<PAGE>
As filed with the Securities and Exchange Commission on May 12, 2000.
Registration No. 333-30684
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
AMENDMENT NO. 2 to
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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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. Paul, Hastings, Janofsky & Walker LLP
John E. Hayes III, Esq. 399 Park Avenue
Jeff T. Harris, Esq. New York, NY 10022-4697
Brobeck, Phleger & Harrison LLP (212) 318-6000
370 Interlocken Boulevard, Suite 500
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. [_]
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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. +
+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 , 2000
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PROSPECTUS
, 2000
LOGO OF INFLOW, INC.
7,000,000 Shares of Common Stock
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This is our initial public offering and no public market currently exists for
our shares. We anticipate that the initial public offering price for our shares
will be between $14.00 and $16.00 per share.
We have applied to have our common stock quoted on the NASDAQ National Market
under the symbol "INFL."
The underwriters expect to deliver the shares of common stock to purchasers on
, 2000.
See "Risk Factors" beginning on page 5 to read about risks that you should
consider before purchasing any shares of our common stock.
------------------------------------------------
<TABLE>
<CAPTION>
Per Share Total
----------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees: $ $
Proceeds to InFlow, Inc.: $ $
----------------------------------------------
</TABLE>
We have granted the underwriters an option to purchase an additional 1,050,000
shares of common stock from us.
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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.
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Donaldson, Lufkin & Jenrette
Chase H&Q
First Union Securities, Inc.
DLJdirect Inc.
<PAGE>
Front Inside Cover Gatefold
- ---------------------------
Page 1
[MAP OF INFLOW'S OPERATIONAL AND UNDER DEVELOPMENT SITES]
Page 2
[PICTURE OF DATA NETWORK EXCHANGE]
Page 3
[PICTURE OF DATA NETWORK EXCHANGE]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page
<S> <C> <C> <C>
Prospectus Summary..................... 1 Business............................... 34
Risk Factors........................... 5 Management............................. 56
Forward-Looking Statements............. 18 Related-Party Transactions............. 65
Trademarks............................. 18 Principal Stockholders................. 69
Use of Proceeds........................ 18 Description of Capital Stock........... 72
Dividend Policy........................ 18 Shares Eligible for Future Sale........ 75
Capitalization......................... 19 Underwriting........................... 77
Dilution............................... 20 Legal Matters.......................... 81
Selected Financial and Other Data...... 22 Experts................................ 81
Where You Can Find Additional
Management's Discussion and Analysis of Information............................ 81
Financial Condition and Results of Index to Financial Statements.......... F-1
Operations............................ 24
</TABLE>
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 colocation facilities, comprised of customized physical space and
network connections for our customers' computer equipment, along with value-
added services for their e-business and data communications applications. Our
highly secure data network exchange facilities, or DNXs, connect to multiple
communications carriers and power sources in order to minimize potential
downtime and maximize performance for our customers. We focus on small and
medium-sized businesses with complex networking needs, an underserved market
segment we believe is in need of reliable, high-performance outsourced
solutions that enable them to quickly expand as their e-businesses grow. We
opened our first state-of-the-art DNX in Denver in July 1998. Today we operate
DNXs in Austin, Denver (two locations), Minneapolis, Raleigh-Durham and San
Diego. We expect to have a total of 15 geographically dispersed DNXs in
operation by the end of 2000 and a total of 35 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 April 30, 2000, we
provided services to 116 customers, including 53 new customers since January 1,
2000.
We provide highly customized solutions through a broad range of network
connections, including high-speed Internet access and private-line services,
which offer more secure, higher-performing connections. We also offer our
customers a suite of value-added services, including MonitorFlow(TM) for
equipment and application monitoring, SecureFlow(TM) for management of a
security feature known as a firewall, and InflowNet(TM) for directing Internet
traffic across the networks of several providers. We have also developed a
proprietary software program, FlowTrack(TM), which is composed of modules
designed to integrate and automate our business processes. Together with our
standardized set of processes for selecting, constructing and staffing new
sites, FlowTrack(TM) allows us to rapidly and efficiently expand and replicate
our business across a broad network of DNXs.
Market Opportunity
We believe that there exists a significant opportunity to provide an
outsourced solution for connecting, monitoring and servicing e-business
applications of small and medium-sized businesses. The 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 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 for many companies.
We believe the challenges involved in managing complex network
infrastructures and connectivity are increasing the demand for outsourced
colocation, network and value-added service solutions such as ours. Forrester
Research estimates that revenues from Internet-related hosting and
1
<PAGE>
colocation services will grow at a compound annual growth rate of 76%, from
approximately $875 million in 1998 to approximately $14.7 billion in 2003.
Our Solution
Our outsourced solutions enable our customers to quickly establish and
rapidly expand their on-line businesses, allowing them to better focus on their
core competencies and accelerate their time to market. In addition to the
performance advantages we offer, our customers benefit from economies of scale
through the sharing of infrastructure and personnel costs among multiple users.
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;
. Leverage our FlowTrack(TM) software and automated deployment processes;
. Continue to emphasize customer service;
. Exhance and cross-sell our suite of services; and
. Expand sales channels and increase brand awareness.
Recent Developments
On May 8, 2000, we sold 1,386,364 shares of our Series C convertible
preferred stock to a limited number of our existing preferred stockholders, at
a per-share price of $22.00, for gross proceeds of $30,500,000.
We have a limited operating history and we have not reported an operating
profit for any year since our incorporation. We expect to incur net losses for
the forseeable future. 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.
You should rely only on the information contained in this prospectus 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.
2
<PAGE>
The Offering
<TABLE>
<C> <S>
Stock offered by Inflow............................ 7,000,000 shares of voting
common stock
Common stock to be outstanding after the offering.. 44,510,643 shares
Use of proceeds.................................... We estimate that the net
proceeds to us from this
offering will be
approximately $95.7
million, or up to $110.3
million if the
underwriters exercise
their over-allotment
option. We will use the
net proceeds as follows:
. approximately $54.0
million to fund the
capital costs of
constructing DNX
facilities expected to
average approximately
$6.0 million per
facility; and
. the remainder for
working capital and
general corporate
purposes.
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 March 15, 2000. This total
includes 3,907,832 shares of our existing common stock held by First Union
Capital Partners, Inc. which will be converted into shares of our non-voting
common stock and which do not have voting rights but are convertible into and
otherwise identical to our common stock. The number of shares of common stock,
both voting and non-voting, calculated as of March 15, 2000 excludes:
. 7,646,665 shares reserved for issuance under our 2000 stock incentive
plan, of which 2,489,220 shares were subject to outstanding options at a
weighted average exercise price of $1.63 per share as of March 15, 2000;
and
. 750,000 shares reserved for issuance under our 2000 employee stock
purchase plan.
See "Description of Capital Stock -- Common Stock" and "Management -- 2000
Stock Incentive Plan" and "-- 2000 Employee Stock Purchase Plan."
----------------
Unless otherwise indicated, all share information contained in this
prospectus:
. Does not give effect to the 1,386,364 shares of Series C convertible
preferred stock sold to a limited number of our existing preferred
stockholders on May 8, 2000;
. Gives effect to the conversion of all outstanding shares of preferred
stock, other than that held by First Union Capital Partners, Inc., into
16,786,504 shares of voting 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 11,042,991 shares
of common stock, including 3,907,832 shares of non-voting common stock
upon the closing of this offering;
. Assumes no exercise of the underwriters' over-allotment option; and
. Reflects an approximate 2.73-for-1 split of our common stock to be
effected prior to the closing of this offering.
3
<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>
Three Months Ended
Period from Inception Years Ended December 31, March 31,
(September 26, 1997) to -------------------------- ----------------------
December 31, 1997 1998 1999 1999 2000
----------------------- ------------ ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ -- $ 45,032 $ 1,998,164 $ 126,396 $ 1,608,231
Costs of data network
exchange facilities:
Direct................. -- 118,848 2,681,591 215,287 2,529,713
Indirect............... -- 173,846 866,254 48,530 1,047,789
---------- ----------- ------------- --------- -----------
Gross profit (loss) from
data network exchange
facilities............. -- (247,662) (1,549,681) (137,421) (1,969,271)
Total operating
expenses............ 72,193 469,248 3,871,931 126,022 6,951,699
---------- ----------- ------------- --------- -----------
Loss from operations.... (72,193) (716,910) (5,421,612) (263,443) (8,920,970)
Other income
(expense)........... (9,314) (77,933) 691,987 (35,148) 837,178
---------- ----------- ------------- --------- -----------
Net loss................ (81,507) (794,843) (4,729,625) (298,591) (8,083,792)
Accretion of convertible
preferred stock........ -- -- (696,897) -- (236,626)
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) $(298,591) $(8,320,418)
========== =========== ============= ========= ===========
Net loss per common
share (basic and
diluted) (1)........... $ (.01) $ (0.10) $ (1.35) $ (0.04) $ (.98)
Weighted average common
shares (basic and
diluted) (1)........... 8,179,929 8,179,929 8,180,040 8,179,929 8,425,857
Pro forma net loss per
common share (basic and
diluted) (1)(2)-
unaudited.............. $ (.59) $ (0.22)
Pro forma weighted
average common shares
(basic and diluted)
(1)(2)-unaudited....... 17,496,175 36,255,353
Other Financial Data:
Cash flow provided by
(used in):
Operating activities... $ (43,868) $ (552,126) $ (4,443) $ (62,722) $ 4,700,813
Investing activities... (18,592) (819,413) (68,916,746) (216,730) (4,493,445)
Financing activities... 603,000 854,604 69,862,642 381,034 745,889
Capital expenditures.... 18,592 819,413 12,005,820 216,730 19,396,626
Other Data:
Customers at end of
period................. -- 12 63 21 94
Operational DNXs........ -- 1 3 1 5
</TABLE>
<TABLE>
<CAPTION>
As of March 31, 2000
---------------------------------------
Pro Pro Forma
Actual Forma(2) As Adjusted(3)
<S> <C> <C> <C>
----------- ----------- ------------
Balance Sheet Data:
Cash and cash equivalents............. $ 1,918,315 $32,343,315 $128,143,315
Short-term investments................ 39,997,424 39,997,424 39,997,423
Working capital....................... 30,241,695 60,666,695 156,316,695
Total assets.......................... 79,214,124 109,639,124 205,289,124
Long-term liabilities, including
current maturities................... 1,775,549 1,775,549 1,775,549
Mandatorily redeemable convertible
preferred stock...................... 78,029,765 -- --
Total stockholders' equity (deficit).. (16,268,953) 92,185,811 187,835,810
</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 balance sheet data reflects the sale of 1,386,364 shares of
Series C convertible preferred stock at a price of $22.00 per share, and
the net proceeds therefrom and the subsequent conversion of our convertible
preferred stock to common stock and non-voting common stock, which will
occur automatically upon the closing of this offering. Upon the effective
date of the anticipated 2.73 for 1 common stock split, the preferred stock
conversion ratio is expected to be 1 preferred share for approximately 2.73
shares of common stock.
(3) Pro Forma As Adjusted balance sheet data reflects the sale of 1,386,364
shares of Series C convertible preferred stock at a price of $22.00 per
share, and the net proceeds therefrom and the subsequent 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 7,000,000 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. Upon the effective date of the antcipated 2.73
for 1 common stock split, the preferred stock conversion ratio is expected
to be 1 preferred share for approximately 2.73 shares of common stock.
4
<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.
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 five 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. Moreover, we are an early stage
company and our business plan may not address key risks or be implemented 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 March 31, 2000, our cumulative net losses were approximately
$18.2 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.
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. The timing of customer installations and
discounts, as well as the fluctuations in bandwidth used by customers and our
overall capacity utilization, will also affect our revenues. 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
5
<PAGE>
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.
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. The market price of our common stock
may decline below the initial public offering price after this offering. 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.
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, and the
terms of any future financing arrangements may restrict our operations.
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. After that time, we will require significant additional funds
to support our operations and fund the expansion of our business. Moreover, our
future capital needs are extremely difficult to accurately predict and we may
need additional capital before that time. We may not be able to obtain
additional funding 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.
If, in the future, we enter into financing arrangements with equipment
lessors, financial institutions or other investors, these arrangements may 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.
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 Austin, 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.
6
<PAGE>
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 timely expansion, completion and 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;
. Manage the timing and magnitude of capital expenditures;
. 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.
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.
Finally, although all of our current DNXs are located in the United States,
we may ultimately expand internationally. International expansion will involve
many of the risks described above, as well as many new risks specific to
foreign operations. We do not have any experience operating internationally and
we may not be successful in our efforts to offer services to international
markets.
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
7
<PAGE>
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 for telecommunications services increases the
risk that we will not be able to timely or cost-effectively meet our customer
needs.
The presence of connections from multiple communications carriers' 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 us with telecommunications circuits which we
then resell to our customers. In offering certain services, we may be deemed a
communications carrier, by reselling those services, but we are still dependent
on underlying third-party carrier services and facilities. Any of these
carriers may decide not to offer their services to us for competitive or other
reasons or may increase the cost of their services.
We rely on various local, national and international telecommunications
companies such as ICG, AT&T Local Services, and US West to provide the local
connections from our DNXs to the physical places where other national and
international telecommunications companies have a presence for network access,
such as Intermedia/Digex, GTE, AT&T, UUNet and Cable and Wireless, provide the
telecommunications circuits which we resell to our customers. The construction
required to provide the local connections to our DNXs is complex and involves
factors outside our control, including regulatory processes and the
availability of construction resources. If we are unable to establish the
necessary bandwidth connectivity to our DNXs, if the connections are 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. There
are a limited number of local providers in each of our markets and we cannot
control any delays or deficiencies associated with this provisioning function.
Additionally, any national or international carrier may refuse to provide us
with services which our customers need or may provide connectivity which has
reliability problems or is at increased costs. Any failure by us to procure the
connections necessary to serve our customers or any increased costs of such
connections may harm our business, operations and the market price of our
stock.
Our dependence on third parties for components and services used in our DNXs
increases the risk that our operations could be interrupted.
We 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 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.
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Our failure to hold required authorizations and to be registered with, or
certified by, applicable regulatory authorities could result in potential
penalties or other adverse consequences.
Certain telecommunications services that we offer, and intend to offer in
the future, including private-line services, which offer more secure, higher
performing connections, are, or may be, subject to regulation and certification
requirements at the state level. To date, except for our Application for
Authority to Provide Telephone Services in the State of Minnesota: Niche
Services, Local Resale Services which we recently filed in the State of
Minnesota with respect to the provision of certain specified services, 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. It
is possible that we have provided certain telecommunications services without
the requisite regulatory approval or certification in a limited number of
jurisdictions. 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.
We may encounter difficulties if we are required to apply for, and obtain,
necessary authorizations in other states in which we expect to operate.
As certain of our current and planned telecommunications services are, or
may be subject to regulation and certification requirements at the state level,
we may be required to apply for and obtain authorizations in states where we
plan to offer our services. The public utility application and registration
process could be lengthy and time-consuming, requiring substantial resources
and management time.
Any past failure to have held required authorizations and to have been
registered with, or certified by, applicable regulatory authorities could
expose us to the risk that such regulators could refuse to grant our
applications to provide such services due to prior non-compliance. We do not
know if we will be allowed to register in particular jurisdictions or if our
applications will be accepted. We also do not know whether our applications
would be granted without onerous terms, or at all.
Delays in obtaining or failure to obtain regulatory approvals could negatively
affect our intended rollout of services.
If we are required in particular states to apply for and obtain
authorizations to provide certain of our services, we could incur delays in the
approval process. Any significant delays in obtaining any requisite regulatory
approvals could result in our being unable to provide those services during the
period in which we have not been certified or authorized to provide those
services. In addition, we may be unable to obtain required regulatory
authorizations in some states, in which case we would be unable to provide
certain services in those states.
Regulation as a carrier will subject us to ongoing regulation at the state and
federal levels and could result in increased costs and other competitive
disadvantages.
If we become authorized as a carrier in a particular state or at the federal
level, we will be subject to the regulatory directives of the applicable
regulatory authorities. Such regulation could subject us to increased costs as
a result of having to comply with these requirements, such as reporting
obligations and the payment of various regulatory fees and surcharges. We may
not be able to pass these costs along to our customers. Compliance with
regulatory requirements, including, but not limited to, regulation of the rates
and terms and conditions of our services, may make it more difficult for us to
operate.
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It is possible that many of our competitors may not be subject to the type
of telecommunications regulation to which we may become subject. Some
regulators may seek, among other things, to regulate our charges and terms of
service. If our competitors are not similarly regulated, they may have an
additional competitive advantage in the event we become regulated.
Changes in current or future regulations, or legislative or judicial
initiatives related to the telecommunications industry, could negatively affect
our business.
The enactment of new legislation or regulatory requirements or changes in
the interpretation of existing legislation and/or changes in regulatory
requirements could negatively affect us. Unlike some of our competitors,
including the incumbent local exchange carriers, we are not subject to some of
the burdensome regulations imposed by federal and state regulation. For
example, we do not have to allow competitors to access portions of our network,
such as transmission lines and equipment used to connect calls, we do not have
to file FCC tariffs for our access services, and our rates are not currently
subject to stringent regulation by the FCC or state public utility commissions.
Our ability to compete may largely depend upon a continued favorable, pro-
competitive regulatory environment, and could be negatively affected by new
regulations or legislation affording greater flexibility and regulatory relief
to certain of our competitors. For example, the FCC is reviewing whether the
regional Bell operating companies may provide certain data services free from
regulation as incumbent local exchange carriers through a separate affiliate.
Legislation has been introduced in Congress that would grant the regional Bell
operating companies permission to provide data services in areas where they are
currently restricted from doing so. The ability of regional Bell operating
companies to provide data services on a broader basis could have a negative
effect on us.
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 some degree of concentration will continue for the
foreseeable future. For the year ending December 31, 1999, our top five
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. As of December 31, 1999, this customer represented
approximately 13% of gross accounts receivable. No other customer individually
represented more than 10% of revenue for the year ended December 31, 1999. Our
agreement with Verio will expire by its terms on August 31, 2000. We are
currently in discussions with Verio regarding a possible new contract; however,
we may not be able to reach a satisfactory agreement with this or other
important customers. 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. We do not have employment
agreements with any of our officers or employees. Any of our officers or
employees can terminate his
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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 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 and, in many cases may also own
their own networks and thereby
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incur lower operating expenses. 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 demand
and market acceptance for our services, our ability to successfully introduce
new products each year, the absence of competing products for certain of our
solutions and our ability to cross-sell multiple services to each customer.
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.
Federal regulations may make the colocation services offered by some of our
competitors more attractive than our own.
In addition, the incumbent local exchange carriers, such as AT&T and US
West, are subject to federal regulations that require them to offer colocation
to other local telephone companies and long distance carriers on an efficient,
nondiscriminatory basis. Some of those rules recently were vacated by the
decision of the Court of Appeals for the D.C. Circuit. However, the rules that
remain in effect are likely to enhance the attractiveness of the incumbent
local exchange carrier's colocation offerings and may make them more
competitive with our own. The FCC may also seek to reinstate the recently
vacated rules in a remand proceeding, which would further enhance the
attractiveness of an incumbent local exchange carrier's colocation offerings
and thus pose an even greater competitive risk to us.
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
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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, our ability to effectively
market and cross-sell our services and our ability to increase the bandwidth
capacity we offer to customers as they grow. 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.
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.
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. Our security 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.
If we are unable to adequately protect our proprietary rights, our business
will suffer.
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
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inadequate and third 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.
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.
If we become subject to infringement claims by third parties, we may be forced
to divert significant resources away from the operation of our business.
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. 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 applications that depend on the absence of delays or down
time;
. The willingness of enterprises to colocate and outsource network access
for their critical 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. 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.
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
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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 circuits, 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 that may provide more flexibility,
security, capacity or speed. 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. 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 into our business or such advances, including
alternate
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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 outsourced solutions
that we currently provide. Keeping pace with technological advances in our
industry may require substantial lead time and capital expenditures. 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. Our general liability insurance 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.
If our systems encounter year 2000 compliance problems, our business could be
harmed.
We have tested our key computer systems and, to date, we have not
encountered any material Year 2000 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 Year 2000 related problems could still occur, which could harm our
business.
Risks Related To This Offering
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 offering without
the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. However, holders of such restricted shares who have not been
officers or directors of us on or since the date of this prospectus may offer,
sell or otherwise dispose of 25% of their shares on the earlier of 90 days
after the date of this offering or on the second trading day after the first
public release of our quarterly results if the last recorded sale price on the
NASDAQ National Market for 20 of the 30 trading days ending on such date is at
least twice the price per share in the initial public offering. These
stockholders may also offer, sell or otherwise dispose of an additional 25% of
their shares 135 days after the date of this offering if the price per share of
common stock has achieved the same target level. Additionally, DLJ may, in its
sole discretion and at
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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 7,000,000 shares sold in this
offering will be eligible for sale. The remaining 37,510,643 shares, based on
the number of shares outstanding as of March 15, 2000, will be restricted
securities as defined in Rule 144 of the Securities Act of 1933, as amended. Of
such restricted shares, approximately 32,962,061 will be eligible for sale upon
the expirations of or their release from the lock-up agreements described above
subject, in some cases, to volume restrictions. The remainder of these shares
will become eligible for sale at various times thereafter. In addition,
1,228,512 shares will be eligible for sale at various times after the date of
this prospectus under Rule 701. In addition, the holders of 27,829,495
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. As of March 15, 2000, options to purchase
2,489,220 shares of our common stock were outstanding under our 1997 stock
option/stock issuance plan, all of which will be outstanding under our 2000
stock incentive plan upon its adoption. The exercise or transfer of these
options or underlying shares may also 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 63.93% 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.
We intend to use approximately $54.0 million of the net proceeds of this
offering to fund the capital costs of constructing DNX facilities, and the
remaining proceeds for working capital and general corporate purposes. Our
management will have broad discretion to spend a significant portion of 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.
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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 $11.12 in the
book value per share of our common stock from the price you pay for our common
stock. See "Dilution."
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.
TRADEMARKS
We have received trademark and service mark registration for the mark
"Inflow." We have applied for protection for the marks "InflowNet(TM)",
"MonitorFlow(TM)" and "SecureFlow(TM)." Other trademarks and service marks
appearing in this prospectus are the property of their respective holders.
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of 7,000,000
shares of common stock in this offering of $95.7 million, assuming an initial
public offering price of $15.00 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 $110.3 million.
We intend to use the net proceeds of this offering as follows:
. approximately $54.0 million to fund the capital costs of constructing DNX
facilities, expected to average approximately $6.0 million per facility;
and
.the remainder for working capital and general corporate purposes.
We presently do not have any specific plans for the proceeds to be used for
working capital and general corporate purposes. Portions of the net proceeds of
this offering may be used to fund potential international expansion. Pending
any such uses, we may 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. In
addition, any future financing arrangements may contain limitations on our
ability to declare and pay cash dividends.
