<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 27, 2000
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INTERNETCONNECT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
NEVADA 4813 95-4713175
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NUMBER)
</TABLE>
4499 GLENCOE AVENUE
MARINA DEL REY, CA 90292
(800) 896-7467
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
CLIFFORD H. YOUNG
CHAIRMAN OF THE BOARD AND PRESIDENT
JOHN W. COMBS
CHIEF EXECUTIVE OFFICER
INTERNETCONNECT, INC.
4499 GLENCOE AVENUE
MARINA DEL REY, CA 90292
(800) 896-7467
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENTS FOR SERVICE)
COPIES TO
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<S> <C>
THOMAS J. POLETTI, ESQ. KENNETH M. DORAN, ESQ.
SUSAN B. KALMAN, ESQ. GIBSON, DUNN & CRUTCHER LLP
KATHERINE J. BLAIR, ESQ. 333 SOUTH GRAND AVENUE
KIRKPATRICK & LOCKHART LLP LOS ANGELES, CALIFORNIA 90071
9100 WILSHIRE BLVD., 8TH FLOOR EAST TELEPHONE (213) 229-7000
BEVERLY HILLS, CALIFORNIA 90212 FACSIMILE (213) 229-7520
TELEPHONE (310) 273-1870
FACSIMILE (310) 274-8357
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS AGGREGATE OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
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Common stock, $.001 par value per share..................... $100,000,000 $26,400
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</TABLE>
(1) Estimated pursuant to Rule 457(o) of the Securities Act of 1933 solely for
the purpose of computing the amount of the registration fee.
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 HEREAFTER 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 COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
PROSPECTUS (Subject to Completion)
Issued April 27, 2000
Shares
[InternetConnect Logo]
COMMON STOCK
-------------------------
WE ARE OFFERING SHARES OF OUR COMMON STOCK. THIS IS OUR INITIAL PUBLIC
OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE ANTICIPATE
THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $ AND $ PER
SHARE.
-------------------------
WE INTEND TO APPLY FOR THE QUOTATION OF OUR COMMON STOCK ON THE NASDAQ NATIONAL
MARKET UNDER THE SYMBOL "INCN."
-------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 4.
-------------------------
PRICE $ A SHARE
-------------------------
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<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS INTERNETCONNECT
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<S> <C> <C> <C>
Per Share............................. $ $ $
Total................................. $ $ $
</TABLE>
We have granted the underwriters the right to purchase up to an additional
shares to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on
, 2000.
-------------------------
MORGAN STANLEY DEAN WITTER BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
, 2000
<PAGE> 3
INSIDE FRONT COVER
[ARTWORK TO BE INSERTED]
Our artwork will consist of diagrams displaying our network and services
and how our customers interact with our solutions. Descriptive captions will be
used to describe the diagrams. In addition, we plan to use our corporate logo
which contains the word "InternetConnect."
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Special Note Regarding Forward-Looking Statements........... 11
Use of Proceeds............................................. 12
Dividend Policy............................................. 12
Capitalization.............................................. 13
Dilution.................................................... 14
Selected Financial Data..................................... 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Business.................................................... 25
Management.................................................. 39
Certain Transactions........................................ 46
Principal Stockholders...................................... 48
Description of Capital Stock................................ 50
Shares Eligible for Future Sale............................. 53
Underwriters................................................ 55
Legal Matters............................................... 58
Experts..................................................... 58
Where You Can Find More Information about InternetConnect... 58
Index to Financial Statements............................... F-1
</TABLE>
---------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of common stock and
seeking offers to buy shares of common stock only in jurisdictions where offers
and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the common stock.
UNTIL , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
i
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights selected information in this prospectus, but it may
not contain all of the information that is important to you. To better
understand this offering, and for a more complete description of the offering,
you should read this entire prospectus carefully, including the "Risk Factors"
section and the financial statements and the notes to those statements, which
are included elsewhere in this prospectus.
INTERNETCONNECT
InternetConnect is a leading provider of broadband networking solutions to
small and medium-sized businesses. We also provide a range of network access
solutions to remote users and branch locations of larger enterprises. We believe
that our services enable our customers to communicate, transact and manage their
businesses more efficiently. We own, manage and control a nationwide data
communications network that allows us to offer high-quality integrated turnkey
solutions. Our services combine the speed and efficiency of digital subscriber
line, or DSL, technologies with the reliability and security of our advanced
private network. Our suite of services includes wide-area private networking,
high-speed DSL Internet access, applications hosting, Web hosting and dial-up
and remote access to the Internet and private computer networks. By the end of
2000, we plan to roll out additional value-added services, including video
conferencing and voice services over our data network.
