the time spent directly on the project); and interest costs incurred
when developing computer software for internal use should be capitalized. SOP
98-1 is effective for financial statements for fiscal years beginning after
December 15, 1998. Accordingly, the Company has adopted SOP 98-1 in its
financial statements for the year ending March 31, 2000.
In April of 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position No. 98-5, Reporting on the Costs of Start-up
Activities, which requires that costs related to such activities be expensed as
incurred. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998. Accordingly, the Company has adopted SOP 98-
5 in the financial statements for the year ending March 31, 2000. The adoption
of SOP 98-5 had no material impact on our financial statements.
Net Loss Per Share
Net loss per share is computed using the weighted average number of shares of
common stock outstanding during each period for basic and diluted earnings per
share. No common stock equivalents are considered in the calculation of diluted
earnings per share as the Company has incurred a loss for all periods presented
and the effect of common stock equivalents would be anti-dilutive.
Unaudited Interim Financial Statements
The unaudited interim consolidated financial statements as of June 30, 1999,
and for the three month periods ended June 30, 1998 and 1999, have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
They do reflect all adjustments (consisting only of normal recurring entries)
which, in the opinion of the Company's management, are necessary for a fair
presentation of the results for the interim periods presented.
The results of operations for the three month period ended June 30, 1999, are
not necessarily indicative of the results that may be expected for any other
interim period or for the full year.
F-10
<PAGE>
DATA RETURN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the three month
periods ended June 30, 1998 and 1999 is unaudited)
2.Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
March 31,
------------------- June 30,
1998 1999 1999
-------- --------- -----------
(unaudited)
<S> <C> <C> <C>
Electronics and computer equipment........... $ 94,400 $ 852,600 $1,518,600
Computer software............................ -- 39,400 63,200
Furniture and office equipment............... 7,700 14,800 21,300
Leasehold improvements....................... 5,000 10,600 10,600
Capital leases--equipment.................... 47,200 51,100 51,100
-------- --------- ----------
154,300 968,500 1,664,800
Less accumulated depreciation and
amortization................................ (12,900) (142,500) (231,700)
-------- --------- ----------
$141,400 $ 826,000 $1,433,100
======== ========= ==========
</TABLE>
3.Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
March 31,
---------------- June 30,
1998 1999 1999
------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Professional fees.................................. $ -- $ -- $289,700
Bonuses............................................ -- 42,800 125,000
Deferred compensation.............................. 40,000 40,000 40,000
Commissions........................................ -- 20,800 47,400
Other.............................................. 20,500 29,300 59,100
------- -------- --------
$60,500 $132,900 $561,200
======= ======== ========
</TABLE>
4.Notes Payable
The Company entered into two separate note agreements for $125,000 each with
a commercial bank. The notes are cross collateralized by a $125,000 certificate
of deposit at the bank and all computer equipment acquired with the loan
proceeds. The notes bear interest at 9.25 percent and 6.9 percent. The notes
are due in equal monthly installments of principal and interest of $3,990 and
$3,871, respectively. Future principal payments at March 31, 1999 are as
follows:
<TABLE>
<S> <C>
2000................................................................... $ 78,900
2001................................................................... 85,500
2002................................................................... 60,400
--------
$224,800
========
</TABLE>
F-11
<PAGE>
DATA RETURN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the three month
periods ended June 30, 1998 and 1999 is unaudited)
5.Shareholders' Equity
Common Stock
Pursuant to a Stock Sales Agreement (the Agreement) dated February 20, 1998,
between the Company and a private investor, the Company sold 2,152,000 shares
of its common stock for $0.46 per share. The Agreement provided for the
issuance of the shares in return for $500,000 cash and a promissory note in the
amount of $500,000 that has been repaid. The Agreement provided the investor
the right to acquire an additional 2,690,000 shares of the Company's common
stock during a specified period in 2001 for $0.37 per share and provided the
Company the right to require the investor to purchase the shares for a period
beginning in February 1999 through August 2001. In February of 1999, the
Company exercised its rights under the Agreement and sold 2,690,000 shares of
its common stock to the investor for $0.37 per share.
The Agreement also provides the investor additional rights including: a right
of first refusal to participate in any future equity offerings up to the total
amount of such offerings and on the same terms as those offered to other
investors, a right to designate two members of the Company's five member Board
of Directors and a requirement for unanimous approval by the Board of Directors
for certain transactions.
The investor's rights terminate upon the earlier to occur of: the mutual
agreement of the Company and the investor, events the result of which are such
that the investor owns less than 5 percent of the issued and outstanding common
stock of the Company, consummation of a public offering of the Company's
capital stock or a breach by the investor of his obligations.
Stock Based Compensation Arrangements
The Company's 1998 Stock Option Plan (the Plan) provides for the issuance to
employees of options to acquire 3,308,700 shares of common stock. The options
are to be issued at fair market value, as defined, and vest as approved by the
Board of Directors. Options generally expire 10 years from the date of grant
and automatically expire at termination of employment. The vesting period for
options to acquire 901,150 shares of common stock accelerates to the effective
date of any registration statement filed by the Company or in the event of a
merger or acquisition of the Company.
Subsequent to March 31, 1999, the Company adopted the 1999 Long-Term
Incentive Plan. See Note 9.
The following table summarizes the stock option activity related to the
Company:
<TABLE>
<CAPTION>
Per Share
Number of Exercise Weighted Average
Shares Price Exercise Price
--------- ----------- ----------------
<S> <C> <C> <C>
Outstanding options--September 22,
1997................................. -- $ -- $ --
Granted............................. 3,577,700 0.02 0.02
--------- ----------- -----
Outstanding options--March 31, 1998... 3,577,700 0.02 0.02
Granted............................. 1,069,275 0.08- 0.17 0.15
--------- ----------- -----
Outstanding options--March 31, 1999... 4,646,975 0.02- 0.17 0.05
Granted............................. 1,304,650 0.23- 1.66 0.44
Expired............................. (26,900) 0.23 0.23
--------- ----------- -----
Outstanding options--June 30, 1999.... 5,924,725 $0.02-$1.66 $0.14
========= =========== =====
Options exercisable--March 31, 1999... 916,752 $ 0.02 $0.02
========= =========== =====
</TABLE>
F-12
<PAGE>
DATA RETURN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the three month
periods ended June 30, 1998 and 1999 is unaudited)
5.Shareholders' Equity--(Continued)
Outstanding options as of March 31, 1999, had a weighted average remaining
contractual life of approximately nine years and a weighted average fair value
at issuance of $0.36 based on the minimum value method.
Certain employees of the Company have been granted options under the Plan to
purchase shares of the Company's common stock at less than fair market value.
Prior to the adoption of the Plan, an employee was granted 3,308,700 options at
a price below fair market value which vest over 4 years. The vesting period for
the 3,308,700 options accelerates to the effective date of any registration
statement filed by the Company. The Company recorded deferred stock
compensation of $1,277,000, $328,000 and $874,100 for the period from
September 22, 1997 (inception) through March 31, 1998, the year ended March 31,
1999 and the three month period ended June 30, 1999, respectively, for the
difference between the exercise price and the deemed fair value of the
Company's common stock underlying certain options granted. These amounts are
being amortized over the vesting period of the individual options, generally
four years. The stock compensation expense charged to income amounted to
$61,300 and $348,800 for the period from September 22, 1997 (inception) to
March 31, 1998 and the year ended March 31, 1999, respectively. The stock
compensation expense charged to income amounted to $84,600 and $139,500 for the
three month periods ended June 30, 1998 and 1999, respectively.
As discussed in Note 1, the Company accounts for its stock based awards to
employees using the intrinsic value method in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees," and its related
interpretations.
SFAS No. 123 requires the disclosure of pro forma net income (loss) and net
income (loss) per share as if the Company had adopted the fair value method
since September 22, 1997 (inception). Under SFAS No. 123, the fair value of
stock based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future price volatility and expected
time to exercise, which greatly affect the calculated values.
The Company's calculations for employee grants were made using the minimum
value method using the following weighted average assumption: expected life,
four years; risk free interest rate of 6 percent; no dividends during the
expected term; and a volatility of zero as the Company is private and has no
trading history. If the computed values of the Company's stock based awards
were amortized to expense over the vesting period of the awards as specified
under SFAS No. 123, net loss would have been $191,320 ($0.01 per basic and
diluted share) and $1,289,160 ($0.07 per basic and diluted share) for the
period from September 22, 1997 (inception) to March 31, 1998 and the year ended
March 31, 1999, respectively.
F-13
<PAGE>
DATA RETURN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the three month
periods ended June 30, 1998 and 1999 is unaudited)
6.Income Tax Information
At March 31, 1998 and 1999, the Company had temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
such amounts as measured by tax laws. Significant components of the Company's
deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
March 31,
-------------------
1998 1999
-------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $ 26,000 $ 333,000
Stock based compensation................................. 21,000 139,000
Accrued expenses......................................... 16,000 22,000
Allowance for bad debts.................................. 2,000 7,000
-------- ---------
Total deferred tax assets.................................. 65,000 501,000
Less: valuation allowance................................ (65,000) (501,000)
-------- ---------
Net deferred tax asset..................................... $ -- $ --
======== =========
</TABLE>
At March 31, 1999, the Company's net operating loss carryforward for federal
income tax purposes is approximately $980,000, expiring in 2013 and 2014. The
Company has recorded a valuation reserve for its net deferred tax benefit for
the period ended March 31, 1998 and the year ended March 31, 1999 due to
uncertainty that the Company will generate sufficient taxable income during the
carryforward period to realize the benefit of its deferred tax asset. In
addition, in connection with the equity transactions that have taken place
since its inception and the proposed initial public offering, the Company may
experience a change in control pursuant to Internal Revenue Code Section 382.
As such, the net operating loss carryforward may be limited as to its possible
use in future periods.
7.Commitments
Leases
The Company leases office space and office equipment under operating leases.
Future noncancelable lease payments under the Company's lease commitments at
March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Capital Leases Operating Leases
-------------- ----------------
<S> <C> <C>
Year Ended March 31:
2000.......................................... $20,500 $102,100
2001.......................................... 20,200 56,500
2002.......................................... 3,300 11,100
------- --------
44,000 $169,700
========
Less amount representing interest............... (7,600)
-------
Present value of lease payments................. 36,400
Current portion of capital leases............... 15,200
-------
Noncurrent portion of capital leases............ $21,200
=======
</TABLE>
The Company recorded rent expense of $13,300 for the period from September
22, 1997 (inception) to March 31, 1998, and $60,500 for the year ended March
31, 1999.
F-14
<PAGE>
DATA RETURN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the three month
periods ended June 30, 1998 and 1999 is unaudited)
7.Commitments--(Continued)
Bandwidth and Co-Location Agreements
The Company has entered into agreements for bandwidth, co-location space and
dedicated Internet access with multiple vendors. The agreements are generally
three year commitments and require penalties for early termination. The
agreements are generally subject to a master contract which allows for service
order upgrades at the Company's request. Following are the Company's minimum
commitments at March 31, 1999.
<TABLE>
<S> <C>
Year Ended March 31:
2000............................................................... $ 525,000
2001............................................................... 475,000
2002............................................................... 175,000
----------
$1,175,000
==========
</TABLE>
Subsequent to year end, the Company entered into an agreement with a vendor
which requires the Company to acquire an additional $10.0 million of services
over the next five years (See Note 9).
8.International Operations
International revenues were approximately $43,500 and $189,000 for the period
from September 22, 1997 (inception) to March 31, 1998 and fiscal 1999,
respectively. The Company's international revenues were primarily generated
from customers located in Europe and Asia. In fiscal 1999, revenues from
customers located in Europe and Asia accounted for approximately 6% and 2% of
total revenues, respectively. Total assets from international operations,
comprised of accounts receivable, were $16,700 and $32,700 of total assets as
of March 31, 1998 and 1999, respectively.
9.Subsequent Events
Proposed Public Offering of Common Stock (Unaudited)
The Board of Directors of the Company has authorized management of the
Company to file a registration statement with the Securities and Exchange
Commission for the initial public offering of the Company's common stock. The
Company contemplates using the proceeds from the proposed public offering to
fund its operations, fund its capital expenditures, expand its marketing and
sales activities, repay its credit facility and for working capital and other
general corporate purposes, including potential acquisitions and investments
and expenses associated with its anticipated move to a new headquarters
facility.
Adoption of the 1999 Long-Term Incentive Plan
In July 1999, the Company adopted the 1999 Long-Term Incentive Plan. The Plan
provides for the issuance of up to 3,228,000 options to acquire its common
stock.
Issuance of Common Stock
Subsequent to year end, the Company issued 5,251,418 shares of common stock
to private investors for total cash consideration of $9.375 million through
July 29, 1999.
F-15
<PAGE>
DATA RETURN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the three month
periods ended June 30, 1998 and 1999 is unaudited)
9.Subsequent Events--(Continued)
In addition, on July 26, 1999, Level 3 Communications, Inc. (Level 3)
acquired 1,952,940 shares of the Company's common stock in exchange for a $5.0
million credit to be applied to the purchase of future bandwidth services. Use
of the credit is as allowed by the Service Credit Agreement. The credit can be
applied as payment for services in excess of the minimum purchases required
under the Strategic Marketing and Sales Agreement (see below) beginning on
January 1, 2001. The Company has a limited right to reacquire the stock in the
event that Level 3 fails to fulfill its obligations under the Service Credit
Agreement or fails to deliver the bandwidth pursuant to the terms of the
Service Credit Agreement. The number of shares subject to the Company's right
to reacquire the stock will be reduced pro rata in each quarter of calendar
year 2001 by the greater of the credit applied to future purchases of bandwidth
or 25% of the total shares. The stock can be reacquired by the Company at the
original purchase price by the Company's forgiveness of the remaining balance
of the credit. In the event the Company's right to reacquire the stock is
exercised, Level 3 is required to pay the Company $750,000, reduced ratably,
based on the amount of bandwidth credit used by the Company.
Strategic Marketing and Sales Agreement
The Company entered into a Strategic Marketing and Sales Agreement with Level
3 on July 1, 1999. The Strategic Marketing and Sales Agreement provides that
the Company will acquire most of its requirements for co-location space,
technical assistance, broadband service and private line service (collectively
the "Services") over a five year period commencing with the date of the
agreement, which are substantially similar or perform substantially the same
function as the Services from Level 3. The prices the Company will pay Level 3
for the Services over the term of the Agreement are based upon Level 3's then-
current prices to other companies purchasing similar quantities. The Agreement
also provides for joint sales and marketing efforts between the Company and
Level 3, including cross training of personnel, and provides that Level 3 will
designate the Company as a preferred provider for Advanced Microsoft Hosting
Service. The Company will pay commission to Level 3 personnel for new customers
generated by their leads.
The Company's annual commitment for the Services is as follows for its year
ended March 31:
<TABLE>
<S> <C>
2000................................................................ $ 400,000
2001................................................................ 1,000,000
2002................................................................ 1,400,000
2003................................................................ 2,000,000
2004................................................................ 3,200,000
2005................................................................ 2,000,000
-----------
$10,000,000
===========
</TABLE>
Payments for the minimum annual purchase commitments will be required
regardless of whether the Company uses the Services. The Company can apply the
$5.0 million credit described above beginning on January 1, 2001 to purchases
in excess of the minimum annual commitments required by the Strategic Marketing
and Sales Agreement. Pricing of the Services will be based on Level 3's
established market prices at the time the service is provided.
F-16
<PAGE>
DATA RETURN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the three month
periods ended June 30, 1998 and 1999 is unaudited)
9.Subsequent Events--(Continued)
ASP and Server Agreement
The Company entered into an agreement with Compaq to purchase the lesser of
2,000 servers or the number of servers reasonably necessary to operate the
Company's business. The requirement to purchase the servers is contingent upon
Compaq providing financing for the servers on competitive terms, upon the
price, performance and quality of the servers being reasonably satisfactory to
the Company and upon Compaq's commitment to deliver these servers on the
schedule we request.
Microsoft Agreements (unaudited)
On September 3, 1999, the Company agreed to sell $5.0 million of its common
stock for a per share purchase price equal to the lesser of the midpoint of the
lowest filing range and the price to public. Microsoft will also acquire a
warrant to purchase $3.75 million of the Company's common stock at the same per
share purchase price. Microsoft is entitled to one demand and unlimited
"piggyback" registration rights. Microsoft also has a right of first refusal
that does not include this offering and that terminates upon completion of the
initial public offering. This transaction will close the earlier of the day
after the pricing of this offering and December 12, 1999.
In addition, on September 3, 1999, the Company entered into a five-year
Development, License and Co-Marketing Agreement with Microsoft to grant a non-
exclusive perpetual license to proprietary installation tools for third-party
hosted applications to Microsoft. The Company will also train Microsoft's
employees and customers in the use of those tools. Microsoft has the sole right
to terminate the agreement if the Company fails to deliver the tools on a
timely basis or if the Company fails to correct any errors in the tools on a
timely basis. Also as part of the agreement, Microsoft will provide up to one
hundred hours of technical consulting and writing services during the
development of the tools.
Stock Split
On September 10, 1999, the Board of Directors approved a 269 for 1 split of
the Company's common stock. All share and per share amounts have been
retroactively restated to reflect the effect of the stock split.
Shareholder Rights Plan
On September 27, 1999, the Board of Directors adopted a Shareholders Rights
Plan (the "Plan") and declared a dividend of one preferred stock purchase right
for each share of common stock. Each right entitles its registered holder to
purchase one one-hundredth of a share of newly designated series A junior
participating preferred stock at a purchase price of $100.00. The rights are
attached to and trade with shares of the Company's common stock, including
future issuances of common stock. The rights are not currently exercisable and
become exercisable upon the earlier to occur of (a) the public announcement
that a person or group of persons has acquired 15% or more of the Company's
common stock, except in connection with an offer approved by the Board of
Directors, or (b) the close of business on the tenth business day, or a later
date determined by the Board of Directors, after the commencement of, or
announcement of an intention to commence, a tender or exchange offer that would
result in a person or group of persons acquiring 15% or more of the Company's
common stock. In the event the rights become exercisable, each holder of a
right (except the Acquiring Person, as defined by the Plan) will have the right
to receive shares of the Company's common stock
F-17
<PAGE>
DATA RETURN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the three month
periods ended June 30, 1998 and 1999 is unaudited)
9.Subsequent Events--(Continued)
having a market value of two times the exercise price of the right. Also, if
the Company is acquired in a merger in which the Company is not the surviving
corporation, or there is a sale of 50% or more of the Company's assets or
earning power, each holder of a right may receive common stock of the acquiring
company having a market value equal to two times the exercise price of the
right. The rights expire September 27, 2009. Each share of series A junior
participating preferred stock has dividend, liquidation and voting rights equal
to those of 100 shares of the Company's common stock. The series A junior
participating preferred stock is not redeemable.
F-18
<PAGE>
Inside back cover
The inside back cover of the prospectus has a caption centered at the top of
the page in large text that reads "Hosting the Back Office for E-Business."
An image of a globe with images of customers' web pages surrounding the globe
above its surface is centered in the middle of the page.
<PAGE>
Centered on the page is the Data Return logo and the slogan "Hosting The Back
Office for E-Business."
<PAGE>
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution
The following is an itemized statement of the amounts of all expenses payable
by the Registrant in connection with the registration of the common stock
offered hereby (estimated except for the Registration Fee, NASD Filing Fee and
Nasdaq National Market listing fee), other than underwriting discounts and
commissions:
<TABLE>
<S> <C>
Registration Fee-Securities and Exchange Commission.............. $ 23,978
NASD Filing Fee.................................................. 9,344
Nasdaq National Market listing fee............................... 90,000
Blue Sky fees and expenses....................................... 10,000
Accountants' fees and expenses................................... 200,000
Legal fees and expenses.......................................... 200,000
Printing and engraving expenses.................................. 300,000
Transfer agent and registrar fees................................ 30,000
Miscellaneous.................................................... 136,678
----------
Total............................................................ $1,000,000
==========
</TABLE>
ITEM 14. Indemnification of Directors and Officers
We have authority under Article 2.02A.(16) and 2.02-1 of the Texas Business
Corporation Act (the "TBCA") to indemnify our directors and officers to the
extent provided for in the TBCA. Our Restated Articles of Incorporation permit
indemnification of directors and officers to the fullest extent permitted by
law.
The TBCA provides in part that a corporation may indemnify a director or
officer or other person who was, is, or is threatened to be made a named
defendant or respondent in a proceeding because the person is or was a
director, officer, employee or agent of the corporation, if it is determined
that such person (i) conducted himself in good faith; (ii) reasonably believed,
in the case of conduct in his official capacity as a director or officer of the
corporation, that his conduct was in the corporation's best interests, and, in
all other cases, that his conduct was at least not opposed to the corporation's
best interests; and (iii) in the case of any criminal proceeding, had no
reasonable cause to believe that this conduct was unlawful.
A corporation may indemnify a person under the TBCA against judgments,
penalties, (including excise and similar taxes), fines, settlement, and
reasonable expenses actually incurred by the person in connection with the
proceeding. If the person is found liable to the corporation or is found liable
on the basis that personal benefit was improperly received by the person, the
indemnification is limited to reasonable expenses actually incurred by the
person in connection with the proceeding, and shall not be made in respect of
any proceeding in which the person shall have been found liable for willful or
intentional misconduct in the performance of his duty to the corporation.
A corporation may also pay or reimburse expenses incurred by a person in
connection with his appearance as a witness or other participation in a
proceeding at a time when he is not a named defendant or respondent in the
proceeding.
Article Eight of our Restated Articles of Incorporation provides that, to the
fullest extent permitted by the TBCA as it exists or as it may be amended, no
director shall be personally liable to Data Return or our shareholders for
monetary damages for breach of fiduciary duty as a director.
Prior to consummation of this offering, we intend to obtain directors and
officers liability insurance.
II-1
<PAGE>
Reference is made to Section 7 of the underwriting agreement filed as Exhibit
1.1 hereto, indemnifying the officers and directors of the registrant against
certain liabilities.
ITEM 15. Recent Sales of Unregistered Securities
Set forth in chronological order is information regarding all securities sold
and employee stock options granted by the Registrant since August 17, 1997 (the
date of incorporation).
(1) Since August 17, 1997, the Registrant has granted to employees
options to purchase an aggregate of 6,532,396 shares of Common Stock at a
weighted average exercise price of $0.29.
(2) On August 17, 1997, the Registrant issued 8,106,315 shares to Sunny
Vanderbeck, 6,562,255 shares to Michelle Chambers and 772,030 to Jason
Lochhead, the founders of the Registrant, in exchange for assets,
principally computer equipment, with a value of $42,000 and cash of $17,000
contributed to the Registrant.
(3) On February 20, 1998, the Registrant issued 2,152,000 shares of
Common Stock to Nathan Landow Family Limited Partnership for a purchase
price of $1,000,000.
(4) On December 22, 1998, the Registrant issued 215,200 shares of Common
Stock to Dexter Stewart RIRA for a purchase price of $100,000.
(5) On December 24, 1998, the Registrant issued 2,690,000 shares of
Common Stock to Nathan Landow Family Limited Partnership for a purchase
price of $1,000,000.
(6) On February 1, 1999, the Registrant issued 53,800 shares of Common
Stock to Nathan Landow Family Limited Partnership for a purchase price of
$25,000.
(7) On April 23, 1999, the Registrant issued 351,852 shares of Common
Stock to Nathan Landow for an aggregate purchase price of $250,000.
(8) On April 26, 1999, the Registrant issued 659,050 shares of Common
Stock to two investors for an aggregate purchase price of $500,000. The
distribution of such shares was as follows: 329,525 shares to David Slagel
for a purchase price of $250,000; 329,525 shares to Steve Loftus for a
purchase price of $250,000.
(9) On May 5, 1999, the Registrant issued 500,878 shares of Common Stock
to four investors for an aggregate purchase price of $500,000. The
distribution of such shares was as follows: 290,789 shares to Tom O'Shea
for a purchase price of $290,000; 110,021 shares to Bob Nolan for a
purchase price of $110,000; 75,051 shares to Bruce Eatroff for a purchase
price of $75,000; 25,017 shares to Tim Brown for a purchase price of
$25,000.
(10) On May 14, 1999, the Registrant issued 193,142 shares of Common
Stock to two investors for an aggregate purchase price of $250,000. The
distribution of such shares was as follows: 96,571 shares to Andrew Evans
for a purchase price of $125,000; 96,571 shares to T. Geir Ramleth for a
purchase price of $125,000.
(11) On May 18, 1999, the Registrant issued 1,202,968 shares of Common
Stock to ZeroDotNet, Inc. for a purchase price of $2,000,000.
(12) On July 26, 1999, the Registrant issued 1,952,940 shares of Common
Stock to Level 3 Communications, Inc. for $5,000,000 in credit for future
bandwidth purchases.
(13) On July 26, 1999, the Registrant issued 1,171,764 shares of Common
Stock to ZeroDotNet, Inc. for a purchase price of $3,000,000.
(14) On July 29, 1999, the Registrant issued 1,171,764 shares of Common
Stock to Compaq Computer Corporation for a purchase price of $3,000,000.
II-2
<PAGE>
The sales described in (2) through (14) were deemed to be exempt from
registration under the Securities Act in reliance on section 4(2) of the
Securities Act as transactions by an issuer not involving a public offering.
The grants of options described in (1) were deemed to be exempt from
registration under the Securities Act in reliance on Rule 701 promulgated under
Section 3(b) of the Securities Act as transactions pursuant to compensatory
benefit plans and contracts relating to compensation as provided under such
Rule 701. All such transactions were completed on the dates given.
ITEM 16. Exhibits and Financial Statement Schedules
(a)Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement
3.1* Form of Amended and Restated Articles of Incorporation of the
Registrant to be filed just prior to effectiveness of this
Registration Statement.
3.2* Amended and Restated Bylaws of the Registrant
4.1 Form of Common Stock Certificate
4.2* Form of Common Stock Warrant between Data Return Corporation and
Microsoft Corporation.
4.3 Form of Rights Agreement by and between Data Return Corporation and
ChaseMellon Shareholder Services, LLC, as rights agent.
5.1 Opinion of Thompson & Knight L.L.P.
10.1+ Strategic Marketing and Sales Agreement dated July 1, 1999, by and
between Data Return Corporation and Level 3 Communications, LLC.
10.2* Restricted Stock Purchase Agreement dated July 23, 1999, by and
between Data Return Corporation and Level 3 Communications, LLC.
10.3* Service Credit Agreement dated July 23, 1999, by and between Data
Return Corporation and Level 3 Communications, LLC.
10.4*+ Customer Order dated April 28, 1999, executed by Data Return
Corporation and Level 3 Communications, LLC
10.5*+ Managed Services Proposal for Data Return dated March 6, 1997, by and
between Data Return Corporation and American Communications Services,
Inc.
