<PAGE>
As filed with the Securities and Exchange Commission on February 18, 2000.
Registration No. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
INFLOW, INC.
(Exact name of registrant as specified in its charter)
Delaware 4813 84-1439489
(State or other (Primary standard industrial (I.R.S. employer
jurisdiction of classification code number) identification number)
incorporation or
organization) ---------------
938 Bannock Street
Suite 300
Denver, CO 80204
Telephone: (303) 942-2800
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Arthur H. Zeile
Chief Executive Officer
InFlow, Inc.
938 Bannock Street
Suite 300
Denver, CO 80204
Telephone: (303) 942-2800
Facsimile: (303) 942-2801
(Name, address, including zip code, and telephone number, including area code
of agent for service)
---------------
Copies to:
Richard R. Plumridge, Esq. Scott M. Wornow, Esq.
John E. Hayes III, Esq. Paul, Hastings, Janofsky & Walker LLP
Jeff T. Harris, Esq. 399 Park Avenue
Brobeck, Phleger & Harrison LLP New York, NY 10022-4697
370 Interlocken Boulevard, Suite 500 (212) 318-6000
Broomfield, CO 80021
(303) 410-2000
---------------
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, 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,
check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed maximum
Title of each class of aggregate Amount of
securities to be registered offering price (1) registration fee
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<S> <C> <C>
Common stock, par value $0.001 per share............ $125,000,000 $33,000
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o).
---------------
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 the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we +
+are permitted by US Federal Securities law to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until +
+the documentation filed with the SEC relating to these securities has been +
+declared effective by the SEC. This prospectus is not an offer to sell these +
+securities or our solicitation of your offer to buy these securities in any +
+jurisdiction where that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY , 2000...................................
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS
, 2000
Shares of Common Stock
- --------------------------------------------------------------------------------
InFlow, Inc.: The Offering:
. We provide . We are offering
equipment
colocation and shares of our
value-added common stock.
services for . The underwriters
mission-critical e- have an option to
business and data purchase an
communications additional
applications shares
through our secure, from us.
carrier-neutral . This is our initial
data network public offering,
exchange and no public
facilities. market currently
exists for our
shares.
Proposed Symbol &
Market: . We plan to use the
. INFL/Nasdaq net proceeds to
National Market fund the completion
and initial
operating losses of
additional data
network exchange
facilities,
including capital
expenditures, sales
and marketing and
other operating
costs; for general
corporate purposes,
including working
capital; and for
continued
development of new
value-added
services.
. Closing:
,
2000.
------------------------------------------------
<TABLE>
<CAPTION>
Per Share Total
----------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to InFlow, Inc.:
----------------------------------------------
</TABLE>
This investment involves risk. See "Risk Factors" beginning on page 6.
- --------------------------------------------------------------------------------
Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
Donaldson, Lufkin & Jenrette
Chase H&Q
First Union Securities, Inc.
DLJdirect Inc.
<PAGE>
Front Inside Cover Gatefold
- ---------------------------
Page 1
[MAP OF INFLOW'S EXISTING AND PLANNED SITES FOR 2000]
Page 2
[DEPICTION OF INFLOW'S SERVICE OFFERINGS -- INFLOWNET,
MONITORFLOW, SECUREFLOW]
[PICTURE OF FLOWTRACK]
Page 3
[INFLOW CORE VALUES GRAPHIC]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page
<S> <C> <C> <C>
Prospectus Summary..................... 1 Business............................... 28
Risk Factors........................... 6 Management............................. 45
Forward-Looking Statements............. 17 Related-Party Transactions............. 52
Use of Proceeds........................ 18 Principal Stockholders................. 53
Dividend Policy........................ 18 Description of Capital Stock........... 55
Capitalization......................... 19 Shares Eligible for Future Sale........ 58
Dilution............................... 20 Underwriting........................... 59
Selected Financial and Other Data...... 21 Legal Matters.......................... 61
Management's Discussion and Analysis of Experts................................ 61
Where You Can Find Additional
Financial Condition and Results of Information............................ 62
Operations............................ 22 Index to Financial Statements.......... F-1
</TABLE>
----------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different from that contained in this prospectus. This
prospectus may only be used where it is legal to sell these securities. The
information contained in this prospectus is only accurate as of the date of
this prospectus, regardless of the time of delivery of this prospectus or any
sale of our common stock.
----------------
i
<PAGE>
PROSPECTUS SUMMARY
Because this is only a summary, it does not contain all of the information
that may be important to you. You should read the entire prospectus, including
"Risk Factors" and the financial statements and the notes to the financial
statements, before deciding to invest in our common stock.
InFlow, Inc.
Overview
We provide equipment colocation and value-added services for mission-
critical e-business and data communications applications through our secure,
carrier-neutral data network exchange facilities. We focus on small and medium-
sized businesses with complex networking needs, an underserved market segment
we believe is in need of reliable and scalable outsourced solutions. We opened
our first state-of-the-art data network exchange facility, or DNX, in Denver in
July 1998. Today we operate DNXs in Denver (two locations), Minneapolis,
Raleigh-Durham and San Diego. We expect to have 15 geographically dispersed
DNXs in operation by the end of 2000 and intend to build another 20 DNXs by the
end of 2002. Our customers benefit from the close proximity of our DNXs to
their businesses and we benefit from frequent interaction with them. As of
February 17, 2000, we provided services to 67 customers, including six new
customers since January 1, 2000.
Our customers demand high-performance, reliable network connections to
maximize the performance of the applications they provide for their business
partners and customers. We offer our customers customized solutions by
providing a broad range of network connections including high-speed Internet
access and more secure, higher performing private-line services using ATM, T-1,
fractional T-1, frame relay, ISDN and modem lines. We also offer our customers
a suite of value-added services, including MonitorFlowTM for equipment and
application health monitoring, SecureFlowTM for firewall management and
InflowNetTM for redundant multi-carrier Internet connectivity.
We have developed an infrastructure and a robust proprietary software
program, FlowTrack(TM), both of which help us to effectively manage our rapid
expansion into multiple markets. We have built an experienced site selection
team and a standardized set of processes to accelerate the design,
construction, staffing and marketing of future DNXs. FlowTrack(TM), which is
composed of asset management, network operations, and customer account and
billing management modules, integrates and automates our business processes and
is designed to allow us to rapidly and efficiently scale them across a broad
network of DNXs.
We believe that our solutions provide our customers not only a compelling
performance advantage but also a compelling cost and time-to-market advantage.
Our customers benefit from economies of scale through the sharing of
infrastructure and personnel costs among multiple users. Our outsourced
solutions enable our customers to quickly establish and rapidly expand their e-
business applications, allowing them to better focus on their core
competencies. Our customers include eBags.com, Email Knowledge, Factual Data
Corp., High Speed Access Corp., KBKids.com, MapQuest.com, MessageMedia Inc.,
Northpoint Communications, Inc., SciQuest.com and Worldprints.com.
Market Opportunity
Forrester Research, or Forrester, estimates that the business-to-business e-
commerce market will grow from $43 billion in 1998 to $1.3 trillion in 2003, a
compound annual growth rate, or CAGR, of 98%. We believe that this dramatic
growth in e-commerce is driving demand for increasingly complex, interactive e-
business applications that require secure, reliable, high-performance network
infrastructures, including more than simply Internet connectivity. At the same
time, we believe the shortage of information technology, or IT, professionals
is impairing the ability of e-businesses to manage their networks. In addition,
we believe the costs associated with developing and maintaining network
infrastructures internally have become prohibitive to many companies.
1
<PAGE>
These challenges involved in managing complex connectivity and network
infrastructures are increasing the demand for outsourced advanced colocation,
network and value-added service solutions such as ours. Forrester estimates
that revenues from Internet-related hosting and colocation services will grow
at a CAGR of 76%, from approximately $875 million in 1998 to approximately
$14.7 billion in 2003. We believe that very few hosting and colocation
providers are capable of meeting the demands of today's e-businesses and that
this has created a significant opportunity for a turnkey outsourced solution
for connecting, monitoring and servicing e-business applications of small and
medium-sized businesses.
Our Solution
We provide our customers with a comprehensive range of high-performance
services for advanced e-business and data communications applications. Through
our state-of-the-art DNXs, we provide carrier-neutral network connectivity,
value-added services and a secure, controlled environment for our customers'
application hardware. Our outsourcing solution offers meaningful performance,
cost and time-to-market benefits to our customers. Specifically, we provide our
customers with the following key advantages:
. Reliable Data Centers and Multiple Carrier Connections
. Complex Network Connectivity
. Value-Added Services
. Geographic Proximity
. Accelerated Time-to-Market and Scalability
Our Strategy
Our objective is to be the leading provider of sophisticated services to
small and medium-sized businesses for the management of their complex e-
business and data communications applications. To achieve this objective, we
intend to:
Rapidly Expand Into Our Target Markets. We intend to increase the number of
our DNXs from five today to 35 by the end of 2002 because we believe
significant opportunities exist to provide complex networking solutions to
small and medium-sized e-businesses. Our expansion into metropolitan areas that
have previously been underserved by our competitors is designed to enable us to
be the "first mover" in many of these markets, an important advantage given the
low customer churn rate in our industry.
Leverage Our Infrastructure. We have developed an infrastructure which we
believe will continue to allow us to rapidly and efficiently expand into
multiple markets. FlowTrack(TM), our proprietary operating system, is designed
to ensure quality customer service and quickly integrate new service offerings
while we rapidly scale our business. We have also built a team and a set of
automated processes to accelerate the design, construction, staffing and
marketing of future DNXs.
Continue to Emphasize Customer Service. We believe that delivering complete
customer satisfaction is vital to growing our business. Our emphasis on
customer service and support has resulted in a strong, loyal base of customers,
and our frequent customer interaction provides us many benefits, including
increased sales opportunities. We intend to remain focused on providing the
highest level of satisfaction to our customers by continuing to hire superior
sales, technical and customer support personnel and maintaining our
comprehensive training programs.
Expand and Cross-Sell Our Suite of Services. We intend to continue to
develop new and enhanced services that we believe will be attractive to
potential and existing customers. These services are designed to increase our
revenue per customer, improve our operating margins and give us a competitive
advantage over other service providers in both attracting and retaining
customers.
2
<PAGE>
Expand Sales Channels and Increase Brand Awareness. We intend to grow our
direct sales organization significantly and use indirect sales channels to
expand coverage and penetration of small and medium-sized businesses as we
build out our DNXs. In addition to the branding achieved by our various sales
channels, we intend to increase our brand recognition through a variety of
marketing and promotional programs.
With the growing trend toward outsourcing by e-businesses and our ability to
rapidly scale, we believe that we are ideally positioned to become a leading
provider of equipment colocation and other value-added services to small and
medium-sized businesses.
Our principal executive offices are located at 938 Bannock Street, Suite
300, Denver, Colorado 80204. Our telephone number at that location is (303)
942-2800. Our Web site is located at www.inflow.com. Information contained on
our Web site does not constitute part of this prospectus.
We have received trademark and service mark registration for the mark
"Inflow." Other trademarks and service marks appearing in this prospectus are
the property of their respective holders.
3
<PAGE>
The Offering
<TABLE>
<C> <S>
Stock offered by Inflow............................ shares of voting common stock
Common stock to be outstanding after the offering.. shares
Use of proceeds.................................... We estimate that the net proceeds to us
from this offering will be approximately
$ million. We will use the net
proceeds:
. to fund the completion and initial
operating losses of additional DNXs,
including capital expenditures, sales and
marketing and other operating costs;
. for general corporate purposes, including
working capital; and
. for continued development of new value-
added services. See "Use of Proceeds."
Proposed Nasdaq National Market symbol............. "INFL"
</TABLE>
The number of shares of common stock to be outstanding after the offering is
based on the number of shares outstanding as of December 31, 1999 and includes
1,433,203 shares of our non-voting common stock, all of which is assumed to be
held by First Union Capital Partners, Inc. and does not have voting rights but
is convertible into and otherwise identical to our common stock. The term
common stock, unless otherwise noted, refers to both our voting and non-voting
shares of common stock. The number of shares of common stock excludes:
. shares reserved for issuance under our 2000 Stock Incentive Plan, of
which shares were subject to outstanding options;
. shares reserved for issuance under our 2000 Employee Stock Purchase
Plan; and
. shares of common stock issuable upon the exercise of options
outstanding as of December 31, 1999 at a weighted average exercise price
of $ per share.
See "Description of Capital Stock -- Common Stock" and "Management -- 2000
Stock Incentive Plan" and "-- 2000 Employee Stock Purchase Plan."
----------------
In this prospectus, references to "Inflow," "we," "our" and "us" refer to
InFlow, Inc. and our wholly-owned subsidiaries unless otherwise indicated, and
not to the underwriters. Unless otherwise indicated, all share information
contained in this prospectus:
. Refers to shares of our common stock, which we are selling in this
offering;
. Gives effect to the conversion of all outstanding shares of preferred
stock, other than that held by First Union Capital Partners, Inc., into
shares of common stock upon the closing of this offering;
. Gives effect to the conversion of all outstanding shares of preferred
stock held by First Union Capital Partners, Inc. into shares of
common stock and shares of non-voting common stock upon the
closing of this offering;
. Assumes no exercise of the underwriters' over-allotment option; and
. Reflects a -for- split of our common stock effected as of , 2000.
4
<PAGE>
SUMMARY FINANCIAL AND OTHER DATA
You should read the following summary financial and other data along with
the sections entitled "Use of Proceeds," "Selected Financial and Other Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and notes and other financial and
operating data included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION YEARS ENDED DECEMBER 31,
(SEPTEMBER 26, 1997) TO --------------------------
DECEMBER 31, 1997 1998 1999
----------------------- ------------ -------------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenue.................... $ 0 $ 45,032 $ 1,998,164
Costs of data network
exchange facilities:
Direct.................... 0 118,848 2,681,591
Indirect.................. 0 173,846 866,254
---------- ----------- -------------
Gross profit (loss) from
data network exchange
facilities................ 0 (247,662) (1,549,681)
Total operating ex-
penses................. 72,193 469,248 3,871,931
---------- ----------- -------------
Loss from operations....... (72,193) (716,910) (5,421,612)
Total other income (ex-
pense)................. (9,314) (77,933) 691,987
---------- ----------- -------------
Net loss................... (81,507) (794,843) (4,729,625)
Accretion of convertible
preferred stock........... 0 0 (696,897)
Deemed dividend related to
beneficial conversion
feature of Series B
preferred stock........... 0 0 (5,655,173)
---------- ----------- -------------
Net loss available to
common stockholders....... $ (81,507) $ (794,843) $ (11,081,695)
========== =========== =============
Net loss per common share
(basic and diluted) (1)... $ (0.03) $ (0.26) $ (3.69)
Weighted average common
shares (basic and diluted)
(1)....................... 3,000,000 3,000,000 3,000,041
Pro forma net loss per
common share (basic and
diluted) (1)(2)-
unaudited................. $ (0.03) $ (0.26) $ (1.62)
Pro forma weighted average
common shares (basic and
diluted) (1)(2)-
unaudited................. 3,000,000 3,000,000 6,416,746
OTHER FINANCIAL DATA:
Cash flow provided by (used
in):
Operating activities...... $ (43,868) $ (552,126) $ (4,443)
Investing activities...... (18,592) (819,413) (68,916,746)
Financing activities...... 603,000 854,604 69,862,642
Capital expenditures....... 18,592 819,413 12,005,820
OTHER DATA:
Customers at end of
period.................... 0 12 61
Operational DNXs........... 0 1 3
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
---------------------------------------
PRO PRO FORMA
ACTUAL FORMA(2) AS ADJUSTED(3)
<S> <C> <C> <C>
----------- ----------- --------
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 965,058 $ 965,058 $
Short-term investments................ 56,387,515 56,387,515
Working capital....................... 54,715,399 54,715,399
Total assets.......................... 72,882,292 72,882,292
Long-term liabilities, including
current maturities................... 1,440,624 1,440,624
Mandatorily redeemable convertible
preferred stock...................... 77,793,139 --
Total stockholders' equity (deficit).. (11,453,573) 66,339,566
</TABLE>
- --------
(1) See note 1 of notes to financial statements for a description of the
computation of basic, diluted and pro forma net loss per share and the
number of shares used to compute basic, diluted and pro forma net loss per
share.
(2) Pro Forma data reflects the conversion of our convertible preferred stock
to common stock and non-voting common stock, which will occur automatically
upon the closing of this offering.
(3) Pro Forma As Adjusted balance sheet data reflects the conversion of our
outstanding preferred stock to common stock and non-voting common stock,
which will occur automatically upon the closing of this offering, the sale
of the shares of common stock in this offering and the receipt
of the net proceeds from this offering, after deducting underwriting fees
and estimated offering expenses.
5
<PAGE>
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should carefully consider the following information about these risks,
together with the other information contained in this prospectus, before you
decide to buy our common stock. If any of the following events actually
occurs, our business and financial results may suffer. In this case, the
market price of our common stock could decline, and you could lose all or part
of your investment in our common stock.
Risks Related To Our Business
We are an early-stage company which makes evaluating our business difficult.
We were founded in 1997 and our first DNX was opened in Denver in July
1998. Our first dollar of revenue from this DNX was not recognized until
September 1998. Since that date, we have opened four additional DNXs. Our
financial statements primarily reflect the results of a single DNX, our
initial Denver location, the operations of which may not be indicative of the
results we will achieve at other locations or of the future results at our
initial Denver DNX. Our limited operating history and lack of meaningful
historical financial or operating data make evaluating our planned business
operations difficult. Additionally, evaluating whether our plan to build
additional DNXs, which will require significant capital expenditures and
management resources, will be successful is difficult because the revenue and
income potential of our business and market is unproven. Many of the revenue
and pricing assumptions in our plan may not conform with future results. We
also expect to encounter challenges and difficulties frequently experienced by
early-stage companies in new and rapidly evolving markets, including our
ability to generate cash flow, hire and train sufficient operational and
technical people and implement our business plan on a timely basis. We may not
successfully address any or all of these challenges and our failure to do so
would adversely affect our business, operations and the market price of our
stock.
We have incurred losses since our inception and expect our losses to continue.
We have incurred net losses in each quarterly and annual period since our
inception. As of December 31, 1999, our cumulative net losses were
approximately $10.1 million. We expect to incur net losses and negative cash
flows from operations on a quarterly and annual basis for the foreseeable
future as we build additional DNXs and increase our sales and marketing
activities. Our ability to achieve profitability depends on many factors which
are beyond our control. Even if we are able to achieve profitability, we may
not be able to sustain profitability during any future periods.
Our quarterly operating results may fluctuate, which may make it difficult to
forecast our future performance and may result in volatility in our stock
price.
We expect that our revenue growth, and our cost structure, will be
unpredictable as we continue to implement our business plan. This
unpredictability will likely result in significant fluctuations in our
quarterly results. Therefore, you should not rely on quarter-to-quarter
comparisons of results of operations as an indication of our future
performance. Because of our limited operating history and the emerging nature
of our industry, we anticipate that securities analysts may have difficulty in
accurately forecasting our results. If our operating results are below market
expectations, the price of our stock will likely decline.
The following are many of the factors which could cause significant
fluctuations in our operating results:
. Demand for and market acceptance of our existing and future services,
along with our ability to cross-sell multiple services to each customer;
. Our continued ability to introduce new services or enhancements and new
offerings by our competitors, including those which may be superior to or
render our offerings obsolete;
. The introduction by third parties of new Internet and networking
technologies and our ability to competitively adjust to and use such
technologies;
6
<PAGE>
. The timing of customer installations and capacity utilization of our
DNXs;
. Fluctuations in bandwidth used by customers and an ability to increase
bandwidth capacity to them as necessary;
. The timing and magnitude of capital expenditures, including construction
costs relating to the expansion of operations;
. The timely expansion, completion and opening of additional DNXs;
. Reliable continuity of service and network availability, as well as our
ability to integrate our products and services into our operations
support system;
. Increased competition in our markets;
. Changes in our pricing policies and those of our competitors' and
provisions for customer discounts and credits;
. Our ability to attract and retain key personnel and customers;
. Continued growth in e-business applications, along with continued demand
for non-Internet forms of network access;
. Economic conditions specific to the Internet industry, as well as other
general economic factors; and
. Adverse regulatory or legislative initiatives.
In addition, a large portion of our expenses is fixed in the short-term,
particularly with respect to communications, depreciation, real estate and
interest expenses, and therefore our results of operations are particularly
sensitive to fluctuations in revenue. Because of this, period-to-period
comparisons of our operating results may not necessarily be meaningful and may
not be an indication of our future performance. Additionally, fluctuations in
our results of operations could cause us to fail to meet the expectations of
securities analysts or investors, which could negatively affect the market
price of our common stock.
Our failure to hold required authorizations and to be registered with, or
certified by, applicable regulatory authorities could harm our business.
Certain telecommunications services that we offer, and intend to offer in
the future, including private-line connectivity, are, or may be, subject to
regulation and certification requirements at the state level. To date, we have
not registered as a public utility in any state or been certified to provide
any form of regulated telecommunications services within any jurisdiction. We
are actively pursuing authorizations or approvals that we believe may be
necessary. While we believe that the law regarding regulation of these and
similar types of services is unclear in certain jurisdictions in which we
currently operate or intend to operate, and we continue to evaluate our status
with counsel, it is possible that we have provided certain telecommunications
services without the requisite regulatory approval or certification in a
limited number of jurisdictions. We may also be required to obtain and to apply
for similar authorizations in other states in which we expect to operate in the
future. Our failure to have held any required authorizations and to have been
registered or certified previously could expose us to risks, including
substantial fines, third-party lawsuits and potential inability to continue our
operations. Moreover, we do not know if we will be allowed to register in
particular jurisdictions or if our applications will be accepted, or that they
would be granted without onerous terms, or at all. The public utility
application and registration process could be lengthy and time-consuming,
requiring substantial resources and management time. Changes in current or
future regulations adopted by regulators, or legislative or judicial
initiatives relating to the telecommunications industry, could have a material
adverse effect on us. If we suffer significant delays in obtaining any
requisite regulatory approvals, we may be unable to provide certain
telecommunications services during the period in which we have not been
certified. Any significant delays of that type could have an adverse effect on
our intended rollout of services.
7
<PAGE>
Authorization as a carrier will also subject us to on-going future
governmental regulation at the state and federal levels, which may make it more
difficult for us to operate and subject us to increased costs which we may not
be able to pass along to our customers. Many of our competitors may not be
subject to similar regulation and may have an additional competitive advantage
in the event we become regulated.
To implement our business plan we will require additional capital in the future
and may not be able to secure adequate funds on terms acceptable to us.
We currently anticipate that the net proceeds of this offering, together
with cash on hand, will be sufficient to meet our anticipated needs for the
next 12 months. However, due to our limited operating history, the nature of
our industry and the possibility that we would encounter delays or cost
overruns in building our planned new DNXs in 2000, our future capital needs are
difficult to predict. Therefore, we may require significant additional funds
after this offering to support our operations or the expansion of our business.
We may not be able to obtain additional funding, if required, in amounts or on
terms acceptable to us. Our inability to raise additional funds could impede
our growth, may force us to scale back or cease our operations or may
negatively affect our financial condition or the market price of our stock.
Our newer DNXs are larger than our first DNX, which may make it difficult for
us to forecast future expenses.
Our first DNX, located in Denver, Colorado, is significantly smaller than
our recently completed DNXs in Denver, Minneapolis, Raleigh-Durham and San
Diego and one-fourth the size of those DNXs which we are developing for
deployment during the rest of 2000. This increase in DNX size adds uncertainty
to our ability to accurately forecast ongoing costs of running our business.
Our lack of experience operating larger facilities could adversely affect our
business, operations and the market price of our stock if we do not
successfully address the complications associated with operating larger DNXs.
If we fail to expand the number of our DNXs or to properly manage our
expansion, our revenues will not grow and we may not be profitable.
The opening of additional DNXs is a key element of our business strategy. To
execute our growth plan, we must:
. Identify appropriate locations;
. Negotiate leases on acceptable terms;
. Design each DNX;
. Obtain permits and the timely approvals of local regulatory authorities;
. Depend upon contractors to construct our additional DNXs in a timely
manner while controlling costs;
. Obtain and install the necessary equipment on a timely basis; and
. Hire, train, motivate and retain qualified employees to assist in our
expansion, as well as to staff our DNXs.
All of these factors involve risks and uncertainties beyond our control and
problems in any other areas could delay the opening of a DNX. Consequently,
opening a new DNX requires significant management time and attention.
Accordingly, you should be aware that we have limited experience in building
DNXs, particulary in building multiple DNXs concurrently, and may not be able
to replicate any success we have had to date in any of our future DNXs. Our
planned expansion will place a significant strain on our limited financial,
administrative, operational and management resources. Our existing operating
and financial control systems, infrastructure and other resources may not be
sufficient to adequately manage the opening of the planned number of DNXs in a
cost-effective and timely manner. Consequently, it may be difficult for us to
meet our growth plan while controlling costs.
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Additional DNXs, if completed, will result in substantial new operating
expenses, including expenses associated with hiring, training, retaining and
managing new employees, purchasing new equipment, implementing new systems,
leasing additional real estate and incurring additional depreciation expense.
If we do not implement adequate management and financial controls, reporting
systems and procedures to operate multiple DNXs in geographically diverse
locations, our operations could be significantly harmed.
If we are unable to obtain real estate leases on acceptable terms, our business
will suffer.
In order to meet our expansion goals, we will need to enter into a
substantial number of leases in new markets. Our site selection template
specifies the size, location and other technical specifications we consider
optimal for our DNXs. Real estate that conforms to our template is often
located in high quality buildings in the central business district of a city.
This type of space may be scarce or in great demand in our target markets, many
of which are experiencing substantial economic growth and shortages of prime
real estate. Even if we are able to locate satisfactory sites in these
potential markets, these sites may be difficult for us to lease on acceptable
terms. If we are unable to obtain leases for new sites on acceptable terms, we
will not be able to achieve our growth plans.
Our dependence on third parties increases the risk that we will not be able to
timely or cost-effectively meet our customer needs.
The presence of diverse bandwidth fiber from communications carriers' fiber
networks to our DNXs is critical to our ability to attract new customers. For
most of the services we provide, we are not a communications carrier, and
therefore rely on third parties to provide our customers with carrier
facilities. In offering certain services, we may be a communications carrier,
by reselling certain services, but we are still dependent on underlying carrier
services and facilities. Carriers may decide not to offer their services within
our DNXs or may increase the cost of their services. The construction required
to connect multiple carrier facilities to our DNXs is complex and involves
factors outside our control, including regulatory processes and the
availability of construction resources. If the establishment of highly diverse
bandwidth connectivity to our DNXs does not occur or is materially delayed, or
if the bandwidth provided to us is subject to capacity bottlenecks and other
reliability problems or is at increased costs, our business, operations and the
market price of our stock will be negatively affected. In addition, we rely on
local loop providers to timely provide connectivity to our DNXs. There is a
limited number of high-bandwidth network providers and we cannot control any
delays or deficiencies associated with this provisioning function.
We also depend on third parties to timely provide critical components of our
reliability solution, such as state-of-the-art equipment and continuous power.
Some of the communications services and networking equipment may be available
only from limited sources. We do not carry significant inventories of
components and have no guaranteed supply arrangements with vendors. We are also
dependent upon our suppliers providing products or components that must comply
with evolving Internet and communications standards or that inter-operate with
other products or components we use. Our performance and reliability are also
highly dependent upon continuous power being supplied by our third party
providers. Although continuous power availability is critical to our business,
we have no control or assurance that we will be supplied with adequate power.
If the equipment or power that we need are unavailable or are not delivered on
a timely basis, our business will be harmed.
We are also dependent upon third parties for the timely construction and
design of our DNXs. The unavailability of these services or the failure of
these services to be timely performed in a professional manner will negatively
affect our business, operations and the market price of our stock.
If we were to lose any of our top customers, we would lose a substantial
portion of our revenue.
A relatively small number of customers account for a large percentage of our
total revenues and we expect this concentration will continue for the
foreseeable future. For the year ending December 31, 1999, our top five
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customers accounted for approximately 46% of our revenue, including Verio, a
potential competitor, which alone accounted for approximately 14% of our
revenue during this period. Our business will be seriously harmed if we do not
generate as much revenue as we expect from these customers or experience a loss
of any significant customer.
Any of our key employees could terminate his or her employment at will.
We depend on the continued services and performance of our senior management
team and other key personnel. The loss of any member of our executive
management team, particularly Arthur H. Zeile, our President and Chief
Executive Officer, or Joel C. Daly, our Vice President, Chief Operating Officer
and Secretary, would significantly harm us. Any of our officers or employees
can terminate his or her employment with us at any time. Although we maintain
$2.5 million "key person" life insurance policies on the lives of each of
Arthur H. Zeile and Joel C. Daly, we believe this amount would not sufficiently
compensate us for the loss of either of their services. The loss of the
services of one or more of our key personnel could seriously interrupt our
business, and because the demand for employees in the communications and
network management services market is intense, we may not be able to
successfully locate, hire, assimilate and retain replacements or other key
management personnel on a timely and cost-effective basis.
It may be difficult for us to hire and retain highly qualified personnel,
particularly as we open additional DNXs in highly competitive markets.
To achieve our growth goals, we will need to hire a substantial number of
people in each new market where we open a DNX. New hires at each DNX will
include a local general manager as well as sales and marketing personnel. The
success of a DNX will depend largely upon the efforts of the people we hire for
those positions. The demand for employees in the communications and network
management services market is intense. Moreover, many of our DNXs are in highly
competitive geographic labor markets. If we are unable to locate, hire and
retain qualified personnel in these markets on a timely and cost-effective
basis, we will face delays in our planned expansion and our financial results
may fail to meet our growth expectations.
If we are unable to compete successfully against new entrants and established
companies with greater resources, our business will suffer.
We believe that new competitors will enter our market. Our success is
dependent upon our ability to substantially differentiate our solutions from
existing and future offerings of our competition. We believe that we may
compare unfavorably with some of our competitors with regard to, among other
things, brand recognition, existing relationships with potential customers,
available pricing discounts, capital availability, strategic relationships and
existing contracts. We may not be able to compete effectively in our target
markets. Moreover, our strategy depends largely upon the rapid deployment of
our solutions. If we are slowed in our rollout of our DNXs, other companies may
gain competitive advantages in markets we are targeting. We expect significant
competition from several areas, including:
.Web hosting and colocation companies;
.National and regional Internet service providers;
.Global, regional and local communications companies; and
.Global technology companies.
Our competition may operate in one or more of these arenas and include
companies such as AboveNet Communications, AT&T Corp., Digital Island, Exodus
Communications, Equinix, Frontier GlobalCenter, Globix, GTE Corporation,
InterNAP, Level 3 Communications, MCI WorldCom, PSINet, Qwest, Sprint, Verio
and the regional Bell operating companies.
Some of our competitors and potential competitors have longer operating
histories and significantly greater financial, technical, marketing and other
resources than we do. In particular, other communications carriers and
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several Web hosting and colocation companies have extensive customer bases and
customer relationships, including relationships with many of our potential
customers. These companies also have significantly greater customer support and
professional services capabilities than we do. Because of their greater
financial resources, some of these companies have the ability to adopt
aggressive pricing policies and may be better able to compete in a price
competitive market. These companies may also be able to bundle their products
or incorporate colocation and other services in a manner that is more
attractive to our potential customers than using our solutions. New competitors
or alliances among competitors may emerge and rapidly acquire significant
market shares. Our competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements than we can. Our
revenue model contains many assumptions which may be invalidated by our
competitors, such as our ability to successfully introduce new products each
year and the absence of competing products for certain of our solutions.
Competitive products may reduce demand for or render certain of our offerings
obsolete. In addition, we believe that the market in which we compete is likely
to face consolidation in the future, which could have the effect of increasing
price and service competition and would negatively affect our business,
operations and the market price of our stock.
A system failure could cause significant delays and interruptions of service to
our customers, which could reduce our revenue and harm our reputation.
Our business depends on our ability to avoid system failures and provide our
customers with fast, efficient and highly reliable network solutions. Our
operations are subject to failure resulting from numerous factors, including
human error, physical or electronic security breaches, network software flaws,
fire, earthquake, flood or other natural disasters, power loss and sabotage or
vandalism. Additionally, if our communications providers fail to provide the
communications capacity that we require, that failure could also result in
interruptions in our services, which could damage our reputation. Our customer
contracts currently provide a service level guarantee related to circuit
performance including service up-time and time to restore a circuit once a
problem is encountered. This guarantee provides a billing credit to customers
if a performance parameter is not met and we may be required to provide
significant credits. If we encounter significant system downtime, we may incur
substantial harm to our reputation and obligations that our liability insurance
may not adequately cover, which could negatively affect our business,
operations and the market price of our stock.
We must retain and expand our customer base and increase the services used by
each customer in order to meet our financial goals.
Our future revenues will depend on our ability to retain and expand our
customer base as we open additional DNXs. Our ability to attract customers to
our DNXs will depend on a variety of factors, including the willingness of
businesses to outsource their network operations, the availability of multiple
communications carriers to provide connections, our operating reliability and
security, and our ability to effectively market our services. We typically
begin building a DNX before we have agreements with customers to use that DNX.
If we open a new DNX and cannot attract customers, we will not be able to cover
costs associated with that DNX and we will not be profitable. In addition, the
Internet and communications industries are intensely competitive and some of
our customers will face competitive pressures and may not ultimately be
successful. If our customers fail, they will not continue to use our DNXs,
which may be disruptive to our business and adversely affect our operating
results and the market price of our stock.
Our success is also dependent upon our ability to successfully introduce new
products to our customers and cross-sell our product offerings to customers in
order to increase our revenue per customer. Although we intend to develop new
services and market these services to customers, we do not know if these or
other services will be accepted by the marketplace or if customers will
purchase multiple products or services. We also may not be able to offer some
of our services in certain jurisdictions without requisite regulatory approval.
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Because we have no experience operating internationally, our international
expansion may be limited.
We currently operate five DNXs in four domestic metropolitan markets.
Although we expect to continue to expand further domestically, we also
anticipate initiating development of a DNX in Europe by the end of 2000. We
expect to continue to evaluate further opportunities for international
expansion; however, we have no experience operating internationally. We may not
be able to adapt our services to international markets or market and sell these
services to customers abroad. We may also face difficulties or increased costs
in locating, building and opening DNXs in foreign countries and managing those
DNXs across disparate geographic areas. Leasing rates and customs in
international markets may vary substantially from domestic markets and delay
our ability to quickly and cost-effectively roll out additional DNXs. We are
unfamiliar with the international labor markets and practices and we may face
difficulty or increased costs hiring and maintaining employees to staff our
international DNXs.
The buildings located in the central business districts of many
international cities may be too old or structurally unsuited for our standard
renovation specifications. As a result, we may be forced to locate outside of
central business districts despite our business model and our lack of
experience in operating outside of central business districts. We may also be
unable to locate in areas with sufficient fiber concentration and may face
additional operational costs associated with increased geographic distance from
sufficiently dense cable areas. International operations may also expose us to
additional taxes and currency risks with which we currently have no experience.
We are also unfamiliar with the laws, permits, policies and regulations in
foreign countries and may face difficulty or increased costs in complying with
such requirements.
If we fail to develop our Inflow brand, we may not be able to effectively
compete.
A key element of our strategy is to increase awareness of the Inflow brand.
If we fail in our efforts to build our brand awareness, we may not be able to
effectively compete and our strategic and financial objectives might not be
met. Many of our competitors, including AT&T Corp., Exodus Communications, GTE
Corporation, MCI WorldCom, Qwest and Sprint, have well-established brands. To
date, our market presence has been limited principally to the Denver market. We
have attracted our existing customers primarily through a small sales force,
the visibility of our founders, Arthur H. Zeile and Joel C. Daly, in the Denver
entrepreneurial community, and our reputation in the Denver marketplace. Our
founders do not have this reputation and visibility in the markets into which
we are expanding. To increase awareness of our brand, we plan to significantly
increase our sales and marketing budget and activities, which may not be
successful.
Breaches of our network security could damage our reputation and cause us to
lose customers.
Despite our design and engineering efforts and implementation of a variety
of network security measures, unauthorized access, computer viruses and
accidental or intentional actions may cause delays or interruptions in our
services. Confidential information, such as credit card and bank account
numbers, may be stored in our customers' computer systems, and breach of the
security protecting such confidential information could result in liability to
us and the loss of existing customers and/or the deterrence of potential
customers. Although we intend to continue to implement industry-standard
security measures, such measures could be circumvented. The costs required to
eliminate computer viruses and alleviate other security problems could be
prohibitively expensive and the efforts to address such problems could result
in interruptions, delays or cessation of service to our customers, which could
negatively affect our business, operations and the market price of our stock.
We may be unable to adequately protect our proprietary rights.
We have not sought patent protection on any of our products, services or
processes. We rely upon a combination of trademark and copyright law, trade
secret protections, and confidentiality agreements and other contractual
arrangements with our employees, consultants and third parties to establish and
protect our proprietary rights. The steps we have taken to protect our
intellectual property rights will likely provide less protection than the level
given by patents and may prove to be inadequate. Notwithstanding our efforts,
third
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parties may still infringe or misappropriate our proprietary rights. Moreover,
effective trademark, copyright and trade secret protection may not be available
in every country in which we eventually operate to the same extent available in
the United States. We may be unable to detect the unauthorized use of our
intellectual property or take appropriate steps to enforce our intellectual
property rights. Defending our intellectual property rights could also result
in the expenditure of significant financial and managerial resources, which
could negatively affect our business, operations and the market price of our
stock.
Although we enter into proprietary information and invention assignment
agreements with our employees and consultants and control access to and
distribution of our proprietary information, unauthorized parties, including
departing employees, business partners and others, may attempt to copy or
otherwise obtain and use our products and technology. Monitoring unauthorized
use of our products and technology is very difficult, and we may be unable to
prevent misappropriation of our products and technology.
We may be subject to infringement claims by third parties.
Third parties may in the future assert copyright, trademark, patent and
other intellectual property rights claims or initiate litigation against us or
our suppliers or customers with respect to existing or future products and
services. Although we believe that our proprietary rights do not infringe on
the intellectual property rights of others, other parties may assert claims
against us that we have misappropriated a trade secret or infringed a patent,
copyright, trademark or other proprietary right belonging to them. Any
infringement or related claims, even if not meritorious, could be costly and
time consuming to litigate, may distract management from other tasks of
operating the business and may result in the loss of significant rights and the
loss of our ability to operate our business.
Risks Related To Our Industry
Because the market for colocation and network management services is new and
its viability is uncertain, our services may not be accepted and we may not be
profitable.
The market for colocation and network management services has only recently
begun to develop and is evolving rapidly. Our future growth, if any, will be
dependent on:
. The growth of the Internet as a global communications and commerce
medium;
. The growth of non-Internet forms of network access;
. The growth of mission-critical e-business applications;
. The willingness of enterprises to colocate and outsource network
connectivity for their mission-critical e-business applications; and
. Our ability to successfully and cost-effectively market our services to a
sufficiently large number of customers.
The market for our services may not fully develop. Our services may not be
adopted or businesses, organizations or consumers may not significantly
increase use of the Internet and other types of networks for commerce and
communication. If this market fails to develop, develops more slowly than
expected or if our services do not achieve widespread market acceptance, our
business, operations and market price of our stock would be adversely affected.
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Because the demand for our services depends on continued growth in the use of
the Internet and other forms of network access, a slowing of this growth could
harm the development of the demand for our services.
Our success will depend in large part on the continued growth of e-business
applications, including the underlying growth of the Internet. The increased
use of the Internet for retrieving, sharing and transferring information among
businesses, consumers, suppliers and partners has only recently begun to
develop. Our success will depend in large part on continued growth in the use
of the Internet, which in turn will depend on a variety of factors including
security, reliability, cost, ease of access, quality of service and necessary
increases in bandwidth availability. The recent attacks on major Web sites have
drawn much media attention and may threaten to slow Internet growth. If the
Internet as a commercial or business medium fails to develop or develops more
slowly than expected, our business, results of operations and financial
condition could be materially adversely affected. The recent growth in the use
of the Internet has caused frequent periods of performance degradation,
requiring the upgrade of routers and switches, communications links and other
components forming the infrastructure of the Internet by Internet Service
Providers and other organizations with links to the Internet. Any perceived
degradation in the performance of the Internet as a whole could undermine the
benefits of our services. Potentially increased performance provided by our
services is ultimately limited by and reliant upon the speed and reliability of
the networks operated by third parties. Consequently, the emergence and growth
of the market for our services is dependent on improvements being made to the
entire Internet infrastructure to alleviate overloading and congestion.
In addition to the Internet, we are dependent on customers continuing to
require non-Internet forms of network access, such as T-1, fractional T-1,
ISDN, frame relay, ATM and modem lines. The continued demand and acceptance of
these alternative forms of network access will be critical to the success of
our business. Any decreased use of these forms of network access or degradation
in the reliability, security or speed of these forms of network access could
harm our business, operations and market price of our stock.
If the government modifies or increases its regulation of the Internet, the
provision of our services could become more costly and the use of the Internet
may decline.
There is currently only a limited body of law and regulation directly
applicable to access to or commerce on the Internet. However, due to the
increasing popularity and use of the Internet, it is possible that a number of
laws and regulations may be adopted at the international, federal, state and
local levels with respect to the Internet and that existing laws and
regulations may become applicable to the Internet. Federal, state and foreign
legislatures have proposed or are currently considering a number of laws and
regulations relating to the Internet. The adoption of any future laws or
regulations, or the application of existing laws and regulations, might
decrease the growth of the Internet, decrease demand for our services, impose
taxes or other costly regulatory or technical requirements on us, or otherwise
increase the cost of doing business. In addition, because our services are
currently available in multiple states and we plan to expand our operations
internationally, such jurisdictions may claim that we are required to qualify
to do business as a foreign corporation in each state or foreign country where
we operate, which could increase our operating costs and negatively affect our
business, operations and the market price of our stock.
If we do not respond to rapid technological change and evolving industry
standards, we will lose customers.
Our future success will depend, in part, on our ability to offer services
that address the increasingly sophisticated and varied needs of our current and
prospective customers and to respond to technological advances and emerging
industry standards and practices on a timely and cost-effective basis. Mission-
critical Internet operations and e-business applications are complex and are
characterized by rapidly changing and unproven technology, evolving industry
standards, changes in customer needs, emerging competition and frequent new
service introductions. Future advances in technology may not be beneficial to,
or compatible with, our business. In addition, we may not be able to
incorporate such advances on a cost-effective or timely basis
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into our business or such advances, including alternate delivery systems like
cable or satellite, may make our services unnecessary or less cost-effective
than using the new technology. Technological advances may have the effect of
encouraging certain of our current or future customers to rely on in-house
personnel and equipment to furnish the out-sourced solutions that we currently
provide. Keeping pace with technological advances in our industry may require
substantial lead time and capital expenditures. Although we currently intend to
support emerging standards, we may not be able to conform to these new
standards in a timely fashion and we may be unable to maintain a competitive
position in the market, which could negatively affect our business, operations
and the market price of our stock.
We may be held liable for information disseminated over our network.
The law relating to the liability of online services companies and Internet
access providers for information carried on or disseminated through their
networks is currently unsettled. It is possible that claims could be made
against us under both United States and foreign law for defamation, negligence,
copyright or trademark infringement or other theories based on the nature and
content of the materials disseminated through our networks. Legislation has
been enacted or proposed that imposes liability for, prohibits or limits the
transmission over the Internet of certain types of information, including
obscene materials and pornography. The imposition upon us of liability for
information carried on or disseminated through our systems could require us to
implement measures to reduce our exposure to such liability, which may require
us to expend substantial resources, or to discontinue certain service
offerings. Although we carry general liability insurance, it may not adequately
compensate us, if at all, or may not cover us if we are held liable for
information carried on or disseminated through our networks, which would
negatively affect our business, operations and market price of our stock.
We continue to monitor our systems for year 2000 compliance.
Prior to entering the year 2000, or Y2K, we developed detailed plans for
implementing, testing and completing any necessary modifications to our key
computer systems and equipment with embedded chips to ensure that they were Y2K
compliant. Now that we have entered the year 2000, we have tested our key
computer systems and, to date, we have not encountered any material Y2K related
disruptions or failures of our systems or services, nor have we been notified
of any disruption or failures in the systems of any of our third parties with
whom we deal. There is an ongoing risk that Y2K related problems could still
occur and we will continue to evaluate these risks.
Risks Related To This Offering
There has been no prior market for our common stock and our common stock may
experience extreme price and volume fluctuations.
Prior to this offering, investors could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after the offering. The initial public offering price will be
determined by negotiations between us and the representatives of the
underwriters. The market price of our common stock may decline below the
initial public offering price after this offering.
Fluctuations in market price and volume are particularly common among
securities of Internet-related companies. The market price and volume of our
common stock may fluctuate significantly. In the past, companies that have
experienced volatility in the market price of their stock have been the objects
of securities class action litigation. If we were to become the object of
securities class action litigation, it might result in substantial costs and a
diversion of our management's attention and resources, which could negatively
affect our business, operations and the market price of our stock.
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Substantial future sales of our common stock in the public market may depress
our stock price.
Sales of substantial amounts of common stock in the public market following
this offering, or the appearance that a large number of shares is available for
sale, could adversely affect the market price for our common stock. The number
of shares of common stock available for sale in the public market will be
limited by lock-up agreements under which certain holders of our outstanding
shares of common stock will agree not to sell or otherwise dispose of any of
their shares for a period of 180 days after the date of this prospectus without
the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation, or DLJ. However, DLJ may, in its sole discretion and at any time
without notice, release all or any portion of the shares subject to lock-up
agreements. In addition to the adverse effect a price decline could have on
holders of common stock, that decline would likely impede our ability to raise
capital through the issuance of additional shares of common stock or other
equity securities.
Our current stockholders hold a substantial number of shares, which, subject
to the lock-up agreements described above, they will be able to sell in the
public market in the near future. All of the shares sold in this
offering will be freely tradable, with the other shares outstanding,
based on the number of shares outstanding as of December 31, 1999, being
restricted securities as defined in Rule 144 of the Securities Act of 1933 as
amended. Approximately of those shares will be freely tradable
beginning 180 days after the effective date of this offering, and the remainder
of these shares will become freely tradable at various times thereafter. In
addition, the holders of restricted shares of our stock are
entitled to certain rights with respect to registration of such shares for
resale in the public market. Sales of a substantial number of shares of our
common stock after this offering could cause our stock price to fall.
Our executive officers, directors and entities affiliated with them will
continue to have substantial control over us after the offering.
Our executive officers, directors and entities affiliated with them, if
acting together, would be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers or other business combination transactions. These
stockholders will beneficially own, in the aggregate, approximately % of our
common stock following the completion of this offering. The interests of these
stockholders may differ from the interests of other stockholders.
We may spend the net proceeds of this offering in ways with which you do not
agree.
The net proceeds of this offering are not allocated for specific uses. Our
management will have broad discretion to spend the net proceeds from this
offering in ways with which investors may not agree. The failure of our
management to apply these funds effectively would result in unfavorable
returns, which could cause the price of our stock to decline.
We have anti-takeover provisions that may make it difficult for a third party
to acquire us.
Provisions of our certificate of incorporation, our bylaws and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
might be beneficial to our stockholders. See "Description of Capital Stock--
Anti-Takeover Effects of Various Provisions of Delaware Law and Our Certificate
of Incorporation and Bylaws" for a discussion of these anti-takeover
provisions.
Investors in this offering will suffer immediate and substantial dilution.
The initial public offering price of our common stock will be substantially
higher than the book value per share of our outstanding common stock
immediately after the offering. Accordingly, if you purchase common stock in
the offering, you will incur immediate dilution of approximately $ in the
book value per share of our common stock from the price you pay for our common
stock. See "Dilution."
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The terms of any future financing arrangements may restrict our operations.
We may in the future enter into financing arrangements with equipment
lessors, financial institutions or other investors that could be secured by our
assets. These financing arrangements would likely require that we satisfy many
financial covenants and could limit our ability to incur other indebtedness or
engage in certain types of transactions. If we encounter difficulties with our
business, we could default under any then-existing financing arrangements,
which would make it very difficult for us to obtain financing in the future on
acceptable terms. If we were to default under financing arrangements that were
secured by our assets, our creditors under those arrangements could foreclose
upon the assets securing our obligations.
We do not anticipate paying cash dividends on our common stock.
We have never declared or paid any cash dividends on our common stock and do
not anticipate paying cash dividends on our common stock in the foreseeable
future. In addition, any future financing arrangements may contain limitations
on our ability to declare and pay cash dividends.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements relate
to future events or our future business or financial performance. In some
cases, you can identify forward-looking statements by terminology--for
instance, may, will, should, would, could, expect, plan, anticipate, believe,
estimate, predict, potential or continue, the negative of these terms, or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined in the risk
factors section. These factors may cause our actual results to differ
materially from any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the forward-
looking statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform these statements to
actual results or to changes in our expectations.
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USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of
shares of common stock in this offering of $ million,
assuming an initial public offering price of $ per share and after deducting
estimated underwriting discounts and commissions and estimated offering
expenses. If the underwriters exercise their over-allotment option in full, we
estimate that our net proceeds will be $ million.
We intend to use the net proceeds of this offering:
. to fund the completion and initial operating losses of additional DNXs,
including capital expenditures, sales and marketing and other operating
costs;
. for general corporate purposes, including working capital; and
. for continued development of new value-added services.
Portions of the net proceeds of this offering may be used to fund potential
international expansion. We have not determined the amount of net proceeds to
be used specifically for each of the foregoing purposes. Pending any such uses,
we intend to invest the net proceeds in interest bearing securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently anticipate that we will retain any future earnings for the operation,
development and proposed expansion of our business. Accordingly, we do not
anticipate declaring or paying any cash dividends in the foreseeable future.
18
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999.
The pro forma information gives effect to the conversion of all of our
outstanding preferred stock as of December 31, 1999, including the conversion
of shares held by First Union Capital Partners, Inc. into shares
of non-voting common stock. The pro forma as adjusted information reflects, in
addition to the pro forma adjustments, the issuance and sale of the
shares of common stock offered by us in this offering at the assumed initial
public offering price of per share. The outstanding share information
excludes:
. shares of common stock issuable upon exercise of options outstanding
as of December 31, 1999;
. shares of common stock reserved for future issuance under our 2000
Stock Incentive Plan as of December 31, 1999;
. shares of common stock reserved for future issuance under our 2000
Employee Stock Purchase Plan as of December 31, 1999; and
. shares of common stock issuable upon the exercise of options
outstanding under our stock option plans at a weighted average exercise
price of $ per share as of , 2000.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and accompanying notes and other financial data included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
As of December 31, 1999
--------------------------------------
Pro Forma
Actual Pro Forma as Adjusted
------------ ----------- -----------
<S> <C> <C> <C>
Long-term liabilities................... $ 1,308,867 $ 1,308,867 $
------------ ----------- ----
Mandatorily redeemable convertible
preferred stock at redemption value,
$0.001 par value:
Series A mandatorily redeemable
convertible preferred stock;
3,310,000 shares authorized;
3,309,953 shares issued and
outstanding actual; none authorized,
issued and outstanding pro forma and
pro forma as adjusted (unaudited)..... 12,108,201 0
Series B mandatorily redeemable
convertible preferred stock;
7,000,000 shares authorized;
6,896,552 shares issued and
outstanding actual; none authorized,
issued and outstanding pro forma and
pro forma as adjusted (unaudited)..... 65,684,938 0
------------ ----------- ----
Total mandatorily redeemable
convertible preferred stock.......... 77,793,139 0
------------ ----------- ----
Stockholders' equity (deficit):
Common stock, voting, $0.001 par
value; 20,000,000 shares authorized,
3,100,000 shares issued and
outstanding actual; 11,873,302 shares
issued and outstanding on a pro forma
basis (unaudited); shares issued
and outstanding on a pro forma as
adjusted basis (unaudited)............ 3,100 11,874
Common stock, non-voting, $0.001 par
value; 1,500,000 shares authorized,
issued and outstanding actual;
1,433,203 shares issued and
outstanding on a pro forma basis
(unaudited); shares issued
and outstanding on a pro forma as
adjusted basis (1) (unaudited)........ 0 1,433
Additional paid-in capital............. 2,346,497 80,129,429
Deferred compensation.................. (3,566,052) (3,566,052)
Stock subscriptions receivable and
other................................. (150,911) (150,911)
Accumulated deficit.................... (10,086,207) (10,086,207)
------------ ----------- ----
Total stockholders' equity
(deficit)........................... (11,453,573) 66,339,566
------------ ----------- ----
Total capitalization................ $ 67,648,433 $67,648,433 $
============ =========== ====
</TABLE>
- --------
(1) 1,500,000 shares of non-voting common stock were authorized by the
stockholders on , 2000 but, for purposes of this table, are assumed to
have been authorized as of December 31, 1999.
19
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1999 was
approximately $ million, or $ per share of common stock. Pro forma net
tangible book value per share is determined by dividing the amount of our total
tangible assets less total liabilities by the number of shares of common stock
outstanding as of December 31, 1999 on a pro forma basis including conversion
of all of our preferred stock into shares of common stock and non-voting common
stock. Dilution in net tangible book value per share represents the difference
between the assumed initial public offering price and the net tangible book
value per share of common stock immediately after the completion of this
offering.
After giving effect to the issuance and sale of the shares of common stock
offered by us at an assumed initial public offering price of $ per share and
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us, our pro forma net tangible book value as of
December 31, 1999 would have been $ million or $ per share of common
stock. This represents an immediate increase in pro forma net tangible book
value to our existing stockholders of $ per share and an immediate dilution
to purchasers in this offering of $ per share.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share at December 31,
1999....................................................... $
Increase in pro forma net tangible book value per share
attributable to this offering..............................
--------
Pro forma net tangible book value per share after this
offering...................................................
--------
Dilution per share to new investors......................... $
========
</TABLE>
The following table summarizes, on a pro forma basis, as of December 31,
1999, the differences between the number of shares of common stock purchased
from us, the aggregate cash consideration paid to us and the average price per
share paid by existing stockholders and new investors purchasing shares of
common stock in this offering. The calculation below is based on an assumed
initial public offering price of $ per share, before deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us:
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration Price
------------------ ------------------- Per
Number Percent Amount Percent Share
---------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 13,306,505 % $71,664,738 % $5.39
New investors....................
---------- ----- ----------- -----
Total............................ 100.0% $ 100.0%
========== ===== =========== =====
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
outstanding as of December 31, 1999. As of December 31, 1999, there were
options outstanding to purchase a total of shares with a weighted
average exercise price of $ per share. To the extent that any of these
options are exercised, there will be further dilution to new investors.
20
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The following selected financial data is qualified by reference to, and
should be read in conjunction with, our financial statements and the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this prospectus. The statement of
operations data presented below for the period from September 26, 1997
(inception) through December 31, 1997 and for each of the years ended December
31, 1998 and 1999 and the selected balance sheet data at December 31, 1997,
1998 and 1999 is derived from our financial statements that have been audited
by PricewaterhouseCoopers LLP, independent accountants, included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
Period from Inception Years Ended December 31,
(September 26, 1997) to -------------------------
December 31, 1997 1998 1999
----------------------- ---------- -------------
<S> <C> <C> <C>
Statements of Operations
Data:
Revenue..................... $ 0 $ 45,032 $ 1,998,164
Costs of data network
exchange facilities:
Direct..................... 0 118,848 2,681,591
Indirect................... 0 173,846 866,254
---------- ---------- -------------
Gross profit (loss) from
data network exchange
facilities................. 0 (247,662) (1,549,681)
Total operating
expenses................ 72,193 469,248 3,871,931
---------- ---------- -------------
Loss from operations........ (72,193) (716,910) (5,421,612)
Total other income
(expense)............... (9,314) (77,933) 691,987
---------- ---------- -------------
Net loss.................... (81,507) (794,843) (4,729,625)
Accretion of convertible
preferred stock............ 0 0 (696,897)
Deemed dividend related to
beneficial conversion
feature of Series B
preferred stock............ -- -- (5,655,173)
---------- ---------- -------------
Net loss available to common
stockholders............... $ (81,507) $ (794,843) $(11,081,695)
========== ========== =============
Net loss per common share
(basic and diluted) (1).... $ (0.03) $ (0.26) $ (3.69)
Weighted average common
shares (basic and diluted)
(1)........................ 3,000,000 3,000,000 3,000,041
Pro forma net loss per
common share (basic and
diluted) (1)(2)-unaudited.. $ (0.03) $ (0.26) $ (1.62)
Pro forma weighted average
common shares (basic and
diluted) (1)(2)-unaudited.. 3,000,000 3,000,000 6,416,746
Other Financial Data:
Cash flow provided by (used
in):
Operating activities....... $ (43,868) $ (552,126) $ (4,443)
Investing activities....... (18,592) (819,413) (68,916,746)
Financing activities....... 603,000 854,604 69,862,642
Capital expenditures........ 18,592 819,413 12,005,820
Other Data:
Customers at end of period.. 0 12 61
Operational DNXs............ 0 1 3
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
----------------------------------
1997 1998 1999
-------- ----------- -----------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................. $540,540 $ 23,605 $ 965,058
Short-term investments.................... 0 0 56,387,515
Working capital........................... (96,750) (1,226,804) 54,715,399
Total assets.............................. 558,783 832,142 72,882,292
Long-term liabilities, including current
maturities............................... 600,000 1,596,595 1,440,624
Mandatorily redeemable convertible
preferred stock.......................... -- -- 77,793,139
Total stockholders' equity (deficit)...... (78,507) (873,350) (11,453,573)
</TABLE>
- --------
(1) See note 1 of notes to financial statements for a description of the
computation of basic, diluted and pro forma net loss per share and the
number of shares used to compute basic, diluted and pro forma net loss per
share.
(2) Pro Forma data reflects the conversion of our convertible preferred stock
to common stock and non-voting common stock, which will occur automatically
upon the closing of this offering.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the financial statements and the
notes to those statements included elsewhere in this prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of certain factors, such as
those set forth under "Risk Factors" and elsewhere in this prospectus.
Overview
We provide equipment colocation and value-added services for mission-
critical e-business and data communications applications through our secure,
carrier-neutral DNXs. We focus on small and medium-sized businesses in need of
reliable and scalable outsourced solutions in underserved markets. We were
incorporated in September 1997 and opened Denver 1, our first DNX, in July 1998
and our first dollar of revenue was realized in September 1998. Today we
operate DNXs in Denver (two locations), Minneapolis, Raleigh-Durham and San
Diego. We intend to have 15 geographically dispersed DNXs in operation by the
end of 2000 and another 20 DNXs by the end of 2002.
Our customers demand high-performance, reliable network connections to
maximize the performance of their applications for their partners and
customers. We provide customized solutions by providing a broad range of
network connections including Internet hosting and more secure, higher
performing private-line services using ATM, T-1, fractional T-1, frame relay,
ISDN and simple modem lines. In addition, we offer our customers value-added
services, including equipment and application health monitoring, firewall
management, data backup and redundant multi-carrier Internet connections.
Our activities in 1999 consisted primarily of:
. Operating our first Denver DNX;
. Locating space and constructing our DNXs in Raleigh-Durham, Minneapolis,
Denver and San Diego;
. Developing and further refining our template for designing and building
future DNXs;
. Raising private equity to fund the deployment of additional DNXs;
. Developing our first three value-added service offerings--InflowNet(TM),
SecureFlow(TM) and MonitorFlow(TM);
. Introducing and continuing development of FlowTrack(TM), our proprietary
software application that allows us to rapidly and efficiently expand by
automating our business processes; and
. Further developing technical resources and our sales and management
teams.
The following table provides an overview of our DNX deployment to date.
<TABLE>
<CAPTION>
Current
Operational First Dollar of Number of
DNX Location Date Revenue Realized Customers
<S> <C> <C> <C> <C>
Denver 1 1860 Lincoln Street, Denver, CO August 1998 September 1998 54
Minneapolis 511 Eleventh Avenue South, Minneapolis, MN October 1999 November 1998 7
Raleigh-Durham 4518 South Miami Blvd., Durham, NC November 1999 December 1999 4
Denver 2 900 Bannock Street, Denver, CO January 2000 February 2000 2
San Diego 9645 Scranton Road, San Diego, CA January 2000 N/A 0
- -----------------------------------------------------------------------------------------------------
</TABLE>
We have formed several wholly-owned subsidiaries through which we will
conduct our operations in the states in which we have or are currently
constructing a DNX, and expect to form additional subsidiaries as we expand our
geographic footprint.
22
<PAGE>
Description of Financial Components
Revenue. Revenue consists of monthly fees for colocation, network
connectivity, systems management and value-added services. Customer contracts
for the lease of cabinet space, network connectivity and our value-added
services are renewable and range from one to three years in duration with
payments due on a monthly basis. Although we do not charge our customers for
initial consulting required in the design and implementation of complex network
solutions, we do realize revenue from charges related to initial network
capacity provisioning, equipment installation and other one-time set-up fees.
Monthly recurring service revenue is recorded in the month the services are
rendered. Fees related to installation services are recorded as deferred
revenue and recognized on a straight-line basis over the weighted-average term
of the customer service contracts. The incremental costs of installation
services are capitalized and recognized on a straight-line basis over the same
period.
Costs of DNXs. Direct costs of DNXs consist primarily of the incremental
costs of installation services, costs for private-line and Internet
connectivity, net rent expense, utilities and maintenance, operations personnel
salaries and benefits, and depreciation and amortization related to our DNXs.
Indirect DNX costs consist primarily of costs related to sales, marketing and
administrative personnel working in DNXs. We expect direct and indirect costs
of DNXs to increase significantly as we execute our strategy of rapidly
developing additional DNXs, due to costs related to construction and
maintenance, network provisioning, and hiring and training new DNX employees.
Sales and Marketing, General and Administrative and Product Development
Expenses. Sales and marketing expenses consist primarily of salaries and
benefits of our Denver headquarters' sales and marketing personnel, advertising
costs for national and regional campaigns and costs for national marketing and
collateral materials. General and administrative expenses include costs related
to our finance and accounting, legal, human resources, construction and
business development functions as well as costs associated with our central
network operations center located at our headquarters. Product development
expenses consist primarily of salaries and benefits of our employees devoted to
software and product development at our headquarters. We expect to add a
significant number of people centrally in sales and marketing, general and
administrative and product development functions as well as dramatically
increase our advertising and marketing efforts as we build out our DNXs.
Stock Compensation Expense. We had outstanding incentive stock options to
purchase a total of 60,000, 264,000 and 850,050 shares as of December 31, 1997,
1998 and 1999, respectively. To reflect the grant of these options, we recorded
aggregate deferred compensation for the years ended December 31, 1997, 1998 and
1999 of $4,141,535. This amount reflects the difference between the deemed fair
market value of our common stock for accounting purposes and the exercise price
of the options as of the date of grant. Deferred compensation is reflected as a
reduction of stockholders' equity and is generally being amortized as a charge
to operations over the 48 month vesting period of the options. This
amortization is being recorded in an accelerated manner consistent with
Financial Accounting Standards Board ("FASB") Interpretation No. 28. We
recorded amortization of deferred stock compensation expense of $575,483 in the
year ended December 31, 1999.
Beneficial Conversion Feature Related to Preferred Stock. In September 1999,
we agreed to sell shares of our $0.001 par value Series B preferred stock at
$8.70 per share. In October and November 1999, we closed this round of
financing and issued a total of 6,896,552 shares of Series B preferred stock at
$8.70 per share and received proceeds, net of issuance costs, totalling
$59,931,035. The difference between the offering price and the deemed fair
value of the Series B preferred stock resulted in a beneficial conversion
feature in the amount of approximately $5,655,000 which was calculated in
accordance with Emerging Issues Task Force No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios. The beneficial conversion feature is reflected as a deemed
dividend in the statement of operations for the year ended December 31, 1999.
23
<PAGE>
Comparison of Fiscal Years Ended December 31, 1999 and 1998
The Denver 1 DNX was opened in July 1998 and our first dollar of revenue was
realized in September 1998. Our Minneapolis and Raleigh-Durham DNXs were opened
in October and November 1999 respectively; however, we generated limited
revenue from those DNXs in 1999. Pre-opening direct and indirect costs of DNXs
were incurred for Denver 2, Minneapolis, Raleigh-Durham and San Diego during
1999.
Revenue. Our revenue increased to $1,998,164 in 1999 from $45,032 in 1998.
This growth in revenue resulted primarily from an increase in the number of
customers to 61 at the end of 1999 from 12 at the end of 1998, as well as
increases in revenue per customer from our first Denver DNX.
Costs of DNXs. Our direct and indirect costs of DNXs increased to $3,547,845
in 1999 from $292,694 in 1998. This growth in costs resulted primarily from
increases in the number of customers and the resultant increase in network
bandwidth under contract and power use.
Sales and Marketing. Sales and marketing costs increased to $653,186 in 1999
from $0 in 1998 as we increased our marketing efforts and hired 17 employees to
begin staffing a national sales support infrastructure.
Product Development. Product and development costs increased to $706,008 in
1999 from $170,263 in 1998. This growth is attributable to increased personnel
costs related to development of FlowTrack(TM), MonitorFlow(TM), SecureFlow(TM)
and InflowNet(TM).
General and Administrative. General and administrative expenses increased to
$1,937,254 in 1999 from $298,985 in 1998 as we hired more personnel to support
our growth.
September 26, 1997 (Inception) through December 31, 1997
We did not generate any revenue during 1997. During this time, we were
primarily refining our business plan, developing the design of our first DNX,
and gathering requirements to start writing a proprietary operating software,
which evolved into FlowTrack(TM). Our costs and expenses consisted primarily of
salaries, travel and legal fees related to start-up activities and capital
expenditures related to personal computers and peripheral equipment. Due to the
absence of revenue and our limited history during 1997, we do not believe it is
meaningful to compare these results with the year ended December 31, 1998.
24
<PAGE>
Quarterly Results of Operations
The following table sets forth certain statement of operations data on a
quarterly basis for the three months ended March 31, 1999, June 30, 1999,
September 30, 1999 and December 31, 1999. This information has been derived
from our unaudited financial statements. In our opinion, this quarterly
information has been prepared on a basis consistent with the audited financial
statements and includes all adjustments, consisting only of normal recurring
adjustments which are necessary for a fair presentation of the financial
information for the quarters presented. This information should be read in
conjunction with the financial statements and notes thereto included elsewhere
in this prospectus. The results of operations for any one quarter are not
necessarily indicative of the results of operations for any future period:
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
<S> <C> <C> <C> <C>
--------- --------- ----------- -----------
<CAPTION>
(unaudited)
<S> <C> <C> <C> <C>
Statements of Operations Data:
Revenue....................... $ 126,396 $ 360,074 $ 596,571 $ 915,123
Costs of DNXs:
Direct...................... 215,287 326,004 681,105 1,459,195
Indirect.................... 48,530 91,266 241,238 485,220
--------- --------- ----------- -----------
Gross profit (loss) from
DNXs..................... (137,421) (57,196) (325,772) (1,029,292)
Other operating expenses:
Sales and marketing......... 15,534 73,638 221,272 342,742
General and administrative.. 93,418 213,586 441,310 1,188,940
Product development......... 13,302 73,962 244,472 374,272
Stock compensation.......... 3,768 38,137 169,958 363,620
--------- --------- ----------- -----------
Total operating expenses...... 126,022 399,323 1,077,012 2,269,574
Operating loss................ (263,443) (456,519) (1,402,784) (3,298,866)
Net interest income
(expense).................... (35,148) 91,745 109,613 525,777
--------- --------- ----------- -----------
Net loss...................... $(298,591) $(364,774) $(1,293,171) $(2,773,089)
========= ========= =========== ===========
</TABLE>
Revenue increased 261% during the quarter ended March 31, 1999, 185% during
the quarter ended June 30, 1999, 66% during the quarter ended September 30,
1999 and 53% during the quarter ended December 31, 1999, as the number of
customers and revenue per customer increased. Direct and indirect costs of DNXs
increased in each quarter due to the increase in the number of customers.
Overhead expenses and deferred stock compensation expenses increased quarter
over quarter primarily due to the addition of personnel as our business
increased.
Liquidity and Capital Resources
We have used cash in our operating and investing activities during all
periods since inception. These cash usages have been funded by sales of stock.
Those sales amounted to $3,000, $0 and $70,210,002 in 1997, 1998 and 1999,
respectively. In April 1999, we sold our Series A preferred stock to First
Union Capital Partners, Inc., our co-founders Joel C. Daly and Arthur H. Zeile
and certain other private investors for aggregate proceeds to us of
approximately $10.2 million. During the fourth quarter of 1999, we sold our
Series B preferred stock to Meritage Investment Partners, First Union Capital
Partners, Inc., J.P. Morgan Investment Corporation, General Electric Capital
Corporation and Stolberg, Meehan and Scano for aggregate proceeds to us of
approximately $60.0 million.
Net cash used in operating activities in 1997, 1998 and 1999 was $43,868,
$552,126 and $4,443, respectively. Net cash used for operating activities in
each of these periods was primarily the result of operating losses and changes
in working capital.
25
<PAGE>
Net cash used for investing activities in 1997, 1998 and 1999 was $18,592,
$819,413 and $68.9 million, respectively. Net cash used for investing
activities in each of 1998 and 1997 was primarily the result of capital
expenditures for DNXs, as well as leasehold improvements, furniture and
fixtures and computers and other equipment. Net cash used in 1999 for investing
activities also includes $56.4 million of purchases of short-term investments.
Although we have plans to invest significantly in property and equipment, we
have no material commitments for such items at this time. We enter into non-
cancelable operating lease agreements for our corporate offices and DNXs.
Future annual minimum lease payments, net of deferred rent as of February 15,
2000, totaled approximately $44.4 million.
We anticipate that we will have significant cash requirements for several
years as we build additional DNXs, increase our employee base to support DNX
operations, develop additional value-added services and expand our marketing
efforts. In addition, we expect to invest significantly in the purchase of
property and equipment. We believe the net proceeds of this offering together
with cash on hand will be sufficient to fund our anticipated operating and
capital needs for the next 12 months. Due to our limited operating history and
the difficulty in predicting our needs, we may require significant additional
funds after this date to support our operations, or the expansion of our
business. We may not be able to obtain additional funding, if required, in
amounts or on terms acceptable to us.
Year 2000 Compliance
Many currently-installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These
systems may recognize a date using "00" as the year 1900 rather than the year
2000. As a result, computer systems and/or software used by many companies and
governmental agencies may need to be upgraded to comply with Year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities.
We expect most material Year 2000 compliance problems to have arisen on or
immediately after January 1, 2000. As of February 18, 2000, we are not aware of
any Year 2000-related problems associated with our internal systems or software
or with the software or systems of other parties with which our systems
interface. It is possible, however, that Year 2000-related problems could still
arise.
Although we have not been a party to any litigation or arbitration
proceeding to date involving our products or services and related to Year 2000
compliance issues, we do not know if in the future we will be required to
defend our products or services in such proceedings, or to negotiate
resolutions of claims based on Year 2000 issues. The costs of defending and
resolving Year 2000-related disputes, regardless of the merits of such
disputes, and any potential liability on our part for Year 2000-related
damages, including consequential damages, could cause our business and
financial results to suffer. In addition, we believe that purchasing patterns
of customers and potential customers may be affected by Year 2000 issues as
companies may continue to expend significant resources to correct or upgrade
their current software systems for Year 2000 compliance. These expenditures may
reduce funds available to purchase software products and services such as those
offered by us. To the extent that Year 2000 issues cause significant delay in,
or cancellation of, decisions to purchase our products or services, our
business and financial results could suffer.
In the event that any of our external vendors cannot timely provide us with
products, services or systems that meet the Year 2000 requirements, we may
incur unexpected expenses to remedy any problems. These expenses could
potentially include purchasing replacement hardware or software. In addition,
our business and our ability to deliver our products and services could be
severely affected, at least for a certain period of time, in the event that
Year 2000 related problems were to cause disruption or failure in the Internet
or other forms of network access as a means of delivery of our products and
services or more generally, disruption to the infrastructure. The total cost of
our Year 2000 compliance activities has not been, and is not anticipated to be,
material to our business, results of operations and financial condition. We may
not be able to remediate all significant Year 2000 problems on a timely basis
and may incur costs in excess of our management's estimates. Our remediation
efforts may involve significant time and expense, and could cause our business
and prospects to suffer.
26
<PAGE>
To date, we have experienced no material complications to our operations due
to Year 2000 issues nor do we expect to experience any material adverse effects
on our business, financial condition or results of operations internally or
from any other party who may experience Year 2000 problems.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants, or
AICPA, issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 is
effective for financial statements for years beginning after December 15, 1998
and provides guidance on accounting for the costs incurred for computer
software developed or obtained for internal use including the requirement to
capitalize specified costs and the amortization of such costs. We have adopted
the provisions of SOP 98-1 in the fiscal year beginning January 1, 1999. The
adoption of SOP 98-1 is not expected to have a material effect on our results
of operations, financial position or cash flows.
In December 1999 the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 provides specific
guidance, among other things, as to the recognition of revenue related to up-
front non-refundable fees and services charges received in connection with a
contractual arrangement. We have applied the provisions of SAB 101 for the year
ended December 31, 1999. The adoption of SAB 101 did not have a material impact
on our financial condition or results of operations.
Qualitative and Quantitative Disclosures about Market Risk
Our exposure to market risk is limited to interest income sensitivity, which
is affected by changes in the general level of U.S. interest rates. Our cash
equivalents are invested with high-quality issuers and limit the amount of
credit exposure to any one issuer. Due to the short-term nature of our cash
equivalents, we believe that we are not subject to any material market risk
exposure.
We do not have any foreign currency hedging or other derivative financial
instruments.
27
<PAGE>
BUSINESS
Overview
We are a rapidly growing provider of equipment colocation and value-added
services for mission-critical e-business and data communications applications.
We provide reliable and scalable outsourced solutions to small and medium-sized
businesses with complex networking needs through our secure, carrier-neutral
data network exchange facilities. We opened our first state-of-the-art DNX in
Denver in July 1998 and today operate DNXs in Denver (two locations),
Minneapolis, Raleigh-Durham and San Diego. We expect to have 15 geographically
dispersed DNXs in operation by the end of 2000 and intend to build another 20
by the end of 2002. Our customers benefit from the close proximity of our DNXs
to their businesses and we benefit from frequent interaction with them. As of
February 17, 2000, we provided services to 67 customers, including six new
customers since January 1, 2000.
Our customers are in need of high-performance, reliable network connections
to maximize the performance of the applications they provide for their business
partners and customers. Using a consultative sales approach, which involves our
sales engineers and network designers, we tailor solutions for our customers
using a broad range of network connections. We optimize our customers'
applications by providing high-speed Internet access and more secure, higher-
performing private-line services using ATM, T-1, fractional T-1, frame relay,
ISDN and modem lines. We offer our customers a suite of value-added services
including MonitorFlowTM for equipment and application health monitoring,
SecureFlowTM for firewall management and InflowNetTM for redundant multi-
carrier Internet connectivity.
We believe that our solutions provide our customers not only a significant
performance advantage but also a compelling cost and time-to-market advantage.
Our customers benefit from economies of scale through the sharing of
infrastructure and personnel costs among multiple users. Our outsourced
solutions enable our customers to quickly establish and rapidly expand their e-
business applications, allowing them to better focus on their core
competencies. Our customers include eBags.com, Email Knowledge, Factual Data
Corp., High Speed Access Corp., KBKids.com, MapQuest.com, MessageMedia Inc.,
Northpoint Communications, Inc., SciQuest.com and Worldprints.com.
Market Opportunity
We believe that a significant opportunity exists to provide colocation
services, management of complex network connections and value-added services to
small and medium-sized companies focused on e-business, due in large part to
the following trends:
Growth of Internet Use for Business. Since the early 1990's, the Internet
has experienced tremendous growth and its use as a medium for communications
and commerce is increasing. According to Forrester, the number of U.S.
enterprises online is expected to grow from 1.8 million in 1998 to
approximately 4.3 million in 2003.
We believe that businesses are increasingly using the Internet for a variety
of reasons, including:
. Engaging in e-commerce, both business-to-business, or B2B, and business-
to-consumer, or B2C;
. Communicating and conducting business more efficiently with customers,
suppliers and employees; and
. Delivering application services to businesses on a usage-based model,
such as the application service provider, or ASP, model.
The greatest area of online growth is in the area of small to medium-sized
companies. According to International Data Corporation, or IDC, Web-related
expenditures by small businesses in the United States are expected to grow from
$9.6 billion in 1999 to over $32 billion by 2003. In addition, Forrester
estimates that the B2B e-commerce market is expected to grow dramatically, from
$43 billion in 1998 to $1.3 trillion in 2003, a CAGR of 98%.
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Increasing Network Complexity. Businesses are seeking to improve
efficiencies by capitalizing on lower network costs and new technologies and
are requiring greater connectivity to their customers, business partners and
employees in geographically dispersed locations. At the same time, many
businesses have been unable to capitalize on the Internet. Growth of Internet
usage and lack of Internet infrastructure development have led to quality and
reliability problems in the delivery of Internet-related services, particularly
at the increasingly congested network access points, or NAPs. In addition,
communications infrastructures are becoming increasingly complex and difficult
to manage as businesses create and scale data networking solutions to meet
their growing needs. Small and medium-sized businesses, in particular, are
finding that designing, implementing and managing their network infrastructures
is an inefficient use of their resources.
Network management has been made even more difficult by the ongoing shortage
of information technology professionals. According to the Information
Technology Association of America, there were over 345,000 open IT positions at
the end of 1998 in the United States, which represents approximately 10% of the
total number of current core IT employees. According to a report released by
the Department of Commerce in 1998, companies were already reporting severe
difficulties in filling these positions.
We believe that small and medium-sized businesses are particularly hard hit
by the scarcity of IT professionals and have a difficult time attracting and
retaining these individuals. At best, the loss of a key IT professional at a
small or medium-sized business can result in a difficult search for a
replacement. At worst, this could mean the loss of all knowledge regarding a
business' customized network infrastructure.
Growth in Outsourcing. An increasing number of businesses, especially small
and medium-sized e-businesses, are outsourcing significant aspects of their
mission-critical information technology needs due to the:
. High cost and complexity of establishing and maintaining a Web presence;
. Challenge of maintaining state-of-the-art technology and redundant
systems to support their e-business applications; and
. Difficulty in attracting and retaining qualified information technology
talent.
As businesses become increasingly comfortable outsourcing their mission-
critical applications and equipment, the market for hosting and colocation
services is expected to grow rapidly. Forrester estimates that revenues from
Internet-related hosting and colocation services will grow from approximately
$875 million in 1998 to approximately $14.7 billion in 2003, a CAGR of 76%.
Within this market, Forrester predicts that the market for customized and
colocation hosting services, segments on which we largely focus, will grow from
approximately $427 million in 1998 to approximately $7.6 billion in 2003, a
CAGR of 80%.
Need for Comprehensive Advanced e-Business Application Solutions. A variety
of companies offer products and services that attempt to address the
infrastructure needs of e-businesses. However, we believe that the solutions
offered by these companies fail to meet the requirements of small and medium-
sized e-businesses for their mission-critical applications. Most providers of
colocation facilities merely provide connectivity and fail to offer the value-
added services necessary to support emerging e-businesses. Additionally, many
of these companies offer only Internet connectivity and do not provide complex
data networking and private-line solutions that are needed by growing B2B
enterprises. Many of these companies provide these services in large facilities
centrally located near the major NAPs, far from their customers. This has
created a significant opportunity for a turnkey outsourced solution for
connecting, monitoring and servicing e-business applications of small and
medium-sized businesses.
Our Solution
We provide our customers with a comprehensive range of high-performance
services for their advanced e-business and data communications applications.
Through our state-of-the-art DNXs, we provide carrier-neutral network
connectivity, value-added services and a secure environment for our customers'
application hardware. Our outsourcing solution offers meaningful performance,
cost and time-to-market benefits to our customers. Specifically, we provide our
customers with the following key advantages:
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<PAGE>
Reliable Data Centers and Multiple Carrier Connections. As more mission-
critical information and applications migrate onto the Internet and other data
networks, our customers are increasingly demanding not only more bandwidth but
more reliable bandwidth. Our DNXs have been engineered and constructed to
eliminate any single point of system failure, which reduces the possibility of
application downtime for our customers. For instance, our DNXs offer redundant
power, fire suppression, environmental controls and security systems. Because
communications networks may fail, our DNXs also offer access to multiple
carriers, thereby providing redundant high-speed network connectivity. We
choose these carriers based on their performance, network architecture, ability
to avoid congested NAPs and available bandwidth.
Complex Network Connectivity. Many businesses require more secure, higher-
performance private-line connectivity solutions than basic Internet
connections. We design, provision and maintain complex network connections
tailored to each customer's needs. We provide customized solutions by using
ATM, T-1, fractional T-1, frame relay, ISDN and modem lines designed to
optimize each connection's price and performance characteristics. Private-line
connections also allow for enhanced security by using a dedicated channel over
which no other data may travel. We believe that this tailored approach to
network connections is integral to serving the emerging e-business community.
Value-Added Services. We offer services that improve the reliability and
performance of our customers' e-business applications. Our InflowNet(TM)
service provides redundant Internet connectivity by dynamically allocating data
among multiple Internet backbones. Other branded services include
SecureFlow(TM) for firewall management and MonitorFlow(TM) for equipment and
application health monitoring. In addition, we provide data backup and other
support services. These services, in the aggregate, are designed to provide a
high degree of reliability, protection of our customers' applications in the
event of a system failure and ongoing security.
Geographic Proximity. We target an underserved customer base in geographic
markets with a significant number of e-businesses. We believe that building
facilities in a large number of cities versus concentrating on a few locations
provides a number of psychological and practical benefits to our customers and
distinguishes us from other colocation providers. Our geographic proximity to
our customers allows customer technicians to easily access their equipment for
maintenance, upgrades and changes, as well as better manage potential
emergencies. Because most fast growing e-businesses frequently change their
hardware and software configurations to take advantage of new and improved
technologies, having their equipment readily accessible is critical. This
regular contact with our customers enables us to sell tailored value-added
services and enhance our service offerings through better identification of
customer needs. Moreover, the geographic dispersion of our DNXs allows our
customers' data traffic to avoid the congested NAPs, thereby increasing the
performance and reliability of their data transmissions.
Accelerated Time-to-Market and Scalability. Because we believe that speed to
market and the ability to rapidly grow are critical to our customers,
particularly e-businesses, we offer an outsourced solution that provides
accelerated deployment and expansion of their applications. Building an in-
house data center is an expensive, complicated and time-consuming process. In
contrast, we guarantee that we will be ready to implement our customers'
applications within 30 days from signing of a contract. Our robust proprietary
database, FlowTrack(TM), facilitates DNX and network capacity planning that
allows us to rapidly fulfill our customers' orders for additional space and
connectivity, typically within days of their request. Our outsourced solution
enables our customers to quickly establish and rapidly expand their e-business
applications, allowing them to better focus on their core competencies.