18
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000. The
pro forma information gives effect to the sale of 1,386,364 shares of Series C
convertible preferred stock at a price of $22.00 per share and the net proceeds
therefrom and subsequent conversion of all of our outstanding preferred stock
as of March 31, 2000, including the conversion of 1,433,202 shares held by
First Union Capital Partners, Inc. into 3,907,832 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 7,000,000 shares of common
stock offered by us in this offering at the assumed initial public offering
price of $15.00 per share.
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. Additionally, Inflow intends to effect an approximate 2.73
for 1 split of its common stock prior to the consumation of this offering which
will result in a conversion ratio of 1 preferred share for approximately 2.73
shares of common stock. All references in this table to common shares, common
share prices, and per share amounts have been adjusted for all periods
presented to reflect this stock split.
<TABLE>
<CAPTION>
As of March 31, 2000
----------------------------------------
Pro Forma
Actual Pro Forma as Adjusted
------------ ------------ ------------
<S> <C> <C> <C>
Long-term liabilities............... $ 1,643,793 $ 1,643,793 $ 1,643,793
------------ ------------ ------------
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 (1)
(unaudited)....................... 12,185,806 -- --
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 (1)
(unaudited)....................... 65,843,959 -- --
------------ ------------ ------------
Total mandatorily redeemable
convertible preferred stock...... 78,029,765 -- --
------------ ------------ ------------
Stockholders' equity (deficit):
Common stock, voting, $0.001 par
value; 20,000,000 shares
authorized actual and 150,000,000
shares authorized pro forma and
pro forma as adjusted; 9,760,779
shares issued and outstanding
actual; 37,462,561 shares issued
and outstanding on a pro forma
basis (unaudited); 44,462,561
shares issued and outstanding on
a pro forma as adjusted basis
(1)(2) (unaudited)................ 9,761 37,463 44,463
Common stock, non-voting, $0.001
par value; 0 shares authorized
actual and 5,000,000 authorized
pro forma and pro forma as
adjusted, 0 shares issued and
outstanding actual, 3,907,832
shares issued and outstanding on
a pro forma and on a pro forma as
adjusted basis (1)(3)
(unaudited)....................... -- 3,907 3,907
Additional paid-in capital......... 24,940,577 133,363,732 229,006,732
Deferred compensation.............. (22,864,971) (22,864,971) (22,864,971)
Stock subscriptions receivable and
other............................. (184,321) (184,321) (184,321)
Accumulated deficit................ (18,169,999) (18,169,999) (18,169,999)
------------ ------------ ------------
Total stockholders' equity
(deficit)....................... (16,268,953) 92,185,811 187,835,811
------------ ------------ ------------
Total capitalization............ $ 63,404,605 $ 93,829,604 $189,479,604
============ ============ ============
</TABLE>
- --------
(1) Upon the effective date of the anticipated common stock split, the
preferred stock conversion ratio is expected to be 1 preferred share for
approximately 2.73 shares of common stock.
(2) Excludes 2,591,050 shares of common stock issuable upon the exercise of
outstanding options as of March 31, 2000.
(3) 5,000,000 shares of non-voting common stock will be authorized by the
stockholders prior to the closing of this offering but, for purposes of the
pro forma and pro forma as adjusted information in this table, are assumed
to have been authorized as of March 31, 2000.
19
<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 2000 was approximately
$92.2 million, or $2.23 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 March 31, 2000 on a pro forma basis including the sale of
1,386,364 shares of Series C convertible preferred stock at a price of $22.00
per share and the net proceeds therefrom and the subsequent 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 $15.00 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 March 31, 2000 would have been $187.8 million or $3.88 per share of
common stock. This represents an immediate increase in pro forma net tangible
book value to our existing stockholders of $1.65 per share of common stock and
an immediate dilution to purchasers in this offering of $11.12 per share of
common stock.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share of common stock... $15.00
Pro forma net tangible book value per share of common stock at
March 31, 2000................................................... $2.23
Increase in pro forma net tangible book value per share of common
stock attributable to this offering after giving effect to
conversion of our preferred stock................................ 1.65
-----
Pro forma net tangible book value per share of common stock after
this offering and after giving effect to conversion of our
preferred stock.................................................. 3.88
------
Dilution per share of common stock to new investors............... $11.12
======
</TABLE>
The following table summarizes, on a pro forma basis, as of March 31, 2000,
including the issuance of 1,386,364 shares of Series C convertible preferred
stock for gross proceeds of $30,500,000 on May 8, 2000. 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 $15.00 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........... 41,370,393 85.5% $102,866,433 49.4% $ 2.48
New investors................... 7,000,000 14.5 105,000,000 50.6 15.00
---------- ----- ------------ ----- ------
Total........................... 48,370,393 100.0% $207,866,433 100.0% $ 4.30
========== ===== ============ ===== ======
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
outstanding as of March 31, 2000. As of March 31, 2000, there were options
outstanding to purchase a total of 2,591,050 shares with a weighted average
exercise price of $1.79 per share. To the extent that any of these options are
exercised, there will be further dilution to new investors.
20
<PAGE>
Additionally, Inflow intends to effect an approximate 2.73 for 1 split of
its common stock prior to the consummation of this offering which will result
in a conversion ratio of 1 preferred share for approximately 2.73 shares of
common stock. All references in the foregoing discussion and tables to common
shares, common share prices, and per share amounts have been adjusted for all
periods presented to reflect this stock split.
21
<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. The selected statement of operations data for the three months
ended March 31, 1999 and 2000 and the balance sheet data at March 31, 2000 are
derived from our unaudited financial statements included elsewhere in this
prospectus. The unaudited financial statements include, in the opinion of our
management, all adjustments, consisting only of normal recurring adjustments,
that we consider necessary for a fair presentation of our financial position
and results of operations for these periods. The financial data for the three
months ended March 31, 2000 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2000 or any other future
period. Additionally, Inflow intends to effect an approximate 2.73 for 1 split
of its common stock prior to the consummation of this offering . All references
in this table to common shares, common share prices, and per share amounts have
been adjusted for all periods presented to reflect this stock split.
<TABLE>
<CAPTION>
Three Months Ended
Period from Inception Years Ended December 31, March 31,
(September 26, 1997) to -------------------------- -----------------------
December 31, 1997 1998 1999 1999 2000
----------------------- ---------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenue................. $ -- $ 45,032 $ 1,998,164 $ 126,396 $ 1,608,231
Costs of data network
exchange facilities:
Direct................. -- 118,848 2,681,591 215,287 2,529,713
Indirect............... -- 173,846 866,254 48,530 1,047,789
---------- ---------- -------------- ---------- -----------
Gross profit (loss) from
data network exchange
facilities............. -- (247,662) (1,549,681) (137,421) (1,969,271)
Total operating
expenses............ 72,193 469,248 3,871,931 126,022 6,951,699
---------- ---------- -------------- ---------- -----------
Loss from operations.... (72,193) (716,910) (5,421,612) (263,443) (8,920,970)
Other income
(expense)........... (9,314) (77,933) 691,987 (35,148) 837,178
---------- ---------- -------------- ---------- -----------
Net loss................ (81,507) (794,843) (4,729,625) (298,591) (8,083,792)
Accretion of convertible
preferred stock........ -- -- (696,897) -- (236,626)
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) $ (298,591) $(8,320,418)
========== ========== ============== ========== ===========
Net loss per common
share (basic and
diluted) (1)........... $ (.01) $ (.10) $ (1.35) (0.04) (0.98)
Weighted average common
shares (basic and
diluted) (1)........... 8,179,929 8,179,929 8,180,040 8,179,929 8,425,857
Pro forma net loss per
common share (basic and
diluted) (1)(2)-
unaudited.............. $ (.59) $ (0.22)
Pro forma weighted
average common shares
(basic and diluted)
(1)(2)-unaudited....... 17,496,175 36,255,353
Other Financial Data:
Cash flow provided by
(used in):
Operating activities... $ (43,868) $ (552,126) $ (4,443) $ (62,722) $ 4,700,813
Investing activities... (18,592) (819,413) (68,916,746) (216,730) (4,493,445)
Financing activities... 603,000 854,604 69,862,642 381,034 745,889
Capital expenditures.... 18,592 819,413 12,005,820 216,730 19,346,626
Other Data:
Customers at end of
period................. -- 12 63 21 94
Operational DNXs........ -- 1 3 1 5
</TABLE>
<TABLE>
<CAPTION>
As of March
As of December 31, 31,
---------------------------------- ------------
1997 1998 1999 2000
-------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents... $540,540 $ 23,605 $ 965,058 $ 1,918,315
Short-term investments...... -- -- 56,387,515 39,997,424
Working capital............. (96,750) (1,226,804) 54,715,399 30,241,695
Total assets................ 558,783 832,142 72,882,292 79,214,124
Long-term liabilities,
including current
maturities................. 600,000 1,596,595 1,440,624 1,775,549
Mandatorily redeemable
convertible preferred
stock...................... -- -- 77,793,139 78,029,765
Total stockholders' equity
(deficit).................. (78,507) (873,350) (11,453,573) (16,268,953)
</TABLE>
22
<PAGE>
- --------
(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 and, upon the effective date of the
anticipated common stock split, the preferred stock conversion ratio is
expected to be 1 preferred share for approximately 2.73 shares of common
stock.
23
<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.
Overview
We provide colocation facilities, comprised of customized physical space and
network connections for our customers' computer equipment, along with value-
added services for their e-business and data communications applications. We
provide these solutions through our secure DNXs, which are connected to
multiple providers communications. 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.
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. In addition, we offer our customers value-
added services, including equipment status monitoring, security management,
data backup and multi-provider Internet connections.
Our activities in 1999 consisted primarily of:
. Operating our first Denver DNX;
. Locating space and constructing our DNXs in Denver, Minneapolis, Raleigh-
Durham 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 as of April
30, 2000.
<TABLE>
<CAPTION>
Operational First Dollar of Number of
DNX Location Date Revenue Realized Customers
<S> <C> <C> <C> <C>
Denver 1 Lincoln Street, Denver, CO August 1998 September 1998 55
Minneapolis Eleventh Avenue South, Minneapolis, MN October 1999 November 1999 12
Raleigh-Durham South Miami Blvd., Durham, NC November 1999 December 1999 15
Denver 2 Bannock Street, Denver, CO January 2000 February 2000 20
San Diego Scranton Road, San Diego, CA January 2000 March 2000 10
Austin Interstate Highway 35 North, Austin, TX April 2000 April 2000 3
- --------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
We have formed several wholly-owned subsidiaries through which we may
conduct certain of our operations in the states in which we have or are
currently constructing a DNX, and may form additional subsidiaries as we expand
our geographic footprint.
We currently operate six DNXs and intend to have a total of 15
geographically dispersed DNXs in operation by the end of 2000 and a total of 35
by the end of 2002. Each new DNX is expected to be constructed to our current
template of approximately 30,000 to 35,000 gross leased square feet, of which
approximately 20,000 square feet will be dedicated to raised-floor hosting
facilities. Each DNX is expected to be fully-staffed at its initial opening
date, in advance of receiving any revenue and we expect to incur both
personnel-related costs in this pre-opening period as well as costs for power,
telecommunications services and other administrative costs. Over the first 24
months of development, we expect to invest approximately $10.5 million to fund
the capital expenditures and initial operating losses of each additional DNX,
of which we expect, as a general matter, that approximately 60% will be
expended prior to receiving any revenue.
We have a limited operating history and we have not reported an operating
profit for any year since our incorporation. We expect to incur net losses for
the foreseeable future.
Certain telecommunications services that we offer, and intend to offer in
the future, are or may be subject to regulation and certification requirements
at the federal and/or state level. The required application and registration
process could be lengthy and time-consuming, and any regulations to which we
may become subject may be burdensome and increase our operating costs. In
addition, our failure to have been registered as a telecommunications carrier
could expose us to substantial fines, lawsuits and the potential inability to
continue our operations.
We rely on multiple local, national, and international telecommunication
companies to provide us with telecommunications circuits, which we resell to
our customers. Any of these carriers may decide not to offer their services to
us for competitive or other reasons or may increase the cost of their services.
Some of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we do and may
be able to adopt aggressive pricing policies and may be better able to compete
in a price competitive market.
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 term of the customer
service contracts. The incremental direct costs incurred related to the
origination of customer contracts are capitalized and recognized on a straight-
line basis over the same term.
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,
25
<PAGE>
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. Stock compensation expense substantially
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 generally
recorded in an accelerated manner consistent with Financial Accounting
Standards Board ("FASB") Interpretation No. 28.
We do not intend to issue stock options below fair market value subsequent
to the date of the effective date of this offering. We recorded deferred
compensation expense of approximately $17,498,800 for the difference between
the exercise price of the stock options and deemed fair market value of our
common stock at the date of grant for all stock options granted to employees in
January, February and March 31, 2000. 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. The deferred compensation for the above
stock options will be amortized to stock compensation expense as follows:
$8,344,993 (2000); $5,140,706 (2001); $2,753,003 (2002); $1,227,467 (2003); and
$96,348 (2004).
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.
Construction-in-progress. At December 31, 1999, we had approximately $3.3
million in construction-in-progress at DNXs included in property and equipment.
These assets were placed into service during the first quarter of 2000 and will
incur approximately $355,000 of depreciation expense during 2000.
26
<PAGE>
Comparison of Three Months Ended March 31, 2000 and 1999
The Denver 2 DNX and San Diego DNX were opened in January of 2000. These DNX
facilities generated approximately 10.4% of total revenue for the three-month
period ended March 31, 2000. Pre-opening direct and indirect costs of DNXs were
incurred for Atlanta, Austin, Irvine, and Phoenix during the three month period
ended March 31, 2000.
Revenue. Revenues increased from $126,396 for the three-month period ended
March 31, 1999 to $1,608,231 for the three-month period ended March 31, 2000.
This increase of approximately $1.5 million was primarily due to increased
sales at our Denver 1 DNX and the opening of four additional DNXs, resulting in
a total of five operational DNXs at March 31, 2000, as compared to one DNX at
March 31, 1999.
The number of our customers increased from 21 at March 31, 1999 to 94 at
March 31, 2000. The increase in the number of customers was due to the opening
of four DNXs since March 31, 1999 in addition to our expanded sales and
marketing efforts. Our revenue per customer increased as we sold new value-
added services to our existing customers as well as because our customers
contracted for more cabinet space and network connectivity as their own
applications expanded. At March 31, 2000 approximately 69% of our customers
purchased value-added services from us, compared to 9% as of March 31, 1999.
Customers increased to 63 at December 31, 1999 and as of April 30, 2000 we
have contracted to provide services to an additional 53 customers. Our total
customer count was 94 at March 31, 2000. We must effectively compete in our
target markets to gain new customers and revenue. Competition may have a
negative effect on our business and financial condition if it reduces our
ability to attract new customers or cause us to reduce the prices we charge our
customers for our services.
Direct Costs of DNXs. Our direct costs of DNXs increased to $2,529,713 for
the three-month period ended March 31, 2000 from $215,287 for the three-month
period ended March 31, 1999. Approximately $702,000 of this increase resulted
from hiring additional customer service technicians in order to support our
growing customer base. In addition, our network and power costs increased
approximately $554,000 and $13,000 respectively for the three-month period
ended March 31, 2000 compared to the three-month period ended March 31, 1999
primarily from an increase in the number of customers and the resultant
increase in network bandwidth and power use. Depreciation expense and rent
expense increased approximately $307,000 and $625,000 respectively for the
three-month period ended March 31, 2000 compared to the three-month period
ended March 31, 1999 primarily from opening four additional DNXs since March
31, 1999.
Indirect Costs of DNXs. Our indirect costs of DNXs increased to $1,047,789
for the three-month period ended March 31, 2000 from $48,530 for the three-
month period ended March 31, 1999 due primarily from incurring additional
personnel-related costs in sales, management and administration at our DNXs.
Sales and Marketing. Sales and marketing costs increased to $935,634 for the
three-month period ended March 31, 2000 from $15,534 for the three-month period
ended March 31, 1999. Approximately $472,000 of this increase was due to hiring
sales support personnel in our corporate offices. In addition, from March 31,
1999 to March 31, 2000 we promoted brand awareness and established a corporate
marketing department by hiring nine marketing employees. Marketing salaries
27
<PAGE>
and other marketing activities including market research, public relations,
trade shows, and advertising increased by approximately $447,000 for the three
month period ended March 31, 2000 compared to the three-month period ended
March 31, 1999.
General and Administrative. General and administrative expenses increased to
$2,666,333 for the three-month period ended March 31, 2000 from $93,418 for the
three-month period ended March 31, 1999 as we hired more personnel to support
our growth.
Product Development. Product development costs increased to $588,186 for the
three-month period ended March 31, 2000 from $13,302 for the three-month period
ended March 31, 1999. This growth is attributable to increased personnel costs
related to the continued development of FlowTrack(TM), MonitorFlow(TM),
SecureFlow(TM) and InflowNet(TM) as well as the development of new and enhanced
services such as Flowshare and Flowview.
Stock Compensation. Stock compensation expense increased to $2,761,546 for
the three-month period ended March 31, 2000 from $3,768 for the three-month
period ended March 31, 1999. We recorded aggregate deferred stock compensation
of $80,119 and $23,124,568 at March 31, 1999 and March 31, 2000 respectively.
Other Income (expense). Other income (expense) was $(35,148) for the three-
month period ended March 31, 1999 compared with $837,178 for the three-month
period ended March 31, 2000. The change was due to interest income earned on
capital raised in our equity financings.
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 63 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.
The number of our customers increased due to our expanded sales and
marketing efforts. Our revenue per customer increased as we sold new value-
added services to our existing customers as well as because our customers
contracted for more cabinet space and network connectivity as their own
applications expanded. At December 31, 1999, approximately 51% of our customers
purchased value-added services from us, compared to 8% as of December 31, 1998.
Direct Costs of DNXs. Our direct costs of DNXs increased to $2,681,591 in
1999 from $118,848 in 1998. Approximately $716,000 of this increase resulted
from hiring 31 additional operations technicians during 1999 to support our
growing customer base. In addition our network and power costs increased
approximately $599,000 and $179,000 respectively from 1998 to 1999 primarily
from an increase in the number of customers and the resultant increase in
network bandwidth and power use.
Indirect Costs of DNXs. Our indirect costs of DNXs increased to $866,254 in
1999 from $173,846 in 1998 due principally to incurring additional personnel-
related costs in sales, management and administration at our DNXs.
28
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Sales and Marketing. Sales and marketing costs increased to $653,186 in 1999
from none in 1998. Approximately $216,000 of this increase is from our attempt
to create a national sales support infrastructure during 1999 by hiring 11
additional corporate sales people. In addition, during 1999 in an attempt to
promote brand awareness we established a corporate marketing department by
hiring five marketing employees. We spent approximately $437,000 on marketing
salaries and other marketing activities including market research, public
relations, trade shows, and advertising.
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.
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).
Stock Compensation. During 1999, we recorded aggregate deferred stock
compensation of $9,480,706. We recorded amortization of this deferred
compensation of $575,483 in 1999. Prior to 1999, we did not record any deferred
compensation.
Other Income (expense). Other income (expense) was ($77,933) in 1998 as
compared with $691,987 in 1999. The change was due to interest income earned on
capital raised in our equity financings.
Comparison of Fiscal Year Ended December 31, 1998 and Period from Inception
(September 26, 1997) 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.
Revenue. Our revenue increased to $45,032 in 1998 from none in 1997. This
revenue growth is attributable to signing our first customer and commencing
operations in the third quarter of 1998.
Cost of DNXs. Our direct and indirect costs of DNXs increased to $292,694 in
1998 from none in 1997 as we opened our first DNX in Denver and incurred costs
related to facility rent, network connectivity and customer service personnel.
Sales and Marketing, General and Administrative Product Development and
Stock Compensation. Our operating expenses increased from $72,193 in 1997 to
$469,248 in 1998 due principally to hiring of additional sales, marketing,
technical and administrative personnel.
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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, December 31, 1999 and March 31, 2000. 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, March 31,
1999 1999 1999 1999 2000
<S> <C> <C> <C> <C> <C>
--------- --------- ----------- ----------- -----------
<CAPTION>
(unaudited)
<S> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenue................. $ 126,396 $ 360,074 $ 596,571 $ 915,123 $ 1,608,231
Costs of DNXs:
Direct................ 215,287 326,004 681,105 1,459,195 2,529,713
Indirect.............. 48,530 91,266 241,238 485,220 1,047,789
--------- --------- ----------- ----------- -----------
Gross profit (loss)
from DNXs.......... (137,421) (57,196) (325,772) (1,029,292) (1,969,271)
Other operating
expenses:
Sales and marketing... 15,534 73,638 221,272 342,742 935,634
General and
administrative....... 93,418 213,586 441,310 1,188,940 2,666,333
Product development... 13,302 73,962 244,472 374,272 588,186
Stock compensation.... 3,768 38,137 169,958 363,620 2,761,546
--------- --------- ----------- ----------- -----------
Total operating
expenses............... 126,022 399,323 1,077,012 2,269,574 6,951,699
Operating loss.......... (263,443) (456,519) (1,402,784) (3,298,866) (8,920,970)
Net interest income
(expense).............. (35,148) 91,745 109,613 525,777 837,178
--------- --------- ----------- ----------- -----------
Net loss................ $(298,591) $(364,774) $(1,293,171) $(2,773,089) $(8,083,792)
========= ========= =========== =========== ===========
</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, 53% during the quarter ended December 31, 1999, and 76% during the
quarter ended March 31, 2000 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 from inception to December 31, 1999. 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 convertible
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 convertible 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 II, L.P. for aggregate proceeds
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to us of approximately $60.0 million. In May 2000, we sold our Series C
convertible preferred stock to certain of our existing preferred stockholders
for aggregate proceeds to us of approximately $30.5 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.
Net cash provided by operating activities for the three-month period ended
March 31, 2000 was $4,700,813. Net cash provided by operating activities was
primarily the result of an $8,083,792 net loss offset by a $10,068,598
increase in accounts payable and other changes in working capital.
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.
Net cash used for investing activities for the three-month period ended
March 31, 2000 was $(4,493,445). Net cash used for investing activities was
primarily the result of $19,396,626 of capital expenditures for DNXs and a
$1,450,000 increase in restricted cash offset by the sale of $16,353,181 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 April 30, 2000, totaled approximately $67.4 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 currently have six DNXs in operation and expect to have a total of 15
DNXs in operation by the end of 2000 and expect to have a total of 35 DNXs by
the end of 2002. The capital costs of constructing DNX facilities are expected
to average approximately $6.0 million per facility. In order to facilitate
this build out our capital requirements are approximately $54.0 million for
2000, and an additional $120.0 million in total for 2001 and 2002.
We expect to receive net proceeds from this offering of approximately $95.7
million, or up to $110.3 million if the underwriters exercise their over-
allotment option. We intend to use the net proceeds of this offering as
follows: approximately $54.0 million to fund the capital costs of constructing
DNX facilities and the remainder for working capital and general corporate
purposes. Based on our DNX development plan, 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. After that
time, we will require significant additional funds to support our operations
and fund the expansion of our business. We intend to raise these additional
funds by either borrowing or by selling more equity; however we may not be
successful in such efforts. Moreover, due to our limited operating history,
the nature of our industry and the possibility that we will encounter delays
or cost overruns in building our planned new DNXs in 2000, our future capital
needs are difficult to predict, and we may need additional capital before this
time. We may not be able to obtain additional
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<PAGE>
funding 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.