10.6* Basic Internet Services Agreement dated December 12, 1997, between
Data Return Corporation and Savvis Communications Enterprises, L.L.C.
10.7* Commercial Lease Agreement dated April 1, 1998, between Data Return
Corporation and DSW Property Management, for approximately 5,088
square feet situated at 801 Stadium Drive, Suite 120, Arlington, Texas
76011.
10.8* Commercial Lease Agreement dated July 14, 1997, between Data Return
Corporation and DSW Property Management, for approximately 2,713
square feet situated at 801 Stadium Drive, Suite 117, Arlington, Texas
76011.
10.9* 1999 Long-Term Incentive Plan
10.10* 1998 Stock Option Plan
10.11* Employment Agreement effective as of May 3, 1998, between Data Return
Corporation and Todd Steitle.
10.12* Employment Agreement dated March 18, 1999, between Data Return
Corporation and Kenneth S. Garber.
10.13* Employment Agreement effective as of January 15, 1998, between Data
Return Corporation and Michael S. Shiff.
10.14* Form of Employment Agreement dated July 1, 1999 between Data Return
Corporation and each of Sunny C. Vanderbeck, Michelle R. Chambers,
Jason A. Lochhead, Stuart A. Walker, Mark A. Bowles and Scott W.
Brewer.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.15* Sublease dated June 28, 1999, between Data Return Corporation and
Eastman Kodak Company, for approximately 22,663 square feet situated
at 222 Las Colinas Boulevard in Irving, Texas.
10.16* Investor's Rights Agreement dated as of July 29, 1999, between Data
Return Corporation and CPQ Holdings, Inc.
10.17* ASP and Server Agreement dated June 29, 1999, between Data Return
Corporation and Compaq Computer Corporation.
10.18*+ Development, License and Co-Marketing Agreement dated September 3,
1999, between Data Return Corporation and Microsoft Corporation.
10.19* Stock Purchase Agreement dated September 2, 1999, between Data
Return Corporation and Microsoft Corporation.
23.1 Consent of Thompson & Knight L.L.P. (included in Exhibit 5.1 above)
23.2 Consent of Ernst & Young LLP
24.1* Power of Attorney (included in Page II-5)
27.1* Financial Data Schedule
99.1* Consent of International Data Corp. dated July 9, 1999.
99.2* Consent of T. Geir Ramleth to being nominated to the Board of
Directors of Data Return Corporation.
</TABLE>
- --------
+ Confidential treatment has been requested with respect to certain portions
of these agreements.
* Previously filed.
** To be filed by amendment.
(b)Financial Statement Schedules
None.
ITEM 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the underwriters,
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by 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 Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, 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 the time
shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 4 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Irving, State of Texas, on October 5, 1999.
Data Return Corporation
/s/ Sunny C. Vanderbeck
By: _________________________________
Sunny C. Vanderbeck
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons on October 5,
1999 in the capacities indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Sunny C. Vanderbeck Chairman of the Board, October 5, 1999
______________________________________ Chief Executive Officer
Sunny C. Vanderbeck and Director (Principal
Executive Officer)
* President, Chief Operating
______________________________________ Officer and Director
Michelle R. Chambers
* Vice President--Research
______________________________________ and Product Development
Jason A. Lochhead and Director
/s/ Stuart A. Walker Vice President--Chief October 5, 1999
______________________________________ Financial Officer,
Stuart A. Walker Treasurer and Secretary
(Principal Financial and
Accounting Officer)
* Director
______________________________________
Nathan Landow
/s/ Sunny C. Vanderbeck October 5, 1999
*By: _________________________________
Sunny C. Vanderbeck
Attorney-in-fact
/s/ Stuart A. Walker October 5, 1999
*By: _________________________________
Stuart A. Walker, as
Attorney-in-fact
</TABLE>
II-5
<PAGE>
_________ Shares of Common Stock
DATA RETURN CORPORATION
UNDERWRITING AGREEMENT
----------------------
[Date]
BEAR, STEARNS & CO. INC.
CIBC WORLD MARKETS CORP.
WIT CAPITAL CORPORATION
as Representatives of the
several Underwriters named in
Schedule I attached hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, N.Y. 10167
Dear Sirs:
Data Return Corporation, a corporation organized and existing under the
laws of Texas (the "Company"), proposes, subject to the terms and conditions
stated herein, to issue and sell to the several underwriters named in Schedule I
hereto (the "Underwriters") an aggregate of ________ shares (the "Firm Shares")
of its common stock, par value $0.001 per share (the "Common Stock") and, for
the sole purpose of covering over-allotments in connection with the sale of the
Firm Shares, at the option of the Underwriters, up to an additional ______
shares (the "Additional Shares") of Common Stock. The Firm Shares and any
Additional Shares purchased by the Underwriters are referred to herein as the
"Shares". The Shares are more fully described in the Registration Statement
referred to below.
1. Representations and Warranties of the Company. The Company represents and
---------------------------------------------
warrants to, and agrees with, the Underwriters that:
(a) The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement, and may have filed an amendment or
amendments thereto, on Form S-1 (No. 333-84011), for the registration of the
Shares under the Securities Act of 1933,
-1-
<PAGE>
as amended (the "Act"). Such registration statement, including the prospectus,
financial statements and schedules, exhibits and all other documents filed as a
part thereof, as amended at the time of effectiveness of the registration
statement, including any information deemed to be a part thereof as of the time
of effectiveness pursuant to paragraph (b) of Rule 430A or Rule 434 of the Rules
and Regulations of the Commission under the Act (the "Regulations"), is herein
called the "Registration Statement" and the prospectus, in the form first filed
with the Commission pursuant to Rule 424(b) of the Regulations or filed as part
of the Registration Statement at the time of effectiveness if no Rule 424(b) or
Rule 434 filing is required, is herein called the "Prospectus". The term
"preliminary prospectus" as used herein means a preliminary prospectus as
described in Rule 430 of the Regulations.
(b) At the time of the effectiveness of the Registration Statement or the
effectiveness of any post-effective amendment to the Registration Statement,
when the Prospectus is first filed with the Commission pursuant to Rule 424(b)
or Rule 434 of the Regulations, when any supplement to or amendment of the
Prospectus is filed with the Commission and at the Closing Date and the
Additional Closing Date, if any, (as hereinafter respectively defined), the
Registration Statement and the Prospectus and any amendments thereof and
supplements thereto complied or will comply in all material respects with the
applicable provisions of the Act and the Regulations and does not or will not
contain an untrue statement of a material fact and does not or will not omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein (i) in the case of the Registration Statement, not
misleading and (ii) in the case of the Prospectus, in light of the circumstances
under which they were made, not misleading. When any related preliminary
prospectus was first filed with the Commission (whether filed as part of the
registration statement for the registration of the Shares or any amendment
thereto or pursuant to Rule 424(a) of the Regulations) and when any amendment
thereof or supplement thereto was first filed with the Commission, such
preliminary prospectus and any amendments thereof and supplements thereto
complied in all material respects with the applicable provisions of the Act and
the Regulations and did not contain an untrue statement of a material fact and
did not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein in light of the circumstances
under which they were made not misleading. No representation and warranty is
made in this subsection (b), however, with respect to any information contained
in or omitted from the Registration Statement or the Prospectus or any related
preliminary prospectus or any amendment thereof or supplement thereto in
reliance upon and in conformity with information furnished in writing to the
Company by or on behalf of any Underwriter through you as herein stated
expressly for use in connection with the preparation thereof. With respect to
the preceding sentence, the Company acknowledges that the only information
furnished in writing by the Representatives on behalf of the several
Underwriters for use in the Registration Statement or the Prospectus are the
____ paragraphs contained under the caption "Underwriting" in the Prospectus.
If Rule 434 is used, the Company will comply with the requirements of Rule 434.
(c) Ernst & Young LLP, who have certified the financial statements and
supporting schedules included in the Registration Statement, are independent
public accountants as required by the Act and the Regulations.
-2-
<PAGE>
(d) Subsequent to the respective dates as of which information is given in the
Registration Statement and the Prospectus, except as set forth in the
Registration Statement and the Prospectus, there has been no material adverse
change, or any development involving a prospective material adverse change in
the business, prospects, properties, assets, operations, condition (financial or
other) or results of operations of the Company, whether or not arising from
transactions in the ordinary course of business, and since the date of the
latest balance sheet presented in the Registration Statement and the Prospectus,
the Company has not incurred nor undertaken any liabilities or obligations,
direct or contingent, which are material to the Company except for liabilities
or obligations which are reflected in the Registration Statement and the
Prospectus.
(e) This Agreement and the transactions contemplated herein have been duly and
validly authorized by the Company and this Agreement has been duly and validly
executed and delivered by the Company.
(f) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby do not and will not (i)
conflict with or result in a breach of any of the terms and provisions of, or
constitute a default (or an event which with notice or lapse of time, or both,
would constitute a default) under, require approval or consent under, or result
in the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company pursuant to, the terms of (A) any agreement,
instrument, contract, indenture, mortgage, lease, license, arrangement or
understanding to which the Company is a party, or to which any of its properties
or assets are subject (collectively, "Material Contracts") or (B) any franchise,
license, permit heretofore issued to the Company, or (ii) violate or conflict
with any provision of the certificate of incorporation or bylaws of the Company
or any judgment, decree, order, statute, rule or regulation of any court or any
public, governmental or regulatory agency or body having jurisdiction over the
Company or any of its properties or assets. No consent, approval,
authorization, order, registration, filing, qualification, license or permit of
or with any court or any public, governmental or regulatory agency or body
having jurisdiction over the Company or any of its properties or assets is
required for the execution, delivery and performance of this Agreement or the
consummation of the transactions contemplated hereby, including the issuance,
sale and delivery of the Shares to be issued, sold and delivered by the Company
hereunder, except the registration under the Act of the Shares and such
consents, approvals, authorizations, orders, registrations, filings,
qualifications, licenses and permits as may be required under state securities
or Blue Sky laws in connection with the purchase and distribution of the Shares
by the Underwriters.
(g) All of the outstanding shares of Common Stock are duly and validly
authorized and issued, fully paid and non-assessable and were not issued and are
not now in violation of or subject to any preemptive rights. The Shares, when
issued, delivered and sold in accordance with this Agreement will be duly and
validly issued and outstanding, fully paid and non-assessable, and will not have
been issued in violation of or be subject to any preemptive or similar rights;
and, except as described in or expressly contemplated by the Prospectus, there
are no outstanding rights (including, without limitation, preemptive rights),
warrants or options to acquire, or instruments convertible into or exchangeable
for, any shares of capital stock or other equity interests in the Company, or
any contract, commitment, agreement, understanding or arrangement of any kind
relating to the issuance of any capital stock of the Company. The Company had,
at ___________, 1999, an authorized and
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outstanding capitalization as set forth in the Registration Statement and the
Prospectus. The Common Stock, the Firm Shares and the Additional Shares conform
to the descriptions thereof contained in the Registration Statement and the
Prospectus.
(h) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Texas. The Company
is duly qualified and in good standing as a foreign corporation in each
jurisdiction in which the character or location of its properties (owned, leased
or licensed) or the nature or conduct of its business makes such qualification
necessary, except for those failures to be so qualified or in good standing
which, individually or in the aggregate, would not have or reasonably be
expected to have any material adverse effect, or result in any development
involving a prospective material adverse effect, in the business, prospects,
properties, assets, operations, condition (financial or other) or results of
operations of the Company. The Company has all requisite power and authority,
and all necessary consents, approvals, authorizations, orders, registrations,
qualifications, licenses and permits of and from all public, regulatory or
governmental agencies and bodies, to own, lease and operate its properties and
conduct its business as now being conducted and as described in the Registration
Statement and the Prospectus, and no such consent, approval, authorization,
order, registration, qualification, license or permit contains a materially
burdensome restriction not adequately disclosed in the Registration Statement
and the Prospectus. There are no contracts or other documents applicable to the
Company that are required to be described in the Registration Statement or
Prospectus or to be filed as exhibits to the Registration Statement that are not
described or filed as required.
(i) Except as described in the Registration Statement and Prospectus, there is
no litigation, arbitration, proceeding, investigation, claim or governmental
proceeding to which the Company is a party or to which any property or assets of
the Company is subject or which is pending or, to the knowledge of the Company,
contemplated against the Company which might result in any material adverse
change or any development involving a material adverse change in the business,
prospects, assets, properties, operations, condition (financial or other) or,
results of operations of the Company or which is required to be disclosed in the
Registration Statement and the Prospectus.
(j) The Company has not taken and will not take, directly or indirectly, any
action designed to cause or result in, or which constitutes 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 or a violation of Regulation M under the Securities Exchange Act of 1934,
as amended (the "Exchange Act").
(k) The financial statements, including the notes thereto, and supporting
schedules included in the Registration Statement and the Prospectus present
fairly the financial position of the Company as of the dates indicated and the
results of its operations for the periods specified; except as otherwise stated
in the Registration Statement, said financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP") applied on a
consistent basis; and the supporting schedules included in the Registration
Statement present fairly the information required to be stated therein. The
selected financial data and the summary financial data included in the
Prospectus present fairly the information shown therein and have been compiled
on a basis consistent with that of the financial statements included in the
Registration Statement. No other
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<PAGE>
financial statements are required by Form S-1 or otherwise to be included in the
Registration Statement or the Prospectus other than those included therein.
(l) Except as described in the Prospectus, no holder of securities of the
Company has any rights to the registration of securities of the Company because
of the filing of the Registration Statement or otherwise in connection with the
sale of the Shares contemplated hereby.
(m) The Company is not, and upon consummation of the transactions contemplated
hereby will not be, subject to registration as an "investment company" under the
Investment Company Act of 1940.
(n) The Company does not have any subsidiaries and does not own or control,
directly or indirectly, any interest in any other corporation, association or
other business entity.
(o) No relationship, direct or indirect, exists between or among the Company,
on the one hand, and the directors, officers, stockholders, customers or
suppliers of the Company, on the other hand, which is required by the Act to be
described in the Registration Statement and the Prospectus which is not so
described. There are no outstanding loans, advances (except normal advances for
business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus.
(p) The Company is in compliance with all environmental, safety or similar
laws or regulations applicable to them or their business or property relating to
the protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants and the disposal of hazardous
or toxic substances, wastes, pollutants and contaminants ("Environmental Laws"),
except those which, individually or in the aggregate, would not have or
reasonably be expected to have any any material adverse effect, or result in any
development involving a prospective material adverse effect, in the business,
prospects, properties, assets, operations, condition (financial or other) or
results of operations of the Company. The Company has not received any notice
from any governmental authority or third party of an asserted claim under
Environmental Laws. The Company has received all permits, licenses or other
approvals required of it under applicable Environmental Laws to conduct its
business and is in compliance with all terms and conditions of any such permit,
license or approval. To the Company's knowledge, no facts currently exist that
will require the Company to make future material capital expenditures to comply
with Environmental Laws. No property which is or has been owned, leased or
occupied by the Company has been designated as a Superfund site pursuant to the
Comprehensive Environmental Response, Compensation of Liability Act of 1980, as
amended (42 U.S.C. Section 9601, et. seq.) or otherwise designated as a
contaminated site under applicable state or local law.
(q) The Company is not in violation or breach of, or in default under (nor has
an event occurred that with notice, lapse of time or both, would constitute a
default under), any Material Contract, and each Material Contract is in full
force and effect, and is the legal, valid and binding obligation of the Company,
and (subject to (i) applicable bankruptcy, insolvency, reorganization,
fraudulent transfer, moratorium or similar laws affecting the enforceability of
creditors' rights
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<PAGE>
generally and (ii) general principles of equity, including without limitation,
standards of materiality, good faith, fair dealing and reasonableness and limits
on the availability of equitable remedies) is enforceable as to the Company in
accordance with its terms.
(r) The Company maintains systems 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 GAAP and to maintain accountability for assets;
(iii) the access to the respective assets of the Company 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.
(s) There are no existing or, to the knowledge of the Company, threatened
labor disputes with the employees of the Company which are likely, individually
or in the aggregate, to have or may reasonably be expected to have a any
material adverse effect, or result in any development involving a prospective
material adverse effect, in the business, prospects, properties, assets,
operations, condition (financial or other) or results of operations of the
Company. The Company is not aware of any existing or imminent labor disturbance
by the employees of any of its principal suppliers or contractors, which would
have any material adverse effect, or result in any development involving a
prospective material adverse effect, in the business, prospects, properties,
assets, operations, condition (financial or other) or results of operations of
the Company. The Company is not aware of any threatened or pending litigation
between the Company and any of its executive officers which, if adversely
determined, could have any material adverse effect, or result in any development
involving a prospective material adverse effect, in the business, prospects,
properties, assets, operations, condition (financial or other) or results of
operations of the Company, and has no reason to believe that such officers will
not remain in the employment of the Company..
(t) Each employee benefit plan, within the meaning of Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), that is
maintained, administered or contributed to by the Company for employees or
former employees of the Company has been maintained in compliance with its terms
and the requirements of any applicable statutes, orders, rules and regulations,
including but not limited to ERISA and the Internal Revenue Code of 1986, as
amended ("Code"). No prohibited transaction, within the meaning of Section 406
of ERISA or Section 4975 of the Code has occurred with respect to any such plan
excluding transactions effected pursuant to a statutory or administrative
exemption. For each such plan which is subject to the funding rules of Section
412 of the Code or Section 302 of ERISA no "accumulated funding deficiency" as
defined in Section 412 of the Code has incurred, whether or not waived, and the
fair market value of the assets of each such plan (excluding for these purposes
accrued but unpaid contributions) exceeded the present value of all benefits
accrued under such plan determined using reasonable actuarial assumptions.
(u) The Company has filed all foreign, federal, state and local tax returns
that are required to be filed or has requested extensions therefor (except in
any case in which the failure to so file would not have or reasonably be
expected to have, individually or in the aggregate, any material adverse effect,
or result in any development involving a prospective material adverse effect, in
the
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<PAGE>
business, prospects, properties, assets, operations, condition (financial or
other) or results of operations of the Company) and the Company has paid all
material taxes required to be paid by it and any other assessment, fine or
penalty levied against it, to the extent that any of the foregoing is due and
payable, except for any such assessment, fine or penalty that is currently being
contested in good faith.
(v) Except as described in the Registration Statement and as shall be
described in the Prospectus, the Company has (i) good and marketable title to
all real and personal properties owned by it, free and clear of all liens,
security interests, pledges, charges, encumbrances and mortgages, and (ii)
valid, subsisting and enforceable leases for all real and personal properties
leased by it, in either case (i) or (ii) above, subject to such exceptions as,
individually or in the aggregate, would not have or reasonably be expected to
have any material adverse effect, or result in any development involving a
prospective material adverse effect, in the business, prospects, properties,
assets, operations, condition (financial or other) or results of operations of
the Company. No real property owned, leased, licensed or used by the Company
lies in an area that is, or, to the best knowledge of the Company, will be,
subject to zoning, use or building code restrictions that would prohibit
ownership, leasing, licensing or use of such real property in the business of
the Company as presently conducted or as the Prospectus indicates are
contemplated to be conducted, subject to such exceptions as, individually or in
the aggregate, would not have or reasonably be expected to have any material
adverse effect, or result in any development involving a prospective material
adverse effect, in the business, prospects, properties, assets, operations,
condition (financial or other) or results of operations of the Company. No
state of facts relating to the actions or inaction of another person or entity
or his, her or its ownership, leasing, licensing or use of any real property
owned, leased, licensed or used by Company would have or reasonably be expected
to have any material adverse effect, or result in any development involving a
prospective material adverse effect, in the business, prospects, properties,
assets, operations, condition (financial or other) or results of operations of
the Company.
(w) The Company is not in violation of any provision of its certificate of
incorporation or of its by-laws or in breach of, or in default under (nor has
any event occurred that with notice, lapse of time, or both, would constitute a
breach of, or default under), except where such breach or default would not have
any material adverse effect, or result in any development involving a
prospective material adverse effect, in the business, prospects, properties,
assets, operations, condition (financial or other) or results of operations of
the Company, any provision of any agreement, instrument, franchise, license or
permit to which the Company is a party or by which any of its properties or
assets may be bound or affected or any judgment, decree, order, statute, rule or
regulation of any court or any public, governmental or regulatory agency or body
having jurisdiction over the Company or any of its properties or assets.
(x) Except as described in the Registration Statement and the Prospectus and
except for rights that have been effectively waived in writing (complete and
accurate copies of which have been provided to the Underwriters prior to the
date of this Agreement), which waivers are in full force and effect, no holder
of securities of the Company has any rights to cause the Company to issue to it,
or register pursuant to the Act, any securities of the Company because of the
filing of the Registration Statement, in connection with the sale of the Shares
contemplated hereby or otherwise, nor does any
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<PAGE>
holder of securities of the Company have preemptive rights or other rights to
purchase any of the Shares. No holder of any security of the Company has the
right to have any security owned by such holder included in the Registration
Statement or to demand registration of any security owned by such holder during
the period ending 180 days after the date of this Agreement. Each stockholder
who owns more than 1% of the Company's outstanding capital stock and each
director and executive officer of the Company has delivered to the
Representatives an enforceable written lock-up agreement in the form attached to
this Agreement ("Lock-Up Agreement").
(y) The Common Stock of the Company, including the Shares, has been approved
for quotation on the Nasdaq National Market.
(z) Except as described in the Registration Statement and the Prospectus, the
Company owns or possesses valid and enforceable licenses or other rights to use
all inventions, patents, patent applications, trademarks, service marks, trade
names, copyrights, technology, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information, systems
or procedures), proprietary techniques (including processes and substances) and
other intellectual property rights necessary to conduct the business now
conducted or presently contemplated to be conducted by the Company as described
in the Registration Statement and the Prospectus ("Intellectual Property"),
subject to such exceptions as would not have any material adverse effect, or
result in any development involving a prospective material adverse effect, in
the business, prospects, properties, assets, operations, condition (financial or
other) or results of operations of the Company; other than as described in the
Registration Statement and the Prospectus: (i) there are no third parties who
have any rights in the Intellectual Property that could preclude the Company
from conducting its business as currently conducted or as presently contemplated
to be conducted as described in the Registration Statement and the Prospectus;
(ii) there are no pending or, to the Company's knowledge, threatened actions,
suits, proceedings, investigations or claims by others challenging the rights of
the Company, or (if the Intellectual Property is licensed) the licensor thereof
in any Intellectual Property owned or licensed to the Company; (iii) the Company
and (if the Intellectual Property is licensed) to the Company's knowledge the
licensor thereof has not infringed, or received any notice of infringement of or
conflict with, any rights of others with respect to the Intellectual Property;
and (iv) there is no dispute between it or any licensor with respect to any
Intellectual Property, subject, with respect to any of (i), (ii), (iii) or (iv),
to such exceptions, individually or in the aggregate, as would not have any
material adverse effect, or result in any development involving a prospective
material adverse effect, in the business, prospects, properties, assets,
operations, condition (financial or other) or results of operations of the
Company. True and correct copies of all material licenses and other material
agreements between the Company and any third party relating to the Intellectual
Property, and all amendments and supplements thereto, have been provided to the
Underwriters.
(aa) The Company maintains insurance with insurers of recognized financial
responsibility of the types and in the amounts (i) generally deemed adequate for
its business and consistent with insurance coverage maintained by similar
companies in similar businesses and (ii) required under any of the Company's
agreements, licenses or other contracts, all of which insurance is in full force
and effect; the Company has no reason to believe that it will not be able to
renew its existing insurance as and when such coverage expires or to obtain
similar insurance adequate and customary
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<PAGE>
for its business and sufficient to satisfy any requirements of its contracts at
a cost that would not have any material adverse effect, or result in any
development involving a prospective material adverse effect, in the business,
prospects, properties, assets, operations, condition (financial or other) or
results of operations of the Company.
(bb) There are no issues related to the Company's preparedness for the Year
2000 that (i) are of a character required to be described or referred to in the
Registration Statement or Prospectus by the Act which have not been accurately
described in the Registration Statement or Prospectus or (ii) might reasonably
be expected to result in any material adverse change in the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company or that might materially affect its properties, assets or rights. All
internal computer systems and each Constituent Component (as defined below) of
those systems and all computer-related products and each Constituent Component
of those products of the Company will, by December 31, 1999, fully comply with
the Year 2000 Qualification Requirements. "Year 2000 Qualification
Requirements" means that the internal computer systems and each Constituent
Component (as defined below) of those systems and all computer-related products
of each Constituent Component (as defined below) of those products of the
Company (i) have been reviewed to confirm that they store, process (including
sorting and performing mathematical operations, calculations and computations),
input and output data containing date and information correctly regardless of
whether the date contains dates and times before, on or after January 1, 2000,
(ii) have been designated to ensure date and time entry recognition and
calculations, and date data interface values that reflect the century, (iii)
accurately manage and manipulate data involving dates and times, including
single century formulas and multi-century formulas, and will not cause an
abnormal ending scenario within the application or generate incorrect values or
invalid results involving such dates, (iv) accurately process any date rollover,
and (v) accept and respond to two-digit year date input in a manner that
resolves any ambiguities as to the century. "Constituent Component" means all
software (including operating systems, programs, packages and utilities),
firmware, hardware, networking components and peripherals provided as part of
the configuration. The Company has inquired of material vendors as to their
preparedness for the Year 2000 and has disclosed in the Registration Statement
or Prospectus any issues that might reasonably be expected to result in any
material adverse change.
(cc) There are no affiliations with the NASD among the Company's officers,
directors or, to the best of the knowledge of the Company, any five percent or
greater stockholder of the Company, except as set forth in the Registration
Statement or otherwise disclosed in writing to the Representatives of the
Underwriters.
(dd Neither the Company nor any person associated with or acting on behalf of
the Company including, without limitation, any director, officer, agent or
employee of the Company has, directly or indirectly, while acting on behalf of
the Company (i) used any corporate funds for unlawful contributions, gifts,
entertainment or other unlawful expenses relating to political activity; (ii)
made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns from
corporate funds; (iii) violated any provision of the Foreign Corrupt Practices
Act of 1977, as amended; or (iv) made any other unlawful payment.
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<PAGE>
2. Purchase, Sale and Delivery of the Shares.
-----------------------------------------
(a) On the basis of the representations, warranties, covenants and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company agrees to sell to the Underwriters and the Underwriters, severally and
not jointly, agree to purchase from the Company, at a purchase price per share
of $_______, the number of Firm Shares set forth opposite the respective names
of the Underwriters in Schedule I hereto plus any additional number of Shares
which such Underwriter may become obligated to purchase pursuant to the
provisions of Section 9 hereof.