The InternetConnect solution consists of five key elements:
- Integrated solutions for high-speed connectivity, private networking and
applications hosting services from a single provider;
- Robust wide-area networking capabilities at substantially lower prices
than available from traditional sources;
- High-speed dedicated connections to our network and the Internet,
primarily through DSL technology;
- Owned and managed nationwide ATM backbone that provides high-speed,
secure and reliable networking solutions; and
- Superior customer service 24 hours-a-day, seven days-a-week.
High-speed connectivity has become important to small and medium-sized
businesses because of the dramatic increase in Internet usage and the rapid
growth of the Internet as a commercial medium. According to the International
Data Corporation, or IDC, there were approximately 200 million Internet users
worldwide in 1999, which is forecasted to grow to approximately one billion by
2005. Small and medium-sized businesses are experiencing an increasing need for
high-speed Internet connections to enable them to maintain complex Websites,
access critical business information and communicate efficiently with employees,
customers and business partners.
We currently operate in 34 major metropolitan markets, including New York,
Los Angeles, Chicago, San Francisco and Washington, D.C. We began offering DSL
connectivity in August 1998. At the end of 1999, we had approximately 3,150
lines in service. As of March 31, 2000, we had more than doubled the number of
DSL lines in service to greater than 6,400 and had a backlog of 3,500 DSL lines
that were in the process of being installed.
1
<PAGE> 6
THE OFFERING
Common stock offered................. shares
Common stock to be outstanding after
the offering......................... shares
Use of proceeds...................... Sales and marketing, working capital
and general corporate purposes. See
"Use of Proceeds" on page 12.
Proposed Nasdaq National Market
symbol............................... INCN
The number of shares of our common stock that will be outstanding after
this offering is based on the number of shares of common stock outstanding on
April 26, 2000. The number of shares that will be outstanding after this
offering excludes:
- 6,041,174 shares of common stock issuable upon exercise of stock options
outstanding as of April 17, 2000 at a weighted average price of $.63 per
share;
- 600,341 shares of common stock issuable upon exercise of warrants
outstanding as of April 26, 2000 at a weighted average price of $6.25 per
share;
- 2,780,824 shares of common stock available as of April 17, 2000 for
future issuance under our 1999 Stock Plan;
- 178,002 shares of common stock available as of April 17, 2000 for future
issuances under our 1999 Executive Stock Plan;
- shares of common stock issuable upon exercise of warrants to be
granted on the effective date of this offering at an assumed initial
public offering price of $ per share; and
- 3,000,000 shares of common stock to be reserved for issuance under our
employee stock purchase plan, which will become effective upon the
completion of this offering.
ADDITIONAL INFORMATION
Unless otherwise indicated, this prospectus assumes that the underwriters
have not exercised their option to purchase additional shares, and also assumes
that all shares of convertible preferred stock and convertible notes have been
automatically converted into shares of common stock.
In this prospectus, the terms "company," "InternetConnect," "we," "us," and
"our" refer to InternetConnect, Inc., a Nevada corporation, and, unless the
context otherwise requires, "common stock" refers to the common stock, par value
$.001 per share, of InternetConnect, Inc.
We own the registration for the trademark INTERNETCONNECT, which we use in
conjunction with the sale of our products and services, and we intend to apply
for the registration of other trademarks. All other trade names and trademarks
used in this prospectus are the property of their respective owners.
------------------------
We were organized in California as InternetConnect, LLC in June 1996. We
merged into ICNT, Inc., a California Corporation, in May 1999, and
reincorporated in Nevada in April 2000 under the name InternetConnect, Inc. We
intend to reincorporate in Delaware prior to the effective date of this
offering. Our principal executive offices are located at 4499 Glencoe Avenue,
Marina del Rey, California 90292, and our telephone number is (800) 896-7467.
Our Website address is www.internetconnect.net. The information on our Website
is not incorporated by reference into this prospectus.
2
<PAGE> 7
SUMMARY FINANCIAL DATA
The following table sets forth summary financial data for InternetConnect.
This information should be read in conjunction with the financial statements and
the notes to those financial statements appearing elsewhere in this prospectus.
The pro forma balance sheet data reflect: (1) the conversion of a $7.5
million promissory note into 2,761,210 shares of Series C Preferred Stock in
March 2000; (2) the conversion of $250,000 of notes payable into 116,279 shares
of common stock in March 2000; (3) the sale of approximately $52.6 million of
Series D Preferred Stock in April 2000; (4) the conversion of all outstanding
shares of preferred stock and remaining convertible notes into an aggregate of
32,444,157 shares of common stock upon completion of this offering; and (5) the
issuance of 6,500 shares of common stock. The pro forma as adjusted balance
sheet data reflect the sale of shares of our common stock in this
offering, at an assumed initial public offering price of $ per share, after
deducting underwriting discounts and commissions and our estimated offering
expenses.