As of December 31, 1999 our commitments under non-cancellable operating
lease agreements in 2000, 2001, 2002, 2003, 2004 and thereafter are $1,828,386,
$2,309,735, $2,339,295, $2,378,319, $2,427,152 and $12,197,441, respectively.
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 April 30, 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.
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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, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." Statement of position 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 statement of position 98-1 in the fiscal year beginning
January 1, 1999. The adoption of statement of position 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, "Revenue
Recognition in Financial Statements" as amended. Staff accounting bulletin 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
staff accounting bulletin 101 for the year ended December 31, 1999. The
adoption of staff accounting bulletin 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.
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<PAGE>
BUSINESS
Overview
We are a rapidly growing provider of colocation facilities, comprised of
customized physical space and network connections for our customers' computer
equipment, along with value-added services for their e-business and data
communications applications. We provide reliable outsourced solutions to small
and medium-sized businesses with sophisticated networking needs through our
secure data network exchange facilities, which are connected to multiple
communications carriers. We opened our first state-of-the-art DNX in Denver in
July 1998 and today we have opened DNXs in Austin, Denver (two locations),
Minneapolis, Raleigh-Durham and San Diego. We expect to have a total of 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 April 30, 2000, we provided services to 116
customers, including 53 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 private line services,
which offer more secure, higher-performing connections, using different types
of connections depending on the customers' transmission rate and data carrying
capacity, or bandwidth, needs. We offer our customers a suite of value-added
services including MonitorFlow(TM) for equipment and application monitoring,
SecureFlow(TM) for security management and InflowNet(TM) for the directing
Internet traffic across the networks of several providers. We have also
developed a proprietary software program, FlowTrack(TM), which is composed of
modules designed to integrate and automate our business processes. Together
with our standardized set of processes for selecting, constructing and staffing
new sites, FlowTrack(TM) allows us to rapidly and efficiently expand and
replicate our business across a broad network of DNXs.
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., 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.
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We believe that businesses are increasingly using the Internet for a variety
of reasons, including:
. Engaging in e-commerce, both business-to-business and business-to-
consumer;
. 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 model.
The greatest area of online growth is in the area of small to medium-sized
companies. According to International Data Corporation, 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 business-to-business e-commerce market is expected to grow
dramatically, from $43 billion in 1998 to $1.3 trillion in 2003, a compound
annual growth rate of 98%.
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 points of direct connection to the Internet,
known as network access points. In addition, communications infrastructures are
becoming increasingly complex and difficult to manage as businesses create and
deploy 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 information
technology positions at the end of 1998 in the United States, which represents
approximately 10% of the total number of current core information technology
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 information technology professionals and have a difficult
time attracting and retaining these individuals. At best, the loss of a key
information technology 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
complex, time-sensitive 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 back-up systems
to support their e-business applications; and
. Difficulty in attracting and retaining qualified information technology
talent.
As businesses become increasingly comfortable outsourcing their critical
applications and equipment, the market for hosting and colocation services is
expected to grow rapidly. Forrester
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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 compound annual growth rate 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 compound annual growth
rate of 80%. The market for colocation services is relatively new and rapidly
evolving and neither we nor this market may achieve or maintain this level of
growth or acceptance. See "Risk Factors--Risks Related to Our Industry."
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 complex, time-sensitive 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 network accesss points, far
from their customers. This has created a significant opportunity for a complete
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 network connectivity with
multiple communications providers, 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:
Reliable Facilities and Multiple Carrier Connections. As more complex, time-
critical information and applications migrate onto the Internet and other data
networks, our customers are increasingly demanding not only more data carrying
capacity, or 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 back-up power, fire suppression, environmental
controls and security systems. Because communications networks may fail, our
DNXs also offer access to multiple carriers, thereby providing back-up high-
speed network connections. We choose these carriers based on their performance,
network architecture, ability to avoid congested network access points 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
different types of connections 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.
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Value-Added Services. We offer services that improve the reliability and
performance of our customers' e-business applications. Our InflowNet(TM)
service provides back-up Internet connectivity by dynamically allocating data
among multiple Internet pathways. Other branded services include SecureFlow(TM)
for firewall, a type of security feature, management and MonitorFlow(TM) for
equipment and application status 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 network access points, thereby
increasing the performance and reliability of their data transmissions.
Accelerated Time-to-Market and Efficient Expansion. 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 the 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 of our DNXs from six 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 turnover rate in our industry.
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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 13 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 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 intensive training programs.
Enhance 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 19 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 42 customers as
of September 30, 1999, 31% currently purchase InflowNet(TM). Additionally,
85.71% of the new customers contracted since September 30, 1999 have purchased
InflowNet(TM). New services currently under development include FlowShare, a
solution that manages server congestion by balancing the amount of data traffic
over each client server, and FlowView, which will provide customers with real-
time monitoring statistics and access to FlowTrack(TM). We are currently
developing enhancements to SecureFlow(TM), which will include the ability to
create customized temporary networks and our data backup services. In addition,
our geographically dispersed footprint may provide us with significant
advantages in providing future services such as placing information closer to
the user in order to make it more readily and speedily accessible.
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, distributors,
companies that package standard products with software solutions and those
which integrate and maintain network systems or computing operations. 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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Our Services
Our services are designed to provide high-performance, reliability and
expertise to our customers. Our services are generally covered by service level
agreements which specify exacting performance levels associated with
availability and service repair time. We believe that our service level
agreements 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
. Back-up power
- -----------------------------------------------------------------------------
Network Access and
Connectivity . Local network connectivity
. National network connectivity
- -----------------------------------------------------------------------------
Valued-Added Services . Multi-provider Internet connectivity
. Advanced monitoring applications, including
SecureFlow(TM) and MonitorFlow(TM)
- -----------------------------------------------------------------------------
</TABLE>
For the year ended December 31, 1999, revenue from equipment colocation,
network access and connectivity, and value added services accounted for 51%,
32%, and 17% of total revenue, respectively. We derive revenue from both
installation charges and monthly recurring service fees. For the year ended
December 31, 1999, installation revenue represented 7.9% of our total revenue
during this period.
Equipment Colocation
Our DNXs are designed to provide our customers with a protected environment
for their data communications equipment. For instance, our DNXs offer back-up
power and fire suppression systems, high levels of physical security and
sophisticated environmental controls. We began offering colocation services in
September of 1998.
39
<PAGE>
Our 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
- -------------------------------------------------------------------------------
Back-up 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>
Network Access and Connectivity
We provide access and connectivity to multiple carriers, including major
Internet pathways such as UUNet, Intermedia/Digex, GTE, Verio, AT&T and Cable &
Wireless. Through local connections with incumbent local exchange carriers,
such as US West, AT&T Local, MCI WorldCom, and competitive local exchange
carriers, such as Time Warner Telecommunications and ICG, we can deliver
customized services directly to a customer's cabinet. We purchase various types
of 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 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 circuit connection
equipment, we take responsibility for the link from the customers' equipment to
the carrier's network. We connect our DNXs to these networks through multiple
pathways. We guarantee the performance of our own network connections and also
pass along the guarantees made by the carriers. Because we do not own the
necessary pathways, we have contracts with several third party service
providers, such as US West, AT&T Local, MCI WorldCom and ICG. Terms of our
agreements with these service providers generally commit us to purchase fixed
amounts of bandwidth and may include the ability to increase bandwidth as
necessary. These agreements are generally non-cancellable by either us or the
third party and include service fees based on rates negotiated on a contract-
by-contract basis.
40
<PAGE>
Our network access and connectivity services include ongoing 24 hours a day,
seven days a week, or 24x7, monitoring of network performance. We began
offering network access and connectivity services in September of 1998. 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 . Multiple types of private-line connections
. Remote access modem lines
. Guaranteed 30 day installation
. Guaranteed 4 hour maximum time to repair
. Match carrier service level agreements for
availability
- ----------------------------------------------------------------------------
National Network Connectivity . Multiple types of private-line connections
. Internet
. Guaranteed 30 day installation
. Guaranteed 4 hour maximum time to repair
. Match carrier service level agreements 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 16 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.
41
<PAGE>
Multi-Provider Internet Access: InflowNet(TM) is an innovative Internet
access solution which provides direct Internet access to the pathways of
multiple major Internet providers such as UUNet, Intermedia/Digex, GTE, AT&T
and Cable & Wireless. Many providers offer limited back-up options within their
own network, but if individual networks fail, so does a customer's application.
By using Border Gateway Protocol v 4.0, an advanced Internet routing protocol,
InflowNet(TM) provides reliability by instantaneously routing traffic to
another pathway should a customer's primary Internet pathway fail. In addition,
we choose providers based on end-user reach, performance, architecture, ability
to avoid congested network access points and available bandwidth, providing a
very reliable, high-performance solution which we believe is appealing to e-
businesses. We introduced InflowNet(TM) in September of 1999. We offer
InflowNet(TM) with varying levels of Internet access capacity as follows:
<TABLE>
<CAPTION>
Branded Service Description
<S> <C>
InflowNet(TM) Max .Multi-provider Internet access solution
.Fixed (known as dedicated) or dynamic (known as
burstable)
bandwidth capacity
.Expandable with increased demand
. Two connections to the local area network known as
the Ethernet
.Guaranteed 100% uptime
.Minimal time-delay guarantee
.On-line bandwidth reports
.Guaranteed 30 day installation
- --------------------------------------------------------------------------
InflowNet(TM) SX .Multi-provider Internet access solution
.Fixed bandwidth capacity
.Fixed-rate pricing
.Single Ethernet connection
.Guaranteed 99% uptime
.Minimal time-delay guarantee
.Guaranteed 30 day installation
- --------------------------------------------------------------------------
</TABLE>
42
<PAGE>
Advanced Monitoring Applications: Our managed monitoring applications are
designed to enhance the reliability and security of our customers' e-business
applications. We began offering monitoring applications during the fourth
quarter of 1998. 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) . Equipment status monitoring on several levels
. 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, a type of security
feature, system tailored to individual security
policy
. Guaranteed 30 day installation
- -----------------------------------------------------------------------
</TABLE>
Efficiently Replicable 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 expand our business across a broad network of fully-functional
DNXs. Additionally, using FlowView(TM), 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.
43
<PAGE>
. 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 spots are identified
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 service level agreements, 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 allow for efficient expansion of our business 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 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 application service provider model. Application service providers
combine software, hardware and networking technologies to provide applications
to customers for a fixed monthly per-user fee. As 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
44
<PAGE>
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
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 multiple markets.
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 turnover
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 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
metropolitain statistical areas in which we already have a DNX, such as in
Denver, and we also expect to continue to explore opportunities for
international expansion.
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 network access points, which are
becoming increasingly congested and where data packets are often lost in the
transfer process.
Design and Build-out Process
We have launched six 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
45
<PAGE>
deployment team consists of 13 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 area and network operations center 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 general manager approximately four to six months
in advance of expected DNX activation. During this time the general manager is
trained in our systems and processes and works in several DNXs at varying
stages of development. The general manager 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.
46
<PAGE>
Roll-out Schedule
We currently have 14 DNXs in various stages of completion and have selected
several additional markets in which we are seeking appropriate DNX locations.
The following table summarizes the location, size and status of our network of
14 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 55
Minneapolis 15,900 8,300 10/99 8/09 12
Raleigh-Durham 14,400 7,500 11/99 9/09 15
Denver 2 9,900 7,400 1/00 1/10 20
San Diego 20,200 11,700 1/00 12/09 10
Austin 34,000 20,000 4/00 12/09 3
Atlanta 35,200 20,000 6/00 6/10 1
Irvine 35,100 20,000 6/00 1/10 N/A
Pittsburgh 24,000 17,000 8/00 3/10 N/A
Phoenix 39,100 20,000 8/00 9/10 N/A
Dallas 60,238 34,000 9/00 8/10 N/A
St. Louis 32,575 22,200 9/00 9/10 N/A
Nashville 22,731 12,500 11/00 10/10 N/A
Portland 41,600 23,200 11/00 12/10 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 April 30, 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 April 30, 2000.
Infrastructure Specifications
Each DNX includes the following features designed to offer maximum
performance, security and reliability:
. Uninterruptible Power Supply System. In order to provide uninterruptible
power supplies to our customers' equipment, we connect to multiple power
grids when available, feed power through uninterruptible power supplies,
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 uninterruptible power
supply 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.
47
<PAGE>
. Advanced 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 network operations center through a closed-circuit TV
system. We maintain a rolling library of surveillance camera video tapes
for 30 days.
. Dual 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.
. 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 network operations center staffed 24x7 by
our trained technicians, reserved testing 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
network operations center, 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 70 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 two to 70 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.
48
<PAGE>
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-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.
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 internet service providers,
equipment vendors and 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 nine 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 116 customers, including eBags.com, Email Knowledge, Factual Data
Corp., High Speed Access Corp., MapQuest.com, MessageMedia Inc., Northpoint
Communications, Inc., SciQuest.com and Worldprints.com, each of which currently
generates recurring monthly revenues in excess of $7,500. Our customers are
typically small to medium-sized e-businesses that are growing rapidly and
require complex communication architectures and services. Our customers include
business-to-business application providers, network providers and business-to-
consumers enterprises. We believe that the emerging business-to-business market
increases our market opportunity because these customers require more complex
network architectures and greater information technology staff attention than
network providers and business-to-consumer 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
49
<PAGE>
nationally recognized entities as well. Currently, 67% of our customers are
business-to-business and 21% of our customers are business-to-consumer. Our
customer base is also somewhat concentrated in that for the year ended December
31, 1999, our top five 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. No other customer
individually represented more than 10% of revenue for the year ended December
31, 1999. We expect some degree of customer concentration will continue for the
foreseeable future. Our agreement with Verio will expire by its terms on August
31, 2000. We are currently in discussions with Verio regarding a possible new
agreement; however we may not be able to reach a satisfactory agreement with
this or other important customers. Our customer contracts are fairly standard
and include provisions relating to warranties, confidentiality obligations,
indemnification, term and termination.
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 service level
agreements and customer support are among the best in our industry. Our
services are generally covered by service level agreements, 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) Internet access solution will have 100%
uptime.
To ensure that we meet our service level agreements each of our sites is
managed by an extensively-trained and experienced general manager. Our general
managers go through up to six months of hands-on, comprehensive training before
they are assigned a site to manage. Typically, we expect a general manager 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 network operations center 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.
We also have constructed a central network operations center, located at our
Denver, Colorado corporate headquarters, to provide advanced troubleshooting
support to each remote site. Currently, we employ 20 of our most experienced
network, information technology and software engineers for this additional
layer of support. Our central network operations center 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.
50
<PAGE>
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 reports 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 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 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 network access point 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.
We generally focus on underserved customers with complex application needs.
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. Some of our competitors and potential
competitors have longer operating histories and significantly greater financial
marketing and other resources than we do. These companies may also have more
extensive customer bases and in some circumstances, own their networks and
thereby may be able to achieve lower operating costs. Our competitors may be
better able to compete in a price competitive market, bundle their products and
services in a more competitive manner or form alliances or otherwise respond to
changing technologies and customer needs. In addition, some competitors, such
as incumbent local exchange carriers, are subject to federal regulations that
require them to offer colocation to other local telephone companies and long
distance carriers on an efficient,
51
<PAGE>
nondiscriminatory basis. These rules may enhance the attractiveness of the
incumbent local exchange carriers' colocation offerings because they may enjoy
greater pricing flexibility or more attractive service offerings.
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 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. See "Risk Factors--If we are
unable to adequately protect our proprietary rights, our business will suffer"
and "--If we become subject to infringement claims by third parties, we may be
forced to divert significant resources away from the operation of 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.
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<PAGE>
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 must permit competition by competitive
local exchange carriers. We are not an incumbent local exchange carrier, but
may be or become a competitive local exchange carrier in some states. In
addition, in many instances the FCC and the state public utilities commissions
share jurisdiction over facilities that are used to provide both interstate and
intrastate communications services.
Federal telecommunications regulation. The FCC has authority to regulate
interstate 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 provide telecommunciations services, 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;
. 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.
These requirements will increase our costs of doing business.
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.
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<PAGE>
These requirements will increase our costs of doing business and may limit
the manner in which we provide some of our services.
The Communications Act and the FCC's rules impose additional requirements on
incumbent local exchange carriers, such as US West and AT&T. We are not
considered an incumbent local exchange carrier. However, the requirements
imposed on incumbent local exchange carriers affect the ability of those
entities to compete and therefore may indirectly affect us. For example, the
FCC has granted incumbent local exchange carriers considerable pricing
flexibility and is likely to further relax regulation of the incumbent local
exchange carriers' rates in the near future. Consequently, the incumbent local
exchange carriers 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 incumbent local exchange carriers to offer colocation on an
efficient, nondiscriminatory basis. Those requirements may enhance the
attractiveness of the incumbent local exchange carriers' colocation services to
our target customers and therefore render the incumbent local exchange carriers
more potent competitors. The FCC's rules recently were vacated in part by the
D.C. Circuit, but the remaining rules still are likely to have this effect. The
FCC may also seek to reinstate the vacated rules in a remand proceeding.
State telecommunications regulation. State public utilities commissions 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 result in
potential penalties or other adverse consequences," "--We may encounter
difficulties if we are required to apply for, and obtain, necessary
authorizations in other states in which we expect to operate," "--Delays in
obtaining or failure to obtain regulatory approvals could negatively affect our
intended rollout of services," "--Regulation as a carrier will subject us to
ongoing regulation at the state and federal levels and could result in
increased costs and other competitive disadvantages," and "--Change in current
or future regulations, or legislative or judicial initiatives related to the
telecommunications industry could negatively affect our business."
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,
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<PAGE>
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 302 full-time employees as of March 31, 2000, of which we had 10 in
marketing, 70 in sales, 97 in operations, 26 in engineering, information
technology and product development, 19 in software development, 7 in business
process automation, 13 in expansion and 60 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:
Atlanta, Austin, Dallas, Denver (two locations), Durham, Irvine, Minneapolis,
Nashville, Phoenix, Pittsburgh, Portland, San Diego and St. Louis.
Legal Proceedings
We are not a party to any material legal proceedings.
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<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table provides information about our executive officers and
directors:
<TABLE>
<CAPTION>
Name Age Position
<C> <C> <S>
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......... 31 Vice President, Business Development
Robert J. Gedrose........... 41 Vice President, Sales
Nancy B. Printz............. 33 Vice President, General Counsel and Assistant
Secretary
Donald F. Detampel, Jr...... 44 Director
L. Watts Hamrick, III....... 40 Director
Stephen O. James............ 55 Director
Scott B. Perper............. 44 Director
G. Jackson Tankersley, Jr... 50 Director
</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.
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<PAGE>
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 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 1999. 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
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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. From 1981 to October 1997, 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.
Board Composition
Upon the closing of this offering our board will consist of seven directors.
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:
. Messrs. Hamrick and Tankersley will serve as our 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);
. Messrs. Perper and Daly will serve as our 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
. Messrs. James, Detampel and Zeile will serve as our 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.
All directors were nominated and elected as directors by the holders of our
common and preferred stock in accordance with provisions of our current
stockholders agreement. These provisions of our stockholders agreement will
terminate upon the completion of this offering. Each of the individuals will
remain as a director until their resignation or until their replacement. Please
see "Related-Party Transactions -- Stockholders' Agreement."
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.
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<PAGE>
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 of
15,000 upon their initial appointment and 5,000 annually thereafter upon each
reelection. They will also be eligible to receive discretionary option grants
under the discretionary option grant program of such plan.
Pursuant to the 1997 stock option/stock issuance plan, in 1999 we granted
Mr. James options to purchase 81,799 shares of our common stock and in January
of 2000 we granted Mr. James options to purchase 40,899 shares of our common
stock. The 81,799 options granted during 1999 have an exercise price of $0.27
and vest in equal monthly installments over 36 months. The 40,899 options
granted in 2000 have an exercise price of $1.46 and vest in equal monthly
installments over 12 months.
In February of 2000, Mr. Detampel was granted options to purchase 40,899
shares of our common stock under the 1997 stock option plan at an exercise
price of $2.93. These options vest in equal monthly installments over 12
months.
Other than Mr. James and Mr. Detampel, none of our directors has been
granted any options to purchase shares of our common stock.
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. For more information regarding
transactions entered into between us and the members of our compensation
committee. Please see the section entitled "Related-Party Transactions."
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<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 $100,000. These individuals are
collectively referred to as Named Executive Officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
-------------------- ------------
Securities
Underlying All Other
Name and Principal Position Salary ($) 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 81,799 $700(1)
James W. McHose, III, Chief
Financial Officer
and Treasurer ............. $ 4,500 $242,110(2) 245,397 $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 $6.02 per share from the
then fair market value of preferred stock.
Option Grants in Fiscal Year Ended December 31, 1999
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Percent of Annual Rates of Stock
Number of Total Options Option Value Price Appreciation
Shares Granted to Fair Market Based on For Option Term
Underlying Employees Exercise or Value of Options Midpoint of ($)(2)
Options in Fiscal Base Price on Date of Grant Expiration Our Estimated ---------------------
Name Granted (#)(1) Year (%) ($/sh)(1) ($/sh) Date Range ($) 5% 10%
---- -------------- ------------- ----------- ---------------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arthur H
Zeile.......... -- -- -- -- -- -- -- --
Joel C. Daly .. -- -- -- -- -- -- -- --
Robert J.
Gedrose........ 81,799 4% $0.27 $1.85 06/01/09 $1,204,899 $1,976,263 $3,160,713
James W. McHose,
III............ 245,397 12% $0.27 $2.37 08/17/09 $3,614,697 $5,928,791 $9,482,140
</TABLE>
- --------
(1) These options are incentive stock options that were granted at an exercise
price of $0.27 per share. These incentive stock options are immediately
exercisable and vest over a period of four years from their grant date at a
rate of 25% after one year of service and in equal monthly installments
over the next 36 months of service. All unvested exercised options are
subject to our right of repurchase at the option base price if the holder
terminates their service with us prior to vesting. The potential realizable
value is based on the term of the option at the time of grant, which is ten
years for each of the options set forth in this table. All amounts have
been calculated using the midpoint of our estimated range as the base value
and assumed annual rates of stock price appreciation of 5% and 10%.
(2) The 5% and 10% assumed annual rates of stock price appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent the company's estimate or projection of future common stock
prices.
Aggregated Option Exercises in the Last Fiscal Year and Fiscal Year End Option
Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options
Year End (#) at Fiscal Year End ($)(1)
---------------------------- ----------------------------
Name Exercisable(2) Unexercisable Exercisable(2) Unexercisable
- ---- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Arthur H. Zeile...... -- -- -- --
Joel C. Daly......... -- -- -- --
Robert J. Gedrose.... 245,397(3) -- $3,645,781 --
James W. McHose,
III................. 245,397 -- $3,614,697 --
</TABLE>
- --------
(1) In the table above, the value of unexercised in-the-money options is based
on the midpoint of our estimated range, minus the per share exercise price
multiplied by the number of shares.