(b) Payment of the purchase price for, and delivery of certificates for, the
Shares shall be made at the offices of Thompson & Knight L.L.P., 1700 Pacific
Avenue, Suite 3300, Dallas, Texas 75201, or at such other place as shall be
agreed upon by the Representatives and the Company, at 10:00 A.M. EDT on the
third or fourth business day (as permitted under Rule 15c6-1 under the Exchange
Act) (unless postponed in accordance with the provisions of Section 9 hereof)
following the date of the effectiveness of the Registration Statement (or, if
the Company has elected to rely upon Rule 430A of the Regulations, the third or
fourth business day (as permitted under Rule 15c6-1 under the Exchange Act)
after the determination of the initial public offering price of the Shares), or
such other time not later than ten business days after such date as shall be
agreed upon by the Representatives and the Company (such time and date of
payment and delivery being herein called the "Closing Date"). Payment shall be
made to the Company by wire transfer in same day funds, against delivery to the
Underwriters for their respective accounts, of certificates for the Shares to be
purchased by them. Certificates for the Shares shall be registered in such name
or names and in such authorized denominations as the Representatives may request
in writing at least two full business days prior to the Closing Date. The
Company will permit the Representatives to examine and package such certificates
for delivery at least one full business day prior to the Closing Date.
(c) In addition, the Company hereby grants to the Underwriters the option to
purchase up to ______ Additional Shares at the same purchase price per share to
be paid by the Underwriters to the Company for the Firm Shares as set forth in
this Section 2, for the sole purpose of covering over-allotments in the sale of
Firm Shares by the Underwriters. This option may be exercised at any time, in
whole or in part, on or before the thirtieth day following the date of the
Prospectus, by written notice by the Representatives to the Company. Such
notice shall set forth the aggregate number of Additional Shares as to which the
option is being exercised and the date and time, as reasonably determined by the
Representatives, when the Additional Shares are to be delivered (such date and
time being herein sometimes referred to as the "Additional Closing Date");
provided, however, that the Additional Closing Date shall not be earlier than
- -------- -------
the Closing Date or earlier than the second full business day after the date on
which the option shall have been exercised nor later than the eighth full
business day after the date on which the option shall have been exercised
(unless such time and date are postponed in accordance with the provisions of
Section 9 hereof). Certificates for the Additional Shares shall be registered
in such name or names and in such authorized denominations as the
Representatives may request in writing at least two full business days prior to
the Additional Closing Date. The Company will permit the Representatives to
examine and package such certificates for delivery at least one full business
day prior to the Additional Closing Date.
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The number of Additional Shares to be sold to each Underwriter shall be the
number which bears the same ratio to the aggregate number of Additional Shares
being purchased as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I hereto (or such number increased as set forth in
Section 9 hereof) bears to the number of Firm Shares being purchased from the
Company, subject, however, to such adjustments to eliminate any fractional
shares as the Representatives in their sole discretion shall make.
Payment for the Additional Shares shall be made by wire transfer in same
day funds at the offices of Thompson & Knight L.L.P., 1700 Pacific Avenue,
Dallas, Texas 75201, or such other location as may be mutually acceptable, upon
delivery of the certificates for the Additional Shares to the Representatives
for the respective accounts of the Underwriters.
3. Offering. Upon the Representatives' authorization of the release of the
--------
Firm Shares, the Underwriters propose to offer the Shares for sale to the public
upon the terms set forth in the Prospectus.
4. Covenants of the Company. The Company covenants and agrees with the
------------------------
Underwriters that:
(a) If the Registration Statement has not yet been declared effective the
Company will use its best efforts to cause the Registration Statement and any
amendments thereto to become effective as promptly as possible, and if Rule 430A
is used or the filing of the Prospectus is otherwise required under Rule 424(b)
or Rule 434, the Company will file the Prospectus (properly completed if Rule
430A has been used) pursuant to Rule 424(b) or Rule 434 within the prescribed
time period and will provide evidence satisfactory to the Representatives of
such timely filing. If the Company elects to rely on Rule 434, the Company will
prepare and file a term sheet that complies with the requirements of Rule 434.
The Company will notify the Representatives immediately (and, if requested
by the Representatives, will confirm such notice in writing) (i) when the
Registration Statement and any amendments thereto become effective, (ii) of any
request by the Commission for any amendment of or supplement to the Registration
Statement or the Prospectus or for any additional information, (iii) of the
mailing or the delivery to the Commission for filing of any amendment of or
supplement to the Registration Statement or the Prospectus, (iv) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereto or of the
initiation, or the threatening, of any proceedings therefor, (v) of the receipt
of any comments from the Commission, and (vi) of the receipt by the Company of
any notification with respect to the suspension of the qualification of the
Shares for sale in any jurisdiction or the initiation or threatening of any
proceeding for that purpose. If the Commission shall propose or enter a stop
order at any time, the Company will make every reasonable effort to prevent the
issuance of any such stop order and, if issued, to obtain the lifting of such
order as soon as possible. The Company will not file any amendment to the
Registration Statement or any amendment of or supplement to the Prospectus
(including the prospectus required to be filed pursuant to Rule 424(b)or Rule
434) that differs from the prospectus on file at the time of the effectiveness
of the Registration Statement
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<PAGE>
before or after the effective date of the Registration Statement to which the
Representatives shall reasonably object in writing after being timely furnished
in advance a copy thereof.
(b) If at any time when a prospectus relating to the Shares is required to be
delivered under the Act any event shall have occurred as a result of which the
Prospectus as then amended or supplemented would, in the judgment of the
Underwriters or the Company include an untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, or if it shall be necessary at any time to amend or
supplement the Prospectus or Registration Statement to comply with the Act or
the Regulations, the Company will notify the Representatives promptly and
prepare and file with the Commission an appropriate amendment or supplement (in
form and substance satisfactory to the Representatives) which will correct such
statement or omission and will use its best efforts to have any amendment to the
Registration Statement declared effective as soon as possible.
(c) The Company will promptly deliver to the Representatives two signed copies
of the Registration Statement, including exhibits and all amendments thereto,
and the Company will promptly deliver to each of the Underwriters such number of
copies of any preliminary prospectus, the Prospectus, the Registration
Statement, and all amendments of and supplements to such documents, if any, and
as the Underwriters may reasonably request.
(d) The Company will endeavor in good faith, in cooperation with the
Representatives, at or prior to the time of effectiveness of the Registration
Statement, to qualify the Shares for offering and sale under the securities laws
relating to the offering or sale of the Shares of such jurisdictions as the
Representatives may designate and to maintain such qualification in effect for
so long as required for the distribution thereof; except that in no event shall
the Company be obligated in connection therewith to qualify as a foreign
corporation or to execute a general consent to service of process.
(e) The Company will make generally available (within the meaning of Section
11(a) of the Act) to its security holders and to the Representatives as soon as
practicable, but not later than 45 days after the end of its fiscal quarter in
which the first anniversary date of the effective date of the Registration
Statement occurs, an earning statement (in form complying with the provisions of
Rule 158 of the Regulations) covering a period of at least twelve consecutive
months beginning after the effective date of the Registration Statement.
(f) During the period of 180 days from the date of the Prospectus, the Company
will not, without the prior written consent of Bear, Stearns & Co. Inc., issue,
sell, offer or agree to sell, grant any option for the sale of, or otherwise
dispose of, directly or indirectly, any Common Stock (or any securities
convertible into, exercisable for or exchangeable for Common Stock), and the
Company will obtain the undertaking of each of its officers and directors and
such of its shareholders as have been heretofore designated by Bear, Stearns &
Co. Inc. and listed on Schedule II attached hereto not to engage in any of the
aforementioned transactions on their own behalf, other than the Company's sale
of Shares hereunder and the Company's issuance of Common Stock upon the exercise
of presently outstanding stock options.
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<PAGE>
(g) During a period of three years from the effective date of the Registration
Statement, the Company will furnish to the Underwriters copies of (i) all
reports to its shareholders; and (ii) all reports, financial statements and
proxy or information statements filed by the Company with the Commission or any
national securities exchange.
(h) The Company will apply the proceeds from the sale of the Shares as set
forth under "Use of Proceeds" in the Prospectus.
(i) The Company will use its best efforts to cause the Shares to be listed for
inclusion in the NASDAQ National Market.
(j) The Company will file with the Commission such reports on Form SR as may
be required pursuant to Rule 463 of the Regulations.
5. Payment of Expenses. Whether or not the transactions contemplated in this
-------------------
Agreement are consummated or this Agreement is terminated, the Company hereby
agrees to pay all costs and expenses incident to the performance of the
obligations of the Company hereunder, including those in connection with (i)
preparing, printing, duplicating, filing and distributing the Registration
Statement, as originally filed and all amendments thereof (including all
exhibits thereto), any preliminary prospectus, the Prospectus and any amendments
or supplements thereto (including, without limitation, fees and expenses of the
Company's accountants and counsel), the underwriting documents (including this
Agreement and the Agreement Among Underwriters) and all other documents related
to the public offering of the Shares (including those supplied to the
Underwriters in quantities as hereinabove stated), (ii) the issuance, transfer
and delivery of the Shares to the Underwriters, including any transfer or other
taxes payable thereon, (iii) the qualification of the Shares under state or
foreign securities or Blue Sky laws, including the costs of printing and mailing
a preliminary and final "Blue Sky Survey" and the fees of counsel for the
Underwriters and such counsel's disbursements in relation thereto, (iv)
quotation of the Shares on the NASDAQ National Market, (v) filing fees of the
Commission and the National Association of Securities Dealers, Inc.; (vi) the
cost of printing certificates representing the Shares and (vii) the cost and
charges of any transfer agent or registrar.
6. Conditions of Underwriters' Obligations. The obligations of the
---------------------------------------
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as provided herein, shall be subject to the accuracy of the representations and
warranties of the Company herein contained, as of the date hereof and as of the
Closing Date (for purposes of this Section 6, "Closing Date" shall refer to the
Closing Date for the Firm Shares and any Additional Closing Date, if different,
for the Additional Shares), to the absence from any certificates, opinions,
written statements or letters furnished to you or to Pillsbury Madison & Sutro
LLP ("Underwriters' Counsel") pursuant to this Section 6 of any misstatement or
omission, to the performance by the Company of its obligations hereunder, and to
the following additional conditions:
(a) The Registration Statement shall have become effective not later than [if
pricing pursuant to Rule 430A 5:30 P.M., New York time, on the date of this
Agreement] [if pricing pursuant to a pricing amendment -- 12:00 P.M., New York
time on the date an amendment to the Registration
-13-
<PAGE>
Statement containing the public offering price has been filed with the
Commission], or at such later time and date as shall have been consented to in
writing by you; if the Company shall have elected to rely upon Rule 430A or Rule
434 of the Regulations, the Prospectus shall have been filed with the Commission
in a timely fashion in accordance with Section 4(a) hereof; and, at or prior to
the Closing Date no stop order suspending the effectiveness of the Registration
Statement or any post-effective amendment thereof shall have been issued and no
proceedings therefor shall have been initiated or threatened by the Commission.
(b) At the Closing Date you shall have received the opinion of Thompson &
Knight L.L.P., counsel for the Company, dated the Closing Date addressed to the
Underwriters and in form and substance satisfactory to Underwriters' Counsel, to
the effect that:
(i) The Company has been duly organized and is validly existing as
a corporation in good standing under the laws of its jurisdiction of
incorporation. The Company is duly qualified and in good standing as a
foreign corporation in each jurisdiction in which the character or location
of its properties (owned, leased or licensed) or the nature or conduct of
its business makes such qualification necessary, except for those failures
to be so qualified or in good standing which will not in the aggregate have
a material adverse effect on the Company. The Company has all requisite
corporate authority to own, lease and license its properties and conduct
its business as now being conducted and as described in the Registration
Statement and the Prospectus. The Company does not have any subsidiaries.
(ii) The Company has an authorized and outstanding capitalization as
set forth in the Registration Statement and the Prospectus. All of the
outstanding shares of Common Stock are duly and validly authorized and
issued, are fully paid and nonassessable and were not issued in violation
of or subject to any preemptive rights. The Shares to be delivered on the
Closing Date have been duly and validly authorized and, when delivered by
the Company in accordance with this Agreement, will be duly and validly
issued, fully paid and nonassessable and will not have been issued in
violation of or subject to any preemptive rights. The Common Stock, the
Firm Shares and the Additional Shares conform to the descriptions thereof
contained in the Registration Statement and the Prospectus.
(iii) The Common Stock currently outstanding is listed, and the
Shares to be sold under this Agreement to the Underwriters are duly
authorized for quotation on the NASDAQ National Market.
(iv) This Agreement has been duly and validly authorized, executed
and delivered by the Company.
(v) There is no litigation or governmental or other action, suit,
proceeding or investigation before any court or before or by any public,
regulatory or governmental agency or body pending or to the best of such
counsel's knowledge, threatened against, or involving the properties or
business of the Company, which is
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<PAGE>
of a character required to be disclosed in the Registration Statement and
the Prospectus which has not been properly disclosed therein.
(vi) The execution, delivery, and performance of this Agreement and
the consummation of the transactions contemplated hereby by the Company do
not and will not (A) conflict with or result in a breach of any of the
terms and provisions of, or constitute a default (or an event which with
notice or lapse of time, or both, would constitute a default) under, or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company pursuant to, any agreement,
instrument, franchise, license or permit known to such counsel to which the
Company is a party or by which its properties or assets may be bound or (B)
violate or conflict with any provision of the certificate of incorporation
or bylaws of the Company, or, to the best knowledge of such counsel, any
judgment, decree, order, statute, rule or regulation of any court or any
public, governmental or regulatory agency or body having jurisdiction over
the Company or any of its properties or assets. No consent, approval,
authorization, order, registration, filing, qualification, license or
permit of or with any court or any public, governmental, or regulatory
agency or body having jurisdiction over the Company or any of its
properties or assets is required for the execution, delivery and
performance of this Agreement or the consummation of the transactions
contemplated hereby, except for (1) such as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters (as to which such counsel
need express no opinion) and (2) such as have been made or obtained under
the Act.
(vii) The Registration Statement and the Prospectus and any
amendments thereof or supplements thereto (other than the financial
statements and schedules and other financial data included or incorporated
by reference therein, as to which no opinion need be rendered) comply as to
form in all material respects with the requirements of the Act and the
Regulations.
(viii) The Registration Statement is effective under the Act, and, to
the best knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement or any post-effective amendment
thereof has been issued and no proceedings therefor have been initiated or
threatened by the Commission and all filings required by Rule 424(b) of the
Regulations have been made.
(ix) In addition, such opinion shall also contain a statement that
such counsel has participated in conferences with officers and
representatives of the Company, representatives of the independent public
accountants for the Company and the Underwriters at which the contents and
the Prospectus and related matters were discussed and, no facts have come
to the attention of such counsel which would lead such counsel to believe
that either the Registration Statement at the time it became effective
(including the information deemed to be part of the Registration Statement
at the time of effectiveness pursuant to Rule 430A(b) or Rule 434, if
-15-
<PAGE>
applicable), or any amendment thereof made prior to the Closing Date as of
the date of such amendment, contained an untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectus as of its date (or any amendment thereof or supplement thereto
made prior to the Closing Date as of the date of such amendment or
supplement) and as of the Closing Date contained or contains an untrue
statement of a material fact or omitted or omits to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading
(it being understood that such counsel need express no belief or opinion
with respect to the financial statements and schedules and other financial
data included or incorporated by reference therein).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance reasonably satisfactory to Underwriters'
Counsel) of other counsel reasonably acceptable to Underwriters' Counsel,
familiar with the applicable laws; (B) as to matters of fact, to the extent they
deem proper, on certificates of responsible officers of the Company and
certificates or other written statements of officers of departments of various
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company, provided that copies of any such statements or
certificates shall be delivered to Underwriters' Counsel. The opinion of such
counsel for the Company shall state that the opinion of any such other counsel
is in form satisfactory to such counsel and, in their opinion, you and they are
justified in relying thereon.
(c) All proceedings taken in connection with the sale of the Firm Shares
and the Additional Shares as herein contemplated shall be satisfactory in form
and substance to the Representatives and to Underwriters' Counsel, and the
Underwriters shall have received from said Underwriters' Counsel a favorable
opinion, dated as of the Closing Date with respect to the issuance and sale of
the Shares, the Registration Statement and the Prospectus and such other related
matters as the Representatives may reasonably require, and the Company shall
have furnished to Underwriters' Counsel such documents as they request for the
purpose of enabling them to pass upon such matters.
(d) At the Closing Date, the Representatives shall have received a
certificate of the Chief Executive Officer and Chief Financial Officer of the
Company, dated the Closing Date to the effect that (i) the condition set forth
in subsection (a) of this Section 6 has been satisfied, (ii) as of the date
hereof and as of the Closing Date the representations and warranties of the
Company set forth in Section 1 hereof are accurate, (iii) as of the Closing Date
the obligations of the Company to be performed hereunder on or prior thereto
have been duly performed and (iv) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, the
Company has not sustained any material loss or interference with its business or
properties from fire, flood, hurricane, accident or other calamity, whether or
not covered by insurance, or from any labor dispute or any legal or governmental
proceeding, and there has not been any material adverse change, or any
development involving a material adverse change, in the business prospects,
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<PAGE>
properties, operations, condition (financial or otherwise), or results of
operations of the Company, except in each case as described in or contemplated
by the Prospectus.
(e) At the time this Agreement is executed and at the Closing Date, the
Representatives shall have received a letter, from Ernst & Young LLP,
independent public accountants for the Company, dated, respectively, as of the
date of this Agreement and as of the Closing Date addressed to the Underwriters
and in form and substance satisfactory to the Representatives, to the effect
that: (i) they are independent certified public accountants with respect to the
Company within the meaning of the Act and the Regulations and stating that the
answer to Item 10 of the Registration Statement is correct insofar as it relates
to them; (ii) stating that, in their opinion, the financial statements and
schedules of the Company included in the Registration Statement and the
Prospectus and covered by their opinion therein comply as to form in all
material respects with the applicable accounting requirements of the Act and the
applicable published rules and regulations of the Commission thereunder; (iii)
on the basis of procedures consisting of a reading of the latest available
unaudited interim consolidated financial statements of the Company a reading of
the minutes of meetings and consents of the shareholders and board of directors
of the Company and the committees of such board subsequent to [insert the date
of the most recent audited consolidated balance sheet of the Company included or
incorporated by reference in the Registration Statement and the Prospectus],
inquiries of officers and other employees of the Company who have responsibility
for financial and accounting matters of the Company with respect to transactions
and events subsequent to [insert the date of the most recent audited
consolidated balance sheet of the Company included or incorporated by reference
in the Registration Statement and the Prospectus] and other specified procedures
and inquiries to a date not more than five days prior to the date of such
letter, nothing has come to their attention that would cause them to believe
that: (A) the unaudited consolidated financial statements and schedules of the
Company presented in the Registration Statement and the Prospectus do not comply
as to form in all material respects with the applicable accounting requirements
of the Act and, if applicable, the Exchange Act and the applicable published
rules and regulations of the Commission thereunder or that such unaudited
consolidated financial statements are not fairly presented in conformity with
generally accepted accounting principles applied on a basis substantially
consistent with that of the audited consolidated financial statements included
in the Registration Statement and the Prospectus; (B) with respect to the period
subsequent to [insert the date of the most recent consolidated balance sheet of
the Company included or incorporated by reference in the Registration Statement
and the Prospectus] there were, as of the date of the most recent available
monthly consolidated financial statements of the Company, if any, and as of a
specified date not more than five days prior to the date of such letter, any
changes in the capital stock or long-term indebtedness of the Company or any
decrease in the net current assets or shareholders' equity of the Company, in
each case as compared with the amounts shown in the most recent balance sheet
presented in the Registration Statement and the Prospectus, except for changes
or decreases which the Registration Statement and the Prospectus disclose have
occurred or may occur or which are set forth in such letter or (C) that during
the period from [insert the date following the date of the most recent
consolidated balance sheet of the Company included or incorporated by reference
in the Registration Statement and the Prospectus to the date of the most recent
available monthly consolidated financial statements of the Company, if any, and
to a specified date not more than five days prior to the date of such letter,
there was any decrease, as compared with the corresponding period in the prior
fiscal year, in total revenues, or total or per share net income, except for
decreases
-17-
<PAGE>
which the Registration Statement and the Prospectus disclose have occurred or
may occur or which are set forth in such letter; and (iv) stating that they have
compared specific dollar amounts, numbers of shares, percentages of revenues and
earnings, and other financial information pertaining to the Company set forth in
the Registration Statement and the Prospectus, which have been specified by the
Representatives prior to the date of this Agreement, to the extent that such
amounts, numbers, percentages, and information may be derived from the general
accounting and financial records of the Company or from schedules furnished by
the Company, and excluding any questions requiring an interpretation by legal
counsel, with the results obtained from the application of specified readings,
inquiries, and other appropriate procedures specified by the Representatives set
forth in such letter, and found them to be in agreement.
(f) Prior to the Closing Date the Company shall have furnished to the
Representatives such further information, certificates and documents as the
Representatives may reasonably request.
(g) The Representatives shall have received from each person who is a
director or officer of the Company or such shareholder as have been heretofore
designated by the Representatives and listed on Schedule II hereto an agreement
to the effect that such person will not, directly or indirectly, without the
prior written consent of Bear, Stearns & Co., Inc., offer, sell, offer or agree
to sell, grant any option to purchase or otherwise dispose (or announce any
offer, sale, grant of an option to purchase or other disposition) of any shares
of Common Stock (or any securities convertible into, exercisable for or
exchangeable or exercisable for shares of Common Stock) for a period of 180 days
after the date of the Prospectus.
(h) At the Closing Date, the Shares shall have been approved for quotation
on the NASDAQ National Market.
If any of the conditions specified in this Section 6 shall not have been
fulfilled when and as required by this Agreement, or if any of the certificates,
opinions, written statements or letters furnished to the Representatives or to
Underwriters' Counsel pursuant to this Section 6 shall not be in all material
respects reasonably satisfactory in form and substance to the Representatives
and to Underwriters' Counsel, all obligations of the Underwriters hereunder may
be cancelled by the Representatives at, or at any time prior to, the Closing
Date and the obligations of the Underwriters to purchase the Additional Shares
may be cancelled by the Representatives at, or at any time prior to, the
Additional Closing Date. Notice of such cancellation shall be given to the
Company in writing, or by telephone, telex or telegraph, confirmed in writing.
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<PAGE>
7. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of Section
15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), against any and all losses, liabilities, claims,
damages and expenses whatsoever as incurred (including but not limited to
attorneys' fees and any and all expenses whatsoever incurred in investigating,
preparing or defending against any litigation, commenced or threatened, or any
claim whatsoever, and any and all amounts paid in settlement of any claim or
litigation), joint or several, to which they or any of them may become subject
under the Act, the Exchange Act or otherwise, insofar as such losses,
liabilities, claims, damages or expenses (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the registration statement for the registration of
the Shares, as originally filed or any amendment thereof, or any related
preliminary prospectus or the Prospectus, or in any supplement thereto or
amendment thereof, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
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the Company will not be liable in any such case to the extent but only to the
extent that any such loss, liability, claim, damage or expense arises out of or
is based upon any such untrue statement or alleged untrue statement or omission
or alleged omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter through
the Representatives expressly for use therein. This indemnity agreement will be
in addition to any liability which the Company may otherwise have including
under this Agreement.
(b) Each Underwriter severally, and not jointly, agrees to indemnify and
hold harmless the Company, each of the directors of the Company, each of the
officers of the Company who shall have signed the Registration Statement, and
each other person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any losses,
liabilities, claims, damages and expenses whatsoever as incurred (including but
not limited to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation), jointly or severally, to which they or any of them
may become subject under the Act, the Exchange Act or otherwise, insofar as such
losses, liabilities, claims, damages or expenses (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in the registration statement for the registration
of the Shares, as originally filed or any amendment thereof, or any related
preliminary prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any Underwriter through the Representatives expressly for use therein;
provided, however, that in no case shall any Underwriter be liable or
- -------- -------
responsible for any amount in excess of the underwriting discount applicable to
the Shares purchased by such Underwriter
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<PAGE>
hereunder. This indemnity will be in addition to any liability which any
Underwriter may otherwise have including under this Agreement. The Company
acknowledges that the statements set forth in the last paragraph of the cover
page and in the ______ paragraphs under the caption "Underwriting" in the
Prospectus constitute the only information furnished in writing by or on behalf
of any Underwriter expressly for use in the registration statement relating to
the Shares as originally filed or in any amendment thereof, any related
preliminary prospectus or the Prospectus or in any amendment thereof or
supplement thereto, as the case may be.
(c) Promptly after receipt by an indemnified party under subsection (a) or
(b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify each party against whom indemnification is
to be sought in writing of the commencement thereof (but the failure so to
notify an indemnifying party shall not relieve it from any liability which it
may have under this Section 7). In case any such action is brought against any
indemnified party, and it notifies an indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel satisfactory to such indemnified party.
Notwithstanding the foregoing, the indemnified party or parties shall have the
right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless (i) the employment of such counsel shall have been authorized in
writing by one of the indemnifying parties in connection with the defense of
such action, (ii) the indemnifying parties shall not have employed counsel to
have charge of the defense of such action within a reasonable time after notice
of commencement of the action, or (iii) such indemnified party or parties shall
have reasonably concluded that there may be defenses available to it or them
which are different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying parties shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses shall be borne by the
indemnifying parties. Anything in this subsection to the contrary
notwithstanding, an indemnifying party shall not be liable for any settlement of
any claim or action effected without its written consent; provided, however,
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that such consent was not unreasonably withheld.
8. Contribution. In order to provide for contribution in circumstances in
------------
which the indemnification provided for in Section 7 hereof is for any reason
held to be unavailable from any indemnifying party or is insufficient to hold
harmless a party indemnified thereunder, the Company and the Underwriters shall
contribute to the aggregate losses, claims, damages, liabilities and expenses of
the nature contemplated by such indemnification provision (including any
investigation, legal and other expenses incurred in connection with, and any
amount paid in settlement of, any action, suit or proceeding or any claims
asserted, but after deducting in the case of losses, claims, damages,
liabilities and expenses suffered by the Company any contribution received by
the Company from persons, other than the Underwriters, who may also be liable
for contribution, including persons who control the Company within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act, officers of the
Company who signed the Registration Statement and directors of the Company) as
incurred to which the Company and one or more of the Underwriters may be
subject, in such proportions as is appropriate to reflect the relative benefits
received by the
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<PAGE>
Company and the Underwriters from the offering of the Shares or, if such
allocation is not permitted by applicable law or indemnification is not
available as a result of the indemnifying party not having received notice as
provided in Section 7 hereof, in such proportion as is appropriate to reflect
not only the relative benefits referred to above but also the relative fault of
the Company and the Underwriters in connection with the statements or omissions
which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative benefits received
by the Company and the Underwriters shall be deemed to be in the same proportion
as (x) the total proceeds from the offering (net of underwriting discounts and
commissions but before deducting expenses) received by the Company and (y) the
underwriting discounts and commissions received by the Underwriters,
respectively, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Company and of the Underwriters 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 or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company
and the Underwriters agree that it would not be just and equitable if
contribution pursuant to this Section 8 were determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this Section
8, (i) in no case shall any Underwriter be liable or responsible for any amount
in excess of the underwriting discount applicable to the Shares purchased by
such Underwriter hereunder, and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. Notwithstanding the provisions of this Section 8 and the
preceding sentence, no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages that such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. For purposes of this Section 8, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act shall have the same rights to contribution as such Underwriter, and
each person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act, each officer of the Company who
shall have signed the Registration Statement and each director of the Company
shall have the same rights to contribution as the Company, subject in each case
to clauses (i) and (ii) of this Section 8. Any party entitled to contribution
will, promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for contribution may
be made against another party or parties, notify each party or parties from whom
contribution may be sought, but the omission to so notify such party or parties
shall not relieve the party or parties from whom contribution may be sought from
any obligation it or they may have under this Section 8 or otherwise. No party
shall be liable for contribution with respect to any action or claim settled
without its consent; provided, however, that such consent was not unreasonably
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withheld.