Our Strategy
Our objective is to be the leading provider of sophisticated services to
small and medium-sized businesses for the management of their complex e-
business and data communications applications. To achieve this objective, we
intend to:
Rapidly Expand Into Our Target Markets. We believe significant opportunities
exist to provide complex networking solutions to small and medium-sized e-
businesses. To establish a leadership position in providing these solutions, we
believe we have to expand quickly into multiple markets. We intend to increase
the number
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of our DNXs from five today to 35 geographically dispersed DNXs by the end of
2002. We are focused primarily on domestic expansion but intend to initiate
development of a DNX in Europe by the end of 2000 and to continue to evaluate
further international opportunities. In addition, our expansion into
metropolitan areas that have previously been underserved by our competitors is
designed to enable us to be the first mover in many of these markets, an
important advantage given the low customer churn rate in our industry.
Leverage Our Infrastructure. We have developed an infrastructure and
proprietary software systems to help us rapidly and efficiently expand into
multiple markets. We have built a team and set of automated processes to
accelerate the design, construction, staffing and marketing of future DNXs. Our
deployment team consists of nine full-time professionals who manage outside
consultants and the key elements of the data center construction process. We
have developed a robust proprietary software system, FlowTrack(TM), which
integrates and automates our business processes and allows us to effectively
manage rapid deployment across a broad network of DNXs. In addition, we hire a
general manager, or GM, for a DNX approximately six months in advance of DNX
activation along with up to seven sales professionals and nine network
engineers and operations technicians to launch each DNX. Automating our
deployment processes, where possible, allows us to more quickly expand into new
markets.
Continue to Emphasize Customer Service. We believe that delivering complete
customer satisfaction is vital to growing our business. We target customers who
are underserved by existing colocation providers or who have a small
information technology staff in need of outside expertise and consultation. Our
emphasis on customer service and support has resulted in a strong, loyal base
of customers and provides us many benefits, including potentially shortened
sales cycles, greater incremental sales opportunities to our existing customers
and new and improved services resulting from customer feedback. We intend to
remain focused on providing the highest level of satisfaction to our customers
by continuing to hire superior sales, technical and customer support personnel
and maintaining our industry-leading training programs.
Expand and Cross-Sell Our Suite of Services. We intend to continue to
develop new and enhanced services that we believe will be attractive to
potential and existing customers and currently employ 14 full-time engineers
and technicians devoted to this development effort. Our sales force is trained
to effectively communicate the benefits of these new services and is motivated
to sell them as they become available to new or existing customers. For
example, we introduced InflowNet(TM) in September 1999. Of our 41 customers as
of September 30, 1999, 29% currently purchase InflowNet(TM). Additionally, 88%
of the new customers contracted since September 30, 1999 have purchased
InflowNet(TM). New services currently under development include FlowShare, a
load-balancing solution that manages server congestion, and Inflow Portal to
provide customers with real-time monitoring statistics and access to
FlowTrackTM. We are currently developing enhancements to SecureFlowTM, which
will include a managed virtual private network service, and our data backup
services. In addition, our geographically dispersed footprint may provide us
with significant advantages in providing future services such as caching and
localized content delivery.
Expand Sales Channels and Increase Brand Awareness. We intend to
significantly grow our direct sales organization to expand coverage and
penetration of small and medium-sized businesses as we build out our DNXs. We
believe that we can further accelerate customer growth by using indirect sales
channels such as relationships with Internet service providers, or ISPs,
distributors, value-added resellers and system integrators. We believe that
building our brand awareness is important to attracting and expanding our
customer base. In addition to the branding achieved by our various sales
channels, we intend to increase our brand recognition through a variety of
marketing and promotional techniques, including traditional advertising,
hosting on-site conferences and seminars, attending trade shows, establishing
and maintaining close relationships with recognized industry analysts and
entering into co-marketing and co-branding agreements with strategic partners
and customers.
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<PAGE>
Our Services
Our services are designed to provide high-performance, reliability,
scalability and expertise to our customers. Our services are generally covered
by service level agreements, or SLAs, which specify exacting performance levels
associated with availability and service repair time. We believe that our SLAs
and customer support are among the best in our industry. Our services are
delivered from our geographically dispersed, state-of-the-art DNXs and fall
within the following general categories, each of which is designed to enhance
the performance, reliability and security of our customers' mission-critical
applications:
<TABLE>
<CAPTION>
Category Services
<C> <S>
Equipment Colocation . Network Design
. Secure Equipment Colocation
. Redundant Power
- -----------------------------------------------------------------------------
Network Access and
Connectivity . Local Network Connectivity
. National Network Connectivity
- -----------------------------------------------------------------------------
Valued-Added Services . Redundant Multi-homed Internet Access
. Advanced Monitoring Applications, including
SecureFlow(TM) and MonitorFlow(TM)
- -----------------------------------------------------------------------------
</TABLE>
Equipment Colocation
Our DNXs are designed to provide our customers with a protected environment
for their data communications equipment. For instance, our DNXs offer redundant
power and fire suppression systems, high levels of physical security and
sophisticated environmental controls.
Our equipment colocation services include space rental and power supply. We
charge an installation fee for each of these services as well as monthly fees
based on space and power usage. Additionally, we provide customers initial
consulting and design assistance at no additional charge to help them optimize
their complex communications solutions. We offer our customers a variety of
choices for these services as follows:
<TABLE>
<CAPTION>
Service Description
<C> <S>
Network Design . Custom engineered solutions
. Network installation, configuration and
testing
. Documentation of network operations and
trouble shooting procedures
- -------------------------------------------------------------------------------
Secure Equipment Colocation . Dedicated, lockable cabinet space rental--19
or 23 inches wide, 7 feet high and 31 or 36
inches deep
. Raised-floor environment for easy, controlled
access to power and network connections
. 24x7 on-site technical support
. Consistent temperature and humidity
. Guaranteed 30 day installation
- -------------------------------------------------------------------------------
Redundant Power . Surge-protected power
. Multiple utility feeds from separate grids,
uninterruptible power supplies and backup
diesel-powered generators
. Multiple A/C and D/C power distribution
offerings
. Guaranteed 30 day installation and 100%
uptime
- -------------------------------------------------------------------------------
</TABLE>
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<PAGE>
Network Access and Connectivity
We provide access and connectivity to multiple carriers, including Tier 1
Internet backbones such as UUNet, Intermedia/Digex, GTE, Verio, AT&T and Cable
& Wireless. Through local loop connections with incumbent local exchange
carriers, or ILECs, and competitive local exchange carriers, or CLECs, such as
US WEST, AT&T Local, MCI WorldCom, Time Warner Telecommunications and ICG, we
can build T-1, fractional T-1, ATM, frame relay, ISDN and modem line services
to a customer's specifications delivered directly to a customer's cabinet. We
purchase these communication circuits in bulk quantities and resell them to our
customers. Because of our carrier neutrality, we can further enhance the
reliability of our customer's applications by providing customized failover
solutions to route traffic to alternative networks in the event of a failure of
any single network. Additionally, we select the network connections which offer
our customers the most appropriate performance and security characteristics for
their business.
By ordering carrier circuits and maintaining our own switching facilities,
we take responsibility for the link from the customer equipment interface to
carrier network switches. We connect our DNXs to these switching centers across
geographically diverse, redundant fiber paths. We guarantee our own switching
performance as well as pass along the guarantees made by the carriers.
Our network access and connectivity services include ongoing 24 hours a day,
seven days a week, or 24x7, monitoring of network performance. We receive both
initial setup fees and recurring monthly revenue for these services. Our
customers enjoy a variety of resold network connectivity options as follows:
<TABLE>
<CAPTION>
Connectivity Options Description
<C> <S>
Local Network Connectivity . Local loop/private-line (T-1, T-3, OC-3, OC-
12)
. Remote access modem lines
. Guaranteed 30 day installation
. Guaranteed 4 hour maximum time to repair
. Match carrier SLAs for availability
- -------------------------------------------------------------------------------
National Network Connectivity . Private line (Fractional T-1, T-1, T-3, OC-3)
. ATM
. Frame relay
. Internet
. Guaranteed 30 day installation
. Guaranteed 4 hour maximum time to repair
. Match carrier SLAs for availability
- -------------------------------------------------------------------------------
</TABLE>
Value-Added Services
We believe that our customers seek value-added services to enhance the
reliability and performance of their applications. We employ 14 full-time
engineers and technicians devoted to the evaluation, development and deployment
of new value-added services. We intend to continue to develop new and enhanced
services which we believe will be attractive to potential and existing
customers.
Redundant Internet Access: InflowNet(TM) is an innovative Internet access
solution which provides direct Internet access to the backbones of multiple
Tier 1 Internet providers such as UUNet, Intermedia/Digex, GTE, AT&T and Cable
& Wireless. Many providers offer limited redundancy within their own network,
but if individual networks fail, so does a customer's application. By using
Border Gateway Protocol v 4.0, an
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<PAGE>
advanced Internet routing protocol, InflowNet(TM) provides reliability by
instantaneously routing traffic to another backbone should a customer's primary
Internet backbone fail. In addition, we choose providers based on end-user
reach, performance, architecture, ability to avoid congested NAPs and available
bandwidth, providing a very reliable, high-performance solution which we
believe is appealing to e-businesses. We offer InflowNet(TM) with varying
levels of Internet access capacity as follows:
<TABLE>
<CAPTION>
Branded Service Description
<S> <C>
InflowNet(TM) . Multi-homed Internet access solution
. Dedicated (fixed) or burstable (usage-based) bandwidth
capacity
. Scalable with increased demand
.Dual Ethernet connections
.Guaranteed 100% uptime
.Minimal latency guarantee
.On-line bandwidth reports
.Guaranteed 30 day installation
- ----------------------------------------------------------------------------
InflowNet(TM) SX .Multi-homed Internet access solution
.Dedicated (fixed) bandwidth capacity
.Fixed-rate pricing
. Single Ethernet connection
.Guaranteed 99% uptime
.Minimal latency guarantee
.Guaranteed 30 day installation
- ----------------------------------------------------------------------------
</TABLE>
Advanced Monitoring Applications: Our managed monitoring applications are
designed to enhance the reliability and security of our customers' e-business
applications. These value-added services are based on applications developed
in-house or by third-party software vendors. We receive both initial setup fees
and recurring monthly revenue for these services. We currently offer our
customers the following branded services on a 24x7 basis:
<TABLE>
<CAPTION>
Branded Service Description
<S> <C>
MonitorFlow(TM) . Multi-dimensional equipment health monitoring
. Based on Hewlett-Packard Open View, MediaHouse
Enterprise Monitor technologies and in-house
developed software
. Various levels of service from equipment level
monitoring to application transaction testing
. Available end-user impact monitoring to help our
customers identify problems before their users do
. Advance troubleshooting plan ensures speedy
resolution upon identification of a problem
. Monthly customer reports provide statistics and
tracking information to help evaluate performance
trends and help in growth planning
. Guaranteed 30 day installation and 100% uptime
- ----------------------------------------------------------------------
. Review and consultation on customer-developed
SecureFlow(TM) security policy
. Based on Checkpoint Firewall-1 technology
. Perimeter-based managed firewall system tailored to
individual security policy
. Guaranteed 30 day installation
- ----------------------------------------------------------------------
</TABLE>
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<PAGE>
Scalable Technology Platform
FlowTrack(TM) is a robust proprietary software program developed in-house
that integrates and automates our business processes. This program allows us to
quickly implement network and equipment provisioning through electronic work
orders issued to technicians in each DNX. FlowTrack(TM) is a critical component
to our 30 day up and running guarantee because it allows us to rapidly and
efficiently scale across a broad network of fully-functional DNXs.
Additionally, through Inflow Portal, our customers will soon be able to access
FlowTrack(TM) through the Internet and receive real-time status updates
regarding their specific work orders.
FlowTrack(TM) gives our sales force online access to the latest Inflow
service and pricing information, enabling them to provide service proposals to
new and existing customers on a real-time basis. Using FlowTrack(TM), our sales
force can instantly review pricing information, analyze profit margins and
network and space capacity factors. This on-the-spot analysis allows our sales
force to respond quickly and accurately to customer inquiries.
FlowTrack(TM) is composed of the following three modules, each of which
focuses on a different aspect of customer management:
. Asset Management. This module records the configuration of customer
applications, including equipment, communication circuits, cabling and
power. Each record is given a unique serial number to allow us to better
manage and monitor customer applications. Using this module, we are able
to track network and space capacity and identify and plan for impending
shortages.
. Network Operations. This module records monitoring alarms and suggests
operational procedures, maintenance and/or work orders to remedy the
problems identified by the alarms. Also, as trouble tickets are generated
and subsequently resolved, they are added to our database, which allows
us to more efficiently manage future problems for our customers and
develop troubleshooting policies and maintenance activities. In addition,
this module contains built-in intelligence relating to managing multiple
networks and equipment.
. Customer Account and Billing Management. The functions necessary to
efficiently administer a customer account, including customer contact
information, service requirements and SLAs, are automated using this
module. All billing information is contained in this module, which
generates bills on a monthly basis, including monthly charges for
recurring services as well for non-recurring charges based on work orders
generated in the network operations module.
FlowTrack(TM) is a multi-module enterprise system based on the Microsoft NT
platform. FlowTrack(TM) v1.7, the current version, is designed to be quickly
deployed across our DNX network, enabling its use as a "requirements gathering"
tool to enhance future versions of the software. Version 1.7 supports multiple
sites using a central database in a client-server environment.
FlowTrack(TM) v2.0, scheduled for release in mid-2000, is a Web-based
application that will be accessible to our customers and employees.
FlowTrack(TM) v2.0 is also based on the NT platform and takes advantage of new
technologies to provide scalability and support for a larger number of DNXs and
users. FlowTrack(TM) v2.0 is expected to further integrate with other external
systems used in delivering our value-added services, managing sales leads and
contacts, accounting and financial systems and human resources. We believe that
this integration will more fully automate additional aspects of our business
and provide us a competitive advantage by offering our customers the benefits
of full functionality with these best-in-class systems.
FlowTrack(TM) is designed to enable us to quickly and effectively integrate
new applications and services such as caching, load balancing and data storage
and backup into our offerings. We believe that FlowTrack(TM) will also allow us
to efficiently integrate the delivery of software applications to end-users
remotely using the Internet, as more businesses seek to take advantage of the
emerging ASP model. ASPs combine software, hardware and networking technologies
to provide applications to customers for a fixed monthly per-user fee. As
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<PAGE>
more of these applications become available, FlowTrack(TM) will enable us to
take advantage of these new service offerings.
Our DNXs
Our DNXs were originally designed with approximately 5,000 to 12,000 square
feet of dedicated raised-floor hosting capacity and 10,000 to 20,000 gross
square feet. During 1999, we increased the planned size of our future DNXs to
approximately 30,000 to 35,000 gross square feet, of which approximately 20,000
square feet is dedicated to raised-floor hosting facilities. We believe that
raised floor facilities of approximately 20,000 square feet are the optimal
size due to the following reasons:
. More Rapid Deployment. By limiting the size of a facility to
approximately 35,000 gross square feet, it is typically easier to locate
satisfactory sites. We generally lease properties in central business
districts, which tend to have higher concentrations of carriers and
fiber. This size facility also uses primarily off-the-shelf power and
heating, ventilation and air conditioning, or HVAC, components, which are
more readily available than the custom-built equipment required in larger
facilities. This significantly speeds the site selection and deployment
process. Our construction time is also reduced compared to that of larger
facilities.
. Lower Construction Costs. We have designed our facilities to maximize the
efficiency of data center construction. For example, the size of our DNXs
enables us to maximize the use of standardized power and HVAC components.
Data centers with over 20,000 square feet of raised floor space typically
require special-order components, which are more costly because of their
limited production and the special architectures required to interconnect
them.
. Reduced Site Selection Risk. We believe that building raised floor
facilities of approximately 20,000 square feet significantly reduces the
risks of site selection when compared to larger data centers. Although we
project that our present DNX size will sustain our customers' space needs
for approximately three years after opening, we have the technology and
expertise to add data centers in the same city and interconnect them. We
implemented this "virtual data center" solution in Denver and found that
some customers prefer to locate their equipment in two separate data
centers in the same city to further enhance the reliability of their
mission-critical network architecture. Combined with our FlowTrack(TM)
asset management module which tracks network and space capacity, we
believe that we will be able to anticipate our customers needs and
efficiently add virtual data centers to markets that exceed our
expectations.
We believe this size of facility will allow us to establish first-mover
advantages in several new markets. We outsource a portion of the site
selection, design and build-out process of our additional DNXs to real estate
agents specializing in communications properties and to law firms able to
negotiate our leases based on a master template. We believe that outsourcing
these functions allows for even more rapid and efficient deployment of our
additional DNXs.
Site Selection
We target attractive markets that offer high concentrations of underserved
e-business customers and minimal competition. Due to the low customer churn
rate in our industry, we feel it is important to establish a first-mover
advantage in our target markets and believe we can leverage our experience in
quickly constructing data centers, hiring and training employees and deploying
our proprietary operating system in order to achieve this objective. In
evaluating potential new markets, we generally concentrate on significant
Metropolitan Statistical Areas, or MSAs, in the United States outside the top
ten. We internally rank these markets in order of priority based on a number of
economic, competitive and demographic factors including presence and
concentration of venture capital-backed companies and number of Internet domain
name registrations. Additionally, we may consider expansion opportunities in
MSAs in which we already have a DNX, such as in Denver and we also expect to
continue to explore opportunities for international expansion.
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<PAGE>
We believe that our geographic diversity allows us to not only be closer to
our customers, but also provides our customers with greater reliability due to
our avoidance of the limited number of primary NAPs, which are becoming
increasingly congested and where data packets are often lost in the transfer
process.
Design and Build-out Process
We have launched five DNXs over a short period of time and have built a team
and set of processes to accelerate the design, construction, staffing and
marketing of future DNXs. Our internal deployment team consists of nine full-
time professionals who manage outside consultants and construction personnel
responsible for completing discrete elements of DNX construction. Based on
experience, use of standardized construction processes and our proprietary
design templates and systems architecture, we expect to activate a DNX within
five to six months of selecting a host city. The following chart illustrates
the timing involved in the deployment of a DNX:
[Bar chart]
Site Design/Build. The key elements of the DNX deployment process include
site selection, lease negotiation, design, construction and commissioning. To
accelerate deployment of our DNXs, our template is designed such that many of
these elements occur concurrently and may be outsourced where appropriate. We
employ multiple specialized real-estate firms to locate suitable properties in
target cities based on a specified set of criteria. We retain multiple outside
legal counsel specializing in real estate to negotiate leases based on a
standard lease template. We retain outside firms to design DNXs using our
proprietary blueprint that specifies each subsystem and component. Construction
firms are hired regionally to speed local regulatory compliance and selected
based on data center build experience. We have a standard configuration for our
network switching platform and NOC architecture that is installed shortly
thereafter. Upon completion, each data center subsystem is tested by an
independent data center design firm and the network and service architecture is
tested by our internal engineering team.
Team Development. We hire a GM approximately four to six months in advance
of expected DNX activation. During this time the GM is trained in our systems
and processes and works in several DNXs at varying stages of development. The
GM is primarily responsible for hiring the initial DNX team and is supported by
our Denver-based human resources department. For instance, we generally hold an
Inflow Career Fair approximately 8-12 weeks prior to expected activation date
of a new DNX where upper management, human resources, national sales and
engineering personnel hold over 100 interviews. We hire up to five sales
professionals and ten network engineers and operations technicians before
commissioning each DNX. Additional team members are added as customers contract
for services.
Marketing Program. Our marketing team develops prospect lists during the
construction period to support pre-sales activities and advertises in local
publications to promote awareness of our services. Special events are held for
prospective customers both before and after data center activation.
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Roll-out Schedule
We currently have nine DNXs in various stages of completion and have
selected approximately 20 additional markets in which we are seeking
appropriate DNX locations. The following table summarizes the location, size
and status of our network of nine DNXs open or currently under development.
<TABLE>
<CAPTION>
Current
Gross Square Raised Floor Operational Lease Number of
DNX Feet(1) Space(2) Date(3) Expiration Customers(4)
<S> <C> <C> <C> <C> <C>
Denver 1 8,400 5,200 7/98 2/08 54
Minneapolis 15,900 8,300 10/99 8/09 7
Raleigh-Durham 14,400 7,500 11/99 9/09 4
Denver 2 9,900 7,400 1/00 1/10 2
San Diego 20,200 11,700 1/00 12/09 0
Austin 34,000 20,000 4/00 12/09 N/A
Atlanta 35,200 20,000 6/00 6/10 N/A
Irvine 35,100 20,000 7/00 1/10 N/A
Phoenix 39,100 20,000 8/00 9/10 N/A
- -------------------------------------------------------------------------------
</TABLE>
(1) Approximate gross square footage under lease, including raised floor,
administrative, sales, marketing, conference, dedicated customer, Network
Operations Center and storage space.
(2) Approximate raised floor square footage allocated to equipment colocation
including customer cabinets and our equipment.
(3) Actual or, in the case of DNXs not operational by February 2000, the
expected date of operation. We generally expect to begin receiving revenue
within 60 days of a DNX's operational date.
(4) Number of customers under contract as of February 17, 2000.
Infrastructure Specifications
Each DNX includes the following features designed to offer maximum
performance, security and reliability:
. Redundant Power Supply System. In order to provide redundant power
supplies to our customers' equipment, we connect to multiple power grids
when available, feed power through uninterruptible power supplies, or
UPS, and provide stand-by diesel generators. Connecting to multiple power
grids through separate power feeds ensures that no single-grid power loss
will cause us to lose our primary power source. In the event of a
temporary loss of power from the power grids, our UPS systems have enough
capacity to supply a minimum of 120 minutes of power to a DNX. Our on-
site diesel generator system is automatically brought on line within
seven seconds of a power failure and can supply power to both AC and DC
systems for a minimum of 24 hours before the on-site fuel tanks must be
refilled.
To further reduce potential interruptions, we use an "interlocking
horseshoe" design in laying our power and network cables so that they
never overlap in our DNXs. We believe this sub-floor routing of network
and power cabling minimizes the potential for data network interference
and expedites the fault location process. For security purposes, the
mechanical and power system feeds are on the perimeter of the raised floor
area and feed either AC or DC power cabling located under the raised
floor. No one may access power cables and customer power connections
without the assistance of one of our employees.
. Redundant Security System. Customer access to each DNX is limited to a
single reception area staffed by one of our employees who logs each
entrance into the DNX. Access is further restricted by a card-access
system located at the main entrance of the DNX and the entrance to the
raised-floor space. All areas of the DNX are under continuous
surveillance in the NOC through a closed-circuit TV system. We maintain a
rolling library of surveillance camera video tapes for 30 days.
. Redundant Fire Suppression System. We generally employ a fire suppression
system based on dry-pipe water supplies to prevent accidental leakage,
coupled with a VESDA early warning system and gas fire suppression
system. These systems are designed to avoid any water being introduced
into the raised floor area.
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<PAGE>
. High Capacity HVAC System. Our HVAC systems ensure that our DNXs operate
at a consistent temperature and humidity level. We assure our customers
that the temperature in our DNXs will average between 65 and 75 degrees
and that relative humidity will average between 45 and 55 percent at all
times.
. Other DNX Features. In addition to the features described above, each DNX
includes a self-contained local NOC staffed 24x7 by our trained
technicians, dedicated test bench and office space for our customers, and
space for our local administrative, sales and marketing functions.
We monitor all power, HVAC and fire-suppression systems on a 24x7 basis
using an automated application under the supervision of our local operations
staff. Component level failures are detected and trigger alarms at the local
NOC, allowing our trained personnel to quickly respond and ensure our systems
are operational.
Sales and Marketing
We primarily market our services and solutions through our direct sales
force which is organized by geographic region and whose compensation is largely
commission-driven. This sales force will be supplemented by our national sales
team which is organized by customer segment. We are currently establishing
other distribution channels and expect to continue reviewing possible
arrangements with outside parties. However, we expect that substantially all of
our revenues through the end of 2000 will be generated by direct sales.
Direct Sales. Our direct sales force currently consists of 34 full-time,
trained sales professionals responsible for developing new clients as well as
new opportunities with existing clients. All sales professionals complete a
comprehensive three-month training program. We have expanded our direct sales
force from one to 34 individuals in the past year. We intend to continue to add
to our direct sales force in parallel with our DNX build-out.
Each DNX is typically staffed with one sales manager, up to six sales
representatives and at least one sales engineer. Our sales engineers, most of
whom hold degrees in network engineering, assist our sales representatives in
the design and implementation of our customized offerings. Additionally, we
have two regional sales managers, each of whom is located in one of the DNXs in
their region and oversee the sales efforts of several local DNX sales
personnel.
Prior to opening a DNX, we focus on hiring and training salespeople and on
conducting market analysis. We typically have each DNX fully-staffed at least
30 days prior to activation in order to commence the sales cycle in advance of
opening the DNX. Our typical direct sales cycle is approximately three months
and includes the following efforts:
. Prospecting, qualifying and opportunity identification, especially for
top regionally-recognized e-commerce businesses to serve as anchors for
DNXs;
. Networking and cold-calling prospective customers and introducing them to
our local DNXs and personnel;
. Conferring with a prospective customer to select service terms and using
FlowTrack(TM) to generate real-time price quotes and cost analysis;
. Consulting on final network design and determining specific services for
immediate or future implementation; and
. Signing a contract, typically one to three years in duration, for initial
services.
We believe the structure of our direct sales efforts allows us to easily
identify the needs of prospective and existing customers, devote significant
attention to customer satisfaction and quickly offer new services to existing
customers.
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<PAGE>
Indirect Sales Channel. We expect to complement our direct sales efforts
with a series of partnerships and alliances, which we call our Lead Agent
Program. Our Lead Agents are expected to include systems integrators, ISPs,
equipment vendors and value-added resellers who have relationships with our
target customer base. We are currently in discussions with candidates from each
of these industries to become Lead Agents and expect to compensate our Lead
Agents on a non-recurring success fee basis. We believe Lead Agents will
function as an extension of our direct sales force and provide a significant
source of leads and referrals.
Marketing. To support our sales efforts and to actively establish and
promote our brand awareness, we plan to further expand our comprehensive
marketing programs. We currently employ eight people in a variety of marketing
activities, including preparing marketing research, service planning and
collateral marketing materials, managing press coverage and other public
relations, attending trade shows, seminars and conferences, hosting on-site
events and maintaining and updating our Web site and brochure materials.
Customers
We provide a combination of colocation, network connectivity and value-added
services to 67 customers, including eBags.com, Email Knowledge, Factual Data
Corp., High Speed Access Corp., KBKids.com, MapQuest.com, MessageMedia Inc.,
Northpoint Communications, Inc., SciQuest.com and Worldprints.com. Our
customers are typically small to medium-sized e-businesses that are growing
rapidly and require complex communication architectures and services. Our
customers include B2B application providers, network providers and B2C
enterprises. We believe that the emerging B2B market increases our market
opportunity because these customers require more complex network architectures
and greater information technology staff attention than network providers and
B2C businesses. Our typical customer requires continuous uptime for their
applications, multiple types of data circuits and has a limited information
technology staff. Although our focus is on small to medium-sized businesses, we
provide services to many nationally recognized entities as well. Currently, 56%
of our customers are B2B and 22% of our customers are B2C.
Customer Support
We believe the key to long-term success is providing best-of-class customer
service and support. We also believe that e-business companies will demand
increasing performance guarantees for their applications as a means of ensuring
better service to their own customers. We believe that our SLAs and customer
support are among the best in our industry. Our services are generally covered
by SLAs, which specify exacting performance levels associated with availability
and service repair time. For example, we guarantee that:
. We will be ready to implement a customer's application within 30 days of
signing a contract;
. Power will always be on; and
. Purchasers of our InflowNet(TM) redundant Internet access solution will
have 100% uptime.
To ensure that we meet our SLAs each of our sites is managed by an
extensively-trained and experienced GM. Our GMs go through up to six months of
hands-on, comprehensive training before they are assigned a site to manage.
Typically, we expect a GM to oversee a dedicated staff of approximately 30
trained technical and operations personnel who provide customer support 24x7.
Staff members are empowered to make on-the-spot decisions, enabling them to
address our customers' concerns immediately without referring the customer to
another staff member.
Each DNX contains a stand-alone NOC and the necessary systems to install,
test, monitor and repair customer network connections and value-added services
on-the-spot. Customers interact with a local account team consisting of
technical operations personnel, sales engineers and sales representatives. All
operations personnel receive multiple levels of training to gain detailed
knowledge of our DNX's physical, network and systems infrastructure as well as
the configuration of our value-added services. By graduating from various
internal and external training programs, operations personnel attain different
certifications and become technical experts which we believe makes them highly
qualified to provide excellent customer service.
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We also have constructed a central NOC, located at our Denver, Colorado
corporate headquarters, to provide advanced troubleshooting support to each
remote site. Currently, we employ 11 of our most experienced network, IT and
software engineers for this additional layer of support. Our central NOC
operations staff can also serve as a backup for a DNX if necessary. Central
operations personnel are primarily responsible for designing and implementing
technical training for the individual site operations teams.
In addition, FlowTrack(TM) provides automated service delivery to the
customer. Specifically, FlowTrack(TM) allows us to track leads, develop service
proposals and quotes, initiate work orders for network connections and value-
added services, issue trouble tickets for failure conditions and generate clear
and concise bills. This automation allows for more efficient customer support
activities.
Competition
Our market is highly competitive and rapidly growing. We also believe that
competition will likely increase in the future. We expect significant
competition from several areas, including information technology and Internet
outsourcing firms; national and regional Internet service providers; and
global, regional and local communications companies. Currently, our solutions
compete with the services offered by many companies, including AboveNet
Communications, AT&T Corp., Digital Island, Exodus Communications, Equinix,
Frontier GlobalCenter, Globix, GTE Corporation, InterNAP, Level 3
Communications, MCI WorldCom, PSINet, Qwest, Sprint, Verio and the regional
Bell operating companies.
We believe that the principal competitive factors in our market are the
ability to locate the right expansion sites in new markets and achieve first-
mover advantages in most markets, upgrade our service offerings to meet the
changing needs of our customers, establish credibility and brand recognition in
our markets, and successfully hire qualified personnel in the face of
increasing competition for their services.
Although several larger companies have entered or will enter our market, we
believe we are positioned to compete favorably because:
. We intend to remain carrier-neutral, providing our customers with the
choices they desire, more reliable solutions, competitive pricing and
greater access to new technology;
. Our focus on multiple markets as opposed to concentrating on a few cities
gives us geographic proximity to our customers, increased reliability
through avoidance of NAP bottlenecks and, we believe, first-mover
advantages in many of these markets; and
. We focus on providing complex network connectivity solutions, not only
Internet connectivity, giving our customers the flexibility and solutions
we believe they need.
Despite our strategy, we may not be successful in differentiating ourselves
or achieving widespread market acceptance of our solutions. Our expansion plans
are aggressive and if we are unable to complete our DNXs in a timely manner,
other companies may enter those markets before us, thereby putting us at a
competitive disadvantage. We may not be able to compete successfully against
current and future competitors. See "Risk Factors--If we are unable to compete
successfully against new entrants and established companies with greater
resources, our business will suffer."
Intellectual Property and Proprietary Rights
To protect our intellectual property, we rely on a combination of trademark
and copyright law, trade secret protections and confidentiality agreements and
other contractual arrangements with our employees, consultants and third
parties. For example, "Inflow" is our trademark and is registered in the United
States. We cannot be certain that the steps we have taken to protect our
intellectual property rights will be adequate or that third parties will not
infringe or misappropriate our proprietary rights. Moreover, effective
trademark, copyright and trade secret protection may not be available in every
country in which we may eventually operate to the same
41
<PAGE>
extent available in the United States. We may be unable to detect the
unauthorized use of our intellectual property or take appropriate steps to
enforce our intellectual property rights. Defending our intellectual property
rights could also result in the expenditure of significant financial and
managerial resources, which could harm our financial results.
We enter into proprietary information and invention assignment agreements
with our employees and consultants and control access to and distribution of
our proprietary information. Despite our efforts to protect our proprietary
rights, unauthorized parties, including departing employees, business partners
and others, may attempt to copy or otherwise obtain and use our services and
technology. Monitoring unauthorized use of our technology is very difficult,
and we cannot be certain that the steps we have taken will prevent
misappropriation of our technology. In addition, the laws in foreign countries
may not protect our proprietary rights as fully as in the United States.
Third parties may in the future assert copyright, trademark, patent and
other intellectual property rights claims or initiate litigation against us or
our suppliers or customers with respect to existing or future services.
Although we believe that our proprietary rights do not infringe on the
intellectual property rights of others, other parties may assert claims against
us that we have misappropriated a trade secret or infringed a patent,
copyright, trademark or other proprietary right belonging to them. Any
infringement or related claims, even if not meritorious, could be costly and
time consuming to litigate, may distract management from other tasks of
operating the business and may result in the loss of significant rights and the
loss of our ability to operate our business.
Government Regulation
Regulation of Our Telecommunications Services. Some of our services are
considered subject to regulation by federal and state telecommunications
regulators. For example, the Federal Communications Commission, or FCC, and
many states regulate the provision of transmission services to third parties,
even on a "resale" basis--that is, even when we do not own the transmission
facilities used to provide those services. In addition, although some of the
services may not be regulated now, federal or state regulators may expand
current regulations to include additional services we offer. The nature and
extent to which our communications services are regulated affects the scope of
our services, our profitability and the degree to which other companies can
successfully compete with us.
The FCC regulates the provision of interstate telecommunications services,
including interstate long distance services and physically intrastate services
that are used to originate and terminate interstate long distance
communications. The FCC also regulates many of the terms and conditions under
which incumbent local exchange carriers, or ILECs, must permit competition by
competitive local exchange carriers, or CLECs. In addition, in many instances
the FCC and the state public utilities commissions, or PUCs, share jurisdiction
over facilities that are used to provide both interstate and intrastate
communications services.
Federal telecommunications regulation. The FCC has authority to regulate
telecommunications services. The FCC has not definitively determined the
boundaries of the telecommunications service category, and therefore the exact
scope of services subject to the FCC's jurisdiction remains unclear. Under
current FCC requirements, we do not need either prior authorization or a tariff
to offer interstate access services. It is possible, however, that a prior
authorization or a tariffing requirement could be imposed in the future.
To the extent we are subject to regulation by the FCC we must:
. contribute to certain funds, including the Universal Service Fund, the
Telecommunications Relay Service Fund, and a fund intended to recover
the costs of administering the use of telephone numbers;
. provide telecommunications services at just, reasonable, and
nondiscriminatory rates;
. interconnect directly or indirectly with the facilities and equipment of
other telecommunications carriers;
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<PAGE>
. be subject to complaints in court or at the FCC for failure to comply
with the Communications Act or the FCC's rules;
. install network features, functions, or capabilities that comply with
guidelines and standards governing accessibility by individuals with
disabilities and interconnectivity with other networks;
. comply with certain network design requirements in order to assist law
enforcement personnel; and
. comply with statutory and regulatory requirements regarding unauthorized
changes in a customer's pre-subscribed carrier.
In addition, to the extent we are considered a "local exchange carrier"
(that is, to the extent we provide local telephone service or interstate access
services), we must comply with certain duties set out in the Communications
Act, including:
. not to prohibit or unreasonably restrict resale of our
telecommunications services;
. to provide number portability;
. to provide dialing parity;
. to afford access to poles, ducts, conduits, and right-of-way to
competing providers of telecommunications services; and
. to establish reciprocal compensation arrangements for the transport and
termination of telecommunications.
The Communications Act and the FCC's rules impose additional requirements on
ILECs. We are not considered an ILEC. However, the requirements imposed on
ILECs affect the ability of those entities to compete and therefore may
indirectly affect us. For example, the FCC has granted ILECs considerable
pricing flexibility and is likely to further relax regulation of the ILECs'
rates in the near future. Consequently, the ILECs may be able to compete
aggressively on price against certain of our services. In addition, the
Communications Act and the FCC's rules require the ILECs to offer colocation on
an efficient, nondiscriminatory basis. Those requirements may enhance the
attractiveness of the ILECs' colocation services to our target customers and
therefore render the ILECs more potent competitors.
State telecommunications regulation. State PUCs have jurisdiction over the
provision of intrastate communications services. Some of our communications
services are classified as intrastate and therefore currently are subject to
extensive state regulation. The nature of such regulation varies from state to
state, but in some states it may be more extensive than the regulations imposed
by the FCC.
We are seeking to expand the scope of our intrastate services in various
jurisdictions, a process which may require us to obtain approval to offer
service in those new states. There is no guarantee that we will be able to
obtain such approvals. In addition, intrastate regulatory requirements are
changing rapidly and will continue to change. The inability to obtain state
approvals to initiate or expand our services could have a material adverse
effect on our business and results of operations.
While we believe that the law regarding regulation of these and similar
types of services is unclear in certain jurisdictions in which we currently
operate or intend to operate, and we continue to evaluate our status with
counsel, it is likely that we have provided certain telecommunications services
without the requisite regulatory approval or certification in a limited number
of jurisdictions. We may also be required to obtain and to apply for similar
authorizations in other states in which we expect to operate in the future. Our
failure to have held any required authorizations and to have been registered or
certified previously could expose us to risks, including substantial fines,
third-party lawsuits and potential inability to continue our operations. See
"Risk Factors--Our failure to hold required authorizations and to be registered
with, or certified by, applicable regulatory authorities could harm our
business."
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Regulation of the Internet. There is currently only a small body of laws and
regulations directly applicable to access to or commerce on the Internet.
However, due to the increasing popularity and use of the Internet, it is
possible that a number of 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 and the convergence of traditional telecommunications
services with Internet communications. The adoption of any such 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. 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. See "Risk
Factors--If the government modifies or increases its regulation of the
Internet, the provision of our services could become more costly and the use of
the Internet may decline."
Employees
We had 185 full-time employees as of February 15, 2000, of which we had
eight in marketing, 34 in sales, 63 in operations, 19 in engineering,
information technology and product development, 13 in software development,
seven in business process automation, nine in expansion and 32 in management
and administration. Our employees are not represented by any collective
bargaining organization and we consider our relations with our employees to be
good. Competition for qualified personnel in our industry is intense. We
believe that we will need to continue to attract, hire and retain qualified
personnel to be successful in the future.
Facilities
Our principal executive offices are located in Denver, Colorado. In addition
to our headquarters, we have leases for our DNXs in the following cities:
Denver (two locations), Minneapolis, Durham, San Diego, Austin, Atlanta, Irvine
and Phoenix.
Legal Proceedings
We are not a party to any material legal proceedings.
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MANAGEMENT
Executive Officers and Directors
The following table provides information about our executive officers and
directors:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Arthur H. Zeile......... 36 President, Chief Executive Officer and Chairman of the Board of Directors
Joel C. Daly............ 31 Vice President, Chief Operating Officer, Secretary and Director
James W. McHose, III.... 36 Vice President, Chief Financial Officer and Treasurer
Dr. Yousif Asfour....... 36 Vice President and Chief Technical Officer
Bruce E. Cunningham..... 30 Vice President, Business Development
Robert J. Gedrose....... 40 Vice President, Sales
Nancy B. Printz......... 33 Vice President, General Counsel and Assistant Secretary
Donald F. Detampel, 44 Director
Jr.....................
L. Watts Hamrick, III... 40 Director
Stephen O. James........ 55 Director
Scott B. Perper......... 44 Director
G. Jackson Tankersley, 50 Director
Jr.....................
</TABLE>
Arthur H. Zeile co-founded Inflow and has served as our President, Chief
Executive Officer and director since our inception in September 1997 and the
Chairman of our Board of Directors since April 1999. From July 1994 to May
1997, he was Vice President of Sales and Marketing for LINK-VTC, a
videoconferencing services company. From 1992 to 1994, he was a Software
Program Manager for The Automation Group, an organization providing client-
server database applications. Mr. Zeile also served as an Executive Officer for
the U.S. Air Force Satellite Communications Program Office, supporting the 150-
man Milstar Satellite program. Mr. Zeile received his master's degree in public
policy from Harvard University and his bachelor of science degree in
astronautical engineering from the U.S. Air Force Academy.
Joel C. Daly co-founded Inflow and has served as our Vice President, Chief
Operating Officer, Secretary and director since our inception in September
1997. From 1993 to May 1997, he was Vice President of Operations for LINK-VTC.
From 1990 to 1993, he was Chief of Scheduling and Cost Estimator for the
Milstar Satellite program in the U.S. Air Force. Mr. Daly received his master's
degree in business administration from Loyola Marymount University and his
bachelor of science degree in management from the U.S. Air Force Academy.
James W. McHose, III has served as our Vice President, Chief Financial
Officer and Treasurer since September 1999, full-time since January 1, 2000.
From July 1996 to September 1999, he was Vice President of Finance for
FrontierVision Partners, LP, a cable television company. From 1987 to July
1996, he was a Senior Manager in the Information, Communications and
Entertainment practice of KPMG Peat Marwick, LLP, a certified public accounting
firm. Mr. McHose received his bachelor of science degree in accounting from
Southern Illinois University.
Dr. Yousif Asfour has served as our Vice President and Chief Technology
Officer since January 2000. From August 1999 to December 1999 he served as our
Director, Software Development. From January 1999 to August 1999, he was a
Systems Architect with Sapient. From 1996 to 1999, he was Director of Software
and Systems Development with Smart Route Systems. From 1994 to 1996, he was a
Senior Consultant with
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Symmetrix. Dr. Asfour received his Ph.D. in cognitive and neural systems from
Boston University and his master of science and bachelor of science degrees in
electrical engineering from the Northeastern University.
Bruce E. Cunningham has served as our Vice President, Business Development
since January 2000. From September 1996 to January 2000, he was an associate
with Brobeck, Phleger & Harrison LLP. Prior to that time, Mr. Cunningham
attended the University of Virginia School of Law, where he received his juris
doctor degree. Mr. Cunningham received his bachelor of arts degree in economics
from Trinity University.
Robert J. Gedrose has served as our Vice President, Sales since July 1998.
From July 1997 to July 1998, he was the Executive Vice President of
Commonwealth Telephone Enterprises, a competitive local exchange carrier. From
February 1994 to April 1997, he was a Vice President and General Manager for
MFS Communications, a competitive local exchange carrier. Mr. Gedrose received
his bachelor of science degree in economics from Williamette University.
Nancy B. Printz has served as our Vice President and General Counsel since
January 2000 and our Assistant Secretary since July 1999. From May 1999 to
December 1999, she served as our Chief Legal Officer. From September 1995 to
April 1999, she was an attorney with Steiner, Darling, Hutchinson & Wilson LLP
where she served as both an associate and as of counsel. From September 1992 to
August 1995, she was an attorney in the corporate department of Davis, Graham &
Stubbs. Ms. Printz received her bachelor of arts degree in political science
from Emory University and her juris doctor degree from Yale Law School.
Donald F. Detampel, Jr. has served on our Board of Directors since February
2000. From December 1998 to February 2000, Mr. Detampel served as President of
Global Center Inc., a wholly-owned subsidiary of Global Crossing, Ltd. From
March 1998 to November 1998, Mr. Detampel was President of Enhanced Services
for Frontier Corporation. From February 1996 to March 1998, Mr. Detampel served
as President of ConferTech International, and from April 1990 to February 1996,
he served as President of Schneider Communications. Mr. Detampel received his
bachelor of science degrees in mathematics and physics from St. Norbert
College.
L. Watts Hamrick, III has served on our Board of Directors since April 1999.
Since 1995, he has served as a Partner of First Union Capital Partners, Inc., a
subsidiary of First Union Corporation. Mr. Hamrick is a Senior Vice President
of First Union Corporation and First Union National Bank of North Carolina. Mr.
Hamrick received his bachelor of arts degree in accounting and his masters in
business administration from Duke University.
Stephen O. James has served as a consultant to us since December 1998 and on
our Board of Directors since March 1999. Since 1995, Mr. James has served as an
independent business consultant for numerous companies, including us. Mr. James
also serves on the board of directors of SCC Communications. He received his
bachelor of arts degree in economics from Denison University.
Scott B. Perper has served on our Board of Directors since April 1995. Since
February 1995, Mr. Perper has been a Managing Partner of First Union Capital
Partners, Inc., a subsidiary of First Union Corporation. Mr. Perper is a Senior
Vice President of First Union Corporation and First Union National Bank of
North Carolina. Mr. Perper received his bachelor of arts degree in government
and legal studies from Bowdoin College and his masters in business
administration from the Graduate School for Business Administration of Harvard
University.
G. Jackson Tankersley, Jr. has served on our Board of Directors since
November 1999. Since September 1998, he has served as Managing Member of
Meritage Investment Partners, LLC, the general partner and sponsor of various
private equity funds. Prior to that time, Mr. Tankersley was a General Partner
of the Centennial Funds. Mr. Tankersley received his bachelor of arts degree in
economics from Denison University and his masters in business administration
from Dartmouth College, Amos Tuck School of Business.
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Board Composition
Upon the closing of this offering, we will have authorized a range of
directors from to . In accordance with the terms of our amended
certificate of incorporation, the terms of office of the board of directors
will be divided into the following three classes, serving staggered three-year
terms:
. Class I directors, whose term will expire at the annual meeting of
stockholders to be held in 2001 (or a special meeting held in lieu of the
annual meeting);
. Class II directors, whose term will expire at the annual meeting of
stockholders to be held in 2002 (or a special meeting held in lieu of the
annual meeting); and
. Class III directors, whose term will expire at the annual meeting of
stockholders to be held in 2003 (or a special meeting held in lieu of the
annual meeting).
As a result, only one class of directors will be elected at each annual
meeting of our stockholders, with the other classes continuing for the
remainder of their respective terms. This classification of our Board of
Directors may have the effect of delaying or preventing a change in control or
management.
Board Committees
Our board of directors has an audit committee and a compensation committee.
The audit committee of our board of directors reviews and monitors our
internal accounting procedures and reviews the results and scope of the annual
audit and other services provided by our independent accountants. The audit
committee also consults with our management and our independent auditors prior
to the presentation of financial statements to stockholders and, as
appropriate, initiates inquiries into aspects of our financial affairs. In
addition, the audit committee is responsible for considering and recommending
the appointment of, and reviewing fee arrangements with, our independent
auditors. The current members of the audit committee are Stephen O. James and
L. Watts Hamrick, III, with one vacancy remaining on the committee.
The compensation committee of our Board of Directors reviews and makes
recommendations to the board regarding the compensation and benefits provided
to our key executive officers and directors, including stock compensation and
loans. In addition, the compensation committee reviews policies regarding
compensation arrangements and benefits for all of our employees. As part of the
foregoing, the compensation committee also administers our 2000 Stock Incentive
Plan. The current members of the compensation committee are Arthur H. Zeile, G.
Jackson Tankersley, Jr. and Scott B. Perper. Mr. Zeile does not participate in
the determination of his own compensation.
Director Compensation
Our directors do not currently receive compensation for attendance at board
meetings or board committee meetings. However, our directors are reimbursed for
all reasonable out-of-pocket expenses incurred in connection with their
attendance at board and board committee meetings. Employee directors are
eligible to participate in our 1997 stock option/stock issuance plan and will
also be eligible to receive equity incentives, in the form of stock option
grants or direct stock issuances, under our 2000 Stock Incentive Plan.
Non-employee board members will receive option grants at periodic intervals
under the automatic option grant program of the 2000 Stock Incentive Plan. They
will also be eligible to receive discretionary option grants under the
discretionary option grant program of such plan.
Compensation Committee Interlocks and Insider Participation
In April 1999, we formed our compensation committee, comprised of Arthur H.
Zeile, G. Jackson Tankersley, Jr. and Scott B. Perper. Mr. Zeile is our
President and Chief Executive Officer. Prior to such date, all compensation
decisions were made by our full Board of Directors. Following this offering,
the compensation committee will continue to make recommendations to the board
regarding all of our compensation decisions.
47
<PAGE>
Executive Compensation
The following table sets forth the approximate cash compensation (including
cash bonuses) paid or awarded by us for the fiscal year ended December 31, 1999
to (i) our Chief Executive Officer and (ii) all of our executive officers whose
salary and bonus for fiscal year 1999 exceeded $100,000. These individuals are
collectively referred to as "Named Executive Officers."
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
------------------ ------------
Securities
Salary Underlying All Other
Name and Principal Position ($) Bonus ($) Options Compensation
- --------------------------- -------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Arthur H. Zeile, President and
Chief Executive Officer...... $ 44,272 $100,000 -- $300(1)
Joel C. Daly, Vice President,
Chief Operating Officer and
Secretary.................... $ 44,274 $100,000 -- $300(1)
Robert J. Gedrose, Vice
President, Sales............. $111,373 $ 10,750 30,000 $700(1)
James W. McHose, III, Chief
Financial Officer
and Treasurer ............... $ 4,500 $242,110(2) 90,000 $135(1)
</TABLE>
- --------
(1) Represents our 401(k) match.
(2) Includes 40,000 shares of Series A preferred stock sold to Mr. McHose at
$3.50 per share on October 15, 1999, a discount of $6.02 per share from the
then fair market value of preferred stock.
Option Grants in Fiscal Year Ended December 31, 1999
<TABLE>
<CAPTION>
Potential
Realizable Value at
Assumed Annual
Percent of Rates of Stock
Number of Total Options Price Appreciation
Shares Granted to For Option Term
Underlying Employees Exercise or ($)(2)
Options in Fiscal Base Price Expiration -------------------
Name Granted (#) Year (%) ($/sh)(1) Date 5% 10%
- ---- ----------- ------------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Arthur H. Zeile......... -- -- -- -- -- --
Joel C. Daly ........... -- -- -- -- -- --
Robert J. Gedrose....... 30,000 4% $0.75 06/01/09 $224,277 $ 370,452
James W. McHose, III.... 90,000 12% $0.75 08/17/09 $879,543 $1,440,504
</TABLE>
- --------
(1) These options are incentive stock options that were granted at an exercise
price of $0.75 per share. The incentive stock options vest 25% after the
initial 12 months of service measured from the grant date. The balance of
the shares vest in equal monthly installments over the next 36 months of
service. The potential realizable value is based on the term of the option
at the time of grant, which is ten years for each of the options set forth
in this table. All amounts have been calculated using the market price on
the date of grant as the base value and assumed annual rates of stock price
appreciation of 5% and 10%.
(2) The 5% and 10% assumed annual rates of stock price appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent the company's estimate or projection of future common stock
prices.
48
<PAGE>
Aggregated Option Exercises in the Last Fiscal Year and Fiscal Year End Option
Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options
Year End (#) at Fiscal Year End ($)(1)
-------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Arthur H. Zeile............. -- -- -- --
Joel C. Daly................ -- -- -- --
Robert J. Gedrose........... 90,000(2) -- $879,300 --
James W. McHose, III........ 90,000 -- $848,700 --
</TABLE>
- --------
(1) In the table above, the value of unexercised in-the-money options is based
on the fair market value of our common stock, determined to be $10.18 per
share on or about December 31, 1999, minus the per share exercise price
multiplied by the number of shares.
(2) Includes 60,000 options granted in 1998 at an exercise price of $0.24 per
share.
2000 Stock Incentive Plan
Introduction
The 2000 Stock Incentive Plan is the successor program to our 1997 Stock
Option/Stock Issuance Plan. The 2000 Stock Incentive Plan will be adopted by
the Board of Directors and approved by our stockholders prior to the date of
this offering. The 2000 Stock Incentive Plan will be administered by our
compensation committee. All outstanding options under our 1997 Stock
Option/Stock Issuance Plan will be transferred to the 2000 Stock Incentive Plan
upon the closing of this offering, and no further option grants will be made
under the predecessor plan. The transferred options will continue to be
governed by their existing terms. Except as otherwise noted, the transferred
options have substantially the same terms as those for grants to be made under
the 2000 Stock Incentive Plan.
Share Reserve
shares of common stock have been authorized for issuance under
the 2000 Stock Incentive Plan. This share reserve consists of shares
estimated to remain available for issuance under our 1997 Stock Option/Stock
Issuance Plan, and shares subject to outstanding options thereunder, plus
an increase of shares. The share reserve will automatically increase on the
first trading day in January of each calendar year, beginning January , 2001,
by an amount equal to % of the total number of shares of common stock
outstanding on the last trading day in December in the preceding calendar year,
but in no event will this annual increase exceed shares. In addition, in no
event may one participant in the 2000 Stock Incentive Plan receive option
grants or direct stock issuances for more than shares in the aggregate per
calendar year.
Programs
The 2000 Stock Incentive Plan will be divided into five separate programs:
. the discretionary option grant program under which eligible individuals
employed by us may be granted options to purchase shares of common stock
at an exercise price determined by the plan administrator;
. the stock issuance program under which eligible individuals may be issued
shares of common stock directly, through the purchase of these shares at
a price determined by the plan administrator or as a bonus tied to the
performance of services;
. the salary investment option grant program which may, at the plan
administrator's discretion, be activated for one or more calendar years
and, if so activated, will allow executive officers and other highly
compensated employees the opportunity to use a portion of their base
salary to acquire special below market stock option grants;
49
<PAGE>
. the automatic option grant program under which option grants will
automatically be made at periodic intervals to eligible non-employee
board members to purchase shares of common stock at an exercise price
equal to 100% of the fair market value of those shares on the grant date;
and
. the director fee option grant program under which our non-employee board
members may be given the opportunity to use a portion of any retainer fee
otherwise payable to them in cash for the year to acquire special below
market stock option grants.
Plan Features
The 2000 Stock Incentive Plan will include the following features:
. The exercise price for any options granted under the plan may be paid in
cash or with mature shares of our common stock valued at fair market
value on the exercise date. The option may also be exercised through a
same-day sale program without any cash outlay by the optionee.
. The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program in return for the
grant of new options for the same or different number of option shares
with an exercise price per share based upon the fair market value of
common stock on the new grant date.
. Stock appreciation rights may be issued under the discretionary option
grant program. Such rights will provide the holders with the election to
surrender their outstanding options for an appreciation distribution from
us equal to the fair market value of the vested shares of common stock
subject to the surrendered option less the exercise price payable for
those shares. We may make the payment in cash or in shares of common
stock.
Change in Control
The 2000 Stock Incentive Plan will include change in control provisions that
may result in the accelerated vesting of outstanding option grants and stock
issuances:
. In the event that we are acquired by merger or asset sale or a board-
approved sale of more than 50% of our capital stock, each outstanding
option under the discretionary option grant program that is not assumed
or continued by the successor corporation will immediately become
exercisable for all the option shares, and all unvested shares will
immediately vest, except to the extent our repurchase rights with respect
to those shares are to be assigned to the successor corporation.
. The plan administrator may grant options which vest immediately upon our
acquisition or upon a hostile change of control or upon the individual's
termination of service following an acquisition that results in a change
in control.
The board will be able to amend or modify the 2000 Stock Incentive Plan at
any time, subject to any required stockholder approval. The 2000 Stock
Incentive Plan will terminate no later than , 2010.
2000 Employee Stock Purchase Plan
The 2000 Employee Stock Purchase Plan will be adopted by the Board of
Directors and approved by our stockholders prior to the date of this offering.
The plan will become effective immediately upon the execution of the
underwriting agreement for this offering. The plan is designed to allow our
eligible employees to purchase shares of our common stock, at semi-annual
intervals, through their periodic payroll deductions. A total of shares
of common stock may be issued under the plan.
The plan will have a series of successive offering periods, each with a
maximum duration of months. However, the initial offering period will begin
on the day the underwriting agreement is executed in connection
50
<PAGE>
with this offering and will end on the last business day in . The next
offering period will begin on the first business day in , and subsequent
offering periods will be set by our compensation committee.
A participant may contribute up to % of his or her cash earnings
through payroll deductions and the accumulated payroll deductions will be
applied to the purchase of shares on the participant's behalf on each
semiannual purchase date (the last business day in and of each
year). The purchase price per share will be % of the lower of the fair market
value of our common stock on the participant's entry date into the offering
period or the fair market value on the semi-annual purchase date. The first
purchase date will occur on the last business day in 2000. In no event,
however, may any participant purchase more than shares, nor may all
participants in the aggregate purchase more than shares on any one
semi-annual purchase date. Should the fair market value of the common stock on
any semi-annual purchase date be less than the fair market value on the first
day of the offering period, then the current offering period will automatically
end and a new offering period will begin, based on the lower fair market value.
The board will be able to amend or modify the plan at any time. The plan
will terminate no later than the last business day in , 2010.
401(k) Plan
We have an employee plan that qualifies as a deferred salary arrangement
under Section 401(k) of the Internal Revenue Code. The 401(k) Plan allows our
employees to defer up to 15% of their pre-tax earnings, subject to the Internal
Revenue Services annual contribution limit. At our discretion, we may make
matching contributions to the 401(k) Plan. As of December 31, 1999, we have
made $22,427 in matching contributions under the 401(k) Plan.
Employment Agreements
We do not currently have any employment agreements with any of our
employees.
Limitation of Liability and Indemnification Matters
Our Certificate of Incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Our bylaws provide that we shall
indemnify each of our directors and officers against expenses (including
attorney's fees), judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with a n proceeding arising by reason of the
fact that such person is or was one of our directors or officers or serving as
director or officer of another corporation, partnership, joint venture, trust,
or other enterprise at our request. We have also entered into agreements to
indemnify directors and certain executive officers. With respect to the
indemnification of directors and officers for liabilities arising under the
Securities Act, the SEC has opined that this indemnification is against public
policy, as expressed in the Securities Act, and is therefore unenforceable.
51
<PAGE>
RELATED-PARTY TRANSACTIONS
Sales of Common Stock
In December 1998, we issued and sold 60,000 shares of our common stock to
Stephen O. James, one of our directors, at a per-share purchase price of $0.24.
In connection with the sale, we loaned an aggregate of $14,400 to Mr. James.
The promissory note was secured by the shares and a stock pledge agreement. In
October 1999, we forgave the balance of the note in payment for consulting
services rendered by Mr. James to us.
Convertible Promissory Notes
Between September 1997 and January 1999, Joel C. Daly, our Vice President,
Chief Operating Officer, Secretary, a director and a 5% stockholder, loaned an
aggregate of $610,000 to us, at an interest rate of 8% per year. The loan by
Mr. Daly was paid in full by us when, in April 1999, Mr. Daly converted his
promissory notes into 187,381 shares of our Series A preferred stock.
Between September 1997 and February 1999, Arthur H. Zeile, our President,
Chief Executive Officer, Chairman of the Board of Directors and a 5%
stockholder, loaned an aggregate of $610,000 to us, at an interest rate of 8%
per year. The loan by Mr. Zeile was paid in full by us when, in April 1999, Mr.
Zeile converted his promissory notes into 186,858 shares of our Series A
preferred stock.
Sales of Series A Preferred Stock
In April 1999, we issued 187,381 shares of our Series A preferred stock to
Joel C. Daly, our Vice President, Chief Operating Officer, Secretary, a
director and a 5% stockholder, at a per-share price of $3.50. Mr. Daly
converted his existing promissory notes and related accrued interest
aggregating $655,833 into 187,381 shares of Series A preferred stock.
In April 1999, we issued 186,858 shares of our Series A preferred stock to
Arthur H. Zeile, our President, Chief Executive Officer, Chairman of the Board
of Directors and a 5% stockholder, at a per-share price of $3.50. Mr. Zeile
converted his existing promissory notes and related accrued interest
aggregating $654,003 into 186,858 shares of Series A preferred stock.
In October 1999, we issued 40,000 shares of our Series A preferred stock to
James W. McHose, III, our Vice President, Chief Financial Officer and
Treasurer, at a per-share price of $3.50, a discount of $6.02 per share from
the then fair market value of our preferred stock. In connection with the sale,
we loaned an aggregate of $87,500 to Mr. McHose at an interest rate of 6%. The
full-recourse promissory note was also secured by 25,000 shares through a stock
pledge agreement.
Sales of Series B Preferred Stock
In October 1999, we issued and sold 2,298,851 shares of our Series B
preferred stock to First Union Capital Partners, Inc., a 5% stockholder, at a
per-share price of $8.70. Two of our directors, L. Watts Hamrick, III and Scott
B. Perper, are partners of First Union Capital Partners, Inc.
Other Related-Party Transactions
Hammered Design, a company owned by Ivar Zeile, the brother of Arthur H.
Zeile, our President, Chief Executive Officer, Chairman of the Board of
Directors and a 5% stockholder, provides facility and design consulting
services to us. We also purchase certain office furnishings from Hammered
Design. As of December 31, 1999, aggregate payments to Hammered Design totaled
approximately $296,000.
52
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of December 31, 1999, as adjusted
to reflect the sale of shares of common stock in this offering, by:
. each person, or group of affiliated persons, known by us to own
beneficially more than 5% of our outstanding common stock;
. each of our directors;
. each of our Named Executive Officers; and
. all of our directors and executive officers as a group.
The following table assumes the conversion of all of our preferred stock
outstanding as of December 31, 1999 into common stock, except for certain
shares of the preferred stock held by First Union Capital Partners, Inc. which
is assumed to convert into 1,433,203 shares of non-voting common stock. See
"Description of Capital Stock."
Beneficial ownership is determined in accordance with the rules of the SEC
and includes voting and investment power with respect to shares. To our
knowledge, except under applicable community property laws or as otherwise
indicated, the persons named in the table have sole voting and sole investment
control with respect to all shares beneficially owned. The applicable
percentage of ownership for each stockholder is based on 13,306,505 shares of
common stock, both voting and non-voting, outstanding as of December 31, 1999,
and shares outstanding after the completion of this offering, in each
case together with applicable options for that stockholder. Shares of common
stock issuable upon exercise of options that are exercisable within 60 days of
December 31, 1999 are deemed outstanding for the purpose of computing the
percentage ownership of the person holding those options but are not deemed
outstanding for computing the percentage ownership of any other person. Options
issued by us are immediately exercisable and the shares of common stock
issuable pursuant to exercise of such options are subject to repurchase by us
at the original exercise price in the event of termination of that person's
relationship with us, which repurchase right lapses over time.
<TABLE>
<CAPTION>
Percentage of
shares
Beneficially
Number of Owned
Shares -----------------
Beneficially Prior to After
Beneficial Owner Owned Offering Offering
<S> <C> <C> <C>
First Union Capital Partners, Inc. (1)......... 5,155,993 38.75%
Meritage Investment Partners, LLC (2).......... 2,298,851 17.28%
Arthur H. Zeile (3)............................ 1,661,858 12.49%
Joel C. Daly (4)............................... 1,647,381 12.38%
Entities affiliated with J.P. Morgan Investment
Corporation (5)............................... 1,149,424 8.64%
General Electric Capital Corporation (6)....... 574,713 4.32%
Stolberg, Meehan & Scano II, L.P. (7).......... 574,713 4.32%
Robert J. Gedrose (8).......................... 90,000 *
James W. McHose, III (9)....................... 130,000 *
L. Watts Hamrick, III (10)..................... 5,155,993 38.75%
Scott B. Perper (11)........................... 5,155,993 38.75%
G. Jackson Tankersley (12)..................... 2,298,851 17.28%
Stephen O. James (13).......................... 82,500 *
Donald F. Detampel, Jr. (14)................... 0 *
All directors and executive officers as a group
(12 persons) (15)............................. 11,187,297 82.22%
</TABLE>
- --------
* Less than 1% of the outstanding shares of our common stock, both voting and
non-voting.
53
<PAGE>
(1) The address of First Union Capital Partners, Inc. is 301 South College
Street, Charlotte, NC 28288-0732.
(2) Stock consists of 2,034,943 shares held directly by Meritage Private Equity
Fund, L.P., 226,207 shares held directly by Meritage Private Equity
Parallel Fund, L.P. and 37,701 shares held directly by Meritage
Entrepreneurs Fund, L.P. (collectively, the "Meritage Funds"). The address
of the Meritage Funds is 1600 Wynkoop Street, Suite 300, Denver, CO 80202.
(3) Stock consists of 1,636,858 shares held by Mr. Zeile and 25,000 shares held
by the Zeile INFLOW Trust dated December 22, 1999. Mr. Zeile disclaims
beneficial ownership of the shares held by such trust. The address of Mr.
Zeile and the trust is 938 Bannock Street, Suite 300, Denver, CO 80204.
(4) Stock consists of 1,607,381 shares held by Mr. Daly and 40,000 shares held
by the Daly INFLOW Trust dated December 22, 1999. Mr. Daly disclaims
beneficial ownership of the shares held by such trust. The address of Mr.
Daly and the trust is 938 Bannock Street, Suite 300, Denver, CO 80204.
(5) Stock consists of 1,034,483 shares held directly by J.P. Morgan Investment
Corporation and 114,941 shares held directly by Sixty Wall Street SBIC
Fund, L.P. (collectively, the "Entities affiliated with J.P. Morgan
Investment Corporation"). The address of the Entities affiliated with J.P.
Morgan Investment Corporation is 101 California Street, 37th Floor, San
Francisco, CA 94111.
(6) The address of GE Capital Corporation is 120 Long Ridge Road, 3rd Floor,
Stamford, CT 06927.
(7) The address of Stolberg, Meehan & Scano II, L.P. is Republic Plaza, 370
17th Street, Suite 4240, Denver, CO 80202.
(8) Stock consists of 90,000 shares subject to options exercisable within 60
days of December 31, 1999.
(9) Stock includes 90,000 shares subject to options exercisable within 60 days
of December 31, 1999.
(10) Stock consists of 5,155,993 shares held directly by First Union Capital
Partners, Inc. Mr. Hamrick is a Partner of First Union Capital Partners,
Inc., a subsidiary of First Union Corporation, and disclaims beneficial
ownership of such shares. Mr. Hamrick's address is 301 South College
Street, Charlotte, NC 28288-0732.
(11) Stock consists of 5,155,993 shares held directly by First Union Capital
Partners, Inc. Mr. Perper is a Managing Partner of First Union Capital
Partners, Inc., a subsidiary of First Union Corporation, and disclaims
beneficial ownership of such shares. Mr. Perper's address is 301 South
College Street, Charlotte, NC 28288-0732.
(12) Stock includes 2,034,943 shares held directly by Meritage Private Equity
Fund, L.P., 226,207 shares held directly by Meritage Private Equity
Parallel Fund, L.P. and 37,701 shares held directly by Meritage
Entrepreneurs Fund, L.P. Mr. Tankersley is a Managing Member of Meritage
Investment Partners, LLC, which is the sole General Partner of each of the
Meritage Funds. Mr. Tankersley disclaims beneficial ownership of the
shares held by the Meritage Funds. The address of each of Meritage
Investment Partners, LLC, the Meritage Funds and Mr. Tankersley is 1600
Wynkoop Street, Suite 300, Denver, CO 80202.
(13) 22,500 of such shares are subject to a repurchase right which lapses at a
rate of 1/36 per month.
(14) Mr. Detampel was elected to our Board of Directors on February 14, 2000.
Mr. Detampel owned no shares as of December 31, 1999.
(15) See footnotes (3), (4) and (8) through (14) above. Includes 300,000 shares
subject to options exercisable within 60 days of December 31, 1999.
54
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
The following description of our common stock, both voting and non-voting,
and preferred stock and the relevant provisions of our amended and restated
certificate of incorporation and amended and restated bylaws as will be in
effect upon the closing of this offering are summaries and are qualified by
reference to our amended and restated certificate of incorporation and the
amended and restated bylaws, copies of which have been filed with the SEC as
exhibits to our registration statement, of which this prospectus forms a part.
Upon closing of this offering, our authorized capital stock will consist of
shares of common stock, par value $0.001 per share, 1,500,000
shares of non-voting common stock, par value $0.001 per share, and
shares of preferred stock, par value $0.001 per share.
Common Stock
Upon the closing of this offering, and giving effect to the issuance of
shares of common stock in this offering and the contemplated
amendment to our amended and restated certificate of incorporation as more
fully discussed below, there will be 1,433,203 shares of common stock
outstanding, and shares of non-voting common stock outstanding.
Upon closing of this offering, holders of non-voting common stock do not
have any voting rights, except as required by applicable law. Holders of both
common stock and non-voting common stock are entitled to receive ratably those
dividends, if any, as may be declared by the Board of Directors out of funds
legally available therefor, subject to any preferential dividend rights of any
outstanding preferred stock. Upon our liquidation, dissolution or winding up,
the holders of both common stock and non-voting common stock are entitled to
receive ratably our net assets available after the payment of all debts and
other liabilities and subject to the prior rights of any outstanding preferred
stock. Holders of the common stock and non-voting common stock have no
preemptive, subscription, redemption or conversion rights except that each
share of non-voting common stock is convertible, at any time, at the option of
the holder into one share of common stock, and generally will convert into one
share of common stock upon transfer of the non-voting common stock from its
original holder. The common stock is not convertible into non-voting common
stock. The outstanding shares of both common stock and non-voting common stock
are, and the shares offered by us in this offering will be, when issued in
consideration for payment thereof, fully paid and nonassessable. The rights,
preferences and privileges of holders of common stock and non-voting common
stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock which we may designate and
issue in the future. Upon the closing of this offering, there will be no shares
of preferred stock outstanding.
Preferred Stock
Upon the closing of this offering, there will be no shares of preferred
stock outstanding. Upon the closing of this offering, the Board of Directors
will be authorized, without further stockholder approval, to issue from time to
time up to an aggregate of 10,000,000 shares of preferred stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption, including sinking fund provisions,
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designation of series. We have no present plans to
issue any shares of preferred stock. See "--Anti-Takeover Effects of Various
Provisions of Delaware Law and Our Certificate of Incorporation and Bylaws."
Conversion of Certain Shares of Stock
Prior to the closing of this offering, we will amend our amended and
restated certificate of incorporation to provide for the issuance of non-voting
common stock. We are undertaking this change in our capital structure
55
<PAGE>
to accommodate one of our principal stockholders, First Union Capital Partners,
Inc. Upon which the person became an interested stockholder, unless the
interested stockholder the closing of this offering, First Union Capital
Partners, Inc. will convert all of its shares of preferred stock into 3,722,790
shares of common stock and 1,433,203 shares of non-voting common stock. We do
not expect that any of our other preferred stockholders will elect to receive
shares of non-voting common stock upon the conversion of their preferred
shares. We do not currently anticipate further issuances of our non-voting
common stock.
Anti-Takeover Effects of Various Provisions of Delaware Law and Our Certificate
of Incorporation and Bylaws
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Subject to some exceptions, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in
attained that status with the approval of the Board of Directors or unless the
business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in
a financial benefit to the interested stockholder. Subject to various
exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, 15% or more of
the corporation's voting stock. This statute could prohibit or delay the
accomplishment of mergers or other takeover or change in control attempts with
respect to Inflow and, accordingly, may discourage attempts to acquire us.
In addition, various provisions of our amended and restated certificate of
incorporation and our amended and restated bylaws, which provisions will be in
effect upon the closing of the offering and are summarized in the following
paragraphs, may be deemed to have an anti-takeover effect and may delay, defer
or prevent a tender offer or takeover attempt that a stockholder might consider
in its best interest, including those attempts that might result in a premium
over the market price for the shares held by stockholders.
Board of Directors Vacancies. Our amended and restated certificate of
incorporation authorizes the Board of Directors to fill vacant directorships or
increase the size of the Board of Directors. This may deter a stockholder from
removing incumbent directors and simultaneously gaining control of the Board of
Directors by filling the vacancies created by this removal with its own
nominees.
Stockholder Action; Special Meeting of Stockholders. Our amended and
restated certificate of incorporation provides that stockholders may not take
action by written consent, but only at duly called annual or special meetings
of stockholders. The amended and restated certificate of incorporation further
provides that special meetings of our stockholders may be called only by the
Chairman of the Board of Directors, the Chief Executive Officer or a majority
of the Board of Directors.
Advance Notice Requirements for Stockholder Proposals and Directors
Nominations. Our amended and restated bylaws provide that stockholders seeking
to bring business before an annual meeting of stockholders, or to nominate
candidates for election as directors at an annual meeting of stockholders, must
provide timely notice thereof in writing. To be timely, a stockholder's notice
must be delivered to or mailed and received at our principal executive offices,
not less than 120 days nor more than 150 days prior to the first anniversary of
the date of our notice of annual meeting provided with respect to the previous
year's annual meeting of stockholders; provided, that if no annual meeting of
stockholders was held in the previous year or the date of the annual meeting of
stockholders has been changed to be more than 30 calendar days earlier than or
60 calendar days after this anniversary, notice by the stockholder, to be
timely, must be so received not more than 90 days nor later than the later of:
. 60 days prior to the annual meeting of stockholders; or
. the close of business on the 10th day following the date on which notice
of the date of the meeting is given to stockholders or made public,
whichever occurs first.
56
<PAGE>
Our amended and restated bylaws also specify certain requirements as to the
form and content of a stockholder's notice. These provisions may preclude
stockholders from bringing matters before an annual meeting of stockholders or
from making nominations for directors at an annual meeting of stockholders.
Authorized But Unissued Shares. The authorized but unissued shares of common
stock and preferred stock are available for future issuance without stockholder
approval, subject to various limitations imposed by The Nasdaq National Market.
These additional shares may be utilized for a variety of corporate purposes,
including future public offerings to raise additional capital, corporate
acquisitions and employee benefit plans. The existence of authorized but
unissued shares of common stock and preferred stock could make more difficult
or discourage an attempt to obtain control of us by means of a proxy context,
tender offer, merger or otherwise.
The Delaware General Corporation Law provides generally that the affirmative
vote of a majority of the shares entitled to vote on any matter is required to
amend a corporation's certificate of incorporation or bylaws, unless a
corporation's certificate of incorporation or bylaws, as the case may be,
requires a greater percentage.
Registration Rights
Upon the closing of this offering, holders of approximately shares of
common stock (or securities convertible into common stock) will be entitled to
registration rights with respect to their shares. Of these shares, shares
of common stock (or securities convertible into common stock) are entitled only
to "piggy-back" registration rights. Holders of securities with registration
rights may require us to register all or part of their shares at any time
following 180 days after this offering. In addition, these holders may also
require us to include their shares in future registration statements that we
file and may require us to register their shares on Form S-3. Upon
registration, these shares will be freely tradable in the public market without
restriction.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Securities
Transfer & Trust Company, Denver, Colorado.
Listing
We have applied to have our shares of common stock approved for listing on
The Nasdaq National Market under the symbol "INFL."
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market could
adversely affect prevailing market prices of our common stock. In addition,
since no shares will be available for sale shortly after this offering because
of certain contractual and legal restrictions on resale described below, sales
of substantial amounts of common stock in the public market after these
restrictions lapse could harm the prevailing market price and our ability to
raise equity capital in the future.
Upon the closing of this offering, we will have outstanding an aggregate of
shares of our common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
all shares sold in this offering will be freely tradable without restriction or
further registration under the Securities Act unless such shares are purchased
by "affiliates" as that term is defined in Rule 144 under the Securities Act.
The remaining shares outstanding are "restricted securities" within
the meaning of Rule 144. Restricted securities may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rule 144 or Rule 701 promulgated under the Securities Act. As a result of the
contractual restrictions described below and the provisions of Rule 144 and
Rule 701, the shares of common stock outstanding prior to this offering will be
available for sale in the public market 180 days following the closing of this
offering, in accordance with the volume limitations and other conditions of
Rule 144.
Our directors and officers signed lock-up agreements under which they agreed
not to transfer or dispose of, directly or indirectly, any shares of our common
stock or any securities convertible into or exercisable or exchangeable for
shares of our common stock for 180 days after the date of this prospectus,
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. After the expiration of the lock-up agreements, our directors and
officers will be allowed to sell shares of our common stock in accordance with
Rule 144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of 1% of the
number of shares of common stock then outstanding, which will equal
approximately shares immediately after the offering, or the average
weekly trading volume of the common stock on The Nasdaq National Market during
the four calendar weeks preceding the filing of a notice on Form 144 with
respect to such sale. Sales under Rule 144 are also subject to various manner-
of-sale provisions, notice requirements and the availability of current public
information about us.
Under Rule 144(k), a person who is not one of our affiliates 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, including the holding period of any
prior owner other than an affiliate, is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
In general, under Rule 701 of the Securities Act as currently in effect,
each of our employees, consultants or advisors who purchases shares from us in
connection with a compensatory stock plan or other written agreement is
eligible to resell such shares 90 days after the effective date of this
offering in reliance on Rule 144, but without compliance with certain
restrictions, including the holding period, contained in Rule 144.
As of December 31, 1999, we had outstanding stock options. As
soon as practicable following the closing of this offering, we intend to file a
registration statement under the Securities Act covering
shares of common stock reserved for issuance under our 2000 Stock Incentive
Plan and 2000 Employee Stock Purchase Plan. Shares issued under these plans
will be eligible for sale in the public market from time to time, subject to
vesting provisions, Rule 144 volume limitations applicable to our affiliates
and, in the case of some options, the expiration of lock-up agreements.
58
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated , 2000, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Chase Securities Inc.,
First Union Securities, Inc., and DLJdirect Inc. have severally agreed to
purchase the numbers of shares of common stock shown opposite their names
below:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.............
Chase Securities Inc............................................
First Union Securities, Inc.....................................
DLJdirect Inc...................................................
------
Total.......................................................
======
</TABLE>
The underwriting agreement provides that the obligations of the several
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, the listing of
our common stock on The Nasdaq National Market and no occurrence of an event
that would have a material adverse effect on us. 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 our shares.
An electronic prospectus will be available on the Web site maintained by
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation. Other than the prospectus in electronic format, the information on
this Web site relating to the offering is not part of this prospectus and has
not been approved or endorsed by us or the underwriters, and should not be
relied on by prospective investors.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to additional shares
at the initial public offering price less the underwriting fees. The
underwriters may exercise their option to cover over-allotments of common stock
made in connection with this offering. To the extent that the underwriters
exercise their 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 our common stock
directly to the public at the initial public offering price shown on the cover
page of this prospectus and some of the common stock to selling group members
at the initial public offering price less a concession of $ per share.
The underwriters and selling group members may re-allow a concession not in
excess of $ per share on sales to other dealers. After the initial
offering of the common stock to the public, the representatives of the
underwriters may change the public offering price and such concessions. The
underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
The following table summarizes the underwriting fees and estimated expenses
we will pay:
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-Allotment Over-Allotment Over-Allotment Over-Allotment
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions paid by
us..................... $ $ $ $
Expenses payable by us.. $ $ $ $
</TABLE>
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act or to contribute to
payments that the underwriters may be required to make in respect of those
liabilities.
59
<PAGE>
We, our officers and directors and certain stockholders have agreed that for
a period of 180 days from the date of this prospectus, we and they will not,
without the prior written consent of DLJ, do either of the following:
. offer, pledge, sell, contract to sell, sell any portion or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for our common stock; or
. enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of our common
stock.
At our request, the underwriters have reserved up to % of the common stock
offered by this prospectus for sale at the initial public offering price for
some of our employees, friends and other people and entities with whom we
maintain business relationships who have expressed an interest in purchasing
common stock in the offering. The number of shares available for sale to the
general public in the offering will be reduced to the extent these persons
purchase, orally or in writing, such reserved shares. Any reserved shares not
purchased or confirmed for purchase will be offered by the underwriters to the
general public on the same basis as the other shares offered by this
prospectus.
We have applied to have our shares of common stock approved for listing on
The Nasdaq National Market under the symbol "INFL." In order to meet the
requirements for listing the common stock on The Nasdaq National Market, the
underwriters have undertaken to sell lots of 100 or more shares to a minimum of
400 beneficial owners.
Under Rule 2720 of the Conduct Rules of the National Association of
Securities Dealers, or NASD, ("Rule 2720"), the Company is considered an
affiliate of First Union Securities, Inc., or First Union. This offering is
being conducted in accordance with Rule 2720, which provides that, among other
things, when a NASD member participates in the underwriting of an affiliate's
equity securities, the price to the public can be no higher than that
recommended by a qualified independent underwriter, or QIU, meeting certain
standards. In accordance with this requirement, Donaldson, Lufkin & Jenrette
Securities Corporation, or DLJ, has assumed the responsibilities of acting as
QIU and will recommend a maximum price to the public in compliance with the
requirements of Rule 2720. In connection with the offering, DLJ is performing
due diligence investigations and reviewing and participating in the preparation
of this prospectus and the registration statement of which this prospectus
forms a part. As compensation for the services of DLJ as QIU, we have agreed to
pay DLJ a fee of $5,000 in addition to the underwriting compensation DLJ will
otherwise receive.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the common stock included
in this offering in any jurisdiction where action for that purpose is required.
The shares included in this offering may not be offered or sold, directly or
indirectly, nor may this prospectus or any other offering material or
advertisement in connection with the offer and sale of any such shares be
distributed or published in any jurisdiction, except under circumstances that
will result in compliance with the applicable rules and regulations of such
jurisdiction. Persons who receive this prospectus are advised to inform
themselves about and to observe any restrictions relating to the offering of
the common stock and the distribution of this prospectus. This prospectus is
not an offer to sell or a solicitation of an offer to buy any shares of common
stock included in this offering in any jurisdiction where that would not be
permitted or legal.
Pricing of this Offering
Prior to this offering, there has been no public market for our common
stock. The initial public offering price offered by this prospectus will be
determined by negotiation between the representatives and us. The principal
factors to be considered in determining the public offering price include:
. the information in this prospectus or available to the underwriters;
. the history and the prospects for the industry in which we compete;
60
<PAGE>
. the ability of our management;
. the prospects for our future earnings;
. the present state of our developments and our current financial
condition;
. the general condition of the securities markets at the time of this
offering; and
. the recent market prices of, and the demand for publicly traded common
stock of generally comparable companies.
Stabilization
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, and penalty bids in compliance with Regulation
M under the Exchange Act.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed to cover
syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would be in
the absence of these transactions. These transactions may be effected on The
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Brobeck, Phleger & Harrison LLP, Broomfield, Colorado. As of December 31,
1999, attorneys at Brobeck, Phleger & Harrison LLP beneficially owned a total
of 20,714 shares of our common stock. Certain legal matters in connection with
the offering will be passed upon for the underwriters by Paul, Hastings,
Janofsky & Walker LLP, New York, New York.
EXPERTS
The financial statements at December 31, 1998 and 1999 and for the period
from September 26, 1997 (inception) through December 31, 1997 and for each of
the two years in the period ended December 31, 1999 included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
61
<PAGE>
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission a registration
statement on Form S-1, including exhibits, schedules and amendments. This
prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules to the registration
statement. For further information about us and the shares of common stock to
be sold in the offering, please refer to the registration statement and the
exhibits and schedules.
You may read and copy all or any portion of the registration statement or
any other information we file at the Securities and Exchange Commission'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 Securities and Exchange Commission. Please call the Securities
and Exchange Commission at 1-800-SEC-0330 for further information about the
public reference rooms. Our Securities and Exchange Commission filings,
including the registration statement, will also be available to you on the
Securities and Exchange Commission's Web site (http://www.sec.gov).
We intend to furnish our stockholders with annual reports containing audited
financial statements and to make available quarterly reports containing
unaudited financial information.