(2) These options are immediately exercisable and vest over a period of four
years from their grant date at a rate of 25% after one year of service and
in equal monthly installments over the next 36 months of service. All
unvested exercised
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<PAGE>
options are subject to our right of repurchase at the option base price if
the holder terminates their service with us prior to vesting.
(3) Includes 163,598 options granted in 1998 at an exercise price of $.09 per
share.
Option Grants to Executive Officers and Directors in Fiscal Year 2000
<TABLE>
<CAPTION>
Number of
Shares
Underlying Exercise or Midpoint
Options Granted Base Price of Estimated Value of
Name (#) ($/sh) Range ($/sh) Options ($)(1)
- -------------- --------------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Bruce E. Cunningham..... 190,865 $1.46 $15.00 $2,584,312
Nancy B. Printz......... 27,266 $1.46 $15.00 $ 369,181
Donald F. Detampel,
Jr..................... 40,899 $2.93 $15.00 $ 493,651
Stephen O. James........ 40,899 $1.46 $15.00 $ 553,772
</TABLE>
(1) In the table above, the value of options is based on the midpoint of our
estimated range, minus the per share exercise price multiplied by the
number of shares.
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.
Outstanding options under the predecessor plan will be incorporated into
the 2000 stock incentive plan upon the date of this offering, and no further
option grants will be made under that plan. The incorporated options will
continue to be governed by their existing terms, unless the compensation
committee extends one or more features of the 2000 stock incentive plan to
those options. However, except as otherwise noted below, the outstanding
options under the predecessor plans contain substantially the same terms and
conditions summarized below for the discretionary option grant program under
the 2000 stock incentive plan.
Share Reserve
7,646,665 shares of common stock have been authorized for issuance under
the 2000 stock incentive plan. This share reserve consists of the shares
estimated to remain available for issuance under our 1997 stock option/stock
issuance plan, and the shares subject to outstanding options thereunder, plus
an increase to be effected prior to the closing of this offering. 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 3% 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 1,500,000 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 950,000 shares in the aggregate per calendar year.
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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;
. 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 discretionary option grant and stock issuance programs will be
administered by our compensation committee. This committee will determine
which eligible individuals are to receive option grants or stock
issuances, the time or times when such option grants or stock issuances
are to be made, the number of subject to each such grant or issuance, the
exercise or purchase price for each such grant or issuance (which may be
less than, equal to or greater than the fair market value of the shares),
the status of any granted option as either an incentive stock option or a
non-statutory stock option under the federal tax laws, the vesting
schedule to be in effect for the option grant or stock issuance and the
maximum term for which any granted option is to remain outstanding. The
committee will also select the executive officers and other highly
compensated employees who may participate in the salary investment option
grant program in the event that program is activated for one or more
calendar years. Neither the compensation committee nor the board will
exercise any administrative discretion with respect to option grants made
under the salary investment option grant program or under the automatic
option grant program or director fee option grant program for the non-
employee board members.
. 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.
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. 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.
. The exercise price for the options may be paid in cash or in 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. In addition, the compensation committee may
allow a participant to pay the option exercise price or direct issue
price (and any associated withholding taxes incurred in connection with
the acquisition of shares) with a full-recourse, interest-bearing
promissory note.
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 compensation committee may grant options and issue shares which will
accelerate (i) upon an acquisition even if the options are assumed and
repurchase rights assigned, (ii) in connection with a hostile change in
control (effected through a successful tender offer for more than 50% of
our outstanding voting stock or by proxy contest for the election of
board members) or (iii) upon a termination of the individual's service
following a change in control or hostile take-over.
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 March 31, 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 750,000 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 24 months. However, the initial offering period will begin
on the day the underwriting agreement is executed in connection with this
offering and will end on the last business day in April 2002. The next offering
period will begin on the first business day in May 2002, and subsequent
offering periods will be set by our compensation committee.
Individuals who are eligible employees on the start date of any offering
period may enter the plan on the start date or on any subsequent semi-annual
entry date. Individuals who become eligible
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employees after the start date of the offering period may join the plan on any
subsequent semi-annual entry date within that period.
A participant may contribute up to 15% of his or her base salary 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 April and October of each year). The purchase
price per share will be 85% 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 October 2000. In no event, however, may any
participant purchase more than 1,000 shares, nor may all participants in the
aggregate purchase more than 187,500 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 April 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. This limitation of liability does not
apply to liabilites arising under the federal securities laws. 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.
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RELATED-PARTY TRANSACTIONS
Sales of Common Stock
In September 1997, we issued and sold 2,726,643 shares of our common stock
to each of Arthur H. Zeile, our president, chief executive officer and Chairman
of our board of directors and a 5% stockholder, and Joel C. Daly, our chief
operating officer, director and a 5% stockholder, in exchange for $1,000 in the
aggregate from each.
In December 1998, we issued and sold 163,598 shares of our common stock to
Stephen O. James, one of our directors, in exchange for his execution and
delivery of a promissory note secured by the shares and a stock pledge
agreement in the amount of $14,400. 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, Mr. Daly 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, Mr. Zeile 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 Preferred Stock
The Series A, Series B and Series C convertible preferred stock have voting,
liquidation, dividend and redemption rights more favorable than those of our
common stock. Upon the closing of this offering, the outstanding shares of
Series A, Series B and Series C convertible preferred stock will automatically
convert into a total of 31,609,615 shares of common stock, or a per share
conversion ratio of 1 preferred share for approximately 2.73 shares of common
stock in light of the expected stock split of approximately 2.73 for 1 to be
effected prior to the closing of this offering.
Series A
In April 1999, we issued and sold 2,857,143 shares of our Series A preferred
stock to First Union Capital Partners, Inc., a 5% stockholder, at a per-share
purchase price of $3.50. Two of our directors, L. Watts Hamrick, III and Scott
B. Perper, are partner and managing partner, respectively, of First Union
Capital Partners, Inc.
In April 1999, we issued 187,381 shares of our Series A convertible
preferred stock to Mr. Daly 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 convertible preferred stock.
In April 1999, we issued 186,858 shares of our Series A convertible
preferred stock to Mr. Zeile at 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 convertible preferred stock.
In October 1999, we issued 40,000 shares of our Series A convertible
preferred stock to James W. McHose, III, our Vice President, Chief Financial
Officer and Treasurer, at below fair market value at a per-share price of
$3.50, a discount of $6.02 per share from the then fair market value of our
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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, due
on or before October 15, 2002, was also secured by 25,000 shares of Series A
convertible preferred stock through a stock pledge agreement. We have the right
to repurchase such 25,000 shares of Series A convertible preferred stock from
Mr. McHose at $3.50 per share if he discontinues his employment with us before
October 15, 2002.
Series B
In October 1999, we issued and sold 2,298,851 shares of our Series B
convertible preferred stock to First Union Capital Partners, Inc., 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.
In October 1999, we issued and sold 2,298,851 shares of our Series B
convertible preferred stock to Meritage Private Equity Fund, L.P., Meritage
Private Equity Parallel Fund, L.P. and Meritage Entrepreneurs Fund, L.P.,
collectively 5% stockholders, at a per-share price of $8.70. One of our
directors, G. Jackson Tankersley, Jr., is a managing member of the general
partner of the Meritage funds.
In October 1999, we issued and sold 1,149,424 shares of our Series B
convertible preferred stock to J.P. Morgan Investment Corporation and Sixty
Wall Street SBIC Fund, collectively 5% stockholders of Inflow, at a per-share
price of $8.70.
For accounting purposes, the difference between the offering price of $8.70
and the deemed fair value of the Series B convertible preferred stock was
calculated as a beneficial conversion feature in the amount of approximately
$5,655,000 and reflected as a deemed dividend in the statement of operations
for the year ended December 31, 1999.
Series C
In May 2000, we issued and sold 454,545 shares of our Series C convertible
preferred stock to First Union Capital Partners, Inc., at a per-share price of
$22.00. Two of our directors, L. Watts Hamrick, III and Scott B. Perper, are
partners of First Union Capital Partners, Inc.
In May 2000, we issued and sold 568,182 shares of our Series C convertible
preferred stock to Meritage Private Equity Fund, L.P., Meritage Private Equity
Parallel Fund, L.P. and Meritage Entrepreneurs Fund, L.P., collectively 5%
stockholders at a per-share price of $22.00. One of our directors, G. Jackson
Tankersley, Jr., is a managing member of the general partner of the Meritage
Funds.
In May 2000, we issued and sold 136,364 shares of our Series C convertible
preferred stock to J.P. Morgan Investment Corporation and Sixty Wall Street
SBIC Fund, collectively 5% stockholders of Inflow, at a per-share price of
$22.00.
Other Transactions with Directors
On February 3, 2000, Donald F. Detampel, Jr. was granted an option to
purchase 40,899 shares of our common stock at $2.93 per share. This option was
immediately exercised by Mr. Detampel. These shares are subject to our
repurchase right, which began lapsing at a rate of 1/12 per month in February
2000.
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On May 4, 1999, Mr. James was granted an option to purchase 81,799 shares of
our common stock at $0.27 per share. Mr. James exercised this option on
December 27, 1999 and these shares are subject to a repurchase right which
began lapsing at a rate of 1/36 per month in May 1999. On January 19, 2000, Mr.
James was granted an option to purchase 40,899 shares of our common stock at
$1.46 per share. Mr. James exercised this option on January 21, 2000. These
shares are subject to our repurchase right, which began lapsing at a rate of
1/12 per month in January 2000.
Other Related-Party Transactions
First Union Capital Partners, Inc., is participating as an underwriter in
this offering. We will pay all of the underwriters participating in this
offering commissions and fees for their services, not to exceed a total amount
of 7% of the proceeds of this offering.
Hammered Design, a company owned by Ivar Zeile, the brother of Mr. Zeile,
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.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been otherwise obtained from
unaffiliated third parties, except for the sale of Series A preferred stock to
Mr. McHose. We believe this sale was necessary to attract Mr. McHose to work
with us. We do not currently have plans to adopt a policy that requires all
future transactions between us and our officers, directors and affiliates to be
on terms no less favorable than could be obtained from unaffiliated third
parties.
Investors' Rights Agreement
In connection with the sale of our Series C convertible preferred stock, we
entered into an investors' rights agreement with Mr. Zeile, Mr. Daly and our
preferred stockholders. This investors' rights agreement amends and restates
the investors' rights agreements that we entered into in connection with the
sale of our Series B convertible preferred stock, and provides the Series A, B
and C stockholders with certain demand and piggyback registration rights. The
holders of 25% or more of the registrable securities are entitled to demand
that we register their registrable securities under the Securities Act on Form
S-1 or any similar long-form registration statement. We are not required to
effect more than four registrations pursuant to these demand registration
rights. The holders of the registrable securities are entitled to demand that
we register their registrable securities under the Securities Act on Form S-3
or any similar short-form registration statement then available to us. In
addition, the holders of registrable securities are entitled to require us to
include their registrable securities in future registration statements that we
may file. Please see "Description of Capital Stock-- Registration Rights."
Stockholders' Agreement
Also in connection with the sale of our Series C convertible preferred
stock, we entered into a stockholders' agreement with the parties to our
investors' rights agreement and Mr. James. This stockholders' agreement amends
and restates the stockholders' agreement that we entered into in connection
with the sale of our Series B convertible preferred stock. The stockholders'
agreement provides that the board most consist of seven members designated as
follows:
. the common stockholders have the right to designate two directors, each
of whom shall be one of our executive officers;
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. the holders of Series A convertible preferred stock have the right to
designate one director;
. the holders of Series B convertible preferred stock have the right to
designate two directors, of which one shall be designated by First Union
Capital Partners, Inc. and one shall be designated by Meritage Private
Equity Fund, L.P.; and
. two independent directors must be designated by the holders of the
common stock and approved by the holders of the Series A, Series B and
Series C convertible preferred stock.
The common stockholders have designated Mr. Zeile and Mr. Daly as directors.
The holders of Series A convertible preferred stock have designated L. Watts
Hamrick, III as director. The holders of Series B convertible preferred stock
have designated Scott B. Perper as the representative of First Union Capital
Partners, Inc. and G. Jackson Tankersley, Jr. as the representative of Meritage
Private Equity Fund, L.P. The holders of the common stock, with the approval of
the holders of the Series A and Series B convertible preferred stock, have
designated Stephen O. James and Donald F. Detampel, Jr. as directors.
In addition, the agreement restricts the sale or transfer of shares of stock
except in limited instances or in compliance with a co-sale procedure which
permits each other stockholder to participate in the proposed sale, based on
such stockholder's pro-rata stock holdings on an as-converted basis. The
agreement will terminate upon the completion of this offering and the board of
directors designation and co-sale provisions will no longer be applicable.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of March 15, 2000, as adjusted to
reflect the sale of 7,000,000 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 March 15, 2000 into common stock, except for 1,433,203 shares
of the preferred stock held by First Union Capital Partners, Inc. which is
assumed to convert into 3,907,832 shares of non-voting common stock. See
"Description of Capital Stock." The following table does not give effect to the
sale of 1,386,364 shares of our Series C convertible preferred stock to a
limited number of our existing preferred stockholders.
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 37,510,643 shares of
common stock, both voting and non-voting, outstanding as of March 15, 2000, and
44,510,643 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 granted on or before March 15, 2000 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. This 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)......... 11,042,989 29.44% 24.81%
Entities affiliated with Meritage Investment
Partners, LLC (2)............................. 6,268,144 16.71% 14.08%
Arthur H. Zeile (3)............................ 4,599,458 12.26% 10.33%
Joel C. Daly (4)............................... 4,600,883 12.27% 10.34%
Entities affiliated with J.P. Morgan Investment
Corporation (5)............................... 3,134,068 8.36% 7.04%
General Electric Capital Corporation (6)....... 1,567,037 4.18% 3.52%
Stolberg, Meehan & Scano II, L.P. (7).......... 1,567,037 4.18% 3.52%
Robert J. Gedrose (8).......................... 245,397 * *
James W. McHose, III (9)....................... 346,282 * *
L. Watts Hamrick, III (10)..................... 11,485,832 30.62% 25.80%
Scott B. Perper (11)........................... 11,499,891 30.66% 25.84%
G. Jackson Tankersley (12)..................... 6,268,144 16.71% 14.08%
Stephen O. James (13).......................... 279,478 * *
Donald F. Detampel, Jr. (14)................... 40,899 * *
All directors and executive officers as a group
(12 persons) (15)............................. 28,870,545 75.65% 63.93%
</TABLE>
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- --------
* Less than 1% of the outstanding shares of our common stock, both voting and
non-voting.
(1) The address of First Union Capital Partners, Inc. is 301 South College
Street, Charlotte, NC 28288-0732.
(2) Stock consists of 5,495,908 shares held directly by Meritage Private Equity
Fund, L.P., 671,945 shares held directly by Meritage Private Equity
Parallel Fund, L.P. and 100,291 shares held directly by Meritage
Entrepreneurs Fund, L.P. The address of the Meritage funds is 1600 Wynkoop
Street, Suite 300, Denver, CO 80202.
(3) Stock consists of 4,517,659 shares held by Mr. Zeile and 81,799 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 4,464,552 shares held by Mr. Daly and 136,331 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 2,820,665 shares held directly by J.P. Morgan Investment
Corporation and 313,403 shares held directly by Sixty Wall Street SBIC
Fund, L.P. The address of J.P. Morgan Investment Corporation and Sixty Wall
Street SBIC Fund, L.P. 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) 81,799 of the shares held by Mr. Gedrose are subject to a repurchase right
which lapses as to 25% of these shares on June 1, 2000 and as to the
remaining 75% of these shares at a rate of 1/36 per month therafter. In
addition, 122,699 of such shares are subject to a repurchase right which
lapses at a rate of 1/36 per month beginning August 3, 1999. Mr. Gedrose's
address is 938 Bannock Street, Suite 300, Denver, CO 80204.
(9) 68,166 of the shares held by Mr. McHose are subject to a repurchase right
which lapses as to these shares on October 15, 2002, if Mr. McHose is still
in our employment. Also includes 245,397 immediately exercisable options to
purchase common stock, of which 61,349 shares have been exercised and are
subject to a repurchase right which lapses on August 17, 2000. The
remaining 184,048 shares, when exercised, will be subject to a repurchase
right which will lapse at a rate of 1/36 per month after August 17, 2000.
Mr. McHose's address is 938 Bannock Street, Suite 300, Denver, CO 80204.
(10) Stock consists of 295,229 shares held by Mr. Hamrick, 147,614 shares held
directly by Hamrick Family Investments Limited I, and 11,042,989 shares
held directly by First Union Capital Partners, Inc. Mr. Hamrick is General
Partner of Hamrick Family Investments Limited I and a Partner of First
Union Capital Partners, Inc., a subsidiary of First Union Corporation. He
disclaims beneficial ownership of shares owned by these two entities. Mr.
Hamrick's address is 301 South College Street, Charlotte, NC 28288-0732.
(11) Stock includes 456,902 shares held by Mr. Perper and 11,042,989 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 its shares.
Mr. Perper's address is 301 South College Street, Charlotte, NC 28288-
0732.
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(12) Stock includes 5,495,908 shares held directly by Meritage Private Equity
Fund, L.P., 671,945 shares held directly by Meritage Private Equity
Parallel Fund, L.P. and 100,291 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
these Meritage funds. Mr. Tankersley disclaims beneficial ownership of the
shares held by these 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) Stock includes 6,816 shares held by the Amy Cherie James Trust and 6,816
shares held by the Michael James Trust. Mr James disclaims beneficial
ownership of the shares held by these trusts. 81,799 of the shares held by
Mr. James are subject to a repurchase right which began lapsing at a rate
of 1/36 per month in May 1999. In addition, 40,899 of such shares are
subject to a repurchase right which began lapsing at a rate of 1/12 per
month in January 2000. Mr. James' address is 915 Spruce Street, Boulder,
CO 80302.
(14) All of the shares held by Mr. Detampel are subject to a repurchase right
which began lapsing at a rate of 1/12 per month in January 2000. Mr.
Detampel's address is 6969 West 90th Ave, Westminster, CO 80021.
(15) See footnotes (3), (4) and (8) through (14) above. Stock includes 467,617
shares subject to options exercisable within 60 days of March 15, 2000.
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DESCRIPTION OF CAPITAL STOCK
General
The following are general descriptions of the material terms 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.
Upon closing of this offering, our authorized capital stock will consist of
150,000,000 shares of common stock, par value $0.001 per share, 5,000,000
shares of non-voting common stock, par value $0.001 per share, and 15,000,000
shares of preferred stock, par value $0.001 per share.
Common Stock
As of March 15, 2000, our stock is held by 62 stockholders of record. Upon
the closing of this offering, and after giving effect to the issuance of
7,000,000 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 44,510,643 shares of common stock
outstanding, including 3,907,832 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 common
stock are entitled to one vote for each share held on all matters submitted to
a vote of stockholders and do not have cumulative voting rights. Accordingly,
holders of a majority of the shares of common stock entitled to vote in any
election of directors may elect all of the directors standing for election.
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 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 15,000,000 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
72
<PAGE>
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 and allow for any holder of preferred stock to convert its shares
into either common stock or non-voting common stock. We are undertaking this
change in our capital structure to accommodate one of our principal
stockholders, First Union Capital Partners, Inc., who wanted to reduce their
ownership percentage of voting common stock. Upon the closing of this offering,
First Union Capital Partners, Inc. will convert 1,433,202 of its shares of
preferred stock into 3,907,832 shares of non-voting common stock, and the
balance of its preferred stock into shares of 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
and our amended and restated bylaws allow the board of directors to 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 bylaws further provide that special meetings of our
stockholders may be called only by the Chairman of the board of directorsor a
majority of the board of directors.
73
<PAGE>
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 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.
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.
Classified Board of Directors. Our board of directors is composed of three
separate classifications. At each annual meeting of stockholders after the
initial classification, the successors to directors whose terms expire will be
elected to serve a term of three years. This classification of directors may
have the effect of delaying or preventing changes in our control. See
"Management--Board Composition."
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 27,829,494
shares of common stock (or securities convertible into common stock) will be
entitled to certain registration rights with respect to their shares. Of these
shares, 8,343,527 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."
74
<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
44,510,643 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 37,510,643 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, officers and other stockholders holding, in the aggregate,
approximately 91.16% of our common stock 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, these
directors, officers and stockholders will be allowed to sell shares of our
common stock in accordance with Rule 144; provided further, holders of such
restricted shares who have not been officers or directors of us on or since the
date of this prospectus may offer, sell or otherwise dispose of 25% of their
shares, that are eligible for sale under Rule 144, on the earlier of 90 days
after the date of this offering or on the second trading day after the first
public release of our quarterly results if the last recorded sale price on the
Nasdaq National Market for 20 of the 30 trading days ending on such date is at
least twice the price per share in the initial public offering. These
stockholders may also offer, sell or otherwise dispose of an additional 25% of
their shares, that are eligible for sale under Rule 144, 135 days after the
date of this offering if the price of the share of common stock has achieved
the same target level. However, Donaldson, Lufkin & Jenrette, may in its sole
discretion, at any time without notice, release all or any portion of the
shares subject to lock-up agreements. Upon expiration of the lock-up agreements
180 days after the date of this prospectus, 32,962,061 shares will become
eligible for sale at various times under Rule 144, of which 29,672,906 shares
are held by affiliates and subject to certain volume restrictions, and
1,228,512 shares will become eligible for sale under Rule 701 (except to the
extent that any shares were sold 90 or 135 days after the date of this
prospectus as described above). In addition, 3,320,070 shares are not subject
to lock-up agreements and will be eligible for sale at various times after the
date of this prospectus.
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
75
<PAGE>
greater of 1% of the number of shares of common stock then outstanding, which
will equal approximately 445,106 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 March 15, 2000, we had 2,489,220 outstanding stock options with a
weighted average exercise price of $1.63. As soon as practicable following the
closing of this offering, we intend to file a registration statement under the
Securities Act covering 8,396,665 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.
76
<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.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 1,050,000 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 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..................... $ $ $ $
</TABLE>
77
<PAGE>
We estimate that the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, are as follows:
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 34,004
NASD fee...................................................... 13,380
NASDAQ listing fee............................................ 5,000
Director and officers insurance expenses...................... 100,000
Legal fees and expenses....................................... 600,000
Accounting fees and expenses.................................. 400,000
Printing expenses............................................. 600,000
Blue sky fees and expenses.................................... 5,000
Transfer Agent and Registrar fees and expenses................ 10,000
Miscellaneous................................................. 232,616
----------
Total..................................................... $2,000,000
==========
</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.
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.