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<PAGE>
9. Default by an Underwriter.
-------------------------
(a) If any Underwriter or Underwriters shall default in its or their
obligation to purchase Firm Shares or Additional Shares hereunder, and if the
Firm Shares or Additional Shares with respect to which such default relates do
not (after giving effect to arrangements, if any, made by the Representatives
pursuant to subsection (b) below) exceed in the aggregate 10% of the number of
Firm Shares or Additional Shares, to which the default relates shall be
purchased by the non-defaulting Underwriters in proportion to the respective
proportions which the numbers of Firm Shares set forth opposite their respective
names in Schedule I hereto bear to the aggregate number of Firm Shares set forth
opposite the names of the non-defaulting Underwriters.
(b) In the event that such default relates to more than 10% of the Firm
Shares or Additional Shares, as the case may be, the Representatives may in
their discretion arrange for the Representatives or for another party or parties
(including any non-defaulting Underwriter or Underwriters who so agree) to
purchase such Firm Shares or Additional Shares, as the case may be, to which
such default relates on the terms contained herein. In the event that within 5
calendar days after such a default the Representatives do not arrange for the
purchase of the Firm Shares or Additional Shares, as the case may be, to which
such default relates as provided in this Section 9, this Agreement or, in the
case of a default with respect to the Additional Shares, the obligations of the
Underwriters to purchase and of the Company to sell the Additional Shares shall
thereupon terminate, without liability on the part of the Company with respect
thereto (except in each case as provided in Section 5, 7(a) and 8 hereof) or the
Underwriters, but nothing in this Agreement shall relieve a defaulting
Underwriter or Underwriters of its or their liability, if any, to the other
Underwriters and the Company for damages occasioned by its or their default
hereunder.
(c) In the event that the Firm Shares or Additional Shares to which the
default relates are to be purchased by the non-defaulting Underwriters, or are
to be purchased by another party or parties as aforesaid, the Representatives or
the Company shall have the right to postpone the Closing Date or Additional
Closing Date, as the case may be for a period, not exceeding five business days,
in order to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus or in any other documents and
arrangements, and the Company agrees to file promptly any amendment or
supplement to the Registration Statement or the Prospectus which, in the opinion
of Underwriters' Counsel, may thereby be made necessary or advisable. The term
"Underwriter" as used in this Agreement shall include any party substituted
under this Section 9 with like effect as if it had originally been a party to
this Agreement with respect to such Firm Shares and Additional Shares.
10. Survival of Representations and Agreements. All representations and
------------------------------------------
warranties, covenants and agreements of the Underwriters and the Company
contained in this Agreement, including the agreements contained in Section 5,
the indemnity agreements contained in Section 7 and the contribution agreements
contained in Section 8, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter or any
controlling person thereof or by or on behalf of the Company, any of its
officers and directors or any controlling person thereof, and shall survive
delivery of and payment for the Shares to and by the Underwriters. The
representations contained in Section 1 and the agreements contained in Sections
5, 7, 8 and
-22-
<PAGE>
11(d) hereof shall survive the termination of this Agreement, including
termination pursuant to Section 9 or 11 hereof.
11. Effective Date of Agreement; Termination.
----------------------------------------
(a) This Agreement shall become effective, upon the later of when (i) the
Representatives and the Company shall have received notification of the
effectiveness of the Registration Statement or (ii) the execution of this
Agreement. If either the initial public offering price or the purchase price
per Share has not been agreed upon prior to 5:00 P.M., New York time, on the
fifth full business day after the Registration Statement shall have become
effective, this Agreement shall thereupon terminate without liability to the
Company or the Underwriters except as herein expressly provided. Until this
Agreement becomes effective as aforesaid, it may be terminated by the Company by
notifying the Representatives or by the Representatives notifying the Company.
Notwithstanding the foregoing, the provisions of this Section 11 and of Sections
1, 5, 7 and 8 hereof shall at all times be in full force and effect.
(b) The Representatives shall have the right to terminate this Agreement at
any time prior to the Closing Date or the obligations of the Underwriters to
purchase the Additional Shares at any time prior to the Additional Closing Date,
as the case may be, if (A) any domestic or international event or act or
occurrence has materially disrupted, or in the Representatives' opinion will in
the immediate future materially disrupt, the market for the Company's securities
or securities in general; or (B) if trading on the Nasdaq National Market or the
New York or American Stock Exchanges shall have been suspended, or minimum or
maximum prices for trading shall have been fixed, or maximum ranges for prices
for securities shall have been required, on the Nasdaq National Market or New
York or American Stock Exchanges by the New York or American Stock Exchanges or
by order of the Commission or any other governmental authority having
jurisdiction; or (C) if a banking moratorium has been declared by a state or
federal authority or if any new restriction materially adversely affecting the
distribution of the Firm Shares or the Additional Shares, as the case may be,
shall have become effective; or (D) (i) if the United States becomes engaged in
hostilities or there is an escalation of hostilities involving the United States
or there is a declaration of a national emergency or war by the United States or
(ii) if there shall have been such change in political, financial or economic
conditions if the effect of any such event in (i) or (ii) as in the
Representatives' judgment makes it impracticable or inadvisable to proceed with
the offering, sale and delivery of the Firm Shares or the Additional Shares, as
the case may be, on the terms contemplated by the Prospectus.
(c) Any notice of termination pursuant to this Section 11 shall be by
telephone, telex, or telegraph, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of the provisions
hereof (otherwise than pursuant to (i) notification by the Representatives as
provided in Section 11(a) hereof or (ii) Section 9(b) or 11(b) hereof), or if
the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth herein is not
satisfied or because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or comply with any provision hereof, the
Company will, subject to demand by the
-23-
<PAGE>
Representatives, reimburse the Underwriters for all out-of-pocket expenses
(including the fees and expenses of their counsel), incurred by the Underwriters
in connection herewith.
12. Notices. All communications hereunder, except as may be otherwise
-------
specifically provided herein, shall be in writing and , if sent to any
Underwriter, shall be mailed, delivered, or telexed or telegraphed and confirmed
in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue,
New York, N.Y. 10167, Attention: _____________; if sent to the Company, shall be
mailed, delivered, or telegraphed and confirmed in writing to the Company, 801
Stadium Drive, Suite 117, Arlington, Texas 76011, Attention: Michelle R.
Chambers.
13. Parties. This Agreement shall insure solely to the benefit of, and
-------
shall be binding upon, the Underwriters and the Company and the controlling
persons, directors, officers, employees and agents referred to in Section 7 and
8, and their respective successors and assigns, and no other person shall have
or be construed to have any legal or equitable right, remedy or claim under or
in respect of or by virtue of this Agreement or any provision herein contained.
The term "successors and assigns" shall not include a purchaser, in its capacity
as such, of Shares from any of the Underwriters.
14. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York, but without regard to
principles of conflicts of law.
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
DATA RETURN CORPORATION
By
Sunny C. Vanderbeck
Accepted as of the date first above written
BEAR, STEARNS & CO. INC.
CIBC World Markets Corp.
Wit Capital Corporation
By
On behalf of themselves and the other
Underwriters named in Schedule I hereto.
-24-
<PAGE>
SCHEDULE I
----------
<TABLE>
<CAPTION>
Number of Firm Shares to
Name of Underwriter be Purchased
- ---------------------------------------------------------------------------
<S> <C>
Bear, Stearns & Co. Inc.
CIBC World Markets Corp.
Wit Capital Corporation
Total
--------------------------
--------------------------
</TABLE>
-25-
<PAGE>
SCHEDULE II
-26-
<PAGE>
EXHIBIT 4.1
COMMON STOCK COMMON STOCK
DATA RETURN(TM)
DATA RETURN CORPORATION
INCORPORATED UNDER THE LAWS OF THE STATE OF TEXAS
THIS CERTIFICATE IS TRANSFERABLE IN NEW YORK, NY AND RIDGEFIELD PARK, NJ
SHARES
CUSIP 23785M 10 4
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $0.001, OF
DATA RETURN CORPORATION
transferable of the books of the Corporation in person or by the authorized
attorney upon surrender of this Certificate properly endorsed. This Certificate
and the shares evidenced hereby are issued under and half-the subject to the
provisions of the Laws of the State of Texas and of the provisions of the
Restated Articles of incorporation and the By-laws of the Corporation and any
amendments thereto, in all of which the holder by acceptance hereof, assents.
This Certificate is not valid until countersigned by the Transfer Agent and
registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
/s/ Michelle R. Chambers /s/ Stuart A. Walker
PRESIDENT SECRETAREY/TREASURER
SEAL OF TEXAS
DATA RETURN CORPORATION
1997
NOTE: LOGO IS FOR POSITION ONLY
AMERICAN BANK NOTE COMPANY PRODUCTION COORDINATOR: LISA MARTIN: 215-530-2168
680 BLAIR MILL ROAD PROOF OF SEPTEMBER 30, 1999
HORSHAM, PA 19044 DATA RETURN CORPORATION
(218) 657-3480 H 63625 FC
SALES: M. GARRETT: 214-823-2700 OPERATOR: MT
/NET/BANKNOTE/NEW ZIP 1/DATA/63525 Rev 1
COUNTERSIGNED AND REGISTERED:
ChaseMellon Shareholder Services, L.L.C.
TRANSFER AGENT
AND REGISTRAR
<PAGE>
DATA RETURN CORPORATION
This certificate also evidences and entitles the holder hereof to certain
rights as set forth in a Rights Agreement dated as of September 27, 1999, as it
may be amended from time to time (the "Rights Agreement"), between Data Return
Corporation and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, the
terms of which are hereby incorporated herein by reference and a copy of which
is on file at the principal executive offices of Data Return Corporation. Under
certain circumstances, as set forth in the Rights Agreement, such Rights will be
evidenced by separate certificates and will no longer be evidenced by this
certificate. Data Return Corporation will mail to the holder of this certificate
a copy of the Rights Agreement without charge after receipt of a written request
therefor. Under certain circumstances, as set forth in the Rights Agreement,
Rights beneficially owned by an Acquiring Person or its Affiliates or Associates
(as such terms are defined in the Rights Agreement) and by any subsequent holder
of such Rights are null and void and nontransferable.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT--__________Custodian___________
TEN ENT -- as tenants by the entireties (Cust.) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act_______________________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received, _______________________ hereby sell(s), assign(s) and
transfer(s) unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
______________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP OR POSTAL CODE OF
ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of Common Stock represented by the within certificate, and do hereby irrevocably
constitute and appoint
______________________________________________________________________ Attorney
to transfer the said shares on the books of the within named Corporation with
full power of substitution in the premises.
Dated, _____________________________________
NOTICE: X ___________________________________
(SIGNATURE)
THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND
WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE
CERTIFICATE IN EVERY
PARTICULAR WITHOUT ALTER- X ___________________________________
ATION OR ENLARGEMENT OR ANY (SIGNATURE)
CHANGE WHATEVER.
- --------------------------------------------------------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM) PURSUANT TO S.E.C. FILE
17AD-16.
- --------------------------------------------------------------------------------
SIGNATURE(S) GUARANTEED BY:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
- ----------------------------------------- -------------------------------------------------------
AMERICAN BANK NOTE COMPANY PRODUCTION COORDINATOR: LISA MARTINI 215-830-2185
680 BLAIR MILL ROAD PROOF OF SEPTEMBER 30, 1999
HORSHAM, PA 19044 DATA RETURN CORPORATION
(215) 687-3480 H 53625 Bk
- ----------------------------------------- -------------------------------------------------------
SALES: M. GARRETT: 214-823-2700 OPERATOR: MT
- ----------------------------------------- -------------------------------------------------------
/NET/BANKNOTE/NEW ZIP 1/DATA/53625 REV 1
- ----------------------------------------- -------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 4.3
- --------------------------------------------------------------------------------
DATA RETURN CORPORATION
and
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
Rights Agent
RIGHTS AGREEMENT
Dated as of September 27, 1999
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
Section 1. Certain Definitions............................................. 1
Section 2. Appointment of Rights Agent..................................... 5
Section 3. Issue of Rights and Right Certificates.......................... 5
Section 4. Form of Right Certificates...................................... 7
Section 5. Execution, Countersignature and Registration.................... 7
Section 6. Transfer, Split-up, Combination and Exchange of
Right Certificates; Mutilated, Destroyed, Lost or
Stolen Right Certificates....................................... 8
Section 7. Exercise of Rights; Expiration Date of Rights................... 9
Section 8. Cancellation and Destruction of Right Certificates..............10
Section 9. Reservation and Availability of Capital Stock...................11
Section 10. Preferred Shares Record Date....................................12
Section 11. Adjustment of Purchase Price, Number of Shares or
Number of Rights................................................12
Section 12. Certificate of Adjustment.......................................19
Section 13. Consolidation, Merger, or Sale or Transfer of Assets
or Earning Power................................................19
Section 14. Fractional Rights and Fractional Shares.........................20
Section 15. Rights of Action................................................21
Section 16. Agreement of Right Holders......................................22
Section 17. Right Certificate Holder Not Deemed a Stockholder...............22
Section 18. Concerning the Rights Agent.....................................23
Section 19. Merger or Consolidation or Change of Name of Rights Agent.......23
Section 20. Duties of Rights Agent..........................................24
i
<PAGE>
Section 21. Change of Rights Agent..........................................26
Section 22. Issuance of New Right Certificates and Additional Rights........27
Section 23. Redemption......................................................28
Section 24. Exchange........................................................28
Section 25. Notice of Certain Events........................................30
Section 26. Notices.........................................................30
Section 27. Supplements and Amendments......................................31
Section 28. Successors......................................................32
Section 29. Benefits of this Agreement......................................32
Section 30. Severability....................................................32
Section 31. Governing Law...................................................32
Section 32. Counterparts....................................................32
Section 33. Descriptive Headings............................................32
Signatures....................................................................33
Exhibit A - Form of Statement of Resolution of Data Return Corporation
Exhibit B - Form of Right Certificate
Exhibit C - Summary of Rights to Purchase Preferred Shares
ii
<PAGE>
AGREEMENT
---------
This AGREEMENT, dated as of September 27, 1999 (the "Agreement"), between
DATA RETURN CORPORATION, a Texas corporation (the "Company"), and CHASEMELLON
SHAREHOLDER SERVICES, L.L.C., a New Jersey limited liability company, as Rights
Agent (the "Rights Agent"),
W I T N E S S E T H:
WHEREAS, the Board of Directors of the Company has authorized and declared
a dividend of one Right (as such term is hereinafter defined) for each share of
Common Stock, par value $.001 per share, of the Company (the "Common Stock")
outstanding at the Close of Business (as such term is hereinafter defined) on
September 27, 1999 (the "Record Date"), and has authorized the issuance of one
Right (as such number may hereafter be adjusted pursuant to the provisions of
this Agreement) with respect to each share of Common Stock that shall become
outstanding between the Record Date and the earliest of the Distribution Date,
the Redemption Date and the Final Expiration Date (as such terms are hereinafter
defined); provided, however, that Rights may be issued with respect to shares of
Common Stock that shall become outstanding after the Distribution Date and prior
to the earlier of the Redemption Date and the Final Expiration Date in
accordance with the provisions of Section 22 of this Agreement. Each Right
shall initially represent the right to purchase one one-hundredth of a share of
Series A Junior Participating Preferred Stock, par value $.001 per share, of the
Company (the "Preferred Shares"), having the powers, rights and preferences set
forth in the Statement of Resolution attached to this Agreement as Exhibit A;
NOW THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
"Acquiring Person" shall mean any Person (as such term is hereinafter
defined) who or which, together with all Affiliates and Associates (as such
terms are hereinafter defined) of such Person, shall be the Beneficial Owner (as
such term is hereinafter defined) of 15 percent or more of the Common Shares (as
such term is hereinafter defined) of the Company then outstanding, but shall not
include (i) the Company, (ii) any Subsidiary (as such term is hereinafter
defined) of the Company, (iii) any employee benefit plan of the Company or any
Subsidiary of the Company or any entity holding Common Shares of the Company for
or pursuant to the terms of any such plan, and (iv) each of the following named
parties or any Affiliates or Associates of such named parties (collectively, the
"Named Parties"): Sunny C. Vanderbeck, Michelle R. Chambers, Nathan Landow, DCR
Technology Fund I, Ltd., OHG Technology, Ltd. and Nathan Landow Family Limited
Partnership, unless such Named Party, together with all Affiliates and
Associates of such Named Party, becomes the Beneficial Owner of that percentage
of the Common Shares of the Company then outstanding equal to or greater than x
plus y, where "x" is the percentage of the issued and outstanding Common Shares
of the Company that such Named Party beneficially owns on the date of this
Agreement, and where "y" is 5 percent. Notwithstanding the foregoing, no Person
shall
1
<PAGE>
become an "Acquiring Person" as the result of an acquisition of Common Shares of
the Company by the Company which, by reducing the number of such shares
outstanding, increases the proportionate number of shares beneficially owned by
such Person to 15 percent or more of the Common Shares of the Company then
outstanding; provided, however, that if a Person shall become the Beneficial
Owner of 15 percent or more of the Common Shares of the Company then outstanding
by reason of share purchases by the Company and shall, after such share
purchases by the Company, become the Beneficial Owner of any additional Common
Shares of the Company, then such Person shall be deemed to be an "Acquiring
Person." Notwithstanding the foregoing, if the Board of Directors of the
Company, within ten (10) days after the first date on which the Company shall
become aware that any Person, together with all Affiliates and Associates of
such Person, is the Beneficial Owner of shares of Common Stock of the Company
such that such Person (but for this sentence) would be an Acquiring Person,
determines in good faith that such Person has inadvertently exceeded the
thresholds set forth in this definition of Acquiring Person, and such Person
divests as promptly as practicable a sufficient number of Common Shares of the
Company so that such Person would no longer be an "Acquiring Person," as defined
pursuant to the foregoing provisions of this definition, then such Person shall
not be deemed to be an "Acquiring Person" for any purposes of this Agreement.
"Adjustment Shares" shall have the meaning set forth in Section 11(a)(ii)
hereof.
"Affiliate" and "Associate," when used with reference to any Person, shall
have the respective meanings ascribed to such terms in Rule 12b-2 of the General
Rules and Regulations under the Exchange Act (as such term is hereinafter
defined), as in effect on the date of this Agreement.
A Person shall be deemed the "Beneficial Owner" of, and shall be deemed to
"beneficially own," and shall be deemed to have "Beneficial Ownership" of, any
securities:
(i) which such Person or any of such Person's Affiliates or Associates
beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's Affiliates or
Associates has (A) the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any agreement,
arrangement or understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide public
offering of securities), or upon the exercise of conversion rights, exchange
rights, rights (other than the Rights), warrants or options, or otherwise;
provided, however, that a Person shall not be deemed the Beneficial Owner of, or
to beneficially own, securities tendered pursuant to a tender or exchange offer
made by or on behalf of such Person or any of such Person's Affiliates or
Associates until such tendered securities are accepted for purchase or exchange;
or (B) the right to vote pursuant to any agreement, arrangement or
understanding; provided, however, that a Person shall not be deemed the
Beneficial Owner of, or to beneficially own, any security if the agreement,
arrangement or understanding to vote such security (1) arises solely from a
revocable proxy or consent given to such Person in response to a public proxy or
consent solicitation made pursuant to, and in accordance with, the applicable
2
<PAGE>
rules and regulations promulgated under the Exchange Act and (2) is not also
then reportable on Schedule 13D under the Exchange Act (or any comparable or
successor report); or
(iii) which are beneficially owned, directly or indirectly, by any
other Person with which such Person or any of such Person's Affiliates or
Associates has any agreement, arrangement or understanding (other than customary
agreements with and between underwriters and selling group members with respect
to a bona fide public offering of securities) for the purpose of acquiring,
holding, voting (except to the extent contemplated by the proviso in clause
(ii)(B) of this definition) or disposing of any securities of the Company.
Notwithstanding anything in this definition of Beneficial Ownership to the
contrary, (A) the phrase "then outstanding," when used with reference to a
Person's Beneficial Ownership of securities of the Company, shall mean the
number of such securities then issued and outstanding together with the number
of such securities not then actually issued and outstanding which such Person
would be deemed to own beneficially hereunder, and (B) a Person shall not be
deemed the Beneficial Owner of, or to beneficially own, any securities which are
beneficially owned, directly or indirectly, by any other Person because such
Person is a party to that certain Shareholders Agreement dated February __,
1999, by and among the Company, Sunny C. Vanderbeck and Michelle R. Chambers.
"Business Day" shall mean any day other than a Saturday, a Sunday or a day
on which banking institutions in the Borough of Manhattan, the City of New York,
the City of Dallas in the State of Texas or in the city in which the office of
the Rights Agent is located are authorized or obligated by law or executive
order to close.
"Close of Business" on any given date shall mean 5:00 P.M., Dallas, Texas
time, on such date; provided, however, that if such date is not a Business Day
it shall mean 5:00 P.M., Dallas, Texas time, on the next succeeding Business
Day.
"Common Shares" when used with reference to the Company shall mean the
shares of Common Stock of the Company. "Common Shares" when used with reference
to any Person other than the Company shall mean the capital stock (or equity
interest) with the greatest voting power of such other Person or, if such other
Person is a Subsidiary of another Person, the Person or Persons which ultimately
control such first-mentioned Person.
"Common share equivalents" shall have the meaning set forth in Section
11(a)(iii) hereof.
"Common Stock" shall have the meaning set forth in the introductory
paragraph of this Agreement.
"Distribution Date" shall have the meaning set forth in Section 3(b)
hereof.
"Equivalent preferred shares" shall have the meaning set forth in Section
11(b) hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as in effect
on the date in question, unless otherwise specifically provided.
3
<PAGE>
"Exchange Ratio" shall have the meaning set forth in Section 24(a) hereof.
"Final Expiration Date" shall have the meaning set forth in Section 7(a)
hereof.
"Flip-In Event" shall have the meaning set forth in Section 11(a)(ii)
hereof.
"Flip-In Trigger Date" shall have the meaning set forth in Section
11(a)(iii) hereof.
"Flip-Over Event" shall have the meaning set forth in Section 13(a) hereof.
"Person" shall mean any individual, firm, corporation or other entity, and
shall include any successor (by merger or otherwise) of such entity.
"Preferred Shares" shall have the meaning set forth in the introductory
paragraph of this Agreement. Any reference in this Agreement to Preferred
Shares shall be deemed to include any authorized fraction of a Preferred Share,
unless the context otherwise requires.
"Principal Party" shall have the meaning set forth in Section 13(b) hereof.
"Purchase Price" with respect to each Right shall mean $100, as such amount
may from time to time be adjusted as provided herein, and shall be payable in
lawful money of the United States of America. All references herein to the
Purchase Price shall mean the Purchase Price as in effect at the time in
question.
"Record Date" shall have the meaning set forth in the introductory
paragraph of this Agreement.
"Redemption Date" shall have the meaning set forth in Section 7(a) hereof.
"Redemption Price" shall have the meaning set forth in Section 23 hereof.
"Right Certificate" shall mean a certificate evidencing a Right in
substantially the form attached to this Agreement as Exhibit B.
"Rights" shall mean the rights to purchase Preferred Shares (or other
securities) as provided in this Agreement.
"Securities Act" shall mean the Securities Act of 1933, as in effect on the
date in question, unless otherwise specifically provided.
"Shares Acquisition Date" shall mean the first date of public announcement
by the Company or an Acquiring Person that an Acquiring Person has become such.
"Statement of Resolution" shall mean the Statement of Resolution
Establishing a Series of Shares of the Company setting forth the powers,
preferences, rights, qualifications, limitations and
4
<PAGE>
restrictions of Series A Junior Participating Preferred Stock of the Company, a
copy of the form of which is attached to this Agreement as Exhibit A.
"Subsidiary" of any Person shall mean any corporation or other entity of
which a majority of the voting power of the voting equity securities or equity
interest is owned, directly or indirectly, by such Person.
"Substitution Period" shall have the meaning set forth in Section
11(a)(iii) hereof.
"Trading Day" shall have the meaning set forth in Section 11(d)(i) hereof.
Section 2. Appointment of Rights Agent. The Company hereby appoints
the Rights Agent to act as agent for the Company in accordance with the terms
and conditions hereof, and the Rights Agent hereby accepts such appointment.
The Company may from time to time appoint such co-Rights Agents as it may deem
necessary or desirable. The Rights Agent shall have no duty to supervise, and
in no event shall be liable for, the acts or omissions of any such Rights Agent.
Section 3. Issue of Rights and Right Certificates.
(a) One Right shall be associated with each Common Share outstanding on
the Record Date, each additional Common Share that shall become outstanding
between the Record Date and the earliest of the Distribution Date, the
Redemption Date and the Final Expiration Date, and each additional Common Share
with which Rights are issued after the Distribution Date and prior to the
earlier of the Redemption Date and the Final Expiration Date as provided in
Section 22 hereof; provided, however, that, if the number of outstanding Rights
are combined into a smaller number of outstanding Rights pursuant to Section 11
hereof, the appropriate fractional Right determined pursuant to such Section
shall thereafter be associated with each such Common Share.