62
<PAGE>
INFLOW, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Accountants.......................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity (Deficit)............................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Inflow, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' equity (deficit) and cash flows present fairly, in
all material respects, the financial position of Inflow, Inc. at December 31,
1998 and 1999, and the results of its operations and its cash flows for the
period from September 26, 1997 (inception) through December 31, 1997 and for
each of the two years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Broomfield, Colorado
February 4, 2000
F-2
<PAGE>
INFLOW, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
Equity
December 31, (Deficit)
---------------------- December 31,
1998 1999 1999
--------- ----------- -------------
(Unaudited)
(Note 1)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 23,605 $ 965,058
Short-term investments................. -- 56,387,515
Accounts receivable, net of allowance
of $0 and $56,000 at December 31,
1998 and 1999, respectively........... 23,644 581,168
Prepaid expenses and other, net........ 3,104 2,015,517
--------- -----------
Total current assets................. 50,353 59,949,258
Property and equipment, net............. 769,829 12,362,791
Restricted cash and deposits............ 11,960 570,243
--------- -----------
Total assets......................... $ 832,142 $72,882,292
========= ===========
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable....................... $ 22,892 $ 4,240,590
Accrued and other liabilities.......... 98,401 829,042
Deferred revenue....................... -- 164,227
Current portion of long-term debt...... 155,864 --
Convertible demand notes payable to
stockholders.......................... 1,000,000 --
--------- -----------
Total current liabilities............ 1,277,157 5,233,859
Deferred rent reimbursements............ 129,595 1,308,867
Long-term debt, net of current portion.. 298,740 --
--------- -----------
Total liabilities.................... 1,705,492 6,542,726
--------- -----------
Commitments and contingencies (Note 8,10
and 11)
Mandatorily redeemable convertible
preferred stock, at redemption value,
$.001 par value:
Series A mandatorily redeemable
convertible preferred stock;
3,310,000 shares authorized;
3,309,953 shares issued and
outstanding at December 31, 1999,
none authorized, issued and
outstanding pro forma (unaudited)..... -- 12,108,201 $ --
Series B mandatorily redeemable
convertible preferred stock;
7,000,000 shares authorized;
6,896,552 shares issued and
outstanding at December 31, 1999,
none authorized, issued and
outstanding pro forma (unaudited) .... -- 65,684,938 --
Stockholders' equity (deficit):
Common stock, voting, $.001 par value;
20,000,000 shares authorized;
3,060,000 and 3,100,000 shares issued
and outstanding at December 31, 1998
and 1999, respectively; 11,873,302
pro forma shares issued and
outstanding (unaudited)............... 3,060 3,100 11,874
Common stock, non-voting, $.001 par
value; 1,433,203 pro forma shares
issued and outstanding (unaudited).... -- -- 1,433
Additional paid-in capital............. 14,340 2,346,497 80,129,429
Deferred compensation.................. -- (3,566,052) (3,566,052)
Stock subscriptions receivable and
other................................. (14,400) (150,911) (150,911)
Accumulated deficit.................... (876,350) (10,086,207) (10,086,207)
--------- ----------- -----------
Total stockholders' equity
(deficit)........................... (873,350) (11,453,573) $66,339,566
--------- ----------- ===========
Total liabilities, mandatorily
redeemable convertible preferred
stock and stockholders' equity
(deficit)......................... $ 832,142 $72,882,292
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
INFLOW, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period
September 26,
1997
(Inception) Year Ended
through December 31,
December 31, ------------------------
1997 1998 1999
------------- ---------- ------------
<S> <C> <C> <C>
Revenue................................ $ -- $ 45,032 $ 1,998,164
Costs of data network exchange
facilities:
Direct................................ -- 118,848 2,681,591
Indirect.............................. -- 173,846 866,254
---------- ---------- ------------
Gross profit (loss) from data network
exchange facilities................... -- (247,662) (1,549,681)
---------- ---------- ------------
Other operating expenses:
Sales and marketing................... 3,704 -- 653,186
General and administrative............ 31,660 298,985 1,937,254
Product development................... 36,829 170,263 706,008
Stock compensation.................... -- -- 575,483
---------- ---------- ------------
Total operating expenses............ 72,193 469,248 3,871,931
---------- ---------- ------------
Loss from operations................... (72,193) (716,910) (5,421,612)
---------- ---------- ------------
Other income (expense):
Interest expense...................... (11,941) (81,640) (61,858)
Interest income....................... 2,627 3,707 753,845
---------- ---------- ------------
Total other income (expense)........ (9,314) (77,933) 691,987
---------- ---------- ------------
Net loss............................... $ (81,507) $ (794,843) $ (4,729,625)
Accreation of convertible preferred
stock................................. -- -- (696,897)
Deemed dividend related to beneficial
conversion feature of Series B
preferred stock....................... -- -- (5,655,173)
---------- ---------- ------------
Net loss avaliable to common
stockholders.......................... $ (81,507) $ (794,843) $(11,081,695)
========== ========== ============
Net loss per common share (basic and
diluted).............................. $ (0.03) $ (0.26) $ (3.69)
========== ========== ============
Weighted average common shares (basic
and diluted).......................... 3,000,000 3,000,000 3,000,041
========== ========== ============
Pro forma net loss per common share
(basic and diluted)--unaudited........ $ (1.62)
============
Pro forma weighted average common
shares (basic and diluted)--
unaudited............................. 6,416,746
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
INFLOW, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Stock
Common Stock Additional Subscriptions
---------------- Paid-in Deferred Receivable Accumulated
Shares Amount Capital Compensation and Other Deficit Total
--------- ------ ---------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 26,
1997 (inception)....... -- $ -- $ -- $ -- $ -- $ -- $ --
Issuances of common
stock.................. 3,000,000 3,000 -- -- -- -- 3,000
Net loss................ -- -- -- -- (81,507) (81,507)
--------- ------ ---------- ----------- --------- ------------ ------------
Balance at December 31,
1997................... 3,000,000 3,000 -- -- -- (81,507) (78,507)
Sale of common stock.... 60,000 60 14,340 -- (14,400) -- --
Net loss................ -- -- -- -- -- (794,843) (794,843)
--------- ------ ---------- ----------- --------- ------------ ------------
Balance at December 31,
1998................... 3,060,000 3,060 14,340 -- (14,400) (876,350) (873,350)
Reclassification of
accumulated earnings
(deficit) upon
conversion to taxable
status................. -- -- (1,174,941) -- -- 1,174,941 --
Deferred compensation
from stock options and
sales of stock ........ -- -- 4,141,535 (4,141,535) -- -- --
Satisfaction of stock
subscription
receivable............. -- -- -- -- 14,400 -- 14,400
Amortization of deferred
compensation........... -- -- -- 575,483 -- -- 575,483
Accretion of preferred
stock.................. -- -- (696,897) -- -- -- (696,897)
Sale of preferred
stock.................. -- -- -- -- (87,500) -- (87,500)
Issuance of common stock
upon exercise of
options................ 30,000 30 22,470 -- -- -- 22,500
Sale of common stock.... 10,000 10 39,990 -- (40,000) -- --
Beneficial conversion
feature related to
issuance of Series B
preferred stock........ -- -- -- -- -- (5,655,173) (5,655,173)
Unrealized loss on
investments available
for sale............... -- -- -- -- (23,411) -- (23,411)
Net loss................ -- -- -- -- -- (4,729,625) (4,729,625)
--------- ------ ---------- ----------- --------- ------------ ------------
Balance at December 31,
1999................... 3,100,000 $3,100 $2,346,497 $(3,566,052) $(150,911) $(10,086,207) $(11,453,573)
========= ====== ========== =========== ========= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
INFLOW, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period
September 26,
1997
(Inception) Year Ended December
through 31,
December 31, -----------------------
1997 1998 1999
------------- --------- ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss................................ $(81,507) $(794,843) $ (4,729,625)
Adjustments to reconcile net loss to net
cash in operating activities:
Depreciation and amortization......... 349 67,827 412,858
Amortization of deferred
compensation......................... -- -- 575,483
Provision for doubtful accounts....... -- -- 56,000
Other................................. -- -- 14,400
Changes in:
Accounts receivable................. -- (23,644) (613,524)
Prepaid expenses and other, net..... -- (3,104) (1,869,563)
Deposits............................ -- (11,960) (201,133)
Accounts payable.................... 21,199 1,693 4,217,698
Accrued and other liabilities....... 16,091 211,905 789,464
Deferred revenue.................... -- -- 164,227
Deferred rent reimbursements........ -- -- 1,179,272
-------- --------- ------------
Net cash used in operating
activities....................... (43,868) (552,126) (4,443)
-------- --------- ------------
Cash Flows From Investing Activities:
Purchase of property and equipment...... (18,592) (819,413) (12,005,820)
Purchase of investments, net............ -- -- (56,410,926)
Restricted cash......................... -- -- (500,000)
-------- --------- ------------
Cash used in investing
activities....................... (18,592) (819,413) (68,916,746)
-------- --------- ------------
Cash Flows From Financing Activities:
Proceeds from issuance of preferred
stock, net of issuance costs........... -- -- 70,043,733
Proceeds from issuance of common stock.. 3,000 -- 22,500
Cash overdraft.......................... -- -- 31,013
Proceeds from long-term debt............ -- 467,593 200,000
Repayments of long-term debt............ -- (12,989) (654,604)
Proceeds from convertible notes
payable................................ 600,000 400,000 220,000
-------- --------- ------------
Net cash provided by financing
activities....................... 603,000 854,604 69,862,642
-------- --------- ------------
Net increase (decrease) in cash......... 540,540 (516,935) 941,453
Cash and cash equivalents, beginning of
period................................. -- 540,540 23,605
-------- --------- ------------
Cash and cash equivalents, end of
period.................................. $540,540 $ 23,605 $ 965,058
======== ========= ============
Supplemental Disclosure of Other Cash
and Non-cash Investing and Financing
Activities:
Interest paid........................... $ -- $ 22,949 $ 42,628
Series A preferred stock issued for a
stock subscription receivable.......... -- -- 87,500
Common stock issued for a stock
subscription receivable................ -- 14,400 40,000
Conversion of convertible notes payable
and accrued interest to Series A
preferred stock........................ -- -- 1,309,836
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS
1. The Company and Summary of Significant Accounting Policies
Organization
InFlow, Inc. (the "Company") provides customers with equipment co-location
and value-added services for mission-critical e-business and data
communications applications through its secure, carrier-neutral data network
exchange facilities ("DNXs"). The Company focuses on small and medium-sized
businesses in need of reliable and scalable outsource solutions in underserved
markets. The Company was incorporated in September 26, 1997 (inception) and
opened its first DNX in Denver in July 1998. As of December 31, 1999 the
Company operates three DNXs; one in Denver, one in Raleigh-Durham and one in
Minneapolis.
Revenue Recognition
Revenue consists of monthly fees for colocation, network connectivity,
systems management, and value-added services. Customer contracts for the lease
of cabinet space, network connectivity and value-added services are renewable
and range from one to three years in duration with payments due on a monthly
basis. The Company also derives revenue from installation services. Monthly
recurring service revenue is recorded in the month the services are rendered.
Fees related to installation services are recorded as deferred revenue and
recognized on a straight-line basis over the weighted-average term of the
customer service contracts. The incremental costs of installation services are
capitalized and recognized on a straight-line basis over the same period.
Direct costs of DNXs consist primarily of the incremental costs of
installation services, costs for local loop and Internet connectivity, net rent
expense, utilities and maintenance, operations personnel salaries and benefits,
and depreciation and amortization at the DNXs. Indirect costs consist primarily
of costs related to the sales, marketing and administrative personnel working
at the DNXs.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments purchased with original
maturities of three months or less. All cash equivalents are carried at cost,
which approximates fair value. Restricted cash represents certificates of
deposit used to collateralize irrevocable letters of credit, which are held as
collateral for certain long-term office leases. There were no outstanding
irrevocable letters of credit as of December 31, 1998. As of December 31, 1999,
there was $142,850 of restricted cash included in prepaid expenses and other,
net and $357,150 of restricted cash included in restricted cash and other
noncurrent assets.
Investments
Investments are classified as available-for-sale as defined in Statement of
Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities, and accordingly are carried at fair
value. Gains or losses on the sale of investments are recognized on the
specific identification method. Unrealized gains or losses are treated as a
separate component of stockholders' equity (deficit) until the security that
the unrealized gain or loss was recorded is sold. At December 31, 1999, the
amortized cost basis, aggregate fair value and gross unrealized holding gains
and losses by major security type were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Aggregate Unrealized Unrealized
Security Type Cost Basis Fair Value Gains Losses
------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Investment grade bonds........ $18,487,170 $18,457,157 $ -- $30,013
Commercial paper.............. 34,931,041 34,943,498 12,457 --
Federal agencies.............. 2,992,715 2,986,860 -- 5,855
----------- ----------- ------- -------
Total investments............. $56,410,926 $56,387,515 $12,457 $35,868
=========== =========== ======= =======
</TABLE>
F-7
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Fair Value of Financial Instruments
The Company's financial instruments include cash, cash equivalents,
investments, restricted cash, accounts receivables, prepaid expenses and other
current assets, accounts payable, accrued liabilities and debt. The carrying
amounts of the Company's financial instruments approximate fair value.
Concentration of Credit Risk and Major Customers
The Company extends trade credit terms to its customers based upon ongoing
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers. For the year ended December 31, 1998, the
Company had three significant customers representing approximately 36%, 30%,
and 16% of revenue. As of December 31, 1998, these three customers represented
approximately 19%, 26% and 23% of accounts receivable. For the year ended
December 31, 1999, the Company had one significant customer representing
approximately 14% of revenue. As of December 31, 1999, this customer
represented approximately 13% of gross accounts receivable.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets,
generally three to seven years. Internally developed software costs are
expensed until the point of technological feasibility, after which time such
costs are capitalized and amortized on a straight-line basis over the estimated
useful lives of the assets, generally three years. Leasehold improvements are
amortized over the lessor of the estimated useful lives of the respective
assets or the lease term. Repair and maintenance costs are charged to expense
when incurred. Upon retirement or disposition of assets, related gains or
losses are recognized in operations.
Long-Lived Assets and Impairments
The Company periodically evaluates the carrying value of long-lived assets,
including, but not limited to, purchased and internally developed software,
property and equipment and other assets, when events and circumstances warrant
such a review. The carrying value of a long-lived asset is considered impaired
when the anticipated undiscounted cash flow from such asset is separately
identifiable and is less than its carrying value. In that event, a loss is
recognized to the extent that the carrying value exceeds the fair value of the
long-lived asset. Fair value is determined primarily using the anticipated cash
flows discounted at a rate commensurate with the risk involved.
Stock Options
SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"),
permits the use of either a fair value-based method or the method defined in
Accounting Principles Board Opinion 25, Accounting for Stock Issued to
Employees ("APB No. 25"), to account for stock-based compensation arrangements.
The Company has elected to determine the value of stock-based compensation
arrangements under the provisions of APB No. 25, and has included the pro forma
disclosures required under SFAS No. 123 in Note 5.
Income Taxes
The financial statements for the period from September 26, 1997 (inception)
through December 31, 1997 and the year ended December 31, 1998 do not include a
provision for income taxes, as the Company was an S Corporation. Under Internal
Revenue Service regulations, the income of the S Corporation and the income tax
F-8
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
liability is borne by the stockholders of the S Corporation. During 1999, the
Company became a taxable entity. For the period the Company was a taxable
entity, deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable earnings. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount more likely than not to
be realized. If the Company had been a taxable entity from inception through
December 31, 1998, the Company would not have recorded any tax expense or
benefit for any period because of the taxable losses incurred and the need for
a full valuation allowance against any available deferred tax assets.
Product Development
Product development costs primarily relate to the development of internally
developed software and the Company's network architecture that are not
capitalizable under Statement of Position 98-1 Accounting for the Costs of
Computer-Software Developed or Obtained for Internal Use. These costs are
expensed as incurred.
Advertising
The Company expenses advertising costs as incurred. Advertising expenses for
the period from September 26, 1997 (inception) through December 31, 1997 and
for the years ended December 31, 1998 and 1999, were approximately $1,856,
$26,464 and $99,692, respectively.
Unaudited Pro Forma Stockholders' Equity (Deficit)
The board of directors authorized management of the Company to file a
registration statement with the Securities and Exchange Commission ("SEC")
permitting the Company to sell shares of its voting common stock to the public.
If the Company's initial public offering is consummated under the terms
presently anticipated, all of the Series A and Series B mandatorily redeemable
convertible preferred stock (collectively referred to as "preferred stock")
will automatically convert into 8,773,302 shares of voting common stock and
1,433,203 shares of non-voting common stock (see note 11). Unaudited pro forma
stockholders' equity (deficit) as of December 31, 1999, as set forth in the
accompanying balance sheet, is adjusted for the anticipated conversion of
preferred stock.
Net Loss Per Share and Unaudited Pro Forma Net Loss Per Common Share
Net loss per common share is calculated in accordance with SFAS No. 128,
Earnings per Share ("SFAS No. 128") and SEC Staff Accounting Bulletin No. 98
("SAB 98"). Under the provisions of SFAS No. 128 and SAB 98, basic net income
(loss) per common share is computed by dividing the net income (loss) available
to common stockholders for the period by the weighted-average number of common
shares outstanding during the period. Diluted net income (loss) per common
share is computed by dividing the net income (loss) available to common
stockholders for the period by the weighted-average number of common and
potential shares outstanding during the period if their effect is dilutive.
Potential common shares consist of shares subject to repurchase by the Company,
incremental common shares issuable upon the exercise of stock options, common
shares issuable upon conversion of the preferred stock and convertible
promissory notes.
The Company has computed unaudited pro forma basic net loss per common share
in accordance with the methodology in SFAS No. 128. The Company's historical
capital structure is not indicative of its prospective structure due to the
automatic conversion of all shares of preferred stock into common stock
concurrent with the closing of the Company's anticipated IPO. Accordingly,
historical basic net loss per common share should not be used as an indicator
of future earnings per common share.
F-9
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Unaudited pro forma basic net loss per common share is computed using the
weighted-average number of common shares outstanding during the period. The
Company has assumed the conversion of all outstanding preferred stock issued
into voting and non-voting common stock as of the date issued on a weighted
average basis.
The following table sets forth the computation of the numerators and
denominators in the basic, diluted and pro forma net loss per common share
calculations for the periods indicated:
<TABLE>
<CAPTION>
Period
September 26,
1997
(Inception) Year Ended December
through 31,
December 31, -----------------------
1997 1998 1999
------------- --------- ------------
<S> <C> <C> <C>
Numerator:
Net loss....................... $ (81,507) $(794,843) $ (4,729,625)
Accretion of convertible
preferred stock............... -- -- (696,897)
Deemed dividend related to
beneficial conversion feature
of Series B preferred stock... -- -- (5,655,173)
--------- --------- ------------
Net loss available to common
stockholders.................... (81,507) (794,843) (11,081,695)
Effect of pro forma conversion of
securities:
Accretion of convertible
preferred stock............... -- -- 696,897
--------- --------- ------------
Pro forma net loss available to
common stockholders--unaudited.. $ (81,507) $(794,843) $(10,384,798)
========= ========= ============
Denominator:
Weighted average common shares
(basic and diluted)........... 3,000,000 3,000,000 3,000,041
Weighted average effect of pro
forma securities:
Series A convertible preferred
stock......................... -- -- 2,446,779
Series B convertible preferred
stock......................... -- -- 969,926
--------- --------- ------------
Pro forma weighted average common
shares (basic and diluted)--
unaudited....................... -- -- 6,416,746
========= ========= ============
</TABLE>
Potential dilutive securities totaling 60,000, 324,000 and 11,126,555 for
the period September 26, 1997 (inception) through December 31, 1997 and for
each of the years ended December 31, 1998 and 1999, respectively, were excluded
from historical basic and diluted loss per common share because of their anti-
dilutive effect.
Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130 establishes
standards for reporting comprehensive income and its components in financial
statements. Comprehensive income includes all changes in equity during a period
from non-owner sources. For the year ended December 31, 1999, total
comprehensive income (loss) was $4,753,036, which included a $23,411 unrealized
holding loss on investments.
F-10
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Recent Accounting Pronouncements
In December, 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 provides
specific guidance, among other things, as to the recognition of revenue
related to up-front non-refundable fees and services charges received in
connection with a contractual arrangement. The Company has applied the
provisions of SAB 101 in the year ended December 31, 1999. The adoption of SAB
101 did not have a material impact on the Company's financial condition or
results of operations.
2. Balance Sheet Components
Certain balance sheet components are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1999
-------- -----------
<S> <C> <C>
Property and equipment
Construction-in-progress at DNXs......................... $ -- $ 3,342,744
Furniture and office equipment........................... -- 725,242
Leasehold improvements and building equipment............ 466,682 5,537,702
Network equipment........................................ 262,686 2,006,478
Internally developed software............................ 20,000 179,493
Computer equipment and software.......................... 88,637 1,052,166
-------- -----------
838,005 12,843,825
Less accumulated depreciation and amortization........... (68,176) (481,034)
-------- -----------
$769,829 $12,362,791
======== ===========
<CAPTION>
December 31,
---------------------
1998 1999
-------- -----------
<S> <C> <C>
Accrued liabilities
Salaries, wages and benefits............................. $ -- $ 351,017
Sales, use and franchise taxes........................... -- 205,735
Deferred rent reimbursements............................. 12,396 131,757
Other.................................................... 86,005 140,533
-------- -----------
$ 98,401 $ 829,042
======== ===========
</TABLE>
3. Notes Payable and Long-term Debt
The Company borrowed a total of $1,220,000 from its founding stockholders,
in the form of convertible demand promissory notes (the "Notes"). The Notes
bear interest equal to 8% per annum. The Notes, including accrued but unpaid
interest, were convertible, at the option of the founding stockholders, into
shares of Series A mandatorily redeemable convertible preferred stock (the
"Series A preferred stock"). Interest expense related
F-11
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
to these Notes was $11,941, $70,606 and $7,290 for the period from September
27, 1997 (inception) through December 31, 1997, for the year ended December 31,
1998 and for the year ended December 31, 1999, respectively. In April 1999, the
Notes and accrued interest were converted into shares of Series A preferred
stock (see Note 4).
During 1998, the Company entered into a loan and security agreement with a
bank, which was amended in March 1999. At December 31, 1998 and 1999, the
Company owned $454,604 and $0, respectively, under this agreement. Interest
accrued at 1.50% above the prime rate. The founding stockholders personally
guaranteed this long-term debt and the agreement expired during 1999.
4. Mandatorily Redeemable Convertible Preferred Stock
In April 1999 and June 1999, the Company issued a total of 2,895,714 shares
of $0.001 par value Series A preferred stock at $3.50 per share and received
proceeds, net of issuance costs, totaling $10,060,198. Concurrently,
outstanding convertible demand notes plus accrued interest of $1,309,836 were
converted into 374,239 shares of Series A preferred stock.
In September 1999, the Company agreed to sell shares of its $0.001 par value
Series B mandatorily redeemable preferred stock (the "Series B preferred
stock") at $8.70 per share. In October and November 1999, the Company closed
this round of financing and issued a total of 6,896,552 shares of Series B
preferred stock $0.001 par value at $8.70 per share and received proceeds, net
of issuance costs, totaling $59,931,035. The difference between the offering
price and the deemed fair value of the Series B preferred stock resulted in a
beneficial conversion feature in the amount of approximately $5,655,000 which
was calculated in accordance with Emerging Issues Task Force No. 98-5
Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios. The beneficial conversion feature is
reflected as a deemed dividend in the statement of operations for the year
ended December 31, 1999.
On October 15, 1999, 40,000 shares of Series A preferred stock were sold to
an employee at $3.50 per share in exchange for $52,500 and a full recourse note
of $87,500. The stock subscription receivable accrues interest at 6% per annum
and is due on or before October 15, 2002. The entire unpaid principal and
accrued interest is immediately due and payable upon certain accelerating
events, as defined in the note. The employee vests in all of the Series A
preferred stock on October 15, 2002. The Company has the right to repurchase
the unvested portion of the Series A preferred stock at the purchase price of
$3.50 at the time of the cessation of service. The Company estimated the fair
value of the Series A preferred stock to be $9.52 at the date of the sale. The
difference between the price paid and the estimated fair value of the shares
times the number of shares, or $240,800, was recorded as deferred compensation.
The amortization of this deferred compensation resulted in $87,028 of expense
during the year ended December 31, 1999. The remaining deferred compensation as
of December 31, 1999 will be amortized to compensation expense using an
accelerated method as described in Financial Accounting Standards Board
Interpretation No. 28 over the remaining vesting period, as defined above.
The holders of the preferred stock have the following rights and
preferences:
Voting Rights
The holders of the preferred stock and the common stock, voting together as
a single class, are entitled to vote upon any matter submitted to the
shareholders. The holders of the preferred stock are entitled to one vote for
each share of common stock that such holder would be entitled to receive if the
preferred stock were converted into common stock. The holders of common stock
have one vote per share of common stock.
F-12
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Dividends
The holders of the preferred stock are entitled to receive dividends prior
and in preference to any dividend on common stock, payable only when, and if
declared by the board of directors. No dividends have been declared to date.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
the holders of the preferred stock are entitled to receive in exchange for and
in redemption of each share of preferred stock, prior and in preference to
common stock, an amount equal to the greater of (i) the sum of the original
issue price, as appropriately adjusted for subsequent stock dividends, stock
splits plus an amount per share determined by dividing $0.28 per annum,
compounded annually, measured from April 5, 1999 to the date of liquidation
multiplied by the number of outstanding shares of Series A preferred stock, by
the total number of outstanding shares of preferred stock or (ii) the amount
per share that would be distributed among the holders of the preferred stock
and common stock pro rata based on the number of shares of common stock held by
each holder assuming conversion of all preferred stock.
Redemption
Within 90 days following the receipt by the Company of a written redemption
demand from the preferred stockholders delivered at any time after November 1,
2006, the Company shall redeem all but not less than all the preferred stock,
and the holders of the preferred stock shall sell all but not less than all of
the preferred stock to the Company, for a per share purchase price equal to the
sum of (A) the sum of the original issue price, plus (B) an amount per share
determined by dividing $0.28 per annum, compounded annually, measured from
April 5, 1999 to the date of such redemption, multiplied by the number of
outstanding shares of Series A preferred stock, by the total number of
outstanding shares of preferred stock.
Conversion
The preferred stock is convertible, at the option of the holder, at any time
after the date of issuance and prior to the redemption date, into shares of
common stock as is determined by dividing the original issue price by the
conversion price in effect on the date the certificate is surrendered for
conversion. The conversion price is the original issue price as adjusted for
certain dilutive issuances, splits and combinations.
Automatic conversion occurs immediately upon the earlier of (i) the
consummation of a firm commitment underwritten public offering of common stock
registered under the Securities Act of 1933, at a public offering price of not
less than $26.00 per share (as adjusted to reflect subsequent stock dividends
and splits), resulting in gross proceeds to the Company of not less than
$50,000,000 and after which the common stock is either listed on a national
securities exchange or traded in the NASDAQ national market system or (ii) the
date specified by written consent or agreement of the required holders.
5. Benefit Plans
The Company maintains a stock option/stock issuance plan (the "Plan") which
provides for two separate equity programs. The board of directors has reserved
1,685,000 shares of common stock for issuance under the Plan.
Stock Option Program
The Plan provides for the grant of incentive stock options to directors, key
employees and consultants to purchase common stock of the Company. The grants
may be structured in the form of option awards that vest over the optionee's
service period. The grants may also be unvested options that can be exercised,
but all of the acquired but unvested shares will be subject to repurchase at
the exercise price, at the option of the Company
F-13
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
within 90 days of the optionee's termination of employment. The options expire
ten years after the date of grant. These shares vest 25% after the initial 12
months of service measured from the grant date. The balance of the shares vest
in equal monthly installments over the next 36 months of service.
The Company applies APB No. 25 in accounting for stock options and
recognized $3,818,435 in deferred compensation during the year ended December
31, 1999. During 1999, the amortization of this deferred compensation resulted
in $488,455 of compensation expense. The remaining deferred compensation of
$3,329,980 as of December 31, 1999 will be amortized to compensation expense
using an accelerated method as described in Financial Accounting Standards
Board Interpretation No. 28 over the remaining vesting period, as defined
above. Had compensation expense for the stock options been determined based on
the fair values at the grant dates for awards under the Plan consistent with
the method of accounting prescribed by SFAS No. 123, the effect on the
Company's pro forma net loss would have been immaterial.
The following summarizes stock option activity:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Number of Exercise Options Exercise
Shares Price Exercisable Price
--------- -------- ----------- --------
<S> <C> <C> <C> <C>
Options outstanding at September
26, 1997 (inception)............ -- $ -- -- $ --
Granted........................ 60,000 $0.24
--------
Options outstanding at December
31, 1997........................ 60,000 $0.24 60,000 $ .24
Granted........................ 204,000 $0.24
--------
Options outstanding at December
31, 1998........................ 264,000 $0.24 264,000 $ .24
Granted........................ 765,390 $1.98
Forfeited...................... (149,340) $0.55
Exercised...................... (30,000) $0.75
--------
Options outstanding at December
31, 1999........................ 850,050 $1.74 850,050 $1.74
========
</TABLE>
Total stock options outstanding and exercisable under the Stock Option
Program as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Number Remaining Average
Range of of Contractual Exercise
Exercise Prices Shares Life (Years) Price
--------------- ------ ----------- --------
<S> <C> <C> <C>
$0.24-0.75 511,700 9.17 $0.52
$1.25 29,300 9.79 1.25
$2.00 32,000 9.90 2.00
$4.00 277,050 10.00 4.00
</TABLE>
The weighted-average grant date fair value of options granted during 1998
and 1999 was $0.05 and $5.94, respectively. The weighted-average remaining
contractual life of options outstanding at December 31, 1998 and 1999 was 9.25
years and 9.49 years, respectively.
In accordance with the guidance provided under SFAS 123, fair values are
based on minimum values. The fair value of each option grant was estimated on
the date of grant using a Black-Scholes type option-pricing model with the
following weighted average assumptions used for grants in the period from
September 26, 1997 (inception) through December 31, 1997 and the years ended
December 31, 1998 and 1999; dividend yield of zero; expected volatility of
zero; risk-free interest rates ranging from 4.22% to 6.30%; and an expected
term of
F-14
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
four years. The risk-free interest rate used in the calculation is the yield on
the grant date of the U.S. Treasury Strip with a maturity equal to the expected
term of the option.
Stock Issuance Program
The Plan also allows the Company to directly issue common stock to eligible
persons, either through immediate purchase or as a bonus for services rendered
to the Company. Such shares may be fully vested when issued, may be subject to
a reverse vesting schedule, or may vest over the period of service or upon
attainment of specified performance objectives.
Pursuant to this program and during 1998, 60,000 shares of the Company's
common stock were sold to a director of the Company at $0.24 per share in
exchange for a full recourse note. During 1999, the stock subscription
receivable and related accrued interest were satisfied through consulting
services rendered by the director. The total fair value of services offset
against the receivable was equal to the balance of the stock subscription
receivable.
Pursuant to this program and during 1999, 10,000 shares of the Company's
common stock were sold to a nonemployee consultant at $4.00 per share in
exchange for a full recourse note. The stock subscription receivable accrues
interest at 6.5% per annum and is due on or before December 31, 2001, unless
certain accelerating events occur. The stock subscription receivable can be
satisfied by services rendered by the consultant and the related shares are
subject to a reverse vesting schedule. The Company has the right to repurchase
the unvested portion of the common shares at the purchase price of $4.00 at the
time of the cessation of service under a consulting agreement entered into with
consultant. The consultant vests in the common shares in a series of twenty-
four equal monthly installments upon the consultant's completion of each
successive month of service under the consulting agreement, beginning on
December 31, 1999. The Company estimated the fair value of common stock to be
$12.23 per share at the date of sale. The difference between the price paid and
the estimated fair value of the shares times the number of shares, or $82,300,
was recorded as deferred compensation. The deferred compensation will be
amortized to compensation expense using an accelerated method as described in
Financial Accounting Standards Board Interpretation No. 28 over the vesting
period and will be subject to variable plan accounting during the two-year
reverse vesting period.
Employee Savings and Retirement Plan
In November 1999, the Company adopted an employee savings and retirement
plan (the "401(k) Plan") covering substantially all of the Company's employees.
Pursuant to the 401(k) Plan, eligible employees may elect to reduce their
current compensation by up to the statutory prescribed limit and have the
amount of such reduction contributed to the 401(k) Plan. The Company makes
matching contributions of 50% of participant contributions not to exceed 6% of
participant compensation. During 1999, the Company contributed $22,427.
7. Income Taxes
Prior to April 1999, the Company elected to be taxed as an S Corporation.
Accordingly, the Company's tax losses passed through to the shareholders. In
April 1999, the Company revoked its tax-free status and elected to become a
taxable corporation.
The Company's net deferred tax assets at December 31, 1999 are as follows:
<TABLE>
<S> <C>
Accruals..................................................... $ 362,352
Depreciation................................................. 49,312
Net operating loss carryforwards............................. 997,177
-----------
Subtotal................................................. 1,408,841
Valuation allowance.......................................... (1,408,841)
-----------
Net deferred tax asset....................................... $ --
===========
</TABLE>
F-15
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
SFAS No. 109 requires that a valuation allowance be provided if it is more
likely than not that some portion or all of a deferred tax asset will not be
realized. The Company has concluded that a full valuation allowance should be
provided as of December 31, 1999.
The Company's effective tax rate differs from the federal income tax rate as
follows:
<TABLE>
<S> <C>
Statutory federal income tax rate.................................... 34%
State income taxes, net of federal benefit........................... 3
Change in valuation allowance........................................ (30)
Stock compensation expense........................................... (4)
Other................................................................ (3)
---
Total................................................................ 0%
===
</TABLE>
At December 31, 1999 the Company has approximately $2.7 million of net
operating loss carryforwards to offset future regular and alternative minimum
taxable income. Past or future changes in the Company's ownership may limit its
ability to utilize net operating losses to offset taxable income.
8. Commitments
The Company enters into non-cancelable operating lease agreements for its
corporate offices and DNXs. The terms of the lease agreements require base
rentals with various annual increases as well as various operating cost
increases.
Additionally, the Company received tenant improvement reimbursements of
$126,104 in 1998 and $1,084,542 in 1999. Such reimbursements are deferred and
recorded as an offset to rent expense over the term of the related leases.
Future annual minimum non-cancelable operating lease payments, net of
deferred rent as of December 31, 1999, are as follows:
<TABLE>
<S> <C>
2000.......................................................... $ 1,828,386
2001.......................................................... 2,309,735
2002.......................................................... 2,339,295
2003.......................................................... 2,378,319
2004.......................................................... 2,427,152
Thereafter.................................................... 12,197,441
-----------
$23,480,328
===========
</TABLE>
Rent expense, net of deferred rent amortization for the period from
September 26, 1997 (inception) through December 31, 1997 and for the years
ended December 31, 1998 and 1999 was $0, $82,793 and $604,886, respectively.
Certain telecommunications services that the Company offers, and intends to
offer in the future, including private line connectivity, are, or may be,
subject to regulation and certification requirements at the state level. To
date, the Company has not registered as a public utility in any state or been
certified to provide any form of regulated telecommunications services within
any jurisdiction. While the Company believes that the law regarding regulation
of these and similar types of services is unclear in certain jurisdictions in
which the Company currently operates or intends to operate, and the Company
continues to evaluate the status with outside counsel, it is likely that we
have provided certain of our telecommunications services without the requisite
F-16
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
regulatory approval or certification in a limited number of jurisdictions. The
Company intends to obtain any such authorizations or approvals that may be
necessary. The Company believes that it will also be required to obtain and to
apply for similar authorizations in other states in which the Company expects
to operate in the future.
The Company cannot predict, with accuracy, the outcome of these events,
however, the Company believes that based on the information currently
available, the outcome of these events would not have a material effect on the
Company's financial position or results of operations. In the event of an
adverse outcome, the ultimate potential loss could have a material, adverse
effect on the Company's financial position, reported results of operations, or
cash flows.
9. Related Parties
During 1999, an entity owned by an immediate family member of the Chief
Executive Officer of the Company provided consulting services and sold office
furnishings to the Company for an aggregate of approximately $296,000 to the
Company. As of December 31, 1999, the Company owed this related party
approximately $66,500.
10. Subsequent Events
In January 2000, the Company signed an irrevocable standby letter of credit
in the amount of $500,000. The Company utilizes letters of credit to
collateralize security deposits on certain long-term office leases.
Subsequent to year-end, the Company granted 318,600 stock options to certain
employees under the Plan with exercise prices below the deemed fair market
value of the Company's common stock at the date of grant. The Company expects
to record deferred compensation for the difference between the exercise price
of the stock options and the deemed fair market value of the Company's common
stock at the date of grant. This deferred compensation will be amortized to
expense over the vesting period of the options, generally four years, using an
accelerated method as described in Financial Accounting Standards Board
Interpretation No. 28.
Subsequent to year-end, the Company entered into operating leases for DNXs.
The commitment under these agreements totals approximately $13,700,000 over the
next ten years.
11. Subsequent Event (unaudited)
Subsequent to February 4, 2000, the Company entered into additional
operating leases for DNXs. The commitment under these agreements totals
approximately $7,300,000 over the next ten years.
F-17
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 2000
Shares of Common Stock
----------------------
PROSPECTUS
----------------------
Donaldson, Lufkin & Jenrette
Chase H&Q
First Union Securities
DLJdirect Inc.
- --------------------------------------------------------------------------------
Until , 2000, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealer's obligation to deliver
a prospectus when acting as an underwriter and with respect to unsold
allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth an estimate of the costs and expenses, other
than the underwriting discounts and commissions, payable by the Registrant in
connection with the issuance and distribution of the common stock being
registered.
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 33,000
NASD fee...................................................... 13,000
NASDAQ listing fee............................................ 5,000
Director and officers insurance expenses...................... 100,000
Legal fees and expenses....................................... 500,000
Accounting fees and expenses.................................. 300,000
Printing expenses............................................. 400,000
Blue sky fees and expenses.................................... 5,000
Transfer Agent and Registrar fees and expenses................ 10,000
Miscellaneous................................................. 134,000
----------
Total..................................................... $1,500,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
The registrant's certificate of incorporation in effect as of the date
hereof, and the Registrant's amended and restated certificate of incorporation
to be in effect upon the closing of this offering (collectively, the
"Certificate") provide that, except to the extent prohibited by the Delaware
General Corporation Law, as amended (the "DGCL"), the Registrant's directors
shall not be personally liable to the Registrant or its stockholders for
monetary damages for any breach of fiduciary duty as directors of the
Registrant. Under the DGCL, the directors have a fiduciary duty to the
registrant which is not eliminated by this provision of the Certificate and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of non-monetary relief will remain available. In addition, each director will
continue to be subject to liability under the DGCL for breach of the director's
duty of loyalty to the Registrant, for acts or omissions which are found by a
court of competent jurisdiction to be not in good faith or involving
intentional misconduct, for knowing violations of law, for actions leading to
improper personal benefit to the director, and for payment of dividends or
approval of stock repurchases or redemptions that are prohibited by DGCL. This
provision also does not affect the directors' responsibilities under any other
laws, such as the Federal securities laws or state or Federal environmental
laws. The Registrant intends to obtain liability insurance for its officers and
directors prior to the closing of this offering.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this
provision shall not eliminate or limit the liability of a director: (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) arising under
Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit. The DGCL provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's bylaws, any agreement, a vote of stockholders or otherwise. The
Certificate eliminates the personal liability of directors to the fullest
extent permitted by Section 102(b)(7) of the DGCL and provides that the
Registrant shall fully indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (whether civil, criminal, administrative or investigative)
by reason of the fact that such person is or was a director or officer of the
Registrant, or is or was serving at the request of the registrant as a director
or officer of another
II-1
<PAGE>
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Certificate. The Registrant is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
Item 15. Recent Sales of Unregistered Securities
The Registrant has sold and issued the following securities since September
26, 1997 (inception):
Common Stock. In September 1997, the Registrant issued (i) 1,500,000 shares
of its common stock, $0.001 par value per share, to Arthur H. Zeile, its co-
founder, in exchange for $9,000 of cash and (ii) 1,500,000 shares of its common
stock, $0.001 par value per share, to Joel C. Daly, its co-founder, in exchange
for $9,000 of cash. The above securities were offered and sold by the
Registrant in reliance upon the exemption from registration pursuant to Section
4(2) of the Securities Act.
In December 1998, the Registrant issued 60,000 shares of its common stock,
$0.001 par value per share, to Stephen O. James, in exchange for his execution
and delivery of a Note Secured by Stock Pledge Agreement in the amount of
$14,400. The above securities were offered and sold by the Registrant in
reliance upon the exemptions from registration pursuant to Section 4(2) of the
Securities Act and Rule 701 promulgated thereunder.
On December 31, 1999, the Registrant issued 10,000 shares of its common
stock, $0.001 par value per share, to an individual for consulting services
rendered to the Registrant, in the amount of $40,000. The above securities were
offered and sold by the Registrant in reliance upon the exemption from
registration pursuant to Section 4(2) of the Securities Act and Rule 701
promulgated thereunder.
Preferred Stock. In a series of closings from April 5, 1999 through October
15, 1999, the Registrant issued an aggregate of 3,309,953 shares of its Series
A convertible preferred stock, $0.001 par value per share, to certain investors
in consideration for the payment of approximately $10,000,000. The above
securities were offered and sold by the Registrant in reliance upon the
exemptions from registration pursuant to Section 4(2) of the Securities Act and
Rule 506 of Regulation D promulgated thereunder.
In a series of closings from October 28, 1999 through November 30, 1999, the
Registrant issued an aggregate of 6,896,552 shares of its Series B convertible
preferred stock, $0.001 par value per share, to certain investors in
consideration for the payment of approximately $60,000,000. The above
securities were offered and sold by the Registrant in reliance upon the
exemptions from registration pursuant to Section 4(2) of the Securities Act and
Rule 506 of Regulation D promulgated thereunder.
Options. The Registrant from time to time has granted stock options to
employees and directors in reliance upon exemption from registration pursuant
to either (i) Section 4(2) of the Securities Act or (ii) Rule 701 promulgated
under the Securities Act.
<TABLE>
<CAPTION>
Number of
Shares
Outstanding
Number of as of
Shares December 31, Exercise
Granted 1999 Prices
--------- ------------ --------
<S> <C> <C> <C>
September 26, 1997 to December 22,
1997................................... -- -- --
December 23, 1997 through May 3, 1999... 290,000 230,000 $0.24
May 4, 1999 through October 18, 1999.... 401,040 281,700 $0.75
October 19, 1999 through November 15,
1999................................... 29,400 29,400 $1.25
November 16, 1999 through December 14,
1999................................... 32,000 32,000 $2.00
December 15, 1999 through December 31,
1999................................... 280,950 280,950 $4.00
</TABLE>
II-2
<PAGE>
As of December 31, 1999, 30,000 shares of common stock have been issued
upon the exercise of options.
The common stock amounts and per share purchase and exercise prices in the
above discussion have been adjusted to reflect a -for- stock split to be
effectuated on or before completion of the offering.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1* Form of underwriting agreement.
3.1 Amended and restated certificate of incorporation.
3.2* Amendment to amended and restated certificate of incorporation.
3.3* Form of amended and restated certificate of incorporation to be
in effect upon the closing of this offering.
3.4 Bylaws.
3.5* Form of amended and restated bylaws to be in effect upon the
closing of this offering.
4.1* Specimen common stock certificate.
4.2 Please see Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5 for provisions of
the certificate of incorporation and bylaws of the Registrant
defining the rights of holders of common stock of the
Registrant.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1 Series A Preferred Stock Purchase Agreement by and among InFlow,
Inc. and the investors listed on Schedule A thereto, dated April
5, 1999.
10.2 Series A Preferred Stock Purchase Agreement by and among InFlow,
Inc. and the investors listed on Schedule A thereto, dated April
19, 1999.
10.3 Stock Purchase Agreement, by and between InFlow, Inc. and James
W. McHose, III, dated as of October 15, 1999.
10.4 Series B Preferred Stock Purchase Agreement by and among InFlow,
Inc. and Meritage Private Equity Fund, L.P., Meritage Private
Equity Parallel Fund, L.P. and Meritage Entrepreneurs Fund,
L.P., dated October 27, 1999.
10.5 Series B Preferred Stock Purchase Agreement by and among InFlow,
Inc. and First Union Capital Partners, Inc., dated October 28,
1999.
10.6 Series B Preferred Stock Purchase Agreement by and among InFlow,
Inc. and J.P. Morgan Investment Corporation, Sixty Wall Street
SBIC Fund, L.P., General Electric Capital Corporation and
Stolberg, Meehan and Scano II, L.P., dated November 30, 1999.
10.7 Second Amended and Restated Stockholders' Agreement, by and
among InFlow, Inc., Art Zeile, Joel Daly and Stephen O. James
and the holders of the Series A and Series B Preferred Stock of
InFlow, Inc. listed on the signature pages thereto, dated as of
November 30, 1999.
10.8 Second Amended and Restated Investors' Rights Agreement, by and
among InFlow, Inc. and the investors listed on the signature
pages thereto, dated as of November 31, 1999.
10.9 Form of Data Center Services Agreement.
10.10*+ InFlow, Inc. Data Center Services Agreement, by and between
InFlow, Inc. and VERIO Rocky Mountain, Inc dated August 31,
1998.
10.11* Lease Agreement, between JER Denver, LLC and InFlow, Inc.
(Denver 1).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.12* Bannock Center (938 Bannock Building) Office Building Lease
Agreement, between 938 Bannock, LLC and InFlow, Inc. (Denver 2).
10.13* Bannock Center (900 Bannock Building) Office Building Lease
Agreement, between 938 Bannock, LLC and InFlow, Inc. (Denver
NOC).
10.14* Lease Agreement between Timeshare Systems, Inc. and InFlow, Inc.
(Minneapolis), dated June 9, 1999.
10.15* Lease Agreement between Miami North, LLC and InFlow, Inc.
(Raleigh-Durham).
10.16* San Diego Tech Center Office Building Lease between San Diego
Tech Center, LLC and InFlow, Inc. (San Diego).
10.17* Lease Agreement between 1052 West Peachtree, LLC, and InFlow,
Inc. (Atlanta).
10.18* Triple Net Lease between AGB Norwood Park, L.P., and InFlow,
Inc. (Austin).
10.19* Sublease between Associates Information Services, Inc., and
InFlow, Inc. (Irvine).
10.20* Lease between Sterling Network Exchange, LLC, and Inflow, Inc.,
dated February 14, 2000 (Phoneix).
10.21 1997 Stock Option/Stock Incentive Plan.
10.22* 2000 Stock Incentive Plan.
10.23* 2000 Employee Stock Purchase Plan.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2* Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit
5.1).
24.1 Powers of Attorney (please see Signature Page).
27.1 Financial Data Schedule.
</TABLE>
- --------
*To be filed by amendment.
+Confidential treatment requested.
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or the notes thereto.
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.
II-4
<PAGE>
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 Securities
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby 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 of 1933 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 that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Denver,
State of Colorado, on this 18th day of February, 2000.
INFLOW, INC.
By: /s/ Arthur H. Zeile ____________
Name:Arthur H. Zeile
Title: President, Chief Executive
Officer
and Chairman of the Board of
Directors
POWER OF ATTORNEY
We, the undersigned directors and/or officers of InFlow, Inc. (the
"Company"), hereby severally constitute and appoint Arthur H. Zeile, President,
Chief Executive Officer and Chairman of the Board of Directors; Joel C. Daly,
Vice President, Chief Operating Officer and Secretary; and James W. McHose,
III, Vice President, Chief Financial Officer and Treasurer, and each of them
individually, with full powers of substitution and resubstitution, our true and
lawful attorneys, with full powers to them and each of them to sign for us, in
our names and in the capacities indicated below, the registration statement on
Form S-1 filed with the Securities and Exchange Commission, and any and all
amendments to said registration statement (including post-effective
amendments), and any registration statement filed pursuant to Rule 462(b) under
the Securities Act of 1933, as amended, in connection with the registration
under the Securities Act of 1933, as amended, of equity securities of the
Registrant, and to file or cause to be filed the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as each of them might or could do in person, and hereby ratifying and
confirming all that said attorneys, and each of them, or their substitute or
substitutes, shall do or cause to be done by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities indicated below:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Arthur H. Zeile President, Chief Executive February 18, 2000
____________________________________ Officer and Chairman of the
Arthur H. Zeile Board of Directors
(Principal Executive
Officer)
/s/ James W. McHose, III Vice President, Chief February 18, 2000
____________________________________ Financial Officer and
James W. McHose, III Treasurer (Principal
Financial and Accounting
Officer)
/s/ Joel C. Daly Vice President, Chief February 18, 2000
____________________________________ Operating Officer,
Joel C. Daly Secretary and Director
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Stephen O. James Director February 18, 2000
____________________________________
Stephen O. James
/s/ Scott B. Perper Director February 18, 2000
____________________________________
Scott B. Perper
/s/ L. Watts Hamrick, III Director February 18, 2000
____________________________________
L. Watts Hamrick, III
/s/ G. Jackson Tankersley, Jr. Director February 18, 2000
____________________________________
G. Jackson Tankersley, Jr.
/s/ Donald F. Detampel, Jr. Director February 18, 2000
____________________________________
Donald F. Detampel, Jr.
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S> <C>
1.1* Form of underwriting agreement.
3.1 Amended and restated certificate of incorporation.
3.2* Amendment to amended and restated certificate of
incorporation.
3.3* Form of amended and restated certificate of incorporation to
be in effect upon the closing of this offering.
3.4 Bylaws.
3.5* Form of amended and restated bylaws to be in effect upon the
closing of this offering.
4.1* Specimen common stock certificate.
4.2 Please see Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5 for provisions
of the certificate of incorporation and bylaws of the
Registrant defining the rights of holders of common stock of
the Registrant.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1 Series A Preferred Stock Purchase Agreement by and among
InFlow, Inc. and the investors listed on Schedule A thereto,
dated April 5, 1999.
10.2 Series A Preferred Stock Purchase Agreement by and among
InFlow, Inc. and the investors listed on Schedule A thereto,
dated April 19, 1999.
10.3 Stock Purchase Agreement, by and between InFlow, Inc. and
James W. McHose, III, dated as of October 15, 1999.
10.4 Series B Preferred Stock Purchase Agreement by and among
InFlow, Inc. and Meritage Private Equity Fund, L.P., Meritage
Private Equity Parallel Fund, L.P. and Meritage Entrepreneurs
Fund, L.P., dated October 27, 1999.
10.5 Series B Preferred Stock Purchase Agreement by and among
InFlow, Inc. and First Union Capital Partners, Inc., dated
October 28, 1999.
10.6 Series B Preferred Stock Purchase Agreement by and among
InFlow, Inc. and J.P. Morgan Investment Corporation, Sixty
Wall Street SBIC Fund, L.P., General Electric Capital
Corporation and Stolberg, Meehan and Scano II, L.P., dated
November 30, 1999.
10.7 Second Amended and Restated Stockholders' Agreement by and
among InFlow, Inc., Art Zeile, Joel Daly and Stephen O. James
and the holders of the Series A and Series B Preferred Stock
of InFlow, Inc. listed on the signature pages thereto, dated
as of November 30, 1999.
10.8 Second Amended and Restated Investors' Rights Agreement by and
among InFlow, Inc. and the investors listed on the signature
pages thereto, dated as of November 31, 1999.
10.9 Form of Data Center Services Agreement.
10.10*+ InFlow, Inc. Data Center Services Agreement by and between
InFlow, Inc. and VERIO Rocky Mountain, Inc., dated August 31,
1998.
10.11* Lease Agreement, between JER Denver, LLC and InFlow, Inc.
(Denver 1).
10.12* Bannock Center (938 Bannock Building) Office Building Lease
Agreement, between 938 Bannock, LLC and InFlow, Inc. (Denver
2).
10.13* Bannock Center (900 Bannock Building) Office Building Lease
Agreement, between 938 Bannock, LLC and InFlow, Inc. (Denver
NOC).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S> <C>
10.14* Lease Agreement between Timeshare Systems, Inc. and InFlow,
Inc. (Minneapolis), dated June 9, 1999.
10.15* Lease Agreement between Miami North, LLC and InFlow, Inc.
(Raleigh-Durham).
10.16* San Diego Tech Center Office Building Lease between San Diego
Tech Center, LLC and InFlow, Inc. (San Diego).
10.17* Lease Agreement between 1052 West Peachtree, LLC, and InFlow,
Inc. (Atlanta).
10.18* Triple Net Lease between AGB Norwood Park, L.P., and InFlow,
Inc. (Austin).
10.19* Sublease between Associates Information Services, Inc., and
InFlow, Inc. (Irvine).
10.20* Lease between Sterling Network Exchange, LLC, and Inflow,
Inc., dated February 14, 2000 (Phoenix).
10.21 1997 Stock Option/Stock Incentive Plan.
10.22* 2000 Stock Incentive Plan.
10.23* 2000 Employee Stock Purchase Plan.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2* Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1).
24.1 Powers of Attorney (please see Signature Page).
27.1 Financial Data Schedule.
</TABLE>
- --------
*To be filed by amendment.
+Confidential treatment requested.
2
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
INFLOW, INC.,
a Delaware Corporation
ARTICLE I
The name of this Corporation is InFlow, Inc.
ARTICLE 11
The address of the registered office-of the Corporation in the State of
Delaware is 1013 Centre Road, City of Wilmington, County of New Castle. The name
of the registered agent at that address is Corporation Service Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
ARTICLE IV
A. Classes of Stock. The Corporation is authorized to issue two
classes of shares to be designated respectively Preferred Stock ("Preferred
Stock") and Common Stock ("Common Stock"). The total number of shares of capital
stock that the Corporation is authorized to issue is Thirty Million Three
Hundred Ten Thousand (30,310,000). The total number of shares of Preferred Stock
that the Corporation shall have authority to issue is Ten Million Three Hundred
Ten Thousand (10,310,000), of which Three Million Three Hundred Ten Thousand
(3,310,000) shares shall be designated Series A Preferred Stock (the "Series A.
Preferred Stock") and Seven million (7,000,000) shares shall be designated
Series B Preferred Stock (the "Series B Preferred Stock"). The total number of
shares of Common Stock that the Corporation shall have authority to issue is
Twenty Million (20,000,000). The Preferred Stock shall have a par value of
$0.001 per share and the Common Stock shall have a par value of $0.001 per
share.
B. Rights, Preferences and Restrictions of Preferred Stock. Except
as expressly set forth in this Article IV, the Series A Preferred Stock and
Series B Preferred Stock shall rank pari passu with respect to dividend,
liquidation and redemption rights. The relative rights,
<PAGE>
preferences, restrictions and other matters relating to the Series A Preferred
Stock and Series B Preferred Stock (collectively, the "Convertible Preferred
Stock") are as follows:
1. Dividend Provisions.
-------------------
(a) The Convertible Preferred Stock shall with respect to dividend
rights rank senior to the Common Stock of the Corporation, and any other series
of Preferred Stock established hereafter by the Board of Directors (all of such
series of Preferred Stock to which the Convertible Preferred Stock ranks senior,
the "Junior Securities").
(b) The holders of shares of Convertible Preferred Stock shall be
entitled to receive dividends, out of any assets legally available therefor,
prior and in preference to any declaration or payment of any dividend (other
than dividends payable in Common Stock or other securities entitling the holder
thereof to receive, directly or indirectly, additional shares of Common Stock
for which an anti-dilution adjustment is provided by Section 4(d)(iii) below) an
Common Stock or other Junior Securities of the Corporation, payable only when,
as and if declared by the Board of Directors. No dividend or other distribution
shall be paid on or declared and set apart for any share of Common Stock, Junior
Securities or any other securities of the Corporation entitled generally to
participate in the earnings or assets of the Corporation (collectively, the
"Common Equity"), other than the Convertible Preferred Stock, for any period
unless at the same time an equal dividend or distribution for the same period
shall be paid on or declared and set apart for each share of Convertible
Preferred Stock based on the number of shares of Common Stock into which each
share is then convertible (the "Conversion Shares"). No dividend or other
distribution shall be paid on or declared and set apart for any Series of
Convertible Preferred Stock unless at the same time an equal dividend or
distribution (determined on an as-converted basis) shall be paid on or declared
and set apart for the other Series of Convertible Preferred Stock.
2. Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution or winding up of the
corporation, either voluntary or involuntary (including without limitation upon
any bankruptcy), the holders of Convertible Preferred Stock shall be entitled to
receive in exchange for and in redemption of each share of Convertible Preferred
Stock. prior and in preference to any distribution to the holders of Junior
Securities by reason of their ownership thereof, from the funds, proceeds or
assets of the Corporation legally available for distribution to stockholders, an
amount equal to the greater of (i) the sum of (A) in the case of Series A
Preferred Stock, an amount equal to $3.50 per share, as appropriately adjusted
for subsequent stock dividends, stock splits and similar transactions affecting
the outstanding Series A Preferred Stock (the "Original Series A Issue Price")
or, in the case of Series B Preferred Stock, an amount equal to $8.70 per share,
as appropriately adjusted for subsequent stock dividends, stock splits and
similar transactions affecting the outstanding Series B Preferred Stock (the
"Original Series B issue Price"), plus (B) in each case, an amount per share
determined by dividing (x) $.28 per annum, compounded annually, measured from
April 5, 1999 to the date of such liquidation, multiplied by the number of
outstanding shares of Series A Preferred Stock, by (y) the total number of
outstanding shares of Convertible Preferred Stock; or (ii) the amount per share
that would be
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distributed among the holders of the Convertible Preferred Stock and Common
Stock pro rata, based on the number of shares of Common Stock held by each
holder assuming conversion of all Convertible Preferred Stock. If upon the
occurrence of such event, the assets, proceeds and funds thus distributed among
the holders of the Convertible Preferred Stock shall be insufficient to permit
the payment to such holders of their full preferential amounts, then the entire
assets, proceeds and funds of the Corporation legally available for distribution
shall be distributed ratably among the holders of the Convertible Preferred
Stock in proportion to the respective amounts such holders are entitled to
receive under the provisions of this Section 2.
(b) Upon the completion of the distribution required by subparagraph
(a) of this Section 2 and any other distribution that may be required with
respect to series of Preferred Stock that may from time to time come into
existence, if assets remain in the Corporation, the holders of the Common Stock
of the Corporation shall receive all of the remaining assets of the Corporation.
(c) (i) For purposes of this Section 2, unless otherwise agreed in
writing by the holders of not less than 75% of the outstanding shares of
Convertible Preferred Stock (the "Required Holders"), a liquidation, dissolution
or winding up of the Corporation shall be deemed to be occasioned by, or to
include, (A) the acquisition of the Corporation by another entity by means of
any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation) that results in the
Corporation's shareholders immediately prior to such transaction not holding (by
virtue of such shares or securities issued solely with respect thereto) at least
50% of the voting power of the surviving or continuing entity, or (B) a sale,
conveyance or disposition of all or substantially all of the assets of the
Corporation unless the Corporation's shareholders immediately prior to such
transaction will, as a result of such sale, conveyance or disposition hold (by
virtue of securities issued as consideration for such sale, conveyance or
disposition) at least 50% of the voting power of the purchasing entity, or (C)
the effectuation by the Corporation or its stockholders of a transaction or
series of related transactions that results in the Corporation's shareholders
immediately prior to such transaction not holding (by virtue of such shares or
securities issued solely with respect thereto) at least 50% of the voting power
of the Corporation. In the event of a liquidation described in the immediately
preceding sentence involving the sale of shares by shareholders of the
Corporation, the funds, proceeds or assets legally available for distribution to
shareholders shall be deemed to be the aggregate compensation to be paid to all
selling shareholders in exchange for all or part of any capital stock of the
Corporation divided by a fraction, the numerator of which is the total number of
shares of Common Stock deemed to be sold pursuant to such liquidation and the
denominator of which is the sum of the total number of shares of Common Stock
outstanding and the total number of shares of Common Stock issuable with respect
to Common Stock Equivalents (as defined below) immediately prior to such
liquidation.
(ii) In any of such events, if the consideration received by the
Corporation is other than cash, its value will be deemed its fair market value.
Any securities shall be valued as follows:
(A) Securities not subject to investment letter or other similar
restrictions on free marketability covered by (B) below:
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(1) If traded on a securities exchange or through
NASDAQNMS, the value shall be deemed to be the average of the closing prices of
the securities on such exchange over the thirty-day period ending three (3) days
prior to the closing;
(2) If actively traded over-the-counter, the value
shall be deemed to be the average of the closing bid or sale prices (whichever
is applicable) over the thirty-day period ending three (3) days prior to the
closing; and
(3) If there is no active public market, the value
shall be the fair market value thereof, as determined by the Board of Directors
of the Corporation and approved by the Required Holders.
(B) The method of valuation of securities subject to investment
letter or other restrictions on free marketability (other than Restrictions,
arising solely by virtue of a shareholder's status as an affiliate or former
affiliate) shall be to make an appropriate discount from the market value
determined as above in (A) (1), (2) or (3) to reflect the approximate fair
market value thereof, as determined by the Board of Directors of the Corporation
and approved by the Required Holders.
(iii) In the event the requirements of this Section 2(c) are not
complied with, the Corporation shall forthwith either:
(A) cause such closing to be postponed until such time as the
requirements of this Section 2 have been complied with; or
(B) cancel such transaction, in which event the rights,
preferences and privileges of the holders of the Convertible Preferred Stock
shall revert to and be the same as such rights, preferences and privileges
existing immediately prior to the date of the first notice referred to in
Section 2(c)(iv) hereof.
(iv) The Corporation shall give each holder of record of
Convertible Preferred Stock written notice of such impending transaction not
later than twenty (20) days prior to the shareholders' meeting called to approve
such transaction, or twenty (20) days prior to the closing of such transaction,
whichever is earlier, and shall also notify such holders in writing of the final
approval of such transaction. The first of such notices shall describe the
material terms and conditions of the impending transaction and the provisions of
this Section 2, and the Corporation shall thereafter give such holders prompt
notice of any material changes. The transaction shall in no event take place
sooner than twenty (20) days after the Corporation has given the first notice
provided for herein or sooner than ten (10) days after the Corporation has given
notice of any material changes provided for herein; provided, however, that such
periods may be shortened upon the written consent of the Required Holders.
3. Redemption. Within ninety (90) days following the receipt by the
Corporation of a written redemption demand from the Required Holders delivered
at any time after November 1, 2006, the Corporation shall redeem all but not
less than all the Convertible Preferred Stock, and the holders of the
Convertible Preferred Stock shall sell all but not less than all of the
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Convertible Preferred to the Corporation, for a per share purchase price (the
"Redemption Price") equal to the sum of (A) in the case of the Series A
Preferred Stock, the Original Series A Issue Price or, in the case of the Series
B Preferred Stock, the Original Series B Issue Price, plus (B) in each case, an
amount per share determined by dividing (x) $.28 per annum, compounded annually,
measured from April 5, 1999 to the date of such redemption, multiplied by the
number of outstanding shares of Series A Preferred Stock, by (y) the total
number of outstanding shares of Convertible Preferred Stock. The closing of such
purchase and sale shall occur at the offices of the Corporation on such business
day reasonably selected by the Corporation during such 90 day period upon not
less than ten days prior written notice to the holders of Convertible Preferred
Stock (the Redemption Date"). At such closing, the Corporation shall pay the
applicable Redemption Price in immediately available funds against delivery of
the stock certificates representing the shares of Convertible Preferred Stock
(or, in lieu of delivery of lost, stolen or destroyed certificates, an agreement
to indemnify the Corporation from any loss incurred by it in connection with
such certificates). Nothing in this Section 3 shall restrict the right of a
holder of Convertible Preferred Stock to convert such shares into Common Stock
in accordance with the provisions of Section 4 at any time up to and including
the Redemption Date. From and after the Redemption Date, the rights of the
holders of Convertible Preferred Stock as stockholders of the Corporation shall
cease and the certificates representing the Convertible Preferred Stock shall
thereafter represent only the right to receive the applicable Redemption Price
upon surrender of such certificates to the Corporation. If the Corporation is
prevented from redeeming or making full payment for the Convertible Preferred
Stock as required pursuant to this Section 3 by any legal restriction or
otherwise, the Corporation shall redeem the maximum number of shares of
Convertible Preferred Stock that it can without violation of such legal
restriction or other impediment, which redemption shall be effected among the
holders of Convertible Preferred Stock pro rata on the basis of the respective
amounts to which such holders would be entitled upon a full redemption of the
Convertible Preferred Stock, and the Corporation shall have a continuing
obligation to such holders of Convertible Preferred Stock to purchase the
remaining shares as soon as possible and shall use its best efforts to obtain
any waiver or consent or to take any other action to authorize or permit the
redemption required pursuant to this Section 3.
4. Conversion. The holders of the Convertible Preferred Stock shall
----------
have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Convertible Preferred Stock
----------------
shall be convertible, at the option of the holder thereof, at any time after the
date of issuance of such share and on or prior to the Redemption Date, at the
office of the Corporation or any transfer agent for such stock, into such number
of fully paid and nonassessable shares of Common Stock as is determined (x) in
the case of Series A Preferred Stock, by dividing the Original Series A Issue
Price by the Series A Conversion Price in effect on the date the certificate is
surrendered for conversion, or (y) in the case of Series B Preferred Stock, by
dividing the Original Series B Issue Price by the Series B Conversion Price in
effect on the date the certificate is surrendered for conversion. The initial
Series A Conversion Price and Series B Conversion Price shall be the Original
Series A Issue Price and the Original Series B Issue Price, respectively;
provided, however, that the Conversion Prices shall be subject to adjustment as
set forth in Section 4(d).
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(b) Automatic Conversion. Each share of Convertible Preferred Stock
--------------------
shall automatically be converted into shares of Common Stock at the applicable
Conversion Price then in effect immediately upon the earlier of (i) the
consummation of a firm commitment underwritten public offering of Common Stock
registered under the Securities Act of 1933, as amended, (x) at a public
offering price of not less than $26.00 per share (adjusted to reflect subsequent
stock dividends, stock splits or similar transactions affecting the outstanding
Common Stock), (y) resulting in gross proceeds to the Corporation of not less
than $50,000,000, and (z) after which the Common Stock is either listed on a
national securities exchange or traded in the NASDAQ National Market System, or
(ii) the date specified by written consent or agreement Of the Required Holders.
Such conversion shall be automatic, without need for any further action by the
holders of shares of Convertible Preferred Stock and regardless of whether the
certificates representing such shares are surrendered to the Corporation or its
transfer agent; provided, however, that the Corporation shall not be obligated
to issue certificates evidencing the shares of Common Stock issuable upon such
conversion unless certificates evidencing such shares of Convertible Preferred
Stock so converted are surrendered to the Corporation or the holder of record of
such shares notifies the Corporation that such certificates have been lost,
stolen or destroyed and executes an agreement to indemnify the Corporation from
any loss incurred by it in connection with such certificates, in each case in
accordance with the procedures described in Section 4(c) below. Upon the
conversion of Convertible Preferred Stock pursuant to this Section 4(b), the
Corporation shall promptly send written notice thereof, by registered or
certified mail, return receipt requested and postage prepaid, by hand delivery
or by overnight delivery, to each holder of record of Convertible Preferred
Stock at such holder's address then shown on the records of the Corporation,
which notice shall state that certificates evidencing shares of Convertible
Preferred Stock must be surrendered at the office of the Corporation (or of its
transfer agent for the Common Stock if applicable) in the manner described in
Section 4(c) below.
(c) Mechanics of Conversion. Before any holder of Convertible
-----------------------
Preferred Stock shall be entitled to receive certificates representing shares of
Common Stock into which shares of Convertible Preferred Stock are converted
pursuant to this Section 4, such holder shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation or of any
transfer agent for the Convertible Preferred Stock, and shall give written
notice to the Corporation at such office of the name or names in which the
certificate Or certificates for shares of Common Stock are to be issued. The
Corporation shall as soon as practicable and in no event later than ten (10)
days after the delivery of said certificates, issue and deliver at such office
to such holder of Convertible Preferred Stock, or to the nominee or nominees of
such holder, a certificate or certificates for the number of shares of Common
Stock to which such holder shall be entitled as aforesaid. The person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
pursuant to this Section 4 shall be treated for all purposes as the record
holder or holders of such shares of Common Stock as of the effective date of
such conversion. If the conversion is in connection with an underwritten
offering of securities registered pursuant to the Securities Act of 1933, as
amended, the conversion may, at the option of any holder tendering Convertible
Preferred Stock for conversion, be conditioned upon the closing with the
underwriters of the sale of securities pursuant to such offering, in which event
the person(s) entitled to receive the Common Stock upon conversion of the
Convertible Preferred Stock shall not be deemed to have converted such.
Convertible Preferred Stock until immediately prior to the closing of such sale
of securities.
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<PAGE>
(d) Conversion Price Adjustments for Certain Dilutive Issuances,
Splits and Combination. The Conversion Prices of the Convertible Preferred
Stock shall be subject to adjustment from time to time as follows:
(A) If the Corporation shall issue, after the date upon
which any shares of any Series of Convertible Preferred Stock were first issued
(the "Purchase Date", with respect to such Series), any Additional Stock (as
defined below) without consideration or for a consideration per share less than
the Conversion Price for such Series in effect immediately prior to the issuance
of such Additional Stock, the Conversion Price for such Series in effect
immediately prior to each such issuance shall forthwith (except as otherwise
provided in this Section 4(d)(i)) be adjusted to a price determined by
multiplying such Conversion Price by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding immediately prior to such
issuance plus the number of shares of Common Stock that the aggregate
consideration received by the Corporation for such issuance would purchase at
such Conversion Price; and the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issuance plus the
number of shares of such Additional Stock.
(B) No adjustment of the Conversion Price for any Series of
Convertible Preferred Stock shall be made in an amount less than one cent per
share, provided that any adjustments which are not required to be made by reason
of this sentence shall be carried forward and shall be either taken into account
in any subsequent adjustment made prior to three (3) years from the date of the
event giving rise to the adjustment being carried forward, or shall be made at
the end of three (3) years from the date of the event giving rise to the
adjustment being carried forward. Except to the limited extent provided for in
Sections 4(d)(i)(E)(3) and (E)(4), no adjustment of any Conversion Price
pursuant to this Section 4(d) shall have the effect of increasing such
Conversion Price above the Conversion Price in effect immediately prior to such
adjustment.
(C) In the case of the issuance of Common Stock for cash, the
consideration shall be deemed to be the amount of cash paid therefor before
deducting any reasonable discounts, commissions or other expenses allowed, paid
or incurred by the Corporation for any underwriting or otherwise in connection
with the issuance and sale thereof.
(D) In the case of the issuance of the Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair value thereof as determined in good faith by
the Board of Directors and the Required Holders irrespective of any accounting
treatment.
(E) In the case of the issuance (whether before, on or after the
applicable Purchase Date) of options to purchase or rights to subscribe for
Common Stock, securities by their terms convertible into or exchangeable for
Common Stock or options to purchase or rights to subscribe for such convertible
or exchangeable securities, the following provisions shall apply for all
purposes of this Section 4(d)(i) and Section 4(d)(ii):
(1) The aggregate maximum number of shares of Common Stock
deliverable upon exercise of such options to purchase or rights to subscribe for
Common Stock shall be deemed to have been issued at the time such
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options or rights were issued and for a consideration equal to the
consideration (determined in the manner provided in Sections
4(d)(i)(C) and (d)(i)(D)), if any, received by the Corporation upon
the issuance of such options or rights plus the minimum exercise price
provided in such options or rights for the Common Stock covered
thereby.
(2) The aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange for any such convertible
or exchangeable securities or upon the exercise of options to purchase
or rights to subscribe for such convertible or exchangeable securities
and subsequent conversion or exchange thereof shall be deemed to have
been issued at the time such securities were issued or such options or
rights were issued and for a consideration equal to the consideration,
if any, received by the Corporation for any such securities and
related options or rights (excluding any cash received on account of
accrued interest or accrued dividends), plus the minimum additional
consideration, if any, to be received by the Corporation upon the
conversion or exchange of such securities or the exercise of any
related options or rights (the consideration in each case to be
determined in the manner provided in Sections 4(d)(i)(C) and
(d)(i)(D)). The issuance of options to purchase or rights to subscribe
for Common Stock, securities convertible into or exchangeable for
Common Stock or options to purchase or rights to subscribe for such
convertible or exchangeable securities together with other securities
of the Corporation in an integrated transaction in which no specific
consideration is allocated to such options, rights or convertible or
exchangeable securities shall be deemed to be issuance of shares of
Common Stock at a per share consideration of $0.01.
(3) In the event of any change in the number of shares of Common
Stock deliverable or in the consideration payable to the Corporation
upon exercise of such options or rights or upon conversion of or in
exchange for such convertible or exchangeable securities (including
but not limited to a change resulting from the antidilution provisions
thereof), each Conversion Price, to the extent in any way affected by
or computed using such options, rights or securities, shall be
recomputed to reflect such change.
(4) Upon the expiration of any such options or rights, the
termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or
exchangeable securities, each Conversion Price, to the extent in any
way affected by or computed using such options, rights or securities
or options or rights related to such securities, shall be recomputed
to reflect the issuance of only the number of shares of Common Stock
(and convertible or exchangeable securities which remain in effect)
actually issued upon the exercise of such options or rights, upon the
conversion or exchange of such securities or upon the exercise of the
options or rights related to such securities.
(5) The number of shares of Common Stock deemed issued and the
consideration deemed paid therefor pursuant to Sections 4(d)(i)(E)(1)
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<PAGE>
and (2) shall be appropriately adjusted to reflect any change,
termination or expiration of the type described in either Sections
4(d)(i)(E)(3) or (4). In the event of any adjustment to a Conversion
Price as a result of the issuance of options, rights or convertible or
exchangeable securities pursuant to this Section 4(d), no further
adjustment to such Conversion Price shall be made for the actual
issuance of Common Stock upon the exercise of any such options or
rights or the conversion or exchange of such securities.
(ii) "Additional Stock" shall mean any shares of Common Stock
issued (or deemed to have been issued pursuant to Section 4(d)(i)(E)) by the
Corporation after the Purchase Date other than:
(A) Common Stock issued pursuant to a transaction
described in Section 4(d)(iii) hereof;
(B) shares of Common Stock issuable or issued to
employees, consultants or directors (if in transactions with primarily non-
financing purposes) of the Corporation directly or pursuant to a stock option
plan or restricted stock plan approved by the Board of Directors of the
Corporation, in each case with vesting and repurchase restrictions approved by
the Board (the "Management Equity Pool");
(C) shares of Common Stock issued or issuable in a public
offering before or in connection with which all outstanding shares of
Convertible Preferred Stock will be converted to Common Stock or upon exercise
of warrants or rights granted to underwriters in connection with such a public
offering;
(D) shares of Common Stock issued upon exercise or
conversion of any option, warrant or other convertible security outstanding as
of the applicable Purchase Date;
(E) Securities issued pursuant to the acquisition of
another business entity or business segment of any such entity by the
Corporation by merger, purchase of substantially all the assets or other
reorganization whereby the Corporation will own not less than fifty-one percent
(51%) of the voting power of such business entity or business segment of any
such entity; or
(F) shares of Common Stock issued in connection with (i)
any borrowings, direct or indirect, from financial institutions or other persons
by the Corporation, whether or not presently authorized, including any type of
loan or payment evidenced by any type of debt instrument, if such borrowing,
loan or debt instrument is approved by the Board of Directors, (ii) any
transaction with vendors or customers or to other persons in similar commercial
situations with the Corporation if such issuance is approved by the Board of
Directors, or (iii) obtaining lease financing, whether issued to a lessor,
guarantor or other person if such issuance is approved by the Board of
Directors; provided that the aggregate number of shares of Common Stock deemed
issued pursuant to (i), (ii) and (iii) above does not exceed 5% of the aggregate
number shares of Common Stock then outstanding plus the aggregate number of
shares of Common Stock issuable
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<PAGE>
upon the exercise, conversion or exchange of any Common Stock Equivalents
then outstanding.
(iii) In the event the Corporation should at any time or
from time to time after the applicable Purchase Date fix a record date for the
effectuation of a split or subdivision of the outstanding shares of Common Stock
or the determination of holders of Common Stock entitled to receive a dividend
or other distribution payable in additional shares of Common Stock or other
securities or rights convertible into, or entitling the holder thereof to
receive directly or indirectly, additional shares of Common Stock ("Common Stock
Equivalents") without payment of any consideration by such holder for the
additional shares of Common Stock or the Common Stock Equivalents (including the
additional shares of Common Stock issuable upon conversion or exercise thereof),
then, as of such record date (or the date of such dividend distribution, split
or subdivision if no record date is fixed), the Conversion Prices of the
Convertible Preferred Stock shall be appropriately decreased so that the number
of shares of Common Stock issuable on conversion of each share of such series
shall be increased in proportion to such increase of the aggregate of shares of
Common Stock outstanding and those issuable with respect to such Common Stock
Equivalents.
(iv) If the number of shares of Common Stock outstanding at
any time after the applicable Purchase Date is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date of such
combination, the Conversion Prices for the Convertible Preferred Stock shall be
appropriately increased so that the number of shares of Common Stock issuable on
conversion of each share of such series shall be decreased in proportion to such
decrease in outstanding shares.
(e) Other Distributions. In the event the Corporation shall
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by the Corporation or other persons, assets (excluding cash
dividends) or options or rights not referred to in Section 4(d)(iii), then, in
each such case for the purpose of this Section 4(e), the holders of the
Convertible Preferred Stock shall be entitled to a proportionate share of any
such distribution as though they were the holders of the number of shares of
Common Stock of the Corporation into which their shares of Convertible Preferred
Stock are convertible as of the record date fixed for the determination of the
holders of Common Stock of the Corporation entitled to receive such
distribution.
(f) Recapitalizations. If at any time or from time to time
there shall be a recapitalization of the Common Stock (other than a subdivision,
combination or a reorganization, merger or consolidation transaction provided
for elsewhere in this Section 4), provision shall be made so that the holders of
the Convertible Preferred Stock shall thereafter be entitled to receive upon
conversion of the Convertible Preferred Stock the number of shares of stock or
other securities or property of the Corporation or otherwise, to which a holder
of Common Stock deliverable upon conversion would have been entitled in
connection with such recapitalization. in any such case, appropriate adjustment
shall be made in the application of the provisions of this Section 4 with
respect to the rights of the holders of the Convertible Preferred Stock after
the recapitalization to the end that the provisions of this Section 4 (including
adjustment of the Conversion Prices then in effect and the number of shares
issuable upon conversion of the
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Convertible Preferred Stock) shall be applicable after that event as nearly
equivalent as may be practicable.
(g) Reorganizations, Mergers or Consolidations. If at any time
or from time to time the Common Stock is converted into other securities or
property, whether pursuant to a reorganization, merger, consolidation or
otherwise (other than a subdivision. combination or recapitalization provided
for elsewhere in this Section 4 or a transaction constituting a deemed
liquidation of the Corporation pursuant to Section 2), provision shall be made
so that the holders of the Convertible Preferred Stock shall thereafter be
entitled to receive upon conversion of the Convertible Preferred Stock the
number of shares of stock or other securities or property of the Corporation or
otherwise, to which a holder of Common Stock deliverable upon conversion would
have been entitled in connection with such transaction. The Corporation shall
not be a party to any reorganization, merger or consolidation in which the
Corporation is not the surviving entity unless the entity surviving such
transaction assumes, by written instrument satisfactory to the Required Holders,
all of the Corporation's obligations hereunder.
(h) No Impairment. The Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Convertible Preferred Stock against
impairment.
(i) No Fractional Shares and Certificate as to AdJustments.
(i) No fractional shares shall be issued upon the conversion
of any share or shares of the Convertible Preferred Stock, and the number of
shares of Common Stock to be issued shall be rounded to the nearest whole share.
Whether or not fractional shares are issuable upon such conversion shall be
determined on the basis of the total number of shares of Convertible Preferred
Stock the holder is at the time converting into Common Stock and the number of
shares of Common Stock issuable upon such aggregate conversion.
(ii) Upon the occurrence of each adjustment or readjustment of
the Conversion Prices of the Convertible Preferred Stock pursuant to this
Section 4, the Corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each holder of Convertible Preferred Stock a certificate setting
forth such adjustment or readjustment and showing in detail the facts upon which
such adjustment or readjustment is based. The Corporation shall, upon the
written request at any time of any holder of Convertible Preferred Stock,
furnish or cause to be furnished to such holder a like certificate setting forth
(A) such adjustment and readjustment, (B) the Conversions Prices for the Series
A and Series B Preferred Stock at the time in effect, and (C) the number of
shares of Common Stock and the amount, if any, of other property, which at the
time would be received upon the conversion of a share of Series A and Series B
Preferred Stock.
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(j) Notices of Record Date. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, the Corporation shall mail to each
holder of Convertible Preferred Stock, at least 20 days prior to the date
specified therein, a notice specifying the date on which any such record is to
be taken for the purpose of such dividend, distribution or right, and the amount
and character of such dividend, distribution or right.
(k) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Convertible Preferred Stock, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Convertible Preferred Stock; and if at
any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the conversion of all then outstanding shares of
Convertible Preferred Stock, in addition to such other remedies as shall be
available to the holder of Convertible Preferred Stock, the Corporation will
take such corporate action as may, in the opinion of its counsel, be necessary
to increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purposes, including, without limitation,
engaging in best efforts to obtain the requisite shareholder approval of any
necessary amendment to this certificate.
(1) Notice. Any notice required by the provisions of this Section 4
to be given to the holders of shares of Convertible Preferred Stock shall be
deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his address appearing on the books of the
Corporation.
5. Voting Rights. Except as provided by the General Corporation Law
of the State of Delaware or as otherwise expressly provided herein with respect
to special class voting arrangements, the holder of each share of Convertible
Preferred Stock shall have the right to one vote for each share of Common Stock
into which such share of Convertible Preferred Stock could then be converted,
and with respect to such vote, such holder shall have full voting rights and
powers equal to the voting rights and powers of the holders of Common Stock, and
shall be entitled, notwithstanding any provision hereof, to notice of any
shareholders' meeting in accordance with the bylaws of the Corporation, and
shall be entitled to vote, together with holders of Common Stock, with respect
to any question upon which holders of Common Stock have the right to vote.
Fractional votes shall not, however, be permitted and any fractional voting
rights available on an as converted basis (after aggregating all fractional
shares into which shares of Convertible Preferred Stock held by each holder
could be converted) shall be rounded to the nearest whole number (with one-half
being rounded upward).