However, 25% of the shares of common stock subject to the restrictions
described above (other than shares owned by directors or officers) will be
released from these restrictions if the reported last sale price of the common
stock on the Nasdaq National Market is at least twice the initial public
offering price for 20 or the 30 consecutive trading days ending on the last
trading day of the 90-day period after the date of this prospectus. These
shares will be released on the later to occur of the 90-day period after the
date of this prospectus and the second trading day after the first public
release of our quarterly results. An additional 25% of the shares subject to
the restrictions described above will be released from these restrictions if
the reported last sale price of the common stock on the Nasdaq National Market
is at least twice the initial public offering price for 20 of the 30
consecutive trading days ending on the last trading day of the 135-day period
after the date of this prospectus.
At our request, the underwriters have reserved up to 7% 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.
78
<PAGE>
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.
First Union Capital Partners, Inc., an affiliate of First Union Securities,
Inc., as the holder of a majority of our Series A preferred stock, has the
right to designate two directors in accordance with the provisions of our
current stockholders agreement. Messrs. Hamrick and Perper are First Union
Capital Partners, Inc.'s designees who are currently serving on the board of
directors, with terms expiring in 2001 and 2002, respectively. The provisions
of the stockholders agreement will terminate upon the completion of this
offering; however, these individuals will remain as directors until their
resignation or until their replacement.
Under Rule 2720 of the Conduct Rules of the National Association of
Securities Dealers, or NASD, we are considered an affiliate of First Union
Securities, Inc. 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
meeting certain standards. In accordance with this requirement, DLJ has assumed
the responsibilities of acting as qualified independent underwriter 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 qualified independent
underwriter, 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;
. the ability of our management;
. the prospects for our future earnings;
. the present state of our developments and our current financial
condition;
79
<PAGE>
. 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.
80
<PAGE>
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 March 15, 2000,
attorneys at Brobeck, Phleger & Harrison LLP, individually and through an
investment fund, beneficially owned a total of 54,530 shares of our common
stock. 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.
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.
81
<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.
The stock split described in the last paragraph of Note 11 to the financial
statements has not been consummated at May 11, 2000. When it has been
consummated, we will be in a position to furnish the following report:
"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'
December 31, Equity
---------------------- March 31, (Deficit)
1998 1999 2000 March 2000
--------- ----------- ------------ -------------
(Unaudited) (Unaudited)
(Note 1)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............... $ 23,605 $ 965,058 $ 1,918,315
Short-term investments..... -- 56,387,515 39,997,424
Accounts receivable, net
of allowance of $0,
$56,000 and $33,300 at
December 31, 1998 and
1999 and March 31, 2000,
respectively.............. 23,644 581,168 1,133,540
Prepaid expenses and
other, net................ 3,104 2,015,517 3,001,935
--------- ----------- ------------
Total current assets..... 50,353 59,949,258 46,051,214
Property and equipment,
net........................ 769,829 12,362,791 31,205,419
Restricted cash and
deposits................... 11,960 570,243 1,957,491
--------- ----------- ------------
Total assets............. $ 832,142 $72,882,292 $ 79,214,124
========= =========== ============
LIABILITIES, MANDATORILY
REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable........... $ 22,892 $ 4,240,590 $ 14,309,188
Accrued and other
liabilities............... 98,401 829,042 1,226,244
Deferred revenue........... -- 164,227 274,087
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 15,809,519
Deferred rent
reimbursements............. 129,595 1,308,867 1,643,793
Long-term debt, net of
current portion............ 298,740 -- --
--------- ----------- ------------
Total liabilities........ 1,705,492 6,542,726 17,453,312
--------- ----------- ------------
Commitments and
contingencies (Notes 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 and March 31,
2000, none authorized,
issued and outstanding
pro forma (unaudited)..... -- 12,108,201 12,185,806 $ --
Series B mandatorily
redeemable convertible
preferred stock;
7,000,000 shares
authorized; 6,896,552
shares issued and
outstanding at December
31, 1999 and March 31,
2000, none authorized,
issued and outstanding
pro forma (unaudited) .... -- 65,684,938 65,843,959 --
Stockholders' equity
(deficit):
Common stock, voting,
$.001 par value;
20,000,000 shares
authorized actual and
150,000,000 shares
authorized pro forma
(unaudited); 8,343,527,
8,452,593 and 9,760,779
(unaudited) shares issued
and outstanding actual at
December 31, 1998 and
1999 and March 31, 2000,
respectively; 33,682,441
pro forma shares issued
and outstanding
(unaudited)............... 8,343 8,452 9,761 33,682
Common stock, non-voting,
$.001 par value; none
authorized actual and
5,000,000 authorized pro
forma (unaudited), none
issued and outstanding
actual, 3,907,832 pro
forma shares issued and
outstanding (unaudited)... -- -- -- 3,907
Additional paid-in
capital................... 9,057 7,680,316 24,940,577 102,942,512
Deferred compensation...... -- (8,905,223) (22,864,971) (22,864,971)
Stock subscriptions
receivable and other...... (14,400) (150,911) (184,321) (184,321)
Accumulated deficit........ (876,350) (10,086,207) (18,169,999) (18,169,999)
--------- ----------- ------------ -----------
Total stockholders'
equity (deficit)........ (873,350) (11,453,573) $(16,268,953) $61,760,810
--------- ----------- ------------ ===========
Total liabilities,
mandatorily redeemable
convertible preferred
stock and
stockholders' equity
(deficit)............. $ 832,142 $72,882,292 $ 79,214,124
========= =========== ============
</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 Three Months Ended
through December 31, March 31,
December 31, ------------------------ ----------------------
1997 1998 1999 1999 2000
------------- ---------- ------------ --------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue................. $ -- $ 45,032 $ 1,998,164 $ 126,396 $ 1,608,231
Costs of data network
exchange facilities:
Direct................. -- 118,848 2,681,591 215,287 2,529,713
Indirect............... -- 173,846 866,254 48,530 1,047,789
---------- ---------- ------------ --------- -----------
Gross profit (loss) from
data network exchange
facilities............. -- (247,662) (1,549,681) (137,421) (1,969,271)
---------- ---------- ------------ --------- -----------
Other operating
expenses:
Sales and marketing.... 3,704 -- 653,186 15,534 935,634
General and
administrative........ 31,660 298,985 1,937,254 93,418 2,666,333
Product development.... 36,829 170,263 706,008 13,302 588,186
Stock compensation..... -- -- 575,483 3,768 2,761,546
---------- ---------- ------------ --------- -----------
Total operating
expenses............ 72,193 469,248 3,871,931 126,022 6,951,699
---------- ---------- ------------ --------- -----------
Loss from operations.... (72,193) (716,910) (5,421,612) (263,443) (8,920,970)
---------- ---------- ------------ --------- -----------
Other income (expense):
Interest expense....... (11,941) (81,640) (61,858) (35,148) (1,389)
Interest income........ 2,627 3,707 753,845 -- 838,567
---------- ---------- ------------ --------- -----------
Total other income
(expense)........... (9,314) (77,933) 691,987 (35,148) 837,178
---------- ---------- ------------ --------- -----------
Net loss................ $ (81,507) $ (794,843) $ (4,729,625) $(298,591) $(8,083,792)
Accretion of convertible
preferred stock........ -- -- (696,897) -- (236,626)
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) $(298,591) $(8,320,418)
========== ========== ============ ========= ===========
Net loss per common
share (basic and
diluted)............... $ (0.01) $ (0.10) $ (1.35) $ (0.04) $ (0.98)
========== ========== ============ ========= ===========
Weighted average common
shares (basic and
diluted)............... 8,179,929 8,179,929 8,180,040 8,179,929 8,425,857
========== ========== ============ ========= ===========
Pro forma net loss per
common share (basic and
diluted)--unaudited.... $ (0.59) $ (0.22)
============ ===========
Pro forma weighted
average common shares
(basic and diluted)--
unaudited.............. 17,496,175 36,255,353
============ ===========
</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.................. 8,179,929 8,180 (5,180) -- -- -- 3,000
Net loss................ -- -- -- -- (81,507) (81,507)
--------- ------ ----------- ------------ --------- ------------ ------------
Balance at December 31,
1997................... 8,179,929 8,180 (5,180) -- -- (81,507) (78,507)
Sale of common stock.... 163,598 163 14,237 -- (14,400) -- --
Net loss................ -- -- -- -- -- (794,843) (794,843)
--------- ------ ----------- ------------ --------- ------------ ------------
Balance at December 31,
1998................... 8,343,527 8,343 9,057 -- (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 ........ -- -- 9,480,706 (9,480,706) -- -- --
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................ 81,799 82 22,418 -- -- -- 22,500
Sale of common stock.... 27,267 27 39,973 -- (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................... 8,452,593 $8,452 $ 7,680,316 $ (8,905,223) $(150,911) $(10,086,207) $(11,453,573)
Deferred compensation
from stock options and
sale of stock ......... -- -- 16,721,294 (16,721,294) -- -- --
Satisfaction of stock
subscription
receivable............. -- -- -- -- 3,500 -- 3,500
Amortization of deferred
compensation........... -- -- -- 2,761,546 -- -- 2,761,546
Accretion of preferred
stock.................. -- -- (236,626) -- -- -- (236,626)
Issuance of common stock
upon exercise of
options................ 1,308,186 1,309 775,593 -- -- -- 776,902
Unrealized loss on
investments available
for sale............... -- -- -- -- (36,910) -- (36,910)
Net loss................ -- -- -- -- -- (8,083,792) (8,083,792)
--------- ------ ----------- ------------ --------- ------------ ------------
Balance at March 31,
2000................... 9,760,779 $9,761 $24,940,577 $(22,864,971) $(184,321) $(18,169,999) $(16,268,953)
========= ====== =========== ============ ========= ============ ============
</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 Three Months
through 31, Ended March 31,
December 31, ----------------------- -----------------------
1997 1998 1999 1999 2000
------------- --------- ------------ --------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From
Operating Activities:
Net loss................ $(81,507) $(794,843) $ (4,729,625) $(298,591) $ (8,083,792)
Adjustments to reconcile
net loss to net cash in
operating activities:
Depreciation and
amortization......... 349 67,827 412,858 37,602 553,998
Amortization of
deferred
compensation......... -- -- 575,483 3,767 2,761,546
Provision for doubtful
accounts............. -- -- 56,000 -- --
Other................. -- -- 14,400 -- 3,500
Changes in:
Accounts
receivable......... -- (23,644) (613,524) (116,292) (552,372)
Prepaid expenses and
other, net......... -- (3,104) (1,869,563) (41,264) (636,418)
Deposits............ -- (11,960) (201,133) -- (287,248)
Accounts payable.... 21,199 1,693 4,217,698 218,254 10,068,598
Accrued and other
liabilities........ 16,091 211,905 789,464 80,131 428,215
Deferred revenue.... -- -- 164,227 53,984 109,860
Deferred rent
reimbursements..... -- -- 1,179,272 (313) 334,926
-------- --------- ------------ --------- ------------
Net cash (used in)
provided by
operating
activities....... (43,868) (552,126) (4,443) (62,722) 4,700,813
-------- --------- ------------ --------- ------------
Cash Flows From
Investing Activities:
Purchase of property and
equipment.............. (18,592) (819,413) (12,005,820) (216,730) (19,396,626)
Purchase of investments,
net.................... -- -- (56,410,926) -- 16,353,181
Restricted cash......... -- -- (500,000) -- (1,450,000)
-------- --------- ------------ --------- ------------
Net cash used in
investing
activities....... (18,592) (819,413) (68,916,746) (216,730) (4,493,445)
-------- --------- ------------ --------- ------------
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 -- 776,902
Cash overdraft.......... -- -- 31,013 -- (31,013)
Proceeds from long-term
debt................... -- 467,593 200,000 420,000 --
Repayments of long-term
debt................... -- (12,989) (654,604) (38,966) --
Proceeds from
convertible notes
payable................ 600,000 400,000 220,000 -- --
-------- --------- ------------ --------- ------------
Net cash provided
by financing
activities....... 603,000 854,604 69,862,642 381,034 745,889
-------- --------- ------------ --------- ------------
Net increase (decrease)
in cash................ 540,540 (516,935) 941,453 101,582 953,257
Cash and cash
equivalents, beginning
of period.............. -- 540,540 23,605 23,605 965,058
-------- --------- ------------ --------- ------------
Cash and cash
equivalents, end of
period.................. $540,540 $ 23,605 $ 965,058 $ 125,187 $ 1,918,315
======== ========= ============ ========= ============
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.
Interim Financial Information
The financial information at March 31, 2000 and for the three months ended
March 31, 1999 and 2000, and the related notes, are unaudited but include all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary for a fair presentation, in all material respects, of its
financial position, operating results, and cash flows for the interim date and
periods presented. Results for the three-month period ended March 31, 2000 are
not necessarily indicative of results for the entire fiscal year or future
periods.
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 term of the customer service
contracts. The incremental direct costs incurred related to the origination of
customer contracts are capitalized and recognized on a straight-line basis over
the same term.
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.
F-7
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
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. There was no revenue for the period from
September 26, 1997 (inception) through December 31, 1997. 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 five
customers that represented approximately 46% of revenue. Of these five
customers, one customer represented approximately 14% of revenue for the year
ended December 31, 1999. As of December 31, 1999, this customer represented
approximately 13% of gross accounts receivable. No other customer individually
represented more than 10% of revenue for the year ended December 31, 1999.
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.
F-8
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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
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.
F-9
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 23,921,663 shares of voting common stock and
3,907,832 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.
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.
F-10
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 Three Months Ended
through 31, March 31,
December 31, ----------------------- ----------------------
1997 1998 1999 1999 2000
------------- --------- ------------ --------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss.............. $ (81,507) $(794,843) $ (4,729,625) $(298,591) $(8,083,792)
Accretion of
convertible preferred
stock................ -- -- (696,897) -- (236,626)
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) (298,591) (8,320,418)
Effect of pro forma
conversion of
securities:
Accretion of
convertible preferred
stock................ -- -- 696,897 -- 236,626
--------- --------- ------------ --------- -----------
Pro forma net loss
available to common
stockholders--
unaudited.............. $ (81,507) $(794,843) $(10,384,798) $(298,591) $(8,083,792)
========= ========= ============ ========= ===========
Denominator:
Weighted average
common shares (basic
and diluted)......... 8,179,929 8,179,929 8,180,040 8,179,929 8,425,857
Weighted average effect
of pro forma
securities:
Series A convertible
preferred stock...... -- -- 6,671,493 -- 9,025,060
Series B convertible
preferred stock...... -- -- 2,644,642 -- 18,804,436
--------- --------- ------------ --------- -----------
Pro forma weighted
average common shares
(basic and diluted)--
unaudited.............. -- -- 17,496,175 -- 36,255,353
========= ========= ============ ========= ===========
</TABLE>
Potential dilutive securities totaling 163,598, 883,432, 30,338,143 and
31,496,851 (unaudited) for the period September 26, 1997 (inception) through
December 31, 1997, for each of the years ended December 31, 1998 and 1999, and
for the three months ended March 31, 2000, 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
F-11
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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" as amended. 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. See Note 1, Revenue Recognition, for a discussion of our
accounting for fees from the contractual arrangements with our customers.
2. Balance Sheet Components
Certain balance sheet components are as follows:
<TABLE>
<CAPTION>
December 31, March 31,
--------------------- -----------
1998 1999 2000
-------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Property and equipment
Construction-in-progress at DNXs.......... $ -- $ 3,342,744 $15,719,616
Furniture and office equipment............ -- 725,242 1,104,408
Leasehold improvements and building
equipment................................ 466,682 5,537,702 10,364,126
Network equipment......................... 262,686 2,006,478 3,309,796
Internally developed software............. 20,000 179,493 358,287
Computer equipment and software........... 88,637 1,052,166 1,384,218
-------- ----------- -----------
838,005 12,843,825 32,240,451
Less accumulated depreciation and
amortization............................. (68,176) (481,034) (1,035,032)
-------- ----------- -----------
$769,829 $12,362,791 $31,205,419
======== =========== ===========
</TABLE>
<TABLE>
<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>
F-12
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 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 owed $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 on a straight-
line basis over the remaining vesting period.
F-13
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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 of not less than 75% of the outstanding
shares of preferred stock 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. Upon the effective date of
the common stock split discussed in footnote 11, the conversion ratio is 1
preferred share for approximately 2.73 common shares (unaudited).
F-14
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 $9.53 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
4,594,393 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 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 $8,991,606 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
$8,503,151 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.
F-15
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 at market.............. 163,598 $0.08
---------
Options outstanding at December
31, 1997........................ 163,598 $0.08 163,598 $ .08
Granted at market.............. 556,235 $0.08
---------
Options outstanding at December
31, 1998........................ 719,833 $0.08 719,833 $ .08
Granted below market........... 2,086,945 $0.72
Forfeited...................... (407,197) $0.20
Exercised...................... (81,799) $0.27
---------
Options outstanding at December
31, 1999........................ 2,317,782 $0.63 2,317,782 $0.63
=========
</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
Remaining Average
Range of Number of Contractual Exercise
Exercise Prices Shares Life (Years) Price
--------------- --------- ----------- --------
<S> <C> <C> <C>
$0.08-0.27 1,395,223 9.17 $0.19
$0.45 79,890 9.79 0.45
$0.73 87,252 9.90 0.73
$1.46 755,416 10.00 1.46
</TABLE>
The weighted-average grant date fair value of options granted during 1998
and 1999 was $.01 and $2.17, 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 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.
F-16
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Pursuant to this program and during 1998, 163,598 shares of the Company's
common stock were sold to a director of the Company for approximately $0.09 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, 27,267 shares of the Company's
common stock were sold to a nonemployee consultant for approximately $1.46 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. The consultant vests in
the common shares in a series of twenty-four equal monthly installments based
upon the consultant's completion of each successive month of service under the
consulting agreement, beginning on December 31, 1999. The Company has the right
to repurchase the unvested portion of the common shares at the purchase price
of approximately $1.46 at the time of the cessation of service under a
consulting agreement entered into with consultant. The Company estimated the
fair value of common stock to be approximately $10.57 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 $248,300, 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>
Allowance for bad debt....................................... $ 20,888
Accrued employee bonuses..................................... 83,378
Accrued sales and use tax.................................... 61,318
Depreciation................................................. 49,312
Net operating loss carryforwards............................. 1,193,945
-----------
Subtotal................................................. 1,408,841
Valuation allowance.......................................... (1,408,841)
-----------
Net deferred tax asset....................................... $ --
===========
</TABLE>
F-17
<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 $2.9 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
F-18
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 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.
From January 1, 2000 through February 4, 2000, the Company granted 871,435
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 recorded deferred compensation related to these grants of
approximately $9,171,000 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.
From January 1, 2000 through February 4, 2000, the Company entered into
operating leases for DNXs. The future minimum lease payments under these
agreements total approximately $13,700,000 over the next ten years.
11. Subsequent Events (unaudited)
From February 5, 2000 to March 31, 2000 the Company granted 716,834 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 the
grant. The Company recorded deferred compensation related to these grants of
approximately $8,327,800 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
F-19
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
grant. Subsequent to March 31, 2000 the Company granted 360,462 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 related to these grants of
approximately $3,819,300 for the difference between the exercise price of the
stock options and the deemed fair market value of the Company's common stock on
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 February 4, 2000, the Company entered into additional
operating leases for DNXs. The future minimum lease payments under these
agreements total approximately $30,100,000 over the next ten years.
Subsequent to February 4, 2000, the Company increased one of their
irrevocable standby letters of credit to $1,000,000 from $300,000. The Company
utilizes letters of credit to collateralize security deposits on certain long-
term office leases.
On May 8, 2000, the Company issued 1,386,364 shares of $.001 par value
Series C mandatorily redeemable convertible preferred stock (the "Series C
preferred stock") at $22.00 per share and received proceeds, net of issuance
costs, totaling approximately $30,425,000. The holders of the Series C
preferred stock have essentially the same rights and preferences as the Series
A and Series B preferred stock. The Company expects to record a beneficial
conversion charge related to the Series C preferred stock in the quarter ending
June 30, 2000.
The Company intends to effect an approximate 2.73 to 1 split of its common
stock. All references in the financial statements to common shares, common
share prices, and per share amounts have been adjusted retroactively for all
periods presented to reflect this stock split. The Company's actual preferred
shares, preferred share prices, and per share amounts have not been adjusted
for this stock split. However, as a result of the common stock split, the
preferred stock conversion ratio has been adjusted from 1:1 to approximately
1:2.73 (see Note 4).
F-20
<PAGE>
The Company intends to amend and restate their certificate of incorporation
to provide for the issuance of non-voting common stock and allow for any holder
of preferred stock to convert its shares into either common stock or non-voting
common stock. The Company is undertaking this change in its capital structure
to accommodate a regulatory concern of one of our principal stockholders. Upon
the conversion of the preferred stock, this principal stockholder will convert
all of its shares of preferred stock into 7,135,159 shares of common stock and
3,907,832 shares of non-voting common stock. The Company does not expect any of
the other preferred stockholders will elect to receive shares of non-voting
common stock upon the conversion of their preferred shares. Therefore, the
conversion of preferred stock into voting common and non-voting common stock in
the pro forma stockholders' equity (deficit) December 31, 1999 column on the
Balance Sheet assumes that only 1,433,203 preferred shares will be converted
into non-voting common shares, with the remainder of the preferred shares
converting into voting common shares based on a 1:2.73 ratio.
F-21
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 2000
[LOGO OF INFLOW, INC.]
7,000,000 Shares of Common Stock
----------------------
PROSPECTUS
----------------------
Donaldson, Lufkin & Jenrette
Chase H&Q
First Union Securities, Inc.
DLJdirect Inc.
- --------------------------------------------------------------------------------
Until , 2000 (25 days after the date of this prospectus), 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.......................................... $ 34,004
NASD fee...................................................... 13,380
NASDAQ listing fee............................................ 5,000
Director and officers insurance expenses...................... 100,000
Legal fees and expenses....................................... 600,000
Accounting fees and expenses.................................. 400,000
Printing expenses............................................. 600,000
Blue sky fees and expenses.................................... 5,000
Transfer Agent and Registrar fees and expenses................ 10,000
Miscellaneous................................................. 232,616
----------
Total..................................................... $2,000,000
==========
</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
II-1
<PAGE>
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 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) 2,726,643 shares
of its common stock, $0.001 par value per share, to Arthur H. Zeile, its co-
founder, in exchange for $1,000 of cash and (ii) 2,726,643 shares of its common
stock, $0.001 par value per share, to Joel C. Daly, its co-founder, in exchange
for $1,000 of cash and (iii) 2,726,643 shares of its common stock, $0.001 par
value per share, to Matt O'Connor, its co-founder, in exchange for $1,000 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 163,598 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 27,266 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.