(b) Until the earlier of (i) the tenth day after the Shares Acquisition
Date and (ii) the tenth Business Day (or such later date as may be determined by
action of the Board of Directors of the Company prior to such time as any Person
becomes an Acquiring Person) after the date of the commencement by any Person
(other than the Company, any Subsidiary of the Company, any employee benefit
plan of the Company or any Subsidiary of the Company, or any entity holding
Common Shares of the Company for or pursuant to the terms of any such plan) of,
or of the first public announcement of the intention of any Person (other than
the Company, any Subsidiary of the Company, any employee benefit plan of the
Company or any Subsidiary of the Company, or any entity holding Common Shares of
the Company for or pursuant to the terms of any such plan) to commence, a tender
or exchange offer the consummation of which would result in any Person becoming
the Beneficial Owner of Common Shares aggregating 15 percent or more of the then
outstanding Common Shares (including any such date which is after the date of
this Agreement and prior to the issuance of the Rights; the earlier of such
dates being herein referred to as the "Distribution Date"), (x) the Rights will
be evidenced (subject to the provisions of Section 3(c) hereof) by the
certificates for Common Shares registered in the names of the holders thereof
(which certificates shall also be deemed to be Right Certificates) and not by
separate Right Certificates, and (y) the Rights, including the right to receive
Right Certificates, will be transferable only in
5
<PAGE>
connection with the transfer of Common Shares; provided that if a tender offer
or exchange offer referred to in clause (ii) above is cancelled or withdrawn
prior to the Distribution Date, such offer shall be deemed, for purposes of this
Agreement, never to have been made. As soon as practicable after the
Distribution Date, the Company will prepare and execute, the Rights Agent will
countersign, and the Company will send or cause to be sent (and the Rights Agent
will, if requested and provided with all necessary information, send) by first-
class, insured, postage-prepaid mail, to each record holder of Common Shares as
of the Close of Business on the Distribution Date, at the address of such holder
shown on the records of the Company, a Right Certificate evidencing one whole
Right for each Common Share (or for the number of Common Shares with which one
whole Right is then associated if the number of Rights per Common Share held by
such record holder has been adjusted in accordance with the provision in Section
3(a) hereof) so held. If the number of Rights associated with each Common Share
has been adjusted in accordance with the proviso in Section 3(a) hereof, at the
time of distribution of the Right Certificates, the Company may make any
necessary and appropriate rounding adjustments so that Right Certificates
representing only whole numbers of Rights are distributed and cash is paid in
lieu of any fractional Right in accordance with Section 14 hereof. As of and
after the Distribution Date, the Rights will be evidenced solely by such Right
Certificates.
(c) On the Record Date, or as soon as practicable thereafter, the Company
will send a copy of a Summary of Rights to Purchase Preferred Shares, in
substantially the form attached to this Agreement as Exhibit C (the "Summary of
Rights"), by first-class, postage-prepaid mail, to each record holder of Common
Shares as of the Close of Business on the Record Date, at the address of such
holder shown on the records of the Company. With respect to any certificate for
Common Shares outstanding as of the Record Date, until the earliest of the
Distribution Date, the Redemption Date and the Final Expiration Date, the Rights
will be evidenced by such certificates registered in the names of the holders
thereof together with a copy of the Summary of Rights attached thereto. Until
the earliest of the Distribution Date, the Redemption Date and the Final
Expiration Date, the surrender for transfer of any certificate for Common Shares
outstanding on the Record Date, with or without a copy of the Summary of Rights
attached thereto, shall also constitute the transfer of the Rights associated
with the Common Shares represented thereby.
(d) Certificates issued for Common Shares after the Record Date
(including, without limitation, reacquired Common Shares referred to in the last
sentence of this paragraph (d)), but prior to the earliest of the Distribution
Date, the Redemption Date and the Final Expiration Date, shall have impressed
on, printed on, written on or otherwise affixed to them the following legend:
This certificate also evidences and entitles the holder hereof to certain
rights as set forth in a Rights Agreement dated as of September 27, 1999,
as it may be amended from time to time (the "Rights Agreement"), between
Data Return Corporation and ChaseMellon Shareholder Services, L.L.C., as
Rights Agent, the terms of which are hereby incorporated herein by
reference and a copy of which is on file at the principal executive offices
of Data Return Corporation. Under certain circumstances, as set forth in
the Rights Agreement, such Rights will be evidenced by separate
certificates and will no longer be evidenced by this certificate. Data
Return Corporation will mail to the holder of this certificate
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a copy of the Rights Agreement without charge after receipt of a written
request therefor. Under certain circumstances, as set forth in the Rights
Agreement, Rights beneficially owned by an Acquiring Person or its
Affiliates or Associates (as such terms are defined in the Rights
Agreement) and by any subsequent holder of such Rights are null and void
and nontransferable.
With respect to such certificates containing the foregoing legend, until the
earliest of the Distribution Date, the Redemption Date and the Final Expiration
Date, the Rights associated with the Common Shares represented by such
certificates shall be evidenced by such certificates alone, and the surrender
for transfer of any such certificate shall also constitute the transfer of the
Rights associated with the Common Shares represented thereby. In the event that
the Company purchases or acquires any Common Shares after the Record Date but
prior to the Distribution Date, any Rights associated with such Common Shares
shall be deemed cancelled and retired so that the Company shall not be entitled
to exercise any Rights associated with the Common Shares which are no longer
outstanding.
Section 4. Form of Right Certificates. The Right Certificates (and the
form of election to purchase and form of assignment to be printed on the reverse
side thereof) shall be in substantially the form attached to this Agreement as
Exhibit B and may have such marks of identification or designation and such
legends, summaries or endorsements printed thereon as the Company may deem
appropriate, which do not affect the duties or responsibilities of the Rights
Agent and as are not inconsistent with the provisions of this Agreement, or as
may be required to comply with any applicable law or with any rule or regulation
made pursuant thereto or with any rule or regulation of any securities exchange
on which the Rights may from time to time be listed or of any automated
quotations system of a national securities association on which the Rights may
from time to time be registered or quoted, or to conform to usage. Subject to
the provisions of Section 22 hereof, the Right Certificates, whenever issued, on
their face shall entitle the holders thereof to purchase such number of one one-
hundredths of a Preferred Share as shall be set forth therein for the Purchase
Price per one one-hundredth of a Preferred Share, subject to adjustment from
time to time as herein provided.
Section 5. Execution, Countersignature and Registration.
(a) The Right Certificates shall be executed on behalf of the Company by
its Chairman of the Board, its President, its Chief Executive Officer, or any of
its Vice Presidents, or its Treasurer, either manually or by facsimile
signature, shall have affixed thereto the Company's seal or a facsimile thereof,
and shall be attested by the Secretary or an Assistant Secretary of the Company,
either manually or by facsimile signature. The Right Certificates shall be
countersigned manually or by facsimile signature by the Rights Agent and shall
not be valid or obligatory for any purpose unless countersigned. In case any
officer of the Company who shall have signed any of the Right Certificates shall
cease to be such an officer of the Company before countersignature by the Rights
Agent and issuance and delivery by the Company, such Right Certificates,
nevertheless, may be countersigned by the Rights Agent and issued and delivered
by the Company with the same force and effect as though the person who signed
such Right Certificates had not ceased to be such an officer of the Company; and
any Right Certificate may be signed on behalf of the Company by any person who,
at the actual date of the execution of such Right Certificate, shall be a proper
officer of
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the Company to sign such Right Certificate, although at the date of the
execution of this Agreement any such person was not such an officer.
(b) Following the Distribution Date and receipt by the Rights Agent of all
necessary information, the Rights Agent will keep or cause to be kept, at its
office, books for registration and transfer of the Right Certificates issued
hereunder. Such books shall show the names and addresses of the respective
holders of the Right Certificates, the number of Rights evidenced on its face by
each of the Right Certificates, the certificate number of each of the Right
Certificates and the date of each of the Right Certificates.
Section 6. Transfer, Split-up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates.
(a) Subject to the provisions of Sections 7(e) and 14 hereof, at any time
after the Close of Business on the Distribution Date, and at or prior to the
Close of Business on the earlier of the Redemption Date and the Final Expiration
Date, any Right Certificate or Right Certificates (except as otherwise provided
herein, including, without limitation, Right Certificates representing Rights
that have become null and void and nontransferable pursuant to Section 7(e)
hereof or that have been exchanged pursuant to Section 24 hereof) may be
transferred, split-up, combined or exchanged for another Right Certificate or
Right Certificates representing, in the aggregate, the same number of Rights as
the Right Certificate or Right Certificates surrendered then represented. Any
registered holder desiring to transfer, split-up, combine or exchange any Right
Certificate or Right Certificates shall make such request in writing delivered
to the Rights Agent, and shall surrender the Right Certificate or Right
Certificates to be transferred, split-up, combined or exchanged at the office of
the Rights Agent designated for such purpose; provided, however, that neither
the Rights Agent nor the Company shall be obligated to take any action
whatsoever with respect to the transfer of any Right Certificate surrendered for
transfer until the registered holder shall have completed and signed the
certification of status contained in the form of assignment on the reverse side
of such Right Certificate and shall have provided such additional evidence of
the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates
or Associates thereof as the Company shall reasonably request. Thereupon the
Rights Agent shall countersign and deliver to the Person entitled thereto a
Right Certificate or Right Certificates, as the case may be, as so requested.
The Company may require payment of a sum sufficient to cover any tax or charge
that may be imposed in connection with any transfer, split-up, combination or
exchange of Right Certificates. The Rights Agent shall have no duty or
obligation under this Section unless and until it is satisfied that all such
taxes and/or charges have been paid.
(b) Upon receipt by the Company and the Rights Agent of evidence
satisfactory to them of the loss, theft, destruction or mutilation of a Right
Certificate, and, in case of loss, theft or destruction, of indemnity or
security satisfactory to them, and, at the Company's request, reimbursement to
the Company and the Rights Agent of all reasonable expenses incidental thereto,
and upon surrender to the Rights Agent and cancellation of the Right Certificate
if mutilated, the Company will make a new Right Certificate of like tenor and
deliver such new Right Certificate to the Rights Agent for delivery to the
registered holder in lieu of the Right Certificate so lost, stolen, destroyed or
mutilated.
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Section 7. Exercise of Rights; Expiration Date of Rights.
(a) Subject to Section 7(e) hereof and except as otherwise provided herein
(including Section 24 hereof), each Right shall entitle the registered holder
thereof, upon exercise thereof as provided herein, to purchase for the Purchase
Price, at any time after the Distribution Date and at or prior to the earliest
of (i) the Close of Business on September 27, 2009 (the "Final Expiration
Date"), (ii) the time at which the Rights are redeemed as provided in Section 23
hereof (the "Redemption Date") and (iii) the time at which such Rights are
exchanged as provided in Section 24 hereof, one one-hundredth of a Preferred
Share, subject to adjustment from time to time as provided in Section 11 or 13
hereof.
(b) The registered holder of any Right Certificate may exercise the Rights
evidenced thereby (except as otherwise provided herein) in whole or in part at
any time after the Distribution Date, upon surrender of the Right Certificate,
with the form of election to purchase on the reverse side thereof duly and
properly executed, to the Rights Agent at the office or offices of the Rights
Agent designated for such purpose, together with payment of the Purchase Price
for each one one-hundredth of a Preferred Share as to which the Rights are
exercised, at or prior to the earliest of (i) the Final Expiration Date, (ii)
the Redemption Date and (iii) the time at which such Rights are exchanged as
provided in Section 24 hereof.
(c) Upon receipt of a Right Certificate representing exercisable Rights,
with the form of election to purchase duly and properly executed, accompanied by
payment of the Purchase Price for the Preferred Shares (or other securities) to
be purchased and an amount equal to any applicable tax or charge required to be
paid by the holder of such Right Certificate in accordance with Section 9
hereof, in lawful money of the United States of America, in cash or by certified
check, cashier's check or money order payable to the order of the Company, the
Rights Agent shall thereupon (i) either (A) promptly requisition from any
transfer agent of the Preferred Shares (or make available, if the Rights Agent
is a transfer agent for such shares) certificates for the number of Preferred
Shares to be purchased, and the Company hereby irrevocably authorizes its
transfer agent to comply with all such requests, or (B) if the Company shall
have elected to deposit the Preferred Shares with a depositary agent under a
depositary arrangement, promptly requisition from the depositary agent
depositary receipts representing the number of one one-hundredths of a Preferred
Share to be purchased (in which case certificates for the Preferred Shares
represented by such receipts shall be deposited by the transfer agent with the
depositary agent), and the Company will direct the depositary agent to comply
with all such requests, (ii) when appropriate, promptly requisition from the
Company the amount of cash to be paid in lieu of issuance of fractional shares
in accordance with Section 14 hereof, (iii) promptly after receipt of such
certificates or depositary receipts, cause the same to be delivered to or upon
the order of the registered holder of such Right Certificate, registered in such
name or names as may be designated by such holder, and (iv) when appropriate,
after receipt, promptly deliver such cash to or upon the order of the registered
holder of such Right Certificate.
(d) In case the registered holder of any Right Certificate shall exercise
fewer than all the Rights evidenced thereby, a new Right Certificate evidencing
Rights equivalent to the Rights remaining unexercised shall be issued by the
Rights Agent and delivered to the registered holder of
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such Right Certificate or to his duly authorized assigns, subject to the
provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary, any Rights
that are at any time beneficially owned by an Acquiring Person or any Affiliate
or Associate of an Acquiring Person shall be null and void and nontransferable,
and any holder of any such Right (including any purported transferee or
subsequent holder) shall not have any right to exercise or transfer any such
Right.
(f) Notwithstanding anything in this Agreement to the contrary, neither
the Rights Agent nor the Company shall be obligated to undertake any action with
respect to a registered holder of any Right Certificate upon the occurrence of
any purported exercise unless such registered holder shall have (i) completed
and signed the certification of status contained in the form of election to
purchase set forth on the reverse side of the Right Certificate surrendered for
such exercise and (ii) provided such additional evidence of the identity of the
Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates
thereof as the Company or the Rights Agent shall reasonably request.
(g) The Company may temporarily suspend, for a period of time not to
exceed 90 calendar days after the Distribution Date, the exercisability of the
Rights in order to prepare and file a Registration Statement under the
Securities Act, on appropriate form, with respect to the Preferred Shares
purchasable upon exercise of the Rights and permit such Registration Statement
to become effective; provided, however, that no such suspension shall remain
effective after, and the Rights shall without any further action by the Company
or any other Person become exercisable immediately upon, the effectiveness of
such Registration Statement. Upon any such suspension, the Company shall issue a
public announcement stating that the exercisability of the Rights has been
temporarily suspended and shall issue a further public announcement at such time
as the suspension is no longer in effect in each case, with prompt notice
thereof to the Rights Agent. Notwithstanding any provision herein to the
contrary, the Rights shall not be exercisable in any jurisdiction if the
requisite qualification under the Blue Sky or securities laws of such
jurisdiction shall not have been obtained or the exercise of the Rights shall
not be permitted under applicable law.
Section 8. Cancellation and Destruction of Right Certificates. All
Right Certificates surrendered for the purpose of exercise, transfer, split-up,
combination or exchange shall, and any Right Certificate representing Rights
that have become null and void and nontransferable pursuant to Section 7(e)
hereof surrendered or presented for any purpose shall, if surrendered or
presented to the Company or to any of its agents, be delivered to the Rights
Agent for cancellation or in cancelled form, or, if surrendered or presented to
the Rights Agent, shall be cancelled by it, and no Right Certificates shall be
issued in lieu thereof except as expressly permitted by any of the provisions of
this Agreement. The Company shall deliver to the Rights Agent for cancellation
and retirement, and the Rights Agent shall so cancel and retire, any Right
Certificate purchased or acquired by the Company. The Rights Agent shall
deliver all cancelled Right Certificates to the Company, or shall, at the
written request of the Company, destroy such cancelled Right Certificates, and
in either such case shall deliver a certificate of destruction thereof or a
certificate of cancellation thereof, as may be appropriate, to the Company.
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Section 9. Reservation and Availability of Capital Stock.
(a) The Company covenants and agrees that it will cause to be reserved and
kept available out of its authorized and unissued Preferred Shares, free from
preemptive rights or any right of first refusal, a number of Preferred Shares
sufficient to permit the exercise in full of all outstanding Rights in
accordance with Section 7 hereof.
(b) In the event that there shall not be sufficient Preferred Shares
authorized but unissued to permit the exercise or exchange of Rights in
accordance with Section 11 or 24 hereof, as the case may be, the Company
covenants and agrees that it will take all such action as may be necessary to
authorize additional Preferred Shares for issuance upon the exercise or exchange
of Rights pursuant to Section 11 or 24 hereof, as the case may be; provided,
however, that if the Company is unable to cause the authorization of additional
Preferred Shares, then the Company shall, or in lieu of seeking any such
authorization, the Company may, to the extent necessary and permitted by
applicable law and any agreements or instruments in effect prior to the
Distribution Date to which it is a party, (i) upon surrender of a Right, pay
cash equal to the Purchase Price in lieu of issuing Preferred Shares and
requiring payment therefor, (ii) upon due exercise of a Right and payment of the
Purchase Price for each Preferred Share as to which such Right is exercised,
issue equity securities having a value equal to the value of the Preferred
Shares which otherwise would have been issuable pursuant to Section 11 or 24
hereof, which value shall be determined by a nationally recognized investment
banking firm selected by the Board of Directors of the Company, or (iii) upon
due exercise of a Right and payment of the Purchase Price for each Preferred
Share as to which such Right is exercised, distribute a combination of Preferred
Shares, cash and/or other equity and/or debt securities having an aggregate
value equal to the value of the Preferred Shares which otherwise would have been
issuable pursuant to Section 11 or 24 hereof, which value shall be determined by
a nationally recognized investment banking firm selected by the Board of
Directors of the Company. To the extent that any legal or contractual
restrictions (pursuant to agreements or instruments in effect prior to the
Distribution Date to which it is a party) prevent the Company from paying the
full amount payable in accordance with the foregoing sentence, the Company shall
pay to holders of the Rights as to which such payments are being made all
amounts which are not then restricted on a pro rata basis as such payments
become permissible under such legal or contractual restrictions until such
payments have been paid in full.
(c) The Company covenants and agrees that it will take all such action as
may be necessary to ensure that all Preferred Shares delivered upon exercise or
exchange of Rights shall, at the time of delivery of the certificates for such
Preferred Shares (subject to payment of the Purchase Price), be duly and validly
authorized and issued and fully paid and nonassessable.
(d) So long as the Preferred Shares issuable upon the exercise or exchange
of Rights may be listed on any national securities exchange or automated
quotations system of a registered national securities association on which the
Preferred Shares may from time to time be listed, traded or quoted, the Company
covenants and agrees that it will use reasonable efforts to cause, from and
after such time as the Rights become exercisable or exchangeable, all Preferred
Shares reserved for such issuance to be listed on such exchange or approved for
quotation in such quotation system, upon official notice of issuance upon such
exercise.
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(e) The Company further covenants and agrees, subject to the provisions of
this Agreement, that it will pay when due and payable any and all taxes and
charges which may be payable in respect of the issuance or delivery of Right
Certificates or of any Preferred Shares or Common Shares or other securities
upon the exercise or exchange of the Rights. The Company shall not, however, be
required to pay any tax or charge which may be payable in respect of any
transfer or delivery of Right Certificates to a Person other than, or in respect
of the issuance or delivery of certificates for Preferred Shares or Common
Shares or other securities, as the case may be, in a name other than that of,
the registered holder of the Right Certificate evidencing Rights surrendered for
exercise or exchange or to issue or deliver any certificates for Preferred
Shares or Common Shares or other securities, as the case may be, upon the
exercise or exchange of any Rights until such tax or charge shall have been paid
(any such tax or charge being payable by the holder of such Right Certificate at
the time of surrender) or until it has been established to the Company's
satisfaction that no such tax or charge is due.
Section 10. Preferred Shares Record Date. Each Person in whose name any
certificate for Preferred Shares or Common Shares or other securities is issued
upon the exercise or exchange of Rights shall for all purposes be deemed to have
become the holder of record of the Preferred Shares or Common Shares or other
securities, as the case may be, represented thereby on, and such certificate
shall be dated, the date upon which the Right Certificate evidencing such Rights
was duly surrendered and payment of any Purchase Price (and any applicable taxes
or charges) was made; provided, however, that, if the date of such surrender and
payment is a date upon which the transfer books of the Company for the Preferred
Shares or Common Shares or other securities, as the case may be, are closed,
such Person shall be deemed to have become the record holder of such Preferred
Shares or Common Shares or other securities, as the case may be, on, and such
certificate shall be dated, the next succeeding Business Day on which the
transfer books of the Company for the Preferred Shares or Common Shares or other
securities, as the case may be, are open. Prior to the exercise of the Rights
evidenced thereby, the holder of a Right Certificate shall not be entitled to
any rights of a stockholder of the Company with respect to shares for which the
Rights shall be exercisable, including, without limitation, the right to vote,
to receive dividends or other distributions or to exercise any preemptive
rights, and shall not be entitled to receive any notice of any proceedings of
the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number of Shares or Number of
Rights. The Purchase Price, the number of Preferred Shares covered by each
Right and the number of Rights outstanding are subject to adjustment from time
to time as provided in this Section 11.
(a)(i) In the event the Company shall at any time after the date of
this Agreement (A) declare a dividend on the Preferred Shares payable in
Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C)
combine the outstanding Preferred Shares into a smaller number of Preferred
Shares or (D) issue any shares of its capital stock in a reclassification
of the Preferred Shares (including any such reclassification in connection
with a consolidation or merger in which the Company is the continuing or
surviving corporation), except as otherwise provided in this Section 11(a),
the Purchase Price in effect at the time of the record date for such
dividend or of the effective date of such subdivision, combination or
reclassification, and the number and kind of shares of capital stock
issuable on such date,
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shall be proportionately adjusted so that the holder of any Right exercised
after such time shall be entitled to receive the aggregate number and kind
of shares of capital stock which, if such Right had been exercised
immediately prior to such date and at a time when the transfer books of the
Company for the Preferred Shares were open, he would have owned upon such
exercise and been entitled to receive by virtue of such dividend,
subdivision, combination or reclassification; provided, however, that in no
event shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of capital stock of the
Company issuable upon exercise of one Right. If an event occurs that would
require an adjustment under both this Section 11(a)(i) and Section
11(a)(ii) hereof, the adjustment provided for in this Section 11(a)(i)
shall be in addition to, and shall be made prior to, any adjustment
required pursuant to Section 11(a)(ii) hereof.
(ii) Subject to Section 24 of this Agreement and the last
sentence of Section 23(a), in the event any Person becomes an Acquiring
Person (a "Flip-In Event"), each holder of a Right, except as provided in
Section 7(e) hereof, shall thereafter have a right to receive, upon
exercise thereof at a price equal to the then current Purchase Price
multiplied times the number of one one-hundredths of a Preferred Share for
which a Right is then exercisable, in accordance with the terms of this
Agreement and in lieu of Preferred Shares, such number of Common Shares of
the Company (such number of Common Shares being referred to herein as the
"Adjustment Shares") as shall equal the result obtained by (x) multiplying
the then current Purchase Price times the number of one one-hundredths of a
Preferred Share for which a Right is then exercisable and dividing that
product by (y) 50 percent of the then current per share market price of the
Company's Common Shares (determined pursuant to Section 11(d) hereof) on
the date of the occurrence of such event. In the event that any Person
shall become an Acquiring Person and the Rights shall then be outstanding,
the Company shall not take any action which would eliminate or diminish the
benefits intended to be afforded by the Rights.
(iii) In the event that there shall not be sufficient Common
Shares authorized but unissued to permit the exercise in full of the Rights
in accordance with Section 11(a)(ii) hereof, the Company shall, to the
extent permitted by applicable law and regulation: (A) determine the excess
of (1) the value of the Adjustment Shares issuable upon the exercise of a
Right (the "Current Value") over (2) the Purchase Price (such excess to be
referred to hereinafter as the "Spread"), and (B) with respect to each
Right, make adequate provision to substitute for the Adjustment Shares,
upon payment of the applicable Purchase Price, (1) cash, (2) a reduction in
the Purchase Price, (3) other equity securities of the Company (including,
without limitation, shares, or units of shares, of preferred stock which
the Board of Directors of the Company has deemed to have the same value as
the Common Shares (such shares of preferred stock being referred to herein
as "common share equivalents")), (4) debt securities of the Company, (5)
other assets or (6) any combination of the foregoing, having an aggregate
value equal to the Current Value as determined by the Board of Directors of
the Company; provided, however, that if the Company shall not have made
adequate provision to deliver value pursuant to clause (B) above within 30
days following the first occurrence of a Flip-In Event (the "Flip-In
Trigger Date"), then the Company shall be obligated to deliver, upon the
surrender for exercise of a Right and without requiring
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payment of the Purchase Price, Common Shares (to the extent available) and
then, if necessary, cash, which shares and/or cash have an aggregate value
equal to the Spread. If the Board of Directors of the Company determines in
good faith that it is likely that sufficient additional Common Shares could
be authorized for issuance upon exercise in full of the Rights, the 30-day
period set forth above may be extended to the extent necessary, but not to
more than 120 days after the Flip-In Trigger Date, in order that the
Company may seek stockholder approval for the authorization of such
additional shares (such period, as it may be extended, the "Substitution
Period"). To the extent the Company determines that some action need be
taken pursuant to the first and/or second sentences of this Section
11(a)(iii), the Company (x) shall provide, subject to Section 7(e) hereof,
that such action shall apply uniformly to all outstanding Rights, and (y)
may suspend the exercisability of the Rights until the expiration of the
Substitution Period in order to seek any authorization of additional shares
and/or to decide the appropriate form of distribution to be made pursuant
to such first sentence and to determine the value thereof. In the event of
any such suspension, the Company shall deliver a notice of such suspension
to the Rights Agent and issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended, as well as a
notice to the Rights Agent and a public announcement at such time as the
suspension is no longer in effect. For purposes of this Section 11(a)(iii),
the value of the Common Shares shall be the current per share market price
(as determined pursuant to Section 11(d) hereof) of the Common Shares on
the Flip-In Trigger Date, and the value of any common share equivalent
shall be deemed to have the same value as the Common Shares on such date.
(b) In case the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Shares entitling them
(for a period expiring within 45 calendar days after such record date) to
subscribe for or purchase Preferred Shares (or shares having the same rights,
privileges and preferences as the Preferred Shares ("equivalent preferred
shares")) or securities convertible into Preferred Shares or equivalent
preferred shares at a price per Preferred Share or equivalent preferred share
(or having a conversion price per share, if a security convertible into
Preferred Shares or equivalent preferred shares) less than the then current per
share market price of the Preferred Shares (as defined in Section 11(d) hereof)
on such record date, the Purchase Price to be in effect after such record date
shall be determined by multiplying the Purchase Price in effect immediately
prior to such record date times a fraction, the numerator of which shall be the
number of Preferred Shares outstanding on such record date plus the number of
Preferred Shares which the aggregate offering price of the total number of
Preferred Shares and/or equivalent preferred shares so to be offered (and/or the
aggregate initial conversion price of the convertible securities so to be
offered) would purchase at such current market price and the denominator of
which shall be the number of Preferred Shares outstanding on such record date
plus the number of additional Preferred Shares and/or equivalent preferred
shares to be offered for subscription or purchase (or into which the convertible
securities so to be offered are initially convertible); provided, however, that
in no event shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of capital stock of the Company
issuable upon exercise of one Right. In case such subscription price may be paid
in consideration part or all of which may be in a form other than cash, the
value of such consideration shall be as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent.