6. Protective Provisions. So long as any shares of Convertible
Preferred Stock are outstanding, the Corporation shall not without first
obtaining the approval (by vote or written consent, as provided by law) of the
Required Holders:
12
<PAGE>
(a) sell, convey, or otherwise dispose of or encumber all or any
substantial portion of its property or business or merge into or consolidate
with any other corporation (other than a wholly-owned subsidiary corporation) or
effect any transaction or series of related transactions in which more than
fifty percent (50%) of the voting power of the Corporation is disposed of; or
(b) alter or change the rights, preferences or privileges of the
shares of Convertible Preferred Stock so as to affect adversely the rights of
holders of such shares; or
(c) increase or decrease (other than by redemption or conversion) the
total number of outstanding shares of Convertible Preferred- Stock; or
(d) authorize or issue, or obligate itself to issue, any equity
security (including any security convertible into or exercisable for any such
equity security) having a preference over, or being on a parity with, the
Convertible Preferred Stock with respect to voting, dividends or upon
liquidation; or
(e) redeem, purchase or otherwise acquire (or pay into or set aside
for a sinking fund for such purpose) any of its capital stock or other equity
securities; provided, however, that this restriction shall not apply to (i) the
repurchase of shares of Common Stock from employees, officers, directors,
consultants or other persons performing services for the Company or any
subsidiary pursuant to agreements under which the Company has the option to
repurchase such shares at cost or at cost upon the occurrence of certain events,
such as the termination of employment or (ii) the redemption of shares of
Convertible Preferred Stock in accordance with Section 3; or
(f) amend the Corporation's Certificate of Incorporation or bylaws;
or
(g) change the authorized number of directors of the Corporation; or
(h) make or declare a dividend or other distribution payable
generally to holders of its outstanding shares of Common Stock or any other
class of Common Equity securities (other than dividends on the Common Stock
payable solely in additional shares of Common Stock or in options or rights
referred to in Section 4(d)(iii)); or
(i) acquire (by merger, purchase of stock or assets or other business
combination transaction) any other business entity or business segment of any
such entity representing in excess of 10% of the Corporation's consolidated
assets on a pro forma basis or issue, or obligate itself to issue, in any such
transaction Common Equity securities representing in excess of 10% of the fully-
diluted Common Stock; or
(j) increase the Management Equity Pool to cover more than 1,685,000
shares of Common Stock (including for such purpose all shares covered by
employee stock options outstanding on the date hereof); or
13
<PAGE>
(k) engage in any transaction with an affiliate of the Corporation
that is not approved by a majority of the disinterested members of the
Corporation's Board of Directors; or
(l) engage in any business operations other than the provision of
colocation, applications hosting and related services (including without
limitation data backbone services) for clients in the communications industry
and activities reasonably incidental thereto.
7. Status of Converted or Redeemed Stock. In the event any shares
of Convertible Preferred Stock shall be redeemed or converted pursuant to
Section 3 or Section 4 hereof, the shares so converted or redeemed shall be
cancelled and shall not be issuable by the Corporation. The Certificate of
Incorporation of the Corporation shall be appropriately amended to effect the
corresponding reduction in the Corporation's authorized capital stock.
C. Common Stock.
------------
1. Dividend Rights. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the Corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
2. Liquidation Rights. Upon the liquidation, dissolution or winding
up of the Corporation, the assets of the Corporation shall be distributed as
provided in Section 2 of Division (B) of this Article IV.
3. Redemption. The Common Stock is not redeemable.
4. Voting Rights. The holder of each share of Common Stock shall
have the right to one vote, and shall be entitled to notice of any shareholders'
meeting in accordance with the bylaws of the Corporation, and shall be entitled
to vote upon such matters and in such manner as may be provided by law. The
holders of Common Stock shall not be entitled to vote as a separate class on any
amendment of this Certificate of Incorporation that increases or decreases the
number of authorized shares of Common Stock.
ARTICLE V
A director of the Corporation shall, to the fullest extent permitted
by the Delaware General Corporation Law as it now exists or as it may hereafter
be amended, not be personally liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, or (iv) for any transaction
from which the director derived any improper personal benefit. If the Delaware
General Corporation Law is amended, after approval by the stockholders of this
Article V, to authorize corporate action further eliminating or limiting
14
<PAGE>
the personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the Delaware General Corporation Law, as so amended.
Any amendment, repeal or modification of this Article V or the
adoption of any provision of this Amended and Restated Certificate of
Incorporation inconsistent with this Article V by the stockholders of the
Corporation shall not apply to or adversely affect any right or protection of a
director of the Corporation existing at the time of such amendment, repeal,
modification or adoption.
ARTICLE VI
The Corporation shall indemnify its officers and directors, and shall
provide for advancement of the expenses of such persons, to the fullest extent
provided by Section 145 of the Delaware General Corporation Law. To the fullest
extent permitted by applicable law, the Corporation is authorized to provide
indemnification of (and advancement of expenses to) agents of the Corporation
(and any other persons to which State law permits the Corporation to provide
indemnification) through Bylaw provisions, agreements with such agents or other
persons, vote of stockholders or disinterested directors or otherwise, in excess
of the indemnification and advancement otherwise permitted by Section 145 of the
Delaware General Corporation Law, subject only to limits created by applicable
Delaware law (statutory or non-statutory), with respect to actions for breach of
duty to the Corporation, its stockholders, and others.
Any amendment, repeal or modification of the foregoing provision of
this Article VI shall not adversely affect any right or protection of a
director, officer, agent or other person existing at the time of, or increase
the liability of any director of the Corporation with respect to any acts or
omissions of such director, officer or agent occurring prior to, such amendment,
repeal, modification or adoption.
ARTICLE VII
The Corporation reserves the right to adopt, amend, alter, supplement,
rescind or repeal in any respect any provision contained in this Amended and
Restated Certificate of Incorporation, in the manner now or hereafter prescribed
by statute or applicable law, and all rights conferred upon stockholders herein
are granted subject to this reservation.
ARTICLE VIII
Subject to the provisions of Article VIII hereof, the Board of
Directors may from time to time adopt, amend, alter, supplement, rescind or
repeal any or all of the Bylaws of the Corporation without any action on the
part of the stockholders; provided, however, that the stockholders may adopt,
amend or repeal any Bylaw adopted by the Board of Directors, and no
15
<PAGE>
amendment or supplement to the Bylaws adopted by the Board of Directors shall
vary or conflict with any amendment or supplement adopted by the stockholders.
ARTICLE IX
Subject to the provisions of Article IV, the number of directors of
the Corporation shall be set from time to time by resolution of the Board of
Directors.
ARTICLE X
Elections of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide.
ARTICLE XI
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any statutory requirements) outside the State of Delaware at such
place or places as may be designated from time to time by the Board of Directors
or in the Bylaws of the Corporation.
ARTICLE X11
The Corporation expressly elects not to be governed by Section 203 of
the Delaware General Corporation Law.
16
<PAGE>
State of Delaware
Secretary of State
Division of Corporations
Filed 09:00 AM 10/28/1999
991457701-2801486
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
INFLOW, INC.
a Delaware corporation
(Pursuant to Sections 228, 242 and 245 of the
General Corporation Law of the State of Delaware)
Inflow, Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware, DOES HEREBY CERTIFY:
FIRST: The original Certificate of Incorporation of Inflow, Inc. was
filed with the Secretary of State of Delaware on September 26, 1997.
SECOND: The Amended and Restated Certificate of Incorporation of Inflow,
Inc. in the form attached hereto as Exhibit A has been duly adopted in
accordance with the provisions of the Sections 228, 242 and 245 of the General
Corporation Law of the State of Delaware by the directors and stockholders of
the Corporation.
THIRD: The Amended and Restated Certificate of Incorporation so adopted
reads in full as set forth in Exhibit A attached hereto and is hereby
incorporated herein by this reference.
IN WITNESS WHEREOF, Inflow, Inc. has caused this Certificate to be
signed by the President and the Secretary this 28th day of October, 1999.
By: /s/ Art Zeile
------------------------------------------
Art Zeile
President and Chief Executive Officer
ATTEST:
By: /s/ Joel Daly
- ------------------------------------------
Joel Daly
Secretary and Chief Operating Officer
<PAGE>
EXHIBIT 3.4
BYLAWS
OF
INFLOW, INC.
(a Delaware corporation)
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office shall be at the office
-----------------
of Corporation Service Company, 1013 Centre Road, County of New Castle,
Wilmington, Delaware, 19805.
Section 2. Other Offices. The corporation may also have offices at such
-------------
other places both within and without the State of Delaware as the Board of
Directors may on an annual basis determine or the business of the corporation
may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Annual Meeting. An annual meeting of the stockholders for the
--------------
election of directors shall be held at such place either within or without the
State of Delaware as shall be designated on an annual basis by the Board of
Directors and stated in the notice of the meeting. Meetings of stockholders for
any other purpose may be held at such time and place, within or without the
State of Delaware, as shall be stated in the notice of the meeting or in a duly
executed waiver of notice thereof. Annual meetings need not be held each year.
Section 2. Notice of Annual Meeting. Written notice of the annual meeting
------------------------
stating the place, date and hour of the meeting shall be given to each
stockholder entitled to vote at such meeting not less than ten (10) nor more
than sixty (60) days before the date of the meeting.
Section 3. Voting List. The officer who has charge of the stock ledger of
-----------
the corporation shall prepare and make, or cause a third party to prepare and
make, at least ten (10) days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
2.
<PAGE>
Section 4. Special Meetings. Special meetings of the stockholders of this
----------------
corporation, for any purpose or purposes, unless otherwise prescribed by statute
or by the Certificate of Incorporation, shall be called by the President or
Secretary at the request in writing of the President, a majority of the members
of the Board of Directors or holders of at least a majority of the total voting
power of all outstanding shares of stock of this corporation then entitled to
vote, and may not be called absent such a request. Such request shall state the
purpose or purposes of the proposed meeting.
Section 5. Notice of Special Meetings. As soon as reasonably practicable
--------------------------
after receipt of a request as provided in Section 4 of this Article II, written
notice of a special meeting, stating the place, date (which shall be not less
than ten (10) nor more than sixty (60) days from the date of the notice) and
hour of the special meeting and the purpose or purposes for which the special
meeting is called, shall be given to each stockholder entitled to vote at such
special meeting.
Section 6. Scope of Business at Special Meeting. Business transacted at any
------------------------------------
special meeting of stockholders shall be limited to the purposes stated in the
notice.
Section 7. Quorum. The holders of a majority of the stock issued and
------
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business, except as otherwise provided by statute or by the
Certificate of Incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the chairman of the meeting or
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally notified. If the adjournment is for more than thirty
(30) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting as provided in Section 5
of this Article II.
Section 8. Qualifications to Vote. The stockholders of record on the books
----------------------
of the corporation at the close of business on the record date as determined by
the Board of Directors and only such stockholders shall be entitled to vote at
any meeting of stockholders or any adjournment thereof.
Section 9. Record Date. The Board of Directors may fix a record date for
-----------
the determination of the stockholders entitled to notice of or to vote at any
stockholders' meeting and at any adjournment thereof, and to fix a record date
for any other purpose. The record date shall not be more than sixty (60) nor
less than ten (10) days before the date of such meeting. If no record date is
fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given, or
if notice is waived, at the close of business on the day next preceding the day
on which the meeting is held. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply
2.
<PAGE>
to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
Section 10. Action at Meetings. When a quorum is present at any meeting,
------------------
the vote of the holders of a majority of the stock having voting power present
in person or represented by proxy shall decide any question brought before such
meeting, unless the question is one upon which by express provision of
applicable law or of the Certificate of Incorporation, a different vote is
required, in which case such express provision shall govern and control the
decision of such question.
Section 11. Voting and Proxies. Unless otherwise provided in the
------------------
Certificate of Incorporation, each stockholder shall at every meeting of the
stockholders be entitled to one (1) vote in person or by proxy for each share of
the capital stock having voting power held by such stockholder, but no proxy
shall be voted on after three (3) years from its date, unless the proxy provides
for a longer period. Each proxy shall be revocable unless expressly provided
therein to be irrevocable and unless it is coupled with an interest sufficient
in law to support an irrevocable power
Section 12. Nominations for Board of Directors. Nominations for election to
----------------------------------
the Board of Directors must be made by the Board of Directors or by any
stockholder of any outstanding class of capital stock of the corporation
entitled to vote for the election of directors. Nominations, other than those
made by the Board of Directors of the corporation, must be preceded by
notification in writing in fact received by the Secretary of the corporation not
less than sixty (60) days prior to any meeting of stockholders called for the
election of directors. Such notification shall contain the written consent of
each proposed nominee to serve as a director if so elected and the following
information as to each proposed nominee and as to each person, acting alone or
in conjunction with one or more other persons as a partnership, limited
partnership, syndicate or other group, who participates or is expected to
participate in making such nomination or in organizing, directing or financing
such nomination or solicitation of proxies to vote for the nominee:
(a) the name, age, residence, address, and business address of each
proposed nominee and of each such person;
(b) the principal occupation or employment, the name, type of
business and address of the corporation or other organization in which such
employment is carried on of each proposed nominee and of each such person;
(c) the amount of stock of the corporation owned beneficially,
either directly or indirectly, by each proposed nominee and each such
person; and
(d) a description of any arrangement or understanding of each
proposed nominee and of each such person with each other or any other
person regarding future employment or any future transaction to which the
corporation will or may be a party.
3.
<PAGE>
The presiding officer of the meeting shall have the authority to determine
and declare to the meeting that a nomination not preceded by notification made
in accordance with the foregoing procedure shall be disregarded.
Section 13. Consent of Stockholders in Lieu of Meeting. Any action required
------------------------------------------
to be taken, or which may be taken, at any annual or special meeting of
stockholders may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock having not less that the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
Section 14. Notice to Stockholders Not Consenting. Prompt notice of the
-------------------------------------
taking of corporate action without a meeting by less than unanimous consent
shall be given in writing to those stockholders who have not consented in
writing. In the event that the action which is consented to is such as would
have required the filing of a certificate under any Section of the General
Corporation Law of the State of Delaware if such action had been voted on by the
stockholders at a meeting thereof, the certificate filed under such other
Section shall state, in lieu of any statement required by such Section
concerning any vote of stockholders, that written consent has been given in
accordance with the provisions of said Section and that written notice to
non-consenting stockholders has been given as provided in this Bylaw.
Section 15. Stockholder Proposals for Meetings. At any meeting of the
----------------------------------
stockholders, only such business shall be conducted as shall be properly before
the meeting. To be properly before a meeting, business must be (a) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors, (b) otherwise properly brought before the meeting by
or at the direction of the Board of Directors, or (c) otherwise properly brought
before the meeting by a stockholder. For business to be properly brought before
a meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary. To be timely, a stockholder's notice must
be delivered to or mailed and received at the principal place of business of the
corporation not less than thirty (30) days nor more than sixty (60) days prior
to the meeting; provided, however, that in the event that less than forty (40)
days notice or prior public disclosure of the date of the meeting is given or
made to stockholders, notice by the stockholder to be timely must be received
not later than the close of business on the tenth day following the day on which
such notice of the date of the meeting was mailed or such public disclosure was
made. A stockholder's written notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before the meeting (a) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (b) the name and address as
they appear on the corporation's books of the stockholder proposing such
business, (c) the class and number of shares of the corporation which are
beneficially owned by such stockholder, and (d) any material interest of such
stockholder in such business. Notwithstanding anything in these Bylaws to the
contrary, no business shall be conducted at a meeting unless properly brought
before such meeting in accordance with the procedures set forth in this Section
15 of Article II. The chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section 15 of
Article II and if it shall be so determined, the chairman of the meeting shall
so
4.
<PAGE>
declare this to the meeting and such business not properly brought before the
meeting shall not be transacted.
ARTICLE III
DIRECTORS
Section 1. Powers. The business of the corporation shall be managed by or
------
under the direction of its Board of Directors, which may exercise all such
powers of the corporation and do all such lawful acts and things as are not by
applicable law or by the Certificate of Incorporation or by these Bylaws
directed or required to be exercised or done by the stockholders.
Section 2. Number; Election; Tenure and Qualification. The number of
------------------------------------------
directors which shall constitute the whole Board of Directors shall be fixed
from time to time by resolution of the Board of Directors or by the Stockholders
at an annual meeting of the Stockholders provided that the number of directors
shall be not less than one (1). With the exception of the first Board of
Directors, which shall be elected by the incorporator, and except as provided in
the corporation's Certificate of Incorporation or in Section 3 of this Article
III, the directors shall be elected at the annual meeting of the stockholders by
a plurality vote of the shares represented in person or by proxy and each
director elected shall hold office until his successor is elected and qualified
unless he shall resign, become disqualified, disabled, or otherwise removed.
Directors need not be stockholders.
Section 3. Vacancies and Newly Created Directorships. Unless otherwise
-----------------------------------------
provided in the Certificate of Incorporation, vacancies and newly-created
directorships resulting from any increase in the authorized number of directors
may be filled by a majority of the directors then in office, though less than a
quorum, or by a sole remaining director. The directors so chosen shall serve for
the remainder of the term of the vacated directorships being filled and until
their successors are duly elected and shall qualify, unless sooner displaced. If
there are no directors in office, then an election of directors may be held in
the manner provided by statute.
Section 4. Location of Meetings. The Board of Directors of the corporation
--------------------
may hold meetings, both regular and special, either within or without the State
of Delaware.
Section 5. Meeting of Newly Elected Board of Directors. The first meeting
-------------------------------------------
of each newly elected Board of Directors shall be held immediately following the
annual meeting of stockholders and no notice of such meeting shall be necessary
to the newly elected directors in order legally to constitute the meeting,
provided a quorum shall be present. In the event such meeting is not held at
such time, the meeting may be held at such time and place as shall be specified
in a notice given as hereinafter provided for special meetings of the Board of
Directors, or as shall be specified in a written waiver signed by all of the
directors.
Section 6. Regular Meetings. Regular meetings of the Board of Directors may
----------------
be held upon at least seven (7) days prior written notice at such time and at
such place as shall from time to time be determined by the Board of Directors;
provided that any director who is absent
5.
<PAGE>
when such a determination is made shall be given notice of such location. Notice
may be waived in accordance with Section 229 of the Delaware General Corporation
Law.
Section 7. Special Meetings. Special meetings of the Board of Directors may
----------------
be called by the President on seven (7) days' notice to each director by mail or
two (2) days' notice to each director by overnight courier service or facsimile;
special meetings shall be called by the President or Secretary in a like manner
and on like notice on the written request of two (2) directors unless the Board
of Directors consists of only one (1) director, in which case special meetings
shall be called by the President or Secretary in a like manner and on like
notice on the written request of the sole director. Notice may be waived in
accordance with Section 229 of the Delaware General Corporation Law.
Section 8. Notice. Notice of any special meeting shall be given to each
------
director at least ten (10) days prior to the meeting by written notice directed
to each director at his or her place of business. Such notice shall be deemed to
have been delivered when sent by registered mail, or by confirmed telex or
telecopy, to each director at his of her business address. Neither the business
to be transacted at, nor the purpose of any regular or special meeting of the
board of Directors need be specified in the notice or waiver of notice of such
meeting. The attendance of a director at any meeting shall constitute a waiver
of notice of such meeting, except where a director attends a meeting for the
express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened.
Section 9. Presumption of Assent. A director of the Corporation who is
---------------------
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be conclusively presumed to have assented to the action
taken, unless he or she shall file his or her written dissent to such action
with the person acting as the Secretary of the meeting before the adjournment
thereof, or shall forward such dissent by registered mail to the Secretary of
the Corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to a director who voted in favor of such action.
Section 10. Quorum and Action at Meetings. At all meetings of the Board of
-----------------------------
Directors, a majority of the directors then in office shall constitute a quorum
for the transaction of business, and the act of a majority of the directors
present at any meeting at which there is a quorum shall be the act of the Board
of Directors, except as may be otherwise specifically provided by statute or by
the Certificate of Incorporation. If a quorum shall not be present at any
meeting of the Board of Directors, the directors present thereat may adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
Section 11. Action Without a Meeting. Unless otherwise restricted by the
------------------------
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the board or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the Board of Directors or committee.
6.
<PAGE>
Section 12. Telephonic Meeting. Unless otherwise restricted by the
------------------
Certificate of Incorporation or these Bylaws, members of the Board of Directors,
or any committee designated by the Board of Directors, may participate in a
meeting of the Board of Directors, or any committee, upon proper notice duly
given, by means of conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other, and
such participation in a meeting shall constitute presence in person at the
meeting.
Section 13. Committees. The Board of Directors may, by resolution passed by
----------
a majority of the whole board, designate one or more committees, each committee
to consist of one (1) or more of the directors of the corporation. The Board of
Directors may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. In the absence of disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member.
Section 14. Committee Authority. Any such committee, to the extent provided
-------------------
in the resolution of the Board of Directors, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the corporation, and may authorize the seal of the corporation to
be affixed to all papers which may require it; but no such committee shall have
the power or authority in reference to amending the Certificate of
Incorporation, adopting an agreement of merger or consolidation, recommending to
the stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a dissolution, amending the
Bylaws of the corporation, or any action requiring unanimous consent of the
Board of Directors pursuant to the terms of the Certificate of Incorporation;
and, unless the resolution or the Certificate of Incorporation expressly so
provide, no such committee shall have the power or authority to declare a
dividend or to authorize the issuance of stock. Such committee or committees
shall have such name or names as may be determined from time to time by
resolution adopted by the Board of Directors.
Section 15. Committee Minutes. Each committee shall keep regular minutes of
-----------------
its meetings and report the same to the Board of Directors when required.
Section 16. Directors Compensation. Unless otherwise restricted by the
----------------------
Certificate of Incorporation or these Bylaws, the Board of Directors shall have
the authority to fix the compensation of directors. The directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors
and may be paid a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary as director. No such payment shall preclude any
director from serving the corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
Section 17. Removal of Directors. One or more of the directors may be
--------------------
removed, with or without cause, at a meeting of stockholders, by the affirmative
vote of the holders of a
7.
<PAGE>
majority of the outstanding stock then entitled to vote at an election of
directors. No director shall be removed at a meeting of stockholders unless the
notice of such meeting shall state a purpose of the meeting is to vote upon the
removal of one or more directors named in the notice. Only the named director or
directors may be removed at such meeting.
Section 18. Resignation. Any director or officer of the corporation may
-----------
resign at any time. Each such resignation shall be made in writing and shall
take effect at the time specified therein, or, if no time is specified, at the
time of its receipt by either the Board of Directors, the President or the
Secretary. The acceptance of a resignation shall not be necessary to make it
effective unless expressly so provided in the resignation.
Section 19. Chairman of the Board. The Board of Directors may, from time to
---------------------
time, appoint a Chairman, who shall preside at all meetings of the stockholders
and of the Board of Directors. He shall have and may exercise such powers as
are, from time to time, assigned to him by the Board of Directors and as
provided by law.
ARTICLE IV
NOTICES
Section 1. Notice to Directors and Stockholders. Whenever, under the
------------------------------------
provisions of the statutes or of the Certificate of Incorporation or of these
Bylaws, notice is required to be given to any director or stockholder, it shall
not be construed to mean personal notice, but such notice may be given in
writing, by mail, addressed to such director or stockholder, at his address as
it appears on the records of the corporation, with postage thereon prepaid, and
such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. An affidavit of the Secretary or an
Assistant Secretary or of the transfer agent of the corporation that the notice
has been given shall in the absence of fraud, be prima facie evidence of the
facts stated therein. Notice to directors may also be given by telephone,
facsimile or telegram.
Section 2. Waiver. Whenever any notice is required to be given under the
------
provisions of the statutes or of the Certificate of Incorporation or of these
Bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto. The written waiver need not specify the business to be
transacted at, nor the purpose of, any regular or special meeting of the
stockholders, directors, or members of a committee of directors. Attendance of a
person at a meeting shall constitute a waiver of notice of such meeting, except
when the person attends a meeting for the express purpose of objecting at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened.
ARTICLE V
OFFICERS
Section 1. Enumeration. The officers of the corporation shall be chosen by
-----------
the Board of Directors and shall be a President, a Secretary, a Treasurer or
Chief Financial Officer and such other officers with such other titles as the
Board of Directors shall determine. The Board of Directors may elect from among
its members a Chairman or Chairmen of the Board and a
8.
<PAGE>
Vice Chairman of the Board. The Board of Directors may also choose one (1) or
more Vice-Presidents and Assistant Secretaries. Any number of offices may be
held by the same person, unless the Certificate of Incorporation or these Bylaws
otherwise provide.
Section 2. Election. The Board of Directors at its first meeting after each
--------
annual meeting of stockholders shall elect a President, a Secretary, a Treasurer
and such other officers with such other titles as the Board of Directors shall
determine.
Section 3. Removal. Any officer elected or appointed by the Board of
-------
Directors may be removed by the Board of Directors whenever in its judgement the
best interests of the Corporation would be served thereby, but such removal
shall be without prejudice to the contract rights, if any, of the person so
removed.
Section 4. Appointment of Other Agents. The Board of Directors may appoint
---------------------------
such other officers and agents as it shall deem necessary, who shall hold their
offices for such terms and shall exercise such powers and perform such duties as
shall be determined from time to time by the Board of Directors.
Section 5. Compensation. The salaries of all officers of the corporation
------------
shall be fixed by the Board of Directors or a committee thereof. The salaries of
agents of the corporation shall, unless fixed by the Board of Directors, be
fixed by the President or any Vice-President of the corporation.
Section 6. Tenure. The officers of the corporation shall hold office until
------
their successors are chosen and qualify. Any officer elected or appointed by the
Board of Directors may be removed at any time by the affirmative vote of a
majority of the directors of the Board of Directors. Any vacancy occurring in
any office of the corporation shall be filled by the Board of Directors.
Section 7. Chairman of the Board and Vice-Chairman of the Board. The
----------------------------------------------------
Chairman or Chairmen of the Board, if any, shall preside at all meetings of the
Board of Directors and of the stockholders at which he or they shall be present.
He or they shall have and may exercise such powers as are, from time to time,
assigned to him or them by the Board and as may be provided by law. In the
absence of the Chairman of the Board, the Vice Chairman of the Board, if any,
shall preside at all meetings of the Board of Directors and of the stockholders
at which he shall be present. He shall have and may exercise such powers as are,
from time to time, assigned to him by the Board of Directors and as may be
provided by law.
Section 8. President. The President shall be the Chief Executive Officer of
---------
the corporation unless such title is assigned to another officer of the
corporation; in the absence of a Chairman and Vice Chairman of the Board, the
President shall preside as the chairman of meetings of the stockholders and the
Board of Directors; and the President shall have general and active management
of the business of the corporation and shall see that all orders and resolutions
of the Board of Directors are carried into effect. The President or any
Vice-President shall execute bonds, mortgages and other contracts requiring a
seal, under the seal of the corporation, except where required or permitted by
law to be otherwise signed and executed
9.
<PAGE>
and except where the signing and execution thereof shall be expressly delegated
by the Board of Directors to some other officer or agent of the corporation.
Section 9. Vice-President. In the absence of the President or in the event
--------------
of his inability or refusal to act, the Vice-President, if any (or in the event
there be more than one Vice-President, the Vice-Presidents in the order
designated by the Board of Directors, or in the absence of any designation, then
in the order of their election) shall perform the duties of the President, and
when so acting shall have all the powers of and be subject to all the
restrictions upon the President. The Vice-President shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe.
Section 10. Secretary. The Secretary shall attend all meetings of the Board
---------
of Directors and all meetings of the stockholders and record all the proceedings
of the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He shall give, or cause to be given, notice of all meetings of
the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
President, under whose supervision he shall be subject. He shall have custody of
the corporate seal of the corporation and he, or an Assistant Secretary, shall
have authority to affix the same to any instrument requiring it and when so
affixed, it may be attested by his signature or by the signature of such
Assistant Secretary. The Board of Directors may give general authority to any
other officer to affix the seal of the corporation and to attest the affixing by
his signature.
Section 11. Assistant Secretary. The Assistant Secretary, or if there be
-------------------
more than one (1), the Assistant Secretaries in the order determined by the
Board of Directors (or if there be no such determination, then in the order of
their election) shall, in the absence of the Secretary or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
Secretary and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
Section 12. Treasurer. The Treasurer shall have the custody of the
---------
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the corporation as may be
ordered by the Board of Directors, President or Chief Executive Officer, taking
proper vouchers for such disbursements, and shall render to the President, Chief
Executive Officer and the Board of Directors, at its regular meetings, or when
the Board of Directors so requires, an account of all his transactions as
Treasurer and of the financial condition of the corporation. If required by the
Board of Directors, the Treasurer shall give the corporation a bond (which shall
be renewed every six (6) years) in such sum and with such surety or sureties as
shall be satisfactory to the Board of Directors for the faithful performance of
the duties of his office and for the restoration to the corporation, in case of
his death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the corporation.
10.
<PAGE>
ARTICLE VI
CAPITAL STOCK
Section 1. Certificates. Every holder of stock in the corporation shall be
------------
entitled to have a certificate, signed by, or in the name of the corporation by,
the Chairman or Vice-Chairman of the Board of Directors, or the President or a
Vice-President and the Treasurer or the Secretary or an Assistant Secretary of
the corporation, certifying the number of shares owned by him in the
corporation. Certificates may be issued for partly paid shares and in such case
upon the face or back of the certificates issued to represent any such partly
paid shares, the total amount of the consideration to be paid therefor and the
amount paid thereon shall be specified.
Section 2. Class or Series. If the corporation shall be authorized to issue
---------------
more than one class of stock or more than one series of any class, the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights shall be set forth
in full or summarized on the face or back of the certificate which the
corporation shall issue to represent such class or series of stock, provided
that, except as otherwise provided in Section 202 of the General Corporation Law
of Delaware, in lieu of the foregoing requirements, there may be set forth on
the face or back of the certificate which the corporation shall issue to
represent such class or series of stock, a statement that the corporation will
furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
Section 3. Signature. Any of or all of the signatures on the certificate
---------
may be facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
Section 4. Lost Certificates. The Board of Directors may direct a new
-----------------
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to advertise the same in such manner
as it shall require and/or to give the corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the corporation
with respect to the certificate alleged to have been lost, stolen or destroyed.
Section 5. Transfer of Stock. Upon surrender to the corporation or the
-----------------
transfer agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
11.
<PAGE>
Section 6. Record Date. In order that the corporation may determine the
-----------
stockholders entitled to notice of or to vote at any meeting of stockholder or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting, nor more than sixty (60) days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
Section 7. Registered Stockholders. The corporation shall be entitled to
-----------------------
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of Delaware.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the corporation,
---------
subject to the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property or in shares of capital
stock, subject to the provisions of the Certificate of Incorporation. Before
payment of any dividend, there may be set aside out of any funds of the
corporation available for dividends such sum or sums as the Board of Directors
from time to time, in their absolute discretion, think proper as a reserve or
reserves to meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the corporation, or for such other purposes as the
Board of Directors shall think conducive to the interest of the corporation, and
the Board of Directors may modify or abolish any such reserve in the manner in
which it was created.
Section 2. Checks. All checks or demands for money and notes of the
------
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 3. Deposits. All funds of the Corporation not otherwise employed
--------
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies or other deposits as the Board of Directors may select.
Section 4. Fiscal Year. The fiscal year of the corporation shall be fixed
-----------
by resolution of the Board of Directors.
Section 5. Seal. The Board of Directors may adopt a corporate seal having
----
inscribed thereon the name of the corporation, the year of its organization and
the words "Corporate Seal,
12.
<PAGE>
Delaware". The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
Section 6. Loans. The Board of Directors of this corporation may, without
-----
stockholder approval, authorize loans to, or guaranty obligations of, or
otherwise assist, including, without limitation, the adoption of employee
benefit plans under which loans and guarantees may be made, any officer or other
employee of the corporation or of its subsidiary, including any officer or
employee who is a director of the corporation or its subsidiary, whenever, in
the judgment of the Board of Directors, such loan, guaranty or assistance may
reasonably be expected to benefit the corporation. The loan, guaranty or other
assistance may be with or without interest, and may be unsecured, or secured in
such manner as the Board of Directors shall approve, including, without
limitation, a pledge of shares of stock of the corporation.
Section 7. Contracts. The Board of Directors may authorize any officer or
---------
officers, agent or agents, to enter into any contract or execute and deliver any
instrument in the name and on behalf of the Corporation, and such authority may
be general or confirmed to specified instances.
Section 8. Waiver of Notice. Whenever any notice whatever is required to be
----------------
given by law, the Certificate of Incorporation or under the provisions of these
Bylaws, a written waiver thereof, signed by the person or persons entitled to
such notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice.
Section 9. Headings. Articles or section headings are inserted herein only
--------
for convenience of reference and shall not be considered in the construction of
any provision hereof.
ARTICLE VIII
INDEMNIFICATION
Section 1. Scope. The corporation shall, to the fullest extent permitted by
-----
Section 145 of the Delaware General Corporation Law, as that Section may be
amended and supplemented from time to time, indemnify any director, officer,
employee or agent of the corporation, against expenses (including attorneys'
fees), judgments, fines, amounts paid in settlement and/or other matters
referred to in or covered by that Section, by reason of the fact that he is or
was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise.
Section 2. Advancing Expenses. Expenses incurred by a director of the
------------------
corporation in defending a civil or criminal action, suit or proceeding by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation (or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise) shall be paid by the corporation in advance
of the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
corporation as authorized by relevant provisions of the Delaware General
13.
<PAGE>
Corporation Law; provided, however, the corporation shall not be required to
advance such expenses to a director (i) who commences any action, suit or
proceeding as a plaintiff unless such advance is specifically approved by a
majority of the Board of Directors, or (ii) who is a party to an action, suit or
proceeding brought by the corporation and approved by a majority of the Board of
Directors which alleges willful misappropriation of corporate assets by such
director, disclosure of confidential information in violation of such director's
fiduciary or contractual obligations to the corporation, or any other willful
and deliberate breach in bad faith of such director's duty to the corporation or
its stockholders.
Section 3. Liability Offset. The corporation's obligation to provide
----------------
indemnification under this Article VIII shall be offset to the extent the
indemnified party is indemnified by any other source including, but not limited
to, any applicable insurance coverage under a policy maintained by the
corporation, the indemnified party or any other person.
Section 4. Continuing Obligation. The provisions of this Article VIII shall
---------------------
be deemed to be a contract between the corporation and each director of the
corporation who serves in such capacity at any time while this bylaw is in
effect, and any repeal or modification thereof shall not affect any rights or
obligations then existing with respect to any state of facts then or theretofore
existing or any action, suit or proceeding theretofore or thereafter brought
based in whole or in part upon any such state of facts.
Section 5. Nonexclusive. The indemnification and advancement of expenses
------------
provided for in this Article VIII shall (i) not be deemed exclusive of any other
rights to which those indemnified may be entitled under any by-law, agreement or
vote of stockholders or disinterested directors or otherwise, both as to action
in their official capacities and as to action in another capacity while holding
such office, (ii) continue as to a person who has ceased to be a director and
(iii) inure to the benefit of the heirs, executors and administrators of such a
person.
Section 6. Other Persons. In addition to the indemnification rights of
-------------
directors, officers, employees, or agents of the corporation, the Board of
Directors in its discretion shall have the power on behalf of the corporation to
indemnify any other person made a party to any action, suit or proceeding who
the corporation may indemnify under Section 145 of the Delaware General
Corporation Law.
Section 7. Definitions. The phrases and terms set forth in this Article
-----------
VIII shall be given the same meaning as the identical terms and phrases are
given in Section 145 of the Delaware General Corporation Law, as that Section
may be amended and supplemented from time to time.
ARTICLE IX
AMENDMENTS
Except as otherwise provided in the Certificate of Incorporation, these
Bylaws may be altered, amended or repealed, or new Bylaws may be adopted, by the
holders of a majority of the outstanding voting shares or by the Board of
Directors, when such power is conferred upon the Board of Directors by the
Certificate of Incorporation, at any regular meeting of the
14.
<PAGE>
stockholders or of the Board of Directors or at any special meeting of the
stockholders or of the Board of Directors if notice of such alteration,
amendment, repeal or adoption of new Bylaws be contained in the notice of such
special meeting. If the power to adopt, amend or repeal Bylaws is conferred upon
the Board of Directors by the Certificate of Incorporation, it shall not divest
or limit the power of the stockholders to adopt, amend or repeal Bylaws.
[NEXT PAGE - CERTIFICATE OF SECRETARY]
15.
<PAGE>
CERTIFICATE OF SECRETARY
The undersigned certifies:
(1) That the undersigned is the duly elected and acting Secretary of
InFlow, Inc., a Delaware corporation (the "Corporation"); and
(2) That the foregoing Bylaws constitute the Bylaws of the Corporation
as duly adopted by the Action by Written Consent dated the 26th day of
September, 1997.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the
seal of the Corporation as of this 26th day of September, 1997.
/s/ Joel C. Daly
----------------------------
Joel C. Daly, Secretary
[SEAL]
16.
<PAGE>
Exhibit 10.1
INFLOW, INC.
SERIES A PREFERRED
STOCK PURCHASE AGREEMENT
APRIL 5, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Purchase and Sale of Stock.......................................... 1
1.1 Sale and Issuance of Series A Preferred Stock.................. 1
1.2 Closing........................................................ 1
1.3 Subsequent Sale of Series A Preferred Stock.................... 1
2. Representations and Warranties of the Company....................... 2
2.1 Organization, Good Standing, Power and Qualification........... 2
2.2 Capitalization and Voting Rights............................... 2
2.3 Subsidiaries................................................... 3
2.4 Authorization.................................................. 3
2.5 Valid Issuance of Preferred and Common Stock................... 3
2.6 Consents....................................................... 3
2.7 Offering....................................................... 4
2.8 Litigation..................................................... 4
2.9 Proprietary Information Agreements............................. 4
2.10 Patents and Trademarks......................................... 4
2.11 Compliance with Other Instruments.............................. 5
2.12 Agreements; Action............................................. 5
2.13 Related-Party Transactions..................................... 6
2.14 Financial Statements........................................... 6
2.15 Changes........................................................ 6
2.16 Tax Returns.................................................... 7
2.17 Permits........................................................ 7
2.18 Environmental and Safety Laws.................................. 8
2.19 Disclosure..................................................... 8
2.20 Registration Rights............................................ 8
2.21 Corporate Documents............................................ 8
2.22 Title to Property and Assets................................... 8
2.23 Labor Agreements and Actions................................... 9
2.24 Insurance...................................................... 9
2.25 Year 2000 Compliance........................................... 9
2.26 Governmental Regulations....................................... 9
2.27 Small Business Concern......................................... 10
3. Representations and Warranties of the Investors..................... 10
3.1 Authorization.................................................. 10
3.2 Purchase Entirely for Own Account.............................. 10
3.3 Disclosure of Information...................................... 10
3.4 Investment Experience.......................................... 10
3.5 Accredited Investor............................................ 11
3.5 Restricted Securities.......................................... 11
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
3.7 Further Limitations on Disposition............................. 11
3.8 Legends........................................................ 12
3.9 Tax Advisors................................................... 12
3.10 Investor Counsel.............................................. 12
4. Conditions of Investor's Obligations at Closing..................... 12
4.1 Representations and Warranties................................. 12
4.2 Performance.................................................... 12
4.3 Compliance Certificate......................................... 12
4.4 Qualifications................................................. 13
4.5 Proceedings and Documents...................................... 13
4.6 Proprietary Information Agreements............................. 13
4.7 Board of Directors............................................. 13
4.8 Opinion of Company Counsel..................................... 13
4.9 Investors' Rights Agreement.................................... 13
4.10 Stockholders' Agreement....................................... 13
4.11 No Material Adverse Change..................................... 13
4.12 No Litigation or Other Proceedings............................. 13
4.13 SBA Documents and Information.................................. 13
5. Conditions of the Company's Obligations at Closing.................. 14
5.1 Representations and Warranties................................. 14
5.2 Payment of Purchase Price...................................... 14
5.3 Investors' Rights Agreement.................................... 14
5.4 Stockholders' Agreement........................................ 14
6. Miscellaneous....................................................... 14
6.1 Survival....................................................... 14
6.2 Successors and Assigns......................................... 14
6.3 Governing Law.................................................. 14
6.4 Titles and Subtitles........................................... 14
6.5 Notices........................................................ 14
6.6 Finder's Fee................................................... 15
6.7 Expenses....................................................... 15
6.8 Amendments and Waivers......................................... 15
6.9 Effect of Amendment or Waiver.................................. 15
6.10 Severability................................................... 15
6.11 Aggregation of Stock.......................................... 16
6.12 Entire Agreement.............................................. 16
6.13 Counterparts.................................................. 16
ii
</TABLE>
SCHEDULE A Schedule of Investors
SCHEDULE B Schedule of Exceptions
SCHEDULE 2.2 Post-Closing Capitalization
<PAGE>
SCHEDULE 2.10 Intellectual Property
SCHEDULE 2.12 Material Contracts
SCHEDULE 2.22 Property
EXHIBIT A Restated Certificate of Incorporation
EXHIBIT B Investors' Rights Agreement
EXHIBIT C List of Stockholders
EXHIBIT D Opinion of Counsel for the Company
EXHIBIT E Stockholders' Agreement
iii
<PAGE>
PREFERRED STOCK PURCHASE AGREEMENT
----------------------------------
THIS PREFERRED STOCK PURCHASE AGREEMENT is made on the fifth day of
April, 1999, by and among InFlow, Inc., a Delaware corporation (the "Company"),
and the investors listed on Schedule A hereto (each, an "Investor" and
----------
collectively, the "Investors").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
--------------------------
1.1 Sale and Issuance of Series A Preferred Stock.
---------------------------------------------
(a) The Company shall adopt and file with the Secretary of
State of Delaware on or before the Closing (as defined below) the Amended and
Restated Certificate of Incorporation in the form attached hereto as Exhibit A
(the "Restated Certificate"). ---------
(b) Subject to the terms and conditions of this Agreement,
each Investor agrees, severally, to purchase at the Closing and the Company
agrees to sell and issue to each Investor at the Closing, that number of shares
of the Company's Series A Preferred Stock set forth opposite each Investor's
name on Schedule A hereto for the purchase price set forth thereon.
----------
1.2 Closing. The purchase and sale of the Series A Preferred
-------
Stock shall take place at the offices of Brobeck, Phleger & Harrison LLP, 1125
Seventeenth Street, Suite 2525, Denver, Colorado 80202 at 10:00 a.m., on April
5, 1999, or at such other time and place as the Company and Investors acquiring
in the aggregate more than half the shares of Series A Preferred Stock sold
pursuant hereto mutually agree upon orally or in writing (which time and place
are designated as the "Closing"). At the Closing the Company shall deliver to
each Investor a certificate representing the Series A Preferred Stock that such
Investor is purchasing against payment of the purchase price therefor by check,
wire transfer, cancellation of indebtedness or any combination thereof. In the
event that payment by an Investor is made, in whole or in part, by cancellation
of indebtedness, then such Investor shall surrender to the Company for
cancellation at the Closing any evidence of such indebtedness or shall execute
an instrument of cancellation in form and substance acceptable to the Company.
In addition, at the Closing the Company shall deliver to any Investor choosing
to pay any part of the purchase price of the Series A Preferred Stock by
cancellation of indebtedness, a check in the amount of any interest accrued on
such indebtedness through the Closing.
1.3 Subsequent Sale of Series A Preferred Stock. The
-------------------------------------------
Company may sell up to the balance of the authorized number of shares of Series
A Preferred Stock not sold at the Closing to such purchasers as it shall select,
at a price not less than $3.50 per share, provided the agreement for sale is
executed not later than July 1, 1999. Any such purchaser shall become a party to
this Agreement and that certain Investors' Rights Agreement dated April 5, 1999,
by and among the Company and the Investors, the form of which is attached hereto
as Exhibit B (the "Investors' Rights Agreement") and that certain Stockholders'
---------
Agreement, by and among the
<PAGE>
Company and the Investors, the form of which is attached hereto as Exhibit E
---------
(the "Stockholders' Agreement") and shall have the rights and obligations
hereunder and thereunder.
2. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to each Investor that, except as set forth on a Schedule
of Exceptions (the "Schedule of Exceptions") furnished each Investor and special
counsel for the Investors prior to execution hereof and attached hereto as
Schedule B, which exceptions shall be deemed to be representations and
- ----------
warranties as if made hereunder:
2.1 Organization, Good Standing, Power and Qualification. The
----------------------------------------------------
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware. The Company has all requisite corporate
power and authority to own and operate its property, to lease the property it
operates as lessee and to conduct the business in which it is currently, or is
currently proposed to be, engaged and has the power and authority to execute,
deliver and perform its obligations under this Agreement, the Investors' Rights
Agreement and the Stockholders' Agreement. The Company is duly qualified to
transact business and is in good standing in each jurisdiction in which the
failure to so qualify would have a material adverse effect on the business,
assets or financial condition of the Company (an "MAE").
2.2 Capitalization and Voting Rights. (a) The authorized capital
--------------------------------
of the Company will consist immediately prior to the Closing of:
(i) Preferred Stock. 3,337,513 shares of Preferred Stock, par
---------------
value $0.001 (the "Preferred Stock"), of which all such shares have been
designated Series A Preferred Stock (the "Series A Preferred Stock") and up to
37,857 shares of which will be sold at the Closing pursuant to this Agreement.
The rights, privileges and preferences of the Series A Preferred Stock will be
as stated in the Restated Certificate.
(ii) Common Stock. 15,000,000 shares of common stock, par value
------------
$0.001 ("Common Stock"), of which 3,060,000 are issued and outstanding.
(iii) The outstanding shares of Common Stock are owned by the
stockholders and in the numbers specified in Exhibit C hereto.
---------
(iv) The outstanding shares of Common Stock are all duly and validly
authorized and issued, fully paid and nonassessable, and were issued in
compliance with all applicable state and federal laws concerning the issuance of
securities.
(v) Except for (A) the conversion privileges of the Series A
Preferred Stock to be issued under this Agreement, (B) the rights provided in
Section 3 of the Stockholders' Agreement, (C) the conversion privileges of those
certain Convertible Promissory Notes held by each of Art Zeile and Joel Daly to
be converted into Series A Preferred Stock at the Closing, and (D) currently
outstanding options to purchase 230,000 shares of Common Stock granted to
employees pursuant to the Company's 1997 Stock Option Plan (the "Option Plan"),
there are no outstanding options, warrants, rights (including conversion or
preemptive rights) or agreements for the purchase or acquisition from the
Company of any shares of its capital stock. In addition to the aforementioned
options, the Company has reserved an additional 414,168
2
<PAGE>
shares of its Common Stock for purchase upon exercise of options to be granted
in the future under the Option Plan. The Company is not a party or subject to
any agreement or understanding which affects or relates to the voting or giving
of written consents with respect to any security or other ownership interest in
the Company or by a director of the Company.
(b) As of the Closing and after giving effect to the
transactions contemplated by this Agreement, the authorized capital stock of the
Company and the issued and outstanding shares thereof are as described on
Schedule 2.2.
- ------------
2.3 Subsidiaries. The Company does not presently own or control,
------------
directly or indirectly, any interest in any other corporation, association, or
other business entity. The Company is not a participant in any joint venture,
partnership, or similar arrangement.
2.4 Authorization. All corporate action on the part of the Company,
-------------
its officers, directors and stockholders necessary for the authorization,
execution and delivery of this Agreement, the Investors' Rights Agreement, and
the Stockholders' Agreement, the performance of all obligations of the Company
hereunder and thereunder, and the authorization (or, in the case of the Common
Stock, reservation for issuance), sale and issuance of the Series A Preferred
Stock being sold hereunder and the Common Stock issuable upon conversion of the
Series A Preferred Stock has been taken or will be taken prior to the Closing.
This Agreement, the Investors' Rights Agreement, and the Stockholders' Agreement
constitute valid and legally binding obligations of the Company, enforceable in
accordance with their respective terms, except (i) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting enforcement of creditors' rights generally, (ii) as
limited by laws relating to the availability of specific performance, injunctive
relief or other equitable remedies, and (iii) to the extent the indemnification
provisions contained in the Investors' Rights Agreement may be limited by
applicable federal or state securities laws.
2.5 Valid Issuance of Preferred and Common Stock. The Series A
--------------------------------------------
Preferred Stock that is being purchased by the Investors hereunder, when issued,
sold and delivered in accordance with the terms of this Agreement for the
consideration expressed herein, will be duly and validly issued, fully paid and
nonassessable, free and clear of all liens and other encumbrances and will be
free of restrictions on transfer, other than restrictions on transfer under this
Agreement, the Investors' Rights Agreement, the Stockholders' Agreement and
under applicable state and federal securities laws. The Common Stock issuable
upon conversion of the Series A Preferred Stock purchased under this Agreement
has been duly and validly reserved for issuance and, upon issuance in accordance
with the terms of the Restated Certificate, will be duly and validly issued,
fully paid and nonassessable, free and clear of all liens and other encumbrances
and will be free of restrictions on transfer, other than restrictions on
transfer under this Agreement, the Investors' Rights Agreement, the
Stockholders' Agreement and under applicable state and federal securities laws.
2.6 Consents. No consent, approval, order or authorization of, or
--------
registration, qualification, designation, declaration or filing with, any
federal, state or local governmental authority or any individual, firm,
corporation, partnership, trust, limited liability company, incorporated or
unincorporated association, joint venture, joint stock company or other entity
of any kind (each, a "Person") on the part of the Company is required in
connection with
3
<PAGE>
the consummation of the transactions contemplated by this Agreement, except for
filings required pursuant to applicable federal and state securities laws and
blue sky laws, which filings will be effected within the required statutory
period.
2.7 Offering. No form of general solicitation or general advertising
--------
was used by the Company or its representatives in connection with the offer or
sale of the Series A Preferred Stock or other securities. Assuming the truth and
accuracy of each Investor's representations set forth in Section 3 of this
Agreement, the offer, sale and issuance of the Series A Preferred Stock as
contemplated by this Agreement are exempt from the registration requirements of
the Securities Act of 1933, as amended (the "Act").
2.8 Litigation. There is no action, suit, proceeding or
----------
investigation pending, or to the Company's knowledge, currently threatened
against the Company that questions the validity of this Agreement, the
Investors' Rights Agreement or the Stockholders' Agreement or the right of the
Company to enter into any of the foregoing or to consummate the transactions
contemplated hereby or thereby, or that would have, either individually or in
the aggregate, an MAE. The Company is not a party or subject to the provisions
of any order, writ, injunction, judgment or decree of any court or government
agency or instrumentality. There is no action, suit, proceeding or investigation
by the Company currently pending or that the Company intends to initiate.
2.9 Proprietary Information Agreements. Each employee and officer of
----------------------------------
the Company has executed a Proprietary Information and Inventions Agreement in
substantially the form provided to special counsel to the Investors.
2.10 Patents and Trademarks. Schedule 2.10 sets forth a complete and
----------------------
accurate list of and describes all franchises, licenses, patents, patent rights,
patent applications, trademarks, trademark rights, service marks, service mark
rights, trade names, trade name rights, copyrights and rights with respect to
any of the foregoing (collectively, "Intellectual Property") presently owned or
held by the Company. The Company owns the right to use all of the Intellectual
Property. To the actual knowledge of the Company (without independent
investigation), the Intellectual Property is all that is necessary for the
Company to conduct its business as presently conducted. To its knowledge (but
without having conducted any special investigation or patent search), no
Intellectual Property conflicts with or infringes on the valid rights of others
and the Company has not received any notice of infringement upon or conflict
with the asserted rights of others. No event has occurred which permits, or
after notice or lapse of time would permit, the revocation or termination of any
of the Intellectual Property. The Company has a valuable body of trade secrets,
including know-how, concepts, computer programs and other technical data (the
"Proprietary Information"). To its knowledge, the Company has the right to use
the Proprietary Information free and clear of any rights, liens, encumbrances or
claims of others, except that the possibility exists that other persons may have
independently developed trade secrets or technical information similar or
identical to those of the Company. The Company is not aware of any such
independent development nor of any misappropriation of its Proprietary
Information. The Company is not aware that any of its employees is obligated
under any contract (including licenses, covenants or commitments of any nature)
or other agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with the use of his or her best
efforts to promote the
4
<PAGE>
interests of the Company or that would conflict with the Company's business. The
Company does not believe it is or will be necessary to utilize any inventions of
any of its employees (or people it currently intends to hire) made prior to
their employment by the Company, except for inventions that have been assigned
or licensed to the Company as of the date hereof.
2.11 Compliance with Other Instruments. The Company is not in
---------------------------------
violation of any provision of its Restated Certificate or Bylaws or any
securities issued by the Company, indenture, credit agreement, contract,
agreement, instrument or other undertaking ("Contractual Obligations") or any
judgment, order, writ, decree or contract, statute, rule or regulation to which
the Company or its assets or property is subject ("Requirements of Law"), a
violation of which would have an MAE. The execution, delivery and performance of
this Agreement, the Investors' Rights Agreement and the Stockholders' Agreement
and the consummation of the transactions contemplated hereby and thereby will
not result in any such violation, or be in conflict with or constitute, with or
without the passage of time and giving of notice, either a default under any
Contractual Obligation or Requirement of Law or an event that results in the
creation of any lien, charge or encumbrance upon any assets of the Company or
the suspension, revocation, impairment, forfeiture or nonrenewal of any material
permit, license, authorization or approval applicable to the Company, its
business or operations or any of its assets or properties.
2.12 Agreements; Action. (a) Except for agreements explicitly
------------------
contemplated hereby, there are no agreements, understandings or proposed
transactions between the Company and any of its officers, directors, affiliates
or any affiliate thereof.
(b) Except for this Agreement, the Investors' Rights Agreement
and the Stockholders' Agreement, Schedule 2.12 hereto sets forth a complete and
-------------
accurate list of all material Contractual Obligations of the Company in effect
on and as of the Closing. Each such Contractual Obligation is valid and
enforceable by the Company against any other party thereto in accordance with
its terms except to the extent that such enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium and other laws of
general application affecting enforcement of creditors' rights generally, and by
laws relating to the availability of specific performance, injunctive relief or
other equitable remedies. The Company has performed and is in compliance with
all of the terms of such Contractual Obligations and all instruments and
agreements relating thereto and no default or event of default, or event or
condition which with notice or lapse of time or both would constitute such a
default or event of default on its part or on the part of any other party
thereto exists with respect to any material Contractual Obligation of the
Company. The Company has no actual knowledge that any such Contractual
Obligation contains any contractual requirement with which there is a reasonable
likelihood the Company will be unable to comply and such failure to comply would
likely result in a MAE or the Company's compliance is reasonably likely to
result in or MAE.
(c) There are no judgments, orders, writs or decrees to which
the Company is a party or by which it is bound that involve obligations
(contingent or otherwise) of, or payments to the Company, in excess of $25,000.
(d) The Company has not (i) declared or paid any dividends or
authorized or made any distribution upon or with respect to any class or series
of its capital
5
<PAGE>
stock, (ii) incurred any indebtedness for money borrowed or any other
liabilities individually in excess of $25,000 or, in the case of indebtedness
and/or liabilities individually less than $10,000, in excess of $50,000 in the
aggregate, (iii) made any loans or advances to any Person, other than advances
in the ordinary course of business, or (iv) sold, exchanged or otherwise
disposed of any of its assets or rights, other than the sale of its inventory in
the ordinary course of business.
(e) For the purposes of subsections (c) and (d) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same Person (including Persons the
Company has reason to believe are affiliated therewith) shall be aggregated for
the purpose of meeting the individual minimum dollar amounts of such
subsections.
2.13 Related-Party Transactions. No employee, officer or director of
--------------------------
the Company or member of his or her immediate family is indebted to the Company,
nor is the Company indebted (or committed to make loans or extend or guarantee
credit) to any of them. To the best of the Company's knowledge, none of such
persons has any direct or indirect ownership interest in any firm or corporation
with which the Company is affiliated or with which the Company has a business
relationship, or any firm or corporation that competes with the Company, except
that employees, officers or directors of the Company and members of their
immediate families may own stock in publicly traded companies that may compete
with the Company. No member of the immediate family of any officer or director
of the Company is directly or indirectly interested in any material Contractual
Obligation with the Company.
2.14 Financial Statements. The Company has delivered to each Investor
--------------------
its audited financial statements (balance sheet and statement of operations,
statement of stockholders' equity and statement of cash flows, including notes
thereto) at December 31, 1998 and for the fiscal year then ended and its
unaudited financial statements (balance sheet and statement of operations,
statement of stockholders' equity and statement of cash flows) at February 28,
1999 and for the two-month period then ended (the "Financial Statements"). The
Financial Statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
indicated and with each other, except that unaudited Financial Statements may
not contain all footnotes required by generally accepted accounting principles.
The Financial Statements fairly present the assets, liabilities, financial
condition and operating results of the Company as of the dates, and for the
periods, indicated therein, subject in the case of unaudited Financial
Statements to normal year-end audit adjustments. Except as set forth in the
Financial Statements, the Company has no liabilities or obligations, contingent
or otherwise, other than (i) liabilities incurred in the ordinary course of
business subsequent to December 31, 1998 and (ii) obligations under contracts
and commitments incurred in the ordinary course of business and not required
under generally accepted accounting principles to be reflected in the Financial
Statements, which, in both cases, individually or in the aggregate, are not
material to the financial condition or operating results of the Company and
which the Company has satisfied as they have become due. Except as disclosed in
the Financial Statements, the Company is not a guarantor or indemnitor of any
indebtedness of any other Person. The Company maintains and will continue to
maintain a standard system of accounting established and administered in
accordance with generally accepted accounting principles.
2.15 Changes. Since December 31, 1998 there has not been:
-------
6
<PAGE>
(a) any change in the assets, liabilities, financial condition or
operating results of the Company from that reflected in the Financial
Statements, except changes in the ordinary course of business consistent with
past practice that have not had an MAE;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets, properties, financial
condition, operating results or business of the Company;
(c) any waiver by the Company of a material right or of a
material debt owed to it;
(d) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by the Company, except in the ordinary
course of business consistent with past practice and not material to the assets,
properties, financial condition, operating results or business of the Company;
(e) any material change or amendment to a contract or arrangement
required to be set forth on Schedule 2.12 by which the Company or any of its
assets or properties is bound or subject;
(f) any material change in any compensation arrangement or
agreement with any employee; or
(g) any agreement or commitment by the Company to do any of the
things described in this Section 2.15.
2.16 Tax Returns. The Company has timely filed all federal, state,
-----------
county, local and foreign income and other tax returns, reports and declarations
(collectively, "Returns") relating to all net income, gross income, gross
receipts, sales, use, ad valorem, transfer, franchise, profits, license,
withholding, payroll, employment, excise, severance, stamp, occupation, premium,
property or windfall profits taxes, or other taxes of any kind whatsoever,
together with any interest and any penalties, additions to tax or additional
amounts imposed by any taxing authority (domestic or foreign) upon the Company
("Taxes") which are required by applicable law to be filed except where the
failure to do so would not be reasonably likely to have an MAE. No audits of
federal income tax Returns of the Company have been conducted at any time since
its formation and the Company has not been advised that any of its returns have
been or are being audited. The Company has paid, or where payment is not
required to be made, has made adequate provision on its books and financial
statements for the payment of, all Taxes in respect of all periods covered by
the Returns and any other taxable period ending on or before the date hereof
except where the failure to do so would not be reasonably likely to have an MAE.
No deficiencies for any Tax, assessment or governmental charge have been
asserted or assessed against the Company which have not been paid, settled or
adequately provided for and there is no basis for.
2.17 Permits. The Company (i) has all material governmental or other
-------
regulatory approvals, licenses, permits and other authorizations in accordance
with all Requirements of Law for it to conduct its business, each of which is in
full force and effect, is final and not subject to review on appeal and is not
the subject of any pending or, to the best of
7
<PAGE>
its knowledge, threatened attack by direct or collateral proceeding, and (ii) is
in compliance in all respects with each governmental approval, license, permit
and authorization relating to it or any of its properties under all applicable
Requirements of Law except where the failure to do so would not be reasonably
likely to have an MAE. Since its date of organization, the Company has not, to
its knowledge, been the subject of any investigation conducted by any grand
jury, administrative agency or other governmental authority. The Company has
not, directly or indirectly, made or authorized any payment, contribution or
gift of money, property, or services, in violation of applicable law, (i) as a
kickback or bribe to any Person or (ii) to any political organization or the
holder of, or any aspirant to, any elective or appointive office of any
governmental authority.
2.18 Environmental and Safety Laws. To its knowledge, the Company is
-----------------------------
not in violation of any applicable statute, law or regulation relating to the
environment or occupational health and safety, and to its knowledge, no material
expenditures are or will be required in order to comply with any such existing
statute, law or regulation.
2.19 Disclosure. Neither this Agreement (including all the exhibits
----------
and schedules hereto) nor any other certificates or agreements made or delivered
in connection herewith contains any untrue statement of a material fact or omits
to state a material fact necessary to make the statements herein or therein not
misleading in light of the circumstances under which they were made.
2.20 Registration Rights. Except as provided in the Investors' Rights
-------------------
Agreement, the Company has not granted or agreed to grant any registration
rights, including piggyback rights, to any person or entity.
2.21 Corporate Documents. Except for amendments necessary to satisfy
-------------------
representations and warranties or conditions contained herein (the form of which
amendments has been approved by the Investors), the Restated Certificate and
Bylaws of the Company are in the form previously provided to special counsel for
the Investors. The minute books of the Company have been made available to the
Investors for their review in connection with the purchase of the Series A
Preferred Stock; such minute books are current and contain correct and complete
copies of all minutes of meetings, resolutions and other actions and proceedings
of the board of directors and shareholders and all committees of the Company.
The record books relating to the equity interests of the Company have been made
available to the Purchasers for their review in connection with its purchase of
the Series A Preferred Stock; such record books are current, correct and
complete and reflect the issuance, sale or exchange of all of capital stock and
other ownership and equity interests in the Company.
2.22 Title to Property and Assets. Exhibit 2.22 sets forth a complete
---------------------------- ------------
and accurate list of all real property and improvements (collectively "Real
Property") owned or leased by the Company. The Company has good and marketable,
indefeasible fee simple title to the Real Property described in Schedule 2.22 as
-------------
being owned by it, and valid and subsisting leasehold rights in the Real
Property described in Schedule 2.22 as being leased by it, free and clear of all
-------------
liens and other encumbrances. Schedule 2.22 also sets forth a complete and
-------------
accurate list of all of the material items of equipment, machinery, computers,
chattels, tools, parts, machine tools, furniture, furnishings, fixtures and
supplies of every nature owned or leased by the Company
8
<PAGE>
in connection with its business as of December 31, 1998. The Company has good
and marketable fee simple title to such items described in Schedule 2.22 as
-------------
being owned by it, and valid and subsisting leasehold rights in such items
described in Schedule 2.22 as being leased by it, free and clear of all liens
-------------
and other encumbrances.
2.23 Labor Agreements and Actions. The Company is not bound by or
----------------------------
subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied, contract, commitment or arrangement with
any labor union, and no labor union has requested or, to the Company's
knowledge, has sought to represent any of the employees, representatives or
agents of the Company. There is no strike or other labor dispute involving the
Company pending, or to the Company's knowledge, threatened, that would have an
MAE. The Company is not aware that any officer or key employee, or that any
group of key employees, intends to terminate their employment with the Company,
nor does the Company have a present intention to terminate the employment of any
of the foregoing. The employment of each officer and employee of the Company is
terminable at the will of the Company. The Company is not a party to or bound by
any currently effective employment contract, deferred compensation agreement,
bonus plan, incentive plan, profit sharing plan, retirement agreement or other
employee compensation agreement. To its knowledge, the Company has complied in
all material respects with all applicable state and federal equal employment
opportunity and other laws related to employment. To its knowledge, the Company
has withheld all amounts required by law or agreement to be withheld by it from
the wages, salaries and other payments to its employees and is not liable for
any arrears of wages or any taxes or penalties for failure to comply with any of
the foregoing. There are no pending, threatened or anticipated (i) employment
discrimination charges or complaints against or involving the Company, before
any federal, state, or local board, department, commission or agency, (ii)
unfair labor practice charges or complaints, disputes or grievances affecting
the Company, or (iii) strikes, slow downs, work stoppages, or lockouts or
threats thereof affecting the Company.
2.24 Insurance. The Company maintains insurance policies (i) insuring
---------
the properties, assets and operations of the business in such amounts and
against such liabilities to the extent required by applicable law or regulations
and (ii) insuring against interruptions in its business. Such policies are in
full force and effect and have been underwritten by unaffiliated insurers. To
its knowledge, the Company has not done anything by way of action or inaction
that invalidates any of such policies in whole or in part.
2.25 Year 2000 Compliance. The Company has initiated a review of its
--------------------
operations with a view to assessing whether its business or operations will, in
the receipt, transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data, be vulnerable to any significant
risk that computer hardware or software used in its business or operations will
not, in the case of dates or time periods occurring after December 31, 1999,
function at least as effectively as in the case of dates or time periods
occurring prior to January 1, 2000. Based on such review and as of the date
hereof, the Company has no reason to believe that any such risk could have an
MAE.
2.26 Governmental Regulations. The Company is not a "registered
------------------------
investment company" or an "affiliated person" or a "principal underwriter" of a
"registered
9
<PAGE>
investment company" as such terms are defined in the Investment Company Act of
1940, as amended.
2.27 Small Business Concern. The Company, together with its
"affiliates" (as that term is defined in Title 13, Code of Federal Regulations,
(SS)121.101), is a "small business concern" within the meaning of the Small
Business Investment Act of 1958 and the regulations thereunder, including Title
13, Code of Federal Regulations, (SS)121.201. The Company does not engage in,
nor shall it hereafter engage in, any activities, nor shall the Company use
directly or indirectly the proceeds from the sale of the Series A Preferred
Stock hereunder for any purpose, for which a "small business investment company"
is prohibited from providing funds by the Small Business Investment Act of 1958
and the regulations thereunder (including Title 13, Code of Federal Regulations,
(SS)107.720).
3. Representations and Warranties of the Investors. Each Investor
severally, but not jointly, hereby represents, warrants and covenants that:
3.1 Authorization. Such Investor has full power and authority to
enter into this Agreement, the Investors' Rights Agreement and the Stockholders'
Agreement, and each such agreement constitutes its valid and legally binding
obligation, enforceable in accordance with its terms, except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium and other laws of
general application affecting enforcement of creditors' rights generally, (ii)
as limited by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies, and (iii) to the extent the
indemnification provisions contained in the Investors' Rights Agreement may be
limited by applicable federal or state securities laws.
3.2 Purchase Entirely for Own Account. This Agreement is made with
such Investor in reliance upon such Investor's representation to the Company,
which by such Investor's execution of this Agreement such Investor hereby
confirms, that the Series A Preferred Stock to be received by such Investor and
the Common Stock issuable upon conversion thereof (collectively, the
"Securities") will be acquired for investment for such Investor's own account,
not as a nominee or agent, and not with a view to the resale or distribution of
any part thereof, and that such Investor has no present intention of selling,
granting any participation in or otherwise distributing the same. By executing
this Agreement, such Investor further represents that such Investor does not
have any contract, undertaking, agreement or arrangement with any person to
sell, transfer or grant participations to such person or to any third person,
with respect to any of the Securities.
3.3 Disclosure of Information. Such Investor believes it has
received all the information it considers necessary or appropriate for deciding
whether to purchase the Series A Preferred Stock. Such Investor further
represents that it has had an opportunity to ask questions and receive answers
from the Company regarding the terms and conditions of the offering of the
Series A Preferred Stock and the business, properties, prospects and financial
condition of the Company.
3.4 Investment Experience. Investor is an investor in securities of
companies in the development stage and acknowledges that it can bear the
economic risk of its
10
<PAGE>
investment, and has such knowledge and experience in financial or business
matters that it is capable of evaluating the merits and risks of the investment
in the Series A Preferred Stock. If other than an individual, such Investor
also represents it has not been organized for the purpose of acquiring the
Series A Preferred Stock.
3.5 Accredited Investor. Such Investor is an "accredited Investor"
-------------------
within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of
Regulation D, as presently in effect.
3.6 Restricted Securities. Such Investor understands that the
---------------------
Securities it is purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations such Securities may be resold without registration under
the Act only in certain limited circumstances. In the absence of an effective
registration statement covering the Securities (or the Common Stock issued on
conversion thereof) or an available exemption from registration under the Act,
the Series A Preferred Stock (and any Common Stock issued on conversion thereof)
must be held indefinitely. In this connection, such Investor represents that it
is familiar with SEC Rule 144, as presently in effect, and understands the
resale limitations imposed thereby and by the Act, including without limitation
the Rule 144 condition that current information about the Company be available
to the public. Such information is not now available and the Company has no
present plans to make such information available.
3.6 Further Limitations on Disposition. Without in any way limiting
----------------------------------
the representations set forth above, such Investor further agrees not to make
any disposition of all or any portion of the Securities unless and until the
transferee has agreed in writing for the benefit of the Company to be bound by
this Section 3, the Investors' Rights Agreement and the Stockholders' Agreement,
and:
(a) There is then in effect a registration statement under the
Act covering such proposed disposition and such disposition is made in
accordance with such registration statement; or
(b) (i) Such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and
(ii) if requested by the Company, such Investor shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company
that such disposition will not require registration of such shares under
the Act. It is agreed that the Company will not require opinions of counsel
for transactions made pursuant to Rule 144 except in unusual circumstances.
(c) Notwithstanding the provisions of subsections (a) and (b)
above, no such registration statement or opinion of counsel shall be
necessary for a transfer by an Investor that is a partnership to a partner
of such partnership or a retired partner of such partnership who retires
after the date hereof, or to the estate of any such partner or retired
partner or the transfer by gift, will or intestate succession of any
partner to his or her spouse or to the siblings, lineal descendants or
ancestors of such partner or his or her spouse, if the transferee
11
<PAGE>
agrees in writing to be subject to the terms hereof to the same extent as if he
or she were an original Investor hereunder.
3.8 Legends. It is understood that the certificates evidencing the
-------
Securities may bear one or all of the following legends:
(a) "These securities have not been registered under the
Securities Act of 1933, as amended. They may not be sold, offered for sale,
pledged or hypothecated in the absence of a registration statement in effect
with respect to the securities under such Act or an opinion of counsel
satisfactory to the Company that such registration is not required or unless
sold pursuant to Rule 144 of such Act."
(b) Any legend required by the Investors' Rights Agreement and
the Stockholders' Agreement.
3.9 Tax Advisors. Such Investor has reviewed with such Investor's
------------
own tax advisors the federal, state and local tax consequences of this
investment, where applicable, and the transactions contemplated by this
Agreement. With respect to matters related to the tax consequences of the
transactions contemplated by this Agreement, each such Investor is relying
solely on such advisors and not on any statements or representations of the
Company or any of its agents and understands that each such Investor (and not
the Company) shall be responsible for such Investor's own tax liability that may
arise as a result of this investment or the transactions contemplated by this
Agreement.
3.10 Investor Counsel. Such Investor acknowledges that such Investor
----------------
has had the opportunity to review this Agreement, the exhibits and the schedules
attached hereto and the transactions contemplated by this Agreement with such
Investor's own legal counsel. Each such Investor is relying solely on such
Investor's legal counsel and not on Brobeck, Phleger & Harrison LLP, for legal
advice with respect to this investment or the transactions contemplated by this
Agreement.
4. Conditions of Investor's Obligations at Closing. The obligations of
-----------------------------------------------
each Investor under subsection 1.1(b) of this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions, the
waiver of which shall not be effective against any Investor who does not consent
thereto:
4.1 Representations and Warranties. The representations and
------------------------------
warranties of the Company contained in Section 2 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the date of such Closing.
4.2 Performance. The Company shall have performed and complied with
-----------
all agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Closing.
4.3 Compliance Certificate. The President of the Company shall
----------------------
delivery to each Investor at the Closing a certificate stating that the
conditions specified in Sections 4.1 and 4.2 have been fulfilled.
12
<PAGE>
4.4 Qualifications. All authorizations, approvals or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state or any Person that are required in connection with the consummation of
the transactions contemplated by this Agreement, including the lawful issuance
and sale of the Securities pursuant to this Agreement, shall be duly obtained
and effective as of the Closing.
4.5 Proceedings and Documents. All corporate and other proceedings
-------------------------
in connection with the transactions contemplated at the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to Investors' special counsel, and they shall have received all such
counterpart original and certified or other copies of such documents as they may
reasonably request.
4.6 Proprietary Information Agreements. Each employee of the Company
----------------------------------
shall have entered into a Proprietary Information and Inventions Agreement in
the form previously provided to special counsel for the Investors.
4.7 Board of Directors. The Company shall have taken all necessary
------------------
corporate action such that immediately following the Closing, the directors of
the Company shall be Art Zeile, Joel Daly, Stephen O. James, Watts Hamrick and
Scott Perper.
4.8 Opinion of Company Counsel. Each Investor shall have received
--------------------------
from Brobeck, Phleger & Harrison LLP, counsel for the Company, an opinion, dated
as of the Closing, in the form attached hereto as Exhibit D.
---------
4.9 Investors' Rights Agreement. The Company shall have entered into
---------------------------
the Investors' Rights Agreement in the form attached as Exhibit B.
4.10 Stockholders' Agreement. The Company, Art Zeile and Joel Daly
-----------------------
shall have entered into the Stockholders' Agreement in the form attached as
Exhibit D.
- ---------
4.11 No Material Adverse Change. On and prior to the Closing, there
--------------------------
shall have occurred no material adverse change in the business, assets or
financial condition of the Company.
4.12 No Litigation or Other Proceedings. There shall be no pending or
----------------------------------
threatened litigation, bankruptcy, insolvency, injunction, order, suit,
investigation or claim against or affecting the Company, any of its properties
or rights, any of its executive officers or with respect to any of the
transactions contemplated by this Agreement, the Investors' Rights Agreement or
the Stockholders' Agreement which would be reasonably likely to have an MAE.
4.13 SBA Documents and Information. The Company shall have executed
-----------------------------
and delivered to First Union Capital Partners, Inc. forms and information
required by the rules and regulations of the United States Small Business
Administration, including, without limitation, a Size Status Declaration on SBA
Form 480 and an Assurance of Compliance on SBA Form 652 and information
necessary for the preparation of a Portfolio Financing Report on SBA Form 1031.
In the event such forms and information are not delivered at Closing, the
Company covenants and agrees to deliver them as soon as practicable thereafter.
13
<PAGE>
5. Conditions of the Company's Obligations at Closing. The obligations
--------------------------------------------------
of the Company to each Investor under this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions by that
Investor:
5.1 Representations and Warranties. The representations and
------------------------------
warranties of the Investors contained in Section 3 shall be true on and as of
the Closing with the same effect as though such representations and warranties
had been made on and as of the Closing.
5.2 Payment of Purchase Price. The Investor shall have delivered the
-------------------------
purchase price specified in Section 1.2.
5.3 Investors' Rights Agreement. Each Investor shall have entered
---------------------------
into the Investors' Rights Agreement in the form attached as Exhibit B.
5.4 Stockholders' Agreement. Each Investor shall have entered into
-----------------------
the Stockholders' Agreement in the form attached as Exhibit E.
6. Miscellaneous.
-------------
6.1 Survival. The warranties, representations and covenants of the
--------
Company and Investors contained in or made pursuant to this Agreement shall
survive the execution and delivery of this Agreement and the Closing and shall
in no way be affected by any investigation of the subject matter thereof made by
or on behalf of the Investors or the Company.
6.2 Successors and Assigns. Except as otherwise provided herein, the
----------------------
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any Securities). Nothing in this Agreement, express or implied,
is intended to confer upon any party, other than the parties hereto or their
respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
6.3 Governing Law. This Agreement shall be governed by and construed
-------------
under the laws of the State of Colorado as applied to agreements among Colorado
residents entered into and to be performed entirely within Colorado, without
giving effect to such state's conflict of laws principles.
6.4 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.5 Notices. All notices required or permitted hereunder shall be in
-------
writing and shall be deemed effectively given: (i) upon personal delivery to the
party to be notified, (ii) when sent by confirmed telex or facsimile if sent
during normal business hours of the recipient, if not, then on the next business
day; (iii) five days after having been sent by registered or certified mail,
return receipt requested, postage prepaid; or (iv) one day after deposit with a
nationally recognized overnight courier, specifying next day delivery, with
written verification of receipt. All communications shall be sent to the address
as set forth on the
14
<PAGE>
signature page hereof or at such other address as such party may
designate by ten days advance written notice to the other parties hereto.
6.6 Finder's Fee. Each party represents that it neither is nor will
------------
be obligated for any finders' fee or commission in connection with this
transaction. Each Investor agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finders' fee (and the costs and expenses of defending against such liability or
asserted liability) for which such Investor or any of its officers, partners,
employees or representatives is responsible. The Company agrees to indemnify and
hold harmless each Investor from any liability for any commission or
compensation in the nature of a finders' fee (and the costs and expenses of
defending against such liability or asserted liability) for which the Company or
any of its officers, employees or representatives is responsible.
6.7 Expenses. Irrespective of whether the Closing is effected, the
--------
Company shall pay all costs and expenses that it incurs with respect to the
negotiation, execution, delivery and performance of this Agreement. If the
Closing is effected, the Company shall, at the Closing, reimburse the Investors
for all reasonable expenses of the Investors incurred in connection with the
negotiation, execution, delivery and performance of this Agreement including,
but not limited to, reasonable fees and, upon receipt of a bill therefor, and
out of pocket expenses of a single special counsel for all Investors. Investors
agree that every effort will be made to minimize these expenses. If any action
at law or in equity is necessary to enforce or interpret the terms of this
Agreement, the Investors' Rights Agreement, the Stockholders' Agreement or the
Restated Certificate, the prevailing party shall be entitled to reasonable
attorney's fees, costs and necessary disbursements in addition to any other
relief to which such party may be entitled.
6.8 Amendments and Waivers. Any term of this Agreement may be
----------------------
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
a majority of the Common Stock not previously sold to the public that is issued
or issuable upon conversion of the Series A Preferred Stock. Any amendment or
waiver effected in accordance with this paragraph shall be binding upon each
holder of any securities purchased under this Agreement at the time outstanding
(including securities into which such securities are convertible), each future
holder of all such securities and the Company.
6.9 Effect of Amendment or Waiver. Each Investor acknowledges that
-----------------------------
by the operation of Section 6.8 hereof the holders of a majority of the Common
Stock not previously sold to the public that is issued or issuable upon
conversion of the Series A Preferred Stock will have the power to diminish or
eliminate all rights of such Investor under this Agreement.
6.10 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
15
<PAGE>
6.11 Aggregation of Stock. All shares of the Series A Preferred Stock
--------------------
or Common Stock issued upon conversion thereof held or acquired by affiliated
entities or persons shall be aggregated together for the purpose of determining
the availability of any rights under this Agreement.
6.12 Entire Agreement. This Agreement and the documents referred to
----------------
herein constitute the entire agreement among the parties and no party shall be
liable or bound to any other party in any manner by any warranties,
representations or covenants except as specifically set forth herein or therein.
6.13 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[SIGNATURE PAGE(S) TO FOLLOW]
16
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INFLOW, INC.
By: /s/ Art Zeile
-----------------------------------
Art Zeile, President and Chief Executive
Officer
By: /s/ Joel Daly
-----------------------------------
Joel Daly, Chief Operating Officer and
Secretary
Address: 1860 Lincoln Street
Suite 305
Denver, CO 80295
INVESTORS:
FIRST UNION CAPITAL PARTNERS, INC.
By: /s/ L. Watts Hamrick, III
___________________________________
Name: L. Watts Hamrick, III
___________________________________
Title: Senior Vice President
___________________________________
Address: 301 South College Street
Charlotte, N.C. 28288-0732
17
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INVESTORS:
RICHARD COLEMAN
/s/ RICHARD COLEMAN
_______________________________________
Address: 22 Viking Drive
Englewood, CO 80110
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INVESTORS:
RICHARD A. FINK
/s/ RICHARD A. FINK
_______________________________________
Address: 5492 Calle Chaparro
P.O. Box 1647 (U.S. Mail only)
Rancho Santa Fe, CA 92067
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INVESTORS:
RICHARD R. PLUMRIDGE
/s/ RICHARD R. PLUMRIDGE
_______________________________________
Address: 2848 Ginny Way
Lafayette, CO 80026
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INVESTORS:
JEREMY W. MAKARECHIAN
/s/ JEREMY W. MAKARECHIAN
_______________________________________
Address: 3555 West 110th Place
Westminster, CO 80030
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INVESTORS:
DAVID A. MAKARECHIAN
/s/ DAVID A. MAKARECHIAN
_______________________________________
Address: 916 Palm Avenue
San Mateo, CA 94401
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INVESTORS:
BRUCE E. CUNNINGHAM
/s/ BRUCE E. CUNNINGHAM
_______________________________________
Address: 4901 West 93rd Avenue
Apt. 2227
Westminster, CO 80030
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INVESTORS:
JOHN E. HAYES III
/s/ JOHN E. HAYES III
_______________________________________
Address: 125 Willowleaf Drive
Littleton, CO 80127
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INVESTORS:
LEE R. SPIEGLER
/s/ LEE R. SPIEGLER
_______________________________________
Address: 16209 West 70th Place
Arvada, CO 80007
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INVESTORS:
ARUN JHA
/s/ ARUN JHA
_______________________________________
Address: 4901 West 93rd Avenue
Apt. 332
Westminster, CO 80030
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INVESTORS:
BROBECK, PHLEGER & HARRISON LLP
BY: /s/ Richard A. Fink
______________________________________
NAME: Richard A. Fink
______________________________________
TITLE: Partners
______________________________________
<PAGE>
SCHEDULE A
----------
<TABLE>
<CAPTION>
Name Amount Invested Number of Shares Purchased
- ------------------------------------------- -------------------------- ------------------------------------
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Brobeck, Phleger & Harrison LLP $ 50,000 14,286
- -------------------------------------------------------------------------------------------------------------
Richard Coleman 50,000 14,286
- -------------------------------------------------------------------------------------------------------------
Richard A. Fink 7,500 2,143
- -------------------------------------------------------------------------------------------------------------
Richard R. Plumridge 7,500 2,143
- -------------------------------------------------------------------------------------------------------------
Jeremy W. Makarechian 7,500 2,143
- -------------------------------------------------------------------------------------------------------------
David A. Makarechian 2,500 714
- -------------------------------------------------------------------------------------------------------------
Bruce E. Cunningham 2,500 714
- -------------------------------------------------------------------------------------------------------------
John E. Hayes, III 2,500 714
- -------------------------------------------------------------------------------------------------------------
Lee R. Spiegler 2,500 714
- -------------------------------------------------------------------------------------------------------------
Arun Jha 2,500 714
- -------------------------------------------------------------------------------------------------------------
Totals $132,500 37,857
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit C
---------
List of Stockholders
<TABLE>
<CAPTION>
Common Stock Series A Preferred
Stock
- ---------------------------------------------------------------
<S> <C> <C>
Art Zeile 1,500,000 186,858
Joel Daly 1,500,000 187,381
Stephen O. James 60,000
First Union Capital 2,857,143
Partners
Brobeck, Phleger & 14,286
Harrison LLP
Richard Coleman 14,286
Richard A. Fink 2,143
Richard R. Plumridge 2,143
Jeremy W. Makarechian 2,143
David A. Makarechian 714
Bruce E. Cunningham 714
John E. Hayes, III 714
Lee R. Spiegler 714
Arun Jha 714
- ---------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 10.2
INFLOW, INC.