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<CAPTION>
YEAR ENDED DECEMBER 31,
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1997 1998 1999
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(IN THOUSANDS, EXCEPT
PER SHARE INFORMATION)
<S> <C> <C> <C>
SUMMARY STATEMENT OF OPERATIONS DATA:
Net revenue................................................. $ 173 $ 434 $ 2,265
Gross profit (loss)(a)...................................... 54 114 (3,819)
Stock-based charges......................................... -- -- 12,711
Total operating expenses.................................... 240 550 21,427
Loss from operations........................................ (186) (436) (25,246)
Net loss.................................................... (199) (477) (25,344)
Net loss attributable to common stockholders(b)............. (199) (477) (35,713)
Basic and diluted net loss per share attributable to common
stockholders(c)........................................... $ (.02) $ (.05) $ (3.98)
Weighted-average shares outstanding used to computing basic
and diluted net loss per share attributable to common
stockholders(c)........................................... 9,148 10,492 8,984
Pro forma basic and diluted net loss per common share
(unaudited)(c)............................................ $ (1.62)
Weighted-average shares outstanding used to compute pro
forma basic and diluted net loss per share
(unaudited)(c)............................................ 15,626
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
--------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
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(IN THOUSANDS)
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SUMMARY BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 10,755
Working capital............................................. 7,375
Total assets................................................ 22,652
Long-term obligations, excluding current portion............ 1,924
Mandatorily redeemable convertible preferred stock.......... 20,369
Total stockholders' equity (deficit)........................ (11,359)
</TABLE>
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(a) Includes $142,000 of stock-based charges in 1999.
(b) Includes $10.4 million of non-cash charges in 1999, relating to mandatorily
redeemable convertible preferred stock.
(c) See Note 11 of Notes to Financial Statements for determination of shares
used in computing basic and diluted net loss per share and unaudited pro
forma net loss per share. Pro forma to give effect to the automatic
conversion of convertible preferred stock and convertible notes payable.
3
<PAGE> 8
RISK FACTORS
This offering and an investment in our common stock involve a high degree
of risk. You should consider carefully the risks described below, which are the
most significant risks we face based on our business and the industry in which
we operate, before you decide to buy our common stock. If any of the following
risks were to occur, our business, financial condition or results of operations
would likely suffer. In that event, the trading price of our common stock could
decline, and you could lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, IT IS DIFFICULT TO EVALUATE AN
INVESTMENT IN OUR COMMON STOCK
We were organized in June 1996. It is difficult to evaluate an investment
in our common stock because we have a limited operating history and the market
for our products and services is rapidly evolving.
Our future performance will depend upon a number of factors, including our
ability to:
- expand our customer base;
- increase the geographic coverage and reliability of our network;
- enhance or develop products and services in response to technological
changes and competitive market conditions;
- develop our sales and marketing capabilities;
- develop our operational support systems and other information technology
systems;
- maintain adequate control of our expenses;
- attract, retain and motivate qualified personnel; and
- raise additional capital.
WE HAVE A HISTORY OF OPERATING LOSSES AND MAY NEVER ACHIEVE PROFITABILITY
We have incurred substantial losses and experienced negative operating cash
flow since our inception. As of December 31, 1999, we had incurred a cumulative
operating loss of $25.8 million and cumulative negative cash flow from operating
activities of $9.0 million. In connection with this offering, we recorded
deferred stock-based compensation charges of $22.4 million with respect to stock
option grants made during 1999 and $19.6 million related to stock option grants
made during the three-months ended March 31, 2000. These amounts will be
amortized over the vesting period of the options, which is generally four years
from the date of grant. We recorded a $9.6 million non-cash stock-based charge
in 1999 and may incur further charges if additional inventory purchases are made
in connection with a promissory note issued to a supplier, which is convertible
into shares of our Series C Preferred Stock. We expect to continue to incur
substantial losses and experience negative operating cash flow for the
foreseeable future as we increase capital expenditures and operating expenses to
expand our network, customer base and sales and marketing operations. We also
expect to incur a non-cash stock-based charge of $21.5 million relating to our
Series D Preferred Stock financing and additional non-cash stock-based charges
relating to warrants issued to suppliers. In addition, prices for digital
communications services have been decreasing over time and we expect that this
trend will continue. Significant decreases in the prices we are able to charge
for the services we provide could harm our revenue and prevent us from achieving
or maintaining profitability. If our future expenses are greater than we expect
or our revenue does not grow as we anticipate, we may never achieve
profitability.