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Preferred Shares owned by or held for the account of the Company shall not be
deemed outstanding for the purpose of any such computation. Such adjustment
shall be made successively whenever such a record date is fixed; and in the
event that such rights, options or warrants are not so issued, the Purchase
Price shall be adjusted to be the Purchase Price which would then be in effect
if such record date had not been fixed.
(c) In case the Company shall fix a record date for the making of a
distribution to all holders of the Preferred Shares (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences of indebtedness
or assets (other than a regular quarterly cash dividend or a dividend payable in
Preferred Shares) or subscription rights or warrants (excluding those referred
to in Section 11(b) hereof), the Purchase Price to be in effect after such
record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date times a fraction, the numerator of which
shall be the then current per share market price of the Preferred Shares on such
record date, less the fair market value (as determined in good faith by the
Board of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent) of the portion of the assets or evidences
of indebtedness so to be distributed or of such subscription rights or warrants
applicable to one Preferred Share and the denominator of which shall be such
current per share market price of the Preferred Shares; provided, however, that
in no event shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of capital stock of the Company
to be issued upon exercise of one Right. Such adjustments shall be made
successively whenever such a record date is fixed; and in the event that such
distribution is not so made, the Purchase Price shall again be adjusted to be
the Purchase Price which would then be in effect if such record date had not
been fixed.
(d)(i) For the purpose of any computation hereunder, other than
computations made pursuant to Section 11(a)(iii) hereof, the "current per
share market price" of any security (a "Security" for the purpose of this
Section 11(d)(i)) on any date shall be deemed to be the average of the
daily closing prices per share of such Security for the 30 consecutive
Trading Days (as such term is hereinafter defined) immediately prior to but
not including such date, and for purposes of computations made pursuant to
Section 11(a)(iii) hereof, the "current per share market price" of a
Security on any date shall be deemed to be the average of the daily closing
prices per share of such Security for the 10 consecutive Trading Days
immediately following such date; provided, however, that in the event that
the current per share market price of the Security is determined during a
period following the announcement by the issuer of such Security of (A) a
dividend or distribution on such Security payable in shares of such
Security or securities convertible into shares of such Security (other than
the Rights), or (B) any subdivision, combination or reclassification of
such Security, and the ex-dividend date for such dividend or distribution,
or the record date for such subdivision, combination or reclassification,
shall not have occurred prior to the commencement of the requisite 30
Trading Day or 10 Trading Day period, as set forth above, then, and in each
such case, the "current per share market price" shall be appropriately
adjusted to reflect the current market price per share equivalent of such
Security. The closing price for each day shall be the last sale price,
regular way, or, in case no such sale takes place on such day, the average
of the closing bid and asked prices, regular way, in either case as
reported in the principal
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consolidated transaction reporting system with respect to securities listed
or admitted to trading on the Nasdaq National Market or, if the Security is
not listed or admitted to trading on the Nasdaq National Market, as
reported in the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange
on which the Security is listed or admitted to trading or, if the Security
is not listed or admitted to trading on any national securities exchange,
the last quoted price or, if not so quoted, the average of the high bid and
low asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotations
System ("NASDAQ") or such other system then in use, or, if on any such date
the Security is not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker
making a market in the Security selected by the Board of Directors of the
Company. The term "Trading Day" shall mean a day on which the principal
national securities exchange on which the Security is listed or admitted to
trading is open for the transaction of business or, if the Security is not
listed or admitted to trading on any national securities exchange, a
Business Day.
(ii) For the purpose of any computation hereunder, the "current
per share market price" of the Preferred Shares shall be determined in
accordance with the method set forth in Section 11(d)(i) hereof. If the
Preferred Shares are not publicly traded, the "current per share market
price" of the Preferred Shares shall be conclusively deemed to be the
current per share market price of the Common Shares, as determined pursuant
to Section 11(d)(i) hereof (appropriately adjusted to reflect any stock
split, stock dividend or similar transaction occurring after the date
hereof), multiplied times the Formula Number (as such term is defined in
Section 2 of the Statement of Resolution). If neither the Common Shares nor
the Preferred Shares are publicly held or so listed or traded, "current per
share market price" shall mean the fair value per share as determined in
good faith by the Board of Directors of the Company, whose determination
shall be described in a statement filed with the Rights Agent and shall be
conclusive for all purposes.
(e) Except as hereinafter provided, no adjustment in the Purchase Price
shall be required unless such adjustment would require an increase or decrease
of at least one percent in the Purchase Price; provided, however, that any
adjustments which by reason of this Section 11(e) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations under this Section 11 shall be made to the nearest cent or to
the nearest one one-millionth of a Preferred Share or one ten-thousandth of any
other share or security, as the case may be. Notwithstanding the first sentence
of this Section 11(e), any adjustment required by this Section 11 shall be made
no later than the earlier of (i) three years from the date of the transaction
which requires such adjustment and (ii) the date of the expiration of the right
to exercise any Rights.
(f) If as a result of an adjustment made pursuant to Section 11(a) hereof,
the holder of any Right thereafter exercised shall become entitled to receive
any shares of capital stock of the Company other than Preferred Shares,
thereafter the number of such other shares so receivable upon exercise of any
Right shall be subject to adjustment from time to time in a manner and on terms
as nearly equivalent as practicable to the provisions with respect to the
Preferred Shares contained in
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Section 11(a) through (c) hereof, inclusive, and the provisions of Sections 7,
9, 10 and 13 hereof with respect to the Preferred Shares shall apply on like
terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-hundredths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided in
Section 11(i) hereof, upon each adjustment of the Purchase Price as a result of
the calculations made in Sections 11(b) and (c) hereof, each Right outstanding
immediately prior to the making of such adjustment shall thereafter evidence the
right to purchase, at the adjusted Purchase Price, that number of one one-
hundredths of a Preferred Share (calculated to the nearest one one-millionth of
a Preferred Share) obtained by (i) multiplying (x) the number of one one-
hundredths of a share covered by a Right immediately prior to this adjustment
times (y) the Purchase Price in effect immediately prior to such adjustment of
the Purchase Price, and (ii) dividing the product so obtained by the Purchase
Price in effect immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of the
Purchase Price to adjust the number of Rights, in substitution for any
adjustment in the number of one one-hundredths of a Preferred Share purchasable
upon the exercise of a Right. Each of the Rights outstanding after such
adjustment of the number of Rights shall be exercisable for the number of one
one-hundredths of a Preferred Share for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one ten-thousandth) obtained by dividing the Purchase
Price in effect immediately prior to adjustment of the Purchase Price by the
Purchase Price in effect immediately after adjustment of the Purchase Price.
The Company shall make a public announcement of its election to adjust the
number of Rights, indicating the record date for the adjustment, and, if known
at the time, the amount of the adjustment to be made with prompt notice thereof
to the Rights Agent. This record date may be the date on which the Purchase
Price is adjusted or any day thereafter, but, if the Right Certificates have
been issued, shall be at least 10 days later than the date of the public
announcement. If Right Certificates have been issued, upon each adjustment of
the number of Rights pursuant to this Section 11(i), the Company shall, as
promptly as practicable, cause to be distributed to holders of record of Right
Certificates on such record date Right Certificates evidencing, subject to
Section 14 hereof, the additional Rights to which such holders shall be entitled
as a result of such adjustment, or, at the option of the Company, shall cause to
be distributed to such holders of record in substitution and replacement for the
Right Certificates held by such holders prior to the date of adjustment, and
upon surrender thereof, if required by the Company, new Right Certificates
evidencing all the Rights to which such holders shall be entitled after such
adjustment. Right Certificates so to be distributed shall be issued, executed
and countersigned in the manner provided for herein and shall be registered in
the names of the holders of record of Right Certificates on the record date
specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or the
number of one one-hundredths of a Preferred Share issuable upon the exercise of
the Rights, the Right Certificates
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theretofore and thereafter issued may continue to express the Purchase Price and
the number of one one-hundredths of a Preferred Share which were expressed in
the initial Right Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment reducing the
Purchase Price below one one-hundredth of the then par value, if any, of the
Preferred Shares issuable upon exercise of the Rights, the Company shall take
any corporate action which may, in the opinion of its counsel, be necessary in
order that the Company may validly and legally issue fully paid and
nonassessable Preferred Shares at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an adjustment
in the Purchase Price be made effective as of a record date for a specified
event, the Company may elect to defer with prompt notice thereof to the Rights
Agent until the occurrence of such event the issuing to the holder of any Right
exercised after such record date of the Preferred Shares and other capital stock
or securities of the Company, if any, issuable upon such exercise over and above
the Preferred Shares and other capital stock or securities of the Company, if
any, issuable upon such exercise on the basis of the Purchase Price in effect
prior to such adjustment; provided, however, that the Company shall deliver to
such holder a due bill or other appropriate instrument evidencing such holder's
right to receive such additional shares or securities upon the occurrence of the
event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that it in its sole discretion shall determine to be advisable in
order that any (i) consolidation or subdivision of the Preferred Shares, (ii)
issuance wholly for cash of any Preferred Shares at less than the current market
price, (iii) issuance wholly for cash of Preferred Shares or securities which by
their terms are convertible into or exchangeable for Preferred Shares, (iv)
dividends on Preferred Shares payable in Preferred Shares, or (v) issuance of
rights, options or warrants referred to hereinabove in Section 11(b), hereafter
made by the Company to holders of its Preferred Shares, shall not be taxable to
such stockholders.
(n) Anything in this Agreement to the contrary notwithstanding, in the
event that at any time after the date of this Agreement and prior to the
Distribution Date, the Company shall (i) declare or pay any dividend on the
Common Shares payable in Common Shares or (ii) effect a subdivision, combination
or consolidation of the Common Shares (by reclassification or otherwise than by
payment of dividends in Common Shares) into a greater or lesser number of Common
Shares, then in any such case (A) the number of one one-hundredths of a
Preferred Share purchasable after such event upon proper exercise of each Right
shall be determined by multiplying the number of one one-hundredths of a
Preferred Share so purchasable immediately prior to such event times a fraction,
the numerator of which is the number of Common Shares outstanding immediately
before such event and the denominator of which is the number of Common Shares
outstanding immediately after such event, and (B) each Common Share outstanding
immediately after such event shall have issued with respect to it that number of
Rights which each Common Share outstanding immediately prior to such event had
issued with respect to it. The adjustments provided for in this Section 11(n)
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<PAGE>
shall be made successively whenever such a dividend is declared or paid or such
a subdivision, combination or consolidation is effected.
Section 12. Certificate of Adjustment. Whenever an adjustment is made
as provided in Section 11 or 13 hereof, the Company shall (a) promptly prepare a
certificate setting forth such adjustment and a brief statement of the facts and
computations accounting for such adjustment, (b) promptly file with the Rights
Agent and with each transfer agent for the Common Shares or the Preferred Shares
a copy of such certificate and (c) mail a brief summary thereof to each holder
of a Right Certificate (or, prior to the Distribution Date, of the Common
Shares) in accordance with Section 26 hereof. The Rights Agent shall be fully
protected in relying on any such certificate and on any adjustment therein
contained and shall have no duty with respect to and shall not be deemed to have
knowledge of any such adjustments unless and until it shall have received such
certificate.
Section 13. Consolidation, Merger, or Sale or Transfer of Assets or
Earning Power.
(a) In the event, directly or indirectly, at any time after a Person has
become an Acquiring Person, (i) the Company shall consolidate with, or merge
with and into, any other Person, (ii) any Person shall consolidate with the
Company, or merge with and into the Company and the Company shall be the
continuing or surviving corporation of such merger and, in connection with such
merger, all or part of the Common Shares shall be changed into or exchanged for
capital stock or other securities of any other Person (or the Company) or cash
or any other property, or (iii) the Company shall sell or otherwise transfer (or
one or more of its Subsidiaries shall sell or otherwise transfer), in one or
more transactions, assets or earning power aggregating 50 percent or more of the
assets or earning power of the Company and its Subsidiaries (taken as a whole)
to any other Person other than the Company or one or more of its wholly-owned
Subsidiaries (any such event described in clauses (i), (ii) or (iii) being
referred to herein as a "Flip-Over Event"), then, and in each such case, proper
provision shall be made so that (A) each holder of a Right (except as otherwise
provided herein) shall thereafter have the right to receive, upon the exercise
thereof at a price equal to the then current Purchase Price multiplied times the
number of one one-hundredths of a Preferred Share for which a Right is then
exercisable, in accordance with the terms of this Agreement and in lieu of
Preferred Shares, such number of validly authorized and issued, fully paid,
nonassessable and freely tradable Common Shares of the Principal Party (as such
term is hereinafter defined), free and clear of liens, encumbrances or other
adverse claims, as shall equal the result obtained by (1) multiplying the then
current Purchase Price times the number of one one-hundredths of a Preferred
Share for which a Right is exercisable immediately prior to the first occurrence
of a Flip-Over Event (or, if a Flip-In Event has occurred prior to the first
occurrence of a Flip-Over Event, multiplying the number of such one one-
hundredths of a share for which a Right was exercisable immediately prior to the
first occurrence of a Flip-In Event times the Purchase Price in effect
immediately prior to such first occurrence), and dividing that product (which,
following the first occurrence of a Flip-Over Event, shall be referred to as the
"Purchase Price" for each Right and for all purposes of this Agreement) by (2)
50 percent of the then current per share market price of the Common Shares of
such Principal Party (determined pursuant to Section 11(d) hereof) on the date
of consummation of such consolidation, merger, sale or transfer; (B) such
Principal Party shall thereafter be liable for, and shall assume, by virtue of
such consolidation, merger, sale or transfer, all the obligations and duties of
the Company pursuant to this Agreement; (C) the term "Company" shall thereafter
be deemed to
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<PAGE>
refer to such Principal Party, it being specifically intended that the
provisions of Section 11 hereof shall apply only to such Principal Party
following the first occurrence of a Flip-Over Event; (D) such Principal Party
shall take such steps (including, but not limited to, the reservation of a
sufficient number of its Common Shares in accordance with Section 9 hereof) in
connection with such consummation as may be necessary to assure that the
provisions hereof shall thereafter be applicable, as nearly as reasonably may
be, in relation to the Common Shares thereafter deliverable upon the exercise of
the Rights; and (E) the provisions of Section 11(a)(ii) hereof shall be of no
effect following the first occurrence of any Flip-Over Event. The Company shall
not consummate any such consolidation, merger, sale or transfer unless prior
thereto the Company and such Principal Party shall have executed and delivered
to the Rights Agent a supplemental agreement so providing. The Company shall not
enter into any transaction of the kind referred to in this Section 13 if at the
time of such transaction there are any rights, warrants, instruments or
securities outstanding or any agreements or arrangements which, as a result of
the consummation of such transaction, would eliminate or substantially diminish
the benefits intended to be afforded by the Rights. The provisions of this
Section 13 shall similarly apply to successive mergers or consolidations or
sales or other transfers.
(b) "Principal Party" shall mean
(i) in the case of any transaction described in clause (i) or
(ii) of the first sentence of Section 13(a) hereof, the Person that is the
issuer of any securities into which Common Shares of the Company are
converted in such transaction, or if there is more than one issuer, the
issuer of Common Shares with the greatest aggregate market value, and if no
securities are so issued, the Person that is the other party to such
transaction, or if there is more than one such Person, the Person having
Common Shares with the greatest aggregate market value; and
(ii) in the case of any transaction described in clause (iii) of
the first sentence of Section 13(a) hereof, the Person that is the party
receiving the greatest portion of the assets or earning power transferred
pursuant to such transaction or transactions;
provided, however, that in any such case, (1) if the Common Shares of such
Person are not at such time and have not been continuously over the
preceding twelve-month period registered under Section 12 of the Exchange
Act, and such Person is a direct or indirect Subsidiary of any Person the
Common Shares of which are and have been so registered, "Principal Party"
shall refer to such other Person; and (2) in case such Person is a
Subsidiary, directly or indirectly, of more than one Person, the Common
Shares of two or more of which are and have been so registered, "Principal
Party" shall refer to whichever of such Persons is the issuer of the Common
Shares having the greatest aggregate market value.
Section 14. Fractional Rights and Fractional Shares.
(a) The Company may, but shall not be required to, issue fractions of
Rights or distribute Right Certificates which evidence fractional Rights. In
lieu of such fractional Rights, the Company may pay to the registered holders of
the Right Certificates with regard to which such fractional
20
<PAGE>
Rights would otherwise be issuable an amount in cash equal to the same fraction
of the current market value of a whole Right. For purposes of this Section
14(a), the current market value of a whole Right shall be the closing price of
the Rights for the Trading Day immediately prior to the date on which such
fractional Rights would have been otherwise issuable. The closing price for any
day shall be the last sale price, regular way, or, in case no such sale takes
place on such day, the average of the closing bid and asked prices, regular way,
in either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the Nasdaq
National Market or, if the Rights are not listed or admitted to trading on the
Nasdaq National Market, as reported in the principal consolidated transaction
reporting system with respect to securities listed or admitted to trading on the
principal national securities exchange on which the Rights are listed or
admitted to trading or, if the Rights are not listed or admitted to trading on
any national securities exchange, the last quoted price or, if not so quoted,
the average of the high bid and low asked prices in the over-the-counter market,
as reported by NASDAQ or such other system then in use or, if on any such date
the Rights are not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a market
in the Rights selected by the Board of Directors of the Company. If on any such
date no such market maker is making a market in the Rights, the fair value of
the Rights on such date as determined in good faith by the Board of Directors of
the Company shall be used.
(b) The Company may, but shall not be required to, issue fractions of
Preferred Shares upon exercise of the Rights or distribute certificates which
evidence fractional Preferred Shares. In lieu of fractional Preferred Shares,
the Company may elect to (i) utilize a depository arrangement as provided by the
terms of the Preferred Shares or (ii) in the case of a fraction of a Preferred
Share (other than one one-hundredth of a Preferred Share or any integral
multiple thereof), pay to the registered holders of Right Certificates at the
time such Rights are exercised as herein provided an amount in cash equal to the
same fraction of the current market value of a whole Preferred Share, if any are
outstanding and publicly traded (or the Formula Number (as such term is defined
in Section 2 of the Statement of Resolution) then in effect times the current
market value of a whole Common Share if the Preferred Shares are not outstanding
and publicly traded). For purposes of this Section 14(b), the current market
value of a Preferred Share (or Common Share) shall be the closing price of a
Preferred Share (or Common Share) (as determined pursuant to the second sentence
of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of
such exercise. If, as a result of an adjustment made pursuant to Section 11
hereof, the holder of any Right thereafter exercised shall become entitled to
receive any securities other than Preferred Shares, the provisions of this
Section 14(b) shall apply, as nearly as reasonably may be, on like terms to such
other securities.
(c) The holder of a Right by the acceptance of the Right expressly waives
his right to receive any fractional Rights or any fractional shares upon
exercise or exchange of a Right except as provided in this Section 14.
Section 15. Rights of Action. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under this
Agreement, are vested in the respective registered holders of the Right
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Right Certificate (or, prior to
the
21
<PAGE>
Distribution Date, of the Common Shares), without the consent of the Rights
Agent or of the holder of any other Right Certificate (or, prior to the
Distribution Date, of the Common Shares), may, in his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Right Certificate in the manner provided
in such Right Certificate and in this Agreement. Without limiting the foregoing
or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Agreement and will be entitled to specific performance of
the obligations hereunder, and injunctive relief against actual or threatened
violations of the obligations of any Person subject to, this Agreement.
Section 16. Agreement of Right Holders. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable only
in connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Right Certificates will be
transferable, subject to Section 7(e) hereof, only on the registry books of the
Rights Agent if surrendered at the office of the Rights Agent designated for
such purpose, duly endorsed or accompanied by a proper instrument of transfer;
(c) the Company and the Rights Agent may deem and treat the person in
whose name the Right Certificate (or, prior to the Distribution Date, the
associated Common Shares certificate) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any notations of
ownership or writing on the Right Certificate or the associated Common Shares
certificate made by anyone other than the Company or the Rights Agent) for all
purposes whatsoever, and neither the Company nor the Rights Agent shall be
affected by any notice to the contrary; and
(d) notwithstanding anything in this Agreement to the contrary, neither
the Company nor the Rights Agent shall have any liability to any holder of a
Right or other person as a result of its inability to perform any of its
obligations under this Agreement by reason of any preliminary or permanent
injunction or other order, decree or ruling issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency or
commission or any statute, rule, regulation or executive order promulgated or
enacted by any governmental authority, prohibiting or otherwise restraining
performance of such obligations; provided, however, the Company must use
reasonable efforts to have any such order, decree or ruling lifted or otherwise
overturned as soon as reasonably practicable.
Section 17. Right Certificate Holder Not Deemed a Stockholder. No
holder, as such, of any Right Certificate shall be entitled to vote or receive
dividends or be deemed, for any purpose, the holder of the Preferred Shares or
any other securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby, nor shall anything contained herein
or in any Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any
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<PAGE>
of the rights of a stockholder of the Company, including, without limitation,
any right to vote for the election of directors or upon any other matter
submitted to stockholders at any meeting thereof, or to give or withhold consent
to any corporate action, or to receive notice of meetings or other actions
affecting stockholders (except as provided in Section 25 hereof), or to receive
dividends or other distributions or subscription rights, or otherwise, until the
Right or Rights evidenced by such Right Certificate shall have been exercised in
accordance with the provisions hereof.
Section 18. Concerning the Rights Agent.
(a) The Company agrees to pay to the Rights Agent reasonable compensation
for all services rendered by it hereunder and, from time to time, on demand of
the Rights Agent, its reasonable expenses and counsel fees and other
disbursements incurred in the administration, preparation, delivery, amendment
and execution of this Agreement and the exercise and performance of its duties
hereunder.
(b) The Rights Agent shall be authorized and protected and shall incur no
liability for, or in respect of any action taken, suffered or omitted by it in
connection with, its administration of this Agreement in reliance upon any Right
Certificate or certificate for the Preferred Shares or Common Shares or for
other securities of the Company, instrument of assignment or transfer, power of
attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement, or other paper or document believed by it to be genuine
and to be signed, executed and, where necessary, verified or acknowledged, by
the proper person or persons, or otherwise upon the advice of counsel as set
forth in Section 20 hereof.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
(a) Any Person into which the Rights Agent or any successor Rights Agent
may be merged or with which it may be consolidated, or any Person resulting from
any merger or consolidation to which the Rights Agent or any successor Rights
Agent shall be a party, or any corporation succeeding to the shareholder
services business of the Rights Agent or any successor Rights Agent, shall be
the successor to the Rights Agent under this Agreement without the execution or
filing of any paper or any further act on the part of any of the parties hereto;
provided, that such Person would be eligible for appointment as a successor
Rights Agent under the provisions of Section 21 hereof. In case, at the time
such successor Rights Agent shall succeed to the agency created by this
Agreement, any of the Right Certificates shall have been countersigned but not
delivered, any such successor Rights Agent may adopt the countersignature of the
predecessor Rights Agent and deliver such Right Certificates so countersigned;
and in case at that time any of the Right Certificates shall not have been
countersigned, any successor Rights Agent may countersign such Right
Certificates either in the name of the predecessor Rights Agent or in the name
of the successor Rights Agent; and in all such cases such Right Certificates
shall have the full force provided in the Right Certificates and in this
Agreement.
(b) In case at any time the name of the Rights Agent shall be changed and
at such time any of the Right Certificates shall have been countersigned but not
delivered, the Rights Agent may adopt the countersignature under its prior name
and deliver Right Certificates so countersigned; and
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<PAGE>
in case at that time any of the Right Certificates shall not have been
countersigned, the Rights Agent may countersign such Right Certificates either
in its prior name or in its changed name; and in all such cases such Right
Certificates shall have the full force provided in the Right Certificates and in
this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes only
the duties and obligations expressly imposed by this Agreement upon the
following terms and conditions, by all of which the Company and the holders of
Right Certificates (or, prior to the Distribution Date, of the Common Shares),
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the advice or opinion of such counsel shall be
full and complete authorization and protection to the Rights Agent as to any
action taken, suffered or omitted by it in good faith and in accordance with
such advice or opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation, the identity of any Acquiring Person and the
determination of the current per share market price) be proved or established by
the Company prior to taking, suffering or omitting any action hereunder, such
fact or matter (unless other evidence in respect thereof be herein specifically
prescribed) may be deemed to be conclusively proved and established by a
certificate signed by any one of the Chairman of the Board, the Chief Executive
Officer, the President, the Chief Financial Officer, the Treasurer or the
Secretary of the Company and delivered to the Rights Agent; and such certificate
shall be full authorization and protection to the Rights Agent and the Rights
Agent shall incur no liability for or in respect of any action taken, suffered
or omitted in good faith by it under the provisions of this Agreement in
reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder to the Company and any
other Person only for its own gross negligence, bad faith or willful misconduct
as determined by a court of competent jurisdiction.
(d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Right
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only.
(e) The Rights Agent shall not be under any liability or responsibility in
respect of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Rights Agent) or in respect of the
validity or execution of any Right Certificate (except its countersignature
thereof); nor shall it be liable or responsible for any breach by the Company of
any covenant or condition contained in this Agreement or in any Right
Certificate; nor shall it be liable or responsible for any change in the
exercisability of the Rights (including but not limited to the Rights becoming
null and void and nontransferable pursuant to Section 7(e) hereof) or any
adjustment in the terms of the Rights (including the manner, method or amount
thereof) provided for in Section 3, 11, 13, 23 or 24 hereof, or the ascertaining
of the existence of facts that would
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<PAGE>
require any such change or adjustment (except with respect to the exercise of
Rights evidenced by Right Certificates after actual notice that such change or
adjustment is required); nor shall it by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any
Preferred Shares or Common Shares to be issued pursuant to this Agreement or any
Right Certificate or as to whether any Preferred Shares or Common Shares will,
when so issued, be validly authorized and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
one of the Chairman of the Board, the Chief Executive Officer, the President,
the Chief Financial Officer, the Secretary or the Treasurer of the Company, and
to apply to such officers for advice or instructions in connection with its
duties, and it shall not be liable for any action taken, suffered or omitted by
it in good faith in accordance with instructions of any such officer or for any
delay in acting while waiting for those instructions. Any application by the
Rights Agent for written instructions from the Company may, at the option of the
Rights Agent, set forth in writing any action proposed to be taken, suffered or
omitted by the Rights Agent under this Agreement and the date on and/or after
which such action shall be taken or suffered or such omission shall be
effective. The Rights Agent shall not be liable for any action taken or
suffered by, or omission of, the Rights Agent in accordance with a proposal
included in any such application on or after the date specified in such
application (which date shall not be less than five Business Days after the date
any officer of the Company actually receives such application unless any such
officer shall have consented in writing to an earlier date) unless, prior to
taking any such action (or the effective date in the case of an omission), the
Rights Agent shall have received written instructions in response to such
application specifying the action to be taken, suffered or omitted.