SERIES A PREFERRED
STOCK PURCHASE AGREEMENT
APRIL 19, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<C> <S> <C>
Page
----
1. Purchase and Sale of Stock........................................ 1
1.1 Sale and Issuance of Series A Preferred Stock................ 1
1.2 Closing...................................................... 1
1.3 Subsequent Sale of Series A Preferred Stock.................. 1
2. Representations and Warranties of the Company..................... 2
2.1 Organization, Good Standing, Power and Qualification........ 2
2.2 Capitalization and Voting Rights............................ 2
2.3 Subsidiaries................................................ 3
2.4 Authorization............................................... 3
2.5 Valid Issuance of Preferred and Common Stock................ 3
2.6 Consents.................................................... 3
2.7 Offering.................................................... 3
2.8 Litigation.................................................. 4
2.9 Proprietary Information Agreements.......................... 4
2.10 Patents and Trademarks...................................... 4
2.11 Compliance with Other Instruments........................... 4
2.12 Agreements; Action.......................................... 5
2.13 Related-Party Transactions.................................. 6
2.14 Financial Statements........................................ 6
2.15 Changes..................................................... 6
2.16 Tax Returns................................................. 7
2.17 Permits..................................................... 7
2.18 Environmental and Safety Laws............................... 8
2.19 Disclosure.................................................. 8
2.20 Registration Rights......................................... 8
2.21 Corporate Documents......................................... 8
2.22 Title to Property and Assets................................ 8
2.23 Labor Agreements and Actions................................ 8
2.24 Insurance................................................... 9
2.25 Year 2000 Compliance........................................ 9
2.26 Governmental Regulations.................................... 9
2.27 Small Business Concern...................................... 9
3. Representations and Warranties of the Investors................... 9
3.1 Authorization................................................ 9
3.2 Purchase Entirely for Own Account............................ 10
3.3 Disclosure of Information.................................... 10
3.4 Investment Experience........................................ 10
3.5 Restricted Securities........................................ 10
3.6 Further Limitations on Disposition........................... 10
</TABLE>
i
<PAGE>
3.7 Legends...................................................... 11
3.8 Tax Advisors................................................. 11
3.9 Investor Counsel............................................. 11
4. Conditions of Investor's Obligations at Closing................... 12
4.1 Representations and Warranties............................... 12
4.2 Performance.................................................. 12
4.3 Compliance Certificate....................................... 12
4.4 Qualifications............................................... 12
4.5 Proceedings and Documents.................................... 12
4.6 Proprietary Information Agreements........................... 12
4.7 Board of Directors........................................... 12
4.8 Investors' Rights Agreement.................................. 12
4.9 Stockholders' Agreement...................................... 12
4.10 No Material Adverse Change................................... 13
4.11 No Litigation or Other Proceedings........................... 13
4.12 SBA Documents and Information................................ 13
5. Conditions of the Company's Obligations at Closing................ 13
5.1 Representations and Warranties............................... 13
5.2 Payment of Purchase Price.................................... 13
5.3 Investors' Rights Agreement.................................. 13
5.4 Stockholders' Agreement...................................... 13
6. Miscellaneous..................................................... 13
6.1 Survival.................................................... 13
6.2 Successors and Assigns...................................... 13
6.3 Governing Law............................................... 14
6.4 Titles and Subtitles........................................ 14
6.5 Notices..................................................... 14
6.6 Finder's Fee................................................ 14
6.7 Expenses.................................................... 14
6.8 Amendments and Waivers...................................... 14
6.9 Effect of Amendment or Waiver............................... 15
6.10 Severability................................................ 15
6.11 Aggregation of Stock........................................ 15
6.12 Entire Agreement............................................ 15
6.13 Counterparts................................................ 15
SCHEDULE A Schedule of Investors
SCHEDULE B Schedule of Exceptions
SCHEDULE 2.2 Post-Closing Capitalization
SCHEDULE 2.10 Intellectual Property
SCHEDULE 2.12 Material Contracts
ii
<PAGE>
SCHEDULE 2.22 Property
EXHIBIT A Restated Certificate of Incorporation
EXHIBIT B Investors' Rights Agreement
EXHIBIT C List of Stockholders
EXHIBIT D Stockholders' Agreement
iii
<PAGE>
PREFERRED STOCK PURCHASE AGREEMENT
----------------------------------
THIS PREFERRED STOCK PURCHASE AGREEMENT is made on the 19th day of
April, 1999, by and among InFlow, Inc., a Delaware corporation (the "Company"),
and the investors listed on Schedule A hereto (each, an "Investor" and
----------
collectively, the "Investors").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
--------------------------
1.1 Sale and Issuance of Series A Preferred Stock.
---------------------------------------------
(a) The Company shall adopt and file with the Secretary of
State of Delaware on or before the Closing (as defined below) the Amended
and Restated Certificate of Incorporation in the form attached hereto as
Exhibit A (the "Restated Certificate").
- ---------
(b) Subject to the terms and conditions of this Agreement,
each Investor agrees, severally, to purchase at the Closing and the Company
agrees to sell and issue to each Investor at the Closing, that number of shares
of the Company's Series A Preferred Stock set forth opposite each Investor's
name on Schedule A hereto for the purchase price set forth thereon.
----------
1.2 Closing. The purchase and sale of the Series A Preferred
-------
Stock shall take place at the offices of Brobeck, Phleger & Harrison LLP, 1125
Seventeenth Street, Suite 2525, Denver, Colorado 80202 at 10:00 a.m., on April
19, 1999, or at such other time and place as the Company and Investors acquiring
in the aggregate more than half the shares of Series A Preferred Stock sold
pursuant hereto mutually agree upon orally or in writing (which time and place
are designated as the "Closing"). At the Closing the Company shall deliver to
each Investor a certificate representing the Series A Preferred Stock that such
Investor is purchasing against payment of the purchase price therefor by check,
wire transfer, cancellation of indebtedness or any combination thereof. In the
event that payment by an Investor is made, in whole or in part, by cancellation
of indebtedness, then such Investor shall surrender to the Company for
cancellation at the Closing any evidence of such indebtedness or shall execute
an instrument of cancellation in form and substance acceptable to the Company.
In addition, at the Closing the Company shall deliver to any Investor choosing
to pay any part of the purchase price of the Series A Preferred Stock by
cancellation of indebtedness, a check in the amount of any interest accrued on
such indebtedness through the Closing.
1.3 Subsequent Sale of Series A Preferred Stock. The Company
-------------------------------------------
may sell up to the balance of the authorized number of shares of Series A
Preferred Stock not sold at the Closing to such purchasers as it shall select,
at a price not less than $3.50 per share, provided the agreement for sale is
executed not later July 1, 1999. Any such purchaser shall become a party to this
Agreement and that certain Investors' Rights Agreement dated April 2, 1999, by
and among the Company and the Investors, the form of which is attached hereto as
Exhibit B (the "Investors' Rights Agreement") and that certain Stockholders'
- ---------
Agreement, by and among the Company and the Investors, the form of which is
attached hereto as Exhibit D (the "Stockholders' Agreement") and shall have the
---------
rights and obligations hereunder and thereunder.
1
<PAGE>
2. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to each Investor that, except as set forth on a Schedule
of Exceptions (the "Schedule of Exceptions") furnished each Investor and special
counsel for the Investors prior to execution hereof and attached hereto as
Schedule B, which exceptions shall be deemed to be representations and
- ----------
warranties as if made hereunder:
2.1 Organization, Good Standing, Power and Qualification. The
----------------------------------------------------
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware. The Company has all requisite corporate
power and authority to own and operate its property, to lease the property it
operates as lessee and to conduct the business in which it is currently, or is
currently proposed to be, engaged and has the power and authority to execute,
deliver and perform its obligations under this Agreement, the Investors' Rights
Agreement and the Stockholders' Agreement. The Company is duly qualified to
transact business and is in good standing in each jurisdiction in which the
failure to so qualify would have a material adverse effect on the business,
assets or financial condition of the Company (an "MAE").
2.2 Capitalization and Voting Rights. (a) The authorized capital
--------------------------------
of the Company will consist immediately prior to the Closing of:
(i) Preferred Stock. 3,337,513 shares of Preferred Stock,
---------------
par value $0.001 (the "Preferred Stock"), of which all such shares have been
designated Series A Preferred Stock (the "Series A Preferred Stock") and up to
37,857 shares of which will be sold at the Closing pursuant to this Agreement.
The rights, privileges and preferences of the Series A Preferred Stock will be
as stated in the Restated Certificate.
(ii) Common Stock. 15,000,000 shares of common stock, par
------------
value $0.001 ("Common Stock"), of which 3,060,000 are issued and outstanding.
(iii) The outstanding shares of Common Stock are owned by the
stockholders and in the numbers specified in Exhibit C hereto.
---------
(iv) The outstanding shares of Common Stock are all duly and
validly authorized and issued, fully paid and nonassessable, and were issued in
compliance with all applicable state and federal laws concerning the issuance of
securities.
(v) Except for (A) the conversion privileges of the Series
A Preferred Stock to be issued under this Agreement, (B) the rights provided in
Section 3 of the Stockholders' Agreement, (C) the conversion privileges of those
certain Convertible Promissory Notes held by each of Art Zeile and Joel Daly to
be converted into Series A Preferred Stock at the Closing, and (D) currently
outstanding options to purchase 230,000 shares of Common Stock granted to
employees pursuant to the Company's 1997 Stock Option Plan (the "Option Plan"),
there are no outstanding options, warrants, rights (including conversion or
preemptive rights) or agreements for the purchase or acquisition from the
Company of any shares of its capital stock. In addition to the aforementioned
options, the Company has reserved an additional 414,168 shares of its Common
Stock for purchase upon exercise of options to be granted in the future under
the Option Plan. The Company is not a party or subject to any agreement or
understanding which affects or relates to the voting or giving of written
consents with respect to any security or other ownership interest in the Company
or by a director of the Company.
2
<PAGE>
(b) As of the Closing and after giving effect to the
transactions contemplated by this Agreement, the authorized capital stock of the
Company and the issued and outstanding shares thereof are as described on
Schedule 2.2.
- ------------
2.3 Subsidiaries. The Company does not presently own or
------------
control, directly or indirectly, any interest in any other corporation,
association, or other business entity. The Company is not a participant in any
joint venture, partnership, or similar arrangement.
2.4 Authorization. All corporate action on the part
-------------
of the Company, its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement, the Investors' Rights
Agreement, and the Stockholders' Agreement, the performance of all obligations
of the Company hereunder and thereunder, and the authorization (or, in the case
of the Common Stock, reservation for issuance), sale and issuance of the Series
A Preferred Stock being sold hereunder and the Common Stock issuable upon
conversion of the Series A Preferred Stock has been taken or will be taken prior
to the Closing. This Agreement, the Investors' Rights Agreement, and the
Stockholders' Agreement constitute valid and legally binding obligations of the
Company, enforceable in accordance with their respective terms, except (i) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium and
other laws of general application affecting enforcement of creditors' rights
generally, (ii) as limited by laws relating to the availability of specific
performance, injunctive relief or other equitable remedies, and (iii) to the
extent the indemnification provisions contained in the Investors' Rights
Agreement may be limited by applicable federal or state securities laws.
2.5 Valid Issuance of Preferred and Common Stock. The
--------------------------------------------
Series A Preferred Stock that is being purchased by the Investors hereunder,
when issued, sold and delivered in accordance with the terms of this Agreement
for the consideration expressed herein, will be duly and validly issued, fully
paid and nonassessable, free and clear of all liens and other encumbrances and
will be free of restrictions on transfer, other than restrictions on transfer
under this Agreement, the Investors' Rights Agreement, the Stockholders'
Agreement and under applicable state and federal securities laws. The Common
Stock issuable upon conversion of the Series A Preferred Stock purchased under
this Agreement has been duly and validly reserved for issuance and, upon
issuance in accordance with the terms of the Restated Certificate, will be duly
and validly issued, fully paid and nonassessable, free and clear of all liens
and other encumbrances and will be free of restrictions on transfer, other than
restrictions on transfer under this Agreement, the Investors' Rights Agreement,
the Stockholders' Agreement and under applicable state and federal securities
laws.
2.6 Consents. No consent, approval, order or
--------
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority or any
individual, firm, corporation, partnership, trust, limited liability company,
incorporated or unincorporated association, joint venture, joint stock company
or other entity of any kind (each, a "Person") on the part of the Company is
required in connection with the consummation of the transactions contemplated by
this Agreement, except for filings required pursuant to applicable federal and
state securities laws and blue sky laws, which filings will be effected within
the required statutory period.
2.7 Offering. No form of general solicitation or general
--------
advertising was used by the Company or its representatives in connection with
the offer or sale of the Series A Preferred Stock or other securities. Assuming
the truth and accuracy of each Investor's representations set forth
3
<PAGE>
in Section 3 of this Agreement, the offer, sale and issuance of the Series A
Preferred Stock as contemplated by this Agreement are exempt from the
registration requirements of the Securities Act of 1933, as amended (the "Act").
2.8 Litigation. There is no action, suit, proceeding or
----------
investigation pending, or to the Company's knowledge, currently threatened
against the Company that questions the validity of this Agreement, the
Investors' Rights Agreement or the Stockholders' Agreement or the right of the
Company to enter into any of the foregoing or to consummate the transactions
contemplated hereby or thereby, or that would have, either individually or in
the aggregate, an MAE. The Company is not a party or subject to the provisions
of any order, writ, injunction, judgment or decree of any court or government
agency or instrumentality. There is no action, suit, proceeding or investigation
by the Company currently pending or that the Company intends to initiate.
2.9 Proprietary Information Agreements. Each employee and
----------------------------------
officer of the Company has executed a Proprietary Information and Inventions
Agreement in substantially the form provided to special counsel to the
Investors.
2.10 Patents and Trademarks. Schedule 2.10 sets forth a
---------------------- -------------
complete and accurate list of and describes all franchises, licenses, patents,
patent rights, patent applications, trademarks, trademark rights, service marks,
service mark rights, trade names, trade name rights, copyrights and rights with
respect to any of the foregoing (collectively, "Intellectual Property")
presently owned or held by the Company. The Company owns the right to use all of
the Intellectual Property. To the actual knowledge of the Company (without
independent investigation), the Intellectual Property is all that is necessary
for the Company to conduct its business as presently conducted. To its knowledge
(but without having conducted any special investigation or patent search), no
Intellectual Property conflicts with or infringes on the valid rights of others
and the Company has not received any notice of infringement upon or conflict
with the asserted rights of others. No event has occurred which permits, or
after notice or lapse of time would permit, the revocation or termination of any
of the Intellectual Property. The Company has a valuable body of trade secrets,
including know-how, concepts, computer programs and other technical data (the
"Proprietary Information"). To its knowledge, the Company has the right to use
the Proprietary Information free and clear of any rights, liens, encumbrances or
claims of others, except that the possibility exists that other persons may have
independently developed trade secrets or technical information similar or
identical to those of the Company. The Company is not aware of any such
independent development nor of any misappropriation of its Proprietary
Information. The Company is not aware that any of its employees is obligated
under any contract (including licenses, covenants or commitments of any nature)
or other agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with the use of his or her best
efforts to promote the interests of the Company or that would conflict with the
Company's business. The Company does not believe it is or will be necessary to
utilize any inventions of any of its employees (or people it currently intends
to hire) made prior to their employment by the Company, except for inventions
that have been assigned or licensed to the Company as of the date hereof.
2.11 Compliance with Other Instruments. The Company is
---------------------------------
not in violation of any provision of its Restated Certificate or Bylaws or any
securities issued by the Company, indenture, credit agreement, contract,
agreement, instrument or other undertaking ("Contractual Obligations") or any
judgment, order, writ, decree or contract, statute, rule or regulation to which
the
4
<PAGE>
Company or its assets or property is subject ("Requirements of Law"), a
violation of which would have an MAE. The execution, delivery and performance of
this Agreement, the Investors' Rights Agreement and the Stockholders' Agreement
and the consummation of the transactions contemplated hereby and thereby will
not result in any such violation, or be in conflict with or constitute, with or
without the passage of time and giving of notice, either a default under any
Contractual Obligation or Requirement of Law or an event that results in the
creation of any lien, charge or encumbrance upon any assets of the Company or
the suspension, revocation, impairment, forfeiture or nonrenewal of any material
permit, license, authorization or approval applicable to the Company, its
business or operations or any of its assets or properties.
2.12 Agreements; Action.
------------------
(a) Except for agreements explicitly contemplated
hereby, there are no agreements, understandings or proposed transactions between
the Company and any of its officers, directors, affiliates or any affiliate
thereof.
(b) Except for this Agreement, the Investors' Rights
Agreement and the Stockholders' Agreement, Schedule 2.12 hereto sets forth a
-------------
complete and accurate list of all material Contractual Obligations of the
Company in effect on and as of the Closing. Each such Contractual Obligation is
valid and enforceable by the Company against any other party thereto in
accordance with its terms except to the extent that such enforcement may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium and
other laws of general application affecting enforcement of creditors' rights
generally, and by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies. The Company has performed and is
in compliance with all of the terms of such Contractual Obligations and all
instruments and agreements relating thereto and no default or event of default,
or event or condition which with notice or lapse of time or both would
constitute such a default or event of default on its part or on the part of any
other party thereto exists with respect to any material Contractual Obligation
of the Company. The Company has no actual knowledge that any such Contractual
Obligation contains any contractual requirement with which there is a reasonable
likelihood the Company will be unable to comply and such failure to comply would
likely result in a MAE or the Company's compliance is reasonably likely to
result in an MAE.
(c) There are no judgments, orders, writs or decrees
to which the Company is a party or by which it is bound that involve obligations
(contingent or otherwise) of, or payments to the Company, in excess of $25,000.
(d) The Company has not (i) declared or paid any
dividends or authorized or made any distribution upon or with respect to any
class or series of its capital stock, (ii) incurred any indebtedness for money
borrowed or any other liabilities individually in excess of $25,000 or, in the
case of indebtedness and/or liabilities individually less than $10,000, in
excess of $50,000 in the aggregate, (iii) made any loans or advances to any
Person, other than advances in the ordinary course of business, or (iv) sold,
exchanged or otherwise disposed of any of its assets or rights, other than the
sale of its inventory in the ordinary course of business.
(e) For the purposes of subsections (c) and (d)
above, all indebtedness, liabilities, agreements, understandings, instruments,
contracts and proposed transactions involving the same Person (including Persons
the Company has reason to believe are affiliated therewith) shall be aggregated
for the purpose of meeting the individual minimum dollar amounts of such
subsections.
5
<PAGE>
2.13 Related-Party Transactions. No employee, officer or
--------------------------
director of the Company or member of his or her immediate family is indebted to
the Company, nor is the Company indebted (or committed to make loans or extend
or guarantee credit) to any of them. To the best of the Company's knowledge,
none of such persons has any direct or indirect ownership interest in any firm
or corporation with which the Company is affiliated or with which the Company
has a business relationship, or any firm or corporation that competes with the
Company, except that employees, officers or directors of the Company and members
of their immediate families may own stock in publicly traded companies that may
compete with the Company. No member of the immediate family of any officer or
director of the Company is directly or indirectly interested in any material
Contractual Obligation with the Company.
2.14 Financial Statements. The Company has delivered to
--------------------
each Investor its audited financial statements (balance sheet and statement of
operations, statement of stockholders' equity and statement of cash flows,
including notes thereto) at December 31, 1998 and for the fiscal year then ended
and its unaudited financial statements (balance sheet and statement of
operations, statement of stockholders' equity and statement of cash flows) at
February 28, 1999 and for the two-month period then ended (the "Financial
Statements"). The Financial Statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods indicated and with each other, except that unaudited
Financial Statements may not contain all footnotes required by generally
accepted accounting principles. The Financial Statements fairly present the
assets, liabilities, financial condition and operating results of the Company as
of the dates, and for the periods, indicated therein, subject in the case of
unaudited Financial Statements to normal year-end audit adjustments. Except as
set forth in the Financial Statements, the Company has no liabilities or
obligations, contingent or otherwise, other than (i) liabilities incurred in the
ordinary course of business subsequent to December 31, 1998 and (ii) obligations
under contracts and commitments incurred in the ordinary course of business and
not required under generally accepted accounting principles to be reflected in
the Financial Statements, which, in both cases, individually or in the
aggregate, are not material to the financial condition or operating results of
the Company and which the Company has satisfied as they have become due. Except
as disclosed in the Financial Statements, the Company is not a guarantor or
indemnitor of any indebtedness of any other Person. The Company maintains and
will continue to maintain a standard system of accounting established and
administered in accordance with generally accepted accounting principles.
2.15 Changes. Since December 31, 1998 there has not been:
-------
(a) any change in the assets, liabilities, financial
condition or operating results of the Company from that reflected in the
Financial Statements, except changes in the ordinary course of business
consistent with past practice that have not had an MAE ;
(b) any damage, destruction or loss, whether or not covered by insurance,
materially and adversely affecting the assets, properties, financial
condition, operating results or business of the Company;
(c) any waiver by the Company of a material right or of a material debt owed to
it;
6
<PAGE>
(d) any satisfaction or discharge of any lien, claim
or encumbrance or payment of any obligation by the Company, except in the
ordinary course of business consistent with past practice and not material
to the assets, properties, financial condition, operating results or
business of the Company;
(e) any material change or amendment to a contract or
arrangement required to be set forth on Schedule 2.12 by which the Company
-------------
or any of its assets or properties is bound or subject;
(f) any material change in any compensation arrangement or agreement with any
employee; or
(g) any agreement or commitment by the Company to do any of the things
described in this Section 2.15.
2.16 Tax Returns. The Company has timely filed all federal,
-----------
state, county, local and foreign income and other tax returns, reports and
declarations (collectively, "Returns") relating to all net income, gross income,
gross receipts, sales, use, ad valorem, transfer, franchise, profits, license,
withholding, payroll, employment, excise, severance, stamp, occupation, premium,
property or windfall profits taxes, or other taxes of any kind whatsoever,
together with any interest and any penalties, additions to tax or additional
amounts imposed by any taxing authority (domestic or foreign) upon the Company
("Taxes") which are required by applicable law to be filed except where the
failure to do so would not be reasonably likely to have an MAE. No audits of
federal income tax Returns of the Company have been conducted at any time since
its formation and the Company has not been advised that any of its returns have
been or are being audited. The Company has paid, or where payment is not
required to be made, has made adequate provision on its books and financial
statements for the payment of, all Taxes in respect of all periods covered by
the Returns and any other taxable period ending on or before the date hereof
except where the failure to do so would not be reasonably likely to have an MAE.
No deficiencies for any Tax, assessment or governmental charge have been
asserted or assessed against the Company which have not been paid, settled or
adequately provided for and there is no basis for.
2.17 Permits. The Company (i) has all material
-------
governmental or other regulatory approvals, licenses, permits and other
authorizations in accordance with all Requirements of Law for it to conduct its
business, each of which is in full force and effect, is final and not subject to
review on appeal and is not the subject of any pending or, to the best of its
knowledge, threatened attack by direct or collateral proceeding, and (ii) is in
compliance in all respects with each governmental approval, license, permit and
authorization relating to it or any of its properties under all applicable
Requirements of Law except where the failure to do so would not be reasonably
likely to have an MAE. Since its date of organization, the Company has not, to
its knowledge, been the subject of any investigation conducted by any grand
jury, administrative agency or other governmental authority. The Company has
not, directly or indirectly, made or authorized any payment, contribution or
gift of money, property, or services, in violation of applicable law, (i) as a
kickback or bribe to any Person or (ii) to any political organization or the
holder of, or any aspirant to, any elective or appointive office of any
governmental authority.
7
<PAGE>
2.18 Environmental and Safety Laws. To its knowledge,
-----------------------------
the Company is not in violation of any applicable statute, law or regulation
relating to the environment or occupational health and safety, and to its
knowledge, no material expenditures are or will be required in order to comply
with any such existing statute, law or regulation.
2.19 Disclosure. Neither this Agreement (including all
----------
the exhibits and schedules hereto) nor any other certificates or agreements made
or delivered in connection herewith contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements herein
or therein not misleading in light of the circumstances under which they were
made.
2.20 Registration Rights. Except as provided in the
-------------------
Investors' Rights Agreement, the Company has not granted or agreed to grant any
registration rights, including piggyback rights, to any person or entity.
2.21 Corporate Documents. Except for amendments necessary
-------------------
to satisfy representations and warranties or conditions contained herein (the
form of which amendments has been approved by the Investors), the Restated
Certificate and Bylaws of the Company are in the form previously provided to
special counsel for the Investors. The minute books of the Company have been
made available to the Investors for their review in connection with the purchase
of the Series A Preferred Stock; such minute books are current and contain
correct and complete copies of all minutes of meetings, resolutions and other
actions and proceedings of the board of directors and shareholders and all
committees of the Company. The record books relating to the equity interests of
the Company have been made available to the Purchasers for their review in
connection with its purchase of the Series A Preferred Stock; such record books
are current, correct and complete and reflect the issuance, sale or exchange of
all of capital stock and other ownership and equity interests in the Company.
2.22 Title to Property and Assets. Exhibit 2.22 sets
---------------------------- ------------
forth a complete and accurate list of all real property and improvements
(collectively "Real Property") owned or leased by the Company. The Company has
good and marketable, indefeasible fee simple title to the Real Property
described in Schedule 2.22 as being owned by it, and valid and subsisting
-------------
leasehold rights in the Real Property described in Schedule 2.22 as being
-------------
leased by it, free and clear of all liens and other encumbrances. Schedule 2.22
-------------
also sets forth a complete and accurate list of all of the material items of
equipment, machinery, computers, chattels, tools, parts, machine tools,
furniture, furnishings, fixtures and supplies of every nature owned or leased by
the Company in connection with its business as of December 31, 1998. The Company
has good and marketable fee simple title to such items described in
Schedule 2.22 as being owned by it, and valid and subsisting leasehold rights
- -------------
in such items described in Schedule 2.22 as being leased by it, free and clear
-------------
of all liens and other encumbrances.
2.23 Labor Agreements and Actions. The Company is not
----------------------------
bound by or subject to (and none of its assets or properties is bound by or
subject to) any written or oral, express or implied, contract, commitment or
arrangement with any labor union, and no labor union has requested or, to the
Company's knowledge, has sought to represent any of the employees,
representatives or agents of the Company. There is no strike or other labor
dispute involving the Company pending, or to the Company's knowledge,
threatened, that would have an MAE. The Company is not aware that any officer or
key employee, or that any group of key employees, intends to terminate their
employment with the Company, nor does the Company have a present intention to
terminate the employment of any
8
<PAGE>
of the foregoing. The employment of each officer and employee of the Company is
terminable at the will of the Company. The Company is not a party to or bound by
any currently effective employment contract, deferred compensation agreement,
bonus plan, incentive plan, profit sharing plan, retirement agreement or other
employee compensation agreement. To its knowledge, the Company has complied in
all material respects with all applicable state and federal equal employment
opportunity and other laws related to employment. To its knowledge, the Company
has withheld all amounts required by law or agreement to be withheld by it from
the wages, salaries and other payments to its employees and is not liable for
any arrears of wages or any taxes or penalties for failure to comply with any of
the foregoing. There are no pending, threatened or anticipated (i) employment
discrimination charges or complaints against or involving the Company, before
any federal, state, or local board, department, commission or agency, (ii)
unfair labor practice charges or complaints, disputes or grievances affecting
the Company, or (iii) strikes, slow downs, work stoppages, or lockouts or
threats thereof affecting the Company.
2.24 Insurance. The Company maintains insurance policies (i)
---------
insuring the properties, assets and operations of the business in such amounts
and against such liabilities to the extent required by applicable law or
regulations and (ii) insuring against interruptions in its business. Such
policies are in full force and effect and have been underwritten by unaffiliated
insurers. To its knowledge, the Company has not done anything by way of action
or inaction that invalidates any of such policies in whole or in part.
2.25 Year 2000 Compliance. The Company has initiated a review of its
--------------------
operations with a view to assessing whether its business or operations will, in
the receipt, transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data, be vulnerable to any significant
risk that computer hardware or software used in its business or operations will
not, in the case of dates or time periods occurring after December 31, 1999,
function at least as effectively as in the case of dates or time periods
occurring prior to January 1, 2000. Based on such review and as of the date
hereof, the Company has no reason to believe that any such risk could have an
MAE.
2.26 Governmental Regulations. The Company is not a "registered
------------------------
investment company" or an "affiliated person" or a "principal underwriter" of a
"registered investment company" as such terms are defined in the Investment
Company Act of 1940, as amended.
2.27 Small Business Concern. The Company, together with its
----------------------
"affiliates" (as that term is defined in Title 13, Code of Federal Regulations,
(S)121.101), is a "small business concern" within the meaning of the Small
Business Investment Act of 1958 and the regulations thereunder, including Title
13, Code of Federal Regulations, (S)121.201. The Company does not engage in, nor
shall it hereafter engage in, any activities, nor shall the Company use directly
or indirectly the proceeds from the sale of the Series A Preferred Stock
hereunder for any purpose, for which a "small business investment company" is
prohibited from providing funds by the Small Business Investment Act of 1958 and
the regulations thereunder (including Title 13, Code of Federal Regulations,
(S)107.720).
3. Representations and Warranties of the Investors. Each Investor
-----------------------------------------------
severally, but not jointly, hereby represents, warrants and covenants that:
3.1 Authorization. Such Investor has full power and authority to
-------------
enter into this Agreement, the Investors' Rights Agreement and the Stockholders'
Agreement, and each such
9
<PAGE>
agreement constitutes its valid and legally binding obligation, enforceable in
accordance with its terms, except (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting enforcement of creditors' rights generally, (ii) as limited by laws
relating to the availability of specific performance, injunctive relief or other
equitable remedies, and (iii) to the extent the indemnification provisions
contained in the Investors' Rights Agreement may be limited by applicable
federal or state securities laws.
3.2 Purchase Entirely for Own Account. This Agreement is made with
---------------------------------
such Investor in reliance upon such Investor's representation to the Company,
which by such Investor's execution of this Agreement such Investor hereby
confirms, that the Series A Preferred Stock to be received by such Investor and
the Common Stock issuable upon conversion thereof (collectively, the
"Securities") will be acquired for investment for such Investor's own account,
not as a nominee or agent, and not with a view to the resale or distribution of
any part thereof, and that such Investor has no present intention of selling,
granting any participation in or otherwise distributing the same. By executing
this Agreement, such Investor further represents that such Investor does not
have any contract, undertaking, agreement or arrangement with any person to
sell, transfer or grant participations to such person or to any third person,
with respect to any of the Securities.
3.3 Disclosure of Information. Such Investor believes it has
-------------------------
received all the information it considers necessary or appropriate for deciding
whether to purchase the Series A Preferred Stock. Such Investor further
represents that it has had an opportunity to ask questions and receive answers
from the Company regarding the terms and conditions of the offering of the
Series A Preferred Stock and the business, properties, prospects and financial
condition of the Company.
3.4 Investment Experience. Such Investor is an investor in
---------------------
securities of companies in the development stage and acknowledges that it can
bear the economic risk of its investment, and has such knowledge and experience
in financial or business matters that it is capable of evaluating the merits and
risks of the investment in the Series A Preferred Stock. If other than an
individual, such Investor also represents it has not been organized for the
purpose of acquiring the Series A Preferred Stock.
3.5 Restricted Securities. Such Investor understands that the
---------------------
Securities it is purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations such Securities may be resold without registration under
the Act only in certain limited circumstances. In the absence of an effective
registration statement covering the Securities (or the Common Stock issued on
conversion thereof) or an available exemption from registration under the Act,
the Series A Preferred Stock (and any Common Stock issued on conversion thereof)
must be held indefinitely. In this connection, such Investor represents that it
is familiar with SEC Rule 144, as presently in effect, and understands the
resale limitations imposed thereby and by the Act, including without limitation
the Rule 144 condition that current information about the Company be available
to the public. Such information is not now available and the Company has no
present plans to make such information available.
3.6 Further Limitations on Disposition. Without in any way limiting
----------------------------------
the representations set forth above, such Investor further agrees not to make
any disposition of all or any portion of the Securities unless and until the
transferee has agreed in writing for the benefit of the
10
<PAGE>
Company to be bound by this Section 3, the Investors' Rights Agreement and the
Stockholders' Agreement, and:
(a) There is then in effect a registration statement
under the Act covering such proposed disposition and such disposition is
made in accordance with such registration statement; or
(b) (i) Such Investor shall have notified the
Company of the proposed disposition and shall have furnished the Company
with a detailed statement of the circumstances surrounding the proposed
disposition, and (ii) if requested by the Company, such Investor shall have
furnished the Company with an opinion of counsel, reasonably satisfactory
to the Company that such disposition will not require registration of such
shares under the Act. It is agreed that the Company will not require
opinions of counsel for transactions made pursuant to Rule 144 except in
unusual circumstances.
(c) Notwithstanding the provisions of subsections (a)
and (b) above, no such registration statement or opinion of counsel shall
be necessary for a transfer by an Investor that is a partnership to a
partner of such partnership or a retired partner of such partnership who
retires after the date hereof, or to the estate of any such partner or
retired partner or the transfer by gift, will or intestate succession of
any partner to his or her spouse or to the siblings, lineal descendants or
ancestors of such partner or his or her spouse, if the transferee agrees in
writing to be subject to the terms hereof to the same extent as if he or
she were an original Investor hereunder.
3.7 Legends. It is understood that the certificates evidencing the
-------
Securities may bear one or all of the following legends:
(a) "These securities have not been registered under
the Securities Act of 1933, as amended. They may not be sold, offered for
sale, pledged or hypothecated in the absence of a registration statement in
effect with respect to the securities under such Act or an opinion of
counsel satisfactory to the Company that such registration is not required
or unless sold pursuant to Rule 144 of such Act."
(b) Any legend required by the Investors' Rights
Agreement and the Stockholders' Agreement.
3.8 Tax Advisors. Such Investor has reviewed with such Investor's
------------
own tax advisors the federal, state and local tax consequences of this
investment, where applicable, and the transactions contemplated by this
Agreement. With respect to matters related to the tax consequences of the
transactions contemplated by this Agreement, each such Investor is relying
solely on such advisors and not on any statements or representations of the
Company or any of its agents and understands that each such Investor (and not
the Company) shall be responsible for such Investor's own tax liability that may
arise as a result of this investment or the transactions contemplated by this
Agreement.
3.9 Investor Counsel. Such Investor acknowledges that such Investor
----------------
has had the opportunity to review this Agreement, the exhibits and the schedules
attached hereto and the transactions contemplated by this Agreement with such
Investor's own legal counsel. Each such Investor is relying solely on such
Investor's legal counsel and not on Brobeck, Phleger & Harrison
11
<PAGE>
LLP, for legal advice with respect to this investment or the transactions
contemplated by this Agreement.
4. Conditions of Investor's Obligations at Closing. The obligations
-----------------------------------------------
of each Investor under subsection 1.1(b) of this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions, the
waiver of which shall not be effective against any Investor who does not consent
thereto:
4.1 Representations and Warranties. The representations
------------------------------
and warranties of the Company contained in Section 2 shall be true on and as of
the Closing with the same effect as though such representations and warranties
had been made on and as of the date of such Closing.
4.2 Performance. The Company shall have performed and
-----------
complied with all agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or before
the Closing.
4.3 Compliance Certificate. The President of the Company
----------------------
shall deliver to each Investor at the Closing a certificate stating that the
conditions specified in Sections 4.1 and 4.2 have been fulfilled.
4.4 Qualifications. All authorizations, approvals or
--------------
permits, if any, of any governmental authority or regulatory body of the United
States or of any state or any Person that are required in connection with the
consummation of the transactions contemplated by this Agreement, including the
lawful issuance and sale of the Securities pursuant to this Agreement, shall be
duly obtained and effective as of the Closing.
4.5 Proceedings and Documents. All corporate and other
-------------------------
proceedings in connection with the transactions contemplated at the Closing and
all documents incident thereto shall be reasonably satisfactory in form and
substance to Investors' special counsel, and they shall have received all such
counterpart original and certified or other copies of such documents as they may
reasonably request.
4.6 Proprietary Information Agreements. Each employee of
----------------------------------
the Company shall have entered into a Proprietary Information and Inventions
Agreement in the form previously provided to special counsel for the Investors.
4.7 Board of Directors. The Company shall have taken all
------------------
necessary corporate action such that immediately following the Closing, the
directors of the Company shall be Art Zeile, Joel Daly, Stephen O. James, Watts
Hamrick and Scott Perper.
4.8 Investors' Rights Agreement. The Company shall have
---------------------------
entered into the Investors' Rights Agreement in the form attached as Exhibit B.
---------
4.9 Stockholders' Agreement. The Company, Art Zeile and
-----------------------
Joel Daly shall have entered into the Stockholders' Agreement in the form
attached as Exhibit D.
---------
12
<PAGE>
4.10 No Material Adverse Change. On and prior to the
--------------------------
Closing, there shall have occurred no material adverse change in the business,
assets or financial condition of the Company.
4.11 No Litigation or Other Proceedings. There shall be no
----------------------------------
pending or threatened litigation, bankruptcy, insolvency, injunction, order,
suit, investigation or claim against or affecting the Company, any of its
properties or rights, any of its executive officers or with respect to any of
the transactions contemplated by this Agreement, the Investors' Rights Agreement
or the Stockholders' Agreement which would be reasonably likely to have an MAE.
4.12 SBA Documents and Information. The Company shall have
-----------------------------
executed and delivered to First Union Capital Partners, Inc. forms and
information required by the rules and regulations of the United States Small
Business Administration, including, without limitation, a Size Status
Declaration on SBA Form 480 and an Assurance of Compliance on SBA Form 652 and
information necessary for the preparation of a Portfolio Financing Report on SBA
Form 1031. In the event such forms and information are not delivered at Closing,
the Company covenants and agrees to deliver them as soon as practicable
thereafter.
5. Conditions of the Company's Obligations at Closing. The
--------------------------------------------------
obligations of the Company to each Investor under this Agreement are subject to
the fulfillment on or before the Closing of each of the following conditions by
that Investor:
5.1 Representations and Warranties. The representations
------------------------------
and warranties of the Investors contained in Section 3 shall be true on and as
of the Closing with the same effect as though such representations and
warranties had been made on and as of the Closing.
5.2 Payment of Purchase Price. The Investor shall have
-------------------------
delivered the purchase price specified in Section 1.2.
5.3 Investors' Rights Agreement. Each Investor shall have
---------------------------
entered into the Investors' Rights Agreement in the form attached as Exhibit B.
---------
5.4 Stockholders' Agreement. Each Investor shall have
-----------------------
entered into the Stockholders' Agreement in the form attached as Exhibit D.
---------
6. Miscellaneous.
-------------
6.1 Survival. The warranties, representations and
--------
covenants of the Company and Investors contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Closing and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Investors or the Company.
6.2 Successors and Assigns. Except as otherwise provided
----------------------
herein, the terms and conditions of this Agreement shall inure to the benefit of
and be binding upon the respective successors and assigns of the parties
(including transferees of any Securities). Nothing in this Agreement, express or
implied, is intended to confer upon any party, other than the parties hereto or
their respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
13
<PAGE>
6.3 Governing Law. This Agreement shall be governed by and
-------------
construed under the laws of the State of Colorado as applied to agreements among
Colorado residents entered into and to be performed entirely within Colorado,
without giving effect to such state's conflict of laws principles.
6.4 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.5 Notices. All notices required or permitted hereunder shall be in
-------
writing and shall be deemed effectively given: (i) upon personal delivery to the
party to be notified, (ii) when sent by confirmed telex or facsimile if sent
during normal business hours of the recipient, if not, then on the next business
day; (iii) five days after having been sent by registered or certified mail,
return receipt requested, postage prepaid; or (iv) one day after deposit with a
nationally recognized overnight courier, specifying next day delivery, with
written verification of receipt. All communications shall be sent to the address
as set forth on the signature page hereof or at such other address as such party
may designate by ten days advance written notice to the other parties hereto.
6.6 Finder's Fee. Each party represents that it neither is nor will
------------
be obligated for any finder's fee or commission in connection with this
transaction. Each Investor agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finders' fee (and the costs and expenses of defending against such liability or
asserted liability) for which such Investor or any of its officers, partners,
employees or representatives is responsible. The Company agrees to indemnify and
hold harmless each Investor from any liability for any commission or
compensation in the nature of a finder's fee (and the costs and expenses of
defending against such liability or asserted liability) for which the Company or
any of its officers, employees or representatives is responsible .
6.7 Expenses. Irrespective of whether the Closing is effected, the
--------
Company shall pay all costs and expenses that it incurs with respect to the
negotiation, execution, delivery and performance of this Agreement. If the
Closing is effected, the Company shall, at the Closing, reimburse the Investors
for all reasonable expenses of the Investors incurred in connection with the
negotiation, execution, delivery and performance of this Agreement including,
but not limited to, reasonable fees and, upon receipt of a bill therefor, and
out of pocket expenses of a single special counsel for all Investors. Investors
agree that every effort will be made to minimize these expenses. If any action
at law or in equity is necessary to enforce or interpret the terms of this
Agreement, the Investors' Rights Agreement, the Stockholders' Agreement or the
Restated Certificate, the prevailing party shall be entitled to reasonable
attorney's fees, costs and necessary disbursements in addition to any other
relief to which such party may be entitled.
6.8 Amendments and Waivers. Any term of this Agreement may be
----------------------
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
a majority of the Common Stock not previously sold to the public that is issued
or issuable upon conversion of the Series A Preferred Stock. Any amendment or
waiver effected in accordance with this paragraph shall be binding upon each
holder of any securities purchased under this Agreement at the time outstanding
(including securities into which such securities are convertible), each future
holder of all such securities and the Company.
14
<PAGE>
6.9 Effect of Amendment or Waiver. Each Investor acknowledges that
-----------------------------
by the operation of Section 6.8 hereof the holders of a majority of the Common
Stock not previously sold to the public that is issued or issuable upon
conversion of the Series A Preferred Stock will have the power to diminish or
eliminate all rights of such Investor under this Agreement.
6.10 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
6.11 Aggregation of Stock. All shares of the Series A Preferred
--------------------
Stock or Common Stock issued upon conversion thereof held or acquired by
affiliated entities or persons shall be aggregated together for the purpose of
determining the availability of any rights under this Agreement.
6.12 Entire Agreement. This Agreement and the documents referred to
----------------
herein constitute the entire agreement among the parties and no party shall be
liable or bound to any other party in any manner by any warranties,
representations or covenants except as specifically set forth herein or therein.
6.13 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[SIGNATURE PAGE(S) TO FOLLOW]
15
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INFLOW, INC.
By: /s/ Art Zeile
-----------------------------------
Art Zeile, President and Chief Executive
Officer
By: /s/ Joel Daly
-----------------------------------
Joel Daly, Chief Operating Officer and
Secretary
Address: 1860 Lincoln Street
Suite 305
Denver, CO 80295
16
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INVESTORS:
RICHARD COLEMAN
/s/ Richard Coleman
---------------------------------------
Address: 22 Viking Drive
Englewood, CO 80110
17
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INVESTORS:
RICHARD A. FINK
/s/ Richard A. Fink
---------------------------------------
Address: 5492 Calle Chaparro
P.O. Box 1647 (U.S. Mail only)
Rancho Santa Fe, CA 92067
18
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INVESTORS:
RICHARD R. PLUMRIDGE
/s/ Richard R. Plumridge
---------------------------------------
Address: 2848 Ginny Way
Lafayette, CO 80026
19
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INVESTORS:
JEREMY W. MAKARECHIAN
/s/ Jeremy W. Makarechian
---------------------------------------
Address: 3555 West 110th Place
Westminster, CO 80030
20
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INVESTORS:
DAVID A. MAKARECHIAN
/s/ David A. Makarechian
---------------------------------------
Address: 916 Palm Avenue
San Mateo, CA 94401
21
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INVESTORS:
BRUCE E. CUNNINGHAM
/s/ Bruce E. Cunningham
_______________________________________
Address: 4901 West 93rd Avenue
Apt. 2227
Westminster, CO 80030
22
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INVESTORS:
JOHN E. HAYES III
/s/ John E. Hayes III
---------------------------------------
Address: 125 Willowleaf Drive
Littleton, CO 80127
23
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INVESTORS:
LEE R. SPIEGLER
/s/ Lee R. Spiegler
_______________________________________
Address: 16209 West 70th Place
Arvada, CO 80007
24
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INVESTORS:
ARUN JHA
/s/ Arun Jha
---------------------------------------
Address: 4901 West 93rd Avenue
Apt. 332
Westminster, CO 80030
25
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INVESTORS:
BROBECK, PHLEGER & HARRISON LLP
BY: /s/ Richard A. Fink
--------------------------------------
NAME: Richard A. Fink
--------------------------------------
TITLE: Partner
--------------------------------------
26
<PAGE>
SCHEDULE A
----------
<TABLE>
<CAPTION>
Name Amount Invested Number of Shares Purchased
- ------------------------------------------- -------------------------- ------------------------------------
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Brobeck, Phleger & Harrison LLP $ 50,000 14,286
- -------------------------------------------------------------------------------------------------------------
Richard Coleman 50,000 14,286
- -------------------------------------------------------------------------------------------------------------
Richard A. Fink 7,500 2,143
- -------------------------------------------------------------------------------------------------------------
Richard R. Plumridge 7,500 2,143
- -------------------------------------------------------------------------------------------------------------
Jeremy W. Makarechian 7,500 2,143
- -------------------------------------------------------------------------------------------------------------
David A. Makarechian 2,500 714
- -------------------------------------------------------------------------------------------------------------
Bruce E. Cunningham 2,500 714
- -------------------------------------------------------------------------------------------------------------
John E. Hayes, III 2,500 714
- -------------------------------------------------------------------------------------------------------------
Lee R. Spiegler 2,500 714
- -------------------------------------------------------------------------------------------------------------
Arun Jha 2,500 714
- -------------------------------------------------------------------------------------------------------------
Totals $132,500 37,857
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit C
---------
List of Stockholders
<TABLE>
<CAPTION>
Common Stock Series A Preferred
Stock
- ---------------------------------------------------------------
<S> <C> <C>
Art Zeile 1,500,000 186,858
Joel Daly 1,500,000 187,381
Stephen O. James 60,000
First Union Capital 2,857,143
Partners
Brobeck, Phleger & 14,286
Harrison LLP
Richard Coleman 14,286
Richard A. Fink 2,143
Richard R. Plumridge 2,143
Jeremy W. Makarechian 2,143
David A. Makarechian 714
Bruce E. Cunningham 714
John E. Hayes, III 714
Lee R. Spiegler 714
Arun Jha 714
- ---------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit 10.3
INFLOW, INC.
STOCK PURCHASE AGREEMENT
AGREEMENT made as of this 15th of October, 1999 by and between InFlow,
Inc., a Delaware corporation (the "Corporation"), and James W. McHose III (the
"Purchaser").
A. PURCHASE OF SHARES
------------------
1. Purchase. Purchaser hereby purchases, and the Corporation hereby
sells to Purchaser, forty thousand (40,000) shares of the Corporation's Series A
Preferred Stock ( the "Purchased Shares") at a purchase price of $3.50 per share
(the "Purchase Price").
2. Payment. Concurrently with the execution of this Agreement,
Purchaser shall deliver to the Secretary of the Corporation: (i) the aggregate
Purchase Price payable for the Purchased Shares in the form of (A) fifty-two
thousand five hundred dollars ($52,500) cash and (B) a promissory note in the
amount of eighty-seven thousand five hundred dollars ($87,500), attached hereto
as Exhibit I and (ii) a duly-executed Assignment Separate from Certificate,
attached hereto as Exhibit II.
3. Delivery of Certificates. The certificates representing the
Purchased Shares shall be held in escrow by the Secretary of the Corporation as
provided in Article F.
4. Stockholder Rights. Until such time as the Corporation exercises
the Repurchase Right, Purchaser (or any successor in interest) shall have all
the rights of a stockholder (including voting, dividend and liquidation rights)
with respect to the Purchased Shares, including the Purchased Shares held in
escrow hereunder, subject, however, to the transfer restrictions of Articles B
and C.
B. SECURITIES LAW COMPLIANCE
-------------------------
1. Restricted Securities. The Purchased Shares have not been
registered under the 1933 Act. Purchaser hereby confirms that Purchaser has
been informed that the Purchased Shares are restricted securities under the 1933
Act and may not be resold or transferred unless the Purchased Shares are first
registered under the Federal securities laws or unless an exemption from such
registration is available. Accordingly, Purchaser hereby acknowledges that
Purchaser is prepared to hold the Purchased Shares for an indefinite period and
that Purchaser is aware that SEC Rule 144 issued under the 1933 Act which
exempts certain resales of unrestricted securities is not presently available to
exempt the resale of the Purchased Shares from the registration requirements of
the 1933 Act.
2. Disposition of Purchased Shares. Purchaser shall make no
disposition of the Purchased Shares (other than a Permitted Transfer) unless and
until there is compliance with all of the following requirements:
<PAGE>
(i) Purchaser shall have provided the Corporation with a written
summary of the terms and conditions of the proposed disposition.
(ii) Purchaser shall have complied with all requirements of this
Agreement applicable to the disposition of the Purchased Shares.
(iii) Purchaser shall have provided the Corporation with written
assurances, in form and substance satisfactory to the Corporation, that (a) the
proposed disposition does not require registration of the Purchased Shares under
the 1933 Act or (b) all appropriate action necessary for compliance with the
registration requirements of the 1933 Act or any exemption from registration
available under the 1933 Act (including Rule 144) has been taken.
The Corporation shall not be required (i) to transfer on its books any
---
Purchased Shares which have been sold or transferred in violation of the
provisions of this Agreement or (ii) to treat as the owner of the Purchased
--
Shares, or otherwise to accord voting, dividend or liquidation rights to, any
transferee to whom the Purchased Shares have been transferred in contravention
of this Agreement.
3. Restrictive Legends. The stock certificates for the Purchased
-------------------
Shares shall be endorsed with the following restrictive legends:
(i) "The shares represented by this certificate have not been
registered under the Securities Act of 1933. The shares may not be sold or
offered for sale in the absence of (a) an effective registration statement
for the shares under such Act, (b) a "no action" letter of the Securities
and Exchange Commission with respect to such sale or offer or (c)
satisfactory assurances to the Corporation that registration under such Act
is not required with respect to such sale or offer."
(ii) "The shares represented by this certificate are unvested and
are subject to certain repurchase rights granted to the Corporation and
accordingly may not be sold, assigned, transferred, encumbered, or in any
manner disposed of except in conformity with the terms of a written
agreement dated October 15, 1999 between the Corporation and the registered
holder of the shares (or the predecessor in interest to the shares). A
copy of such agreement is maintained at the Corporation's principal
corporate offices."
C. TRANSFER RESTRICTIONS
---------------------
1. Restriction on Transfer. Except for any Permitted Transfer,
-----------------------
Purchaser shall not transfer, assign, encumber or otherwise dispose of any of
the Purchased Shares which are subject to the Repurchase Right. In addition,
Purchased Shares which are released from the Repurchase Right shall not be
transferred, assigned, encumbered or otherwise disposed of in contravention of
the Market Stand-Off.
2. Transferee Obligations. Each person (other than the Corporation)
----------------------
to whom the Purchased Shares are transferred by means of a Permitted Transfer
must, as a
2.
<PAGE>
condition precedent to the validity of such transfer, acknowledge in
writing to the Corporation that such person is bound by the provisions of this
Agreement and that the transferred shares are subject to (i) the Repurchase
Right and (ii) the Market Stand-Off, to the same extent such shares would be so
subject if retained by Purchaser.
3. Market Stand-Off.
----------------
(a) In connection with any underwritten public offering by the
Corporation of its equity securities pursuant to an effective registration
statement filed under the 1933 Act, including the Corporation's initial public
offering, Owner shall not sell, make any short sale of, loan, hypothecate,
pledge, grant any option for the purchase of, or otherwise dispose or transfer
for value or otherwise agree to engage in any of the foregoing transactions with
respect to, any Purchased Shares without the prior written consent of the
Corporation or its underwriters. Such restriction (the "Market Stand-Off")
shall be in effect for such period of time from and after the effective date of
the final prospectus for the offering as may be requested by the Corporation or
such underwriters. In no event, however, shall such period exceed one hundred
eighty (180) days.
(b) Owner shall be subject to the Market Stand-Off provided and only
if the officers and directors of the Corporation are also subject to similar
restrictions.
(c) Any new, substituted or additional securities which are by reason
of any Recapitalization or Reorganization distributed with respect to the
Purchased Shares shall be immediately subject to the Market Stand-Off, to the
same extent the Purchased Shares are at such time covered by such provisions.
(d) In order to enforce the Market Stand-Off, the Corporation may
impose stop-transfer instructions with respect to the Purchased Shares until the
end of the applicable stand-off period.
D. REPURCHASE RIGHT
----------------
1. Grant. The Corporation is hereby granted the right (the
-----
"Repurchase Right"), exercisable at any time during the ninety (90)-day period
following the date Purchaser ceases for any reason to remain in Service, to
repurchase at the Purchase Price all or any portion of the Purchased Shares in
which Purchaser is not, at the time of his or her cessation of Service, vested
in accordance with the Vesting Schedule (such shares to be hereinafter referred
to as the "Unvested Shares").
2. Exercise of the Repurchase Right. The Repurchase Right shall be
--------------------------------
exercisable by written notice delivered to each Owner of the Unvested Shares
prior to the expiration of the ninety (90)-day exercise period. The notice
shall indicate the number of Unvested Shares to be repurchased and the date on
which the repurchase is to be effected, such date to be not more than thirty
(30) days after the date of such notice. The certificates representing the
Unvested Shares to be repurchased shall be delivered to the Corporation prior to
the close of business on the date specified for the repurchase. Concurrently
with the receipt of such stock certificates, the Corporation shall pay to Owner,
in cash or cash equivalents (including the cancellation of any purchase-money
indebtedness), an amount equal to the
3.
<PAGE>
Purchase Price previously paid for the Unvested Shares which are to be
repurchased from Owner.
3. Termination of the Repurchase Right. The Repurchase Right shall
-----------------------------------
terminate with respect to any Unvested Shares for which it is not timely
exercised under Paragraph D.2. In addition, the Repurchase Right shall
terminate and cease to be exercisable with respect to any and all Purchased
Shares in which Purchaser vests in accordance with the following Vesting
Schedule:
(i) Purchaser shall be fully vested in 15,000 of the Shares
immediately upon execution of this Agreement.
(ii) Purchaser shall vest in the remaining 25,000 of the Shares
on October 15, 2002.
(iii) Purchaser shall vest in any Unvested Shares in the
event of a Corporate Transaction.
(iv) In no event shall any additional Unvested Shares vest
following the Purchaser's cessation of Service for any reason.
(v) Purchaser shall acquire a vested interest in the Unvested
Shares, and the Repurchase Right shall accordingly lapse with respect to
those Shares upon Purchaser's cessation of Service due to death or
Permanent Disability.
All Vested Shares as to which the Repurchase Rights lapse shall,
however, remain subject to the Market Stand-Off.
4. Recapitalization. Any new, substituted or additional securities
----------------
or other property (including cash paid other than as a regular cash dividend)
which is by reason of any Recapitalization distributed with respect to the
Purchased Shares shall be immediately subject to the Repurchase Right, but only
to the extent the Purchased Shares are at the time covered by such right.
Appropriate adjustments to reflect such distribution shall be made to the number
and/or class of Purchased Shares subject to this Agreement and to the price per
share to be paid upon the exercise of the Repurchase Right in order to reflect
the effect of any such Recapitalization upon the Corporation's capital
structure; provided, however, that the aggregate purchase price shall remain the
--------
same.
5. Fractional Shares. No fractional shares shall be repurchased
-----------------
by the Corporation. Accordingly, should the Repurchase Right extend to a
fractional share at the time of Purchaser's cessation of Service, then such
fractional share shall be added to any fractional share in which Purchaser is at
such time vested in order to make one whole vested share no longer subject to
the Repurchase Right.
6. Omitted.
-------
E. OMITTED
-------
4.
<PAGE>
F. ESCROW
------
1. Deposit. Upon issuance, the certificates for the Purchased Shares
-------
which are subject to the Repurchase Right shall be deposited in escrow with the
Corporation to be held in accordance with the provisions of this Article F.
Each deposited certificate shall be accompanied by a duly-executed Assignment
Separate from Certificate in the form of Exhibit II. The deposited
----------
certificates, together with any other assets or securities from time to time
deposited with the Corporation pursuant to the requirements of this Agreement,
shall remain in escrow until such time or times as the certificates (or other
assets and securities) are to be released or otherwise surrendered for
cancellation in accordance with Paragraph F.3. Upon delivery of the
certificates (or other assets and securities) to the Corporation, Owner shall be
issued a receipt acknowledging the number of Purchased Shares (or other assets
and securities) delivered in escrow.
2. Recapitalization/Reorganization. Any new, substituted or
-------------------------------
additional securities or other property which is by reason of any
Recapitalization or Reorganization distributed with respect to the Purchased
Shares shall be immediately delivered to the Corporation to be held in escrow
under this Article F, but only to the extent the Purchased Shares are at the
time subject to the escrow requirements hereunder. However, all regular cash
dividends on the Purchased Shares (or other securities at the time held in
escrow) shall be paid directly to Owner and shall not be held in escrow.
3. Release/Surrender. The Purchased Shares, together with any other
-----------------
assets or securities held in escrow hereunder, shall be subject to the following
terms relating to their release from escrow or their surrender to the
Corporation for repurchase and cancellation:
(i) Should the Corporation elect to exercise the Repurchase
Right with respect to any Unvested Shares, then the escrowed certificates
for those Unvested Shares (together with any other assets or securities
attributable thereto) shall be surrendered to the Corporation concurrently
with the payment to Owner of an amount equal to the aggregate Purchase
Price paid for those Unvested Shares, and Owner shall cease to have any
further rights or claims with respect to such Unvested Shares (or other
assets or securities attributable thereto).
(ii) Omitted.
(iii) Omitted.
(iv) As the Purchased Shares (or any other assets or securities
attributable thereto) vest in accordance with the Vesting Schedule, the
certificates for those vested shares (as well as all other vested assets
and securities) shall be released from escrow upon Owner's request, but not
more frequently than once every six (6) months.
(v) All Purchased Shares which vest (and any other vested
assets and securities attributable thereto) shall be released within thirty
(30) days after the Purchaser's cessation of Service.
5.
<PAGE>
(vi) All Purchased Shares (or other assets or securities)
released from escrow shall nevertheless remain subject to the Market Stand-
Off, until such restriction terminates.
G. SPECIAL TAX ELECTION
--------------------
1. Section 83(b) Election . Under Code Section 83, the excess of the
-----------------------
fair market value of the Purchased Shares on the date any forfeiture
restrictions applicable to such shares lapse over the Purchase Price paid for
such shares will be reportable as ordinary income on the lapse date. For this
purpose, the term "forfeiture restrictions" includes the right of the
Corporation to repurchase the Purchased Shares pursuant to the Repurchase Right.
Purchaser may elect under Code Section 83(b) to be taxed at the time the
Purchased Shares are acquired, rather than when and as such Purchased Shares
cease to be subject to such forfeiture restrictions. Such election must be
filed with the Internal Revenue Service within thirty (30) days after the date
of this Agreement. Even if the fair market value of the Purchased Shares on the
date of this Agreement equals the Purchase Price paid (and thus no tax is
payable), the election must be made to avoid adverse tax consequences in the
future. THE FORM FOR MAKING THIS ELECTION IS ATTACHED AS EXHIBIT III HERETO.
-----------
PURCHASER UNDERSTANDS THAT FAILURE TO MAKE THIS FILING WITHIN THE APPLICABLE
THIRTY (30)-DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME AS THE
FORFEITURE RESTRICTIONS LAPSE.
2. FILING RESPONSIBILITY. PURCHASER ACKNOWLEDGES THAT IT IS
---------------------
PURCHASER'S SOLE RESPONSIBILITY, AND NOT THE CORPORATION'S, TO FILE A TIMELY
ELECTION UNDER CODE SECTION 83(b), EVEN IF PURCHASER REQUESTS THE CORPORATION OR
ITS REPRESENTATIVES TO MAKE THIS FILING ON HIS OR HER BEHALF.
H. GENERAL PROVISIONS
------------------
1. Assignment. The Corporation may assign the Repurchase Right to
----------
any person or entity selected by the Board, including (without limitation) one
or more stockholders of the Corporation.
2. No Employment or Service Contract. Nothing in this Agreement or
---------------------------------
in the Plan shall confer upon Purchaser any right to continue in Service for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Parent or Subsidiary employing or
retaining Purchaser) or of Purchaser, which rights are hereby expressly reserved
by each, to terminate Purchaser's Service at any time for any reason, with or
without cause.
3. Notices. Any notice required to be given under this Agreement
-------
shall be in writing and shall be deemed effective upon personal delivery or upon
deposit in the U.S. mail, registered or certified, postage prepaid and properly
addressed to the party entitled to such notice at the address indicated below
such party's signature line on this Agreement or at such other address as such
party may designate by ten (10) days advance written notice under this paragraph
to all other parties to this Agreement.
6.
<PAGE>
4. No Waiver. The failure of the Corporation in any instance to
---------
exercise the Repurchase Right shall not constitute a waiver of any other
repurchase rights that may subsequently arise under the provisions of this
Agreement or any other agreement between the Corporation and Purchaser. No
waiver of any breach or condition of this Agreement shall be deemed to be a
waiver of any other or subsequent breach or condition, whether of like or
different nature.
5. Cancellation of Shares. If the Corporation shall make available,
----------------------
at the time and place and in the amount and form provided in this Agreement, the
consideration for the Purchased Shares to be repurchased in accordance with the
provisions of this Agreement, then from and after such time, the person from
whom such shares are to be repurchased shall no longer have any rights as a
holder of such shares (other than the right to receive payment of such
consideration in accordance with this Agreement). Such shares shall be deemed
purchased in accordance with the applicable provisions hereof, and the
Corporation shall be deemed the owner and holder of such shares, whether or not
the certificates therefor have been delivered as required by this Agreement.
6. Purchaser Undertaking. Purchaser hereby agrees to take whatever
---------------------
additional action and execute whatever additional documents the Corporation may
deem necessary or advisable in order to carry out or effect one or more of the
obligations or restrictions imposed on either Purchaser or the Purchased Shares
pursuant to the provisions of this Agreement.
I. Governing Law. This Agreement shall be governed by, and construed in
-------------
accordance with, the laws of the State of Colorado, as such laws are applied to
contracts entered into and performed in such State without resort to that
State's conflict-of-laws provisions.
J. Successors and Assigns. The provisions of this Agreement shall inure
----------------------
to the benefit of, and be binding upon, the Corporation and its successors and
assigns and Purchaser and Purchaser's legal representatives, heirs, legatees,
distributees, assigns and transferees by operation of law, whether or not any
such person shall have become a party to this Agreement and have agreed in
writing to join herein and be bound by the terms and conditions hereof.
K. Counterparts. This Agreement may be executed in one or more
------------
counterparts. Each such counterpart shall be deemed to be an original and all
such counterparts shall together constitute one and the same instrument.
7.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first indicated above.
INFLOW, INC.
By: /s/ Art Zeile
_____________________________________
Art Zeile, President
PURCHASER
/s/ James W. McHose III
--------------------------------------
James W. McHose III
Address: 7304 Island Circle
Boulder, Colorado 80301
8.
<PAGE>
EXHIBIT I
PROMISSORY NOTE
<PAGE>
EXHIBIT II
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED James W. McHose III hereby sell(s), assign(s) and
transfer(s) unto InFlow, Inc. (the "Corporation"),
_________________(____________) shares of the Series A Preferred Stock of the
Corporation standing in ________________________name on the books of the
Corporation represented by Certificate No. ___________________ herewith and do
hereby irrevocably constitute and appoint _______________________________
Attorney to transfer the said stock on the books of the Corporation with full
power of substitution in the premises.
Dated: ______________________
Signature ____________________________
James W. McHose III
Instruction: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Corporation to exercise its
Repurchase Right set forth in the Agreement without requiring additional
signatures on the part of Purchaser.
<PAGE>
EXHIBIT III
SECTION 83(b) TAX ELECTION
This statement is being made under Section 83(b) of the Internal Revenue Code,
pursuant to Treas. Reg. Section 1.83-2.
(1) The taxpayer who performed the services is:
Name: James W. McHose III
Address: 7304 Island Circle
Boulder, Colorado 80301
Taxpayer Ident. No.: ###-##-####
(2) The property with respect to which the election is being made is 25,000
shares of the Series A Preferred Stock of InFlow, Inc.
(3) The property was issued on October 15, 1999.
(4) The taxable year in which the election is being made is the calendar year
1999.
(5) The property is subject to a repurchase right pursuant to which the issuer
has the right to acquire the property at the original purchase price if for
any reason taxpayer's service with the issuer is terminated. Such
repurchase right will lapse October 15, 2002.
(6) The fair market value at the time of transfer (determined without regard to
any restriction other than a restriction which by its terms will never
lapse) is $3.50 per share.
(7) The amount paid for such property is $3.50 per share.
(8) A copy of this statement was furnished to InFlow, Inc. for whom taxpayer
rendered the services underlying the transfer of property.
(9) This statement is executed as of: November 12, 1999.
________________________________________________________
Spouse (if any) Taxpayer
This form must be filed with the Internal Revenue Service Center with which
taxpayer files his or her federal income tax returns. The filing must be made
within thirty (30) days after the execution date of the Stock Issuance Agreement
and should be made by registered or certified mail, return receipt requested.
Purchaser must retain two (2) copies of the completed form for filing with his
or her federal and state tax returns for the current tax year and an additional
copy for his or her records.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Agreement:
A. Agreement shall mean this Stock Purchase Agreement.
---------
B. Board shall mean the Corporation's Board of Directors.
-----
C. Code shall mean the Internal Revenue Code of 1986, as amended.
----
D. Common Stock shall mean the Corporation's common stock.
------------
E. Corporate Transaction shall mean any of the following
---------------------
transactions:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities
immediately prior to such transaction,
(ii) the sale, transfer or other disposition of all or substantially
all of the Corporation's assets or capital stock, or
(iii) a tender or exchange offer in which, after the consummation of
the offer, the offeror is the beneficial owner (as determined pursuant
to Section 13(d) of the Securities Exchange Act of 1934, as amended),
directly or indirectly, of at least 15 percent of the outstanding
Common Stock.
F. Corporation shall mean InFlow, Inc., a Delaware corporation.
-----------
G. Disability shall mean the inability of an individual to engage in
----------
any substantial gainful activity by reason of any medically determinable
physical or mental impairment and shall be determined by the Plan Administrator
on the basis of such medical evidence as the Plan Administrator deems warranted
under the circumstances. Disability shall be deemed to constitute Permanent
Disability in the event that such Disability is expected to result in death or
has lasted or can be expected to last for a continuous period of twelve (12)
months or more.
H. Disposition Notice shall have the meaning assigned to such term in
------------------
Paragraph E.2.
I. Exercise Notice shall have the meaning assigned to such term in
---------------
Paragraph E.3.
J. Fair Market Value of a share of Common Stock on any relevant date
-----------------
prior to the initial public offering of the Common Stock shall be determined by
the Corporation's
i.
<PAGE>
stock option plan administrator after taking into account such factors as it
shall deem appropriate.
K. Omitted.
-------
L. Market Stand-Off shall mean the market stand-off restriction
----------------
specified in Paragraph C.3.
M. 1933 Act shall mean the Securities Act of 1933, as amended.
--------
N. Owner shall mean Purchaser and all subsequent holders of the
-----
Purchased Shares who derive their chain of ownership through a Permitted
Transfer from Purchaser.
O. Parent shall mean any corporation (other than the Corporation) in
------
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
P. Purchaser shall mean the person to whom shares are issued pursuant
---------
to this Agreement.
Q. Permitted Transfer shall mean (i) a gratuitous transfer of the
------------------
Purchased Shares, provided and only if Purchaser obtains the Corporation's prior
--------------------
written consent to such transfer, (ii) a transfer of title to the Purchased
Shares effected pursuant to Purchaser's will or the laws of intestate succession
following Purchaser's death or (iii) a transfer to the Corporation in pledge as
security for any purchase-money indebtedness incurred by Purchaser in connection
with the acquisition of the Purchased Shares.
R. Omitted.
-------
S. Omitted.
-------
T. Purchase Price shall have the meaning assigned to such term in
--------------
Paragraph A.1.
U. Purchased Shares shall have the meaning assigned to such term in
----------------
Paragraph A.1.
V. Recapitalization shall mean any stock split, stock dividend,
----------------
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration.
W. Reorganization shall mean any of the following transactions:
--------------
(i) a merger or consolidation in which the Corporation is not the
surviving entity,
ii.
<PAGE>
(ii) a sale, transfer or other disposition of all or
substantially all of the Corporation's assets,
(iii) a reverse merger in which the Corporation is the surviving
entity but in which the Corporation's outstanding voting securities are
transferred in whole or in part to a person or persons different from the
persons holding those securities immediately prior to the merger, or
(iv) any transaction effected primarily to change the state in
which the Corporation is incorporated or to create a holding company
structure.
X. Repurchase Right shall mean the right granted to the Corporation
----------------
in accordance with Article D.
Y. SEC shall mean the Securities and Exchange Commission.
---
Z. Service shall mean the Purchaser's performance of services to the
-------
Corporation (or any Parent or Subsidiary) in the capacity of an employee,
subject to the control and direction of the employer entity as to both the work
to be performed and the manner and method of performance, a non-employee member
of the board of directors or a consultant or independent advisor.
AA. Omitted.
-------
BB. Subsidiary shall mean any corporation (other than the
----------
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
CC. Target Shares shall have the meaning assigned to such term in
-------------
Paragraph E.2.
DD. Vesting Schedule shall mean the vesting schedule specified in
----------------
Paragraph D.3.
EE. Unvested Shares shall have the meaning assigned to such term in
---------------
Paragraph D.1.
iii.
<PAGE>
Exhibit 10.4
PREFERRED STOCK PURCHASE AGREEMENT
PREFERRED STOCK PURCHASE AGREEMENT dated October 27, 1999 (the "Agreement")
by and among InFlow, Inc., a Delaware corporation (the "Company"), and Meritage
Private Equity Fund, L.P., Meritage Private Equity Parallel Fund, L.P. and
Meritage Entrepreneurs Fund, L.P. (each, an "Investor" and collectively, the
"Investors").
1. Purchase and Sale of Stock.
--------------------------
1.1 Sale and Issuance of Series B Preferred Stock.
(a) Prior to or concurrently with the date hereof, the Company
has adopted and filed with the Secretary of State of Delaware the Second Amended
and Restated Certificate of Incorporation in the form attached hereto as
Exhibit A (the "Restated Certificate").
(b) Subject to the terms and conditions of this Agreement, each
Investor agrees, severally but not jointly, to purchase from the Company at the
Closing, and the Company agrees to sell and issue to each Investor at the
Closing, that number of shares of the Company's Series B Preferred Stock set
forth opposite such Investor's name on Schedule A hereto for the purchse
price of $8.70 per share.
1.2 Closing. The purchase and sale of the Series B Preferred Stock
shall take place at the Company's offices located at 1860 Lincoln Avenue, Suite
305, Denver, Colorado 80295 at 10:00 a.m. on October 28, 1999, or at such other
time and place as the Company and the Investors mutually agree upon orally or in
writing (which time and place are designated as the "Closing"). At the Closing,
the Company shall deliver to each Investor a certificate representing the Series
B Preferred Stock that such Investor is purchasing against payment of the
purchase price therefor by wire transfer of immediately available funds.
1.3 Subsequent Sale of Series B Preferred Stock. The Company may
sell up to an additional 3,448,276 shares of Series B Preferred Stock at a price
of not less than $8.70 per share prior to November 30, 1999 to one or more
additional purchasers selected by the Company. Any such additional purchaser
shall execute a purchase agreement in substantially the form of this Agreement
and shall become a party to the Amended and Restated Investors' Rights Agreement
in the form attached hereto as Exhibit B (the "Investors' Rights Agreement") and
the Amended and Restated Stockholders' Agreement in the form attached hereto as
Exhibit C (the "Stockholders' Agreement").
1.4 Post-Closing Obligations. In the event that, at any time, the
Company's representation and warranty in Section 2.2 is determined not to have
been true when made, the Company shall promptly issue to the Investors, on a pro
rata basis as an adjustment to the purchase price paid for the shares of Series
B Preferred Stock purchased hereunder and without the payment of additional
consideration by the Investors, an additional number of shares of Series B
Preferred Stock such that each Investor would own the same economic interest and
<PAGE>
voting power as it would have owned had such representation and warranty been
true and correct in all respects when made. If at the time of an adjustment
pursuant to the preceding sentence any shares of Series B Preferred Stock
purchased hereunder have been converted into Common Stock, the Company shall
issue additional shares of Common Stock with respect to such converted shares of
Series B Preferred Stock based on the conversion ratio that would have been in
effect if such shares had remained outstanding. Any additional shares issued
pursuant to this Section 1.4 shall be treated as if they were issued at the
Closing and shall reflect any anti-dilution adjustments arising from the date of
Closing through the date of such issuance. Concurrently with each such
issuance, the Company shall pay or accrue all dividends or other distributions
which would have been paid or accrued with respect to such additional shares
from the date of Closing through the date of such issuance.
2. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to each Investor that, except as set forth on the
Schedule of Exceptions (the "Schedule of Exceptions") attached hereto as
Schedule B, which exceptions shall be deemed to be representations and
- ----------
warranties as if made hereunder:
2.1 Organization, Good Standing, Power and Qualification. The
----------------------------------------------------
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware. The Company has all requisite corporate
power and authority to own and operate its property, to lease the property it
operates as lessee and to conduct the business in which it is currently, or is
currently proposed to be, engaged and has the power and authority to execute,
deliver and perform its obligations under this Agreement, the Investors' Rights
Agreement and the Stockholders' Agreement. The Company is duly qualified to
transact business and is in good standing in each jurisdiction in which the
failure to so qualify would have a material adverse effect on the business,
assets or financial condition of the Company (an "MAE").
2.2 Capitalization and Voting Rights. (a) The authorized, issued
and outstanding capital stock of the Company will consist immediately prior to
the Closing of:
(i) Preferred Stock. 10,310,000 shares of Preferred
---------------
Stock, par value $0.001 (the "Preferred Stock"), of which (i) 3,310,000
shares have been designated Series A Preferred Stock (the "Series A
Preferred Stock"), of which 3,309,953 shares are outstanding, and (ii)
7,000,000 shares have been designated Series B Preferred Stock (the "Series
B Preferred Stock"), none of which are outstanding. The rights, privileges
and preferences of the Series A and Series B Preferred Stock are as stated
in the Restated Certificate.
(ii) Common Stock. 20,000,000 shares of common stock, par
------------
value $0.001 ("Common Stock"), of which 3,060,000 shares are issued and
outstanding.
(b) The outstanding shares of Series A Preferred Stock and
Common Stock are owned by the stockholders and in the numbers specified in
Exhibit D hereto.
- ---------
2
<PAGE>
(c) The outstanding shares of Series A Preferred Stock and
Common Stock are all duly and validly authorized and issued, fully paid and
nonassessable, and were issued in compliance with all applicable state and
federal laws concerning the issuance of securities.
(d) Except for (A) the conversion privileges of the Series A and
Series B Preferred Stock, (B) the rights provided in Section 3 of the
Stockholders' Agreement, and (C) currently outstanding options to purchase
572,700 shares of Common Stock granted to employees pursuant to the Company's
1997 Stock Option Plan, as amended (the "Option Plan"), there are no outstanding
options, warrants, rights (including conversion or preemptive rights) or
agreements for the purchase or acquisition from the Company of any shares of its
capital stock. In addition to the aforementioned options, the Company will
reserve an additional 1,112,300 shares of its Common Stock for purchase upon
exercise of options to be granted in the future under the Option Plan. The
Company is not a party or subject to any agreement or understanding which
affects or relates to the voting or giving of written consents with respect to
any security or other ownership interest in the Company or by a director of the
Company.
2.3 Subsidiaries. The Company does not presently own or control,
------------
directly or indirectly, any interest in any other corporation, association, or
other business entity. The Company is not a participant in any joint venture,
partnership, or similar arrangement.
2.4 Authorization. All corporate action on the part of the Company,
its officers, directors and stockholders necessary for the authorization,
execution and delivery of this Agreement, the Investors' Rights Agreement, and
the Stockholders' Agreement, the performance of all obligations of the Company
hereunder and thereunder, and the authorization (or, in the case of the Common
Stock, reservation for issuance), sale and issuance of the Series B Preferred
Stock being sold hereunder and the Common Stock issuable upon conversion of the
Series B Preferred Stock has been taken or will be taken prior to the Closing.
This Agreement, the Investors' Rights Agreement, and the Stockholders' Agreement
constitute valid and legally binding obligations of the Company, enforceable in
accordance with their respective terms, except (i) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting enforcement of creditors' rights generally, (ii) as
limited by laws relating to the availability of specific performance, injunctive
relief or other equitable remedies, and (iii) to the extent the indemnification
provisions contained in the Investors' Rights Agreement may be limited by
applicable federal or state securities laws.
2.5 Valid Issuance of Preferred and Common Stock. The Series B
--------------------------------------------
Preferred Stock that is being purchased by the Investors hereunder, when issued,
sold and delivered in accordance with the terms of this Agreement for the
consideration expressed herein, will be duly and validly issued, fully paid and
nonassessable, free and clear of all liens and other encumbrances and will be
free of restrictions on transfer, other than restrictions on transfer under this
Agreement, the Investors' Rights Agreement, the Stockholders' Agreement and
under applicable state and federal securities laws. The Common Stock issuable
upon conversion of the Series B Preferred Stock purchased under this Agreement
has been duly and validly reserved for issuance and, upon issuance in accordance
with the terms of the Restated Certificate, will be duly and validly issued,
fully paid and nonassessable, free and clear of all liens and other
3
<PAGE>
encumbrances and will be free of restrictions on transfer, other than
restrictions on transfer under this Agreement, the Investors' Rights Agreement,
the Stockholders' Agreement and under applicable state and federal securities
laws.
2.6 Consents. No consent, approval, order or authorization of, or
--------
registration, qualification, designation, declaration or filing with, any
federal, state or local governmental authority or any individual, firm,
corporation, partnership, trust, limited liability company, incorporated or
unincorporated association, joint venture, joint stock company or other entity
of any kind (each, a "Person") on the part of the Company is required in
connection with the consummation of the transactions contemplated by this
Agreement, except for filings required pursuant to applicable federal and state
securities laws and blue sky laws, which filings will be effected within the
required statutory period.
2.7 Offering. No form of general solicitation or general advertising
--------
was used by the Company or its representatives in connection with the offer or
sale of the Series B Preferred Stock or other securities. Assuming the truth and
accuracy of each Investor's representations set forth in Section 3 of this
Agreement, the offer, sale and issuance of the Series B Preferred Stock as
contemplated by this Agreement are exempt from the registration requirements of
the Securities Act of 1933, as amended (the "Act").
2.8 Litigation. There is no action, suit, proceeding or
----------
investigation pending, or to the Company's knowledge currently threatened,
against the Company that questions the validity of this Agreement, the
Investors' Rights Agreement or the Stockholders' Agreement or the right of the
Company to enter into any of the foregoing or to consummate the transactions
contemplated hereby or thereby, or that would have, either individually or in
the aggregate, an MAE. The Company is not a party or subject to the provisions
of any order, writ, injunction, judgment or decree of any court or government
agency or instrumentality. There is no action, suit, proceeding or investigation
by the Company currently pending or that the Company intends to initiate.
2.9 Proprietary Information Agreements. Each employee and officer of
----------------------------------
the Company has executed a Proprietary Information and Inventions Agreement in
substantially the form provided to the Investors.
2.10 Patents and Trademarks. Schedule 2.10 sets forth a complete and
---------------------- -------------
accurate list and description of all franchises, licenses, patents, patent
rights, patent applications, trademarks, trademark rights, service marks,
service mark rights, trade names, trade name rights, copyrights and rights with
respect to any of the foregoing (collectively, "Intellectual Property")
presently owned or held by the Company. The Company owns the right to use all of
the Intellectual Property. To the actual knowledge of the Company (without
independent investigation), the Intellectual Property is all that is necessary
for the Company to conduct its business as presently conducted. To its knowledge
(but without having conducted any special investigation or patent search), no
Intellectual Property conflicts with or infringes on the valid rights of others
and the Company has not received any notice of infringement upon or conflict
with the asserted rights of others. No event has occurred which permits, or
after notice or lapse of time would permit, the revocation or termination of any
of the Intellectual Property. The Company has a valuable body of trade secrets,
including know-how, concepts, computer
4
<PAGE>
programs and other technical data (the "Proprietary Information"). To its
knowledge, the Company has the right to use the Proprietary Information free and
clear of any rights, liens, encumbrances or claims of others, except that the
possibility exists that other persons may have independently developed trade
secrets or technical information similar or identical to those of the Company.
The Company is not aware of any such independent development nor of any
misappropriation of its Proprietary Information. The Company is not aware that
any of its employees is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with the use of his or her best efforts to promote the interests of
the Company or that would conflict with the Company's business. The Company does
not believe it is or will be necessary to utilize any inventions of any of its
employees (or people it currently intends to hire) made prior to their
employment by the Company, except for inventions that have been assigned or
licensed to the Company as of the date hereof.
2.11 Compliance with Other Instruments. The Company is not in
---------------------------------
violation of any provision of its Restated Certificate or Bylaws or any
securities issued by the Company, any indenture, credit agreement, contract,
agreement, instrument or other undertaking ("Contractual Obligations") or any
judgment, order, writ, decree or contract, statute, rule or regulation to which
the Company or its assets or property is subject ("Requirements of Law"), a
violation of which would have an MAE. The execution, delivery and performance of
this Agreement, the Investors' Rights Agreement and the Stockholders' Agreement
and the consummation of the transactions contemplated hereby and thereby will
not result in any such violation, or be in conflict with or constitute, with or
without the passage of time and giving of notice, either a default under any
Contractual Obligation or Requirement of Law or an event that results in the
creation of any lien, charge or encumbrance upon any assets of the Company or
the suspension, revocation, impairment, forfeiture or nonrenewal of any material
permit, license, authorization or approval applicable to the Company, its
business or operations or any of its assets or properties.
2.12 Agreements; Action.
------------------
(a) Except for agreements explicitly contemplated hereby,
there are no agreements, understandings or proposed transactions between the
Company and any of its officers, directors, affiliates or any affiliate thereof.
(b) Except for this Agreement, the Investors' Rights Agreement
and the Stockholders' Agreement, Schedule 2.12 hereto sets forth a complete and
-------------
accurate list of all material Contractual Obligations of the Company in effect
on and as of the Closing. Each such Contractual Obligation is valid and
enforceable by the Company against any other party thereto in accordance with
its terms except to the extent that such enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium and other laws of
general application affecting enforcement of creditors' rights generally, and by
laws relating to the availability of specific performance, injunctive relief or
other equitable remedies. The Company has performed and is in compliance with
all of the terms of such Contractual Obligations and all instruments and
agreements relating thereto and no default or event of default, or event or
condition which with notice or lapse of time or both would constitute such a
default or event of default, on its part or on the part of any other party
thereto exists with respect to any material Contractual Obligation of the
Company. The Company has no actual knowledge that any such Contractual
Obligation contains any contractual requirement with which there is a reasonable
5
<PAGE>
likelihood the Company will be unable to comply and such failure to comply would
likely result in an MAE or the Company's compliance is reasonably likely to
result in an MAE.
(c) There are no judgments, orders, writs or decrees to which the
Company is a party or by which it is bound that involve obligations (contingent
or otherwise) of, or payments to the Company, in excess of $25,000.