On May 8, 2000, the Registrant issued an aggregate of 1,386,364 shares of
its Series C convertible preferred stock, $0.001 per value per share, to
certain existing investors, in consideration for the payment of approximately
$30,500,000. The above securities offered and sold by the
II-2
<PAGE>
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 March 15, Exercise
Granted 2000 Prices
--------- ----------- --------
<S> <C> <C> <C>
September 26, 1997 to December 22, 1997.. -- -- --
December 23, 1997 through May 3, 1999.... 790,726 40,899 $0.08
May 4, 1999 through October 18, 1999..... 1,093,492 431,358 $0.27
October 19, 1999 through November 15,
1999.................................... 80,163 38,445 $0.45
November 16, 1999 through December 14,
1999.................................... 87,252 77,163 $0.73
December 15, 1999 through February 2,
2000.................................... 1,418,945 1,177,841 $1.46
February 3, 2000 - March 12, 2000........ 757,734 703,746 $2.93
March 13, 2000 - March 15, 2000.......... 19,768 19,768 $4.40
</TABLE>
As of December 31, 1999, 81,799 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 an approximate 2.73-for-1 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> <C>
1.1** Form of underwriting agreement.
3.1 Form of third amended and restated certificate of
incorporation.
3.2** Amendment to form of third amended and restated
certificate of incorporation.
3.3** Form of fourth 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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S> <C>
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 Series C preferred stock Purchase Agreement by and among
Inflow, Inc. and Meritage Private Equity Fund, L.P.,
Meritage Private Equity Parallel Fund, L.P., Meritage
Entrepreneurs Fund, L.P., First Union Capital Partners,
Inc., J.P. Morgan Investment Corporation, Sixty Wall
Street SBIC Fund, L.P. and Stolberg, Meehan and Scano II,
L.P., dated May 8, 2000.
10.8 Third 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, Series B and Series
C preferred stock of InFlow, Inc. listed on the signature
pages thereto, dated as of May 8, 2000.
10.9 Third Amended and Restated Investors' Rights Agreement by
and among InFlow, Inc. and the investors listed on the
signature pages thereto, dated as of May 8, 2000.
10.10* Form of Data Center Services Agreement.
10.11+ InFlow, Inc. Data Center Services Agreement by and between
InFlow, Inc. and VERIO Rocky Mountain, Inc., dated August
31, 1998.
10.12* Lease Agreement, between JER Denver, LLC and InFlow, Inc.
(Denver 1).
10.13* Bannock Center (938 Bannock Building) Office Building
Lease Agreement, between 938 Bannock, LLC and InFlow, Inc.
(Denver 2).
10.14* Bannock Center (900 Bannock Building) Office Building
Lease Agreement, between 938 Bannock, LLC and InFlow, Inc.
(Denver NOC).
10.15* Lease Agreement between Timeshare Systems, Inc. and
InFlow, Inc. (Minneapolis), dated June 9, 1999.
10.16* Lease Agreement between Miami North, LLC and InFlow, Inc.
(Raleigh-Durham).
10.17* San Diego Tech Center Office Building Lease between San
Diego Tech Center, LLC and InFlow, Inc. (San Diego).
10.18* Lease Agreement between 1052 West Peachtree, LLC, and
InFlow, Inc. (Atlanta).
10.19* Triple Net Lease between AGB Norwood Park, L.P., and
InFlow, Inc. (Austin).
10.20* Sublease between Associates Information Services, Inc.,
and InFlow, Inc. (Irvine).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S> <C>
10.21* Lease between Sterling Network Exchange, LLC, and Inflow,
Inc., dated February 14, 2000 (Phoenix).
10.22* 1997 Stock Option/Stock Issuance Plan.
10.23 2000 Stock Incentive Plan.
10.24* 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
27.1* Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
+ Confidential treatment has been requested for the redacted portions of
this exhibit, which have been filed separately with the Commission.
(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.
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
II-5
<PAGE>
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-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Denver, State of Colorado, on May 12, 2000.
INFLOW, INC.
By: /s/ Arthur H. Zeile ____________
Name:Arthur H. Zeile
Title: President, Chief Executive
Officer
and Chairman of the Board
of
Directors
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the registration statement has been signed by the following
persons in the capacities indicated below:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* President, Chief Executive May 12, 2000
____________________________________ Officer and Chairman of the
Arthur H. Zeile Board of Directors
(Principal Executive
Officer)
* Vice President, Chief May 12, 2000
____________________________________ Financial Officer and
James W. McHose, III Treasurer (Principal
Financial and Accounting
Officer)
* Vice President, Chief May 12, 2000
____________________________________ Operating Officer,
Joel C. Daly Secretary and Director
* Director May 12, 2000
____________________________________
Stephen O. James
* Director May 12, 2000
____________________________________
Scott B. Perper
* Director May 12, 2000
____________________________________
L. Watts Hamrick, III
* Director May 12, 2000
____________________________________
G. Jackson Tankersley, Jr.
* Director May 12, 2000
____________________________________
Donald F. Detampel, Jr.
/s/ James W. McHose, III As Attorney-in-Fact May 12, 2000
_______________________________
James W. McHose, III
*By:
</TABLE>
II-7
<PAGE>
Report of Independent Accountants on
Financial Statement Schedule
To the Stockholders and Board of Directors of Inflow, Inc.:
Our audits of the financial statements referred to in our report dated
February 4, 2000 appearing in this Registration Statement on Form S-1 also
included an audit of the financial statement schedule included in this
Registration Statement. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related financial statements.
PricewaterhouseCoopers LLP
Broomfield, Colorado
February 4, 2000
<PAGE>
SCHEDULE II
Inflow, Inc.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance Charged Balance
at to Costs at End
Beginning and of
Description of Period Acquired Expenses Deductions Period
----------- --------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Period from Inception
(September 26, 1997) to
December 31, 1997:
Allowance for doubtful
accounts...................... $ -- -- -- -- $ --
===== ==== ====== ==== =======
Year ended December 31, 1998:
Allowance for doubtful
Accounts...................... $ -- -- -- -- $ --
===== ==== ====== ==== =======
Year ended December 31, 1999:
Allowance for doubtful
Accounts...................... $ -- -- 56,000 -- $56,000
===== ==== ====== ==== =======
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S> <C>
1.1** Form of underwriting agreement.
3.1 Form of third amended and restated certificate of
incorporation.
3.2** Amendment to form of third amended and restated certificate of
incorporation.
3.3** Form of fourth 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 Series C preferred stock Purchase Agreement by and among
Inflow, Inc. and Meritage Private Equity Fund, L.P., Meritage
Private Equity Parallel Fund, L.P., Meritage Entrepreneurs
Fund, L.P., First Union Capital Partners, Inc., J.P. Morgan
Investment Corporation, Sixty Wall Street SBIC Fund, L.P. and
Stolberg, Meehan and Scano II, L.P., dated May 8, 2000.
10.8 Third 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, Series B and Series C
preferred stock of InFlow, Inc. listed on the signature pages
thereto, dated as of May 8, 2000.
10.9 Third Amended and Restated Investors' Rights Agreement by and
among InFlow, Inc. and the investors listed on the signature
pages thereto, dated as of May 8, 2000.
10.10* Form of Data Center Services Agreement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S> <C>
10.11+ InFlow, Inc. Data Center Services Agreement by and between
InFlow, Inc. and VERIO Rocky Mountain, Inc., dated August 31,
1998.
10.12* Lease Agreement, between JER Denver, LLC and InFlow, Inc.
(Denver 1).
10.13* Bannock Center (938 Bannock Building) Office Building Lease
Agreement, between 938 Bannock, LLC and InFlow, Inc. (Denver
2).
10.14* Bannock Center (900 Bannock Building) Office Building Lease
Agreement, between 938 Bannock, LLC and InFlow, Inc. (Denver
NOC).
10.15* Lease Agreement between Timeshare Systems, Inc. and InFlow,
Inc. (Minneapolis), dated June 9, 1999.
10.16* Lease Agreement between Miami North, LLC and InFlow, Inc.
(Raleigh-Durham).
10.17* San Diego Tech Center Office Building Lease between San Diego
Tech Center, LLC and InFlow, Inc. (San Diego).
10.18* Lease Agreement between 1052 West Peachtree, LLC, and InFlow,
Inc. (Atlanta).
10.19* Triple Net Lease between AGB Norwood Park, L.P., and InFlow,
Inc. (Austin).
10.20* Sublease between Associates Information Services, Inc., and
InFlow, Inc. (Irvine).
10.21* Lease between Sterling Network Exchange, LLC, and Inflow,
Inc., dated February 14, 2000 (Phoenix).
10.22* 1997 Stock Option/Stock Issuance Plan.
10.23 2000 Stock Incentive Plan.
10.24* 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
27.1* Financial Data Schedule.
</TABLE>
- --------
* Filed previously
** To be filed by amendment.
+ Confidential treatment has been requested for the redacted portions of
this exhibit, which have been filed separately with the Commission.
<PAGE>
Exhibit 3.1
THIRD AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
INFLOW, INC.,
a Delaware Corporation
ARTICLE I
The name of this Corporation is InFlow, Inc.
ARTICLE II
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 Fifty Million (50,000,000).
The total number of shares of Preferred Stock that the Corporation shall have
authority to issue is Thirteen Million Seven Hundred Twenty Thousand
(13,720,000), of which Three Million Three Hundred Ten Thousand (3,310,000)
shares shall be designated Series A Preferred Stock (the "Series A Preferred
Stock"), Seven Million (7,000,000) shares shall be designated Series B Preferred
Stock (the "Series B Preferred Stock") and Three Million Four Hundred Ten
Thousand (3,410,000) shares shall be designated Series C Preferred Stock (the
"Series C Preferred Stock"). The total number of shares of Common Stock that the
Corporation shall have authority to issue is Thirty-Six Million Two Hundred
Eighty Thousand (36,280,000). 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, Series
B Preferred Stock and Series C Preferred Stock shall rank pari passu with
respect to dividend, liquidation and redemption rights.
<PAGE>
The relative rights, preferences, restrictions and other matters relating to the
Series A Preferred Stock, Series B Preferred Stock and Series C 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) on
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 each 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") or, in the case of Series C Preferred Stock, an
amount equal to $22.00 per share, as appropriately adjusted for subsequent stock
dividends, stock splits and similar transactions affecting the outstanding
Series C Preferred Stock (the "Original Series C Issue Price"), plus (B)
2
<PAGE>
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 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 any other 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.
3
<PAGE>
(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 :
(1) If traded on a securities exchange or through
NASDAQ-NMS, 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
4
<PAGE>
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
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 or, in the case of the
Series C Preferred Stock, the Original Series C 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
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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, or (z) in the
case of Series C Preferred Stock, by dividing the Original Series C Issue Price
by the Series C Conversion Price in effect on the date the certificate is
surrendered for conversion. The initial Series A Conversion Price, Series B
Conversion Price, and Series C Conversion Price shall be the Original Series A
Issue Price, the Original Series B Issue Price and the Original Series C Issue
Price, respectively; provided, however, that the Conversion Prices shall be
subject to adjustment as set forth in Section 4(d).
(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 (A) with respect to the Series A and Series B Preferred Stock,
not less than $26.00 per share (adjusted to reflect subsequent stock dividends,
stock splits or similar transactions affecting the outstanding Common Stock) and
(B) with respect to the Series C Preferred Stock, not less than $35.00 per share
(or such lesser amount as may be agreed to in writing by at least 75% of the
holders of Series C Preferred Stock) (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
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<PAGE>
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.
(d) Conversion Price Adjustments for Certain Dilutive Issuances,
------------------------------------------------------------
Splits and Combinations. The Conversion Prices of the Convertible Preferred
- -----------------------
Stock shall be subject to adjustment from time to time as follows:
(i) (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.
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<PAGE>
(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 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
8
<PAGE>
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) 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,
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<PAGE>
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 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.
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<PAGE>
(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 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
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<PAGE>
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 Conversion Prices for the Series A, Series B and
Series C 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, Series B and Series C
Preferred Stock.
(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
(l) Notices. 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.
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<PAGE>
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:
(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
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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 2,685,000
shares of Common Stock (including for such purpose all shares covered by
employee stock options outstanding on the date hereof); or
(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
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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 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 Third 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.
15
<PAGE>
ARTICLE VIII
Subject to the provisions of Article IV 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 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 XII
The Corporation expressly elects not to be governed by Section 203 of
the Delaware General Corporation Law.
* * * * *
16
<PAGE>
Exhibit 10.7
EXECUTION COPY
--------------
PREFERRED STOCK PURCHASE AGREEMENT
PREFERRED STOCK PURCHASE AGREEMENT dated May 8, 2000 (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., First Union
Capital Partners, Inc., Meritage Private Equity Fund, L.P., Meritage Private
Equity Parallel Fund, L.P., Meritage Entrepreneurs Fund, L.P., 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 C Preferred Stock.
---------------------------------------------
(a) Prior to the date hereof, the Company has adopted and
filed with the Secretary of State of Delaware the Third 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 C Preferred Stock set
forth opposite such Investor's name on Schedule A hereto for the purchase price
----------
of $22.00 per share.
1.2 Closing. The purchase and sale of the Series C Preferred
-------
Stock shall take place at the Company's offices located at 938 Bannock Street,
Suite 300, Denver, Colorado 80204 at 10:00 a.m. on May 8, 2000, 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
C 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 C Preferred Stock. The Company may
-------------------------------------------
sell up to an additional 2,022,727 shares of Series C Preferred Stock at a price
of not less than $22.00 per share (and otherwise on substantially identical
terms) prior to June 22, 2000 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 Third
Amended and Restated Investors' Rights Agreement in the form attached hereto as
Exhibit B (the "Investors' Rights Agreement") and the Third Amended and Restated
- ---------
Stockholders' Agreement in the form attached hereto as Exhibit C (the
---------
"Stockholders' Agreement"). Notwithstanding the foregoing, and subject to the
following sentences, in the event that the Company issues additional shares of
Series C Preferred Stock at a price per share less than $22.00 per share (the
"Lower Price") prior to June 22, 2000, the Company shall concurrently issue to
each Investor (the "Additional Series C Shares"), for no additional
consideration, that number of additional shares of Series C Preferred Stock that
such Investor
<PAGE>
would have received had it purchased shares pursuant to this Agreement at the
Lower Price. Any Additional Series C Shares issued pursuant to this Section 1.3
shall be treated as if they were issued at the Closing, and the Company and the
Investors shall use their best efforts to amend the Company's Restated
Certificate to (a) reduce the "Original Series C Issue Price" and the "Series C
Conversion Price" (as such terms are defined therein) to equal such Lower Price
and (b) if necessary, authorize the issuance of additional Series C Preferred
Stock in order to issue the Investors the Additional Series C Shares. The
Investors acknowledge that any issuance of Additional Series C Shares pursuant
to this Section 1.3 is intended to make the Investors whole for the issuance of
shares of Series C Preferred Stock by the Company prior to June 22, 2000, and
shall be in lieu of any anti-dilution protection otherwise applicable under the
Company's Restated Certificate.
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 C Preferred Stock purchased hereunder and without the payment of
additional consideration by the Investors, an additional number of shares of
Series C 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 C 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 C 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
<PAGE>
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. 13,720,000 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, (ii)
7,000,000 shares have been designated Series B Preferred Stock (the "Series
B Preferred Stock"), of which 6,896,552 shares are outstanding and (iii)
3,410,000 shares have been designated Series C Preferred Stock (the "Series
C Preferred Stock"), of which none are outstanding. The rights, privileges
and preferences of the Series A, Series B, and Series C Preferred Stock are
as stated in the Restated Certificate.
(ii) Common Stock. 36,280,000 shares of common stock,
------------
par value $0.001 ("Common Stock"), of which 3,657,630 shares are issued and
outstanding.
(b) The outstanding shares of Series A and 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 and Series B
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, Series B and Series C Preferred Stock, (B) the rights provided in Section 3
of the Stockholders' Agreement, and (C) 1,004,420 options outstanding as of
April 30, 2000, and such other options which have been granted in the ordinary
course by the Company since such date to purchase shares of the Company's Common
Stock pursuant to the Company's 1997 Stock Option Plan, as amended (the "Option
Plan"), which Option Plan authorizes the grant of options to purchase up to
2,685,000 shares of the Company's Common Stock, 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. The Company also expects to grant warrants to purchase up to
250,000 shares of Common Stock to a lender or financial institution in
connection with a new credit facility. 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.
(e) The issuance by the Company of 3,409,091 shares of
Series C Preferred Stock as of the date hereof would constitute approximately
17.38% of the Company's outstanding capital stock, calculated on a fully diluted
basis.
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,
3
<PAGE>
except for the subsidiaries listed on Exhibit F attached hereto. 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
C Preferred Stock being sold hereunder and the Common Stock issuable upon
conversion of the Series C 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 C
--------------------------------------------
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 C 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.
4
<PAGE>
2.7 Offering. The Company has filed an S-1 Registration
--------
Statement with the Securities and Exchange Commission on February 18, 2000 and
an S-1/A Registration Statement on March 28, 2000 (File No. 333-30684) for the
issuance of up to 8,050,000 shares of its Common Stock. Assuming the truth and
accuracy of each Investor's representations set forth in Section 3 of this
Agreement, including without limitation the qualification of each Investor as a
"qualified institutional buyer" within the meaning of Rule 144A of the
Securities Act of 1933, as amended (the "Act") or an institutional "accredited
investor" as defined under Regulation D of the Act as set forth in Section 3.10,
the offer, sale and issuance of the Series C Preferred Stock as contemplated by
this Agreement are exempt from the registration requirements of 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 material 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
5
<PAGE>
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. To its knowledge, 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, except where such nonperformance, noncompliance,
default or event of default is not reasonably likely to result in an MAE. 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.
6
<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) except for the anticipated credit facility
currently being negotiated, 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, 1999 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
March 31, 2000 and for the three-month period then ended (the "Financial
Statements"). The Financial Statements have been prepared in all material
respects in accordance with generally accepted accounting principles applied on
a consistent basis throughout the periods indicated and with each other and
fairly present in all material respects 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 March 31, 2000 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.
7
<PAGE>
2.15 Changes. Since March 31, 2000, 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 against the Company which have not been paid, settled or
adequately provided for and there is no basis therefor.
8
<PAGE>
2.17 Permits. To its knowledge, 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 C 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 C
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 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
9
<PAGE>
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 March 31, 2000. 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 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.
2.26 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").
To its knowledge, no Investor shall, solely by virtue of its purchase
10
<PAGE>
and ownership of the Series C 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 C 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 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 C 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 C Preferred Stock and the business, properties, prospects and financial
condition of the Company.
11
<PAGE>
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 C Preferred Stock. If other than an
individual, such Investor also represents it has not been organized for the
purpose of acquiring the Series C 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 C Preferred Stock (or the Common
Stock issued on conversion thereof) or an available exemption from registration
under the Act, the Series C 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 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.
12
<PAGE>
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.
3.10 Qualified Institutional Buyer.
-----------------------------
Other than with respect to Meritage Private Equity Fund, L.P.,
Meritage Private Equity Parallel Fund, L.P. and Meritage Entrepreneurs Fund,
L.P. (the "Meritage Group"), Stolberg, Meehan and Scano II, L.P. ("Stolberg")
and Sixty Wall Street SBIC Fund, L.P. ("SWS"), each Investor is a "qualified
institutional buyer" as defined under Rule 144A of the Act. SWS, Stolberg and
each member of the Meritage Group is an institutional "accredited investor" as
defined under Regulation D of the Act.
13
<PAGE>
4. Conditions of Investor's Obligations at Closing. The obligations
-----------------------------------------------
of each Investor under Section 1 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 Investors' Rights Agreement. The Company, each Investor and
---------------------------
the other parties thereto shall have entered into the Investors' Rights
Agreement in the form attached hereto as Exhibit B.
---------
4.7 Stockholders' Agreement. The Company, each Investor and the
-----------------------
other parties thereto shall have entered into the Stockholders' Agreement in the
form attached as Exhibit C.
---------
4.8 No Material Adverse Change. On and prior to the Closing
--------------------------
since March 31, 2000, there shall have occurred no material adverse change in
the business, assets or financial condition of the Company.
4.9 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.
14
<PAGE>
4.10 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 and other parties
---------------------------
thereto (other than the Company) shall have entered into the Investors' Rights
Agreement in the form attached as Exhibit B.
---------
5.4 Stockholders' Agreement. Each Investor and other parties
-----------------------
thereto (other than the Company) 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 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.
15
<PAGE>
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 $25,000; provided further, the Investors agree to use their
reasonable efforts to minimize such 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 C 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 C Preferred Stock will have the power to diminish or
eliminate all rights of such Investor under this Agreement.
16
<PAGE>
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 C 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 FOLLOWS]
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: 938 Bannock Street, Suite 300
Denver, CO 80204
First Union Capital Partners, Inc. Meritage Private Equity Fund, L.P.
Meritage Private Equity Parallel
Fund, L.P.
Meritage Entrepreneurs Fund, L.P.
By: /s/ L. Watts Hamrick, III,
------------------------------
L. Watts Hamrick, III,
Senior Vice President By: Meritage Investment Partners, LLC
Address: 301 South College Street By:/s/ G. Jackson Tankersley, Jr.
Charlotte, NC 28288-0732 ------------------------------
G. Jackson Tankersley, Jr.,
Managing Member
Address: 1600 Wynkoop Street, Suite 300
Denver, CO 80202
J.P. Morgan Investment Corporation Sixty Wall Street SBIC Fund, L.P.,
By: Sixty Wall Street SBIC Corporation,
By: /s/ Michael Robinson its General Partner
------------------------------
Name: ____________________________
Title: ___________________________ By: /s/ Michael Robinson
------------------------------------
Name: __________________________________
Address: 101 California Street, Title:__________________________________
37th Floor
San Francisco, CA 94111 Address: 101 California Street, 37th Floor
San Francisco, CA 94111
Stolberg, Meehan and Scano II, L.P.
By: Stolberg, Meehan & Scano LLC,
General Partner
By: /s/ Peter Van Genderen
------------------------------------
Name: __________________________________
Title: _________________________________
Address: Republic Plaza
370 17th Street
Suite 4240
Denver, CO 80202
18
<PAGE>
Schedule A
----------
<TABLE>
<CAPTION>
Investor Number of Shares Aggregate
- -------- ---------------- ---------
of Series C Purchase Price
----------- --------------
Preferred Stock
---------------
- -------------------------------------------------------------------------
<S> <C> <C>
J.P. Morgan Investment 102,273 $ 2,250,006.00
Corporation
- -------------------------------------------------------------------------
Sixty Wall Street SBIC Fund, 34,091 $ 750,002.00
L.P.
- -------------------------------------------------------------------------
First Union Capital Partners, 454,545 $ 9,999,990.00
Inc.
- -------------------------------------------------------------------------
Stolberg, Meehan and Scano 227,273 $ 5,000,006.00
II, L.P.
- -------------------------------------------------------------------------
Meritage Private Equity Fund, 498,182 $10,960,004.00
L.P.
- -------------------------------------------------------------------------
Meritage Private Equity 60,909 $ 1,339,998.00
Parallel Fund, L.P.
- -------------------------------------------------------------------------
Meritage Entrepreneurs Fund, 9,091 $ 200,002.00
L.P.