(h) The Rights Agent and any stockholder, director, affiliate, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing in this Agreement shall preclude the Rights Agent
from acting in any other capacity for the Company or for any other Person.
(i) The Rights Agent may execute and exercise any of the rights or powers
hereby vested in it or perform any duty hereunder either itself or by or through
its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct, absent gross negligence, bad faith or willful misconduct
(as determined by a court of competent jurisdiction) in the selection and
continued employment thereof.
(j) The Company agrees to indemnify the Rights Agent for, and to hold the
Rights Agent harmless against any loss, liability, damage, judgment, fine,
penalty, claim, demand, settlement, cost
25
<PAGE>
or expense, incurred without gross negligence, bad faith or willful misconduct
on the part of the Rights Agent, for any action taken, suffered or omitted by
the Rights Agent in connection with the acceptance and administration of this
Agreement, including, without limitation, the costs and expenses of defending
against any claim of liability arising therefrom, directly or indirectly. The
Company shall be entitled to participate at its own expense in the defense of
any action, proceeding, suit or claim brought against the Rights Agent, and, if
the Company so elects, the Company shall assume the defense of any such action,
proceeding, suit or claim. In the event that the Company assumes such defense,
the Company shall not thereafter be liable for the fees and expenses of any
additional counsel retained by the Rights Agent unless there exists a conflict
of interest between the Company and the Rights Agent which could reasonably
impair such joint representation and, so long as the Company shall retain
counsel satisfactory to the Rights Agent, in the exercise of its reasonable
judgment, to defend such action, proceeding, suit or claim. The Rights Agent
agrees not to settle any litigation in connection with any action, proceeding,
suit or claim with respect to which it may seek indemnification from the Company
without the prior written consent of the Company so long as such consent is not
unreasonably withheld. The indemnity provided herein shall survive the
termination of this Agreement and the termination and the expiration of the
Rights. The costs and expenses incurred in enforcing this right of
indemnification shall be paid by the Company. Anything contrary notwithstanding,
in no event shall the Rights Agent be liable for special, punitive, indirect,
consequential or incidental loss or damage of any kind whatsoever (including but
not limited to lost profits), even if the Rights Agent has been advised of the
likelihood of such loss or damage. Any liability of the Rights Agent under this
Rights Agreement will be limited to the amount of fees paid by the Company to
the Rights Agent.
(k) No provision of this Agreement shall require the Rights Agent to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
it believes that repayment of such funds or adequate indemnification against
such risk or liability is not reasonably assured to it.
(l) If, with respect to any Rights Certificate surrendered to the Rights
Agent for exercise or transfer, the certificate contained in the form of
assignment or the form of election to purchase set forth on the reverse side
thereof, as the case may be, has not been completed to certify the holder is not
an Acquiring Person (or an Affiliate or Associate thereof), the Rights Agent
shall not take any further action with respect to such requested exercise or
transfer without first consulting with the Company.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign from its duties under this Agreement upon 30 days'
notice in writing mailed to the Company and to each transfer agent of the Common
Shares or Preferred Shares by registered or certified mail, and to the holders
of the Right Certificates (or, prior to the Distribution Date, of the Common
Shares) by first-class mail. The Company may remove the Rights Agent or any
successor Rights Agent upon 30 days' notice in writing, mailed to the Rights
Agent or successor Rights Agent, as the case may be, and to each transfer agent
of the Common Shares or Preferred Shares by registered or certified mail, and to
the holders of the Right Certificates (or, prior to the Distribution Date, of
the Common Shares) by first-class mail. If the Rights Agent shall resign or be
removed or shall otherwise become incapable of acting, the Company shall appoint
a successor to the Rights
26
<PAGE>
Agent. If the Company shall fail to make such appointment within a period of 30
days after giving notice of such removal or after it has been notified in
writing of such resignation or incapacity by the resigning or incapacitated
Rights Agent or by the holder of a Right Certificate (or, prior to the
Distribution Date, of the Common Shares) (who shall, with such notice, submit
his Right Certificate or, prior to the Distribution Date, the certificate
representing his Common Shares, for inspection by the Company), then the
registered holder of any Right Certificate (or, prior to the Distribution Date,
of the Common Shares) or the Rights Agent may apply to any court of competent
jurisdiction for the appointment of a new Rights Agent. Any successor Rights
Agent, whether appointed by the Company or by such a court, shall be a Person
organized and doing business under the laws of the United States or of the State
of New York or of any other state of the United States, in good standing, which
is authorized to do business under such laws and is subject to supervision or
examination by federal or state authority and which has at the time of its
appointment as Rights Agent a combined capital and surplus of at least $50
million; provided that the principal transfer agent for the Common Shares shall
in any event be qualified to be the Rights Agent. After appointment, the
successor Rights Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Rights Agent without
further act or deed; but the predecessor Rights Agent shall deliver and transfer
to the successor Rights Agent any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary for
the purpose. Not later than the effective date of any such appointment, the
Company shall file notice thereof in writing with the predecessor Rights Agent
and each transfer agent of the Common Shares or Preferred Shares, and mail a
notice thereof in writing to the registered holders of the Right Certificates
(or, prior to the Distribution Date, of the Common Shares). Failure to give any
notice provided for in this Section 21, however, or any defect therein, shall
not affect the legality or validity of the resignation or removal of the Rights
Agent or the appointment of the successor Rights Agent, as the case may be.
Section 22. Issuance of New Right Certificates and Additional Rights.
Notwithstanding any of the provisions of this Agreement or of the Rights to the
contrary, the Company may, at its option, issue new Right Certificates
evidencing Rights in such form as may be approved by its Board of Directors of
the Company to reflect any adjustment or change made in accordance with the
provisions of this Agreement. In addition, in connection with the issuance or
sale of Common Shares following the Distribution Date and prior to the earlier
of the Redemption Date and the Final Expiration Date, the Company (i) shall,
with respect to Common Shares so issued or sold pursuant to the exercise of
stock options or under any employee plan or arrangement, or upon the exercise,
conversion or exchange of securities, notes or debentures issued by the Company,
and (ii) may, in any other case, if deemed necessary or appropriate by the Board
of Directors of the Company, issue Right Certificates representing the
appropriate number of Rights in connection with such issuance or sale; provided,
however, that no such Right Certificate shall be issued if, and to the extent
that, the Company shall be advised by counsel that such issuance would create a
significant risk of material adverse tax consequences to the Company or the
Person to whom such Right Certificate would be issued, and no such Right
Certificate shall be issued if, and to the extent that, appropriate adjustment
shall otherwise have been made in lieu of the issuance thereof.
27
<PAGE>
Section 23. Redemption.
(a) A majority of the Board of Directors of the Company may, at its
option, at any time prior to the earlier of (i) the Close of Business on the
tenth day following the Shares Acquisition Date (or, if the Shares Acquisition
Date shall have occurred prior to the Record Date, the Close of Business on the
tenth day following the Record Date) and (ii) the Final Expiration Date, redeem
all but not less than all of the then outstanding Rights at a redemption price
of $.001 per Right, appropriately adjusted to reflect any stock split, stock
dividend or similar transaction occurring after the date hereof (such redemption
price being hereinafter referred to as the "Redemption Price"). The redemption
of the Rights by the Board of Directors of the Company may be made effective at
such time, on such basis and with such conditions as the Board of Directors of
the Company in its sole discretion may establish. Notwithstanding anything
contained in this Agreement to the contrary, the Rights shall not be exercisable
pursuant to Section 11(a)(ii) prior to the expiration of the Company's right of
redemption hereunder.
(b) Immediately upon the action of the Board of Directors of the Company
ordering the redemption of the Rights pursuant to paragraph (a) of this Section
23, and without any further action and without any notice, the right to exercise
the Rights will terminate and the only right thereafter of the holders of Rights
shall be to receive the Redemption Price. Within ten (10) Business Days after
the action of the Board of Directors of the Company ordering the redemption of
the Rights, the Company shall give notice of such redemption to the Rights Agent
and the holders of the then outstanding Rights by mailing such notice to all
such holders at their last addresses as they appear upon the registry books of
the Rights Agent or, prior to the Distribution Date, on the registry books of
the transfer agent for the Common Shares. Each such notice of redemption will
state the method by which payment of the Redemption Price will be made. The
notice, if mailed in the manner herein provided, shall be conclusively presumed
to have been duly given, whether or not the holder of Rights receives such
notice. In any case, failure to give such notice by mail, or any defect in the
notice, to any particular holder of Rights shall not affect the sufficiency of
notice to other holders of Rights. Neither the Company nor any of its
Affiliates or Associates may redeem, acquire or purchase for value any Rights at
any time in any manner other than that specifically set forth in this Section 23
or in Section 24 hereof, and other than in connection with the purchase of
Common Shares prior to the Distribution Date.
Section 24. Exchange.
(a) The Board of Directors of the Company may, at its option, at any time
after any Person becomes an Acquiring Person, mandatorily exchange all or part
of the then outstanding and exercisable Rights (which shall not include Rights
that shall have become null and void and nontransferable pursuant to the
provisions of Section 7(e) hereof) for Common Shares at an exchange ratio of one
Common Share per Right, appropriately adjusted to reflect any stock split, stock
dividend or similar transaction occurring after the date hereof (such exchange
ratio being hereinafter referred to as the "Exchange Ratio"). Notwithstanding
the foregoing, the Board of Directors of the Company shall not be empowered to
effect such exchange at any time after any Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan of the Company or any such
Subsidiary, or any entity holding Common Shares of the Company for or
28
<PAGE>
pursuant to the terms of any such plan), together with all Affiliates and
Associates of such Person, becomes the Beneficial Owner of 50 percent or more of
the Common Shares then outstanding.
(b) Immediately upon the action of the Board of Directors of the Company
ordering the exchange of any Rights pursuant to paragraph (a) of this Section
24, and without any further action and without any notice, the right to exercise
such Rights shall terminate and the only right thereafter of the holders of such
Rights shall be to receive that number of Common Shares equal to the number of
such Rights held by such holder multiplied times the Exchange Ratio. The
Company shall promptly give public notice of any such exchange with prompt
notice thereof to the Rights Agent; provided, however, that the failure to give,
or any defect in, such notice shall not affect the validity of such exchange.
The Company promptly shall mail a notice of any such exchange to all the holders
of such Rights at their last addresses as they appear upon the registry books of
the Rights Agent. Any notice which is mailed in the manner herein provided
shall be deemed given, whether or not the holder receives the notice. Each such
notice of exchange will state the method by which the exchange of the Common
Shares for Rights will be effected and, in the event of any partial exchange,
the number of Rights which will be exchanged. Any partial exchange shall be
effected pro rata based on the number of Rights (other than Rights which have
become null and void and nontransferable pursuant to the provisions of Section
7(e) hereof) held by each holder of Rights.
(c) In any exchange pursuant to this Section 24, the Company, at its
option, may substitute Preferred Shares (or equivalent preferred shares) for
Common Shares exchangeable for Rights, at the initial rate of one one-hundredth
of a Preferred Share (or equivalent preferred share) for each Common Share, as
appropriately adjusted to reflect adjustments in the voting rights of the
Preferred Shares pursuant to the terms thereof, so that the fraction of a
Preferred Share delivered in lieu of each Common Share shall have the same
voting rights as one Common Share.
(d) In the event that the number of Common Shares or Preferred Shares
which are authorized but unissued are not sufficient to permit any exchange of
Rights as contemplated in accordance with this Section 24, the Company may, at
its option, take all such action as may be necessary to authorize additional
Common Shares or Preferred Shares.
(e) The Company may, but shall not be required to, issue fractions of
Common Shares upon exchange of Rights pursuant to this Section 24 or distribute
certificates which evidence fractional Common Shares. In lieu of such
fractional Common Shares, the Company may pay to the registered holders of the
Right Certificates with regard to which such fractional Common Shares would
otherwise be issuable an amount in cash equal to the same fraction of the
current market value of a whole Common Share for the Trading Day immediately
prior to the date of exchange pursuant to this Section 24. For purposes of this
paragraph (e), the current market value of a whole Common Share shall be the
closing price of a Common Share (as determined pursuant to the second sentence
of Section 11(d)(i) hereof).
29
<PAGE>
Section 25. Notice of Certain Events.
(a) In case the Company shall propose (i) to pay any dividend payable in
capital stock of any class to the holders of its Preferred Shares or to make any
other distribution to the holders of its Preferred Shares (other than a regular
quarterly cash dividend), (ii) to offer to the holders of its Preferred Shares
rights or warrants to subscribe for or to purchase any additional Preferred
Shares or shares of capital stock of any class or any other securities, rights
or options, (iii) to effect any reclassification of its Preferred Shares (other
than a reclassification involving only the subdivision of outstanding Preferred
Shares), (iv) to effect any consolidation or merger into or with, or to effect
any sale or other transfer (or to permit one or more of its Subsidiaries to
effect any sale or other transfer), in one or more transactions, of 50 percent
or more of the assets or earning power of the Company and its Subsidiaries
(taken as a whole) to, any other Person, (v) to effect the liquidation,
dissolution or winding up of the Company, or (vi) to declare or pay any dividend
on the Common Shares payable in Common Shares or to effect a subdivision,
combination or consolidation of the Common Shares (by reclassification or
otherwise than by payment of dividends in Common Shares), then, in each such
case, the Company shall give to each holder of a Right Certificate (or, prior to
the Distribution Date, of the Common Shares) and the Rights Agent, in accordance
with Section 26 hereof, a notice of such proposed action, which shall specify
the record date for the purposes of such stock dividend or distribution of
rights or warrants, or the date on which such reclassification, consolidation,
merger, sale, transfer, liquidation, dissolution, or winding up is to take place
and the date of participation therein by the holders of the Common Shares and/or
Preferred Shares, if any such date is to be fixed, and such notice shall be so
given in the case of any action covered by clause (i) or (ii) above at least ten
(10) days prior to the record date for determining holders of the Preferred
Shares for purposes of such action, and in the case of any such other action, at
least ten (10) days prior to the date of the taking of such proposed action or
the date of participation therein by the holders of the Common Shares and/or
Preferred Shares, whichever shall be the earlier.
(b) In case a Flip-In Event shall occur, then the Company shall as soon as
practicable thereafter give to each holder of a Right Certificate (or, prior to
the Distribution Date, of Common Shares) and the Rights Agent, in accordance
with Section 26 hereof, a notice of the occurrence of such event, which notice
shall describe such event and the consequences of such event to holders of
Rights under Section 11(a)(ii) hereof.
Section 26. Notices. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Right Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:
Data Return Corporation
801 Stadium Drive, Suite 117
Arlington, Texas 76011
Attention: Corporate Secretary
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Right Certificate to or on the Rights
30
<PAGE>
Agent shall be sufficiently given or made if sent by first-class mail, postage
prepaid, addressed (until another address is filed in writing with the Company)
as follows:
ChaseMellon Shareholder Services, L.L.C.
2323 Bryan Street, Suite 2300
Dallas, Texas 75201
Attention: Tim Oliver
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
Section 27. Supplements and Amendments. At any time prior to the
Distribution Date and subject to the last sentence of this Section 27, the
Company may by action of its Board of Directors, and the Rights Agent shall if
the Company so directs, supplement or amend any provision of this Agreement
(including, without limitation, the date upon which the Distribution Date shall
occur, the time during which the Rights may be redeemed pursuant to Section 23
or any provision of the Statement of Resolution) in any manner without the
approval of any holder of the Rights. From and after the Distribution Date and
subject to applicable law, the Company may by action of its Board of Directors,
and the Rights Agent shall if the Company so directs, from time to time
supplement or amend this Agreement without the approval of any holders of Right
Certificates in order (i) to cure any ambiguity or to correct or supplement any
provision contained in this Agreement which may be defective or inconsistent
with any other provision of this Agreement or (ii) to make any other provisions
in regard to matters or questions arising hereunder which the Company may deem
necessary or desirable and which shall not adversely affect the interests of the
holders of the Rights or Right Certificates (other than an Acquiring Person or
any Affiliate or Associate of an Acquiring Person). Any supplement or amendment
adopted during any period after any Person has become an Acquiring Person but
prior to the Distribution Date shall be null and void unless such supplement or
amendment could have been adopted under the prior sentence from and after the
Distribution Date. Without limiting the foregoing, the Company may at any time
prior to the Distribution Date amend this Agreement to lower the thresholds set
forth in the definition of Acquiring Person in Section 1 hereof and in Section
3(b) hereof to not less than the greater of (i) the sum of 0.001 percent and the
largest percentage of the outstanding Common Shares then known by the Company to
be beneficially owned by any Person (other than the Company, any Subsidiary of
the Company, any employee benefit plan of the Company or any Subsidiary of the
Company, or any entity holding Common Shares of the Company for or pursuant to
the terms of any such plan) and (ii) 10 percent. Upon the delivery of a
certificate from an appropriate officer of the Company which states that the
proposed supplement or amendment is in compliance with the terms of this Section
27, the Rights Agent shall execute such supplement or amendment; provided,
however, that the Rights Agent may, but shall not be obligated to, enter into
any such supplement or amendment which changes or increases its own rights,
duties, obligations, liabilities or immunities under this Agreement. Prior to
the Distribution Date, the interests of the holders of Rights shall be deemed
coincident with the interests of the holders of the Common Shares of the
Company. In addition, notwithstanding anything to the contrary contained in
this Agreement, no supplement or amendment to this
31
<PAGE>
Agreement shall be made which (i) reduces the Redemption Price (except as
required hereunder by appropriate adjustment to reflect any stock split, stock
dividend or similar transaction occurring after the date of this Agreement) or
(ii) provides for an earlier Final Expiration Date.
Section 28. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any Person other than the Company, the Rights Agent and
the registered holders of the Right Certificates (and, prior to the Distribution
Date, of the Common Shares) any legal or equitable right, remedy or claim under
this Agreement; but this Agreement shall be for the sole and exclusive benefit
of the Company, the Rights Agent and the registered holders of the Right
Certificates (and, prior to the Distribution Date, of the Common Shares).
Section 30. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
Section 31. Governing Law. THIS AGREEMENT AND EACH RIGHT CERTIFICATE
ISSUED HEREUNDER SHALL BE DEEMED TO BE A CONTRACT MADE UNDER LAWS OF THE STATE
OF TEXAS AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
SUCH STATE APPLICABLE TO CONTRACTS TO BE MADE AND PERFORMED ENTIRELY WITHIN SUCH
STATE; PROVIDED, HOWEVER, THAT ALL PROVISIONS REGARDING THE RIGHTS, DUTIES AND
OBLIGATIONS OF THE RIGHTS AGENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE
PERFORMED ENTIRELY WITHIN SUCH STATE.
Section 32. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall for all purposes be deemed to be an
original, and all such counterparts shall together constitute but one and the
same instrument.
Section 33. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions of this
Agreement.
32
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested, all as of the day and year first above written.
DATA RETURN CORPORATION
Attest:
By: By:
------------------------------ ------------------------------
Name: Name:
----------------------- -----------------------
Title: Title:
----------------------- -----------------------
CHASEMELLON SHAREHOLDER
SERVICES, L.L.C., as Rights Agent
Attest:
By: By:
------------------------------ ------------------------------
Name: Name:
----------------------- -----------------------
Title: Title:
----------------------- -----------------------
33
<PAGE>
EXHIBIT A
FORM
of
STATEMENT OF RESOLUTION
ESTABLISHING SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
DATA RETURN CORPORATION
To the Secretary of State
of the State of Texas:
Pursuant to Article 2.13 of the Texas Business Corporation Act ("TBCA"),
and pursuant to Article Four of its Amended and Restated Articles of
Incorporation (the "Articles of Incorporation"), the undersigned, Data Return
Corporation, a corporation organized and existing under the TBCA (the
"Corporation"), hereby submits the following statement for the purpose of
establishing and designating a series of shares and fixing and determining the
relative rights and preferences thereof:
1. The name of the corporation is Data Return Corporation.
2. The following resolution establishing and designating a series of
shares and fixing and determining the relative rights and preferences
thereof was duly adopted by the Board of Directors of the Corporation
as of September 27, 1999:
RESOLVED, that, pursuant to the authority vested in the Board of
Directors of the Corporation in accordance with the provisions of the
Amended and Restated Articles of Incorporation of the Corporation, a series
of Preferred Stock, par value $.001 per share, of the Corporation is hereby
established and created, and that the designation and number of shares
thereof and the voting and other powers, preferences and relative,
participating, optional and other special rights of the shares of such
series, and the qualifications, limitations and restrictions thereof, are
as follows:
Series A Junior Participating Preferred Stock
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series A Junior Participating Preferred Stock" (the "Series A
Preferred Stock"). The number of shares initially constituting the Series A
Preferred Stock shall be 1,000,000; provided, however, that if more than a total
of 1,000,000 shares of Series A Preferred Stock shall be issuable upon the
exercise of Rights (the "Right") issued pursuant to the Rights Agreement dated
as of September 27, 1999 between the Corporation and ChaseMellon Shareholder
Services, L.L.C. as Rights Agent (the
<PAGE>
"Rights Agreement"), the Board of Directors of the Corporation, pursuant to
Section 2.13 of the TBCA, shall adopt a resolution or resolutions providing for
an increase in the total number of shares of Series A Preferred Stock authorized
to be issued (to the extent that the Articles of Incorporation then permits) to
the largest number of whole shares (rounded up to the nearest whole share)
issuable upon exercise of such Rights.
Section 2. Dividends and Distributions.
(a) Subject to the prior and superior rights of the holders of shares of
any other series of Preferred Stock or other class of stock of the Corporation
ranking prior and superior to the Series A Preferred Stock with respect to
dividends, the holders of shares of Series A Preferred Stock shall be entitled
to receive, when, as and if declared by the Board of Directors, out of the
assets of the Corporation legally available therefor, (i) quarterly dividends
payable in cash on the last day of each fiscal quarter in each year, or such
other dates as the Board of Directors of the Corporation shall approve (each
such date being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the first issuance
of a share or a fraction of a share of Series A Preferred Stock, in the amount
of $.01 per whole share (rounded to the nearest cent) less the amount of all
cash dividends declared on the Series A Preferred Stock pursuant to the
following clause (ii) since the immediately preceding Quarterly Dividend Payment
Date or, with respect to the first Quarterly Dividend Payment Date, since the
first issuance of any share or fraction of a share of Series A Preferred Stock
(the total of which shall not, in any event, be less than zero) and (ii)
dividends payable in cash on the payment date for each cash dividend declared on
the Common Stock in an amount per whole share (rounded to the nearest cent)
equal to the Formula Number (as hereinafter defined) then in effect multiplied
times the cash dividends then to be paid on each share of Common Stock. In
addition, if the Corporation shall pay any dividend or make any distribution on
the Common Stock payable in assets, securities or other forms of noncash
consideration (other than dividends or distributions solely in shares of Common
Stock), then, in each such case, the Corporation shall simultaneously pay or
make on each outstanding whole share of Series A Preferred Stock a dividend or
distribution in like kind equal to the Formula Number then in effect multiplied
times such dividend or distribution on each share of the Common Stock. As used
herein, the "Formula Number" shall be 100; provided, however, that, if at any
time after September 27, 1999, the Corporation shall (x) declare or pay any
dividend on the Common Stock payable in shares of Common Stock or make any
distribution on the Common Stock in shares of Common Stock, (y) subdivide (by a
stock split or otherwise) the outstanding shares of Common Stock into a larger
number of shares of Common Stock or (z) combine (by a reverse stock split or
otherwise) the outstanding shares of Common Stock into a smaller number of
shares of Common Stock, then in each such event the Formula Number shall be
adjusted to a number determined by multiplying the Formula Number in effect
immediately prior to such event by a fraction, the numerator of which is the
number of shares of Common Stock that are outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
are outstanding immediately prior to such event (and rounding the result to the
nearest whole number); and provided further, that, if at any time after
September 27, 1999, the Corporation shall issue any shares of its stock in a
merger, reclassification, or change of the outstanding shares of Common Stock,
then in each such event the Formula Number shall be appropriately adjusted to
reflect such merger, reclassification or change so that each share of Series A
Preferred Stock continues to be the
<PAGE>
economic equivalent of a Formula Number of shares of Common Stock prior to such
merger, reclassification or change.
(b) The Corporation shall declare a dividend or distribution on the Series
A Preferred Stock as provided in paragraph (a) of this Section immediately prior
to or at the same time it declares a dividend or distribution on the Common
Stock (other than a dividend or distribution solely in shares of Common Stock);
provided, however, that, in the event no dividend or distribution (other than a
dividend or distribution solely in shares of Common Stock) shall have been
declared on the Common Stock during the period between any Quarterly Dividend
Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend
of $.001 per share on the Series A Preferred Stock shall nevertheless be payable
on such subsequent Quarterly Dividend Payment Date. The Board of Directors may
fix a record date for the determination of holders of shares of Series A
Preferred Stock entitled to receive a dividend or distribution declared thereon,
which record date shall be not more than 60 days prior to the date fixed for the
payment thereof.
(c) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Preferred Stock from and after the Quarterly Dividend Payment
Date next preceding the date of original issue of such shares of Series A
Preferred Stock; provided, however, that dividends on such shares which are
originally issued after the record date for the determination of holders of
shares of Series A Preferred Stock entitled to receive a quarterly dividend and
on or prior to the next succeeding Quarterly Dividend Payment Date shall begin
to accrue and be cumulative from and after such Quarterly Dividend Payment Date.
Notwithstanding the foregoing, dividends on shares of Series A Preferred Stock
which are originally issued prior to the record date for the determination of
holders of shares of Series A Preferred Stock entitled to receive a quarterly
dividend on the first Quarterly Dividend Payment Date shall be calculated as if
cumulative from and after the last day of the fiscal quarter next preceding the
date of original issuance of such shares. Accrued but unpaid dividends shall not
bear interest. Dividends paid on the shares of Series A Preferred Stock in an
amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding.
(d) So long as any shares of the Series A Preferred Stock are outstanding,
no dividends or other distributions shall be declared, paid or distributed, or
set aside for payment or distribution, on the Common Stock unless, in each case,
the dividend required by this Section 2 to be declared on the Series A Preferred
Stock shall have been declared.
(e) The holders of the shares of Series A Preferred Stock shall not be
entitled to receive any dividends or other distributions except as provided
herein.
Section 3. Voting Rights. The holders of shares of Series A Preferred
Stock shall have the following voting rights:
(a) Each holder of Series A Preferred Stock shall be entitled to a number
of votes equal to the Formula Number then in effect, for each share of Series A
Preferred Stock held of record on each matter on which holders of the Common
Stock or stockholders generally are entitled to vote, multiplied times the
maximum number of votes per share which any holder of the Common Stock
<PAGE>
or stockholders generally then have with respect to such matter (assuming any
holding period or other requirement to vote a greater number of shares is
satisfied).
(b) Except as otherwise provided herein or by applicable law, the holders
of shares of Series A Preferred Stock and the holders of shares of Common Stock
shall vote together as one class for the election of directors of the
Corporation and on all other matters submitted to a vote of stockholders of the
Corporation.