(d) The Company has not (i) declared or paid any dividends or
authorized or made any distribution upon or with respect to any class or series
of its capital stock, (ii) incurred any indebtedness for money borrowed or any
other liabilities individually in excess of $100,000 or, in the case of
indebtedness and/or liabilities individually less than $100,000, in excess of
$250,000 in the aggregate, (iii) made any loans or advances to any Person, other
than advances in the ordinary course of business, or (iv) sold, exchanged or
otherwise disposed of any of its assets or rights, other than the sale of its
inventory in the ordinary course of business.
(e) For the purposes of subsections (c) and (d) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same Person (including Persons the
Company has reason to believe are affiliated therewith) shall be aggregated for
the purpose of meeting the individual minimum dollar amounts of such
subsections.
2.13 Related-Party Transactions. No employee, officer or director of
--------------------------
the Company or member of his or her immediate family is indebted to the Company,
nor is the Company indebted (or committed to make loans or extend or guarantee
credit) to any of them. To the best of the Company's knowledge, none of such
persons has any direct or indirect ownership interest in any firm or corporation
with which the Company is affiliated or with which the Company has a business
relationship, or any firm or corporation that competes with the Company, except
that employees, officers or directors of the Company and members of their
immediate families may own stock in publicly traded companies that may compete
with the Company. No member of the immediate family of any officer or director
of the Company is directly or indirectly interested in any material Contractual
Obligation with the Company.
2.14 Financial Statements. The Company has delivered to each
--------------------
Investor its audited financial statements (balance sheet and statement of
operations, statement of stockholders' equity and statement of cash flows,
including notes thereto) at December 31, 1998 and for the fiscal year then ended
and its unaudited financial statements (balance sheet and statement of
operations, statement of stockholders' equity and statement of cash flows) at
September 30, 1999 and for the nine-month period then ended (the "Financial
Statements"). The Financial Statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods indicated and with each other, except that unaudited
Financial Statements may not contain all footnotes required by generally
accepted accounting principles. The Financial Statements fairly present the
assets, liabilities, financial condition and operating results of the Company as
of the dates, and for the periods, indicated therein, subject in the case of
unaudited Financial Statements to normal year-end audit adjustments. Except as
set forth in the Financial Statements, the Company has no liabilities or
obligations, contingent or otherwise, other than (i) liabilities incurred in the
ordinary course of
6
<PAGE>
business subsequent to September 30, 1999 and (ii) obligations under contracts
and commitments incurred in the ordinary course of business and not required
under generally accepted accounting principles to be reflected in the Financial
Statements, which, in both cases, individually or in the aggregate, are not
material to the financial condition or operating results of the Company and
which the Company has satisfied as they have become due. Except as disclosed in
the Financial Statements, the Company is not a guarantor or indemnitor of any
indebtedness of any other Person. The Company maintains and will continue to
maintain a standard system of accounting established and administered in
accordance with generally accepted accounting principles.
2.15 Changes. Since September 30, 1999, there has not been:
-------
(a) any change in the assets, liabilities, financial condition
or operating results of the Company from that reflected in the Financial
Statements, except changes in the ordinary course of business consistent with
past practice that are not reasonably likely to have an MAE;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets, properties, financial
condition, operating results or business of the Company;
(c) any waiver by the Company of a material right or of a
material debt owed to it;
(d) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by the Company, except in the ordinary
course of business consistent with past practice and not material to the assets,
properties, financial condition, operating results or business of the Company;
(e) any material change or amendment to a contract or
arrangement required to be set forth on Schedule 2.12 by which the Company or
any of its assets or properties is bound or subject;
(f) any material change in any compensation arrangement or
agreement with any employee; or
(g) any agreement or commitment by the Company to do any of the
things described in this Section 2.15.
2.16 Tax Returns. The Company has timely filed all federal, state,
-----------
county, local and foreign income and other tax returns, reports and declarations
(collectively, "Returns") relating to all net income, gross income, gross
receipts, sales, use, ad valorem, transfer, franchise, profits, license,
withholding, payroll, employment, excise, severance, stamp, occupation, premium,
property or windfall profits taxes, or other taxes of any kind whatsoever,
together with any interest and any penalties, additions to tax or additional
amounts imposed by any taxing authority (domestic or foreign) upon the Company
("Taxes") which are required by applicable law to be filed except where the
failure to do so would not be reasonably likely to have an MAE. No audits of
federal income tax Returns of the Company have been conducted at
7
<PAGE>
any time since its formation and the Company has not been advised that any of
its returns have been or are being audited. The Company has paid, or where
payment is not required to be made, has made adequate provision on its books and
financial statements for the payment of, all Taxes in respect of all periods
covered by the Returns and any other taxable period ending on or before the date
hereof except where the failure to do so would not be reasonably likely to have
an MAE. No deficiencies for any Tax, assessment or governmental charge have been
asserted or assessed against the Company which have not been paid, settled or
adequately provided for and there is no basis therefor.
2.17 Permits. The Company (i) has all material governmental or other
-------
regulatory approvals, licenses, permits and other authorizations in accordance
with all Requirements of Law for it to conduct its business, each of which is in
full force and effect, is final and not subject to review on appeal and is not
the subject of any pending or, to the best of its knowledge, threatened attack
by direct or collateral proceeding, and (ii) is in compliance in all respects
with each governmental approval, license, permit and authorization relating to
it or any of its properties under all applicable Requirements of Law except
where the failure to do so would not be reasonably likely to have an MAE. Since
its date of organization, the Company has not, to its knowledge, been the
subject of any investigation conducted by any grand jury, administrative agency
or other governmental authority. The Company has not, directly or indirectly,
made or authorized any payment, contribution or gift of money, property, or
services, in violation of applicable law, (i) as a kickback or bribe to any
Person or (ii) to any political organization or the holder of, or any aspirant
to, any elective or appointive office of any governmental authority.
2.18 Environmental and Safety Laws. To its knowledge, the Company is
-----------------------------
not in violation of any applicable statute, law or regulation relating to the
environment or occupational health and safety, and to its knowledge, no material
expenditures are or will be required in order to comply with any such existing
statute, law or regulation.
2.19 Disclosure. Neither this Agreement (including all the exhibits
----------
and schedules hereto) nor any other certificates or agreements made or delivered
in connection herewith contains any untrue statement of a material fact or omits
to state a material fact necessary to make the statements herein or therein not
misleading in light of the circumstances under which they were made.
2.20 Registration Rights. Except as provided in the Investors' Rights
-------------------
Agreement, the Company has not granted or agreed to grant any registration
rights, including piggyback rights, to any person or entity.
2.21 Corporate Documents. The Restated Certificate and Bylaws of the
-------------------
Company are in the forms previously provided to the Investors. The minute books
of the Company have been made available to the Investors for their review in
connection with the purchase of the Series B Preferred Stock; such minute books
are current and contain correct and complete copies of all minutes of meetings,
resolutions and other actions and proceedings of the board of directors and
shareholders and all committees of the Company. The record books relating to the
equity interests of the Company have been made available to the Investors for
their review in connection with the purchase of the Series B Preferred Stock;
such record books
8
<PAGE>
are current, correct and complete and reflect the issuance, sale or exchange of
all of capital stock and other ownership and equity interests in the Company.
2.22 Title to Property and Assets. Schedule 2.22 sets forth a
---------------------------- -------------
complete and accurate list of all real property and improvements (collectively
"Real Property") owned or leased by the Company. The Company has good and
marketable, indefeasible fee simple title to the Real Property described in
Schedule 2.22 as being owned by it, and valid and subsisting leasehold rights in
- -------------
the Real Property described in Schedule 2.22 as being leased by it, free and
-------------
clear of all liens and other encumbrances. Schedule 2.22 also sets forth a
-------------
complete and accurate list of all of the material items of equipment, machinery,
computers, chattels, tools, parts, machine tools, furniture, furnishings,
fixtures and supplies of every nature owned or leased by the Company in
connection with its business as of September 30, 1999. The Company has good and
marketable fee simple title to such items described in Schedule 2.22 as being
-------------
owned by it, and valid and subsisting leasehold rights in such items described
in Schedule 2.22 as being leased by it, free and clear of all liens and other
-------------
encumbrances.
2.23 Labor Agreements and Actions. The Company is not bound by or
----------------------------
subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied, contract, commitment or arrangement with
any labor union, and no labor union has requested or, to the Company's
knowledge, has sought to represent any of the employees, representatives or
agents of the Company. There is no strike or other labor dispute involving the
Company pending, or to the Company's knowledge, threatened, that would have an
MAE. The Company is not aware that any officer or key employee, or that any
group of key employees, intends to terminate their employment with the Company,
nor does the Company have a present intention to terminate the employment of any
of the foregoing. The employment of each officer and employee of the Company is
terminable at the will of the Company. The Company is not a party to or bound by
any currently effective employment contract, deferred compensation agreement,
bonus plan, incentive plan, profit sharing plan, retirement agreement or other
employee compensation agreement. To its knowledge, the Company has complied in
all material respects with all applicable state and federal equal employment
opportunity and other laws related to employment. To its knowledge, the Company
has withheld all amounts required by law or agreement to be withheld by it from
the wages, salaries and other payments to its employees and is not liable for
any arrears of wages or any taxes or penalties for failure to comply with any of
the foregoing. There are no pending, threatened or anticipated (i) employment
discrimination charges or complaints against or involving the Company before any
federal, state, or local board, department, commission or agency, (ii) unfair
labor practice charges or complaints, disputes or grievances affecting the
Company, or (iii) strikes, slow downs, work stoppages, or lockouts or threats
thereof affecting the Company.
2.24 Insurance. The Company maintains insurance policies (i) insuring
---------
the properties, assets and operations of its business in such amounts and
against such liabilities to the extent required by applicable law or regulations
and (ii) insuring against interruptions in its business. Such policies are in
full force and effect and have been underwritten by unaffiliated insurers. To
its knowledge, the Company has not done anything by way of action or inaction
that invalidates any of such policies in whole or in part.
9
<PAGE>
2.25 Year 2000 Compliance. The Company has initiated a review of its
--------------------
operations with a view to assessing whether its business or operations will, in
the receipt, transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data, be vulnerable to any significant
risk that computer hardware or software used in its business or operations will
not, in the case of dates or time periods occurring after December 31, 1999,
function at least as effectively as in the case of dates or time periods
occurring prior to January 1, 2000. Based on such review and as of the date
hereof, the Company has no reason to believe that any such risk could have an
MAE.
2.26 Governmental Regulations. The Company is not a "registered
------------------------
investment company" or an "affiliated person" or a "principal underwriter" of a
"registered investment company" as such terms are defined in the Investment
Company Act of 1940, as amended.
2.27 Certain Tax Matters. The Company's capital stock does not
-------------------
constitute a United States real property interest as that term is defined in
Section 897(c)(1)(A)(ii) of the Internal Revenue Code of 1986, as amended (the
"Code"), and the Company is not and has not been a "United States real property
holding corporation" as defined in Section 897(c)(2) of the Code (a "USRPHC").
No Investor shall, solely by virtue of its purchase and ownership of the Series
B Preferred Stock and the underlying Common Stock, (i) be deemed to have
received "unrelated business taxable income" as defined in Section 512 of the
Code ("UBTI") as a result of the Company's operations, or (ii) be deemed to be
engaged in the conduct of a "trade or business within the United States" within
the meaning of Section 864(b) of the Code, and the Company shall exercise its
reasonable best efforts consistent with prudent business practices to ensure
that the Investors do not receive UBTI and are not deemed to be engaged in a
U.S. trade or business solely as a result of their ownership of the Company's
securities. From time to time upon request of any Investor, the Company shall
make a determination as to the Company's status as a USRPHC and as to the
accuracy of the foregoing representations and warranties and shall notify each
Investor of and change in circumstances that could result in any of the
foregoing representations and warranties no longer being true and correct as
soon as practicable after the Company obtains knowledge of such change in
circumstances.
3. Representations and Warranties of the Investors. Each Investor,
-----------------------------------------------
severally but not jointly, hereby represents, warrants and covenants that:
3.1 Authorization. Such Investor has full power and authority to
-------------
enter into this Agreement, the Investors' Rights Agreement and the Stockholders'
Agreement, and each such agreement constitutes its valid and legally binding
obligation, enforceable in accordance with its terms, except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium and other laws of
general application affecting enforcement of creditors' rights generally, (ii)
as limited by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies, and (iii) to the extent the
indemnification provisions contained in the Investors' Rights Agreement may be
limited by applicable federal or state securities laws.
3.2 Purchase Entirely for Own Account. This Agreement is made with
---------------------------------
such Investor in reliance upon such Investor's representation to the Company,
which by such
10
<PAGE>
Investor's execution of this Agreement such Investor hereby confirms, that the
Series B Preferred Stock to be received by such Investor and the Common Stock
issuable upon conversion thereof (collectively, the "Securities") will be
acquired for investment for such Investor's own account, not as a nominee or
agent, and not with a view to the resale or distribution of any part thereof in
violation of applicable securities laws, and that such Investor has no present
intention of selling, granting any participation in or otherwise distributing
the same in violation of applicable securities laws. By executing this
Agreement, such Investor further represents that such Investor does not have any
contract, undertaking, agreement or arrangement with any person to sell,
transfer or grant participations to such person or to any third person, with
respect to any of the Securities.
3.3 Disclosure of Information. Such Investor believes it has
-------------------------
received all the information it considers necessary or appropriate for deciding
whether to purchase the Series B Preferred Stock. Such Investor further
represents that it has had an opportunity to ask questions and receive answers
from the Company regarding the terms and conditions of the offering of the
Series B Preferred Stock and the business, properties, prospects and financial
condition of the Company.
3.4 Investment Experience. Such Investor is an investor in
---------------------
securities of companies in the development stage and acknowledges that it can
bear the economic risk of its investment, and has such knowledge and experience
in financial or business matters that it is capable of evaluating the merits and
risks of the investment in the Series B Preferred Stock. If other than an
individual, such Investor also represents it has not been organized for the
purpose of acquiring the Series B Preferred Stock.
3.5 Restricted Securities. Such Investor understands that the
---------------------
Securities it is purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations such Securities may be resold without registration under
the Act only in certain limited circumstances. In the absence of an effective
registration statement covering the Series B Preferred Stock (or the Common
Stock issued on conversion thereof) or an available exemption from registration
under the Act, the Series B Preferred Stock (and any Common Stock issued on
conversion thereof) must be held indefinitely. In this connection, such Investor
represents that it is familiar with SEC Rule 144, as presently in effect, and
understands the resale limitations imposed thereby and by the Act, including
without limitation the Rule 144 condition that current information about the
Company be available to the public. Such information is not now available and
the Company has no present plans to make such information available.
3.6 Further Limitations on Disposition. Without in any way limiting
----------------------------------
the representations set forth above, such Investor further agrees not to make
any disposition of all or any portion of the Securities unless:
(a) There is then in effect a registration statement under the
Act covering such proposed disposition and such disposition is made in
accordance with such registration statement; or
11
<PAGE>
(b) (i) Such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii) if
requested by the Company, such Investor shall have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company that such disposition
will not require registration of such shares under the Act. It is agreed that
the Company will not require opinions of counsel for transactions made pursuant
to Rule 144 except in unusual circumstances.
(c) Notwithstanding the provisions of subsections (a) and (b)
above, no such registration statement or opinion of counsel shall be necessary
for a transfer by an Investor that is a partnership to a partner of such
partnership or a retired partner of such partnership who retires after the date
hereof, or to the estate of any such partner or retired partner or the transfer
by gift, will or intestate succession of any partner to his or her spouse or to
the siblings, lineal descendants or ancestors of such partner or his or her
spouse, if the transferee agrees in writing to be subject to the terms hereof to
the same extent as if he or she were an original Investor hereunder.
3.7 Legends. It is understood that the certificates evidencing the
-------
Securities may bear one or all of the following legends:
(a) "These securities have not been registered under the
Securities Act of 1933, as amended. They may not be sold, offered for sale,
pledged or hypothecated in the absence of a registration statement in effect
with respect to the securities under such Act or an applicable exemption
therefrom."
(b) Any legend required by the Investors' Rights Agreement and
the Stockholders' Agreement.
The Company agrees, upon the request of any Investor or its transferee, to
remove the legend required by paragraph (a) above at such time as all Securities
held by such person may be freely transferred pursuant to SEC Rule 144(k), and
to remove the legend required by paragraph (b) above at such time as the
restrictions of the Investors' Rights Agreement and the Stockholders' Agreement
are no longer applicable to such Securities.
3.8 Tax Advisors. Such Investor has reviewed with such Investor's own
------------
tax advisors the federal, state and local tax consequences of this investment,
where applicable, and the transactions contemplated by this Agreement. With
respect to matters related to the tax consequences of the transactions
contemplated by this Agreement, each such Investor is relying solely on such
advisors and not on any statements or representations of the Company or any of
its agents and understands that each such Investor (and not the Company) shall
be responsible for such Investor's own tax liability that may arise as a result
of this investment or the transactions contemplated by this Agreement.
3.9 Investor Counsel. Such Investor acknowledges that such Investor
----------------
has had the opportunity to review this Agreement, the exhibits and the schedules
attached hereto and the transactions contemplated by this Agreement with such
Investor's own legal counsel.
12
<PAGE>
Each such Investor is relying solely on such Investor's legal counsel
and not on E*Law Group or Brobeck, Phleger & Harrison LLP for legal advice with
respect to this investment or the transactions contemplated by this Agreement.
4. Conditions of Investor's Obligations at Closing. The obligations of
-----------------------------------------------
each Investor under Section 5 of this Agreement are subject to the fulfillment
on or before the Closing of each of the following conditions, the waiver of
which shall not be effective against any Investor who does not consent thereto:
4.1 Representations and Warranties. The representations and
------------------------------
warranties of the Company contained in Section 2 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the date of such Closing.
4.2 Performance. The Company shall have performed and complied with
-----------
all agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Closing.
4.3 Compliance Certificate. The President of the Company shall
----------------------
deliver to each Investor at the Closing a certificate stating that the
conditions specified in Sections 4.1 and 4.2 have been fulfilled.
4.4 Qualifications. All authorizations, approvals or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state or any Person that are required in connection with the consummation of
the transactions contemplated by this Agreement, including the lawful issuance
and sale of the Securities pursuant to this Agreement, shall be duly obtained
and effective as of the Closing.
4.5 Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated at the Closing and all documents
incident thereto shall be reasonably satisfactory in form and substance to the
Investors, and they shall have received all such counterpart original and
certified or other copies of such documents as they may reasonably request.
4.6 Proprietary Information Agreements. Each employee of the Company
----------------------------------
shall have entered into a Proprietary Information and Inventions Agreement in
the form previously provided to special counsel for the Investors.
4.7 Board of Directors. The Company shall have taken all necessary
------------------
corporate action such that immediately following the Closing, the directors of
the Company shall be Art Zeile, Joel Daly, Stephen O. James, Watts Hamrick,
Scott Perper and G. Jackson Tankersley, Jr.
4.8 Investors' Rights Agreement. The Company, First Union Capital
---------------------------
Partners, Inc., Art Zeile and Joel Daly shall have entered into the Investors'
Rights Agreement in the form attached as Exhibit B.
---------
13
<PAGE>
4.9 Stockholders' Agreement. The Company, First Union Capital
-----------------------
Partners, Inc., Art Zeile and Joel Daly shall have entered into the
Stockholders' Agreement in the form attached as Exhibit C.
---------
4.10 No Material Adverse Change. On and prior to the Closing, there
shall have occurred no material adverse change in the business, assets or
financial condition of the Company.
4.11 No Litigation or Other Proceedings. There shall be no pending or
threatened litigation, bankruptcy, insolvency, injunction, order, suit,
investigation or claim against or affecting the Company, any of its properties
or rights, any of its executive officers or with respect to any of the
transactions contemplated by this Agreement, the Investors' Rights Agreement or
the Stockholders' Agreement which would be reasonably likely to have an MAE.
4.12 Legal Opinion. The Investors shall have received the opinion of
-------------
Brobeck, Phleger & Harrison LLP, legal counsel to the Company, dated as of the
Closing in the form of Exhibit E hereto.
---------
5. Conditions of the Company's Obligations at Closing. The obligations
--------------------------------------------------
of the Company to each Investor under this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions by that
Investor:
5.1 Representations and Warranties. The representations and
warranties of the Investors contained in Section 3 shall be true on and as of
the Closing with the same effect as though such representations and warranties
had been made on and as of the Closing.
5.2 Payment of Purchase Price. The Investor shall have delivered the
-------------------------
purchase price specified in Section 1.1.
5.3 Investors' Rights Agreement. Each Investor shall have entered
into the Investors' Rights Agreement in the form attached as Exhibit B.
---------
5.4 Stockholders' Agreement. Each Investor shall have entered into
the Stockholders' Agreement in the form attached as Exhibit C.
---------
6. Miscellaneous.
-------------
6.1 Survival. The warranties, representations and covenants of the
--------
Company and the Investors contained in or made pursuant to this Agreement shall
survive the execution and delivery of this Agreement and the Closing and shall
in no way be affected by any investigation of the subject matter thereof made by
or on behalf of the Investors or the Company.
6.2 Successors and Assigns. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any Securities). Nothing in this Agreement, express or implied,
is intended to confer upon any party, other than
14
<PAGE>
the parties hereto or their respective successors and assigns, any rights,
remedies, obligations or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
6.3 Governing Law. This Agreement shall be governed by
-------------
and construed under the laws of the State of Colorado as applied to agreements
among Colorado residents entered into and to be performed entirely within
Colorado, without giving effect to such state's conflict of laws principles.
6.4 Titles and Subtitles. The titles and subtitles used in
--------------------
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.5 Notices. All notices required or permitted hereunder
-------
shall be in writing and shall be deemed effectively given: (i) upon personal
delivery to the party to be notified, (ii) when sent by confirmed facsimile if
sent during normal business hours of the recipient, if not, then on the next
business day; or (iii) one day after deposit with a nationally recognized
overnight courier, specifying next day delivery, with written verification of
receipt. All communications shall be sent to the address as set forth on the
signature page hereof or at such other address as such party may designate by
ten days advance written notice to the other parties hereto.
6.6 Finder's Fee. finders' fee or commission in connection
------------
with this transaction. Each Investor agrees to indemnify and to hold harmless
the Company from any liability for any commission or compensation in the nature
of a finders' fee (and the costs and expenses of defending against such
liability or asserted liability) for which such Investor or any of its officers,
partners, employees or representatives is responsible. The Company agrees to
indemnify and hold harmless each Investor from any liability for any commission
or compensation in the nature of a finders' fee (and the costs and expenses of
defending against such liability or asserted liability) for which the Company or
any of its officers, employees or representatives is responsible.
6.7 Expenses. Irrespective of whether the Closing is
--------
effected, the Company shall pay all costs and expenses that it incurs with
respect to the negotiation, execution, delivery and performance of this
Agreement. If the Closing is effected, the Company shall, at the Closing,
reimburse the Investors for all reasonable expenses of the Investors incurred in
connection with the negotiation, execution, delivery and performance of this
Agreement in an amount not to exceed $10,000. If any action at law or in equity
is necessary to enforce or interpret the terms of this Agreement, the Investors'
Rights Agreement, the Stockholders' Agreement or the Restated Certificate, the
prevailing party shall be entitled to reasonable attorney's fees, costs and
necessary disbursements in addition to any other relief to which such party may
be entitled.
6.8 Amendments and Waivers. Any term of this Agreement may be
----------------------
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
a majority of the Common Stock not previously sold to the public that is issued
or issuable upon conversion of the Series B Preferred Stock. Any
15
<PAGE>
amendment or waiver effected in accordance with this paragraph shall be binding
upon each holder of any securities purchased under this Agreement at the time
outstanding (including securities into which such securities are convertible),
each future holder of all such securities and the Company.
6.9 Effect of Amendment or Waiver. Each Investor
-----------------------------
acknowledges that by the operation of Section 6.8 hereof the holders of a
majority of the Common Stock not previously sold to the public that is issued or
issuable upon conversion of the Series B Preferred Stock will have the power to
diminish or eliminate all rights of such Investor under this Agreement.
6.10 Severability. If one or more provisions of this
------------
Agreement are held to be unenforceable under applicable law, such provision
shall be excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
6.11 Aggregation of Stock. All shares of the Series B
--------------------
Preferred Stock or Common Stock issued upon conversion thereof held or acquired
by affiliated entities or persons shall be aggregated together for the purpose
of determining the availability of any rights under this Agreement.
6.12 Entire Agreement. This Agreement and the documents
----------------
referred to herein constitute the entire agreement among the parties and no
party shall be liable or bound to any other party in any manner by any
warranties, representations or covenants except as specifically set forth herein
or therein.
6.13 Counterparts. This Agreement may be executed in two or
------------
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[SIGNATURE PAGE(S) TO FOLLOW]
16
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INFLOW, INC.
By: /s/ Art Zeile
___________________________________
Art Zeile
President and Chief Executive Officer
Address: 1860 Lincoln Street
Suite 305
Denver, CO 80295
MERITAGE PRIVATE EQUITY FUND, L.P.
MERITAGE PRIVATE EQUITY PARALLEL FUND, L.P.
MERITAGE ENTREPRENEURS FUND, L.P.
By Meritage Investment Partners, LLC
General Partner
By: /s/ G. Jackson Tankersley, Jr.
___________________________________
G. Jackson Tankersley, Jr.
Managing Member
Address: 1600 Wynkoop Street
Suite 300
Denver, CO 80202
17
<PAGE>
EXHIBIT 10.5
PREFERRED STOCK PURCHASE AGREEMENT
PREFERRED STOCK PURCHASE AGREEMENT dated October 28, 1999 (the
"Agreement") by and among InFlow, Inc., a Delaware corporation (the "Company"),
and First Union Capital Partners, Inc. (the "Investor").
1. Purchase and Sale of Stock.
--------------------------
1.1 Sale and Issuance of Series B Preferred Stock.
(a) Prior to or concurrently with the date hereof, the
Company has adopted and filed with the Secretary of State of Delaware the Second
Amended and Restated Certificate of Incorporation in the form attached hereto as
Exhibit A (the "Restated Certificate").
(b) Subject to the terms and conditions of this
Agreement, the Investor agrees to purchase from the Company at the Closing, and
the Company agrees to sell and issue to the Investor at the Closing, that number
of shares of the Company's Series B Preferred Stock set forth opposite the
Investor's name on Schedule A hereto for the purchase price of $ 8.70 per share.
1.2 Closing. The purchase and sale of the Series B Preferred
Stock shall take place at the Company's offices located at 1860 Lincoln Avenue,
Suite 305, Denver, Colorado 80295 at 10:00 a.m. on November 1, 1999, or at such
other time and place as the Company and the Investor mutually agree upon orally
or in writing (which time and place are designated as the "Closing"). At the
Closing, the Company shall deliver to the Investor a certificate representing
the Series B Preferred Stock that the Investor is purchasing against payment of
the purchase price therefor by wire transfer of immediately available funds.
1.3 Subsequent Sale of Series B Preferred Stock. The Company
may sell up to an additional 2,298,850 shares of Series B Preferred Stock at a
price of not less than $8.70 per share prior to November 30, 1999 to one or more
additional purchasers selected by the Company. Any such additional purchaser
shall execute a purchase agreement in substantially the form of this Agreement
and shall become a party to the Amended and Restated Investors' Rights Agreement
in the form attached hereto as Exhibit B (the "Investors' Rights Agreement") and
the Amended and Restated Stockholders' Agreement in the form attached hereto as
Exhibit C (the "Stockholders' Agreement").
1.4 Post-Closing Obligations. In the event that, at any time,
the Company's representation and warranty in Section 2.2 is determined not to
have been true when made, the Company shall promptly issue to the Investor, as
an adjustment to the purchase price paid for the shares of Series B Preferred
Stock purchased hereunder and without the payment of additional consideration by
the Investor, an additional number of shares of Series B Preferred Stock such
that the Investor would own the same economic interest and voting power as it
would have owned had such representation and warranty been true and correct in
all respects when
<PAGE>
made. If at the time of an adjustment pursuant to the preceding sentence any
shares of Series B Preferred Stock purchased hereunder have been converted into
Common Stock, the Company shall issue additional shares of Common Stock with
respect to such converted shares of Series B Preferred Stock based on the
conversion ratio that would have been in effect if such shares had remained
outstanding. Any additional shares issued pursuant to this Section 1.4 shall be
treated as if they were issued at the Closing and shall reflect any anti-
dilution adjustments arising from the date of Closing through the date of such
issuance. Concurrently with each such issuance, the Company shall pay or accrue
all dividends or other distributions which would have been paid or accrued with
respect to such additional shares from the date of Closing through the date of
such issuance.
2. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to the Investor that, except as set forth on the
Schedule of Exceptions (the "Schedule of Exceptions") attached hereto as
Schedule B, which exceptions shall be deemed to be representations and
- ----------
warranties as if made hereunder:
2.1 Organization, Good Standing, Power and Qualification. The
----------------------------------------------------
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware. The Company has all requisite corporate
power and authority to own and operate its property, to lease the property it
operates as lessee and to conduct the business in which it is currently, or is
currently proposed to be, engaged and has the power and authority to execute,
deliver and perform its obligations under this Agreement, the Investors' Rights
Agreement and the Stockholders' Agreement. The Company is duly qualified to
transact business and is in good standing in each jurisdiction in which the
failure to so qualify would have a material adverse effect on the business,
assets or financial condition of the Company (an "MAE").
2.2 Capitalization and Voting Rights.
--------------------------------
(a) The authorized, issued and outstanding capital stock of
the Company will consist immediately prior to the Closing of:
(i) Preferred Stock. 10,310,000 shares of Preferred
---------------
Stock, par value $0.001 (the "Preferred Stock"), of which (i) 3,310,000
shares have been designated Series A Preferred Stock (the "Series A
Preferred Stock"), of which 3,309,953 shares are outstanding, and (ii)
7,000,000 shares have been designated Series B Preferred Stock (the
"Series B Preferred Stock"), of which 2,298,851 shares are outstanding.
The rights, privileges and preferences of the Series A and Series B
Preferred Stock are as stated in the Restated Certificate.
(ii) Common Stock. 20,000,000 shares of common stock,
------------
par value $0.001 ("Common Stock"), of which 3,060,000 shares are issued
and outstanding.
(b) The outstanding shares of Series A Preferred Stock,
Series B Preferred Stock and Common Stock are owned by the stockholders
and in the numbers specified in Exhibit D hereto.
---------
(c) The outstanding shares of Series A Preferred Stock,
Series B Preferred Stock and Common Stock are all duly and validly
authorized and issued, fully paid
2
<PAGE>
and nonassessable, and were issued in compliance with all applicable state and
federal laws concerning the issuance of securities.
(d) Except for (A) the conversion privileges of the Series A
and Series B Preferred Stock, (B) the rights provided in Section 3 of the
Stockholders' Agreement, and (C) currently outstanding options to purchase
572,700 shares of Common Stock granted to employees pursuant to the Company's
1997 Stock Option Plan, as amended (the "Option Plan"), there are no outstanding
options, warrants, rights (including conversion or preemptive rights) or
agreements for the purchase or acquisition from the Company of any shares of its
capital stock. In addition to the aforementioned options, the Company will
reserve an additional 1,112,300 shares of its Common Stock for purchase upon
exercise of options to be granted in the future under the Option Plan. The
Company is not a party or subject to any agreement or understanding which
affects or relates to the voting or giving of written consents with respect to
any security or other ownership interest in the Company or by a director of the
Company.
2.3 Subsidiaries. The Company does not presently own or control,
------------
directly or indirectly, any interest in any other corporation, association, or
other business entity. The Company is not a participant in any joint venture,
partnership, or similar arrangement.
2.4 Authorization. All corporate action on the part of the
-------------
Company, its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement, the Investors' Rights
Agreement, and the Stockholders' Agreement, the performance of all obligations
of the Company hereunder and thereunder, and the authorization (or, in the case
of the Common Stock, reservation for issuance), sale and issuance of the Series
B Preferred Stock being sold hereunder and the Common Stock issuable upon
conversion of the Series B Preferred Stock has been taken or will be taken prior
to the Closing. This Agreement, the Investors' Rights Agreement, and the
Stockholders' Agreement constitute valid and legally binding obligations of the
Company, enforceable in accordance with their respective terms, except (i) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium and
other laws of general application affecting enforcement of creditors' rights
generally, (ii) as limited by laws relating to the availability of specific
performance, injunctive relief or other equitable remedies, and (iii) to the
extent the indemnification provisions contained in the Investors' Rights
Agreement may be limited by applicable federal or state securities laws.
2.5 Valid Issuance of Preferred and Common Stock. The Series B
--------------------------------------------
Preferred Stock that is being purchased by the Investors hereunder, when issued,
sold and delivered in accordance with the terms of this Agreement for the
consideration expressed herein, will be duly and validly issued, fully paid and
nonassessable, free and clear of all liens and other encumbrances and will be
free of restrictions on transfer, other than restrictions on transfer under this
Agreement, the Investors' Rights Agreement, the Stockholders' Agreement and
under applicable state and federal securities laws. The Common Stock issuable
upon conversion of the Series B Preferred Stock purchased under this Agreement
has been duly and validly reserved for issuance and, upon issuance in accordance
with the terms of the Restated Certificate, will be duly and validly issued,
fully paid and nonassessable, free and clear of all liens and other encumbrances
and will be free of restrictions on transfer, other than restrictions on
transfer under
3
<PAGE>
this Agreement, the Investors' Rights Agreement, the Stockholders' Agreement and
under applicable state and federal securities laws.
2.6 Consents. No consent, approval, order or authorization
--------
of, or registration, qualification, designation, declaration or filing with, any
federal, state or local governmental authority or any individual, firm,
corporation, partnership, trust, limited liability company, incorporated or
unincorporated association, joint venture, joint stock company or other entity
of any kind (each, a "Person") on the part of the Company is required in
connection with the consummation of the transactions contemplated by this
Agreement, except for filings required pursuant to applicable federal and state
securities laws and blue sky laws, which filings will be effected within the
required statutory period.
2.7 Offering. No form of general solicitation or general
--------
advertising was used by the Company or its representatives in connection with
the offer or sale of the Series B Preferred Stock or other securities. Assuming
the truth and accuracy of the Investor's representations set forth in Section 3
of this Agreement, the offer, sale and issuance of the Series B Preferred Stock
as contemplated by this Agreement are exempt from the registration requirements
of the Securities Act of 1933, as amended (the "Act").
2.8 Litigation. There is no action, suit, proceeding or
----------
investigation pending, or to the Company's knowledge currently threatened,
against the Company that questions the validity of this Agreement, the
Investors' Rights Agreement or the Stockholders' Agreement or the right of the
Company to enter into any of the foregoing or to consummate the transactions
contemplated hereby or thereby, or that would have, either individually or in
the aggregate, an MAE. The Company is not a party or subject to the provisions
of any order, writ, injunction, judgment or decree of any court or government
agency or instrumentality. There is no action, suit, proceeding or investigation
by the Company currently pending or that the Company intends to initiate.
2.9 Proprietary Information Agreements. Each employee and
----------------------------------
officer of the Company has executed a Proprietary Information and Inventions
Agreement in substantially the form provided to the Investor.
2.10 Patents and Trademarks. Schedule 2.10 sets forth a
---------------------- -------------
complete and accurate list and description of all franchises, licenses, patents,
patent rights, patent applications, trademarks, trademark rights, service marks,
service mark rights, trade names, trade name rights, copyrights and rights with
respect to any of the foregoing (collectively, "Intellectual Property")
presently owned or held by the Company. The Company owns the right to use all of
the Intellectual Property. To the actual knowledge of the Company (without
independent investigation), the Intellectual Property is all that is necessary
for the Company to conduct its business as presently conducted. To its knowledge
(but without having conducted any special investigation or patent search), no
Intellectual Property conflicts with or infringes on the valid rights of others
and the Company has not received any notice of infringement upon or conflict
with the asserted rights of others. No event has occurred which permits, or
after notice or lapse of time would permit, the revocation or termination of any
of the Intellectual Property. The Company has a valuable body of trade secrets,
including know-how, concepts, computer programs and other technical data (the
"Proprietary Information"). To its knowledge, the
4
<PAGE>
Company has the right to use the Proprietary Information free and clear of any
rights, liens, encumbrances or claims of others, except that the possibility
exists that other persons may have independently developed trade secrets or
technical information similar or identical to those of the Company. The Company
is not aware of any such independent development nor of any misappropriation of
its Proprietary Information. The Company is not aware that any of its employees
is obligated under any contract (including licenses, covenants or commitments of
any nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency, that would interfere with the use of his or
her best efforts to promote the interests of the Company or that would conflict
with the Company's business. The Company does not believe it is or will be
necessary to utilize any inventions of any of its employees (or people it
currently intends to hire) made prior to their employment by the Company, except
for inventions that have been assigned or licensed to the Company as of the date
hereof.
2.11 Compliance with Other Instruments. The Company is not
---------------------------------
in violation of any provision of its Restated Certificate or Bylaws or any
securities issued by the Company, any indenture, credit agreement, contract,
agreement, instrument or other undertaking ("Contractual Obligations") or any
judgment, order, writ, decree or contract, statute, rule or regulation to which
the Company or its assets or property is subject ("Requirements of Law"), a
violation of which would have an MAE. The execution, delivery and performance of
this Agreement, the Investors' Rights Agreement and the Stockholders' Agreement
and the consummation of the transactions contemplated hereby and thereby will
not result in any such violation, or be in conflict with or constitute, with or
without the passage of time and giving of notice, either a default under any
Contractual Obligation or Requirement of Law or an event that results in the
creation of any lien, charge or encumbrance upon any assets of the Company or
the suspension, revocation, impairment, forfeiture or nonrenewal of any material
permit, license, authorization or approval applicable to the Company, its
business or operations or any of its assets or properties.
2.12 Agreements; Action.
------------------
(a) Except for agreements explicitly contemplated
hereby, there are no agreements, understandings or proposed transactions between
the Company and any of its officers, directors, affiliates or any affiliate
thereof.
(b) Except for this Agreement, the Investors' Rights
Agreement and the Stockholders' Agreement, Schedule 2.12 hereto sets forth a
-------------
complete and accurate list of all material Contractual Obligations of the
Company in effect on and as of the Closing. Each such Contractual Obligation is
valid and enforceable by the Company against any other party thereto in
accordance with its terms except to the extent that such enforcement may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium and
other laws of general application affecting enforcement of creditors' rights
generally, and by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies. The Company has performed and is
in compliance with all of the terms of such Contractual Obligations and all
instruments and agreements relating thereto and no default or event of default,
or event or condition which with notice or lapse of time or both would
constitute such a default or event of default, on its part or on the part of any
other party thereto exists with respect to any material Contractual Obligation
of the Company. The Company has no actual knowledge that any such Contractual
Obligation contains any contractual requirement with which there is a reasonable
5
<PAGE>
likelihood the Company will be unable to comply and such failure to comply would
likely result in an MAE or the Company's compliance is reasonably likely to
result in an MAE.
(c) There are no judgments, orders, writs or decrees to
which the Company is a party or by which it is bound that involve obligations
(contingent or otherwise) of, or payments to the Company, in excess of $25,000.
(d) The Company has not (i) declared or paid any dividends
or authorized or made any distribution upon or with respect to any class or
series of its capital stock, (ii) incurred any indebtedness for money borrowed
or any other liabilities individually in excess of $100,000 or, in the case of
indebtedness and/or liabilities individually less than $100,000, in excess of
$250,000 in the aggregate, (iii) made any loans or advances to any Person, other
than advances in the ordinary course of business, or (iv) sold, exchanged or
otherwise disposed of any of its assets or rights, other than the sale of its
inventory in the ordinary course of business.
(e) For the purposes of subsections (c) and (d) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same Person (including Persons the
Company has reason to believe are affiliated therewith) shall be aggregated for
the purpose of meeting the individual minimum dollar amounts of such
subsections.
2.13 Related-Party Transactions. No employee, officer or
--------------------------
director of the Company or member of his or her immediate family is indebted to
the Company, nor is the Company indebted (or committed to make loans or extend
or guarantee credit) to any of them. To the best of the Company's knowledge,
none of such persons has any direct or indirect ownership interest in any firm
or corporation with which the Company is affiliated or with which the Company
has a business relationship, or any firm or corporation that competes with the
Company, except that employees, officers or directors of the Company and members
of their immediate families may own stock in publicly traded companies that may
compete with the Company. No member of the immediate family of any officer or
director of the Company is directly or indirectly interested in any material
Contractual Obligation with the Company.
2.14 Financial Statements. The Company has delivered to
--------------------
the Investor its audited financial statements (balance sheet and statement of
operations, statement of stockholders' equity and statement of cash flows,
including notes thereto) at December 31, 1998 and for the fiscal year then ended
and its unaudited financial statements (balance sheet and statement of
operations, statement of stockholders' equity and statement of cash flows) at
September 30, 1999 and for the nine-month period then ended (the "Financial
Statements"). The Financial Statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods indicated and with each other, except that unaudited
Financial Statements may not contain all footnotes required by generally
accepted accounting principles. The Financial Statements fairly present the
assets, liabilities, financial condition and operating results of the Company as
of the dates, and for the periods, indicated therein, subject in the case of
unaudited Financial Statements to normal year-end audit adjustments. Except as
set forth in the Financial Statements, the Company has no liabilities or
obligations, contingent or otherwise, other than (i) liabilities incurred in the
ordinary course of
6
<PAGE>
business subsequent to September 30, 1999 and (ii) obligations under contracts
and commitments incurred in the ordinary course of business and not required
under generally accepted accounting principles to be reflected in the Financial
Statements, which, in both cases, individually or in the aggregate, are not
material to the financial condition or operating results of the Company and
which the Company has satisfied as they have become due. Except as disclosed in
the Financial Statements, the Company is not a guarantor or indemnitor of any
indebtedness of any other Person. The Company maintains and will continue to
maintain a standard system of accounting established and administered in
accordance with generally accepted accounting principles.
2.15 Changes. Since September 30, 1999, there has not been:
-------
(a) any change in the assets, liabilities, financial
condition or operating results of the Company from that reflected in the
Financial Statements, except changes in the ordinary course of business
consistent with past practice that are not reasonably likely to have an MAE;
(b) any damage, destruction or loss, whether or not
covered by insurance, materially and adversely affecting the assets, properties,
financial condition, operating results or business of the Company;
(c) any waiver by the Company of a material right or of a
material debt owed to it;
(d) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by the Company, except in the ordinary
course of business consistent with past practice and not material to the assets,
properties, financial condition, operating results or business of the Company;
(e) any material change or amendment to a contract or
arrangement required to be set forth on Schedule 2.12 by which the Company or
any of its assets or properties is bound or subject;
(f) any material change in any compensation arrangement or
agreement with any employee; or
(g) any agreement or commitment by the Company to do any
of the things described in this Section 2.15.
2.16 Tax Returns. The Company has timely filed all federal,
-----------
state, county, local and foreign income and other tax returns, reports and
declarations (collectively, "Returns") relating to all net income, gross income,
gross receipts, sales, use, ad valorem, transfer, franchise, profits, license,
withholding, payroll, employment, excise, severance, stamp, occupation, premium,
property or windfall profits taxes, or other taxes of any kind whatsoever,
together with any interest and any penalties, additions to tax or additional
amounts imposed by any taxing authority (domestic or foreign) upon the Company
("Taxes") which are required by applicable law to be filed except where the
failure to do so would not be reasonably likely to have an MAE. No audits of
federal income tax Returns of the Company have been conducted at
7
<PAGE>
any time since its formation and the Company has not been advised that any of
its returns have been or are being audited. The Company has paid, or where
payment is not required to be made, has made adequate provision on its books and
financial statements for the payment of, all Taxes in respect of all periods
covered by the Returns and any other taxable period ending on or before the date
hereof except where the failure to do so would not be reasonably likely to have
an MAE. No deficiencies for any Tax, assessment or governmental charge have been
asserted or assessed against the Company which have not been paid, settled or
adequately provided for and there is no basis therefor.
2.17 Permits. The Company (i) has all material governmental
-------
or other regulatory approvals, licenses, permits and other authorizations in
accordance with all Requirements of Law for it to conduct its business, each of
which is in full force and effect, is final and not subject to review on appeal
and is not the subject of any pending or, to the best of its knowledge,
threatened attack by direct or collateral proceeding, and (ii) is in compliance
in all respects with each governmental approval, license, permit and
authorization relating to it or any of its properties under all applicable
Requirements of Law except where the failure to do so would not be reasonably
likely to have an MAE. Since its date of organization, the Company has not, to
its knowledge, been the subject of any investigation conducted by any grand
jury, administrative agency or other governmental authority. The Company has
not, directly or indirectly, made or authorized any payment, contribution or
gift of money, property, or services, in violation of applicable law, (i) as a
kickback or bribe to any Person or (ii) to any political organization or the
holder of, or any aspirant to, any elective or appointive office of any
governmental authority.
2.18 Environmental and Safety Laws. To its knowledge, the
-----------------------------
Company is not in violation of any applicable statute, law or regulation
relating to the environment or occupational health and safety, and to its
knowledge, no material expenditures are or will be required in order to comply
with any such existing statute, law or regulation.
2.19 Disclosure. Neither this Agreement (including all the
----------
exhibits and schedules hereto) nor any other certificates or agreements made or
delivered in connection herewith contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements herein
or therein not misleading in light of the circumstances under which they were
made.
2.20 Registration Rights. Except as provided in the
-------------------
Investors' Rights Agreement, the Company has not granted or agreed to grant any
registration rights, including piggyback rights, to any person or entity.
2.21 Corporate Documents. The Restated Certificate and Bylaws
-------------------
of the Company are in the forms previously provided to the Investor. The minute
books of the Company have been made available to the Investor for their review
in connection with the purchase of the Series B Preferred Stock; such minute
books are current and contain correct and complete copies of all minutes of
meetings, resolutions and other actions and proceedings of the board of
directors and shareholders and all committees of the Company. The record books
relating to the equity interests of the Company have been made available to the
Investor for its review in connection with the purchase of the Series B
Preferred Stock; such record books are
8
<PAGE>
current, correct and complete and reflect the issuance, sale or exchange of
all of capital stock and other ownership and equity interests in the Company.
2.22 Title to Property and Assets. Schedule 2.22 sets forth
---------------------------- -------------
a complete and accurate list of all real property and improvements (collectively
"Real Property") owned or leased by the Company. The Company has good and
marketable, indefeasible fee simple title to the Real Property described in
Schedule 2.22 as being owned by it, and valid and subsisting leasehold rights in
the Real Property described in Schedule 2.22 as being leased by it, free and
clear of all liens and other encumbrances. Schedule 2.22 also sets forth a
complete and accurate list of all of the material items of equipment, machinery,
computers, chattels, tools, parts, machine tools, furniture, furnishings,
fixtures and supplies of every nature owned or leased by the Company in
connection with its business as of September 30, 1999. The Company has good and
marketable fee simple title to such items described in Schedule 2.22 as being
owned by it, and valid and subsisting leasehold rights in such items described
in Schedule 2.22 as being leased by it, free and clear of all liens and other
encumbrances.
2.23 Labor Agreements and Actions. The Company is not
----------------------------
bound by or subject to (and none of its assets or properties is bound by or
subject to) any written or oral, express or implied, contract, commitment or
arrangement with any labor union, and no labor union has requested or, to the
Company's knowledge, has sought to represent any of the employees,
representatives or agents of the Company. There is no strike or other labor
dispute involving the Company pending, or to the Company's knowledge,
threatened, that would have an MAE. The Company is not aware that any officer or
key employee, or that any group of key employees, intends to terminate their
employment with the Company, nor does the Company have a present intention to
terminate the employment of any of the foregoing. The employment of each officer
and employee of the Company is terminable at the will of the Company. The
Company is not a party to or bound by any currently effective employment
contract, deferred compensation agreement, bonus plan, incentive plan, profit
sharing plan, retirement agreement or other employee compensation agreement. To
its knowledge, the Company has complied in all material respects with all
applicable state and federal equal employment opportunity and other laws related
to employment. To its knowledge, the Company has withheld all amounts required
by law or agreement to be withheld by it from the wages, salaries and other
payments to its employees and is not liable for any arrears of wages or any
taxes or penalties for failure to comply with any of the foregoing. There are no
pending, threatened or anticipated (i) employment discrimination charges or
complaints against or involving the Company before any federal, state, or local
board, department, commission or agency, (ii) unfair labor practice charges or
complaints, disputes or grievances affecting the Company, or (iii) strikes, slow
downs, work stoppages, or lockouts or threats thereof affecting the Company.
2.24 Insurance. The Company maintains insurance policies
---------
(i) insuring the properties, assets and operations of its business in such
amounts and against such liabilities to the extent required by applicable law or
regulations and (ii) insuring against interruptions in its business. Such
policies are in full force and effect and have been underwritten by unaffiliated
insurers. To its knowledge, the Company has not done anything by way of action
or inaction that invalidates any of such policies in whole or in part.
9
<PAGE>
2.25 Year 2000 Compliance. The Company has initiated a
--------------------
review of its operations with a view to assessing whether its business or
operations will, in the receipt, transmission, processing, manipulation,
storage, retrieval, retransmission or other utilization of data, be vulnerable
to any significant risk that computer hardware or software used in its business
or operations will not, in the case of dates or time periods occurring after
December 31, 1999, function at least as effectively as in the case of dates or
time periods occurring prior to January 1, 2000. Based on such review and as of
the date hereof, the Company has no reason to believe that any such risk could
have an MAE.
2.26 Governmental Regulations. The Company is not a
------------------------
"registered investment company" or an "affiliated person" or a "principal
underwriter" of a "registered investment company" as such terms are defined in
the Investment Company Act of 1940, as amended.
3. Representations and Warranties of the Investor. The Investor
----------------------------------------------
hereby represents, warrants and covenants that:
3.1 Authorization. The Investor has full power and authority
-------------
to enter into this Agreement, the Investors' Rights Agreement and the
Stockholders' Agreement, and each such agreement constitutes its valid and
legally binding obligation, enforceable in accordance with its terms, except (i)
as limited by applicable bankruptcy, insolvency, reorganization, moratorium and
other laws of general application affecting enforcement of creditors' rights
generally, (ii) as limited by laws relating to the availability of specific
performance, injunctive relief or other equitable remedies, and (iii) to the
extent the indemnification provisions contained in the Investors' Rights
Agreement may be limited by applicable federal or state securities laws.
3.2 Purchase Entirely for Own Account. This Agreement is
---------------------------------
made with the Investor in reliance upon the Investor's representation to the
Company, which by the Investor's execution of this Agreement the Investor hereby
confirms, that the Series B Preferred Stock to be received by the Investor and
the Common Stock issuable upon conversion thereof (collectively, the
"Securities") will be acquired for investment for the Investor's own account,
not as a nominee or agent, and not with a view to the resale or distribution of
any part thereof in violation of applicable securities laws, and that the
Investor has no present intention of selling, granting any participation in or
otherwise distributing the same in violation of applicable securities laws. By
executing this Agreement, the Investor further represents that the Investor does
not have any contract, undertaking, agreement or arrangement with any person to
sell, transfer or grant participations to such person or to any third person,
with respect to any of the Securities.
3.3 Disclosure of Information. The Investor believes it has
-------------------------
received all the information it considers necessary or appropriate for deciding
whether to purchase the Series B Preferred Stock. The Investor further
represents that it has had an opportunity to ask questions and receive answers
from the Company regarding the terms and conditions of the offering of the
Series B Preferred Stock and the business, properties, prospects and financial
condition of the Company.
3.4 Investment Experience. The Investor is an investor in
---------------------
securities of companies in the development stage and acknowledges that it can
bear the economic risk of its
10
<PAGE>
investment, and has such knowledge and experience in financial or business
matters that it is capable of evaluating the merits and risks of the investment
in the Series B Preferred Stock. If other than an individual, the Investor also
represents it has not been organized for the purpose of acquiring the Series B
Preferred Stock.
3.5 Restricted Securities. The Investor understands that
---------------------
the Securities it is purchasing are characterized as "restricted securities"
under the federal securities laws inasmuch as they are being acquired from the
Company in a transaction not involving a public offering and that under such
laws and applicable regulations such Securities may be resold without
registration under the Act only in certain limited circumstances. In the absence
of an effective registration statement covering the Series B Preferred Stock (or
the Common Stock issued on conversion thereof) or an available exemption from
registration under the Act, the Series B Preferred Stock (and any Common Stock
issued on conversion thereof) must be held indefinitely. In this connection, the
Investor represents that it is familiar with SEC Rule 144, as presently in
effect, and understands the resale limitations imposed thereby and by the Act,
including without limitation the Rule 144 condition that current information
about the Company be available to the public. Such information is not now
available and the Company has no present plans to make such information
available.
3.6 Further Limitations on Disposition. Without in any way
----------------------------------
limiting the representations set forth above, the Investor further agrees not to
make any disposition of all or any portion of the Securities unless:
(a) There is then in effect a registration statement
under the Act covering such proposed disposition and such disposition is made in
accordance with such registration statement; or
(b) (i) The Investor shall have notified the Company
of the proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii) if
requested by the Company, the Investor shall have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company that such disposition
will not require registration of such shares under the Act. It is agreed that
the Company will not require opinions of counsel for transactions made pursuant
to Rule 144 except in unusual circumstances.
(c) Notwithstanding the provisions of subsections (a)
and (b) above, no such registration statement or opinion of counsel shall be
necessary for a transfer by an Investor that is a partnership to a partner of
such partnership or a retired partner of such partnership who retires after the
date hereof, or to the estate of any such partner or retired partner or the
transfer by gift, will or intestate succession of any partner to his or her
spouse or to the siblings, lineal descendants or ancestors of such partner or
his or her spouse, if the transferee agrees in writing to be subject to the
terms hereof to the same extent as if he or she were an original Investor
hereunder.
3.7 Legends. It is understood that the certificates
-------
evidencing the Securities may bear one or all of the following legends:
11
<PAGE>
(a) "These securities have not been registered under
the Securities Act of 1933, as amended. They may not be sold, offered for sale,
pledged or hypothecated in the absence of a registration statement in effect
with respect to the securities under such Act or an applicable exemption
therefrom."
(b) Any legend required by the Investors' Rights
Agreement and the Stockholders' Agreement.
The Company agrees, upon the request of the Investor or its transferee, to
remove the legend required by paragraph (a) above at such time as all Securities
held by such person may be freely transferred pursuant to SEC Rule 144(k), and
to remove the legend required by paragraph (b) above at such time as the
restrictions of the Investors' Rights Agreement and the Stockholders' Agreement
are no longer applicable to such Securities.
3.8 Tax Advisors. The Investor has reviewed with its own
------------
tax advisors the federal, state and local tax consequences of this investment,
where applicable, and the transactions contemplated by this Agreement. With
respect to matters related to the tax consequences of the transactions
contemplated by this Agreement, the Investor is relying solely on such advisors
and not on any statements or representations of the Company or any of its agents
and understands that the Investor (and not the Company) shall be responsible for
the Investor's own tax liability that may arise as a result of this investment
or the transactions contemplated by this Agreement.
3.9 Investor Counsel. The Investor acknowledges that it has
----------------
had the opportunity to review this Agreement, the exhibits and the schedules
attached hereto and the transactions contemplated by this Agreement with the
Investor's own legal counsel. The Investor is relying solely on its legal
counsel and not on E*Law Group or Brobeck, Phleger & Harrison LLP for legal
advice with respect to this investment or the transactions contemplated by this
Agreement.
4. Conditions of Investor's Obligations at Closing. The obligations
-----------------------------------------------
of the Investor under Section 5 of this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions:
4.1 Representations and Warranties. The representations
------------------------------
and warranties of the Company contained in Section 2 shall be true on and as of
the Closing with the same effect as though such representations and warranties
had been made on and as of the date of such Closing.
4.2 Performance. The Company shall have performed and
-----------
complied with all agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or before
the Closing.
4.3 Compliance Certificate. The President of the Company
----------------------
shall deliver to the Investor at the Closing a certificate stating that the
conditions specified in Sections 4.1 and 4.2 have been fulfilled.
12
<PAGE>
4.4 Qualifications. All authorizations, approvals or
--------------
permits, if any, of any governmental authority or regulatory body of the United
States or of any state or any Person that are required in connection with the
consummation of the transactions contemplated by this Agreement, including the
lawful issuance and sale of the Securities pursuant to this Agreement, shall be
duly obtained and effective as of the Closing.
4.5 Proceedings and Documents. All corporate and other
-------------------------
proceedings in connection with the transactions contemplated at the Closing and
all documents incident thereto shall be reasonably satisfactory in form and
substance to the Investor, and the Investor shall have received all such
counterpart original and certified or other copies of such documents as it may
reasonably request.
4.6 Proprietary Information Agreements. Each employee of
----------------------------------
the Company shall have entered into a Proprietary Information and Inventions
Agreement in the form previously provided to special counsel for the Investor.
4.7 Board of Directors. The Company shall have taken all
------------------
necessary corporate action such that immediately following the Closing, the
directors of the Company shall be Art Zeile, Joel Daly, Stephen O. James, Watts
Hamrick, Scott Perper and G. Jackson Tankersley, Jr.
4.8 Investors' Rights Agreement. The Company, Meritage
---------------------------
Private Equity Fund, L.P., Art Zeile and Joel Daly shall have entered into the
Investors' Rights Agreement in the form attached as Exhibit B.
---------
4.9 Stockholders' Agreement. The Company, Meritage Private
-----------------------
Equity Fund, L.P., Art Zeile and Joel Daly shall have entered into the
Stockholders' Agreement in the form attached as Exhibit C.
---------
4.10 No Material Adverse Change. On and prior to the Closing,
--------------------------
there shall have occurred no material adverse change in the business, assets or
financial condition of the Company.
4.11 No Litigation or Other Proceedings. There shall be no
----------------------------------
pending or threatened litigation, bankruptcy, insolvency, injunction, order,
suit, investigation or claim against or affecting the Company, any of its
properties or rights, any of its executive officers or with respect to any of
the transactions contemplated by this Agreement, the Investors' Rights Agreement
or the Stockholders' Agreement which would be reasonably likely to have an MAE.
4.12 Legal Opinion. The Investor shall have received the
-------------
opinion of Brobeck, Phleger & Harrison LLP, legal counsel to the Company, dated
as of the Closing in the form of Exhibit E hereto.
---------
13
<PAGE>
5. Conditions of the Company's Obligations at Closing. The
--------------------------------------------------
obligations of the Company to the Investor under this Agreement are subject to
the fulfillment on or before the Closing of each of the following conditions:
5.1 Representations and Warranties. The representations
------------------------------
and warranties of the Investor contained in Section 3 shall be true on and as of
the Closing with the same effect as though such representations and warranties
had been made on and as of the Closing.
5.2 Payment of Purchase Price. The Investor shall have
-------------------------
delivered the purchase price specified in Section 1.1.
5.3 Investors' Rights Agreement. The Investor shall have
---------------------------
entered into the Investors' Rights Agreement in the form attached as Exhibit B.
---------
5.4 Stockholders' Agreement. The Investor shall have
-----------------------
entered into the Stockholders' Agreement in the form attached as Exhibit C.
---------
6. Miscellaneous.
-------------
6.1 Survival. The warranties, representations and covenants
--------
of the Company and the Investor contained in or made pursuant to this Agreement
shall survive the execution and delivery of this Agreement and the Closing and
shall in no way be affected by any investigation of the subject matter thereof
made by or on behalf of the Investor or the Company.
6.2 Successors and Assigns. Except as otherwise provided
----------------------
herein, the terms and conditions of this Agreement shall inure to the benefit of
and be binding upon the respective successors and assigns of the parties
(including transferees of any Securities). Nothing in this Agreement, express or
implied, is intended to confer upon any party, other than the parties hereto or
their respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
6.3 Governing Law. This Agreement shall be governed by
-------------
and construed under the laws of the State of Colorado as applied to agreements
among Colorado residents entered into and to be performed entirely within
Colorado, without giving effect to such state's conflict of laws principles.
6.4 Titles and Subtitles. The titles and subtitles used in
--------------------
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.5 Notices. All notices required or permitted hereunder
-------
shall be in writing and shall be deemed effectively given: (i) upon personal
delivery to the party to be notified, (ii) when sent by confirmed facsimile if
sent during normal business hours of the recipient, if not, then on the next
business day; or (iii) one day after deposit with a nationally recognized
overnight courier, specifying next day delivery, with written verification of
receipt. All communications shall be sent to the address as set forth on the
signature page hereof or at such other address as such party may designate by
ten days advance written notice to the other parties hereto.
14
<PAGE>
6.6 Finder's Fee. Each party represents that it neither
------------
is nor will be obligated for any finders' fee or commission in connection with
this transaction. The Investor agrees to indemnify and to hold harmless the
Company from any liability for any commission or compensation in the nature of a
finders' fee (and the costs and expenses of defending against such liability or
asserted liability) for which the Investor or any of its officers, partners,
employees or representatives is responsible. The Company agrees to indemnify and
hold harmless the Investor from any liability for any commission or compensation
in the nature of a finders' fee (and the costs and expenses of defending against
such liability or asserted liability) for which the Company or any of its
officers, employees or representatives is responsible.
6.7 Expenses. Irrespective of whether the Closing is
--------
effected, the Company shall pay all costs and expenses that it incurs with
respect to the negotiation, execution, delivery and performance of this
Agreement. If the Closing is effected, the Company shall, at the Closing,
reimburse the Investor for all reasonable expenses of the Investor incurred in
connection with the negotiation, execution, delivery and performance of this
Agreement in an amount not to exceed $10,000. If any action at law or in equity
is necessary to enforce or interpret the terms of this Agreement, the Investors'
Rights Agreement, the Stockholders' Agreement or the Restated Certificate, the
prevailing party shall be entitled to reasonable attorney's fees, costs and
necessary disbursements in addition to any other relief to which such party may
be entitled.
6.8 Amendments and Waivers. Any term of this Agreement may
----------------------
be amended and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
a majority of the Common Stock not previously sold to the public that is issued
or issuable upon conversion of the Series B Preferred Stock. Any amendment or
waiver effected in accordance with this paragraph shall be binding upon each
holder of any securities purchased under this Agreement at the time outstanding
(including securities into which such securities are convertible), each future
holder of all such securities and the Company.
6.9 Effect of Amendment or Waiver. The Investor acknowledges
-----------------------------
the holders of a majority of the Common Stock not previously sold to the public
that is issued or issuable upon conversion of the Series B Preferred Stock will
have the power to diminish or eliminate all rights of the Investor under this
Agreement.
6.10 Severability. If one or more provisions of this
------------
Agreement are held to be unenforceable under applicable law, such provision
shall be excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
6.11 Aggregation of Stock. All shares of the Series B
--------------------
Preferred Stock or Common Stock issued upon conversion thereof held or acquired
by affiliated entities or persons shall be aggregated together for the purpose
of determining the availability of any rights under this Agreement.
15
<PAGE>
6.12 Entire Agreement. This Agreement and the documents
----------------
referred to herein constitute the entire agreement among the parties and no
party shall be liable or bound to any other party in any manner by any
warranties, representations or covenants except as specifically set forth herein
or therein.
6.13 Counterparts. This Agreement may be executed in
------------
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
[SIGNATURE PAGE(S) TO FOLLOW]
16
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INFLOW, INC.
By: /s/ Art Zeile
___________________________________
Art Zeile
President and Chief Executive Officer
Address: 1860 Lincoln Street
Suite 305
Denver, CO 80295
FIRST UNION CAPITAL PARTNERS, INC.
By: /s/ L. Watts Hamrick III
___________________________________
L. Watts Hamrick III
Senior Vice President
Address: 301 South College Street
Charlotte, NC 28288-0732
17
<PAGE>
Exhibit 10.6
PREFERRED STOCK PURCHASE AGREEMENT
PREFERRED STOCK PURCHASE AGREEMENT dated November 30, 1999 (the
"Agreement") by and among InFlow, Inc., a Delaware corporation (the "Company"),
and J.P. Morgan Investment Corporation, Sixty Wall Street SBIC Fund, L.P.,
General Electric Capital Corporation and Stolberg, Meehan and Scano II, L.P.
(each, an "Investor" and, collectively, the "Investors").
1. Purchase and Sale of Stock.
--------------------------
1.1 Sale and Issuance of Series B Preferred Stock.
(a) Prior to the date hereof, the Company has adopted and filed
with the Secretary of State of Delaware the Second Amended and Restated
Certificate of Incorporation in the form attached hereto as Exhibit A (the
"Restated Certificate").
(b) Subject to the terms and conditions of this Agreement, each
Investor agrees, severally but not jointly, to purchase from the Company at the
Closing, and the Company agrees to sell and issue to each Investor at the
Closing, that number of shares of the Company's Series B Preferred Stock set
forth opposite such Investor's name on Schedule A hereto for the purchase price
of $8.70 per share.
1.2 Closing. The purchase and sale of the Series B Preferred Stock shall
take place at the Company's offices located at 1860 Lincoln Avenue, Suite 305,
Denver, Colorado 80295 at 10:00 a.m. on November 30, 1999, or at such other time
and place as the Company and the Investors mutually agree upon orally or in
writing (which time and place are designated as the "Closing"). At the Closing,
the Company shall deliver to each Investor a certificate representing the Series
B Preferred Stock that such Investor is purchasing against payment of the
purchase price therefor by wire transfer of immediately available funds.
1.3 Omitted.
1.4 Post-Closing Obligations. In the event that, at any time, the
Company's representation and warranty in Section 2.2 is determined not to have
been true when made, the Company shall promptly issue to the Investors, on a pro
rata basis as an adjustment to the purchase price paid for the shares of Series
B Preferred Stock purchased hereunder and without the payment of additional
consideration by the Investors, an additional number of shares of Series B
Preferred Stock such that each Investor would own the same economic interest and
voting power as it would have owned had such representation and warranty been
true and correct in all respects when made. If at the time of an adjustment
pursuant to the preceding sentence any shares of Series B Preferred Stock
purchased hereunder have been converted into Common Stock, the Company shall
issue additional shares of Common Stock with respect to such converted shares of
Series B Preferred Stock based on the conversion ratio that would have been in
effect if such shares had remained outstanding. Any additional shares issued
pursuant to this
<PAGE>
Section 1.4 shall be treated as if they were issued at the Closing and shall
reflect any anti-dilution adjustments arising from the date of Closing through
the date of such issuance. Concurrently with each such issuance, the Company
shall pay or accrue all dividends or other distributions which would have been
paid or accrued with respect to such additional shares from the date of Closing
through the date of such issuance.
2. Representations and Warranties of the Company. The Company hereby
represents and warrants to each Investor that, except as set forth on the
Schedule of Exceptions (the "Schedule of Exceptions") attached hereto as
Schedule B, which exceptions shall be deemed to be representations and
warranties as if made hereunder:
2.1 Organization, Good Standing, Power and Qualification. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware. The Company has all requisite corporate
power and authority to own and operate its property, to lease the property it
operates as lessee and to conduct the business in which it is currently, or is
currently proposed to be, engaged and has the power and authority to execute,
deliver and perform its obligations under this Agreement, the Investors' Rights
Agreement and the Stockholders' Agreement. The Company is duly qualified to
transact business and is in good standing in each jurisdiction in which the
failure to so qualify would have a material adverse effect on the business,
assets or financial condition of the Company (an "MAE").
2.2 Capitalization and Voting Rights. (a) The authorized, issued
and outstanding capital stock of the Company will consist immediately prior to
the Closing of:
(i) Preferred Stock. 10,310,000 shares of Preferred Stock,
par value $0.001 (the "Preferred Stock"), of which (i) 3,310,000 shares
have been designated Series A Preferred Stock (the "Series A Preferred
Stock"), of which 3,309,953 shares are outstanding and (ii) 7,000,000
shares have been designated Series B Preferred Stock (the "Series B
Preferred Stock"), of which 4,597,702 shares are outstanding. The rights,
privileges and preferences of the Series A and Series B Preferred Stock are
as stated in the Restated Certificate.
(ii) Common Stock. 20,000,000 shares of common stock, par
value $0.001 ("Common Stock"), of which 3,060,000 shares are issued and
outstanding.
(b) The outstanding shares of Series A Preferred Stock and Common
Stock are owned by the stockholders and in the numbers specified in Exhibit D
hereto.
(c) The outstanding shares of Series A Preferred Stock and Common
Stock are all duly and validly authorized and issued, fully paid and
nonassessable, and were issued in compliance with all applicable state and
federal laws concerning the issuance of securities.
(d) Except for (A) the conversion privileges of the Series A and
Series B Preferred Stock, (B) the rights provided in Section 3 of the
Stockholders'
2
<PAGE>
Agreement, and (C) currently outstanding options to purchase 604,700 shares of
Common Stock granted to employees pursuant to the Company's 1997 Stock Option
Plan, as amended (the "Option Plan"), there are no outstanding options,
warrants, rights (including conversion or preemptive rights) or agreements for
the purchase or acquisition from the Company of any shares of its capital stock.
In addition to the aforementioned options, the Company has reserved an
additional 1,080,300 shares of its Common Stock for purchase upon exercise of
options to be granted in the future under the Option Plan. The Company is not a
party or subject to any agreement or understanding which affects or relates to
the voting or giving of written consents with respect to any security or other
ownership interest in the Company or by a director of the Company.
2.3 Subsidiaries. The Company does not presently own or control,
directly or indirectly, any interest in any other corporation, association, or
other business entity. The Company is not a participant in any joint venture,
partnership, or similar arrangement.
2.4 Authorization. All corporate action on the part of the Company,
its officers, directors and stockholders necessary for the authorization,
execution and delivery of this Agreement, the Investors' Rights Agreement, and
the Stockholders' Agreement, the performance of all obligations of the Company
hereunder and thereunder, and the authorization (or, in the case of the Common
Stock, reservation for issuance), sale and issuance of the Series B Preferred
Stock being sold hereunder and the Common Stock issuable upon conversion of the
Series B Preferred Stock has been taken or will be taken prior to the Closing.
This Agreement, the Investors' Rights Agreement, and the Stockholders' Agreement
constitute valid and legally binding obligations of the Company, enforceable in
accordance with their respective terms, except (i) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting enforcement of creditors' rights generally, (ii) as
limited by laws relating to the availability of specific performance, injunctive
relief or other equitable remedies, and (iii) to the extent the indemnification
provisions contained in the Investors' Rights Agreement may be limited by
applicable federal or state securities laws.
2.5 Valid Issuance of Preferred and Common Stock. The Series B
Preferred Stock that is being purchased by the Investors hereunder, when issued,
sold and delivered in accordance with the terms of this Agreement for the
consideration expressed herein, will be duly and validly issued, fully paid and
nonassessable, free and clear of all liens and other encumbrances and will be
free of restrictions on transfer, other than restrictions on transfer under this
Agreement, the Investors' Rights Agreement, the Stockholders' Agreement and
under applicable state and federal securities laws. The Common Stock issuable
upon conversion of the Series B Preferred Stock purchased under this Agreement
has been duly and validly reserved for issuance and, upon issuance in accordance
with the terms of the Restated Certificate, will be duly and validly issued,
fully paid and nonassessable, free and clear of all liens and other encumbrances
and will be free of restrictions on transfer, other than restrictions on
transfer under this Agreement, the Investors' Rights Agreement, the
Stockholders' Agreement and under applicable state and federal securities laws.
2.6 Consents. No consent, approval, order or authorization of, or
registration, qualification, designation, declaration or filing with, any
federal, state or local governmental authority or any individual, firm,
corporation, partnership, trust, limited liability
3
<PAGE>
company, incorporated or unincorporated association, joint venture, joint stock
company or other entity of any kind (each, a "Person") on the part of the
Company is required in connection with the consummation of the transactions
contemplated by this Agreement, except for filings required pursuant to
applicable federal and state securities laws and blue sky laws, which filings
will be effected within the required statutory period.
2.7 Offering. No form of general solicitation or general
advertising was used by the Company or its representatives in connection with
the offer or sale of the Series B Preferred Stock or other securities. Assuming
the truth and accuracy of each Investor's representations set forth in Section 3
of this Agreement, the offer, sale and issuance of the Series B Preferred Stock
as contemplated by this Agreement are exempt from the registration requirements
of the Securities Act of 1933, as amended (the "Act").
2.8 Litigation. There is no action, suit, proceeding or
investigation pending, or to the Company's knowledge currently threatened,
against the Company that questions the validity of this Agreement, the
Investors' Rights Agreement or the Stockholders' Agreement or the right of the
Company to enter into any of the foregoing or to consummate the transactions
contemplated hereby or thereby, or that would have, either individually or in
the aggregate, an MAE. The Company is not a party or subject to the provisions
of any order, writ, injunction, judgment or decree of any court or government
agency or instrumentality. There is no action, suit, proceeding or investigation
by the Company currently pending or that the Company intends to initiate.
2.9 Proprietary Information Agreements. Each employee and officer
of the Company has executed a Proprietary Information and Inventions Agreement
in substantially the form provided to the Investors.
2.10 Patents and Trademarks. Schedule 2.10 sets forth a complete and
accurate list and description of all franchises, licenses, patents, patent
rights, patent applications, trademarks, trademark rights, service marks,
service mark rights, trade names, trade name rights, copyrights and rights with
respect to any of the foregoing (collectively, "Intellectual Property")
presently owned or held by the Company. The Company owns the right to use all of
the Intellectual Property. To the actual knowledge of the Company (without
independent investigation), the Intellectual Property is all that is necessary
for the Company to conduct its business as presently conducted. To its knowledge
(but without having conducted any special investigation or patent search), no
Intellectual Property conflicts with or infringes on the valid rights of others
and the Company has not received any notice of infringement upon or conflict
with the asserted rights of others. No event has occurred which permits, or
after notice or lapse of time would permit, the revocation or termination of any
of the Intellectual Property. The Company has a valuable body of trade secrets,
including know-how, concepts, computer programs and other technical data (the
"Proprietary Information"). To its knowledge, the Company has the right to use
the Proprietary Information free and clear of any rights, liens, encumbrances or
claims of others, except that the possibility exists that other persons may have
independently developed trade secrets or technical information similar or
identical to those of the Company. The Company is not aware of any such
independent development nor of any misappropriation of its Proprietary
Information. The Company is not aware that any of its employees is obligated
under any contract (including licenses, covenants or commitments of any
4
<PAGE>
nature) or other agreement, or subject to any judgment, decree or order of any
court or administrative agency, that would interfere with the use of his or her
best efforts to promote the interests of the Company or that would conflict with
the Company's business. The Company does not believe it is or will be necessary
to utilize any inventions of any of its employees (or people it currently
intends to hire) made prior to their employment by the Company, except for
inventions that have been assigned or licensed to the Company as of the date
hereof.
2.11 Compliance with Other Instruments. The Company is not in
violation of any provision of its Restated Certificate or Bylaws or any
securities issued by the Company, any indenture, credit agreement, contract,
agreement, instrument or other undertaking ("Contractual Obligations") or any
judgment, order, writ, decree or contract, statute, rule or regulation to which
the Company or its assets or property is subject ("Requirements of Law"), a
violation of which would have an MAE. The execution, delivery and performance of
this Agreement, the Investors' Rights Agreement and the Stockholders' Agreement
and the consummation of the transactions contemplated hereby and thereby will
not result in any such violation, or be in conflict with or constitute, with or
without the passage of time and giving of notice, either a default under any
Contractual Obligation or Requirement of Law or an event that results in the
creation of any lien, charge or encumbrance upon any assets of the Company or
the suspension, revocation, impairment, forfeiture or nonrenewal of any material
permit, license, authorization or approval applicable to the Company, its
business or operations or any of its assets or properties.
2.12 Agreements; Action. (a) Except for agreements explicitly
contemplated hereby, there are no agreements, understandings or proposed
transactions between the Company and any of its officers, directors, affiliates
or any affiliate thereof.
(b) Except for this Agreement, the Investors' Rights
Agreement and the Stockholders' Agreement, Schedule 2.12 hereto sets forth a
complete and accurate list of all material Contractual Obligations of the
Company in effect on and as of the Closing. Each such Contractual Obligation is
valid and enforceable by the Company against any other party thereto in
accordance with its terms except to the extent that such enforcement may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium and
other laws of general application affecting enforcement of creditors' rights
generally, and by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies. The Company has performed and is
in compliance with all of the terms of such Contractual Obligations and all
instruments and agreements relating thereto and no default or event of default,
or event or condition which with notice or lapse of time or both would
constitute such a default or event of default, on its part or on the part of any
other party thereto exists with respect to any material Contractual Obligation
of the Company. The Company has no actual knowledge that any such Contractual
Obligation contains any contractual requirement with which there is a reasonable
likelihood the Company will be unable to comply and such failure to comply would
likely result in an MAE or the Company's compliance is reasonably likely to
result in an MAE.
(c) There are no judgments, orders, writs or decrees to which
the Company is a party or by which it is bound that involve obligations
(contingent or otherwise) of, or payments to the Company, in excess of $25,000.
5
<PAGE>
(d) The Company has not (i) declared or paid any dividends or
authorized or made any distribution upon or with respect to any class or series
of its capital stock, (ii) incurred any indebtedness for money borrowed or any
other liabilities individually in excess of $100,000 or, in the case of
indebtedness and/or liabilities individually less than $100,000, in excess of
$250,000 in the aggregate, (iii) made any loans or advances to any Person, other
than advances in the ordinary course of business, or (iv) sold, exchanged or
otherwise disposed of any of its assets or rights, other than the sale of its
inventory in the ordinary course of business.
(e) For the purposes of subsections (c) and (d) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same Person (including Persons the
Company has reason to believe are affiliated therewith) shall be aggregated for
the purpose of meeting the individual minimum dollar amounts of such
subsections.
2.13 Related-Party Transactions. No employee, officer or director of the
Company or member of his or her immediate family is indebted to the Company, nor
is the Company indebted (or committed to make loans or extend or guarantee
credit) to any of them. To the best of the Company's knowledge, none of such
persons has any direct or indirect ownership interest in any firm or corporation
with which the Company is affiliated or with which the Company has a business
relationship, or any firm or corporation that competes with the Company, except
that employees, officers or directors of the Company and members of their
immediate families may own stock in publicly traded companies that may compete
with the Company. No member of the immediate family of any officer or director
of the Company is directly or indirectly interested in any material Contractual
Obligation with the Company.
2.14 Financial Statements. The Company has delivered to each Investor its
audited financial statements (balance sheet and statement of operations,
statement of stockholders' equity and statement of cash flows, including notes
thereto) at December 31, 1998 and for the fiscal year then ended and its
unaudited financial statements (balance sheet and statement of operations,
statement of stockholders' equity and statement of cash flows) at September 30,
1999 and for the nine-month period then ended (the "Financial Statements"). The
Financial Statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
indicated and with each other, except that unaudited Financial Statements may
not contain all footnotes required by generally accepted accounting principles.
The Financial Statements fairly present the assets, liabilities, financial
condition and operating results of the Company as of the dates, and for the
periods, indicated therein, subject in the case of unaudited Financial
Statements to normal year-end audit adjustments. Except as set forth in the
Financial Statements, the Company has no liabilities or obligations, contingent
or otherwise, other than (i) liabilities incurred in the ordinary course of
business subsequent to September 30, 1999 and (ii) obligations under contracts
and commitments incurred in the ordinary course of business and not required
under generally accepted accounting principles to be reflected in the Financial
Statements, which, in both cases, individually or in the aggregate, are not
material to the financial condition or operating results of the Company and
which the Company has satisfied as they have become due. Except as disclosed in
the Financial Statements, the Company is not a guarantor or indemnitor of any
indebtedness of any other Person. The Company maintains and will continue to
maintain a
6
<PAGE>
standard system of accounting established and administered in accordance with
generally accepted accounting principles.
2.15 Changes. Since September 30, 1999, there has not been:
(a) any change in the assets, liabilities, financial condition or
operating results of the Company from that reflected in the Financial
Statements, except changes in the ordinary course of business consistent with
past practice that are not reasonably likely to have an MAE;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets, properties, financial
condition, operating results or business of the Company;
(c) any waiver by the Company of a material right or of a material
debt owed to it;
(d) any satisfaction or discharge of any lien, claim or encumbrance
or payment of any obligation by the Company, except in the ordinary course of
business consistent with past practice and not material to the assets,
properties, financial condition, operating results or business of the Company;
(e) any material change or amendment to a contract or arrangement
required to be set forth on Schedule 2.12 by which the Company or any of its
assets or properties is bound or subject;
(f) any material change in any compensation arrangement or agreement
with any employee; or
(g) any agreement or commitment by the Company to do any of the
things described in this Section 2.15.
2.16 Tax Returns. The Company has timely filed all federal, state,
county, local and foreign income and other tax returns, reports and declarations
(collectively, "Returns") relating to all net income, gross income, gross
receipts, sales, use, ad valorem, transfer, franchise, profits, license,
withholding, payroll, employment, excise, severance, stamp, occupation, premium,
property or windfall profits taxes, or other taxes of any kind whatsoever,
together with any interest and any penalties, additions to tax or additional
amounts imposed by any taxing authority (domestic or foreign) upon the Company
("Taxes") which are required by applicable law to be filed except where the
failure to do so would not be reasonably likely to have an MAE. No audits of
federal income tax Returns of the Company have been conducted at any time since
its formation and the Company has not been advised that any of its returns have
been or are being audited. The Company has paid, or where payment is not
required to be made, has made adequate provision on its books and financial
statements for the payment of, all Taxes in respect of all periods covered by
the Returns and any other taxable period ending on or before the date hereof
except where the failure to do so would not be reasonably likely to have an MAE.
No deficiencies for any Tax, assessment or governmental charge have been
asserted or assessed
7
<PAGE>
against the Company which have not been paid, settled or adequately provided for
and there is no basis therefor.
2.17 Permits. The Company (i) has all material governmental or other
regulatory approvals, licenses, permits and other authorizations in accordance
with all Requirements of Law for it to conduct its business, each of which is in
full force and effect, is final and not subject to review on appeal and is not
the subject of any pending or, to the best of its knowledge, threatened attack
by direct or collateral proceeding, and (ii) is in compliance in all respects
with each governmental approval, license, permit and authorization relating to
it or any of its properties under all applicable Requirements of Law except
where the failure to do so would not be reasonably likely to have an MAE. Since
its date of organization, the Company has not, to its knowledge, been the
subject of any investigation conducted by any grand jury, administrative agency
or other governmental authority. The Company has not, directly or indirectly,
made or authorized any payment, contribution or gift of money, property, or
services, in violation of applicable law, (i) as a kickback or bribe to any
Person or (ii) to any political organization or the holder of, or any aspirant
to, any elective or appointive office of any governmental authority.
2.18 Environmental and Safety Laws. To its knowledge, the Company is not
in violation of any applicable statute, law or regulation relating to the
environment or occupational health and safety, and to its knowledge, no material
expenditures are or will be required in order to comply with any such existing
statute, law or regulation.
2.19 Disclosure. Neither this Agreement (including all the exhibits and
schedules hereto) nor any other certificates or agreements made or delivered in
connection herewith contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements herein or therein not
misleading in light of the circumstances under which they were made.
2.20 Registration Rights. Except as provided in the Investors' Rights
Agreement, the Company has not granted or agreed to grant any registration
rights, including piggyback rights, to any person or entity.