- -------------------------------------------------------------------------
</TABLE>
19
<PAGE>
EXHIBIT 10.8
EXECUTION COPY
--------------
THIRD AMENDED AND RESTATED
STOCKHOLDERS' AGREEMENT
This THIRD AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT dated as of
May 8, 2000 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, Series B and Series C Preferred
Stock of the Company, together with those holders listed on Schedule A hereto or
that subsequently execute a counterpart signature page hereto (collectively, the
"Purchasers" and each individually a "Purchaser"). The Series A, the Series B
and the Series C 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 Second Amended and Restated Stockholders Agreement dated as of November 30,
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, in each case in an
aggregate amount in excess of 250,000 shares of Common Stock (subject to stock
dividends, stock splits and similar transactions); (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,
<PAGE>
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 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
2
<PAGE>
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 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.
3
<PAGE>
(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 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,
4
<PAGE>
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 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 within thirty (30) days following
-----------------
receipt of the Sale Notice, any Stockholder fails to notify the Selling
Stockholder that it desires to
5
<PAGE>
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. 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
6
<PAGE>
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., Meritage Private Equity Parallel
Fund, L.P. or Meritage Entrepreneurs, 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. 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
7
<PAGE>
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 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. (currently Scott Perper) and one
member shall be designated by Meritage Private Equity Fund, L.P.
(currently 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, Series B and Series C Preferred Stock
(currently Stephen O. James and Donald F. Detampel, Jr.).
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
8
<PAGE>
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 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
9
<PAGE>
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
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
10
<PAGE>
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.
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 public offering price of (A) with
respect to shares other than Series C Preferred Stock and then only with respect
to Section 3, not less than $26.00 per share (adjusted to reflect subsequent
stock dividends, stock splits or similar transactions affecting the outstanding
Common Stock) and (B) otherwise, not less than $35.00 per share (or such lesser
amount as may be agreed to in writing by at least 75% of the holders of Series C
Preferred Stock) (adjusted to reflect subsequent stock dividends, stock splits
or similar transactions affecting the outstanding Common Stock), (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.
11
<PAGE>
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 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.
12
<PAGE>
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
-------------------------------------
President and Chief Executive Officer
Address: 938 Bannock Street
Suite 300
Denver, CO 80204
PURCHASERS:
<TABLE>
<CAPTION>
<S> <C>
First Union Capital Partners, Inc. Meritage Private Equity Fund, L.P.
Meritage Private Equity Parallel Fund, L.P.
Meritage Entrepreneurs Fund, L.P.
By: /s/ L. Watts Hamrick, III
---------------------------------------
Senior Vice President By: Meritage Investment Partners, LLC
Address: 301 South College Street By: /s/ G. Jackson Tankersley, Jr.
Charlotte, NC 28288-0732 ------------------------------
Managing Member
Address: 1600 Wynkoop Street, Suite 300
Denver, CO 80202
J.P. Morgan Investment Corporation Sixty Wall Street SBIC Fund, L.P.,
By: /s/ Michael Robinson By: Sixty Wall Street SBIC Corporation, its
------------------------------ General Partner
Name: ____________________________
Title: ___________________________ By: /s/ Michael Robison
-----------------------------
Name: ___________________________
Address: 101 California Street, 37th Floor Title: __________________________
San Francisco, CA 94111
Address: 101 California Street, 37th Floor
San Francisco, CA 94111
</TABLE>
13
<PAGE>
(Signature Page to Third Amended and Restated Stockholders Agreement continued)
PURCHASERS (continued):
Stolberg, Meehan and Scano II, L.P.
/s/ Arthur H. Zeile By: Stolberg, Meehan & Scano LLC,
- ------------------------------------ General Partner
/s/ Joel C. Daly
- ------------------------------------
By: /s/ Peter Van Genderen
Name: ___________________________
Title: __________________________
Address: Republic Plaza
370 17th Street
Suite 4240
Denver, CO 80202
COMMON HOLDERS:
/s/ Arthur H. Zeile
----------------------------------------
/s/ Joel C. Daly
----------------------------------------
/s/ Stephen O. James
----------------------------------------
14
<PAGE>
EXHIBIT 10.9
EXECUTION COPY
---------------
THIRD AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
THIRD AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT dated as of May 8,
2000 (the "Agreement") by and among (i) InFlow, Inc., a Delaware corporation
(the "Company"), and (ii) the investors listed on the signature pages attached
hereto, together with those investors listed on Schedule A attached hereto or
----------
that subsequently execute a counterpart signature page hereto, each of which is
herein referred to as an "Investor." The Second Amended and Restated Investors'
Rights Agreement dated November 30, 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:
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(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, the Series B Preferred
Stock, $.001 par value, and the Series C Preferred Stock, $.001 par value.
<PAGE>
(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 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
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(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.
(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
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<PAGE>
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 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
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<PAGE>
(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 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 exercise 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.
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<PAGE>
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.
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.
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<PAGE>
(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 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
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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;
(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
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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 shares or the anticipated 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. 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 sharr 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
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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.
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.
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(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
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
11
<PAGE>
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.
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
12
<PAGE>
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 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. 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
13
<PAGE>
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
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
Investors as of the date of this Agreement, the Company shall deliver to such
Investors 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.
14
<PAGE>
(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.
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, Series B or Series C 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, Series B or Series C 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, Series B or Series C
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
15
<PAGE>
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 and Directors and Officers Insurance. The Company agrees to
--------------------------------------------
maintain, as long as such persons serve as executive officers of the Company,
"key man" life insurance on each of Art Zeile and Joel Daly with the Company as
the sole beneficiary of such insurance, in an amount reasonably acceptable to
the Investors. The Company also agrees to maintain directors and officers
liability insurance in an amount reasonably acceptable to the Investors.
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 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.
16
<PAGE>
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.
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
-------------------------------------
President and Chief Executive Officer
Address: 938 Bannock Street
Suite 300
Denver, CO 80204
INVESTORS:
<TABLE>
<CAPTION>
<S> <C>
First Union Capital Partners, Inc. Meritage Private Equity Fund, L.P.
Meritage Private Equity Parallel Fund, L.P.
Meritage Entrepreneurs Fund, L.P.
By: /s/ L. Watts Hamrick, III By: Meritage Investment Partners, LLC
-------------------------------------
Senior Vice President
Address: 301 South College Street By: /s/ G. Jackson Tankersley, Jr.
Charlotte, NC 28288-0732 --------------------------------------
Managing Member
Address: 1600 Wynkoop Street, Suite 300
Denver, CO 80202
J.P. Morgan Investment Corporation Sixty Wall Street SBIC Fund, L.P.,
By: /s/ Michael Robinson By: Sixty Wall Street SBIC Corporation, its
------------------------------------- General Partner
Name: ____________________________
Title: ___________________________ By: /s/ Michael Robinson
----------------------------------------
Name: _______________________________________
Address: 101 California Street, 37th Floor Title: ______________________________________
San Francisco, CA 94111
Address: 101 California Street, 37th Floor
San Francisco, CA 94111
</TABLE>
18
<PAGE>
(Signature Page to Third Amended and Restated Investors' Rights Agreement
continued)
INVESTORS (continued):
Stolberg, Meehan and Scano II, L.P.
By: Stolberg, Meehan & Scano LLC,
General Partner
By: /s/ Peter Van Genderen
-----------------------------
Name: ___________________________
Title: __________________________
Address: Republic Plaza
370 17th Street
Suite 4240
Denver, CO 80202
/s/ Arthur H. Zeile
- ----------------------------------------------
/s/ Joel C. Daly
- ----------------------------------------------
/s/ Stephen O. James
- ----------------------------------------------
19
<PAGE>
Exhibit 10.23
INFLOW, INC.
2000 STOCK INCENTIVE PLAN
-------------------------
Article One
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 2000 Stock Incentive 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 shall have the meanings assigned to such terms in the
attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into five separate equity incentive
programs:
(i) the Discretionary Option Grant Program under which
eligible persons may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock,
(ii) the Salary Investment Option Grant Program under which
eligible employees may elect to have a portion of their base salary invested
each year in special options,
(iii) 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),
(iv) the Automatic Option Grant Program under which eligible
non-employee Board members shall automatically receive options at periodic
intervals to purchase shares of Common Stock, and
(v) the Director Fee Option Grant Program under which
non-employee Board members may elect to have all or any portion of their
annual retainer fee otherwise payable in cash applied to a special option
grant.
B. The provisions of Articles One and Seven shall apply to all equity
programs under the Plan and shall govern the interests of all persons under
the Plan.
<PAGE>
III. ADMINISTRATION OF THE PLAN
A. Prior to the Section 12 Registration Date, the Discretionary
Option Grant and Stock Issuance Programs shall be administered by the Board
unless otherwise determined by the Board. The following provisions shall
govern the administration of the Plan:
(i) The Board shall have the authority to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to
Section 16 Insiders but may delegate such authority in whole or in part to
the Primary Committee.
(ii) Administration of the Discretionary Option Grant and Stock
Issuance Programs with respect to all other persons eligible to participate
in those programs may, at the Board's discretion, be vested in the Primary
Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons.
(iii) The Board (or Primary Committee) shall select the Section
16 Insiders and other highly compensated Employees eligible to participate
in the Salary Investment Option Grant Program. However, all option grants
under the Salary Investment Option Grant Program shall be made in
accordance with the terms of that program and the Plan Administrator shall
not exercise any administrative discretion with respect to option grants
made under the program.
(iv) Administration of the Automatic Option Grant and Director
Fee Option Grant Programs shall be self-executing in accordance with the
terms of those programs.
B. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full power and authority
subject to the provisions of the Plan:
(i) to establish such rules as it may deem appropriate for
proper administration of the Plan, to make all factual determinations, to
construe and interpret the provisions of the Plan and the awards thereunder
and to resolve any and all ambiguities thereunder;
(ii) to determine, with respect to awards made under the
Discretionary Option Grant and Stock Issuance Programs, which eligible
persons are to receive such awards, the time or times when such awards are
to be made, the number of shares to be covered by each such award, the
vesting schedule (if any) applicable to the award, the status of a granted
option as either an Incentive Option or a Non-Statutory Option and the
maximum term for which the option is to remain outstanding;
(iii) to amend, modify or cancel any outstanding award with the
consent of the holder or accelerate the vesting of such award; and
(iv) to take such other discretionary actions as permitted
pursuant to the terms of the applicable program.
2
<PAGE>
Decisions of each Plan Administrator within the scope of its administrative
functions under the Plan shall be final and binding on all parties.
C. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions of
any Secondary Committee and reassume all powers and authority previously
delegated to such committee.
D. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any options or stock issuances under the Plan.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or 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. Only Employees who are Section 16 Insiders or other highly
compensated individuals shall be eligible to participate in the Salary
Investment Option Grant Program.
C. Only non-employee Board members shall be eligible to participate
in the Automatic Option Grant and Di rector Fee Option Grant Programs.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
initially reserved for issuance over the term of the Plan shall not exceed seven
million six hundred forty-six thousand six hundred sixty-five (7,646,665)
shares. Such reserve shall consist of (i) the number of shares estimated to
remain available for issuance, as of the Plan Effective Date, under the
Predecessor Plan, including the shares subject to the outstanding options to be
incorporated into the Plan and the additional shares which would otherwise be
available for future grant, plus (ii) an increase of four million four hundred
three thousand five hundred twenty-eight (4,403,528) shares authorized by the
Board subject to stockholder approval prior to the Section 12 Registration Date.
3
<PAGE>
B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of January
each calendar year during the term of the Plan, beginning with the calendar
year 2001, by an amount equal to three percent (3%) of the total number of
shares of Common Stock outstanding on the last trading day in December of the
immediately preceding calendar year, but in no event shall such annual
increase exceed one million five hundred thousand (1,500,000) shares.
C. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances
for more than nine hundred fifty thousand (950,000) shares of Common Stock in
the aggregate per calendar year.
D. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plan) shall be
available for subsequent issuance under the Plan to the extent those options
expire, terminate or are cancelled for any reason prior to exercise in full.
Unvested shares issued under the Plan and subsequently repurchased by the
Corporation, at the original exercise or issue price paid per share, pursuant
to the Corporation's repurchase rights under the Plan shall be added back to
the number of shares of Common Stock reserved for issuance under the Plan and
shall accordingly be available for reissuance through one or more subsequent
options or direct stock issuances under the Plan. However, should the
exercise price of an option under the Plan be paid with shares of Common
Stock or should shares of Common Stock otherwise issuable under the Plan be
withheld by the Corporation in satisfaction of the withholding taxes incurred
in connection with the exercise of an option or the vesting of a stock
issuance under the Plan, then the number of shares of Common Stock available
for issuance under the Plan shall be reduced by the gross number of shares
for which the option is exercised or which vest under the stock issuance, and
not by the net number of shares of Common Stock issued to the holder of such
option or stock issuance. Shares of Common Stock underlying one or more stock
appreciation rights exercised under the Plan shall not be available for
subsequent issuance.
E. If any change is made to the Common Stock by reason of 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, appropriate adjustments
shall be made to (i) the maximum number and/or class of securities issuable
under the Plan, (ii) the number and/or class of securities by which the share
reserve is to increase each calendar year pursuant to the automatic share
increase provisions of the Plan, (iii) the number and/or class of securities
for which any one person may be granted options, separately exercisable stock
appreciation rights and direct stock issuances under the Plan per calendar
year, (iv) the number and/or class of securities for which grants are
subsequently to be made under the Automatic Option Grant Program to new and
continuing non-employee Board members, (v) the number and/or class of
securities and the exercise price per share in effect under each outstanding
option under the Plan and (vi) the number and/or class of securities and
price per share in effect under each outstanding option incorporated into
this Plan from the Predecessor Plan. Such adjustments to the outstanding
options are to be effected in a manner which shall preclude the enlargement
or dilution of rights and benefits under such options. The adjustments
determined by the Plan Administrator shall be final, binding and conclusive.
4
<PAGE>
Article Two
DISCRETIONARY 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 at the time of the option grant and may be less than, equal to 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 II of Article
Seven and the documents evidencing the option, be payable in one or more of the
following forms:
(i) in cash or check made payable to the Corporation;
(ii) 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
(iii) 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 instructions to (a) 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) 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.
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C. Cessation of Service.
1. The following provisions shall govern the exercise of any
options outstanding at the time of the Optionee's cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason 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) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently exercised by his or her
Beneficiary.
(iii) 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.
(iv) Should the Optionee's Service be terminated for
Misconduct or should the Optionee engage in Misconduct while his or her
options are outstanding, then all such options shall terminate immediately
and cease to be outstanding.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding:
(i) to extend the period of time for which the option is
to remain exercisable following the Optionee's cessation of Service to such
period of time as the Plan Administrator shall deem appropriate, but in no
event beyond the expiration of the option term, and/or
(ii) to permit the option to be exercised, during the
applicable post-Service exercise period, for one or more additional
installments in which the Optionee would have vested 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. Repurchase Rights. 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
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repurchase, at the exercise price paid per share, any or all 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. Limited Transferability of Options. During the lifetime of the
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than to a Beneficiary following the
Optionee's death. Non-Statutory Options shall be subject to the same
restrictions, except that a Non-Statutory Option may, to the extent permitted by
the Plan Administrator, be assigned in whole or in part during the Optionee's
lifetime (i) as a gift to one or more members of the Optionee's immediate
family, to a trust in which Optionee and/or one or more such family members hold
more than fifty percent (50%) of the beneficial interest or to an entity in
which more than fifty percent (50%) of the voting interests are owned by one or
more such family members or (ii) pursuant to a domestic relations order. The
terms applicable to the assigned portion shall be the same as those in effect
for the option immediately prior to such assignment and shall be set forth in
such documents issued to the assignee as the Plan Administrator may deem
appropriate.
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 Articles One, Two and Six shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options
when issued under the Plan shall not be subject to the terms of this Section II.
A. Eligibility. Incentive Options may only be granted to Employees.
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 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.
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III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. Each option outstanding at the time of a Change in Control but not
otherwise fully-vested shall automatically accelerate so that each such option
shall, immediately prior to the effective date of the Change in Control, become
exercisable for all of the shares of Common Stock at the time subject to that
option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock. However, an outstanding option shall not so accelerate
if and to the extent: (i) such option is, in connection with the Change in
Control, assumed or otherwise continued in full force and effect by the
successor corporation (or parent thereof) pursuant to the terms of the Change in
Control, (ii) such option is replaced with a cash incentive program of the
successor corporation which preserves the spread existing at the time of the
Change in Control on the shares of Common Stock for which the option is not
otherwise at that time exercisable and provides for subsequent payout in
accordance with the same vesting schedule applicable to those option shares or
(iii) the acceleration of such option is subject to other limitations imposed by
the Plan Administrator at the time of the option grant. Each option outstanding
at the time of the Change in Control shall terminate as provided in Section
III.C. of this Article Two.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Change in Control, except to
the extent: (i) those repurchase rights are assigned to the successor
corporation (or parent thereof) or otherwise continue in full force and effect
pursuant to the terms of the Change in Control or (ii) such accelerated vesting
is precluded by other limitations imposed by the Plan Administrator at the time
the repurchase right is issued.
C. Immediately following the consummation of the Change in Control,
all outstanding options shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof) or otherwise
expressly continued in full force and effect pursuant to the terms of the Change
in Control.
D. Each option which is assumed in connection with a Change in
Control shall be appropriately adjusted, immediately after such Change in
Control, to apply to the number and class of securities which would have been
issuable to the Optionee in consummation of such Change in Control had the
option been exercised immediately prior to such Change in Control. Appropriate
adjustments to reflect such Change in Control shall also be made to (i) the
exercise price payable per share under each outstanding option, provided the
aggregate exercise price payable for such securities shall remain the same, (ii)
the maximum number and/or class of securities available for issuance over the
remaining term of the Plan and (iii) the maximum number and/or class of
securities for which any one person may be granted options, separately
exercisable stock appreciation rights and direct stock issuances under the Plan
per calendar year. To the extent the actual holders of the Corporation's
outstanding Common Stock receive cash consideration for their Common Stock in
consummation of the Change in Control, the successor corporation may, in
connection with the assumption of the outstanding options, substitute one or
more shares of its own common stock with a fair market value equivalent to the
cash consideration paid per share of Common Stock in such Change in Control.
8
<PAGE>
E. The Plan Administrator may at any time provide that one or more
options will automatically accelerate in connection with a Change in Control,
whether or not those options are assumed or otherwise continued in full force
and effect pursuant to the terms of the Change in Control. Any such option shall
accordingly become exercisable, immediately prior to the effective date of such
Change in Control, for all of the shares of Common Stock at the time subject to
that option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock. In addition, the Plan Administrator may at any time
provide that one or more of the Corporation's repurchase rights shall not be
assignable in connection with such Change in Control and shall terminate upon
the consummation of such Change in Control.
F. The Plan Administrator may at any time provide that one or more
options will automatically accelerate upon an Involuntary Termination of the
Optionee's Service within a designated period (not to exceed eighteen (18)
months) following the effective date of any Change in Control in which those
options 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 at any time provide that one or more of the Corporation's
repurchase rights shall immediately terminate upon such Involuntary Termination.
G. The Plan Administrator may at any time provide that one or more
options will automatically accelerate in connection with a Hostile Take-Over.
Any such option shall become exercisable, immediately prior to the effective
date of such Hostile Take-Over, for all of the shares of Common Stock at the
time subject to that option and may be exercised for any or all of those shares
as fully-vested shares of Common Stock. In addition, the Plan Administrator may
at any time provide that one or more of the Corporation's repurchase rights
shall terminate automatically upon the consummation of such Hostile Take-Over.
Alternatively, the Plan Administrator may condition such automatic acceleration
and termination upon an Involuntary Termination of the Optionee's Service within
a designated period (not to exceed eighteen (18) months) following the effective
date of such Hostile Take-Over. Each option so accelerated shall remain
exercisable for fully-vested shares until the expiration or sooner termination
of the option term.
H. The portion of any Incentive Option accelerated in connection with
a Change in Control or Hostile Take Over shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) 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.
IV. STOCK APPRECIATION RIGHTS
The Plan Administrator may, subject to such conditions as it may
determine, grant to selected Optionees stock appreciation rights which will
allow the holders of those rights to elect between the exercise of the
underlying option for shares of Common Stock and the surrender of that option in
exchange for a distribution from the Corporation in an amount equal to the
excess of (a) the Option Surrender Value of the number of shares for which the
option is surrendered over (b) the aggregate exercise price payable for such
shares. The distribution may
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<PAGE>
be made in shares of Common Stock valued at Fair Market Value on the option
surrender date, in cash, or partly in shares and partly in cash, as the Plan
Administrator shall in its sole discretion deem appropriate.
10
<PAGE>
ARTICLE THREE
SALARY INVESTMENT OPTION GRANT PROGRAM
--------------------------------------
I. OPTION GRANTS
The Primary Committee may implement the Salary Investment Option Grant
Program for one or more calendar years beginning after the Plan Effective Date
and select the Section 16 Insiders and other highly compensated Employees
eligible to participate in the Salary Investment Option Grant Program for each
such calendar year. Each selected individual who elects to participate in the
Salary Investment Option Grant Program must, prior to the start of each calendar
year of participation, file with the Plan Administrator (or its designate) an
irrevocable authorization directing the Corporation to reduce his or her base
salary for that calendar year by an amount not less than five thousand Dollars
($5,000) nor more than seventy five thousand Dollars ($75,000). Each individual
who files such a timely election shall be granted an option under the Salary
Investment Grant Program on the first trading day in January for the calendar
year for which the salary reduction is to be in effect.
II. OPTION TERMS
Each option shall be a Non-Statutory Option 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.
A. Exercise Price.
1. The exercise price per share shall be thirty-three and one-
third percent (33-1/3%) of 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 be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.
B. Number of Option Shares. The number of shares of Common Stock
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the dollar amount of the approved reduction in the Optionee's
base salary for the calendar year, and
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<PAGE>
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. Exercise and Term of Options. The option shall become
exercisable in a series of twelve (12) successive equal monthly installments
upon the Optionee's completion of each calendar month of Service in the calendar
year for which the salary reduction is in effect. Each option shall have a
maximum term of ten (10) years measured from the option grant date.
D. Cessation of Service. Each option outstanding at the time of
the Optionee's cessation of Service shall remain exercisable, for any or all of
the shares for which the option is exercisable at the time of such cessation of
Service, until the earlier of (i) the expiration of the option term or (ii) the
expiration of the three (3)-year period following the Optionee's cessation of
Service. To the extent the option is held by the Optionee at the time of his or
her death, the option may be exercised by his or her Beneficiary. However, the
option shall, immediately upon the Optionee's cessation of Service, terminate
and cease to remain outstanding with respect to any and all shares of Common
Stock for which the option is not otherwise at that time exercisable.
III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Change in Control or Hostile Take-Over while
the Optionee remains in Service, each outstanding option shall automatically
accelerate so that each such option shall, immediately prior to the effective
date of the Change in Control or Hostile Take-Over, become fully exercisable
with respect to the total number of 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. Each such option accelerated in connection with a
Change in Control shall terminate upon the Change in Control, except to the
extent assumed by the successor corporation (or parent thereof) or otherwise
continued in full force and effect pursuant to the terms of the Change in
Control. Each such option accelerated in connection with a Hostile Take-Over
shall remain exercisable until the expiration or sooner termination of the
option term.