(c) If, at the time of any annual meeting of stockholders for the election
of directors, the equivalent of six quarterly dividends (whether or not
consecutive) payable on any share or shares of Series A Preferred Stock are in
default, the number of directors constituting the Board of Directors of the
Corporation shall be increased by two. In addition to voting together with the
holders of Common Stock for the election of other directors of the Corporation,
the holders of record of the Series A Preferred Stock, voting separately as a
class to the exclusion of the holders of Common Stock, shall be entitled at said
meeting of stockholders (and at any subsequent annual meeting of stockholders),
unless all dividends in arrears have been paid or declared and set apart for
payment prior thereto, to vote for the election of two directors of the
Corporation, the holders of any Series A Preferred Stock being entitled to cast
a number of votes per share of Series A Preferred Stock equal to the Formula
Number. Until the default in payments of all dividends which permitted the
election of said directors shall cease to exist, any director who shall have
been so elected pursuant to the next preceding sentence may be removed at any
time, either with or without cause, only by the affirmative vote of the holders
of the shares of Series A Preferred Stock at the time entitled to cast a
majority of the votes entitled to be cast for the election of any such director
at a special meeting of such holders called for that purpose, and any vacancy
thereby created may be filled by the vote of such holders. If and when such
default shall cease to exist, the holders of the Series A Preferred Stock shall
be divested of the foregoing special voting rights, subject to revesting in the
event of each and every subsequent like default in payments of dividends. Upon
the termination of the foregoing special voting rights, the terms of office of
all persons who have been elected directors pursuant to said special voting
rights shall forthwith terminate, and the number of directors constituting the
Board of Directors shall be reduced by two. The voting rights granted by this
Section 3(c) shall be in addition to any other voting rights granted to the
holders of the Series A Preferred Stock in this Section 3.
(d) Except as provided herein, in Section 11 or by applicable law, holders
of Series A Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for authorizing or taking any
corporate action.
Section 4. Certain Restrictions.
(a) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Preferred Stock outstanding shall have
been paid in full, the Corporation shall not:
<PAGE>
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for consideration any shares
of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other distributions,
on any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock,
except dividends paid ratably on the Series A Preferred Stock and all such
parity stock on which dividends are payable or in arrears in proportion to
the total amounts to which the holders of all such shares are then
entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock;
provided that the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such parity stock in exchange for shares of any stock
of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares
of Series A Preferred Stock, or any shares of stock ranking on a parity
with the Series A Preferred Stock, except in accordance with a purchase
offer made in writing or by publication (as determined by the Board of
Directors) to all holders of such shares upon such terms as the Board of
Directors, after consideration of the respective annual dividend rates and
other relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable treatment
among the respective series or classes.
(b) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (a) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock, without designation as to series, and may thereafter be issued
as part of a new series of Preferred Stock subject to the conditions and
restrictions on issuance set forth herein, in the Certificate of Incorporation,
or in any other Certificate of Designations creating a series of Preferred Stock
or any similar stock of the Corporation or as otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon the
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, no distribution shall be made (i) to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Stock unless, prior thereto, the holders
of shares of Series A Preferred Stock shall have received an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment, plus an amount equal to the greater of (x) $1.00
per whole share and (y) an aggregate amount per share equal to the
<PAGE>
Formula Number then in effect multiplied times the aggregate amount to be
distributed per share to holders of Common Stock, or (ii) to the holders of
stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred Stock, except
distributions made ratably on the Series A Preferred Stock and all such parity
stock in proportion to the total amounts to which the holders of all such shares
are entitled upon such liquidation, dissolution or winding up.
Section 7. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash or any other property, or any combination thereof, then in any
such case the then outstanding shares of Series A Preferred Stock shall at the
same time be similarly exchanged for or changed into an amount per share equal
to the Formula Number then in effect multiplied times the aggregate amount of
stock, securities, cash or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is exchanged or changed.
In the event both this Section 7 and Section 2 appear to apply to a transaction,
this Section 7 shall control.
Section 8. No Redemption; No Sinking Fund.
(a) The shares of Series A Preferred Stock shall not be subject to
redemption by the Corporation; provided, however, that the Corporation may
purchase or otherwise acquire outstanding shares of Series A Preferred Stock in
the open market or by offer to any holder or holders of shares of Series A
Preferred Stock.
(b) The shares of Series A Preferred Stock shall not be subject to or
entitled to the operation of a retirement or sinking fund.
Section 9. Ranking. The Series A Preferred Stock shall rank, with
respect to the payment of dividends and as to distributions of assets upon
liquidation, dissolution or winding up of the Corporation, junior to all other
series of Preferred Stock of the Corporation, unless the Board of Directors
shall specifically determine otherwise in fixing the powers, preferences and
relative, participating, optional and other special rights of the shares of any
such other series and the qualifications, limitations and restrictions thereof.
Section 10. Fractional Shares. The Series A Preferred Stock shall be
issuable upon exercise of the Rights issued pursuant to the Rights Agreement in
whole shares or in any fraction of a share that is one one-hundredth of a share
or any integral multiple of such fraction which shall entitle the holder, in
proportion to such holder's fractional shares, to receive dividends, exercise
voting rights, participate in distributions and to have the benefit of all other
rights of holders of Series A Preferred Stock. In lieu of fractional shares,
the Corporation, prior to the first issuance of a share or a fraction of a share
of Series A Preferred Stock, may elect (i) to make a cash payment as provided in
the Rights Agreement for fractions of a share other than one one-hundredth of a
share or any integral multiple thereof or (ii) to issue depository receipts
evidencing such authorized fraction of a share of Series A Preferred Stock
pursuant to an appropriate agreement between the Corporation and a depository
selected by the Corporation; provided that such agreement shall provide that the
holders
<PAGE>
of such depository receipts shall have all the rights, privileges and
preferences to which they are entitled as holders of the Series A Preferred
Stock.
Section 11. Amendment. None of the powers, preferences or relative,
participating, optional or other special rights of the Series A Preferred Stock
as provided herein or in the Certificate of Incorporation of the Corporation
shall be amended in any manner that would alter or change the powers,
preferences, rights or privileges of the holders of Series A Preferred Stock so
as to affect them adversely without the affirmative vote of the holders of at
least 66-2/3 percent of the outstanding shares of Series A Preferred Stock,
voting as a separate class.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designations to be duly executed in its corporate name on this _____ day of
_____________, 1999.
DATA RETURN CORPORATION
By
------------------------------------------
Sunny C. Vanderbeck
Chairman and Chief Executive Officer
<PAGE>
EXHIBIT B
[Form of Right Certificate]
Certificate No. R- ____________ Rights
NOT EXERCISABLE AFTER SEPTEMBER 27, 2009, OR EARLIER IF REDEEMED BY THE
COMPANY. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE
COMPANY, AT $.001 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT.
RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR AN AFFILIATE OR
ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS
AGREEMENT) AND BY ANY SUBSEQUENT HOLDER OF SUCH RIGHTS ARE NULL AND VOID
AND NONTRANSFERABLE.
Right Certificate
DATA RETURN CORPORATION
This certifies that _________________________________, or registered
assigns, is the registered owner of the number of Rights set forth above, each
of which entitles the owner thereof, subject to the terms, provisions and
conditions of the Rights Agreement, dated as of September 27, 1999 (the "Rights
Agreement"), between Data Return Corporation, a Texas corporation (the
"Company"), and ChaseMellon Shareholder Services, L.L.C., a New Jersey limited
liability company, as Rights Agent (the "Rights Agent"), unless the Rights
evidenced hereby have been previously redeemed by the Company, to purchase from
the Company at any time after the Distribution Date (as defined in the Rights
Agreement) and prior to 5:00 P.M., Dallas, Texas time, on September 27, 2009
(the "Final Expiration Date"), at the office or agency of the Rights Agent
designated for such purpose, or its successors as Rights Agent, one one-
hundredth of a fully paid, nonassessable share of Series A Junior Participating
Preferred Stock, par value $.001 per share, of the Company (the "Preferred
Shares"), at a purchase price per one one-hundredth of a share equal to $100
(the "Purchase Price"), upon presentation and surrender of this Right
Certificate with the Form of Election to Purchase duly executed.
The Purchase Price and the number and kind of shares that may be purchased
upon exercise of each Right evidenced by this Right Certificate, as set forth
above, are the Purchase Price and the number and kind of shares that may be
purchased as of _____________. As provided in the Rights Agreement, the
Purchase Price and the number and kind of shares that may be purchased upon the
exercise of each Right evidenced by this Right Certificate are subject to
modification and adjustment upon the happening of certain events.
B-1
<PAGE>
This Right Certificate is subject to all the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
reference to the Rights Agreement is hereby made for a full description of the
rights, limitations of rights, obligations, duties and immunities hereunder of
the Rights Agent, the Company and the holders of the Right Certificates. Copies
of the Rights Agreement are on file at the above-mentioned office and agency of
the Rights Agent and are also available from the Company upon request.
If the Rights evidenced by this Right Certificate are at any time
beneficially owned by an Acquiring Person or an Associate or Affiliate of an
Acquiring Person (as such terms are defined in the Rights Agreement), such
Rights shall be null and void and nontransferable and the holder of any such
Right (including any purported transferee or subsequent holder) shall not have
any right to exercise or transfer any such Right.
This Right Certificate, with or without other Right Certificates, upon
surrender at the office of the Rights Agent, may be exchanged for another Right
Certificate or Right Certificates of like tenor and date evidencing Rights
entitling the holder to purchase a like aggregate number and kind of shares as
the Rights evidenced by the Right Certificate or Right Certificates surrendered
shall have entitled such holder to purchase. If this Right Certificate shall be
exercised in part, the holder shall be entitled to receive upon surrender hereof
another Right Certificate or Right Certificates for the number of whole Rights
not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced by
this Right Certificate may be redeemed by the Company at its option at a
redemption price (in cash or shares of Common Stock or other securities of the
Company deemed by the Board of Directors of the Company to be at least
equivalent in value) of $.001 per Right (which amount may be subject to
adjustment as provided in the Rights Agreement) at any time prior to the earlier
of (i) the close of business on the tenth day following the first date of public
announcement by the Company or an Acquiring Person that an Acquiring Person has
become such and (ii) the Final Expiration Date.
The Company may, but shall not be required to, issue fractions of a
Preferred Share (other than one one-hundredth of a Preferred Share or any
integral multiple thereof) or distribute certificates which evidence fractions
of a Preferred Share upon the exercise of any Right or Rights evidenced hereby.
In lieu of issuing fractional shares, the Company may elect to make a cash
payment as provided in the Rights Agreement for fractions of a share other than
one one-hundredth of a share or any integral multiple thereof or to issue
certificates or utilize a depository arrangement as provided in the terms of the
Rights Agreement and the Preferred Shares.
No holder of this Right Certificate, as such, shall be entitled to vote or
receive dividends or be deemed, for any purpose, the holder of the Preferred
Shares or any other securities of the Company which may at any time be issuable
on the exercise hereof, nor shall anything contained in the Rights Agreement or
herein be construed to confer upon the holder hereof, as such, any of the rights
of a stockholder of the Company, including, without limitation, any right to
vote for the election of directors or upon any other matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions
B-2
<PAGE>
affecting stockholders (except as provided in the Rights Agreement), or to
receive dividends or other distributions or subscription rights, or otherwise,
until the Right or Rights evidenced by this Right Certificate shall have been
exercised as provided in accordance with the provisions of the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company and
its corporate seal.
Dated as of:
[CORPORATE SEAL]
ATTEST: DATA RETURN CORPORATION
By
- ----------------------------------- --------------------------------
Name: Name:
Title: Title:
Countersigned:
CHASEMELLON SHAREHOLDER
SERVICES, L.L.C., as Rights Agent
By
--------------------------------
Authorized Signature
B-3
<PAGE>
[On Reverse Side of Right Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Right Certificate.)
FOR VALUE RECEIVED _______________________ hereby sells, assigns and
transfers unto _________________________________________________________________
________________________________________________________________________________
(Please print name and address of transferee)
________________________________________________________________________________
this Right Certificate, together with all right, title and interest therein, and
does hereby irrevocably constitute and appoint _________________________
Attorney, to transfer the within Right Certificate on the books of the within-
named Company, with full power of substitution.
Dated:
-------------
-----------------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a participant in a Securities Transfer
Association recognized signature program.
Certification of Status
The undersigned hereby certifies by checking the appropriate boxes that:
(1) this Right Certificate [_] is [_] is not being sold, assigned or
transferred by or on behalf of a Person who is or was an Acquiring Person or an
Affiliate or Associate thereof (as such terms are defined in the Rights
Agreement); and
(2) after due inquiry and to the best knowledge of the undersigned, it
[_] did [_] did not acquire the Rights evidenced by this Right Certificate
from any person who is, was or subsequently became an Acquiring Person or an
Affiliate or Associate thereof (as such terms are defined in the Rights
Agreement).
-----------------------------------
Signature
Dated:
-------------
B-4
<PAGE>
[On Reverse Side of Right Certificate -- continued]
FORM OF ELECTION TO PURCHASE
(To be executed by the registered holder if such holder desires
to exercise the Rights represented by the Right Certificate.)
To: DATA RETURN CORPORATION
The undersigned hereby irrevocably elects to exercise __________________
Rights represented by this Right Certificate to purchase the Preferred Shares
(or other shares) issuable upon the exercise of such Rights and requests that
certificates for such shares be issued in the name of:
Please insert social security
or other identifying number ____________________________________________________
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
Please insert social security
or other identifying number ____________________________________________________
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
Dated:
-------------
-----------------------------------
Signature
B-5
<PAGE>
[On Reverse Side of Right Certificate -- continued]
Signature Guaranteed:
Signatures must be guaranteed by a participant in a Securities Transfer
Association recognized signature program.
Certification of Status
The undersigned hereby certifies by checking the appropriate boxes that:
(1) this Right Certificate [_] is [_] is not being exercised by or on
behalf of a Person who is or was an Acquiring Person or an Affiliate or
Associate thereof (as such terms are defined in the Rights Agreement); and
(2) after due inquiry and to the best knowledge of the undersigned, it
[] did [] did not acquire the Rights evidenced by this Right Certificate from
any person who is, was or subsequently became an Acquiring Person or an
Affiliate or Associate thereof (as such terms are defined in the Rights
Agreement).
-----------------------------------
Signature
Dated:
-------------
NOTICE
------
The signature in the Form of Assignment or Form of Election to Purchase, as
the case may be, must conform to the name as written upon the face of this Right
Certificate in every particular, without alteration or enlargement or any change
whatsoever.
In the event the Certification of Status set forth above in the Form of
Assignment or the Form of Election to Purchase, as the case may be, is not
completed, the Company and the Rights Agent will deem the beneficial owner of
the Rights evidenced by this Right Certificate to be an Acquiring Person or an
Affiliate or Associate thereof (as such terms are defined in the Rights
Agreement) and such Assignment or Election to Purchase will not be honored.
B-6
<PAGE>
EXHIBIT C
SUMMARY OF RIGHTS TO PURCHASE
PREFERRED SHARES
On September 27, 1999, the Board of Directors of Data Return Corporation
(the "Company") authorized and declared a dividend of one Right (a "Right") for
each outstanding share of Common Stock, par value $.001 per share ("Common
Stock"), of the Company (the "Common Shares"). The dividend is payable on
September 27, 1999 (the "Record Date") to the holders of record of the Common
Shares at the close of business on that date. In addition, the Company has
authorized the issuance of one Right with respect to each share of Common Stock
that shall become outstanding between the Record Date and the earliest of the
Distribution Date, the Redemption Date and the Final Expiration Date (as such
terms are hereinafter defined). When exercisable each Right entitles the
registered holder to purchase from the Company one one-hundredth of a share of
Series A Junior Participating Preferred Stock, par value $.001 per share, of the
Company (the "Preferred Shares"), at a price of $100 per one one-hundredth of a
Preferred Share (the "Purchase Price"), subject to adjustment. The description
and terms of the Rights are set forth in a Rights Agreement (the "Rights
Agreement") between the Company and ChaseMellon Shareholder Services, L.L.C., as
Rights Agent (the "Rights Agent").
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (other than the
Company, any subsidiary of the Company, any employee benefit plan of the Company
or any subsidiary of the Company or any entity holding shares of Common Stock
for or pursuant to the terms of any such plan, and certain other persons named
in the Rights Agreement) (an "Acquiring Person") has acquired beneficial
ownership of 15 percent or more of the outstanding Common Shares and (ii) 10
business days (or such later date as may be determined by action of the Board of
Directors of the Company prior to such time as any person or group of affiliated
or associated persons becomes an Acquiring Person) following the commencement
of, or first public announcement of an intention to commence, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of affiliated or associated persons of 15 percent
or more of the outstanding Common Shares (the earlier of such dates being herein
referred to as the "Distribution Date"), the Rights will be evidenced, with
respect to any of the Common Share certificates outstanding as of the Record
Date, by such Common Share certificate with a copy of this Summary of Rights
attached thereto.
The Rights Agreement provides that, until the Distribution Date (or earlier
redemption or expiration of the Rights), the Rights will be transferred with and
only with the Common Shares. Until the Distribution Date (or earlier redemption
or expiration of the Rights), new Common Share certificates issued after the
Record Date, upon transfer or new issuance of Common Shares, will contain a
notation incorporating the Rights Agreement by reference. Until the
Distribution Date (or earlier redemption or expiration of the Rights), the
surrender for transfer of any certificates for Common Shares outstanding on or
after the Record Date, even without such notation or a copy of this Summary of
Rights being attached thereto, will also constitute the transfer of the Rights
associated with the Common Shares represented by such certificate. As soon as
practicable
C-1
<PAGE>
following the Distribution Date, separate certificates evidencing the Rights
("Right Certificates") will be mailed to holders of record of the Common Shares
as of the close of business on the Distribution Date and such separate Right
Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights
will expire on September 27, 2009 (the "Final Expiration Date"), unless the
Final Expiration Date is extended or unless the Rights are earlier redeemed or
exchanged by the Company, in each case, as described below.
The Purchase Price payable, and the number of Preferred Shares or other
securities or property issuable, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Shares, (ii) upon the grant to holders of the Preferred Shares of certain rights
or warrants to subscribe for or purchase Preferred Shares at a price, or
securities convertible into Preferred Shares with a conversion price, less than
the then current market price of the Preferred Shares or (iii) upon the
distribution to holders of the Preferred Shares of evidences of indebtedness or
assets (excluding regular periodic cash dividends paid out of earnings or
retained earnings or dividends payable in Preferred Shares) or of subscription
rights or warrants (other than those referred to above).
The number of outstanding Rights and the number of one one-hundredths of a
Preferred Share issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the Common Shares or a stock
dividend on the Common Shares payable in Common Shares or subdivisions,
consolidations or combinations of the Common Shares occurring, in any such case,
prior to the Distribution Date.
Preferred Shares purchasable upon exercise of the Rights will not be
subject to redemption by the Company. Each Preferred Share will be entitled to
a minimum preferential quarterly dividend payment of $.001 per share but will be
entitled to an aggregate dividend of 100 multiplied times the dividend declared
per Common Share. In the event of liquidation, the holder of the Preferred
Shares will be entitled to a minimum preferential liquidation payment of $1.00
per share but will be entitled to an aggregate payment of 100 multiplied times
the payment made per Common Share. Each Preferred Share will have 100 votes,
voting together with the Common Shares. Finally, in the event of any merger,
consolidation or other transaction in which Common Shares are exchanged, each
Preferred Share will be entitled to receive 100 multiplied times the amount
received per Common Share. These rights are protected by customary antidilution
provisions.
Because of the nature of the Preferred Shares' dividend, liquidation and
voting rights, the value of the one one-hundredth interest in a Preferred Share
purchasable upon exercise of each Right should approximate the value of one
Common Share.
In the event that the Company is acquired in a merger or other business
combination transaction or 50 percent or more of its consolidated assets or
earning power are sold after a person or group of affiliated or associated
persons has become an Acquiring Person, proper provision will be made so that
each holder of a Right will thereafter have the right to receive, upon the
exercise
C-2
<PAGE>
thereof at the then current exercise price of the Right, that number of shares
of common stock of the acquiring company which at the time of such transaction
will have a market value of two times the exercise price of the Right. In the
event that any person or group of affiliated or associated persons becomes an
Acquiring Person, proper provision shall be made so that each holder of a Right,
other than Rights beneficially owned by the Acquiring Person (which will
thereafter be null and void and nontransferable), will thereafter have the right
to receive upon exercise that number of Common Shares of the Company having a
market value of two times the exercise price of the Right.
At any time after any person or group of affiliated or associated persons
becomes an Acquiring Person and prior to the acquisition by such person or group
of 50 percent or more of the outstanding Common Shares, the Board of Directors
of the Company may exchange the Rights (other than Rights owned by such person
or group which will have become null and void and nontransferable), in whole or
in part, at an exchange ratio of one Common Share, or one one-hundredth of a
Preferred Share (or of a share of a class or series of the Company's preferred
stock having equivalent rights, preferences and privileges), per Right (subject
to adjustment).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least one
percent in such Purchase Price. The Company may, but shall not be required to,
issue fractions of a Preferred Share (other than one one-hundredth of a
Preferred Share or any integral multiple thereof, which may, at the election of
the Company, be evidenced by depositary receipts) and in lieu thereof, an
adjustment in cash will be made based on the market price of the Preferred
Shares on the last trading day prior to the date of exercise.
At any time prior to the close of business on the tenth day following a
public announcement that an Acquiring Person has become such an Acquiring
Person, the Board of Directors of the Company may redeem the Rights in whole,
but not in part, at a price of $.001 per Right (the "Redemption Price"). The
redemption of the Rights may be made effective at such time, on such basis and
with such conditions as the Board of Directors in its sole discretion may
establish. The time at which the Rights are redeemed by the Company is herein
referred to as the "Redemption Date." Immediately upon any redemption of the
Rights, the right to exercise the Rights will terminate and the only right
thereafter of the holders of Rights will be to receive the Redemption Price.
The terms of the Rights may be amended by the Board of Directors of the
Company without the consent of the holders of the Rights, including without
limitation an amendment to lower certain thresholds described above to not less
than the greater of (i) the sum of 0.001 percent and the largest percentage of
the outstanding Common Shares then known by the Company to be beneficially owned
by any person or group of affiliated or associated persons and (ii) 10 percent,
except that from and after such time as any person or group of affiliated or
associated persons becomes an Acquiring Person no such amendment may adversely
affect the interests of the holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.
C-3
<PAGE>
The Preferred Shares shall rank, with respect to the payment of dividends
and as to distributions of assets upon liquidation, dissolution or winding up of
the Company, junior to all other series of preferred stock of the Company,
unless the Board of Directors of the Company shall specifically determine
otherwise in fixing the powers, preferences and relative, participating,
optional and other special rights of the shares of any such other series and the
qualifications, limitations and restrictions thereof.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to a Registration Statement on Form 8-A dated
_______________, 1999. A copy of the Rights Agreement is available free of
charge from the Company. This summary description of the Rights does not
purport to be complete and is qualified in its entirety by reference to the
Rights Agreement, which is hereby incorporated herein by reference.
C-4
<PAGE>
EXHIBIT 5.1
[THOMPSON & KNIGHT LETTERHEAD]
(817) 347-1700
September 2, 1999
Data Return Corporation
801 Stadium Drive, Suite 117
Arlington, Texas 76011
Dear Sirs:
We have acted as counsel for Data Return Corporation, a Texas corporation
(the "Company"), in connection with the offering and sale by the Company (the
"Offering") of shares (the "Shares") of Common Stock, par value $0.001 per share
("Common Stock"), of the Company having a value (based on aggregate offering
price) of $86,250,000, consisting of (i) shares (the "Firm Shares") of Common
Stock to be sold to the underwriters (the "Underwriters") that will be named in
the Underwriting Agreement to be entered into between the Company and Bear,
Stearns & Co. Inc., CIBC World Markets and Wit Capital Corporation, as
representatives of the Underwriters (the "Underwriting Agreement"), and (ii)
additional shares (the "Over-Allotment Shares") of Common Stock that will be
purchasable by the Underwriters pursuant to an over-allotment option contained
in the Underwriting Agreement. The Firm Shares and, if the over-allotment
option is exercised by the Underwriters, the Over-Allotment Shares are to be
offered to the public by the Underwriters pursuant to the Underwriting
Agreement.
We have participated in and are familiar with the corporate proceedings of
the Company relating to the preparation of the Company's Registration Statement
on Form S-1 (the "Registration Statement") filed with the Securities and
Exchange Commission on this date with respect to the registration of the Shares
under the Securities Act of 1933, as amended (the "1933 Act").
In connection with the foregoing, we have examined the originals or copies
certified or otherwise authenticated to our satisfaction of the Registration
Statement, and such corporate records of the Company, certificates of public
officials, and other agreements, instruments and documents as we have deemed
necessary to require as a basis for the opinion hereinafter expressed.
<PAGE>
Based upon the foregoing and in reliance thereon, and subject to the
assumptions and qualifications hereinafter specified, it is our opinion that the
shares have been duly authorized by all necessary corporate action on the part
of the Company, and, when sold and paid for in accordance with the terms of the
Underwriting Agreement, will be validly issued, fully paid and nonassessable.
In rendering the opinion expressed herein, we have assumed that no action
heretofore taken by the Board of Directors of the Company in connection with the
matters described or referred to herein will be modified, rescinded or withdrawn
after the date hereof. We have also assumed that the Underwriting Agreement will
be executed and delivered by one or more officers of the Company duly authorized
to do so by the Board of Directors.
We are members of the Bar of the State of Texas only and do not purport to
be experts on the laws of any state or jurisdiction other than the State of
Texas and the United States, and we express no opinion herein as to the effect
that the laws and decisions of courts of any jurisdiction other than the United
States and the State of Texas may have upon the opinion expressed herein. We
hereby consent to the reference to this firm in the Prospectus included in the
Registration Statement under the caption "Legal Matters" as the attorneys who
will pass upon the legal validity of the Shares, and to the filing of this
opinion as Exhibit 5.1 to the Registration Statement. The foregoing, however,
shall not constitute an admission to our being experts as provided for in
Sections 7 and 11 of the 1933 Act.
Respectfully submitted,
/s/ Thompson & Knight L.L.P.
By: THOMPSON & KNIGHT L.L.P.
<PAGE>
Exhibit 23.2
We consent to the reference to our firm under the captions "Summary Financial
Information", "Selected Financial Data" and "Experts" and to the use of our
report dated May 18, 1999, except for Note 9, as to which the date is September
27, 1999, in Amendment No. 4 to the Registration Statement (Form S-1 No.
333-84011) and related Prospectus of Data Return Corporation dated October 5,
1999.
/s/ Ernst & Young LLP
Dallas, Texas
October 5, 1999