2.21 Corporate Documents. The Restated Certificate and Bylaws of the
Company are in the forms previously provided to the Investors. The minute books
of the Company have been made available to the Investors for their review in
connection with the purchase of the Series B Preferred Stock; such minute books
are current and contain correct and complete copies of all minutes of meetings,
resolutions and other actions and proceedings of the board of directors and
shareholders and all committees of the Company. The record books relating to the
equity interests of the Company have been made available to the Investors for
their review in connection with the purchase of the Series B Preferred Stock;
such record books are current, correct and complete and reflect the issuance,
sale or exchange of all of capital stock and other ownership and equity
interests in the Company.
2.22 Title to Property and Assets. Schedule 2.22 sets forth a complete
and accurate list of all real property and improvements (collectively "Real
Property") owned or leased by the Company. The Company has good and marketable,
indefeasible fee simple title to
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<PAGE>
the Real Property described in Schedule 2.22 as being owned by it, and valid and
subsisting leasehold rights in the Real Property described in Schedule 2.22 as
being leased by it, free and clear of all liens and other encumbrances. Schedule
2.22 also sets forth a complete and accurate list of all of the material items
of equipment, machinery, computers, chattels, tools, parts, machine tools,
furniture, furnishings, fixtures and supplies of every nature owned or leased by
the Company in connection with its business as of September 30, 1999. The
Company has good and marketable fee simple title to such items described in
Schedule 2.22 as being owned by it, and valid and subsisting leasehold rights in
such items described in Schedule 2.22 as being leased by it, free and clear of
all liens and other encumbrances.
2.23 Labor Agreements and Actions. The Company is not bound by or subject
to (and none of its assets or properties is bound by or subject to) any written
or oral, express or implied, contract, commitment or arrangement with any labor
union, and no labor union has requested or, to the Company's knowledge, has
sought to represent any of the employees, representatives or agents of the
Company. There is no strike or other labor dispute involving the Company
pending, or to the Company's knowledge, threatened, that would have an MAE. The
Company is not aware that any officer or key employee, or that any group of key
employees, intends to terminate their employment with the Company, nor does the
Company have a present intention to terminate the employment of any of the
foregoing. The employment of each officer and employee of the Company is
terminable at the will of the Company. The Company is not a party to or bound by
any currently effective employment contract, deferred compensation agreement,
bonus plan, incentive plan, profit sharing plan, retirement agreement or other
employee compensation agreement. To its knowledge, the Company has complied in
all material respects with all applicable state and federal equal employment
opportunity and other laws related to employment. To its knowledge, the Company
has withheld all amounts required by law or agreement to be withheld by it from
the wages, salaries and other payments to its employees and is not liable for
any arrears of wages or any taxes or penalties for failure to comply with any of
the foregoing. There are no pending, threatened or anticipated (i) employment
discrimination charges or complaints against or involving the Company before any
federal, state, or local board, department, commission or agency, (ii) unfair
labor practice charges or complaints, disputes or grievances affecting the
Company, or (iii) strikes, slow downs, work stoppages, or lockouts or threats
thereof affecting the Company.
2.24 Insurance. The Company maintains insurance policies (i) insuring the
properties, assets and operations of its business in such amounts and against
such liabilities to the extent required by applicable law or regulations and
(ii) insuring against interruptions in its business. Such policies are in full
force and effect and have been underwritten by unaffiliated insurers. To its
knowledge, the Company has not done anything by way of action or inaction that
invalidates any of such policies in whole or in part.
2.25 Year 2000 Compliance. The Company has initiated a review of its
operations with a view to assessing whether its business or operations will, in
the receipt, transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data, be vulnerable to any significant
risk that computer hardware or software used in its business or operations will
not, in the case of dates or time periods occurring after December 31, 1999,
function at least as effectively as in the case of dates or time periods
occurring prior to January 1,
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2000. Based on such review and as of the date hereof, the Company has no
reason to believe that any such risk could have an MAE.
2.26 Governmental Regulations. The Company is not a "registered
investment company" or an "affiliated person" or a "principal underwriter" of a
"registered investment company" as such terms are defined in the Investment
Company Act of 1940, as amended.
2.27 Certain Tax Matters. The Company's capital stock does not
constitute a United States real property interest as that term is defined in
Section 897(c)(1)(A)(ii) of the Internal Revenue Code of 1986, as amended (the
"Code"), and the Company is not and has not been a "United States real property
holding corporation" as defined in Section 897(c)(2) of the Code (a "USRPHC").
No Investor shall, solely by virtue of its purchase and ownership of the Series
B Preferred Stock and the underlying Common Stock, (i) be deemed to have
received "unrelated business taxable income" as defined in Section 512 of the
Code ("UBTI") as a result of the Company's operations, or (ii) be deemed to be
engaged in the conduct of a "trade or business within the United States" within
the meaning of Section 864(b) of the Code, and the Company shall exercise its
reasonable best efforts consistent with prudent business practices to ensure
that the Investors do not receive UBTI and are not deemed to be engaged in a
U.S. trade or business solely as a result of their ownership of the Company's
securities. From time to time upon request of any Investor, the Company shall
make a determination as to the Company's status as a USRPHC and as to the
accuracy of the foregoing representations and warranties and shall notify each
Investor of and change in circumstances that could result in any of the
foregoing representations and warranties no longer being true and correct as
soon as practicable after the Company obtains knowledge of such change in
circumstances.
3. Representations and Warranties of the Investors.
Each Investor, severally but not jointly, hereby represents,
warrants and covenants that:
3.1 Authorization. Such Investor has full power and authority to enter
into this Agreement, the Investors' Rights Agreement and the Stockholders'
Agreement, and each such agreement constitutes its valid and legally binding
obligation, enforceable in accordance with its terms, except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium and other laws of
general application affecting enforcement of creditors' rights generally, (ii)
as limited by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies, and (iii) to the extent the
indemnification provisions contained in the Investors' Rights Agreement may be
limited by applicable federal or state securities laws.
3.2 Purchase Entirely for Own Account. This Agreement is made with
such Investor in reliance upon such Investor's representation to the Company,
which by such Investor's execution of this Agreement such Investor hereby
confirms, that the Series B Preferred Stock to be received by such Investor and
the Common Stock issuable upon conversion thereof (collectively, the
"Securities") will be acquired for investment for such Investor's own account
and not with a view to the resale or distribution of any part thereof in
violation of applicable securities laws, and that such Investor has no present
intention of selling, granting any participation in or otherwise distributing
the same in violation of applicable securities laws. By
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<PAGE>
executing this Agreement, such Investor further represents that such Investor
does not have any contract, undertaking, agreement or arrangement with any
person to sell, transfer or grant participations to such person or to any third
person in violation of applicable securities laws, with respect to any of the
Securities.
3.3 Disclosure of Information. Such Investor believes it has received all
the information it considers necessary or appropriate for deciding whether to
purchase the Series B Preferred Stock. Such Investor further represents that it
has had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the offering of the Series B Preferred
Stock and the business, properties, prospects and financial condition of the
Company.
3.4 Investment Experience. Such Investor is an investor in securities of
companies in the development stage and acknowledges that it can bear the
economic risk of its investment, and has such knowledge and experience in
financial or business matters that it is capable of evaluating the merits and
risks of the investment in the Series B Preferred Stock. If other than an
individual, such Investor also represents it has not been organized for the
purpose of acquiring the Series B Preferred Stock.
3.5 Restricted Securities. Such Investor understands that the Securities
it is purchasing are characterized as "restricted securities" under the federal
securities laws inasmuch as they are being acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations such Securities may be resold without registration under
the Act only in certain limited circumstances. In the absence of an effective
registration statement covering the Series B Preferred Stock (or the Common
Stock issued on conversion thereof) or an available exemption from registration
under the Act, the Series B Preferred Stock (and any Common Stock issued on
conversion thereof) must be held indefinitely. In this connection, such Investor
represents that it is familiar with SEC Rule 144, as presently in effect, and
understands the resale limitations imposed thereby and by the Act, including
without limitation the Rule 144 condition that current information about the
Company be available to the public. Such information is not now available and
the Company has no present plans to make such information available.
3.6 Further Limitations on Disposition. Without in any way limiting the
representations set forth above, such Investor further agrees not to make any
disposition of all or any portion of the Securities unless:
(a) There is then in effect a registration statement under the Act
covering such proposed disposition and such disposition is made in accordance
with such registration statement; or
(b) (i) Such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii) if
requested by the Company, such Investor shall have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company that such disposition
will not require registration of such shares under the Act. It is
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<PAGE>
agreed that the Company will not require opinions of counsel for transactions
made pursuant to Rule 144 except in unusual circumstances.
(c) Notwithstanding the provisions of subsections (a) and (b) above,
no such registration statement or opinion of counsel shall be necessary for a
transfer by an Investor that is a partnership to a partner of such partnership
or a retired partner of such partnership who retires after the date hereof, or
to the estate of any such partner or retired partner or the transfer by gift,
will or intestate succession of any partner to his or her spouse or to the
siblings, lineal descendants or ancestors of such partner or his or her spouse,
if the transferee agrees in writing to be subject to the terms hereof to the
same extent as if he or she were an original Investor hereunder.
3.7 Legends. It is understood that the certificates evidencing the
Securities may bear one or all of the following legends:
(a) "These securities have not been registered under the Securities
Act of 1933, as amended. They may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration statement in effect with respect
to the securities under such Act or an applicable exemption therefrom."
(b) Any legend required by the Investors' Rights Agreement and the
Stockholders' Agreement.
The Company agrees, upon the request of any Investor or its transferee, to
remove the legend required by paragraph (a) above at such time as all Securities
held by such person may be freely transferred pursuant to SEC Rule 144(k), and
to remove the legend required by paragraph (b) above at such time as the
restrictions of the Investors' Rights Agreement and the Stockholders' Agreement
are no longer applicable to such Securities.
3.8 Tax Advisors. Such Investor has reviewed with such Investor's own
tax advisors the federal, state and local tax consequences of this investment,
where applicable, and the transactions contemplated by this Agreement. With
respect to matters related to the tax consequences of the transactions
contemplated by this Agreement, each such Investor is relying solely on such
advisors and not on any statements or representations of the Company or any of
its agents and understands that each such Investor (and not the Company) shall
be responsible for such Investor's own tax liability that may arise as a result
of this investment or the transactions contemplated by this Agreement.
3.9 Investor Counsel. Such Investor acknowledges that such Investor has
had the opportunity to review this Agreement, the exhibits and the schedules
attached hereto and the transactions contemplated by this Agreement with such
Investor's own legal counsel. Each such Investor is relying solely on such
Investor's legal counsel and not on Brobeck, Phleger & Harrison LLP for legal
advice with respect to this investment or the transactions contemplated by this
Agreement.
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<PAGE>
4. Conditions of Investor's Obligations at Closing. The obligations of
each Investor under Section 5 of this Agreement are subject to the fulfillment
on or before the Closing of each of the following conditions, the waiver of
which shall not be effective against any Investor who does not consent thereto:
4.1 Representations and Warranties. The representations and
warranties of the Company contained in Section 2 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the date of such Closing.
4.2 Performance. The Company shall have performed and complied with
all agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Closing.
4.3 Compliance Certificate. The President of the Company shall
deliver to each Investor at the Closing a certificate stating that the
conditions specified in Sections 4.1 and 4.2 have been fulfilled.
4.4 Qualifications. All authorizations, approvals or permits, if any,
of any governmental authority or regulatory body of the United States or of any
state or any Person that are required in connection with the consummation of the
transactions contemplated by this Agreement, including the lawful issuance and
sale of the Securities pursuant to this Agreement, shall be duly obtained and
effective as of the Closing.
4.5 Proceedings and Documents. All corporate and other proceedings
in connection with the transactions contemplated at the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to the Investors, and they shall have received all such counterpart
original and certified or other copies of such documents as they may reasonably
request.
4.6 Proprietary Information Agreements. Each employee of the Company
shall have entered into a Proprietary Information and Inventions Agreement in
the form previously provided to special counsel for the Investors.
4.7 Board of Directors. The Company shall have taken all necessary
corporate action such that, the directors of the Company shall be Art Zeile,
Joel Daly, Stephen O. James, Watts Hamrick, Scott Perper and G. Jackson
Tankersley, Jr.
4.8 Investors' Rights Agreement. The Company, First Union Capital
Partners, Inc., Meritage Private Equity Fund, L.P., Art Zeile, Joel Daly and
each Investor shall have entered into the Second Amended and Restated Investors'
Rights Agreement in the form attached hereto as Exhibit B.
4.9 Stockholders' Agreement. The Company, First Union Capital
Partners, Inc., Meritage Private Equity Fund, L.P., Art Zeile, Joel Daly and
each Investor shall have entered into the Second Amended and Restated
Stockholders' Agreement in the form attached as Exhibit C.
13
<PAGE>
4.10 No Material Adverse Change. On and prior to the Closing, there shall
have occurred no material adverse change in the business, assets or financial
condition of the Company.
4.11 No Litigation or Other Proceedings. There shall be no pending or
threatened litigation, bankruptcy, insolvency, injunction, order, suit,
investigation or claim against or affecting the Company, any of its properties
or rights, any of its executive officers or with respect to any of the
transactions contemplated by this Agreement, the Investors' Rights Agreement or
the Stockholders' Agreement which would be reasonably likely to have an MAE.
4.12 Legal Opinion. The Investors shall have received the opinion of
Brobeck, Phleger & Harrison LLP, legal counsel to the Company, dated as of the
Closing in the form of Exhibit E hereto.
5. Conditions of the Company's Obligations at Closing. The obligations of the
Company to each Investor under this Agreement are subject to the fulfillment on
or before the Closing of each of the following conditions by that Investor:
5.1 Representations and Warranties. The representations and warranties of
the Investors contained in Section 3 shall be true on and as of the Closing with
the same effect as though such representations and warranties had been made on
and as of the Closing.
5.2 Payment of Purchase Price. The Investor shall have delivered the
purchase price specified in Section 1.1.
5.3 Investors' Rights Agreement. Each Investor shall have entered into
the Investors' Rights Agreement in the form attached as Exhibit B.
5.4 Stockholders' Agreement. Each Investor shall have entered into the
Stockholders' Agreement in the form attached as Exhibit C.
6. Miscellaneous.
6.1 Survival. The warranties, representations and covenants of the
Company and the Investors contained in or made pursuant to this Agreement shall
survive the execution and delivery of this Agreement and the Closing and shall
in no way be affected by any investigation of the subject matter thereof made by
or on behalf of the Investors or the Company.
6.2 Successors and Assigns. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any Securities). Nothing in this Agreement, express or implied,
is intended to confer upon any party, other than the parties hereto or their
respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
6.3 Governing Law. This Agreement shall be governed by and construed
under the laws of the State of Colorado as applied to agreements among Colorado
14
<PAGE>
residents entered into and to be performed entirely within Colorado, without
giving effect to such state's conflict of laws principles.
6.4 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.5 Notices. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given: (i) upon personal delivery to the
party to be notified, (ii) when sent by confirmed facsimile if sent during
normal business hours of the recipient, if not, then on the next business day;
or (iii) one day after deposit with a nationally recognized overnight courier,
specifying next day delivery, with written verification of receipt. All
communications shall be sent to the address as set forth on the signature page
hereof or at such other address as such party may designate by ten days advance
written notice to the other parties hereto.
6.6 Finder's Fee. Each party represents that it neither is nor will be
obligated for any finders' fee or commission in connection with this
transaction. Each Investor agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finders' fee (and the costs and expenses of defending against such liability or
asserted liability) for which such Investor or any of its officers, partners,
employees or representatives is responsible. The Company agrees to indemnify and
hold harmless each Investor from any liability for any commission or
compensation in the nature of a finders' fee (and the costs and expenses of
defending against such liability or asserted liability) for which the Company or
any of its officers, employees or representatives is responsible.
6.7 Expenses. Irrespective of whether the Closing is effected, the
Company shall pay all costs and expenses that it incurs with respect to the
negotiation, execution, delivery and performance of this Agreement. If the
Closing is effected, the Company shall, at the Closing, reimburse the Investors
for all reasonable expenses of the Investors incurred in connection with the
negotiation, execution, delivery and performance of this Agreement in an amount
not to exceed $10,000. If any action at law or in equity is necessary to enforce
or interpret the terms of this Agreement, the Investors' Rights Agreement, the
Stockholders' Agreement or the Restated Certificate, the prevailing party shall
be entitled to reasonable attorney's fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
6.8 Amendments and Waivers. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively), only
with the written consent of the Company and the holders of a majority of the
Common Stock not previously sold to the public that is issued or issuable upon
conversion of the Series B Preferred Stock. Any amendment or waiver effected in
accordance with this paragraph shall be binding upon each holder of any
securities purchased under this Agreement at the time outstanding (including
securities into which such securities are convertible), each future holder of
all such securities and the Company.
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<PAGE>
6.9 Effect of Amendment or Waiver. Each Investor acknowledges that by
the operation of Section 6.8 hereof the holders of a majority of the Common
Stock not previously sold to the public that is issued or issuable upon
conversion of the Series B Preferred Stock will have the power to diminish or
eliminate all rights of such Investor under this Agreement.
6.10 Severability. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
6.11 Aggregation of Stock. All shares of the Series B Preferred Stock or
Common Stock issued upon conversion thereof held or acquired by affiliated
entities or persons shall be aggregated together for the purpose of determining
the availability of any rights under this Agreement.
6.12 Entire Agreement. This Agreement and the documents referred to
herein constitute the entire agreement among the parties and no party shall be
liable or bound to any other party in any manner by any warranties,
representations or covenants except as specifically set forth herein or therein.
6.13 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[SIGNATURE PAGE(S) TO FOLLOW]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
InFlow, Inc.
By: /s/ Art Zeile
_______________________________________
Art Zeile
President and Chief Executive Officer
Address: 1860 Lincoln Street
Suite 305
Denver, CO 80295
J.P. Morgan Investment Corporation Sixty Wall Street SBIC Fund, L.P.,
by Sixty Wall Street SBIC Corporation,
its General Partner
By: ______________________________ By: __________________________________
Its: _____________________________ Its: _________________________________
Address: 101 California Street, Address: 101 California Street,
37th Floor 37th Floor
San Francisco, CA 94111 San Francisco, CA 94111
General Electric Capital Corporation Stolberg, Meehan and Scano II, L.P.
By: /s/ Molly S. Fergusson General Partner
________________________________ Stolberg, Meehan & Scano LLC,
Molly S. Fergusson General Partner
Its: Manager of Operations By: /s/ Peter Van Genderen, Partner
________________________________
Peter Van Genderen, Partner
Address: 120 Long Ridge Road Address: Republic Plaza
Stanford, CT 06927 370 17th Street
Suite 4240
Denver, CO 80202
17
<PAGE>
Schedule A
----------
<TABLE>
<CAPTION>
Investor Number of Shares of Aggregate
- ------------------------------ Series B Preferred Purchase Price
Stock ------------------
---------------------
- -------------------------------------------------------------------------
<S> <C> <C>
J.P. Morgan Investment 1,034,483 $9,000,002.10
Corporation
- -------------------------------------------------------------------------
Sixty Wall Street SBIC Fund, 114,941 $ 999,986.70
L.P.
- -------------------------------------------------------------------------
General Electric Capital 574,713 $5,000,003.10
Corporation
- -------------------------------------------------------------------------
Stolberg, Meehan and Scano 574,713 $5,000,003.10
II, L.P.
- -------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit 10.7
SECOND AMENDED AND RESTATED
STOCKHOLDERS' AGREEMENT
SECOND AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT dated as of
November 30, 1999 by and among (i) InFlow, Inc., a Delaware corporation (the
"Company"), (ii) Art Zeile, Joel Daly and Stephen O. James, as holders of the
common stock (the "Common Stock") of the Company (the "Common Holders") and
(iii) the undersigned holders of the Series A and Series B Preferred Stock of
the Company (collectively, the "Purchasers" and each individually a
"Purchaser"). The Series A and Series B Preferred Stock shall be referred to
herein as "Preferred Shares" and the Common Stock held by the Common Holders
shall be referred to herein as "Common Shares"). This Agreement amends and
restates in its entirety the Stockholders Agreement dated as of October 28, 1999
among the Company, the Common Holders and certain of the Purchasers.
1. Definitions.
(a) Purchaser Holders. For purposes of this Agreement, the term
"Purchaser Holders" shall mean the Purchasers or persons who have acquired
shares from such Purchasers or the Purchasers' transferees or assignees in
accordance with the provisions of this Agreement.
(b) New Securities. For purposes of this Agreement, the term "New
Securities" shall mean any capital stock of the Company whether now authorized
or not, and rights, options or warrants to purchase such capital stock, and
securities of any type whatsoever that are, or may become, convertible into or
exchangeable for such capital stock; provided that the term "New Securities"
does not include (i) securities issued upon conversion of the Preferred Shares;
(ii) securities issued pursuant to the acquisition of another business entity or
business segment of any such entity by the Company by merger, purchase of
substantially all the assets or other reorganization whereby the Company will
own not less than fifty-one percent (51%) of the voting power of such business
entity or business segment of any such entity; (iii) any borrowings, direct or
indirect, from financial institutions or other persons by the Company, whether
or not presently authorized, including any type of loan or payment evidenced by
any type of debt instrument, provided such borrowings do not have any equity
features including warrants, options or other rights to purchase capital stock
and are not convertible into capital stock of the Company; (iv) securities
issued to employees, consultants, officers or directors of the Company pursuant
to any stock option, stock purchase or stock bonus plan, agreement or
arrangement approved by the Board of Directors; (v) securities issued to vendors
or customers or to other persons in similar commercial situations with the
Company if such issuance is approved by the Board of Directors; (vi) securities
issued in connection with obtaining lease financing, whether issued to a lessor,
guarantor or other person if such issuance is approved by the Board of
Directors; (vii) securities issued in a Qualified Public Offering (as defined in
Section 13 below); (viii) securities issued in connection with any stock split,
stock dividend or recapitalization of the Company; and (ix) any right, option or
warrant to acquire any security convertible into the
<PAGE>
securities excluded from the definition of New Securities pursuant to
subsections (i) through (viii) above.
(c) Equity Securities. For purposes of this Agreement, the term
"Equity Securities" shall mean any securities having voting rights in the
election of the Board of Directors or any securities evidencing an ownership
interest in the Company, or any securities convertible into or exercisable for
any shares of the foregoing, or any agreement or commitment to issue any of the
foregoing.
(d) Company Holders. For purposes of this Agreement, the term
"Company Holders" shall mean any Common Holder and any Person who acquires
shares of Common Stock pursuant to the Option Plan as a result of the exercise
of options granted thereunder after the date hereof.
(e) Person. For purposes of this Agreement, the term "Person" shall
mean any individual, firm, corporation, partnership, trust, limited liability
company, incorporated or unincorporated association, joint venture, joint stock
company or other entity of any kind.
(f) Option Plan. For purposes of this Agreement, the term "Option
Plan" shall mean the Company's 1997 Stock Option Plan, as amended.
(g) Stock. For purposes of this Agreement, the term "Stock" shall
mean the Preferred Shares and the Common Shares.
(h) Stockholder. For purposes of this Agreement, the term
"Stockholder" shall mean a Purchaser Holder or a Company Holder.
2. Transfer Restrictions; Right of First Refusal.
(a) Before any Stock (the "Offered Shares") may be sold or
transferred by any Stockholder (the "Selling Stockholder"), the Selling
Stockholder shall deliver a notice by certified mail (the "Sale Notice") to the
principal business office of the Company and to each of the Purchaser Holders
(and, if necessary in order to comply with Section 4, the other Stockholders)
stating (i) the Selling Stockholder's bona fide intention to sell or transfer
the Offered Shares, (ii) the number of such shares to be sold or transferred,
(iii) the price and terms for which the Selling Stockholder proposes to sell or
transfer the Offered Shares, and (iv) the name and address of the proposed
purchaser or transferee and that such purchaser or transferee is committed to
acquire the stated number of shares on the stated price and terms. The Company,
upon the request of the Selling Stockholder, will provide a list of the
addresses of the Purchaser Holders (and, if required in order to comply with
Section 4, the other Stockholders).
(b) In the event that the Selling Stockholder is a Common Holder (an
"RFR Holder"), the Company shall have the right at any time within twenty (20)
days of receipt of the Sale Notice (the "Company Election Period") to elect to
purchase some or all of the Offered Shares at the price per share specified in
the Sale Notice, or if no price is specified therein, at the Fair Market Value
thereof. "Fair Market Value" shall be determined by the Board
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of Directors of the Company in good faith (with at least one Series B Director
(as defined in Section 7 below) voting to approve the value so determined).
(c) If the Company desires to purchase all or any part of the Offered
Shares from the RFR Holder, the Company shall communicate in writing its
election to purchase to the RFR Holder and the Purchaser Holders, which
communication shall state the number of Offered Shares the Company desires to
purchase and shall be given to the RFR Holder and the Purchaser Holders in
accordance with the notice requirements of this Agreement prior to or
concurrently with the expiration of the Company Election Period.
(d) If the Company does not elect to purchase all of the Offered Shares
from the RFR Holder, each Purchaser Holder shall have the absolute right at any
time within ten (10) days following the expiration of the Company Election
Period (the "Purchaser Election Period") to elect to purchase, at the price per
share specified in the Sale Notice, or if no price is specified therein, at the
Fair Market Value thereof, that portion of the balance of the Offered Shares
from the RFR Holder as shall be equal to the number of such Offered Shares
multiplied by a fraction, the numerator of which shall be the number of
Preferred Shares then owned by each Purchaser Holder and the denominator of
which shall be the aggregate number of Preferred Shares then owned by all of the
Purchaser Holders. (The amount of Offered Shares that each Purchaser Holder is
entitled to purchase under this Section 2(e) shall be referred to as its "Pro
Rata Share").
(e) If any Purchaser Holder elects not to exercise its option to purchase
its Pro Rata Share of the Offered Shares from the RFR Holder, then those
Purchaser Holders that do exercise their option shall have the option, for an
additional five (5) days following the end of the Purchaser Election Period, to
elect to acquire the Offered Shares that could have been acquired by the
nonexercising Purchaser Holders in proportion to the relative number of
Preferred Shares held by the exercising Purchaser Holders.
(f) If the Company and/or the Purchaser Holders elect to purchase all or
any portion of the Offered Shares from the RFR Holder, any written communication
of an election to so purchase delivered by the Company or the Purchaser Holders
shall, when taken in conjunction with the offer, be deemed to constitute a
valid, legally binding and enforceable agreement for the sale and purchase of
the stated Offered Shares. Sales of the Offered Shares to be sold to the
Company and/or the Purchaser Holders pursuant to this Section 2 shall be made at
the offices of the Company on the 60th day following the date of the Sale Notice
(or if such 60th day is not a business day, then on the next succeeding business
day). Such sales shall be effected by the delivery to the Company of a
certificate or certificates evidencing the Offered Shares to be purchased by the
Company or the Purchaser Holders duly endorsed for transfer to such party,
against payment to the RFR Holder of the purchase price therefor by the party
purchasing such Offered Shares.
(g) If the Company and/or the Purchaser Holders do not purchase all of the
Offered Shares from the RFR Holder, then, subject to the other terms of this
Agreement all, but not less than all, of the Offered Shares not so purchased may
be sold by the RFR Holder at any time within ninety (90) days after the date of
the Sale Notice. Any such sale shall be to
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the proposed transferee specified in the Sale Notice, at not less than the price
and upon other terms and conditions, if any, not more favorable to the proposed
transferee than those specified in the offer. If the Offered Shares are not sold
within such 90-day period, the RFR Holder shall not thereafter transfer any
Offered Shares without again complying with the requirements of this Section 2.
(h) In the event that the Selling Stockholder is a Purchaser Holder,
the Company shall have the right to approve the proposed transferee(s) of the
Offered Shares, which approval shall not be unreasonably withheld (it being
understood that the Company's failure to approve a proposed transferee that the
Company believes in good faith constitutes an actual or potential competitor of
the Company shall be conclusively deemed reasonable).
(i) If Offered Shares are sold pursuant to this Section 2 to any
purchaser who is not a party to this Agreement, it shall be a condition of such
sale that the purchaser shall execute a counterpart of this Agreement and the
Offered Shares so sold shall be subject to this Agreement.
3. Preemptive Right.
(a) The Right. If the Company shall propose to issue any New
Securities, it shall first offer to sell to each Purchaser Holder a Ratable
Portion of such New Securities on the same terms and conditions and at the
lowest price as such New Securities are offered to any person. "Ratable Portion"
shall mean that portion of such New Securities equal to the fraction determined
by dividing the number of shares of Common Stock held by the Purchaser Holder
(assuming full conversion and exercise of all convertible or exercisable
securities) by the number of Common Shares then outstanding (assuming full
conversion and exercise of all convertible or exercisable securities but
excluding the New Securities so issued).
(b) Notice. The Company shall give written notice of the proposed
issuance of New Securities to each Purchaser Holder not later than thirty (30)
days prior to issuance. Such notice shall contain all material terms and
conditions of the issuance and of the New Securities. Each Purchaser Holder may
elect to exercise all or any portion of its rights under this Section 3 by
giving written notice to the Company within thirty (30) days of the Company's
notice. If the consideration paid by others for the New Securities is not cash,
the value of the consideration shall be determined in good faith by the
Company's Board of Directors (with at least one Series B Director (as defined in
Section 7 below) voting to approve the value so determined), and any electing
Purchaser Holder shall pay the cash equivalent thereof as so determined. All
payments shall be delivered by electing Purchaser Holders to the Company not
later than the date specified by the Company in its notice, but in no event
earlier than thirty-five (35) days after the Company's notice. Each Purchaser
Holder shall have a right of over allotment such that, if any other Purchaser
Holder fails to exercise the right to purchase its full Ratable Portion of the
New Securities, the other participating Purchaser Holders may, before the date
ten (10) days following the expiration of the thirty (30) day period, set forth
above, exercise an additional right to purchase, on a pro rata basis, the New
Securities not previously purchased by so notifying the Company, in writing,
within such ten (10) day period. Each Purchaser Holder shall be entitled to
apportion New Securities to be purchased among its
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partners and affiliates (which, in the case of First Union Capital Partners,
Inc., shall be deemed to include First Union Corporation or any Person directly
or indirectly controlling, controlled by or under common control with First
Union Corporation and, in the case of Meritage Private Equity Fund, L.P. shall
include Meritage Investment Partners, LLC and any entity controlling, controlled
by or under common control with such Person), provided that such Purchaser
Holder notifies the Company of such allocation.
4. Right of Co-Sale.
(a) The Right. If at any time a Selling Stockholder proposes to
sell any shares of Stock to any third party in a transaction involving the sale
of more than five percent (5%) of the then-outstanding Common Stock determined
on an as-converted basis (a "Co-Sale Transaction"), then the Sale Notice
required by Section 2 shall be delivered to all Stockholders. In the event that,
after giving effect to all purchases of such Stock by the Company and the
Purchaser Holders pursuant to Section 2, the amount of Stock to be sold to such
third party continues to represent at least five percent (5%) of the then-
outstanding Common Stock on an as-converted basis, then each Stockholder which
notifies the Selling Stockholder in writing within 30 days following receipt of
the Sale Notice (a "Co-Seller") shall have the opportunity to sell a pro rata
portion of the remaining Stock which the Selling Stockholder proposes to sell to
such third party in the Co-Sale Transaction. In the event a Co-Seller exercises
its right of co-sale hereunder, the Selling Stockholder shall assign so much of
his interest in the proposed agreement of sale as the Co-Seller shall be
entitled to and shall request hereunder, and the Co-Seller shall assume such
part of the obligations of the Selling Stockholder under such agreement as shall
relate to the sale of the securities by the Co-Seller. For the purposes of this
Section 4, the "pro rata portion" which each Co-Seller shall be entitled to sell
shall be an amount of Stock equal to a fraction of the total amount of Stock
proposed to be sold to such third party (after giving effect to all purchases
pursuant to Section 2), the numerator of which shall be the number of shares of
Stock owned by such Co-Seller and the denominator of which shall be the total
number of shares of Stock then held by the Selling Stockholder and all Co-
Sellers (giving effect in each case to the conversion of all Preferred Shares
into Common Stock). Insofar as possible this right of co-sale shall apply to
Stock of the same class or classes as the Stock subject to the Sale Notice. If
any Person desiring to exercise its rights of co-sale hereunder does not have a
sufficient amount of Stock of the same class as the Stock subject to the Sale
Notice, such Person may substitute Stock of another class so long as such class
ranks senior in liquidation to the class of Stock subject to the Sale Notice. In
the event the proposed Transfer is of Common Stock and a Person wishing to
exercise its rights of co-sale hereunder does not have sufficient shares of
Common Stock, but has Preferred Shares, such Person may convert a sufficient
number of Preferred Shares into Common Stock in accordance with the procedures
set forth in the Certificate of Incorporation, as amended.
(b) Failure to Notify. If withinthirty (30) days following
receipt of the Sale Notice, any Stockholder fails to notify the Selling
Stockholder that it desires to participate in the Co-Sale Transaction, then the
Selling Stockholder may effect the Co-Sale Transaction within a period of ninety
(90) days after the date of the Sale Notice without the participation of such
Stockholder. Any such sale shall be made only to persons identified in the Sale
Notice and at the same price and upon the same terms and conditions as those set
forth in the Sale Notice.
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In the event the Selling Stockholder has not sold the Stock or entered
into an agreement to sell the Stock within such ninety (90) day period, the
Selling Stockholder shall not thereafter sell any Equity Securities without
again complying with Section 2 and this Section 4.
(c) Prohibited Transfers. In the event that a Selling Stockholder
should sell any Stock in contravention of the co-sale rights under this
Agreement (a "Prohibited Transfer"), each holder of such co-sale rights, in
addition to such other remedies as may be available at law, in equity or
hereunder, shall have the put option provided below, and such Selling
Stockholder shall be bound by the applicable provisions of such option. In the
event of a Prohibited Transfer, each holder of co-sale rights shall have the
right to sell to such Selling Stockholder the type and number of shares of Stock
equal to the number of shares each holder of co-sale rights would have been
entitled to transfer to the purchaser under Section 4(b) hereof had the
Prohibited Transfer been effected pursuant to and in compliance with the terms
hereof. Such sale shall be made on the following terms and conditions:
(i) The price per share at which the shares are to be sold to the
Selling Stockholder shall be equal to the price per share paid by the
purchaser to such Selling Stockholder in such Prohibited Transfer. The
Selling Stockholder shall also reimburse each co-sale rights holder for
any and all fees and expenses, including legal fees and expenses,
incurred pursuant to the exercise or the attempted exercise of the
rights under Section 4.
(ii) Within ninety (90) days after the date on which a holder of
co-sale rights received notice of the Prohibited Transfer or otherwise
became aware of the Prohibited Transfer, such Person shall, if
exercising the option created hereby, deliver to the Selling
Stockholder the certificate or certificates representing shares to be
sold, each certificate to be properly endorsed for transfer.
(iii) Such Selling Stockholder shall, upon receipt of the
certificate or certificate for the shares to be sold by a co-sale
rights holder pursuant to this Section 4(e), pay the aggregate purchase
price therefor and the amount of reimbursable fees and expenses, as
specified in Section 4(e)(i), in cash or by other means acceptable to
the co-sale rights holder.
5. Limitations to Rights of First Refusal and Co-Sale. Notwithstanding
the provisions of Sections 2 and 4 of this Agreement, each Purchaser Holder may
sell or otherwise assign, with or without consideration, an unlimited amount of
Stock to any spouse or member of his immediate family, or to a custodian,
trustee (including a trustee of a voting trust), executor or other fiduciary for
the account of his spouse or members of his immediate family, or to a trust for
himself, or to a charitable remainder trust or, in the case of First Union
Capital Partners, Inc., to First Union Corporation or any Person directly or
indirectly controlling, controlled by or under common control with First Union
Corporation or, in the case of Meritage Private Equity Fund, L.P., to Meritage
Investment Partners, LLC and any Person controlling, controlled by or under
common control with such Person or any of their respective partners or, in the
case of J.P.
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Morgan Investment Corporation or Sixty Wall Street SBIC Fund, L.P., to J.P.
Morgan & Co. Incorporated and any Person controlling, controlled by or under
common control with J.P. Morgan & Co. Incorporated or, in the case of General
Electric Capital Corporation, to General Electric Corporation and any Person
controlling, controlled by or under common control with General Electric
Corporation or, in the case of Stolberg, Meehan & Scano II, L.P., to Stolberg,
Meehan & Scano LLC and any Person controlling, controlled by or under common
control with Stolberg, Meehan & Scano LLC; provided that each such transferee or
assignee, prior to the completion of the sale, transfer or assignment shall have
executed documents assuming the obligations of the Purchaser Holder under this
Agreement with respect to the transferred securities. Notwithstanding the
provisions of Section 4 of this Agreement, each of Art Zeile and Joel Daly may
sell his Common Shares without the participation of any Co-Seller following the
termination of his employment with the Company, other than for Cause, or
following a material reduction in his (i) duties and responsibilities or (ii)
compensation, unless agreed to by such Common Holder or required by law, or a
material change in his responsibilities which are not agreed to by such Common
Holder. As used herein, "Cause" shall mean a termination for any of the
following reasons: (i) engaging in intentional misconduct which would tend to
discredit the Company; (ii) being convicted of a felony; (iii) committing an act
of fraud against the Company or the willful material misappropriation of
property belonging to the Company; (iv) materially breaching any proprietary
information agreement between such Common Holder and the Company or (v)
willfully disregarding such Common Holder's duties despite adequate warnings
from the Board.
6. Drag-Along Rights. If holders of at least seventy-five percent
(75%) of the then outstanding Preferred Shares approve a transaction to sell, or
in any other way, directly or indirectly convey, assign, distribute, pledge,
encumber or otherwise dispose of all or substantially all of the Company's
assets, property or business or merge into or consolidate with any other
corporation (other than a wholly-owned subsidiary of the Company) or effect any
transaction or series of related transactions in which more than fifty percent
(50%) of the voting power of the Company is disposed of (collectively, a "Drag-
Along Transaction"), then, upon thirty (30) days written notice to the other
Stockholders and the Company (the "Drag-Along Notice"), which notice shall
include reasonable details of the proposed transaction, including the proposed
time and place of closing and the consideration to be received by the
Stockholders in such transaction, each Stockholder shall be obligated to, and
shall sell, transfer and deliver, or cause to be sold, transferred and
delivered, to such third party, all of his Equity Securities in the same
transaction at the closing thereof (and will deliver certificates for all of his
shares at the closing, free and clear of all liens, claims, or encumbrances
except those arising under this Agreement and the Amended and Restated
Investors' Rights Agreement of even date herewith). Each Common Holder shall
receive the same consideration per share on an as-converted to Common Stock
basis upon consummation of the Drag-Along Transaction as is received by the
holders of Preferred Shares after giving effect to any liquidation preference to
which any Person is entitled to pursuant to the Company's Certificate of
Incorporation, as amended; provided, however, that if within thirty (30) days of
receipt of the Drag-Along Notice, the Company irrevocably commits in writing to
use its best efforts to complete a firm commitment underwritten public offering
pursuant to an effective registration statement under the Securities Act
covering the offer and sale of the Company's Common Stock at a price per share
of not less than the price per share which the holders of the Equity Securities
(on an as-converted to
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Common Stock basis) would receive upon the consummation of the Drag-Along
Transaction (a "Qualified IPO"), then the closing of the Drag-Along Transaction
shall be suspended until the earlier of (i) one hundred twenty (120) days after
the Company so commits or (ii) the date the Company determines that it will be
unable to complete the Qualified IPO within such 120-day period.
7. Board of Directors.
(a) Composition. The Stockholders agree that, in any election of
directors of the Company (or action by written consent in lieu thereof), they
shall vote all shares of capital stock of the Company owned or controlled by
them (or act by written consent) to elect a Board of Directors comprised of
seven members designated as follows:
(i) two directors (the "Common Directors"), each of whom shall
be an executive officer of the Company designated by the holders of a
majority of the then-outstanding Common Stock (currently Art Zeile and
Joel Daly);
(ii) one director (the "Series A Director") designated by the
holders of a majority of the then-outstanding Series A Preferred Stock
(currently L. Watts Hamrick) so long as at least 1,650,000 shares of
Series A Preferred Stock remain outstanding;
(iii) two directors (the "Series B Directors") designated by the
holders of a majority of the then-outstanding Series B Preferred
Stock, of which one member shall be designated by First Union Capital
Partners, Inc. (initially Scott Perper) and one member shall be
designated by Meritage Private Equity Fund, L.P. (initially G. Jackson
Tankersley, Jr.), in each case so long as such Stockholder and its
affiliates continues to hold at least 1,149,851 shares of Series B
Preferred Stock; and
(iv) two independent directors (the "Outside Directors")
selected by the holders of a majority of the then-outstanding Common
Stock and approved by the holders of a majority of the then-
outstanding Series A and Series B Preferred Stock (currently Stephen
O. James and a director to be determined).
The obligation to vote shares in accordance with this Section 7 shall be
specifically applicable to and enforceable against any transferees of the
parties hereto.
(b) Vacancies; Removal. In the event of any vacancy in the Board of
Directors, each of the Stockholders agree to vote all shares of stock owned or
controlled by them and to otherwise use their best efforts to fill such vacancy
so that the Board of Directors of the Company will include directors designated
as provided in Section 7(a) above. Each of the Stockholders agrees to vote all
shares of stock owned by them for the removal of a director whenever (but only
whenever) there shall be presented to the Board of Directors the written
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direction that such director be removed executed by the person or persons
entitled to designate such director pursuant to Section 7(a).
(c) Meetings. The Board of Directors shall hold regularly scheduled
meetings as determined by a majority of the Board of Directors. The Company
will give each Director written notice at least three (3) days (24 hours, in the
case of a telephone meeting) in advance of all meetings of the Board of
Directors and all meetings of committees of the Board of Directors. If the
Company proposes to take any action by written consent in lieu of a meeting of
its Board of Directors or any committee thereof, the Company shall give written
notice thereof to each such Director prior to the effective date of such consent
describing in reasonable detail the nature and the substance of such action.
(d) Expenses and Insurance. The Company shall reimburse all persons
serving as directors, consistent with the Company's policies for such
reimbursement, if any, for their actual and reasonable out-of-pocket expenses
incurred in attending meetings of the Board of Directors and all committees
thereof. In addition, the Company shall maintain directors' and officers'
liability insurance from reputable insurers of sound financial standing in such
amounts as shall be reasonably requested by the Board of Directors.
(e) Compensation Committee of the Board of Directors. The Board of
Directors shall establish a compensation committee (the "Compensation
Committee") to which it shall delegate the authority to take all actions with
respect to the Option Plan. The Compensation Committee shall consist of four
members, one of which shall be a Common Director who is also an officer of the
Company (which person shall be a non-voting member), two of which shall be the
Series B Directors and one of which shall be an Outside Director.
8. Legend. Each existing or replacement certificate for shares
now owned by the Purchasers and Company Holders shall bear the following legend
upon its face:
"THE OWNERSHIP, VOTING, TRANSFER, ENCUMBRANCE, PLEDGE, ASSIGNMENT OR
OTHER DISPOSITION OF THIS CERTIFICATE AND THE SHARES OF STOCK
REPRESENTED THEREBY, ARE SUBJECT TO THE RESTRICTIONS CONTAINED IN A
STOCKHOLDERS' AGREEMENT AMONG THE COMPANY AND CERTAIN STOCKHOLDERS.
COPIES OF THE AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE
SECRETARY OF THE COMPANY."
9. Public Offering. In the event that the Board of Directors of the
Company approves an initial public offering of the Common Stock of the Company,
each of the Company Holders shall take all necessary or desirable actions in
connection with the consummation of the initial public offering. In the event
that such public offering is an underwritten offering and the managing
underwriters advise the Company in writing that in their opinion the current
capital structure may adversely affect the marketability of the offering, each
of the Company Holders
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shall consent to and vote for a recapitalization, reorganization and/or exchange
of the Company's capital stock into securities that the managing underwriters
and the Board of Directors find acceptable and shall take all necessary or
desirable actions in connection with the consummation of the recapitalization,
reorganization and/or exchange; provided that the resulting securities reflect
and are consistent with the rights and preferences set forth in the Company's
Certificate of Incorporation as in effect immediately prior to such public
offering.
10. "Market Stand-Off" Agreement. Each Company Holder hereby agrees
that, during the period of duration (not to exceed one-hundred eighty (180) days
in the case of the Company's initial public offering or 90 days in any
subsequent registration) specified by the Company and an underwriter of Common
Stock or other securities of the Company following the effective date of the
Company's registration statement in connection with its initial firm-commitment
underwritten offering of Common Stock or other securities to the general public,
it shall not, to the extent requested by the Company or such underwriter,
directly or indirectly sell, offer to sell, contract to sell (including, without
limitation, any short sale), grant any option to purchase or otherwise transfer
or dispose of (other than to donees who agree to be similarly bound) any
securities of the Company held by it, except Common Stock or other securities
included in such registration. In order to enforce the foregoing covenant, the
Company may impose stop-transfer instructions with respect to such securities of
each Company Holder (and the shares or securities of every other person subject
to the foregoing restriction) until the end of such period. This covenant shall
survive termination of this Agreement pursuant to Section 13.
11. Notices. All notices, demands or other communications to be
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally
to the recipient, sent to the recipient by reputable overnight courier service
(charges prepaid), or transmitted by facsimile or electronic mail (with request
for immediate confirmation of receipt in a manner customary for communications
of such type and with physical delivery of the communication being made by one
of the other means specified in this Section as promptly as practicable
thereafter). Such notices, demands and other communications shall be addressed
(i) in the case of a Stockholder, to his or its address as is designated in
writing from time to time by such party, (ii) in the case of the Company, to its
principal office, and (iii) in the case of any transferee of a party to this
Agreement or its transferee, to such transferee at its address as designated in
writing by such transferee to the Company from time to time.
12. Assignment of Rights. This Agreement and the rights and
obligations of the parties hereunder shall inure to the benefit of, and be
binding upon, the parties' respective successors, assigns and legal
representatives; provided, however, that the rights of the Stockholders
hereunder are only assignable to an assignee or transferee (i) who acquires all
of the securities of the Company held by the transferring Stockholder on the
date hereof or, if less than all, securities representing at least fifty percent
(50%) of the securities of the Company held by such transferring Stockholder as
of the date of this Agreement, or (ii) or to a transferee described in the first
sentence of Section 5, and it shall be a requirement of such transfer that such
assignee shall then become a party to this Agreement.
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13. Term. This Agreement shall terminate upon the earlier of (i) the
closing of a firm commitment underwritten public offering pursuant to an
effective registration statement under the Securities Act covering the offer and
sale of the Company's Common Stock (x) at a price per share of not less than
$26.00 (as adjusted for stock splits, reverse stock splits and the like effected
after the date of this Agreement), (y) resulting in gross proceeds to the
Company of not less than $50,000,000, and (z) after which the Common Stock is
either listed on a national securities exchange or traded in the NASDAQ National
Market System (a "Qualified Public Offering"); (ii) ten years from the date of
this Agreement; (iii) the acquisition of the Company by another entity by means
of any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation) that results in the
Company's stockholders immediately prior to such transaction not holding (by
virtue of such shares or securities issued solely with respect thereto) at least
50% of the voting power of the surviving or continuing entity; (iv) a sale,
conveyance or disposition of all or substantially all of the assets of the
Company unless the Company's stockholders immediately prior to such transaction
will, as a result of such sale, conveyance or disposition hold (by virtue of
securities issued as consideration for such sale, conveyance or disposition) at
least 50% of the voting power of the purchasing entity; or (v) the effectuation
by the Company or its stockholders of a transaction or series of related
transactions that results in the Company's stockholders immediately prior to
such transaction not holding (by virtue of such shares or securities issued
solely with respect thereto) at least 50% of the voting power of the Company.
14. Entire Agreement. This instrument contains the entire
understanding of the parties with respect to the subject matter hereof,
supersedes all other agreements between or among any of the parties with respect
to the subject matter hereof and cannot be altered or otherwise amended except
pursuant the terms of Section 17 below. This Agreement shall be interpreted
under the laws of the State of Colorado without reference to its principles of
conflicts of law.
15. Attorneys' Fees. If any action at law or in equity is necessary
to enforce or interpret the terms of this Agreement, the prevailing party shall
be entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
16. Further Instruments and Actions. The parties agree to execute
such further instruments and to take such further action as may reasonably be
necessary to carry out the intent of this Agreement. The parties further agree
to cooperate affirmatively with the Company, to the extent reasonably requested
by the Company to enforce rights and obligations to this Agreement.
17. Amendments and Waivers. Any term of this Agreement may be
amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of at least seventy-five percent (75%) of the outstanding
Preferred Shares; provided, however, that any amendment or waiver adversely
affecting the rights of the persons holding Common Shares and not similarly
adversely affecting the rights of holders of Preferred Shares shall require the
written consent of a majority in interest of the outstanding Common Shares. Any
amendment or waiver effected in
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accordance with this Section shall be binding upon the Company and all
Stockholders and their respective successors and assigns.
18. Rights; Separability. Unless otherwise expressly provided
herein, a Company Holder's rights hereunder are several rights, not rights
jointly held with any other Company Holder. In case any provision of this
Agreement shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
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IN WITNESS WHEREOF, this Agreement has been duly executed effective as
of the date and year first above written.
INFLOW, INC.
By: /s/ Art Zeile
___________________________________
Art Zeile
President and Chief Executive Officer
Address: 1860 Lincoln Street
Suite 305
Denver, CO 80295
PURCHASERS:
MERITAGE PRIVATE EQUITY FUND, L.P.
MERITAGE PRIVATE EQUITY PARALLEL FUND, L.P.
MERITAGE ENTREPRENEURS FUND, L.P.
By Meritage Investment Partners, LLC
General Partner
By: /s/ G. Jackson Tankersley, Jr.
___________________________________
G. Jackson Tankersley, Jr.
Managing Member
Address: 1600 Wynkoop Street
Suite 300
Denver, CO 80202
FIRST UNION CAPITAL PARTNERS, INC.
By: /s/ L. Watts Hamrick III
___________________________________
L. Watts Hamrick III
Senior Vice President
Address: 301 South College Street
Charlotte, NC 28288-0732
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SIXTY WALL STREET SBIC FUND, L.P.,
by Sixty Wall Street SBIC Corporation, its General
Partner
By: __________________________________
Its: __________________________________
Address: 101 California Street, 37th Floor
San Francisco, CA 94111
J.P. MORGAN INVESTMENT CORPORATION
By: __________________________________
Its: __________________________________
Address: 101 California Street, 37th Floor
San Francisco, CA 94111
GENERAL ELECTRIC CAPITAL CORPORATION
By: /s/ Molly S. Fergusson
___________________________________
Molly S. Fergusson
Manager of Operations
Address: 120 Long Ridge Road
Stanford, CT 06927
STOLBERG, MEEHAN AND SCANO II, L.P.
Stolberg, Meehan & Scano LLC,
General Partner
By: /s/ Peter Van Genderen
____________________________________
Peter Van Genderen, Partner
Address: Republic Plaza
370 17th Street
Suite 4240
Denver, CO 80202
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/s/ Art Zeile
--------------------------------------
Art Zeile
/s/ Joel Daly
--------------------------------------
Joel Daly
COMMON HOLDERS:
/s/ Art Zeile
--------------------------------------
Art Zeile
/s/ Joel Daly
--------------------------------------
Joel Daly
/s/ Stephen O. James
--------------------------------------
Stephen O. James
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INVESTORS' RIGHTS AGREEMENT
COUNTERPART AND ACKNOWLEDGEMENT
-------------------------------
TO: INFLOW, INC.
RE: Amended and Restated Investors' Rights Agreement dated as of October 28,
1999 by and among InFlow, Inc. and certain other persons set forth therein
(as amended, the "Agreement")
The undersigned hereby agrees to be bound by the terms of the Agreement,
and shall be entitled to all benefits of an "Investor" (as defined in the
Agreement and as modified herein) pursuant to the Agreement, as fully and
effectively as through the undersigned had executed a counterpart of the
Agreement together with the other parties to the Agreement. The undersigned
hereby acknowledges having received and reviewed a copy of the Agreement.
IN WITNESS WHEREOF, the parties have executed this Counterpart and
Acknowledgement as of December ___, 1999.
INVESTOR:
DALY INFLOW TRUST
/s/ John James Daly
---------------------------------------
John James Daly, Trustee
Address:
-------------------------------------
-------------------------------------
-------------------------------------
AGREED TO AND ACKNOWLEDGED:
INFLOW, INC.
By: /s/ Art Zeile
------------------------------------------------
Art Zeile, President and Chief Executive Officer
By: /s/ Joel Daly
------------------------------------------------
Joel Daly, Chief Operating Officer and Secretary
Address: 938 Bannock Street
Denver, CO 80204
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INVESTORS' RIGHTS AGREEMENT
COUNTERPART AND ACKNOWLEDGEMENT
TO: InFlow, Inc.
RE: Amended and Restated Investors' Rights Agreement dated as of October 28,
1999 by and among InFlow, Inc. and certain other persons set forth therein
(as amended, the "Agreement")
The undersigned hereby agrees to be bound by the terms of the Agreement,
and shall be entitled to all benefits of an "Investor" (as defined in the
Agreement and as modified herein) pursuant to the Agreement, as fully and
effectively as through the undersigned had executed a counterpart of the
Agreement together with the other parties to the Agreement. The undersigned
hereby acknowledges having received and reviewed a copy of the Agreement.
IN WITNESS WHEREOF, the parties have executed this Counterpart and
Acknowledgement as of December ___, 1999.
INVESTOR:
ZEILE INFLOW TRUST
/s/ Ivar Zeile
---------------------------------------
Ivar Zeile, Trustee
Address:
-------------------------------------
-------------------------------------
-------------------------------------
AGREED TO AND ACKNOWLEDGED:
INFLOW, INC.
By: /s/ Art Zeile
------------------------------------------------
Art Zeile, President and Chief Executive Officer
By: /s/ Joel Daly
------------------------------------------------
Joel Daly, Chief Operating Officer and Secretary
Address: 938 Bannock Street
Denver, CO 80204
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Exhibit 10.8
SECOND AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
SECOND AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT dated as of
November 30, 1999 (the "Agreement") by and among (i) InFlow, Inc., a Delaware
corporation (the "Company"), and (ii) the investors listed on the signature
pages attached hereto, each of which is herein referred to as an "Investor."
The Amended and Restated Investors' Rights Agreement dated October 28, 1999
between the Company and certain of the Investors is hereby amended and restated
in its entirety.
1. Registration Rights.
The Company covenants and agrees as follows:
1.1 Definitions.
-----------
For purposes of this Section 1:
(a) The term "Act" means the Securities Act of 1933, as amended.
(b) The term "Form S-3" means such form under the Act as in effect on
the date hereof or any registration form under the Act subsequently adopted by
the SEC which permits inclusion or incorporation of substantial information by
reference to other documents filed by the Company with the SEC.
(c) The term "Holder" means any person owning or having the right to
acquire Registrable Securities or any assignee thereof in accordance with
Section 1.13 hereof.
(d) The term "Initiating Holders" means one or more holders of
Registrable Securities representing, in the case of a registration other than a
registration on Form S-3, not less than 25% of the Registrable Securities then
outstanding and, in the case of a registration on Form S-3, not less than 10% of
the Registrable Securities then outstanding.
(e) The term "1934 Act" shall mean the Securities Exchange Act of
1934, as amended.
(f) The term "Person" shall mean a natural person, partnership,
limited liability company, corporation, trust, or unincorporated organization or
association, company, firm, joint venture or other business entity, or a
government or governmental agency or instrumentality or political subdivision
thereof.
(g) The term "Preferred Stock" shall mean, collectively, the Company's
Series A Preferred Stock, $.001 par value, and Series B Preferred Stock, $.001
par value.
(h) The term "register", "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with
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the Act, and the declaration or ordering of effectiveness of such registration
statement or document.
(i) The term "Registrable Securities" means (i) the shares of the
Company's Common Stock, $.001 par value ("Common Stock"), issuable or issued
upon conversion of the Preferred Stock, (ii) the 3,060,000 shares of Common
Stock (the "Management Stock") issued to Art Zeile, Joel Daly and Stephen James;
provided, however, that such shares of Management Stock shall not be deemed
Registrable Securities and such Persons shall not be deemed Holders for the
purposes of Section 1.2, 1.3 and 3.7 hereof or for purposes of the definition of
Initiating Holders, and (iii) any Common Stock issued as (or issuable upon the
conversion or exercise of any warrant, right or other security which is issued
as) a dividend or other distribution with respect to, or in exchange for or in
replacement of the shares referenced in (i) and (ii) above, excluding in all
cases, however, any Registrable Securities sold by a person in a transaction in
which his rights under this Section 1 are not assigned.
(j) The number of shares of "Registrable Securities then outstanding"
shall be determined by the number of shares of Common Stock outstanding which
are, and the number of shares of Common Stock issuable pursuant to then
exercisable or convertible securities (including the Preferred Stock) which are,
Registrable Securities.
(k) The term "SEC" shall mean the Securities and Exchange Commission.
1.2 Request for Registration.
------------------------
(a) If the Company shall receive at any time after the earlier of (i)
April 1, 2006 or (ii) six (6) months after the effective date of the first
registration statement for a public offering of securities of the Company (other
than a registration statement relating either to the sale of securities to
employees of the Company pursuant to a stock option, stock purchase or similar
plan or a SEC Rule 145 transaction), a written request from the Initiating
Holders that the Company file a registration statement under the Act covering
the registration of at least twenty percent (20%) of the Registrable Securities
then outstanding (or a lesser percentage if the anticipated aggregate offering
price, net of underwriting discounts and commissions, would exceed $10,000,000)
then the Company shall:
(i) within ten (10) days of the receipt thereof, give written
notice of such request to all Holders; and
(ii) file as soon as practicable, and in any event within 60 days
of the receipt of such request, a registration statement in form and
scope sufficient to permit under the Act and any other applicable law
and regulations the disposition of all Registrable Securities which
the Holders request to be registered in accordance with the method or
methods of distribution specified in such request, subject to the
limitations of Section 1.2(b), within twenty (20) days of the mailing
of such notice by the Company in accordance with Section 3.5.
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(b) If the Initiating Holders intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall so
advise the Company as a part of their request made pursuant to Section 1.2(a)
and the Company shall include such information in the written notice referred to
in Section 1.2(a). The underwriter will be selected by a majority in interest
of the Initiating Holders and shall be reasonably acceptable to the Company. In
such event, the right of any Holder to include Registrable Securities in such
registration shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting (unless otherwise mutually agreed by a majority in interest of the
Initiating Holders and such Holder) to the extent provided herein. All Holders
proposing to distribute their securities through such underwriting shall
(together with the Company as provided in Section 1.4(e)) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting. Notwithstanding any other provision of this
Section 1.2, if the underwriter advises the Initiating Holders in writing that
in its good faith view marketing factors require a limitation of the number of
shares to be underwritten, then the Company shall so advise all Holders of
Registrable Securities which would otherwise be underwritten pursuant hereto,
and the Company will exclude from such registration (i) first, securities held
by any Person who does not have any contractual rights to cause the Company to
register such securities, (ii) second, securities held by any Person with such
contractual rights other than those granted in this Agreement and (iii) third,
shares held by all Holders, including the Initiating Holders, of Registrable
Securities with such contractual rights granted in this Agreement, pro rata
among the Holders of such shares on the basis of the respective numbers of
shares of Common Stock requested to be included in such registration. If at
least eighty percent (80%) of the Registrable Securities requested to be
registered by the Initiating Holders are not included in such registration, then
the Initiating Holders may request that the Company effect an additional
registration under the Securities Act of all or part of the Initiating Holders'
Registrable Securities in accordance with the provisions of this Section 1.2,
and the Company shall effect such additional registration at its sole expense.
(c) Notwithstanding the foregoing, if the Company shall furnish to
Holders requesting a registration statement pursuant to this Section 1.2, a
certificate signed by the Chief Executive Officer of the Company stating that in
the good faith judgment of the Board of Directors of the Company, it would
(because of the existence of, or in anticipation of, any acquisition, financing
activity, or other transaction involving the Company, or the unavailability for
reasons beyond the Company's control of any required financial statements,
disclosure of information which is in its best interest not to publicly
disclose, or any other event or condition of similar significance to the
Company) be seriously detrimental to the Company and its stockholders for such
registration statement to be filed and it is therefore essential to defer the
filing of such registration statement, the Company shall have the right to defer
taking action with respect to such filing for a period of not more than 90 days
after receipt of the request of the Initiating Holders; provided, however, that
the Company may not utilize this right more than once in any twelve-month
period.
(d) A demand registration requested pursuant to this Section 1.2 shall
not be deemed to have been effected unless the registration statement relating
thereto (i) has become effective under the Act and any of the Registrable
Securities of the Initiating Holders included in such registration have actually
been sold thereunder, and (ii) has remained effective for a period
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of at least 120 days (or such shorter period in which all Registrable Securities
included in such registration have actually been sold thereunder); provided that
if after any registration statement requested pursuant to this Section 1.2
becomes effective (i) such registration statement is interfered with by any stop
order, injunction or other order or requirement of the Commission or other
governmental agency or court solely due to the actions or omissions to act of
the Company and (ii) less than fifty percent (50%) of the Registrable Securities
included in such registration have been sold thereunder, such registration
statement shall not be included as a registration which may be requested
pursuant to this Section 1.2 and shall be at the sole expense of the Company.
(e) In addition, the Company shall not be obligated to effect, or to
take any action to effect, any registration pursuant to this Section 1.2:
(i) After the Company has effected four registrations pursuant to
this Section 1.2 and such registrations have been declared or ordered
effective and have remained effective for at least 120 consecutive
days; or
(ii) During the period starting with the date 90 days prior to
the Company's good faith estimate of the date of filing of, and ending
on a date 180 days after the effective date of, a Company-initiated
registration statement in connection with a bona fide firm commitment
underwritten registration for securities to be offered for the
Company's own account (the "Intended Registration") ; provided that
the Company is actively employing in good faith all reasonable efforts
to cause the Intended Registration to become effective and provided
further that the Company gives notice to all Holders upon commencement
of such period. The Holders shall be entitled to exercise their
rights pursuant to Section 1.4 hereof with respect to an Intended
Registration. An Intended Registration shall not be deemed to be a
demand registration of the Holders pursuant to this Section 1.2.
1.3 S-3 Registration.
----------------
In case the Company shall receive from the Initiating Holders a written
request or requests that the Company effect a registration on Form S-3 and any
related qualification or compliance with respect to all or a part of the
Registrable Securities owned by such Holders, the Company will:
(a) promptly give written notice of the proposed registration, and any
related qualification or compliance, to all other Holders; and
(b) as soon as practicable, and in any event within 30 days of the
receipt of such notice, file a registration statement on Form S-3, or a post-
effective amendment thereto and effect all other qualifications and compliances
as may be so requested and as would permit or facilitate the sale and
distribution (through market transactions using brokers, in a firm commitment
underwriting, in negotiated transactions or otherwise) of all or such portion of
such Holder's or Holders' Registrable Securities as are specified in such
request, together with all or such portion of the Registrable Securities of any
other Holder or Holders joining in such request as are specified in a written
request given within 15 days after receipt of such written notice from
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the Company; provided, however, that the Company shall not be obligated to
effect any such registration, qualification or compliance, pursuant to this
Section 1.3: (i) if Form S-3 is not available for such offering by the Holders;
(ii) if the Holders, together with the holders of any other securities of the
Company entitled to inclusion in such registration, propose to sell Registrable
Securities and such other securities (if any) at an aggregate price to the
public (net of any underwriters' discounts or commissions) of less than
$2,500,000; (iii) if the Company shall furnish to the Holders a certificate
signed by the President of the Company stating that in the good faith judgment
of the Board of Directors of the Company, it would be (because of the existence
of, or in anticipation of, any acquisition, financing activity, or other
transaction involving the Company, or the unavailability for reasons beyond the
Company's control of any required financial statements, disclosure of
information which is in its best interest not to publicly disclose, or any other
event or condition of similar significance to the Company) seriously detrimental
to the Company and its shareholders for such Form S-3 Registration to be
effected at such time, in which event the Company shall have the right to defer
the filing of the Form S-3 registration statement for a period of not more than
60 days after receipt of the request of the Holder or Holders under this Section
1.3; provided, however, that the Company shall not utilize this right more than
once in any twelve month period; (iv) if the Company has, within the twelve (12)
month period preceding the date of such request, already effected two
registrations on Form S-3 for the Holders pursuant to this Section 1.3; or (v)
in any particular jurisdiction in which the Company would be required to qualify
to do business or to execute a general consent to service of process in
effecting such registration, qualification or compliance.
(c) Subject to the foregoing, the Company shall file a registration
statement covering the Registrable Securities and other securities so requested
to be registered as soon as practicable after receipt of the request or requests
of the Holders and shall keep it continuously effective for a period of not less
than 120 days or, if shorter, until such Registrable Securities have been sold
pursuant thereto.
1.4 Company Registration.
--------------------
If (but without any obligation to do so) the Company proposes to register
(including for this purpose a registration effected by the Company for
stockholders other than the Holders) any of its stock or other securities under
the Act in connection with the public offering of such securities solely for
cash (other than a registration relating solely to the sale of securities to
participants in a Company stock plan, a registration on any form which does not
include substantially the same information as would be required to be included
in a registration statement covering the sale of the Registrable Securities or a
registration in which the only Common Stock being registered is Common Stock
issuable upon conversion of debt securities which are also being registered),
the Company shall, at such time, promptly give each Holder written notice of
such registration. Upon the written request of each Holder given within twenty
(20) days after mailing of such notice by the Company in accordance with Section
3.5, the Company shall, subject to the provisions of Section 1.9, cause to be
registered under the Act all of the Registrable Securities that each such Holder
has requested to be registered. Notwithstanding the foregoing, the Company has
no obligation to register any shares pursuant to this Section 1.4 and may
withdraw any such registration at any time.
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1.5 Obligations of the Company.
--------------------------
Whenever required under this Section 1 to effect the registration of any
Registrable Securities, the Company shall, as expeditiously as reasonably
possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of a majority of the Registrable Securities registered thereunder, keep such
registration statement effective for a period of up to one hundred twenty (120)
days or until the distribution contemplated in the Registration Statement has
been completed; provided, however, that (i) such 120-day period shall be
extended for a period of time equal to the period the Holder refrains from
selling any securities included in such registration at the request of an
underwriter of Common Stock (or other securities) of the Company; and (ii) in
the case of any registration of Registrable Securities on Form S-3 which are
intended to be offered on a continuous or delayed basis, such 120-day period
shall be extended, if necessary, to keep the registration statement effective
until all such Registrable Securities are sold, provided that Rule 415, or any
successor rule under the Act, permits an offering on a continuous or delayed
basis, and provided further that applicable rules under the Act governing the
obligation to file a post-effective amendment permit, in lieu of filing a post-
effective amendment which (I) includes any prospectus required by Section
10(a)(3) of the Act or (II) reflects facts or events representing a material or
fundamental change in the information set forth in the registration statement,
the incorporation by reference of information required to be included in (I) and
(II) above to be contained in periodic reports filed pursuant to Section 13 or
15(d) of the 1934 Act in the registration statement.
(b) Prepare and file with the SEC such amendments, supplements and
post-effective amendments to such registration statement and the prospectus used
in connection with such registration statement as may be necessary to comply
with the provisions of the Act with respect to the disposition of all securities
covered by such registration statement.
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders;
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions, and do any and all other
acts and things which may be necessary or advisable to enable such Holders or
underwriter to consummate the disposition in each such jurisdiction of such
Registrable Securities.
(e) use its best efforts to cause the Registrable Securities covered
by such registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary by virtue of the
business and operations of the Company to
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enable the Holder or Holders thereof to consummate the disposition of such
Registrable Securities;
(f) immediately notify the managing underwriter, if any, and each
Holder of such Registrable Securities at any time when a prospectus relating
thereto is required to be delivered under the Securities Act of the happening of
any event which comes to the Company's attention if as a result of such event
the prospectus included in such registration statement contains an untrue
statement of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not misleading and
the Company shall promptly prepare and furnish to such Holder a supplement or
amendment to such prospectus so that, as thereafter delivered to the purchasers
of such Registrable Securities, such prospectus shall not contain an untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading;
(g) use its best efforts to cause all such Registrable Securities
covered by the registration statement to be listed on a national securities
exchange and on each securities exchange on which similar securities issued by
the Company are then listed, and enter into such customary agreements including
a listing application and indemnification agreement in customary form (provided
that the applicable listing requirements are satisfied), and to provide a
transfer agent and registrar for such Registrable Securities covered by such
registration statement no later than the effective date of such registration
statement;
(h) enter into such customary agreements (including an underwriting
agreement in customary form) and take all such other actions as the Initiating
Holders or the underwriters retained by such Holders, if any, reasonably request
in order to expedite or facilitate the disposition of such Registrable
Securities, including customary indemnification;
(i) make available for inspection during normal business hours by any
Holder of Registrable Securities covered by such registration statement, any
underwriter participating in any disposition pursuant to such registration
statement, and any attorney, accountant or other agent retained by any such
Holder or underwriter (collectively, the "Inspectors"), all financial and other
records, pertinent corporate documents and properties of the Company and its
subsidiaries (collectively, "Records"), if any, as shall be reasonably necessary
to enable them to exercise their due diligence responsibility, and cause the
Company's and its subsidiaries' officers, directors and employees to supply all
information and respond to all inquiries reasonably requested by any such
Inspector in connection with such registration statement. Notwithstanding the
foregoing, the Company shall have no obligation to disclose any Records to the
Inspectors in the event the Company determines that such disclosure is
reasonably likely to have an adverse effect on the Company's ability to assert
the existence of an attorney-client privilege with respect thereto;
(j) use its best efforts to obtain a "comfort" letter from the
Company's independent public accountants in customary form and covering such
matters of the type customarily covered by "comfort" letters as the Holders of a
majority (by number of shares) of the Registrable Securities being sold
reasonably request, and provided that such request is reasonable in the
underwriter's point of view;
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(k) use its best efforts to obtain an obtain an opinion of counsel
from the Company's counsel in customary form and covering such matters of the
type customarily covered in opinions of counsel in connection with such
transactions; and
(l) comply, and continue to comply during the period that such
registration statement is effective under the Securities Act, in all material
respects with the Securities Act and the Securities Exchange Act of 1934 and
with all applicable rules and regulations of the Commission with respect to the
disposition of all securities covered by such registration statement, and make
available to its security holders, as soon as reasonably practicable, an
earnings statement covering the period of at least twelve (12) months, but not
more than eighteen (18) months, beginning with the first full calendar month
after the effective date of such registration statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the Securities Act,
and not file any amendment or supplement to such registration statement or
prospectus to which Holder shall have reasonably objected on the grounds that
such amendment or supplement does not comply in all material respects with the
requirements of the Securities Act, having been furnished with a copy thereof at
least five (5) business days prior to the filing thereof.
Each Holder of Registrable Securities agrees that, upon receipt of any notice
from the Company of the happening of any event of the kind described in Section
1.5(f) hereof, such Holder shall discontinue disposition of Registrable
Securities pursuant to the registration statement covering such Registrable
Securities until such Holder's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 1.5(f) hereof, and, if so directed by
the Company, such Holder shall deliver to the Company (at the Company's expense)
all copies (including, without limitation, any and all drafts), other than
permanent file copies, then in such Holder's possession, of the prospectus
covering such Registrable Securities current at the time of receipt of such
notice. In the event the Company shall give any such notice, the period
mentioned in Section 1.5(a) hereof shall be extended by the greater of (i) ten
(10) business days or (ii) the number of days during the period from and
including the date of the giving of such notice pursuant to Section 1.5(f)
hereof to and including the date when each Holder of Registrable Securities
covered by such registration statement shall have received the copies of the
supplemented or amended prospectus contemplated by Section 1.5(f) hereof.
1.6 Furnish Information.
-------------------
(a) It shall be a condition precedent to the obligations of the
Company to take any action pursuant to this Section 1 with respect to the
Registrable Securities of any selling Holder that such Holder shall furnish to
the Company such information regarding itself, the Registrable Securities held
by it, and the intended method of disposition of such securities as shall be
required to effect the registration of such Holder's Registrable Securities.
(b) The Company shall have no obligation with respect to any
registration requested pursuant to Section 1.2 or Section 1.3 if, due to the
operation of Section 1.6(a), the number of shares or the anticipated aggregate
offering price of the Registrable Securities to be included in the registration
does not equal or exceed the number of share or the anticipated
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aggregate offering price required to originally trigger the Company's obligation
to initiate such registration as specified in Section 1.2(a) or Section 1.3(b),
as applicable.
1.7 Expenses of Demand Registration.
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All expenses (other than underwriting discounts and commissions) incurred in
connection with up to two registrations, filings or qualifications pursuant to
Section 1.2 hereof, including (without limitation) all registration, filing and
qualification fees, printers' and accounting fees, fees and disbursements of
counsel for the Company, and fees and disbursements of one counsel for the
selling Holders, shall be borne by the Company; provided, however, that the
Company shall not be required to pay for any expenses of any registration
proceeding begun pursuant to Section 1.2 if the registration request is
subsequently withdrawn at the request of the Holders of a majority of the
Registrable Securities to be registered (in which case all participating holders
shall bear such expenses), unless the Holders of a majority of the Registrable
Securities agree to forfeit their right to one demand registration pursuant to
Section 1.2.
1.8 Expenses of Company Registration and Form S-3 Registrations.
-----------------------------------------------------------
The Company shall bear and pay all expenses incurred in connection with any
registration, filing or qualification of Registrable Securities with respect to
the registrations pursuant to Sections 1.3 and 1.4 for each Holder, including
(without limitation) all registration, filing, and qualification fees, printers
and accounting fees relating or apportionable thereto and the fees and
disbursements of counsel for the Company in its capacity as counsel to the
selling Holders hereunder; if Company counsel does not make itself available for
this purpose, the Company will pay the reasonable fees and disbursements of one
counsel for the selling Holders selected by them, but excluding underwriting
discounts and commissions relating to Registrable Securities.
1.9 Underwriting Requirements.
-------------------------
In connection with any offering involving an underwriting of shares of the
Company's capital stock, the Company shall not be required under Sections 1.3
and 1.4 to include any of the Holders' securities in such underwriting unless
they accept the terms of the underwriting as agreed upon between the Company and
the underwriters selected by it (or by other persons entitled to select the
underwriters), and then only in such quantity as the underwriters determine in
their sole discretion will not jeopardize the success of the offering by the
Company. If the total amount of securities, including Registrable Securities,
requested by stockholders to be included in such offering pursuant to Sections
1.3 and 1.4 exceeds the amount of securities sold (other than by the Company in
the case of a registration under Section 1.4) that the underwriters determine in
their sole discretion is compatible with the success of the offering, then the
Company shall exclude from such registration (i) first, securities held by any
Person who does not have any contractual rights to cause the Company to register
such securities, (ii) second, securities held by any Person with such
contractual rights other than those granted in this Agreement, (iii) third, any
Management Stock included in the underwriting, and (iv) fourth, shares held by
any Person with such contractual rights granted in this Agreement, pro rata
among the Holders of such shares on the basis of the respective numbers of
shares of Common Stock requested to be included in such registration, but in no
event shall the amount of securities of the selling Holders included in the
offering be reduced below twenty percent (20%) of the total amount of securities
included in such offering, unless such offering is the initial public offering
of the Company's securities.
9
<PAGE>
1.10 Delay of Registration.
---------------------
No Holder shall have any right to obtain or seek an injunction restraining or
otherwise delaying any such registration as the result of any controversy that
might arise with respect to the interpretation or implementation of this Section
1.
1.11 Indemnification.
---------------
In the event any Registrable Securities are included in a registration
statement under this Section 1:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, its directors, officers and partners, any underwriter
(as defined in the Act) for such Holder and each person, if any, who controls
such Holder or underwriter within the meaning of the Act or the 1934 Act,
against any losses, claims, damages, liabilities (joint or several) or expenses
to which they may become subject under the Act or the 1934 Act, insofar as such
losses, claims, damages, liabilities or expenses (or actions in respect thereof)
arise out of or are based upon any of the following statements, omissions or
violations (collectively a "Violation"): (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Act, the 1934 Act, or any rule or regulation
promulgated under the Act or the 1934 Act; and the Company will pay to each such
Holder, director, officer, partner, underwriter or controlling person, any legal
or other expenses reasonably incurred by them in connection with investigating
or defending any such loss, claim, damage, liability, or action; provided,
however, that the indemnity agreement contained in this Section 1.11(a) shall
not apply to amounts paid in settlement of any such loss, claim, damage,
liability, or action if such settlement is effected without the consent of the
Company (which consent shall not be unreasonably withheld), nor shall the
Company be liable in any such case for any such loss, claim, damage, liability,
or action to the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by any such Holder,
underwriter or controlling person.
(b) To the extent permitted by law, each selling Holder will indemnify
and hold harmless the Company, each of its directors, each of its officers who
has signed the registration statement, each person, if any, who controls the
Company within the meaning of the Act, any underwriter, any other Holder selling
securities in such registration statement and any controlling person of any such
underwriter or other Holder, against any losses, claims, damages, or liabilities
(joint or several) to which any of the foregoing persons may become subject,
under the Act or the 1934 Act, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereto) arise out of or are based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Holder expressly for use in connection with such registration;
and each such Holder will pay any legal or other expenses reasonably incurred by
any person intended to be indemnified pursuant to this Section 1.11(b), in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement contained
in this Section 1.11(b) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is effected
10
<PAGE>
without the consent of the Holder, which consent shall not be unreasonably
withheld; provided, that, in no event shall any indemnity under this Section
1.11(b) exceed the gross proceeds from the offering received by such Holder.
(c) Promptly after receipt by an indemnified party under this Section
1.11 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 1.11, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.11, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.11.
(d) If the indemnification provided for in this Section 1.11 is held by
a court of competent jurisdiction to be unavailable to an indemnified party with
respect to any loss, liability, claim, damage, or expense referred to therein,
then the indemnifying party, in lieu of indemnifying such indemnified party
hereunder, shall contribute to the amount paid or payable by such indemnified
party as a result of such loss, liability, claim, damage, or expense in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and of the indemnified party on the other in connection
with the statements or omissions that resulted in such loss, liability, claim,
damage, or expense as well as any other relevant equitable considerations. The
relative fault of the indemnifying party and of the indemnified party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the indemnifying party or by the indemnified
party and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in the underwriting agreement
entered into in connection with the underwritten public offering are in conflict
with the foregoing provisions, the provisions in the underwriting agreement
shall control.
(f) The obligations of the Company and Holders under this Section 1.11
shall survive the completion of any offering of Registrable Securities in a
registration statement under this Section 1, and otherwise.
11
<PAGE>
1.12 Reports Under Securities Exchange Act of 1934.
---------------------------------------------
With a view to making available to the Holders the benefits of Rule 144
promulgated under the Act and any other rule or regulation of the SEC that may
at any time permit a Holder to sell securities of the Company to the public
without registration or pursuant to a registration on Form S-3, the Company
agrees to:
(a) make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times after ninety (90) days
after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the 1934 Act; and
(c) furnish to any Holder, so long as the Holder owns any Registrable
Securities, forthwith upon request (i) a written statement by the Company that
it has complied with the reporting requirements of SEC Rule 144 (at any time
after ninety (90) days after the effective date of the first registration
statement filed by the Company), the Act and the 1934 Act (at any time after it
has become subject to such reporting requirements), or that it qualifies as a
registrant whose securities may be resold pursuant to Form S-3 (at any time
after it so qualifies), (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC (including Rule 144A)
which permits the selling of any such securities without registration or
pursuant to such form.
1.13 Assignment of Registration Rights.
---------------------------------
The rights to cause the Company to register Registrable Securities pursuant to
this Section 1 may be assigned (but only with all related obligations) by a
Holder to a transferee or assignee of such securities, provided: (a) the
Company is, within a reasonable time after such transfer, furnished with written
notice of the name and address of such transferee or assignee and the securities
with respect to which such registration rights are being assigned; (b) such
transferee or assignee agrees in writing to be bound by and subject to the terms
and conditions of this Agreement, including without limitation the provisions of
Section 1.15 below; and (c) such assignment shall be effective only if
immediately following such transfer either (x) the Common Stock is neither
listed on a national securities exchange nor traded in the NASDAQ National
Market System or (y) the further disposition of such securities by the
transferee or assignee is restricted under the Act.
1.14 Limitations on Subsequent Registration Rights.
---------------------------------------------
From and after the date of this Agreement, the Company shall not, without the
prior written consent of the Holders of a majority of the outstanding
Registrable Securities, enter into any agreement with any holder or prospective
holder of any securities of the Company which would allow such holder or
prospective holder (a) registration rights which are superior to the
registration rights granted pursuant to this Agreement, (b) registration rights
which are pari passu with the registration rights granted pursuant to Sections
1.2, 1.3 and 1.4 of this Agreement, (c) to include such securities in any
registration filed under Section 1.2 or Section 1.3, unless under the terms of
such agreement, such holder or prospective holder may include such securities in
any such registration only to the extent that the inclusion of such securities
will not reduce the amount of
12
<PAGE>
the Registrable Securities included by the Holders in such registration, or (d)
to make a demand registration which could result in such registration statement
being declared effective prior to the earlier of six months after either of the
dates set forth in Section 1.2(a) or within one hundred eighty (180) days of the
effective date of any registration effected pursuant to Section 1.2.
1.15 "Market Stand-Off" Agreement.
----------------------------
(a) Each Investor hereby agrees that, during the period of duration specified
by the managing underwriter of Common Stock or other equity securities of
the Company, following the date of the first sale of such securities to the
public pursuant to a registration statement of the Company filed under the
Act, it shall not, to the extent requested by such underwriter, directly or
indirectly sell, offer to sell, contract to sell (including, without
limitation, any short sale), grant any option to purchase or otherwise
transfer or dispose of (other than to donees who agree to be similarly
bound) any securities of the Company held by it at any time during such
period except Common Stock included in such registration; provided,
however, that such market stand-off time period shall not exceed 180 days
in the case of the Company's initial public offering or 90 days in any
subsequent registration and in any event shall not exceed the stand-off
period applicable to holders of Management Stock. In order to enforce the
foregoing covenant, the Company may impose stop-transfer instructions with
respect to the Registrable Securities of each Investor (and the shares or
securities of every other person subject to the foregoing restriction)
until the end of such period. Notwithstanding the foregoing, the
obligations described in this Section 1.15 shall not apply to a
registration relating solely to employee benefit plans on Form S-l or Form
S-8 or similar forms which may be promulgated in the future, or a
registration relating solely to a Commission Rule 145 transaction on Form
S-4 or similar forms which may be promulgated in the future.
1.16 Termination of Registration Rights.
----------------------------------
(a) No Holder shall be entitled to exercise any right provided for in
this Section 1 (other than Section 1.3) after five (5) years following the
consummation of the sale of securities pursuant to a registration statement
filed by the Company under the Act in connection with the initial firm
commitment underwritten offering of its Common Stock to the general public.