B. Each option which is assumed in connection with a Change in
Control shall be appropriately adjusted to apply to the number and class of
securities which would have been issuable to the Optionee in consummation of
such Change in Control had the option been exercised immediately prior to such
Change in Control. Appropriate adjustments shall also be made to the exercise
price payable per share under each outstanding option, provided the aggregate
exercise price payable for such securities shall remain the same. To the extent
the actual holders of the Corporation's outstanding Common Stock receive cash
consideration for their Common Stock in consummation of the Change in Control,
the successor corporation may, in connection with the assumption of the
outstanding options, substitute one or more shares of its own common stock with
a fair market value equivalent to the cash consideration paid per share of
Common Stock in such Change in Control.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding options. The Optionee shall in return be entitled to a
cash distribution from the Corporation in an
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<PAGE>
amount equal to the excess of (i) the Option Surrender Value of the shares of
Common Stock at the time subject to each surrendered option (whether or not the
Optionee is otherwise at the time vested in those shares) over (ii) the
aggregate exercise price payable for such shares. Such cash distribution shall
be paid within five (5) days following the surrender of the option to the
Corporation.
IV. REMAINING TERMS
The remaining terms of each option granted under the Salary Investment
Option Grant Program shall be the same as the terms in effect for options made
under the Discretionary Option Grant Program.
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<PAGE>
Article Four
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 options. Shares
of Common Stock may also be issued under the Stock Issuance Program pursuant to
share right awards which entitle the recipients to receive those shares upon the
attainment of designated performance goals or Service requirements. Each such
award shall be evidenced by one or more documents which comply with the terms
specified below.
A. Purchase Price.
1. The purchase price per share of Common Stock subject to
direct issuance shall be fixed by the Plan Administrator and may be less than,
equal to or greater than the Fair Market Value per share of Common Stock on the
issue date.
2. Subject to the provisions of Section II of Article Seven,
shares of Common Stock may be issued under the Stock Issuance Program for any 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/Issuance Provisions.
1. The Plan Administrator may issue shares of Common Stock which
are fully and immediately vested upon issuance or which are to vest in one or
more installments over the Participant's period of Service or upon attainment of
specified performance objectives. Alternatively, the Plan Administrator may
issue share right awards which shall entitle the recipient to receive a
specified number of vested shares of Common Stock upon the attainment of one or
more performance goals or Service requirements established by the Plan
Administrator.
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 his or her 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.
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<PAGE>
3. The Participant shall have full stockholder rights with respect
to the issued shares of Common Stock, 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, 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 the
surrendered shares.
5. The Plan Administrator may 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 cessation of the Participant's
Service or the non-attainment of the performance objectives applicable to those
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.
6. Outstanding share right awards shall automatically terminate, and
no shares of Common Stock shall actually be issued in satisfaction of those
awards, if the performance goals or Service requirements established for such
awards are not attained. The Plan Administrator, however, shall have the
authority to issue shares of Common Stock in satisfaction of one or more
outstanding share right awards as to which the designated performance goals or
Service requirements are not attained.
II. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. All of the Corporation's outstanding repurchase rights shall
terminate automatically, and all the shares of Common Stock subject to those
terminated rights shall immediately vest in full, in the event of any Change in
Control, except to the extent (i) those repurchase rights are assigned to the
successor corporation (or parent thereof) or otherwise continue in full force
and effect pursuant to the terms of the Change in Control or (ii) such
accelerated vesting is precluded by other limitations imposed by the Plan
Administrator at the time the repurchase right is issued.
B. The Plan Administrator may at any time provide for the automatic
termination of one or more of those outstanding repurchase rights and the
immediate vesting of the shares of Common Stock subject to those terminated
rights upon (i) a Change in Control or Hostile Take-Over or (ii) an Involuntary
Termination of the Participant's Service within a designated period (not to
exceed eighteen (18) months) following the effective date of any
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<PAGE>
Change in Control or Hostile Take-Over in which those repurchase rights are
assigned to the successor corporation (or parent thereof) or otherwise continue
in full force and effect.
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.
16
<PAGE>
Article Five
AUTOMATIC OPTION GRANT PROGRAM
------------------------------
I. OPTION TERMS
A. Grant Dates. Options shall be made on the dates specified below:
1. Each individual who is first elected or appointed as a non-
employee Board member at any time after the Plan Effective Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase fifteen thousand (15,000) shares of Common
Stock, provided that individual has not previously been in the employ of the
Corporation (or any Parent or Subsidiary).
2. On the date of each Annual Stockholders Meeting beginning with
the 2001 Annual Stockholder Meeting, each individual who is to continue to serve
as a non-employee Board member shall automatically be granted a Non-Statutory
Option to purchase five thousand (5,000) shares of Common Stock, provided that
individual has served as a non-employee Board member for at least six (6)
months.
B. Exercise Price.
1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. Option Term. Each option shall have a term of ten (10) years
measured from the option grant date.
D. Exercise and Vesting of Options. Each option shall be immediately
exercisable for any or all of the option shares. However, any unvested shares
purchased under the option shall be subject to repurchase by the Corporation, at
the exercise price paid per share, upon the Optionee's cessation of Board
service prior to vesting in those shares. Each option shall vest, and the
Corporation's repurchase right shall lapse upon the Optionee's completion of one
(1) year of Board service measured from the option grant date.
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<PAGE>
E. Cessation of Board Service. The following provisions shall govern
the exercise of any options outstanding at the time of the Optionee's cessation
of Board service:
(i) Any option outstanding at the time of the Optionee's
cessation of Board service for any reason shall remain exercisable for a
twelve (12)-month period following the date of such cessation of Board
service, but in no event shall such option be exercisable after the
expiration of the option term.
(ii) Any option exercisable in whole or in part by the Optionee
at the time of death may be subsequently exercised by his or her
Beneficiary.
(iii) Following the Optionee's cessation of Board service, the
option may not be exercised in the aggregate for more than the number of
shares for which the option was exercisable on the date of such cessation
of Board 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 Board service, terminate and cease to be
outstanding for any and all shares for which the option is not otherwise at
that time exercisable.
(iv) However, should the Optionee cease to serve as a Board
member by reason of death or Permanent Disability, then all shares at the
time subject to the option shall immediately vest so that such option may,
during the twelve (12)-month exercise period following such cessation of
Board service, be exercised for all or any portion of those shares as
fully-vested shares of Common Stock.
II. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Change in Control or Hostile Take-Over, the
shares of Common Stock at the time subject to each outstanding option but not
otherwise vested shall automatically vest in full so that each such option may,
immediately prior to the effective date of such Change in Control or Hostile
Take-Over, became fully exercisable for all of the shares of Common Stock at the
time subject to such option and maybe exercised for all or any of those shares
as fully-vested shares of Common Stock. Each such option accelerated in
connection with a Change in Control shall terminate upon the Change in Control,
except to the extent assumed by the successor corporation (or parent thereof) or
otherwise continued in full force and effect pursuant to the terms of the Change
in Control. Each such option accelerated in connection with a Hostile Take-Over
shall remain exercisable until the expiration or sooner termination of the
option term.
B. All outstanding repurchase rights shall automatically terminate and
the shares of Common Stock subject to those terminated rights shall immediately
vest in full, in the event of any Change in Control or Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have
a thirty (30)-day period in which to surrender to the Corporation each of his or
her outstanding options. The Optionee shall in return be entitled to a cash
distribution from the Corporation in an
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<PAGE>
amount equal to the excess of (i) the Option Surrender Value of the shares of
Common Stock at the time subject to each surrendered option (whether or not the
option is otherwise at the time exercisable for those shares) over (ii) the
aggregate exercise price payable for such shares. Such cash distribution shall
be paid within five (5) days following the surrender of the option to the
Corporation.
D. Each option which is assumed in connection with a Change in Control
shall be appropriately adjusted to apply to the number and class of securities
which would have been issuable to the Optionee in consummation of such Change in
Control had the option been exercised immediately prior to such Change in
Control. Appropriate adjustments shall also be made to the exercise price
payable per share under each outstanding option, provided the aggregate exercise
price payable for such securities shall remain the same. To the extent the
actual holders of the Corporation's outstanding Common Stock receive cash
consideration for their Common Stock in consummation of the Change in Control,
the successor corporation may, in connection with the assumption of the
outstanding options, substitute one or more shares of its own common stock with
a fair market value equivalent to the cash consideration paid per share of
Common Stock in such Change in Control.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for options made under
the Discretionary Option Grant Program.
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<PAGE>
ARTICLE SIX
DIRECTOR FEE OPTION GRANT PROGRAM
---------------------------------
I. OPTION GRANTS
The Board may implement the Director Fee Option Grant Program as of
the first day of any calendar years beginning after the Underwriting Date. Upon
such implementation of the Program, each non-employee Board member may elect to
apply all or any portion of the annual retainer fee otherwise payable in cash
for his or her service on the Board to the acquisition of a special option grant
under this Director Fee Option Grant Program. Such election must be filed with
the Corporation's Chief Financial Officer prior to the first day of the calendar
year for which the election is to be in effect. Each non-employee Board member
who files such a timely election with respect to the annul retainer fee shall
automatically be granted an option under this Director Fee Option Grant Program
on the first trading day in January in the calendar year for which that fee
would otherwise be payable.
II. OPTION TERMS
Each option shall be a Non-Statutory Option governed by the terms and
conditions specified below.
A. Exercise Price.
1. The exercise price per share shall be thirty-three and one-
third percent (33-1/3%) of 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 be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.
B. Number of Option Shares. The number of shares of Common Stock
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the portion of the annual retainer fee subject to the non-
employee Board member's election, and
B is the Fair Market Value per share of Common Stock on the option
grant date.
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C. Exercise and Term of Options. The option shall become exercisable in
a series of twelve (12) successive equal monthly installments upon the
Optionee's completion of each month of Board service during the calendar year in
which the option is granted. Each option shall have a maximum term of ten (10)
years measured from the option grant date.
D. Cessation of Board Service. Should the Optionee cease Board service
for any reason (other than death or Permanent Disability) while holding one or
more options, then each such option shall remain exercisable, for any or all of
the shares for which the option is exercisable at the time of such cessation of
Board service, until the earlier of (i) the expiration of the ten (10)-year
option term or (ii) the expiration of the three (3)-year period measured from
the date of such cessation of Board service. However, each option held by the
Optionee at the time of such cessation of Board service shall immediately
terminate and cease to remain outstanding with respect to any and all shares of
Common Stock for which the option is not otherwise at that time exercisable.
E. Death or Permanent Disability. Should the Optionee's service as a
Board member cease by reason of death or Permanent Disability, then each option
held by such Optionee shall immediately become exercisable for all the shares of
Common Stock at the time subject to that option, and the option may be exercised
for any or all of those shares as fully-vested shares until the earlier of (i)
the expiration of the ten (10)-year option term or (ii) the expiration of the
three (3)-year period measured from the date of such cessation of Board service.
Should the Optionee die after cessation of Board service but while
holding one or more options, then each such option may be exercised, for any or
all of the shares for which the option is exercisable at the time of the
Optionee's cessation of Board service (less any shares subsequently purchased by
Optionee prior to death), by the Optionee's Beneficiary. Such right of exercise
shall lapse, and the option shall terminate, upon the earlier of (i) the
expiration of the ten (10)-year option term or (ii) the three (3)-year period
measured from the date of the Optionee's cessation of Board service.
III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Change in Control or Hostile Take-Over while the
Optionee remains in Board service, each outstanding option held by such Optionee
shall automatically accelerate so that each such option shall, immediately prior
to the effective date of the Change in Control or Hostile Take-Over, become
fully exercisable with respect to the total number of 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. Each such option accelerated in
connection with a Change in Control shall terminate upon the Change in Control,
except to the extent assumed by the successor corporation (or parent thereof) or
otherwise expressly continued in full force and effect pursuant to the terms of
the Change in Control. Each such option accelerated in connection with a
Hostile Take-Over shall remain exercisable until the expiration or sooner
termination of the option term.
B. Upon the occurrence of a Hostile Take-Over, the Optionee shall have
a thirty (30)-day period in which to surrender to the Corporation each of his or
her outstanding options. The Optionee shall in return be entitled to a cash
distribution from the Corporation in an
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amount equal to the excess of (i) the Option Surrender Value of the shares of
Common Stock at the time subject to each surrendered option (whether or not the
Optionee is otherwise at the time vested in those shares) over (ii) the
aggregate exercise price payable for such shares. Such cash distribution shall
be paid within five (5) days following the surrender of the option to the
Corporation.
C. Each option which is assumed in connection with a Change in Control
shall be appropriately adjusted, immediately after such Change in Control, to
apply to the number and class of securities which would have been issuable to
the Optionee in consummation of such Change in Control had the option been
exercised immediately prior to such Change in Control. Appropriate adjustments
shall also be made to the exercise price payable per share under each
outstanding option, provided the aggregate exercise price payable for such
securities shall remain the same. To the extent the actual holders of the
Corporation's outstanding Common Stock receive cash consideration for their
Common Stock in consummation of the Change in Control, the successor corporation
may, in connection with the assumption of the outstanding options under the
Director Fee Option Grant Program, substitute one or more shares of its own
common stock with a fair market value equivalent to the cash consideration paid
per share of Common Stock in such Change in Control.
IV. REMAINING TERMS
The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for options made
under the Discretionary Option Grant Program.
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ARTICLE SEVEN
MISCELLANEOUS
-------------
I. NO IMPAIRMENT OF AUTHORITY
Outstanding awards 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.
II. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing 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. In no event may the maximum credit available to the
Optionee or Participant 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.
III. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock upon
the exercise of options or the issuance or vesting of such shares under the Plan
shall be subject to the satisfaction of all applicable Federal, state and local
income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan with the right to use shares of Common Stock in satisfaction of all or part
of the Withholding Taxes incurred by such holders in connection with the
exercise of their options or the vesting of their shares. Such right may be
provided to any such holder in either or both of the following formats:
Stock Withholding: The election to have the Corporation withhold,
from the shares of Common Stock otherwise issuable upon the exercise of such
Non-Statutory Option or the vesting of such shares, a portion of those shares
with an aggregate Fair Market Value equal to the percentage of the Withholding
Taxes (not to exceed one hundred percent (100%)) designated by the holder.
Stock Delivery: The election to deliver to the Corporation, at the
time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Withholding
Taxes) with an aggregate Fair Market Value equal to the percentage of the Taxes
(not to exceed one hundred percent (100%)) designated by the holder.
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IV. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on _______, 2000. The Plan shall
become effective immediately upon the Plan Effective Date. However, the Salary
Investment Option Grant and Director Fee Option Grant Programs shall not be
implemented until such time as the Primary Committee or the Board may deem
appropriate. Options may be granted under the Discretionary Option Grant Program
at any time on or after the Plan Effective Date. However, no options 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 Plan
Effective Date, then all options previously granted under this Plan shall
terminate and cease to be outstanding, and no further options shall be granted
and no shares shall be issued under the Plan.
B. The Plan shall serve as the successor to the Predecessor Plan, and
no further options or direct stock issuances shall be made under the Predecessor
Plan after the Plan Effective Date. All options outstanding under the
Predecessor Plan on the Plan Effective Date shall be incorporated into the Plan
at that time and shall be treated as outstanding options under the Plan.
However, each outstanding option so incorporated shall continue to be governed
solely by the terms of the documents evidencing such option, and no provision of
the Plan shall be deemed to affect or otherwise modify the rights or obligations
of the holders of such incorporated options with respect to their acquisition of
shares of Common Stock.
C. One or more provisions of the Plan, including (without limitation)
the option/vesting acceleration provisions of Article Two relating to Changes in
Control, may, in the Plan Administrator's discretion, be extended to one or more
options incorporated from the Predecessor Plan which do not otherwise contain
such provisions.
D. The Plan shall terminate upon the earliest of (i) March 31, 2010,
(ii) the date on which all shares available for issuance under the Plan shall
have been issued as fully-vested shares or (iii) the termination of all
outstanding options in connection with a Change in Control. Upon such plan
termination, all outstanding options and unvested stock issuances shall
thereafter continue to have force and effect in accordance with the provisions
of the documents evidencing such grants or issuances.
V. 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
stock options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
B. Options to purchase shares of Common Stock may be granted under the
Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in
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excess of the number of shares then available for issuance under the Plan,
provided any excess shares actually issued under those programs shall be 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.
VI. 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.
VII. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted 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 stock options
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VIII. NO EMPLOYMENT/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.
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APPENDIX
---------
The following definitions shall be in effect under the Plan:
A. Automatic Option Grant Program shall mean the automatic option
grant program in effect under the Plan.
B. Beneficiary shall mean, in the event the Plan Administrator
implements a beneficiary designation procedure, the person designated by an
Optionee or Participant, pursuant to such procedure, to succeed to such person's
rights under any outstanding awards held by him or her at the time of death. In
the absence of such designation or procedure, the Beneficiary shall be the
personal representative of the estate of the Optionee or Participant or the
person or persons to whom the award is transferred by will or the laws of
inheritance.
C. Board shall mean the Corporation's Board of Directors.
D. Change in Control shall mean a change in ownership or control of
the Corporation effected through any of the following transactions:
(i) a merger, consolidation or reorganization approved by
the Corporation's stockholders, unless securities representing more than
fifty percent (50%) of the total combined voting power of the voting
securities of the successor corporation are immediately thereafter
beneficially owned, directly or indirectly and in substantially the same
proportion, by the persons who beneficially owned the Corporation's
outstanding voting securities immediately prior to such transaction,
(ii) any stockholder-approved transfer or other disposition
of all or substantially all of the Corporation's assets, or
(iii) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders which the Board recommends such
stockholders accept.
E. Code shall mean the Internal Revenue Code of 1986, as amended.
F. Common Stock shall mean the Corporation's voting common stock.
G. Corporation shall mean Inflow, Inc., a Delaware corporation, and
any corporate successor to all or substantially all of the assets or voting
stock of Inflow, Inc. which shall by appropriate action adopt the Plan.
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H. Director Fee Option Grant Program shall mean the director fee option
grant program in effect under the Plan.
I. Discretionary Option Grant Program shall mean the discretionary
option grant program in effect under the Plan.
J. 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.
K. Exercise Date shall mean the date on which the Corporation shall have
received written notice of the option exercise.
L. 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 on the Nasdaq National Market or any successor system and in The
Wall Street Journal. 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 and reported in The Wall Street Journal. 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) For purposes of any option grants made on the Underwriting
Date, the Fair Market Value shall be deemed to be equal to the price per
share at which the Common Stock is to be sold in the initial public
offering pursuant to the Underwriting Agreement.
(iv) For purposes of any options made prior to the Underwriting
Date, the Fair Market Value shall be determined by the Plan Administrator,
after taking into account such factors as it deems appropriate.
M. Hostile Take-Over shall mean:
(i) the acquisition, directly or indirectly, by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation) of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing
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more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange offer
made directly to the Corporation's stockholders which the Board does not
recommend such stockholders to accept, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A) who
were still in office at the time the Board approved such election or
nomination.
N. Incentive Option shall mean an option which satisfies the
requirements of Code Section 422.
O. 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 or Parent or Subsidiary
employing the individual which materially reduces his or her duties and
responsibilities or the level of management to which he or she reports, (B)
a reduction in his or her level of compensation (including base salary,
fringe benefits and target bonus under any 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 by the Corporation without the individual's consent.
P. 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 intentional wrongdoing by such
person, whether by omission or commission, which adversely affects the business
or affairs of the Corporation (or any Parent or Subsidiary) in a material
manner. This shall not limit the grounds for the dismissal or discharge of any
person in the Service of the Corporation (or any Parent or Subsidiary).
Q. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
R. Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.
S. Option Surrender Value shall mean the Fair Market Value per share of
Common Stock on the date the option is surrendered to the Corporation or, in the
event of a
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Hostile Take-Over, effected through a tender offer, the highest reported price
per share of Common Stock paid by the tender offeror in effecting such Hostile
Take-Over, if greater. However, if the surrendered option is an Incentive
Option, the Option Surrender Value shall not exceed the Fair Market Value per
share.
T. Optionee shall mean any person to whom an option is granted under the
Discretionary Option Grant, Salary Investment Option Grant, Automatic Option
Grant or Director Fee Option Grant Program.
U. 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.
V. Participant shall mean any person who is issued shares of Common
Stock under the Stock Issuance Program.
W. Permanent Disability or Permanently Disabled 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 expected
to result in death or to be of continuous duration of twelve (12) months or
more. However, solely for purposes of the Automatic Option Grant and Director
Fee Option Grant Programs, Permanent Disability or Permanently Disabled shall
mean the inability of the non-employee Board member to perform his or her usual
duties as a Board member by reason of any medically determinable physical or
mental impairment expected to result in death or to be of continuous duration of
twelve (12) months or more.
X. Plan shall mean the Corporation's 2000 Stock Incentive Plan, as set
forth in this document.
Y. Plan Administrator shall mean the particular entity, whether the
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant, Salary Investment Option Grant and
Stock Issuance Programs with respect to one or more classes of eligible persons,
to the extent such entity is carrying out its administrative functions under
those programs with respect to the persons under its jurisdiction. However, the
Primary Committee shall have the plenary authority to make all factual
determinations and to construe and interpret any and all ambiguities under the
Plan to the extent such authority is not otherwise expressly delegated to any
other Plan Administrator.
Z. Plan Effective Date shall mean _________________, the date on which
the Common Stock is first registered under Section 12(g) of the 1934 Act.
AA. Predecessor Plan shall mean the Corporation's pre-existing 1997 Stock
Option/Stock Issuance Plan in effect immediately prior to the Plan Effective
Date hereunder.
BB. Primary Committee shall mean the committee of two (2) or more non-
employee Board members appointed by the Board to administer the Discretionary
Option Grant
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and Stock Issuance Programs with respect to Section 16 Insiders and to
administer the Salary Investment Option Grant Program with respect to all
eligible individuals.
CC. Salary Investment Option Grant Program shall mean the salary
investment grant program in effect under the Plan.
DD. Secondary Committee shall mean a committee of one (1) or more Board
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.
EE. Section 16 Insider shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
FF. Service shall mean the performance of services for 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 or stock issuance.
GG. Stock Exchange shall mean either the American Stock Exchange or the
New York Stock Exchange.
HH. Stock Issuance Program shall mean the stock issuance program in
effect under the Plan.
II. 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.
JJ. 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).
KK. Withholding Taxes shall mean the Federal, state and local income and
employment withholding tax liabilities to which the holder of Non-Statutory
Options or unvested
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shares of Common Stock may become subject in connection with the exercise of
those options or the vesting of those shares.
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Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the use in this Registration Statement on Form S-1 of our
reports dated February 4, 2000 relating to the financial statements and the
financial statement schedule of Inflow, Inc., which appear 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
May 11, 2000