(b) In addition, the right of any Holder to request registration or
inclusion in any registration pursuant to Section 1.4 shall terminate on the
first date following the Company's initial public offering of Common Stock on
which both (i) all shares of Registrable Securities held or entitled to be held
upon conversion by such Holder may immediately be sold under Rule 144 during the
following 90-day period, and (ii) the Common Stock is either listed on a
national securities exchange or traded in the NASDAQ National Market System.
2. Covenants of the Company.
2.1 Delivery of Financial Statements.
--------------------------------
The Company shall deliver to each Investor (or, in the case of items referred
to in clauses (e) and (f) of this Section 2.1, to each Investor holding
securities representing 10.0% or more of the fully-diluted Common Stock
determined on an as-converted basis (a "Qualified Holder"); Notwithstanding the
foregoing, as long as First Union Capital Partners, Inc., Meritage Private
Equity Fund, L.P., Meritage Private Equity
13
<PAGE>
Parallel Fund, L.P., Meritage Entrepreneurs Fund, L.P., J.P. Morgan Investment
Corporation, Sixty Wall Street SBIC Fund, L.P., General Electric Capital
Corporation or Stolberg, Meehan & Scano II, L.P. own securities representing at
least fifty percent (50%) of the securities of the Company held by such Investor
as of the date of this Agreement, the Company shall deliver to such Investor the
items referred to in clauses 2.1(e) and (f)):
(a) as soon as practicable, but in any event within ninety (90) days
after the end of each fiscal year of the Company, an income statement for such
fiscal year, a balance sheet of the Company and statement of stockholder's
equity as of the end of such fiscal year, and a statement of cash flows for such
fiscal year, such year-end financial reports to be in reasonable detail,
prepared in accordance with generally accepted accounting principles ("gaap"),
and audited and certified by independent public accountants of nationally
recognized standing selected by the Company;
(b) as soon as practicable, but in any event within forty-five (45)
days after the end of each of the first three (3) quarters of each fiscal year
of the Company, an unaudited balance sheet and statements of income and cash
flows for and as of the end of such fiscal quarter;
(c) within thirty (30) days of the end of each month, an unaudited
balance sheet and statements of income and cash flows for and as of the end of
such month, in reasonable detail; and
(d) with respect to the financial statements called for in subsections
(b) and (c) of this Section 2.1, an instrument executed by the Chief Financial
Officer or President of the Company and certifying that such financial
statements were prepared in accordance with gaap consistently applied with prior
practice for earlier periods (with the exception of footnotes that may be
required by gaap) and fairly present the financial condition of the Company and
its results of operation for the period specified, subject to normal year-end
audit adjustment.
(e) as soon as practicable, but in any event thirty (30) days prior to
the end of each fiscal year, a budget and business plan for the next fiscal
year, prepared on a monthly basis, including balance sheets and statements of
income and cash flows for such months and, as soon as prepared, any other
budgets or revised budgets prepared by the Company; and
(f) such other information relating to the financial condition,
business, prospects or corporate affairs of the Company as such Investor may
from time to time reasonably request; provided, however, that the Company shall
be allowed a reasonable time to process such request and shall not be obligated
under this or any other provision of Section 2.1 to provide information which it
deems in good faith to be a trade secret or similar confidential information.
2.2 Inspection.
----------
The Company shall permit each Qualified Holder, at such Investor's expense, to
visit and inspect the Company's properties, to examine its books of account and
records and to discuss the Company's affairs, finances and accounts with its
officers, all at such reasonable times as may be requested by the Investor;
provided, however, that the Company shall not be obligated pursuant to this
Section 2.2 to provide access to any information which it reasonably considers
to be a trade secret or similar confidential information.
14
<PAGE>
2.3 Termination of Information and Inspection Covenants.
---------------------------------------------------
The covenants set forth in Sections 2.1 and Section 2.2 shall terminate as to
Investors and be of no further force or effect when the sale of securities
pursuant to a registration statement filed by the Company under the Act in
connection with the firm commitment underwritten offering of its securities to
the general public is consummated or when the Company first becomes subject to
the periodic reporting requirements of Sections 12(g) or 15(d) of the 1934 Act,
whichever event shall first occur.
2.4 Regulatory Compliance. In the event that (i) First Union Capital
---------------------
Partners, Inc., (ii) Sixty Wall Street SBIC Fund, L.P. or (iii) J.P. Morgan
Investment Corporation (each, an "SBIC") determines that, by reason of any
future federal or state rule, regulation, guideline, order, interpretive
release, ruling, request or directive relating to Small Business Investment
Companies under the Small Business Investment Act of 1958 (having the force of
law and where the failure to comply therewith would be unlawful)(collectively, a
"Regulatory Requirement"), it is effectively restricted or prohibited from
holding the shares of Series A or Series B Preferred Stock (or any capital stock
distributable to such SBIC in any merger, reorganization, readjustment or other
reclassification or exchange with respect to the Company or any successor
thereof) or otherwise realize upon or receive the benefits intended under the
Series A or Series B Agreements, and following such SBIC's respective exercise
of its reasonable best efforts to overcome such Regulatory Requirement, the
Company, the Company's Board of Directors and the other shareholders of the
Company shall make all reasonable efforts to take such action as such SBIC may
reasonably deem necessary to permit such Investor to comply with such Regulatory
Requirement. Such action to be taken may include the Company's authorization or
creation of one or more new classes of interests and the modification or
amendment of the Series A Agreement or the Series B Agreement or the other
agreements executed in connection therewith; and, if compliance with such
Regulatory Requirement cannot be satisfied by such efforts, such SBIC shall be
allowed to sell or exchange, convey, dispose or otherwise transfer
(collectively, "Transfer") all or part of its shares of the Company's capital
stock as necessary to comply with such Regulatory Requirement without such
Transfer being subject to any co-sale rights or rights of first refusal by any
other shareholder of the Company or any other Person (including the Company)
under the Stockholders' Agreement of even date herewith among the Company and
certain stockholders of the Company. Each SBIC shall give written notice to the
Company of any such determination and the action or action necessary to comply
with such Regulatory Requirement, and the Company, the Company's Board of
Directors and the shareholders of the Company shall take all steps necessary to
comply with such determination as expeditiously as possible.
2.5 Key Man Insurance. The Company agrees to obtain within 30 days after
-----------------
the date of this Agreement, and thereafter maintain so long as such persons
serve as executive officers of the Company, "key man" life insurance in the
amount of $2,500,000 on each of Art Zeile and Joel Daly with the Company as the
sole beneficiary of such insurance.
3. Miscellaneous.
3.1 Successors and Assigns.
----------------------
Except as otherwise provided herein, the terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
15
<PAGE>
successors and assigns of the parties (including transferees of any shares of
Registrable Securities). Nothing in this Agreement, express or implied, is
intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
3.2 Governing Law.
-------------
This Agreement shall be governed by and construed under the laws of the State
of Colorado as applied to agreements among Colorado residents entered into and
to be performed entirely within Colorado.
3.3 Counterparts.
------------
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
3.4 Titles and Subtitles.
--------------------
The titles and subtitles used in this Agreement are used for convenience only
and are not to be considered in construing or interpreting this Agreement.
3.5 Notices.
-------
All notices required or permitted hereunder shall be in writing and
shall be deemed effectively given: (i) upon personal delivery to the party to be
notified, (ii) when sent by confirmed facsimile if sent during normal business
hours of the recipient, if not, then on the next business day; or (iii) one day
after deposit with a nationally recognized overnight courier, specifying next
day delivery, with written verification of receipt. All communications shall be
sent to the address as set forth on the signature page hereof or at such other
address as such party may designate by ten days advance written notice to the
other parties hereto.
3.6 Expenses.
--------
If any action at law or in equity is necessary to enforce or interpret the
terms of this Agreement, the prevailing party shall be entitled to reasonable
attorneys' fees, costs and necessary disbursements in addition to any other
relief to which such party may be entitled.
3.7 Amendments and Waivers.
----------------------
Any term of this Agreement may be amended and the observance of any term of
this Agreement may be waived (either generally or in a particular instance and
either retroactively or prospectively), only with the written consent of the
Company and the holders of at least seventy-five percent (75%) of the
Registrable Securities then outstanding. Any amendment or waiver effected in
accordance with this paragraph shall be binding upon each holder of any
Registrable Securities then outstanding, each future holder of all such
Registrable Securities, and the Company.
3.8 Severability.
------------
If one or more provisions of this Agreement are held to be unenforceable under
applicable law, such provision shall be excluded from this Agreement and the
balance of the Agreement shall be interpreted as if such provision were so
excluded and shall be enforceable in accordance with its terms.
3.9 Aggregation of Stock.
--------------------
All shares of Registrable Securities held or acquired by affiliated entities
or persons shall be aggregated together for the purpose of determining the
availability of any rights under this Agreement.
16
<PAGE>
3.10 Entire Agreement; Amendment; Waiver.
-----------------------------------
This Agreement (including the Exhibits hereto, if any) constitutes the full
and entire understanding and agreement between the parties with regard to the
subjects hereof and thereof.
17
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INFLOW, INC.
By: /s/ Art Zeile
___________________________________
Art Zeile
President and Chief Executive Officer
Address: 1860 Lincoln Street
Suite 305
Denver, CO 80295
INVESTORS:
MERITAGE PRIVATE EQUITY FUND, L.P.
MERITAGE PRIVATE EQUITY PARALLEL FUND, L.P.
MERITAGE ENTREPRENEURS FUND, L.P.
By Meritage Investment Partners, LLC
General Partner
By: /s/ G. Jackson Tankersley, Jr.
___________________________________
G. Jackson Tankersley, Jr.
Managing Member
Address: 1600 Wynkoop Street
Suite 300
Denver, CO 80202
FIRST UNION CAPITAL PARTNERS, INC.
By: /s/ L. Watts Hamrick III
___________________________________
L. Watts Hamrick III
Senior Vice President
Address: 301 South College Street
Charlotte, NC 28288-0732
18
<PAGE>
SIXTY WALL STREET SBIC FUND, L.P.,
by Sixty Wall Street SBIC Corporation, its General
Partner
By: __________________________________
Its: __________________________________
Address: 101 California Street, 37th Floor
San Francisco, CA 94111
J.P. MORGAN INVESTMENT CORPORATION
By: __________________________________
Its: __________________________________
Address: 101 California Street, 37th Floor
San Francisco, CA 94111
GENERAL ELECTRIC CAPITAL CORPORATION
By: /s/ Molly S. Fergusson
___________________________________
Molly S. Fergusson
Manager of Operations
Address: 120 Long Ridge Road
Stanford, CT 06927
19
<PAGE>
STOLBERG, MEEHAN AND SCANO II, L.P.
Stolberg, Meehan & Scano LLC,
General Partner
By: /s/ Peter Van Genderen
--------------------------------
Peter Van Genderen, Partner
Address: Republic Plaza
370 17th Street
Suite 4240
Denver, CO 80202
/s/ Art Zeile
-------------------------------------
Art Zeile
/s/ Joel Daly
-------------------------------------
Joel Daly
20
<PAGE>
EXHIBIT 10.9
INFLOW, INC.
DATA CENTER SERVICES AGREEMENT
This Data Center Services Agreement ("Agreement") is made and entered
into on this ___ day of ___________, 19__ ("Effective Date") by and between
InFlow, Inc., a Delaware corporation doing business in Colorado as InflowNet,
Inc. ("INFLOW") with a principal place of business at 1860 Lincoln Street #305,
Denver, CO 80295 and _____________________, a ________________________________
corporation ("Customer") with a principal place of business at
___________________________________________________.
WHEREAS, INFLOW provides colocation services in the telecommunications
market at its data center located at 1860 Lincoln Street, Suite 305, Denver,
Colorado 80296 (the "Data Center");
WHEREAS, INFLOW desires to provide Customer with, and Customer desires
to receive, services at the Data Center for Customer's telecommunications
equipment, as provided herein;
WHEREAS, Customer will be entitled to house telecommunications
equipment at a specific location within the Data Center, as provided herein;
WHEREAS, Exhibit A to this Agreement identifies the services that
---------
INFLOW will provide to Customer, subject to the terms of this Agreement;
WHEREAS, INFLOW and Customer may, from time to time after the date
hereof, execute one or more modifications of this Agreement, in the form
attached as Exhibit E, to change the services that INFLOW will provide to
---------
Customer (collectively, the "Service Change Forms");
NOW, THEREFORE, the parties hereto agree as follows:
1. SERVICES AND CUSTOMER EQUIPMENT. Subject to the terms and
conditions of this Agreement, during the term of this Agreement:
a. Data Center Services. INFLOW will provide to Customer the
services described in Exhibit A, as modified by any Service Change
---------
Forms (the "Data Center Services").
b. Customer Area. The "Customer Area" will mean the location
within the Data Center that INFLOW designates for placement of
Customer Equipment.
c. Customer Equipment. As part of the Data Center Services,
Customer will have a license to install, maintain, use, operate,
monitor, repair and replace in the Customer Area the equipment set
forth in Exhibit B (the "Customer Equipment"). Customer may not use
---------
the Customer Area for any other purpose. Customer has not been granted
any real property interest in the Customer Area or any other portion
of INFLOW's premises.
d. Service Change Forms. INFLOW and Customer may agree to execute
one or more Service Change Forms at any time and from time to time
after the date of this Agreement. Any such Service Change Forms shall
be incorporated into this Agreement and shall become a part hereof. In
the event of any discrepancies between this Agreement, any Service
Change Form and any subsequent Service Change Form, regarding the Data
Center Services or otherwise, the Service Change Form with the most
recent date shall control. Nothing in this paragraph or any other
provision of this Agreement shall obligate INFLOW or Customer to agree
to any Service Change Form. Each party shall have the absolute right
to refuse any proposal to change the terms of this Agreement as they
exist now or at any future time.
2. FEES AND BILLING. Customer will pay INFLOW all fees and charges set
forth below for the Data Center Services provided hereunder. All
payments required by this Agreement are exclusive of sales tax and
other federal, state, municipal or other governmental taxes now in
force or enacted in the future, all of which Customer will be
responsible for and will pay in full except for any federal or state
income taxes payable by INFLOW.
a. Installation Fees. Customer will pay all installation fees
identified in Exhibit A on the Installation Payment Date as set forth
---------
in Exhibit A or fifteen calendar days after any Customer Equipment has
---------
been placed within the Data Center, whichever date is earlier.
Customer shall pay all installation fees identified in any Service
Change Form within thirty (30) days of the date of invoice therefor,
or as otherwise agreed in such Service Change Form.
b. Usage Fees and Other Charges. Customer shall pay recurring
fees for Data Center Services from and after the earlier to occur of
(i) the "Installation Date" indicated in Exhibit A, regardless of
---------
whether Customer has commenced use of the Data Center Services, unless
Customer is unable to install the Customer Equipment by the
Installation Date due to a default by INFLOW, in which case billing
will not begin until the date INFLOW has remedied such default and
(ii) the date the Customer Equipment is placed in the Customer Area.
In the event that any Service Change Form specifies additional Data
Center Services, Customer will pay for such additional services from
and after the date INFLOW first provides such additional Data Center
Services to Customer or as otherwise agreed in such Service Change
Form.
c. Billing and Payment Terms. Customer will be billed monthly, in
arrears, for recurring fees for the provision of Data Center Services,
and payment of such fees and charges will be due within thirty (30)
days of the date of each INFLOW invoice. All payments will be made in
U.S. dollars. Late payments hereunder will accrue interest at a rate
of one and one-half percent (1 1/2%) per month, or the highest rate
allowed by applicable law, whichever is lower. If Customer makes a
late payment hereunder or if in its judgement INFLOW determines that
Customer is not creditworthy or is otherwise not financially secure,
INFLOW will have the right, upon written notice to Customer, to
require full payment before the provision of Data Center Services or
other assurances to secure Customer's payment obligations hereunder.
3. RIGHTS AND OBLIGATIONS
a. Compliance with Law and Rules and Regulations. Customer will
comply at all times with all applicable laws and regulations with
respect to the Customer Equipment and Customer's use thereof. Customer
will also comply at all times with INFLOW's general rules and
regulations relating to its provision of Data Center Services, as
initially set forth in Exhibit D and as updated by INFLOW from time to
---------
time (the "Rules and Regulations"). Customer acknowledges that INFLOW
exercises no control whatsoever over the content of information
passing through the Customer Equipment and equipment and facilities
used by INFLOW to provide Data Center Services, and that it is the
sole responsibility of Customer to ensure that the information it
transmits and receives complies with all applicable laws and
regulations.
b. Customer's Costs. INFLOW will be responsible only for those
costs incurred by INFLOW to provide the Data Center Services pursuant
to this Agreement. Customer agrees that it will be solely responsible
for all costs and expenses that it incurs in connection with this
Agreement and the Customer Equipment.
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<PAGE>
c. Access and Security. INFLOW will provide three (3) security
system badges to Customer for entry into the Data Center. INFLOW will
provide Customer with one (1) key for each of the Customer Cabinets
and will maintain a spare at the Data Center. Customer will give
written notice to INFLOW of the individuals who are authorized by
Customer to have access to the Customer Area (the "Permitted
Individuals"). INFLOW will maintain a list of the Permitted
Individuals and will have the right to limit Customer's access to the
Data Center solely to the Permitted Individuals. Subject to the terms
of this Agreement and the Rules and Regulations, the Permitted
Individuals will have access to the Customer Area at all times. While
in the Data Center, each individual representing or otherwise entering
for or on behalf of Customer (each, a "Representative") will comply at
all times with the terms of this Agreement and with all of the Rules
and Regulations. Without limiting the foregoing, each Representative
will comply with INFLOW's security and safety procedures, including
without limitation, sign-in, identification and escort requirements.
INFLOW may refuse entry to, or require the immediate departure of, any
individual who (i) is disorderly, (ii) has failed to comply with this
Agreement or the Rules and Regulations, or (iii) has failed to comply
with any of INFLOW's other procedures and requirements after being
notified of them.
d. No Competitive Services. Customer may not at any time permit
any Data Center Services to be utilized for the provision of any
services that compete with any INFLOW services, without INFLOW's prior
written consent.
e. Interconnection. Unless expressly authorized pursuant to the
prior written consent of INFLOW, Customer will not interconnect its
equipment with equipment or services of other entities within the Data
Center or another INFLOW data center.
f. Damage Prevention. Customer and its Representatives will
refrain from using any facilities, equipment, tools, materials,
apparatus, or methods that, in INFLOW's sole judgment, might cause
damage to the Data Center or otherwise interfere with INFLOW
operations or the equipment or operations of any other INFLOW
customer. INFLOW reserves the right to take any reasonable action to
prevent harm to the services, personnel or property of INFLOW (and its
affiliates, vendors, and customers).
g. Safeguarding of Tools. Customer's Representatives may bring
small tools and portable test equipment into the Data Center provided
that they remove the same upon their departure from the Data Center.
Customer will be responsible for the care and safeguarding of all such
tools and test equipment. Customer's Representatives may not bring any
other equipment, material, or apparatus into the Data Center without
INFLOW's prior written consent. In particular, and without limiting
the foregoing, Customer's Representatives may not bring into the Data
Center any of the following: wet cell batteries, explosives, flammable
liquids or gases, alcohol, controlled substances, weapons, cameras,
and similar equipment and materials.
h. Inspection. INFLOW and its designees may inspect or observe
Customer's equipment (including, but not limited to, the Customer
Equipment) at any time. If the Customer Equipment is in a security
enclosure, Customer will furnish INFLOW with the appropriate keys or
information needed to enter the enclosure.
i. Security Procedures. INFLOW will (i) establish security
procedures which it determines are appropriate and cost effective to
monitor and control access to the Data Center, and (ii) make
reasonable efforts to enforce such procedures.
j. Temperature. INFLOW will (i) monitor the temperature in the
Data Center at reasonable intervals, and (ii) undertake such measures
as it determines are appropriate and cost-effective to generally
maintain a temperature in the Data Center of no more than seventy (70)
degrees Fahrenheit.
4. INSURANCE
a. Minimum Levels of Customer's Insurance. During the term of
this Agreement, Customer will keep in full force and effect: (i)
comprehensive general liability insurance in an amount not less than
one million dollars ($1,000,000) per occurrence for bodily injury and
property damage; (ii) employer's liability insurance; (iii) workers'
compensation insurance in an amount not less than that required by
applicable law; and (iv) all risk casualty insurance covering the
Customer Equipment in the amount of its full replacement value.
Customer also agrees that it will maintain, and will be solely
responsible for ensuring that its agents (including contractors and
subcontractors) maintain, other insurance at levels no less than those
required by applicable law and customary in Customer's and its agents'
industries. Each policy must contain a provision that the insurance
policy, and the coverage that it provides, will be primary and
noncontributing with respect to any policies carried by INFLOW.
b. Minimum Levels of INFLOW's Insurance. During the term of this
Agreement, INFLOW will keep in full force and effect: (i)
comprehensive general liability insurance in an amount not less than
one million dollars ($1,000,000) per occurrence for bodily injury and
property damage; (ii) employer's liability insurance; (iii) workers'
compensation insurance in an amount not less than that required by
applicable law; and (iv) all risk casualty insurance covering INFLOW's
personal property and premises in the building in the amount of its
full replacement value.
c. Naming INFLOW as an Additional Insured. Customer agrees that
prior to the installation of any Customer Equipment, Customer will
cause its insurance provider(s) to name INFLOW as an additional
insured and notify INFLOW in writing of the effective date thereof
d. Evidence of Insurance. Prior to installation of any Customer
Equipment in the Customer Area, Customer will furnish INFLOW with
certificates of insurance which evidence the minimum levels of
insurance set forth above. Customer will provide INFLOW at least
thirty (30) days advance written notice of any termination,
cancellation, or material change in coverage.
e. Acceptable Insurance Companies. All of the insurance required
in this Agreement will be issued by responsible insurance companies
authorized to issue insurance in Colorado rated B VII or higher by
Best's Insurance Rating Service, or an equivalent rating if Best's
rating system is changed or discontinued.
f. Waiver of Right of Recovery; Waiver of Subrogation. Neither
party, nor its officers, directors, shareholders, employees, agents or
invitees, will be liable to the other party or to any insurance
company insuring the other party (by way of subrogation or otherwise)
for any loss or damage to its equipment or property within the Data
Center, or for loss of business revenue or extra expense arising out
of or related to its equipment or property within the Data Center. The
foregoing waiver applies to the extent the loss or damage is covered
by: (i) the injured party's insurance; or (ii) the insurance the
injured party is required to carry under this Agreement, whichever is
greater.
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<PAGE>
5. CONFIDENTIAL INFORMATION
a. Confidential Information. Each party acknowledges that it may
have access to certain confidential information of the other party
concerning the other party's business, plans, customers, technology,
and products, including the terms and conditions of this Agreement
("Confidential Information"). Confidential Information will include,
but not be limited to, each party's proprietary software and customer
information. Each party agrees that it will not use in any way, for
its own account or the account of any third party, except as expressly
permitted by this Agreement, nor disclose to any third party (except
as required by law or to that party's attorneys, accountants and other
advisors as reasonably necessary and subject to the confidentiality
provision hereof), any of the other party's Confidential Information
and will take reasonable precautions to protect the confidentiality of
such information.
b. Exceptions. Information will not be deemed Confidential
Information hereunder if such information: (i) is rightfully known to
the receiving party prior to receipt from the disclosing party
directly or indirectly from a source other than one having an
obligation of confidentiality to the disclosing party; (ii) becomes
known (independently of disclosure by the disclosing party) to the
receiving party directly or indirectly from a source other than one
having an obligation of confidentiality to the disclosing party; (iii)
becomes publicly known or otherwise ceases to be secret or
confidential, except through a breach of this Agreement by the
receiving party; or (iv) is independently developed by the receiving
party.
6. REPRESENTATIONS AND WARRANTIES
a. Warranties by Customer
i. Customer Equipment. Customer represents and warrants that
it owns or has the legal right and authority, and will continue
to own or maintain the legal right and authority during the term
of this Agreement, to place and use the Customer Equipment as
contemplated by this Agreement. ii. Customer's Business. Customer
represents and warrants that Customer's services, products,
materials, data, information and Customer Equipment used by
Customer in connection with this Agreement as well as Customer's
and its permitted customers' and users' use of the Data Center
Services (collectively, "Customer's Business") does not as of the
Installation Date, and will not during the term of this Agreement
operate in any manner that would violate any applicable law or
regulation.
iii. Rules and Regulations. Customer has read the Rules and
Regulations and represents and warrants that Customer and
Customer's Business are currently in full compliance with the
Rules and Regulations, and will remain so at all times during the
term of this Agreement.
b. Warranties and Disclaimers by INFLOW
i. Service Level Warranty. INFLOW's warranty for providing
Data Center Services to Customer is set forth in Exhibit C.
---------
INFLOW's maintenance of the Data Center and Data Center Services,
as described in paragraph 18 of the Rules and Regulations, will
not be deemed to be a failure of INFLOW to provide Data Center
Services under the warranty in Exhibit C. The warranty in Exhibit
--------- -------
C does not apply to any Data Center Services that expressly
-
exclude such warranty. Exhibit C sets forth Customer's sole and
---------
exclusive remedy for any failure by INFLOW to provide Data Center
Services.
ii. No Other Warranty. EXCEPT FOR ANY EXPRESS WARRANTY SET
FORTH IN EXHIBIT C, THE DATA CENTER SERVICES ARE PROVIDED ON AN
---------
"AS IS" BASIS, AND CUSTOMER'S USE OF THE DATA CENTER SERVICES IS
AT ITS OWN RISK. INFLOW DOES NOT MAKE, AND HEREBY DISCLAIMS, ANY
AND ALL OTHER EXPRESS AND/OR IMPLIED WARRANTIES, INCLUDING, BUT
NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE, NONINFRINGEMENT AND TITLE, AND ANY WARRANTIES
ARISING FROM A COURSE OF DEALING, USAGE, OR TRADE PRACTICE.
WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, INFLOW DOES NOT
WARRANT THAT THE DATA CENTER SERVICES WILL BE UNINTERRUPTED,
ERROR-FREE, OR SECURE.
iii. Actions of Third Party. Without limiting the foregoing
disclaimer, Customer specifically acknowledges that INFLOW's
network services beyond its Data Center premises are provided or
controlled by third parties. At times, actions or inactions
caused by these third parties can produce situations in which
INFLOW's customers' connections to telecommunication networks (or
portions thereof) may be impaired or disrupted. Although INFLOW
will use commercially reasonable efforts to take any actions it
deems appropriate to remedy and avoid such events, INFLOW cannot
guarantee that they will not occur. Accordingly, so long as
INFLOW acts in a commercially reasonable manner as described
above, INFLOW will have no liability whatsoever resulting from or
related to such events.
7. LIMITATIONS OF LIABILITY
a. Personal Injury. Each Representative visiting the Data Center
does so at its own risk and INFLOW will have no liability whatsoever
for any harm to such persons resulting from any cause other than
INFLOW's gross negligence or willful misconduct resulting in personal
injury to such persons during such a visit.
b. Damage to Customer Equipment or Business. INFLOW will have no
liability for any damage to, or loss relating to, the Customer
Equipment or Customer's Business resulting from any cause whatsoever.
c. Exclusions. Except as specified in Sections 7(a) and 7(b)
------------- ----
above, in no event will INFLOW be liable to Customer, any
Representative, or any third party for any claims arising out of or
related to this Agreement, Customer Equipment, Customer's Business or
otherwise, and any lost revenue, lost profits, replacement goods, loss
of technology, rights or services, incidental, punitive, indirect or
Page 3
<PAGE>
consequential damages, loss of data, or interruption of loss of use of
service or of any Customer Equipment or Customer's Business, even if
advised of the possibility of such damages, whether under theory of
contract, tort (including negligence), strict liability or otherwise.
d. Customer's Insurance. Customer agrees that it and its
Representatives will not pursue any claims against INFLOW for any
liability INFLOW may have under or relating to this Agreement until
Customer first makes claims against Customer's insurance provider(s)
and such insurance provider(s) finally resolve(s) such claims.
Customer waives its right of recovery against INFLOW (and waives the
subrogation right of its insurance provider(s)) to the extent such
claims are covered by (i) Customer's insurance, or (ii) the insurance
Customer is required to carry under this Agreement, whichever is
greater.
e. Basis of the Bargain; Failure of Essential Purpose. Customer
acknowledges that INFLOW has set its prices and entered into this
Agreement in reliance upon the limitations of liability and the
disclaimers of warranties and limitations on damages set forth in this
Agreement, and that the same form an essential basis of the bargain
between the parties. The parties agree that the limitations and
exclusions of liability and disclaimers specified in this Agreement
will survive and apply even if found to have failed of their essential
purpose.
8. INDEMNIFICATION.
a. INFLOW's Indemnification of Customer. INFLOW will indemnify,
defend and hold Customer harmless from and against any and all costs,
liabilities, losses, damages and expenses (including, but not limited
to, reasonable attorneys' fees) (collectively, "Losses") resulting
from any claim, suit, action, or proceeding (each, an "Action")
brought against Customer alleging (i) the infringement of any third
party registered U.S. copyright or issued U.S. patent resulting from
the provision of Data Center Services pursuant to this Agreement (but
excluding any infringement contributorily caused by Customer's
Business or Customer Equipment) and (ii) personal injury to a
Representative from INFLOW's gross negligence or willful misconduct.
b. Customer's Indemnification of INFLOW. Customer will indemnify,
defend and hold INFLOW, its affiliates and customers harmless from and
against any and all Losses suffered by, or resulting from or arising
out of any Action brought by or against, INFLOW, its affiliates or
customers alleging: (i) with respect to the Customer's Business; (A)
infringement or misappropriation of any intellectual property rights;
(B) defamation, libel, slander, obscenity, pornography, or violation
of the rights of privacy or publicity; or (C) spamming, or any other
offensive, harassing or illegal conduct; (ii) any damage or
destruction to the Customer Area, the Data Center or the equipment of
INFLOW or any other customer by the Customer Equipment, any
Representative, or any other action or inaction of Customer; (iii) any
other damage arising from the Customer Equipment or Customer's
Business; (iv) any violation of law or regulation by Customer or its
Representatives; or (v) any violation of this Agreement or the Rules
and Regulations by Customer or its Representatives.
c. Notice. Each party will provide the other party prompt written
notice of the existence of any such event of which and when it becomes
aware, and an opportunity to participate in the defense thereof.
9. TERM. The term of this Agreement will commence on the Effective
Date and continue for an initial term of _______ (__) year(s) from the
Effective Date unless modified by a Service Change Form. At the
expiration of this initial term, this Agreement will automatically
renew for successive terms of one (1) year subject to Customer's
acceptance of INFLOW's then current fees, unless notice of non-renewal
is given by either party no less than ninety (90) days before
expiration of the term. Customer will be deemed to have accepted
INFLOW's then current fees for any successive term unless Customer
gives notice to INFLOW of its rejection of any increase in fees no
later than ten (10) days after Customer receives notice thereof.
10. DEFAULT AND REMEDIES.
a. Default by INFLOW. The occurrence of any of the following will
be a "Default" by INFLOW: (i) INFLOW fails to perform or observe any
of its obligations under this Agreement after a period of thirty (30)
days after receiving notice from Customer of such failure; or (ii)
INFLOW's insolvency or liquidation as a result of which INFLOW ceases
to do business for a continuous period of at least one (1) month.
b. Default by Customer. The occurrence of any of the following
will be a "Default" by Customer: (i) Customer fails to pay, when due,
any fees or charges owing to INFLOW under this Agreement; or (ii)
Customer fails to perform or observe its obligations under any of the
following provisions of this Agreement: Section 3(c) (Access and
------------
Security), Section 3(d) (No Competitive Services), Section 3(e)
------------ ------------
(Interconnection), Section 3(f) (Damage Prevention); Section 5(a)
------------ ------------
(Confidential Information); or (iii) Customer breaches any
representation or warranty made by Customer in this Agreement; or (iv)
Customer fails to perform or observe any of its other obligations
under this Agreement after a period of thirty (30) days after
receiving notice from INFLOW of such failure; or (v) Customer's
insolvency or liquidation as a result of which Customer ceases to do
business for a continuous period of at least one (1) month.
c. Customer's Remedies for Default by INFLOW. If INFLOW commits a
Default, Customer will be entitled, at its election, to terminate this
Agreement or seek any available remedies at law or in equity.
Customer's right of recovery for any such Default will be limited as
elsewhere provided in this Agreement, including, without limitation,
Section 7 and Exhibit C. Notwithstanding anything to the contrary in
--------- ---------
this Agreement, INFLOW's maximum aggregate liability to Customer
related to or in connection with this Agreement will be limited to the
total amount paid by Customer to INFLOW hereunder for the prior twelve
(12) month period.
d. INFLOW's Remedies for Default by Customer. If Customer commits
a Default, INFLOW will be entitled, at its election, to exercise any
one or more of the following remedies, then or at any time thereafter:
(i) to exercise any remedy for such Default set forth elsewhere in
this Agreement; (ii) to pursue any remedy available at law or in
equity, (iii) to terminate this Agreement; (iv) to suspend Data Center
Services; and (v) to remove any or all of the Customer Equipment and
any other property of Customer to the extent reasonably necessary to
ensure compliance with any law or regulation or to prevent harm to the
business or equipment of INFLOW or any of its customers.
11. OTHER PROVISIONS.
a. Non-Assignment. Customer will not be permitted to assign this
agreement in whole or in part without INFLOW's prior written consent,
which will not be unreasonably withheld. Any
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<PAGE>
assignment in violation of the foregoing restriction will be null and
void. Except as restricted above, this Agreement will be binding upon,
and inure to the benefit of, the parties hereto and their respective
successors and assigns.
b. Independent Contractors. The parties will have the status of
independent contractors, and nothing in this Agreement will be deemed
to place the parties in the relationship of employer-employee,
principal-agent, or partners or in a joint venture.
c. Non-Waiver. Failure of either party to enforce any of its
rights hereunder will not be deemed to constitute a waiver of its
future enforcement of such rights or any other rights.
d. Severability. If any provision of this Agreement is held to be
invalid, illegal, or unenforceable under present or future laws, such
item will be struck from the Agreement; however, such invalidity or
enforceability will not affect the remaining provisions or conditions
of this Agreement. The parties will remain legally bound by the
remaining terms of this Agreement, and will strive to reform the
Agreement in a manner consistent with the original intent of the
parties.
e. Force Majeure. Either party will be excused from any delay or
failure in performance hereunder caused by reason of any occurrence or
contingency beyond its reasonable control, including but not limited
to, acts of God, earthquake, labor disputes and strikes, riots, war,
and governmental requirements. The obligations and rights of the party
so excused will be extended on a day-to-day basis for the period of
time equal to that of the underlying cause of the delay.
f. Governing Law; Jurisdiction. This Agreement will be
interpreted and enforced according to the laws of the State of
Colorado. INFLOW and Customer hereby consent and submit to the
personal jurisdiction of the State and federal courts of the State of
Colorado.
g. Integration. This Agreement expresses the complete and final
understanding of the parties with respect to the subject matter
hereof, and supersedes all prior communications between the parties,
whether written or oral with respect to the subject matter hereof. No
modification of this Agreement will be binding upon the parties
hereto, unless evidenced by a writing duly signed by authorized
representatives of the respective parties hereto.
h. Exhibits Incorporated. All Exhibits to this Agreement are
incorporated herein and made a part hereof as if fully set forth
herein.
i. Notices. All notices or other instruments or communications
provided for under this Agreement will be in writing, signed by the
party giving the same, and will be deemed properly given and received
(i) on the next business day after deposit for overnight delivery by
an overnight courier service such as Federal Express or (ii) three (3)
business days after mailing, by registered or certified mail, return
receipt requested. All such notices or other instruments will be
furnished with delivery or postage charges prepaid addressed to the
party at the address set forth below or such other address as such
party may designate by notice to the other party.
If to INFLOW:
General Manager
INFLOW Inc.
1860 Lincoln Street, Suite 305
Denver, CO 80295
with a copy to:
Legal Department
INFLOW, Inc.
1860 Lincoln Street, Suite 305
Denver, CO 80295
If to Customer:
-----------------------------
-----------------------------
-----------------------------
-----------------------------
AGREED AND ACCEPTED AS OF THE DATE SET FORTH
ABOVE:
CUSTOMER:
__________________, a ____________ corporation
By:
------------------------------------------------------
(Authorized Signature)
Name:
----------------------------------------------------
Title:
---------------------------------------------------
Date:
----------------------------------------------------
INFLOW:
InFlow, Inc., a Delaware corporation d/b/a InflowNet, Inc.
By:
------------------------------------------------------
(Authorized Signature)
Name:
----------------------------------------------------
Title:
---------------------------------------------------
Date:
----------------------------------------------------
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<PAGE>
EXHIBIT A
---------
Initial SERVICES PROVIDED AND FEE SCHEDULE
Data Center Services
The "Installation Date" will be _____________________. The "Installation Payment
Date" will be _____________.
INFLOW will provide the following services:
1. Datacenter Space.
a. Cabinets. INFLOW will provide Customer _____ (__) cabinets to
--------
accommodate their equipment (the "Customer Cabinets") in
accordance with this Agreement and the Rules and Regulations.
Each cabinet shall be 84 inches high, contain up to three (3)
fixed shelves, one (1) rolling shelf, front and rear-locking
perforated doors, and one (I) eleven (11) port surge-protected
power strip. In conjunction with Customer's Representatives,
INFLOW will install the Customer Equipment in the Customer
Cabinets and connect such Customer Equipment to building ground,
electrical power circuits and telephony cabling in support of
Customer's use of Data Center Services. Customer will ensure that
the Customer Equipment will not place a load upon the floor of
the Data Center that exceeds one hundred (100) pounds per square
foot
b. Right of First Refusal. Customer will have a right of first
----------------------
refusal for the ______ (__) additional cabinet locations that are
numbered _______________________________ according to INFLOW's
numbering scheme for the Data Center. Customer's right of first
refusal for each cabinet location will be for a term of twelve
(12) months. If INFLOW desires to make available to another
customer a cabinet location subject to Customer's right of first
refusal, INFLOW will notify Customer of such desire in writing.
If Customer chooses to exercise its right of first refusal for
such cabinet location, Customer will give written notice to
INFLOW within ten (10) business days after Customer's receipt of
INFLOW's notice. Customer will immediately thereafter become
obligated for full payment for such cabinet location, at the same
price as Customer then pays for its other cabinet locations under
this Agreement. If Customer does not notify INFLOW within the
time period required above, then Customer's right of first
refusal for such cabinet location will terminate and INFLOW will
have no further obligation whatsoever to Customer with respect
thereto.
2. Network Circuits. Based upon Customer's written instructions, INFLOW will
take the following actions to install Customer network circuits: (1)
Provide data cable connections from the Customer Cabinets to the ingress
point within the Data Center of_____________________________ ("Customer's
Designated Carrier(s)"); (2) Submit network circuit order to Customer's
Designated Carrier(s); (3) Confirm Customer's Designated Carrier's order
number and scheduled installation date; (4) Coordinate circuit installation
by Customer's Designated Carrier; (5) Confirm circuit operation by
end-to-end or other testing procedures as may be appropriate; (6) Accept
network circuit from Customer's Designated Carrier upon approval of
Customer; and (7) Coordinate equipment (CS U, DSU, multiplexer, router,
etc) installation necessary for network circuit installation.
Based upon Customer's written instructions, INFLOW will monitor Customer
network circuits for faults, notify Customer in the event of the detection
of a fault and assist in troubleshooting fault and restoring service.
a. Network: Local Service(s). INFLOW will provide ______ (__)
-------------------------
[Carrier] DS-[#] local access circuit(s) for Customer
application.
b. Network: Private Line(s). INFLOW will provide _____ (__)[Carrier]
------------------------
DS-[#] point-to-point circuit(s) between Customer's cabinet and
Customer's facility located at___________________________.
c. Network: Internet Service(s). INFLOW will provide____() [#]
----------------------------
[M/kbps] Internet circuit(s) for Customer application. Customer
shall at all times adhere to the Acceptable Use Policy located at
[URL] as amended from time to time effective upon posting of the
revised policy at the URL. Notwithstanding anything to the
contrary contained herein, INFLOW may immediately take corrective
action, including disconnection or discontinuance of Internet
Services in the event of notice of possible violation by Customer
of the Acceptable Use Policy
d. Network: Modem/Phone Circuit(s). INFLOW will provide ___ ()analog
-------------------------------
modem/phone circuits for Customer application.
e. Interconnection. INFLOW will provide data cable connections from
---------------
Customer equipment to [Carrier] termination point within the Data
Center as directed by Customer for direct billing by Carrier.
f. Network Interface(s). INFLOW will provide ______ (__)DS-[#]
--------------------
CSU-DSU(s) for Customer application.
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<PAGE>
3. Power Circuits.
a. A/C Power Circuit(s). INFLOW will provide one 20 ampere (UPS and
--------------------
generator-protected) A/C electrical circuit with two (2) female
receptacles for each Customer Cabinet.
b. B-Side A/C Power Circuit(s). INFLOW will provide _______(_) 20
---------------------------
ampere B-side (LIPS and generator-protected) A/C electrical
circuit(s) with two (2) female receptacles each for Customer
application.
c. D/C Power Circuit(s). INFLOW will provide _______(_)______ ampere
--------------------
(UPS and generator-protected) D/C electrical circuit(s) with one
(1) female receptacle each for Customer application.
d. B-Side D/C Power Circuit(s). INFLOW will provide ______(_)_____
---------------------------
ampere B-side (UPS and generator-protected) D/C electrical
circuit (s) with one (1) female receptacle each for Customer
application.
4. Technical Support Services.
a. Application Monitoring. Based upon Customer's written
----------------------
instructions, INFLOW will monitor (__) Customer application test
points. INFLOW will (1) Verify DNS server operation, (2) Verify
FTP server operation, (3) Verify Mail server operation, (4)
verify News server operation, (5) Ping a network device, (6)
Verify connection to a service on a port, (7) Verify retrieval of
a web page, and/or (8) Verify a web page transaction in order to
monitor Customer application performance. INFLOW will notify the
Customer by telephone, email or page of a failed test condition.
b. NT Server Monitoring. Based upon Customer's written instructions,
--------------------
INFLOW will monitor (__) Customer NT Servers. INFLOW will monitor
(1) Percentage CPU utilization, (2) Disk space utilization, (3)
Virtual memory utilization, (4) Process status, and/or (5) Web
server load for each NT server. INFLOW will notify the Customer
by telephone, email or page of a failed test condition.
c. UNIX Server Monitoring. Based upon Customer's written
----------------------
instructions, INFLOW will monitor ____ (__) Customer Unix
Servers. INFLOW will monitor (1) Percentage CPU utilization, (2)
Disk space utilization, (3) Virtual memory utilization, (4)
Process status, and/or (5) Web server load for each Unix server.
INFLOW will notify the Customer by telephone, email or page of a
failed test condition.
d. Managed Firewall Service. Based on Customer's approved security
------------------------
policy, INFLOW will manage and monitor ______ () Checkpoint
FireWall-l implementations. INFLOW will manage software updates
and patches for the firewall and its host operating system,
continuously monitor the firewall implementations and respond to
security incidents in accordance with INFLOW's standard response
procedures. This service includes Checkpoint FireWall- I and
operating system software, host platform hardware and twenty (20)
hours of security policy development consulting.
e. Technical Support. Based upon Customer's written instructions,
-----------------
INFLOW will provide first-level maintenance of Customer Equipment
including: monitoring for faults, replacement of faulty plug-in
type cards using spares provided by Customer, power-cycling of
equipment, and fault isolation, logging and Customer notification
based on pre-defined plans.
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<PAGE>
Fees and Charges. Fees for Data Center Services provided to Customer are
identified below. Recurring fees are indicated for a calendar month of service.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Services Installation Fee Usage Fee
===================================================================================================================================
<S> <C> <C>
S l.a. Cabinet Space (19") $1,000 per cabinet. $1,000 per cabinet.
p
a Cabinet Space (23") $1,000 per cabinet. $1,100 per cabinet.
c ------------------------------------------------------------------------------------------------------------------------------
e 1.b. Right of First Refusal N/A $200 per cabinet location.
===================================================================================================================================
2.a. Local Service [Based on Customer Designated Configuration] [Based on Customer Designated Configuration]
N ------------------------------------------------------------------------------------------------------------------------------
e 2.b. Private Line(s) [Based on Customer Designated Configuration] [Based on Customer Designated Configuration]
t ------------------------------------------------------------------------------------------------------------------------------
w 2.c. Internet Service(s) [Based on Customer Designated Configuration] [Based on Customer Designated Configuration]
o ------------------------------------------------------------------------------------------------------------------------------
r 2.d. Modem/Phone Circuit(s) $0 per analog modem circuit. $50 per analog modem circuit.
k ------------------------------------------------------------------------------------------------------------------------------
2.e. Interconnection $0 per cable. $40 per cable to non-zero-mile POP.
C
i $100 per cable to zero-mile POP for 0-1.5
r Mbps connection.
c
u $500 per cable to zero-mile POP for 1.5+
i Mbps connection.
t ------------------------------------------------------------------------------------------------------------------------------
s 2.f. Network Interface(s) [Based on Customer Designated Configuration] [Based on Customer Designated Configuration]
===================================================================================================================================
P C 3.a. A/C Power Circuit(s) $100 per 20-Ampere A/C circuit. $15 per A/C ampere based on running amperes.
o i ------------------------------------------------------------------------------------------------------------------------------
w r 3.b. B-Side A/C Power Circuit(s) $100 per 20-Ampere A/C circuit. $30 per 20-Ampere circuit.
e c ------------------------------------------------------------------------------------------------------------------------------
r u 3.c. D/C Power Circuit(s) $400 per 20-Ampere D/C circuit. $20 per D/C ampere based on running amperes.
i ------------------------------------------------------------------------------------------------------------------------------
t 3.d. B-Side D/C Power Circuit(s) $400 per 20-Ampere D/C circuit. $40 per 20-Ampere circuit.
s
===================================================================================================================================
T S 4.a. Application Monitoring $35 per 1-5 test points. $35 per 1-5 test points.
e u ------------------------------------------------------------------------------------------------------------------------------
c p 4.b. NT Server Monitoring $100 per server. $55 per server.
h p ------------------------------------------------------------------------------------------------------------------------------
n o 4.c. UNIX Server Monitoring $200 per server. $65 per server.
i r ------------------------------------------------------------------------------------------------------------------------------
c t 4.d. Managed Firewall Service $4,000 per firewall implementation. $2,500 per firewall implementation.
a ------------------------------------------------------------------------------------------------------------------------------
l S 4.e. Technical Support (Tier 1) N/A $100 per man-hour in 15 minute increments.
e
r
v
i
c
e
s
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 8
<PAGE>
EXHIBIT B
---------
CUSTOMER EQUIPMENT
The "Customer Equipment" permitted in the Customer Area is as follows. Customer
shall be allowed to place additional equipment in the Customer Area with the
prior approval of INFLOW.
[Insert Equipment Description Here]
Page 9
<PAGE>
EXHIBIT C
---------
SERVICE LEVEL AGREEMENT
INFLOW's Service Level Agreement defines the performance criteria to which
INFLOW will be held accountable, reporting methods and compensation in the event
that performance levels are not met.
On-Time Provisioning
- --------------------
Performance Criteria: All electrical and network connections for Customer's
operations will be installed no later than the installation date and for Service
Change Forms no later than 30 calendar days after the date the Service Change
Form is signed by Customer.. Customer must have the network and power interface
equipment supporting its equipment properly installed and functioning no later
than the installation date. If Customer fails to meet such deadline, the
deadline for INFLOW's performance under this paragraph will be extended until
the date which is seven calendar days after Customer gives notice to INFLOW that
its network and power interface equipment supporting its equipment is properly
installed and functioning. Network provisioning service levels are only
applicable if Customer purchases network connections through INFLOW.
Reporting Methods: INFLOW tracks the installation time within the Customer
implementation schedule.
Compensation: In the event that INFLOW fails to meet the due date for
provisioning, INFLOW will credit Customer's bill in an amount equal to the
cabinet or network installation charges affected.
Network Availability
- --------------------
Performance Criteria: The Customer's network connections from the cabinet
interface to network carrier ingress point will be available 99.9% of the time
each month. This service level does apply to INFLOW owned/provided equipment
used to multiplex Customer's network connections. This service level does not
apply to Customer owned/provided equipment in a cabinet or to network
connections that are not made through INFLOW's cross connect switch.
Reporting Methods: INFLOW will provide to Customer a report showing the start
time, stop time and duration of network outages no later than 15 calendar days
after the end of each month. The network availability rate will be calculated
based on dividing the total amount of time without network outages by the total
amount of time in the month.
Compensation: In the event that INFLOW fails to meet the network availability
service level, INFLOW will credit Customer's bill in the amount equal to one
month of INFLOW's network charge to the Customer for the circuit(s) involved.
Power Availability
- ------------------
Performance Criteria: Power will be continuously available 100% of the time to
Customer's cabinet interface each month. This service level does not apply to
Customer owned/provided equipment in a cabinet.
Reporting Methods: INFLOW will provide to Customer a report showing the start
time, stop time and duration of power outages no later than 15 calendar days
after the end of each month. The power availability rate will be calculated
based on dividing the total amount of time without power outages by the total
amount of time in the month.
Compensation: In the event that INFLOW fails to meet the power availability
service level, INFLOW will credit Customer's bill in the amount equal to 100% of
one month's power usage (amperage) charge for the cabinet(s) involved.
Network Time to Restore
- -----------------------
Performance Criteria: All network problems reported by Customer on average will
be cleared within 4 hours. This service level does not apply to Customer
owned/provided equipment in a cabinet or to network connections that are not
made through INFLOW's cross connect switch.
Reporting Methods: INFLOW will provide to Customer a report showing the start
time and restoration time for all network trouble tickets initiated during a
service month no later than 15 calendar days after the end of that month. A
simple mathematical average will be calculated for the durations of all trouble
tickets.
Compensation: In the event that INFLOW fails to meet the network availability
service level, INFLOW will credit Customer's bill in the amount equal to one
month of INFLOW's network charge to the Customer for the circuit(s) involved.
Additional Conditions
- ---------------------
[Based on Customer Requirements]
Page 10
<PAGE>
EXHIBIT D
---------
RULES AND REGULATIONS
GENERAL RULES AND REGULATIONS
1. All INFLOW Customers and their representatives, employees, contractors,
agents and users of Customers' facilities are subject to these Rules and
Regulations in connection with their use of INFLOW Data Center Services.
2. All equipment installation activities must be approved by INFLOW.
3. Customer representatives shall not approach, handle, use, inspect or
examine in any way any other equipment but their own.
4. Customer's use of the Data Center and the building in which it is located
shall at all times comply with the rules and regulations promulgated by the
owner of such building from time to time, a copy of which may be obtained
from INFLOW.
5. Customer representatives shall not disclose the identity of any INFLOW
clients.
6. The Data Center shall be kept neat and orderly at all times. Customer
representatives shall remove all trash and debris upon departure from the
Data Center. INFLOW shall have the right to remove and discard any trash
and debris left in the Data Center in violation of the foregoing.
7. At conclusion of work being done in the Data Center, Customer shall ensure
all cables are routed and dressed neatly in cabinets and all doors are
closed and locked.
8. Use of freight elevator is available for large equipment delivery only with
prior INFLOW approval.
9. Dollies and carts are available for use with prior INFLOW approval.
10. Customer Equipment must be configured and run at all times in compliance
with the manufacturer's specifications, including power outlet, power
consumption and clearance requirements.
11. No sign, advertisement, notice or object shall be displayed by a Customer
in or on the exterior of the Data Center walls, doors, ceilings, or racks
without INFLOW's prior approval.
12. No Customer, nor any of Customer's representatives or visitors, shall at
any time bring into or keep upon the Data Center premises any hazardous,
inflammable, combustible, explosive or otherwise dangerous fluid, chemical
or substance at any time.
13. No acids, vapors or other materials shall be discharged or permitted to be
discharged into the waste lines, vents or flues of the Data Center.
14. Customer may not bring, or make use of, any of the following into the
facility:
food or drink, tobacco products, explosives, weapons, chemicals, illegal
drugs, alcohol or other intoxicants, electro-magnetic devices, radioactive
materials, photographic or recording equipment of any kind (other than tape
back-up equipment).
15. INFLOW reserves the right to inspect all objects to be brought into or
taken out of the Data Center and to exclude from the Data Center all
objects which violate any of these Rules and Regulations. INFLOW may
require any person entering or leaving the Data Center with any package
document the contents of the said package.
16. All connections to and from Customer's equipment must be clearly labeled.
Customers may use INFLOW's labeling code or choose to use their own code.
All Customer labeling codes must be provided to INFLOW for purposes of
configuration control.
17. Periodically, INFLOW will conduct routine scheduled maintenance of its Data
Center and Data Center Services. INFLOW shall notify Customers a minimum
of 15 calendar days in advance of said maintenance. Customer agrees to
cooperate with INFLOW during the scheduled maintenance so that INFLOW
minimizes Customer impact.
ACCESS AND SECURITY
18. Only those individuals specifically identified by Customer on the
authorized personnel list maintained by INFLOW may access the Data Center.
19. Customer will notify INFLOW in writing of any change in Customer's
representatives.
Page 11
<PAGE>
20. Customer representatives shall stay in the vicinity of their own equipment
when in the INFLOW facility.
21. All visitors who do not have badges are required to sign the access log
located in the NOC upon entry and exit.
22. "Tailgating" is prohibited. Tailgating is the act of following a badged
individual into the Data Center without swiping the badge for access.
23. Customer shall not access the building roof, third floor electrical or
communications closets, the Data. Center ceiling or floor without prior
consent from INFLOW.
CONDUCT GUIDELINES
24. Customer and its representatives may not misuse or abuse any INFLOW
property or equipment.
25. Customer and its representatives may not harass any individual including
INFLOW personnel and representatives of other Customers of INFLOW.
26. Customer and its representatives may not engage in any activity that is in
violation of the law or aid in criminal activity while on INFLOW property
or in connection with the Data Center Services. Customer and its
Representatives may not assist or permit any persons in engaging in any of
the activities described above. If Customer becomes aware of any such
activities, Customer will use best efforts to stop such activities
immediately, including, if necessary, terminating Customer's user's access
to Customer's online facilities.
27. Customer and its representatives may not infringe or misappropriate the
intellectual property rights of others. This includes posting copyrighted
materials without appropriate permission, using trademarks of others
without appropriate permission or attribution, and posting or distributing
trade secret information of others in violation of a duty of
confidentiality.
28. Customer and its representatives may not violate the personal privacy
rights of others. This includes collecting and distributing information
about users without their permission, except as permitted by applicable
law.
29. Customer and its representatives may not send, post or host harassing,
abusive, libelous or obscene materials or take any similar actions.
30. Customer and its representatives may not intentionally omit, delete, forge
or misrepresent transmission information, including headers, return
addressing information and IP addresses or take any other actions intended
to cloak Customer's or its users' identity or contact information.
31. If Customer becomes aware of any such activities, Customer will use best
efforts to stop such activities immediately, including, if necessary,
terminating Customer's user's access to Customer's online facilities.
MODIFICATION OF RULES AND REGULATIONS
INFLOW reserves the right to change these Rules and Regulations at any time.
Customer is responsible for regularly reviewing these Rules and Regulations.
Continued use of the Data Center Services following any such changes shall
constitute the Customer's acceptance of such changes.
INFLOW reserves the right to deny access to anyone not adhering to the above
rules and regulations.
Page 12
<PAGE>
EXHIBIT E
---------
SERVICE CHANGE FORM
MODIFICATION OF DATA CENTER SERVICES AGREEMENT
AND SUMMARY OF DATA CENTER SERVICES
The provisions of this Modification of Data Center Services Agreement
and Summary of Data Center Services (this "Modification") are hereby added to
and made part of the Data Center Services Agreement dated _____________ between
InFlow, Inc., a Delaware corporation d/b/a InflowNet, Inc. ("INFLOW") and
____________________ , a _____________ corporation ("Customer"), as the same may
have been modified prior to the date hereof (the "Existing Services Agreement").
In the event of any conflict of any of the terms set forth in the Existing
Services Agreement and the terms set forth in this Addendum, including, without
limitation, the Summary of Data Center Services, the terms set forth in this
Addendum shall control. References in the Existing Services Agreement and in
this Modification to the "Agreement" shall refer to the Existing Services
Agreement as amended by this Modification.
SERVICE MODIFICATIONS
The Existing Services Agreement is amended to provide as follows:
. [Cabinet Space. The number of Customer Cabinets is [increased][decreased]
-------------
by ___, to a total of____ Customer Cabinets. The "Customer Area is amended
to mean the cabinet location(s) in the Data Center numbered
_________________ according to INFLOW's numbering scheme for the Data
Center.]
. [Data. Center Services. The Data Center Services are further amended as set
---------------------
forth below.]
.
.
. [Other Amendments. The Existing Services Agreement is further amended as
----------------
set forth below.]
.
.
It is agreed that the term of the Existing Services Agreement will end on
____________.
Page 13
<PAGE>
SUMMARY OF DATA CENTER SERVICES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Services Quantity Install Status* Install Fee Usage Fee
Date Per Unit Per Unit
=====================================================================================================
<S> <C> <C> <C> <C> <C>
S l.a. Cabinet Space (19") TBD TBD TBD $1,000 $1,000
p
a Cabinet Space (23") TBD TBD TBD $1,000 $1,100
c ------------------------------------------------------------------------------------------------
e 1.b. Right of First Refusal TBD TBD TBD N/A $200
=====================================================================================================
N C 2.a. Local Service TBD TBD TBD TBD TBD
e i ------------------------------------------------------------------------------------------------
t r 2.b. Private Line(s) TBD TBD TBD TBD TBD
w c ------------------------------------------------------------------------------------------------
o u 2.c. Internet Service(s) TBD TBD TBD TBD TBD
r i ------------------------------------------------------------------------------------------------
k t 2.d. Modem/Phone Circuit(s) TBD TBD TBD $0 $50
s ------------------------------------------------------------------------------------------------
2.e. Interconnection TBD TBD TBD $0 TBD
------------------------------------------------------------------------------------------------
2.f. Network Interface(s) TBD TBD TBD TBD TBD
=====================================================================================================
P C 3.a A/C Power Circuit(s)--20A TBD TBD TBD $100 $15
o i ------------------------------------------------------------------------------------------------
w r 3.b. B-Side A/C Power Circuit(s)--20A TBD TBD TBD $100 $30
e c ------------------------------------------------------------------------------------------------
r u 3.c D/C Power Circuit(s)--20A TBD TBD TBD $400 $20
i ------------------------------------------------------------------------------------------------
t 3.d. B-Side D/C Power Circuit(s)--20A TBD TBD TBD $400 $40
s ------------------------------------------------------------------------------------------------
=====================================================================================================
T S 4.a. Application Monitoring TBD TBD TBD $35 $35
e u ------------------------------------------------------------------------------------------------
c p 4.b. NT Server Monitoring TBD TBD TBD $100 $55
h p ------------------------------------------------------------------------------------------------
n o 4.c. UNIX Server Monitoring TBD TBD TBD $200 $65
i r ------------------------------------------------------------------------------------------------
c t 4.d. Managed Firewall Service TBD TBD TBD $4,000. $2,500
a ------------------------------------------------------------------------------------------------
l 4.e. Technical Support (Tier I) TBD TBD TBD N/A $100
- -----------------------------------------------------------------------------------------------------
</TABLE>
*Status: Completed or Pending
AGREED AND ACCEPTED AS OF_____________:
<TABLE>
<S> <C>
INFLOW: CUSTOMER:
InFlow, Inc., a Delaware corporation d/b/a InflowNet, Inc. ___________________, a ___________ corporation
By: _____________________________________________________ By:____________________________________________
(Authorized Signature) (Authorized Signature)
Name:___________________________________________________ Name:__________________________________________
Title:__________________________________________________ Title:_________________________________________
Date:___________________________________________________ Date:__________________________________________
</TABLE>
Page 14
<PAGE>
EXHIBIT 10.21
INFLOW, INC.
1997 STOCK OPTION/STOCK ISSUANCE PLAN
-------------------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1997 Stock Option/Stock Issuance Plan is intended to promote the
interests of InFlow, Inc., a Delaware corporation, by providing eligible persons
with the opportunity to acquire a proprietary interest, or otherwise increase
their proprietary interest, in the Corporation as an incentive for them to
remain in the service of the Corporation.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into two (2) separate equity programs:
(i) the Option Grant Program under which eligible persons may, at
the discretion of the Plan Administrator, be granted options to purchase
shares of Common Stock, and
(ii) the Stock Issuance Program under which eligible persons may,
at the discretion of the Plan Administrator, be issued shares of Common
Stock directly, either through the immediate purchase of such shares or as
a bonus for services rendered the Corporation (or any Parent or
Subsidiary).
B. The provisions of Articles One and Four shall apply to both equity
programs under the Plan and shall accordingly govern the interests of all
persons under the Plan.
III. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered by the Board. However, any or all
administrative functions otherwise exercisable by the Board may be delegated to
the Committee. Members of the Committee shall serve for such period of time as
the Board may determine and shall be subject to removal by the Board at any
time. The Board may also at any time terminate the functions of the Committee
and reassume all powers and authority previously delegated to the Committee.
B. The Plan Administrator shall have full power and authority
(subject to the provisions of the Plan) to establish such rules and regulations
as it may deem appropriate for proper administration of the Plan and to make
such determinations under, and issue such
<PAGE>
interpretations of, the Plan and any outstanding options or stock issuances
thereunder as it may deem necessary or advisable. Decisions of the Plan
Administrator shall be final and binding on all parties who have an interest in
the Plan or any option or stock issuance thereunder.
IV. ELIGIBILITY
A. The persons eligible to participate in the Plan are as follows:
(i) Employees,
(ii) non-employee members of the Board or the non-employee
members of the board of directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who
provide services to the Corporation (or any Parent or Subsidiary).
B. The Plan Administrator shall have full authority to determine, (i)
with respect to the option grants under the Option Grant Program, which eligible
persons are to receive option grants, the time or times when such option grants
are to be made, the number of shares to be covered by each such grant, the
status of the granted option as either an Incentive Option or a Non-Statutory
Option, the time or times at which each option is to become exercisable, the
vesting schedule (if any) applicable to the option shares and the maximum term
for which the option is to remain outstanding, and (ii) with respect to stock
issuances under the Stock Issuance Program, which eligible persons are to
receive stock issuances, the time or times when such issuances are to be made,
the number of shares to be issued to each Participant, the vesting schedule (if
any) applicable to the issued shares and the consideration to be paid by the
Participant for such shares.
C. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Option Grant Program or to effect stock
issuances in accordance with the Stock Issuance Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock. The maximum number of shares of Common
Stock which may be issued over the term of the Plan shall not exceed 360,000
shares.
B. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i) the options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan and subsequently repurchased by the
Corporation, at the option exercise price paid per share, pursuant to the
Corporation's repurchase rights under the Plan shall also be available for
reissuance through one or more subsequent option grants under the Plan.
C. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change
<PAGE>
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration, appropriate adjustments shall be made to (i) the
maximum number and/or class of securities issuable under the Plan and (ii) the
number and/or class of securities and the exercise price per share in effect
under each outstanding option in order to prevent the dilution or enlargement of
benefits thereunder. The adjustments determined by the Plan Administrator shall
be final, binding and conclusive. In no event shall any such adjustments be made
in connection with the conversion of one or more outstanding shares of the
Corporation's preferred stock into shares of Common Stock.
<PAGE>
ARTICLE TWO
OPTION GRANT PROGRAM
--------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator and may be equal to, less than or greater than the Fair Market
Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon exercise of
the option and shall, subject to the provisions of Section I of Article Four and
the documents evidencing the option, be payable in cash or check made payable to
the Corporation. Should the Common Stock be registered under Section 12(g) of
the 1934 Act at the time the option is exercised, then the exercise price may
also be paid as follows:
(i) in shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date, or
(ii) to the extent the option is exercised for vested shares,
through a special sale and remittance procedure pursuant to which the
Optionee shall concurrently provide irrevocable written instructions (A) to
a Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (B) to the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable at
----------------------------
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
C. Effect of Termination of Service.
--------------------------------
<PAGE>
1. The following provisions shall govern the exercise of any options
held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason other than Disability or death shall
remain exercisable for such period of time thereafter as shall be
determined by the Plan Administrator and set forth in the documents
evidencing the option, but no such option shall be exercisable after the
expiration of the option term.
(ii) Should Optionee's Service terminate by reason of
Disability, then the Optionee shall have a period of six (6) months
following the date of such cessation of Service during which to exercise
each outstanding option held by such Optionee. However, should such
Disability be deemed to constitute Permanent Disability, then the period
during which each outstanding option held by the Optionee is to remain
exercisable shall be extended by an additional six (6) months so that the
exercise period shall be the twelve (12)-month period following the date of
the Optionee's cessation of Service by reason of such Permanent Disability.
(iii) Should the Optionee die while holding one or more
outstanding options, then the personal representative of the Optionee's
estate or the person or persons to whom the option is transferred pursuant
to the Optionee's will or in accordance with the laws of descent and
distribution shall have a period of twelve (12) months following the date
of the Optionee's death during which to exercise each such option.
(iv) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and cease
to be outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
(v) In the event of an Involuntary Termination following a
Corporate Transaction, the provisions of Section III of this Article Two
shall govern the period for which the outstanding options are to remain
exercisable following the Optionee's cessation of Service and shall
supersede any provisions to the contrary in this section.
2. The Plan Administrator shall have the discretion, exercisable
either at the time an option is granted or at any time while the option remains
outstanding, to:
(i) extend the period of time for which the option is to remain
exercisable following Optionee's cessation of Service or death from the
<PAGE>
limited period otherwise in effect for that option to such greater period
of time as the Plan Administrator shall deem appropriate, but in no event
beyond the expiration of the option term, and/or
(ii) permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the number of vested
shares of Common Stock for which such option is exercisable at the time of
the Optionee's cessation of Service but also with respect to one or more
additional installments in which the Optionee would have vested under the
option had the Optionee continued in Service.
D. Stockholder Rights. The holder of an option shall have no
------------------
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. Unvested Shares. The Plan Administrator shall have the
---------------
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares,
the Corporation shall have the right to repurchase, at the exercise price paid
per share, all or (at the discretion of the Corporation and with the consent of
the Optionee) any of those unvested shares. The terms upon which such
repurchase right shall be exercisable (including the period and procedure for
exercise and the appropriate vesting schedule for the purchased shares) shall be
established by the Plan Administrator and set forth in the document evidencing
such repurchase right.
F. First Refusal Rights. Until such time as the Common Stock is
--------------------
first registered under Section 12(g) of the 1934 Act, the Corporation shall have
the right of first refusal with respect to any proposed disposition by the
Optionee (or any successor in interest) of any shares of Common Stock issued
under the Plan. Such right of first refusal shall be exercisable in accordance
with the terms established by the Plan Administrator and set forth in the
document evidencing such right.
G. Limited Transferability of Options. During the lifetime of the
----------------------------------
Optionee, the option shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee's death.
H. Withholding. The Corporation's obligation to deliver shares of
-----------
Common Stock upon the exercise of any options granted under the Plan shall be
subject to the satisfaction of all applicable Federal, state and local income
and employment tax withholding requirements.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of the Plan shall be applicable to Incentive Options. Options which
are specifically designated as Non-Statutory Options shall not be subject to the
---
terms of this Section II.
A. Eligibility. Incentive Options may only be granted to Employees.
-----------
<PAGE>
B. Exercise Price. The exercise price per share shall not be less
--------------
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
C. Dollar Limitation. The aggregate Fair Market Value of the shares
-----------------
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one (1) calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% Stockholder. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date and the option term shall not exceed five
(5) years measured from the option grant date.
III. CORPORATE TRANSACTION
A. In the event of any Corporate Transaction, each outstanding option
shall be (i) assumed by the successor corporation (or parent thereof) or (ii)
replaced with a comparable option to purchase shares of the capital stock of the
successor corporation (or parent thereof) or with a cash incentive program of
the successor corporation which preserves the spread existing on the unvested
option shares at the time of the Corporate Transaction and provides for
subsequent payout in accordance with the same vesting schedule applicable to
such option. The determination of option comparability under clause (ii) above
shall be made by the Plan Administrator, and its determination shall be final,
binding and conclusive. However, to the extent the successor corporation (or
parent thereof) does not effect such assumption or replacement, each outstanding
option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable for all of the shares of Common Stock at the time subject to
such option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock.
B. All outstanding repurchase rights shall also be assigned to the
successor corporation (or parent thereof) in the event of any Corporate
Transaction. However, to the extent the successor corporation (or parent
thereof) does not accept such assignment, the outstanding repurchase rights
shall terminate automatically, and the shares of Common Stock subject to those
terminated rights shall immediately vest in full, upon the consummation of the
Corporate Transaction, except to the extent such accelerated vesting is
precluded by other limitations imposed by the Plan Administrator at the time the
repurchase right is issued.
C. Unless otherwise provided by the Plan Administrator, immediately
following the consummation of the Corporate Transaction, all outstanding options
shall terminate and cease to be outstanding, except to the extent assumed by the
successor corporation (or parent thereof).
<PAGE>
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction, had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to (i) the number and class of
securities available for issuance under the Plan following the consummation of
such Corporate Transaction and (ii) the exercise price payable per share under
each outstanding option, provided the aggregate exercise price payable for such
--------
securities shall remain the same.
E. The Plan Administrator shall have the discretion, exercisable
either at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration, in whole or in part, of
one or more outstanding options (and the automatic termination, in whole or in
part, of one or more outstanding repurchase rights, with the immediate vesting
of the shares of Common Stock subject to those terminated rights) upon the
occurrence of a Corporate Transaction, whether or not those options are to be
assumed or replaced (or those repurchase rights are to be assigned) in the
Corporate Transaction.
F. The Plan Administrator shall also have full power and authority to
grant options under the Plan which will automatically accelerate in whole or in
part should the Optionee's Service subsequently terminate by reason of an
Involuntary Termination within a designated period (not to exceed twelve (12)
months) following the effective date of any Corporate Transaction in which those
options are assumed or replaced and do not otherwise accelerate. Any options so
accelerated shall remain exercisable for fully-vested shares until the earlier
-------
of (i) the expiration of the option term or (ii) the expiration of the one (1)-
year period measured from the effective date of the Involuntary Termination. In
addition, the Plan Administrator may provide that one or more of the
Corporation's outstanding repurchase rights with respect to shares held by the
Optionee at the time of such Involuntary Termination shall immediately terminate
in whole or in part, and the shares subject to those terminated rights shall
accordingly vest.
G. The portion of any Incentive Option accelerated in connection with
a Corporate Transaction shall remain exercisable as an Incentive Option only to
the extent the applicable One Hundred Thousand Dollar limitation is not
exceeded. To the extent such dollar limitation is exceeded, the accelerated
portion of such option shall be exercisable as a Non-Statutory Option under the
Federal tax laws.
H. The grant of options under the Plan shall in no way affect the
right of the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Plan and to grant in
substitution therefor new options covering the
<PAGE>
same or different number of shares of Common Stock but with an exercise price
per share based on the Fair Market Value per share of Common Stock on the new
option grant date.
<PAGE>
ARTICLE THREE
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below.
A. Purchase Price.
--------------
1. The purchase price per share shall be fixed by the Plan
Administrator and may be less than the Fair Market Value of the Common Stock on
the stock issuance date.
2. Subject to the provisions of Section I of Article Four, shares of
Common Stock may be issued under the Stock Issuance Program for one or both of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any Parent or
Subsidiary).
B. Vesting Provisions.
------------------
1. Shares of Common Stock issued under the Stock Issuance Program
may, in the discretion of the Plan Administrator, be fully and immediately
vested upon issuance or may vest in one or more installments over the
Participant's period of Service or upon attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program, namely:
(i) the Service period to be completed by the Participant or the
performance objectives to be attained,
(ii) the number of installments in which the shares are to vest,
(iii) the interval or intervals (if any) which are to lapse
between installments, and
(iv) the effect which death, Disability or other event designated
by the Plan Administrator is to have upon the vesting schedule,
<PAGE>
shall be determined by the Plan Administrator and incorporated into the Stock
Issuance Agreement.
2. Any new, substituted or additional securities or other property
(including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full stockholder rights with respect to
any shares of Common Stock issued to the Participant under the Stock Issuance
Program, whether or not the Participant's interest in those shares is vested.
Accordingly, the Participant shall have the right to vote such shares and to
receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while holding
one or more unvested shares of Common Stock issued under the Stock Issuance
Program or should the performance objectives not be attained with respect to one
or more such unvested shares of Common Stock, then those shares shall be
immediately surrendered to the Corporation for cancellation, and the Participant
shall have no further stockholder rights with respect to those shares. To the
extent the surrendered shares were previously issued to the Participant for
consideration paid in cash or cash equivalent (including the Participant's
purchase-money indebtedness), the Corporation shall repay to the Participant the
cash consideration paid for the surrendered shares and shall cancel the unpaid
principal balance of any outstanding purchase-money note of the Participant
attributable to such surrendered shares.
5. The Plan Administrator may in its discretion waive the surrender
and cancellation of one or more unvested shares of Common Stock (or other assets
attributable thereto) which would otherwise occur upon the non-completion of the
vesting schedule applicable to such shares. Such waiver shall result in the
immediate vesting of the Participant's interest in the shares of Common Stock as
to which the waiver applies. Such waiver may be effected at any time, whether
before or after the Participant's cessation of Service or the attainment or non-
attainment of the applicable performance objectives.
C. First Refusal Rights. Until such time as the Common Stock is
--------------------
first registered under Section 12(g) of the 1934 Act, the Corporation shall have
the right of first refusal with respect to any proposed disposition by the
Participant (or any successor in interest) of any shares of Common Stock issued
under the Stock Issuance Program. Such right of first refusal shall be
exercisable in accordance with the terms established by the Plan Administrator
and set forth in the document evidencing such right.
II. CORPORATE TRANSACTION
<PAGE>
A. All of the outstanding repurchase rights under the Stock Issuance
Program shall be assigned to the successor corporation (or parent thereof) in
any Corporate Transaction. However, to the extent such successor corporation
(or parent thereof) does not accept such assignment, the repurchase rights shall
automatically terminate and the shares shall vest in full unless such
accelerated vesting is precluded by other limitations imposed in the Stock
Issuance Agreement.
B. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase/cancellation rights remain outstanding under the
Stock Issuance Program, to provide that those rights shall automatically
terminate in whole or in part, and the shares of Common Stock subject to those
terminated rights shall immediately vest, in the event the Participant's Service
should subsequently terminate by reason of an Involuntary Termination within a
designated period (not to exceed twelve (12) months) following the effective
date of any Corporate Transaction in which those repurchase/cancellation rights
are assigned to the successor corporation (or parent thereof).
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
<PAGE>
ARTICLE FOUR
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price or the purchase price for shares issued to such person
under the Plan by delivering a promissory note payable in one or more
installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. Promissory notes may be authorized with or without
security or collateral. In all events, the maximum credit available to the
Optionee or Participant may not exceed the sum of (i) the aggregate option
---
exercise price or purchase price payable for the purchased shares (less the par
value of such shares) plus (ii) any Federal, state and local income and
employment tax liability incurred by the Optionee or the Participant in
connection with the option exercise or share purchase.
II. EFFECTIVE DATE AND TERM OF PLAN
A. The Plan shall become effective when adopted by the Board, but no
option granted under the Plan may be exercised, and no shares shall be issued
under the Plan, until the Plan is approved by the Corporation's stockholders.
If such stockholder approval is not obtained within twelve (12) months after the
date of the Board's adoption of the Plan, then all options previously granted
under the Plan shall terminate and cease to be outstanding, and no further
options shall be granted and no shares shall be issued under the Plan. Subject
to such limitation, the Plan Administrator may grant options and issue shares
under the Plan at any time after the effective date of the Plan and before the
date fixed herein for termination of the Plan.
B. The Plan shall terminate upon the earliest of (i) the expiration
--------
of the ten (10)-year period measured from the date the Plan is adopted by the
Board, (ii) the date on which all shares available for issuance under the Plan
shall have been issued or (iii) the termination of all outstanding options in
connection with a Corporate Transaction. Upon such Plan termination, all
options and unvested stock issuances outstanding under the Plan shall continue
to have full force and effect in accordance with the provisions of the documents
evidencing such options or issuances.
III. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such amendment or
modification.
B. Options to purchase shares of Common Stock may be granted under
the Plan and shares of Common Stock may be issued under the Plan that are in
each instance in excess of the number of shares then available for issuance
under the Plan, provided any excess
<PAGE>
shares actually issued under the Plan are held in escrow until there is obtained
stockholder approval of an amendment sufficiently increasing the number of
shares of Common Stock available for issuance under the Plan. If such
stockholder approval is not obtained within twelve (12) months after the date
the first such excess issuances are made, then (i) any unexercised options
granted on the basis of such excess shares shall terminate and cease to be
outstanding and (ii) the Corporation shall promptly refund to the Optionees and
the Participants the exercise or purchase price paid for any excess shares
issued under the Plan and held in escrow, together with interest (at the
applicable Short-Term Federal Rate) for the period the shares were held in
escrow, and such shares shall thereupon be automatically cancelled and cease to
be outstanding.
IV. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
V. WITHHOLDING
The Corporation's obligation to deliver shares of Common Stock upon
the exercise of any options or upon the issuance or vesting of any shares issued
under the Plan shall be subject to the satisfaction of all applicable Federal,
state and local income and employment tax withholding requirements.
VI. REGULATORY APPROVALS
The implementation of the Plan, the granting of any options under the
Plan and the issuance of any shares of Common Stock (i) upon the exercise of any
option or (ii) under the Stock Issuance Program shall be subject to the
Corporation's procurement of all approvals and permits required by regulatory
authorities having jurisdiction over the Plan, the options granted under it and
the shares of Common Stock issued pursuant to it.
VII. NO EMPLOYMENT OR SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
-----
B. Code shall mean the Internal Revenue Code of 1986, as amended.
----
C. Committee shall mean a committee of two (2) or more Board members
---------
appointed by the Board to exercise one or more administrative functions under
the Plan.
D. Common Stock shall mean the Corporation's common stock.
------------
E. Corporate Transaction shall mean any of the following
---------------------
transactions:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction,
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets or capital stock, or
(iii) a tender or exchange offer in which, after the
consummation of the offer, the offeror is the beneficial owner (as
determined pursuant to Section 13(d) of the Securities Exchange Act of
1934, as amended), directly or indirectly, of at least 15 percent of the
outstanding Common Stock.
F. Corporation shall mean InFlow, Inc., a Delaware corporation.
-----------
G. Disability shall mean the inability of the Optionee or the
----------
Participant to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment and shall be determined by
the Plan Administrator on the basis of such medical evidence as the Plan
Administrator deems warranted under the circumstances. Disability shall be
deemed to constitute Permanent Disability in the event that such Disability is
expected to result in death or has lasted or can be expected to last for a
continuous period of twelve (12) months or more.
H. Employee shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
I. Exercise Date shall mean the date on which the Corporation shall
-------------
have received written notice of the option exercise.
<PAGE>
J. Fair Market Value per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date for
which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall be
the closing selling price on the last preceding date for which such
quotation exists.
(iii) If the Common Stock is at the time neither listed on
any Stock Exchange nor traded on the Nasdaq National Market, then the Fair
Market Value shall be determined by the Plan Administrator after taking
into account such factors as the Plan Administrator shall deem appropriate.
K. Incentive Option shall mean an option which satisfies the
----------------
requirements of Code Section 422.
L. Involuntary Termination shall mean the termination of the Service
-----------------------
of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially reduces
his or her level of responsibility, (B) a reduction in his or her level of
compensation (including base salary, fringe benefits and participation in
corporate-performance based bonus or incentive programs) by more than
fifteen percent (15%) or (C) a relocation of such individual's place of
employment by more than fifty (50) miles, provided and only if such change,
reduction or relocation is effected without the individual's consent.
M. Misconduct shall mean the commission of any act of fraud,
----------
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing
<PAGE>
definition shall not be deemed to be inclusive of all the acts or omissions
which the Corporation (or any Parent or Subsidiary) may consider as grounds for
the dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
N. 1934 Act shall mean the Securities Exchange Act of 1934, as
--------
amended.
O. Non-Statutory Option shall mean an option not intended to satisfy
--------------------
the requirements of Code Section 422.
P. Option Grant Program shall mean the option grant program in effect
--------------------
under the Plan.
Q. Optionee shall mean any person to whom an option is granted under
--------
the Plan.
R. Parent shall mean any corporation (other than the Corporation) in
------
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
S. Participant shall mean any person who is issued shares of Common
-----------
Stock under the Stock Issuance Program.
T. Plan shall mean the Corporation's 1997 Stock Option/Stock Issuance
----
Plan, as set forth in this document.
U. Plan Administrator shall mean either the Board or the Committee,
------------------
to the extent the Committee is at the time responsible for the administration of
the Plan.
V. Service shall mean the provision of services to the Corporation
-------
(or any Parent or Subsidiary) by a person in the capacity of an Employee, a non-
employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant.
W. Stock Exchange shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.
X. Stock Issuance Agreement shall mean the agreement entered into by
------------------------
the Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
Y. Stock Issuance Program shall mean the stock issuance program in
----------------------
effect under the Plan.
Z. Subsidiary shall mean any corporation (other than the Corporation)
----------
in an unbroken chain of corporations beginning with the Corporation, provided
each corporation (other
<PAGE>
than the last corporation) in the unbroken chain owns, at the time of the
determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
AA. 10% Stockholder shall mean the owner of stock (as determined
---------------
under Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
<PAGE>
Exhibit 21.1
List of Subsidiaries
AZ-Inflow, Inc.
CA-Inflow, Inc.
CO-Inflow, Inc.
GA-Inflow, Inc.
MN-Inflow, Inc.
NC-Inflow, Inc.
TX-Inflow, Inc.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated February 4, 2000 relating to the financial statements of Inflow,
Inc., which appears in such Registration Statement. We also consent to the
references to us under the headings "Experts" and "Selected Financial Data" in
such Registration Statement.
PricewaterhouseCoopers LLP
Broomfield, Colorado
February 18, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 26,605 965,058
<SECURITIES> 0 56,387,515
<RECEIVABLES> 23,644 637,168
<ALLOWANCES> 0 56,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 50,353 59,949,258
<PP&E> 838,005 12,843,825
<DEPRECIATION> 68,176 481,034
<TOTAL-ASSETS> 832,142 72,882,292
<CURRENT-LIABILITIES> 1,277,157 5,233,859
<BONDS> 0 0
0 77,793,139
0 0
<COMMON> 17,400 2,313,697
<OTHER-SE> (890,750) (13,803,170)
<TOTAL-LIABILITY-AND-EQUITY> 832,142 72,882,292
<SALES> 45,032 1,998,164
<TOTAL-REVENUES> 45,032 1,998,164
<CGS> 292,694 3,547,845
<TOTAL-COSTS> 469,248 3,871,931
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 81,640 61,858
<INCOME-PRETAX> 794,843 4,729,625
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 794,843 4,729,625
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 794,843 4,729,625
<EPS-BASIC> (0.26) (3.69)
<EPS-DILUTED> 0 0
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