4
<PAGE> 9
OUR OPERATING RESULTS ARE DIFFICULT TO FORECAST, MAY FLUCTUATE AND COULD
FALL BELOW OUR AND ANALYSTS' EXPECTATIONS
It is difficult to forecast our operating results because of our limited
operating history and the recent development of the market for dedicated
broadband network and Internet connectivity services. Our operating results in
any period could fall short of expectations for a number of factors, including:
- our inability to deploy our network and services on a timely basis to
satisfy customer demand;
- delays by our suppliers in the installation of telecommunication lines;
- significant technical difficulties or network downtime;
- the incurrence of substantial capital expenditures and operating costs in
connection with the expansion of our network;
- the announcement or introduction of new or enhanced services by our
competitors;
- failures by our network suppliers to provide reliable services and their
ability to meet our demand;
- our inability to secure financing to fund our operations and expand our
business;
- the timing and willingness of incumbent local exchange carriers, or
ILECs, and competitive local exchange carriers, or CLECs, to provide data
transport and other services at favorable prices;
- the mix of orders between lower-priced and higher-priced DSL lines and
market acceptance of our value-added services; and
- negative conditions in the data communications and network services
industries.
As a result of these factors, our operating results could fall below the
expectations of securities analysts and investors in future periods. If this
happens, the market price of our stock would likely decrease. These fluctuations
also mean that you will not be able to rely upon our operating results in any
particular period as an indication of our future performance.
IF OUR BUSINESS MODEL IS NOT SUCCESSFUL, WE MAY NOT ACHIEVE OR MAINTAIN
PROFITABILITY
We do not know whether our business model and strategy will be successful.
For our business model to be successful, we will need to deploy our network in
many markets and attract a large number of business customers who have not
historically purchased private networking services or any of our other
value-added services. If we are not able to deploy our network as planned or
achieve significant market acceptance of our services, we may never become
profitable. If the assumptions underlying our business model are not valid or we
are unable to implement our business plan, achieve the predicted level of market
penetration or sustain the desired level of pricing for our services, our
results of operations will suffer, which could cause our stock price to decline.
WE DEPEND ON THIRD PARTIES FOR DSL CIRCUITRY
We currently rely on Covad Communications and NorthPoint Communications for
all of the DSL circuitry required for our DSL services. These vendors supply us
with DSL circuits pursuant to agreements that expire in December 2001 and March
2001, respectively. While we may seek to enter into DSL circuit supply
agreements with other third-party providers, we cannot assure you that we will
be successful in doing so, or in extending the term of any existing agreements,
on satisfactory terms or at all. We have experienced, and may experience in the
future, lengthy periods between our orders for, and our suppliers' provision of,
DSL circuitry. An inability to obtain adequate and timely delivery and
installation of DSL circuitry could harm our business. Additionally, we cannot
assure you that these vendors will not become direct competitors of ours in the
future.
5
<PAGE> 10
DISRUPTIONS IN SUPPLY OF EQUIPMENT AND SERVICES FROM THIRD-PARTY VENDORS
COULD HARM OUR ABILITY TO PROVIDE OUR SERVICES
We rely on outside vendors to supply, install and service key components of
our network, which uses asynchronous transfer mode, or ATM, technology. Our
reliance on third-party vendors involves a number of risks, including the
absence of guaranteed capacity, a lack of control over delivery schedules and
potential liability to our customers if suppliers do not meet their service
level commitments to us. We have experienced delays from some of our vendors and
we cannot assure you that any of our vendors will fulfill their commitments to
us on a timely basis, if at all. If any of our suppliers, installers or field
service providers reduces or interrupts its supply to us, we may be unable to
provide our services to our customers. Although multiple manufacturers currently
produce or develop equipment that will meet our current and anticipated
requirements, our suppliers may be unable to manufacture or deliver the amount
of equipment we order. If our suppliers or licensors compete with us, or if our
competitors enter into exclusive or restrictive arrangements with our suppliers
or licensors, then the availability and pricing of the equipment we purchase and
the technology we license may be materially and adversely affected.
IF WE ARE UNABLE TO DEVELOP AND MAINTAIN GOOD RELATIONSHIPS WITH
THIRD-PARTY DISTRIBUTORS, OUR ABILITY TO EXPAND OUR CUSTOMER BASE COULD BE
HARMED
In addition to marketing through our direct sales force, we offer our
services through third-party distributors. We may not be able to develop and
maintain good relationships with distributors, and we cannot assure you that
they will recommend our services rather than our competitors' services to their
customers. If we are not able to develop and maintain good relationships with
third-party distributors, we may not be able to expand our customer base as we
intend.
OUR FAILURE TO RAISE ADDITIONAL CAPITAL COULD REDUCE OUR ABILITY TO COMPETE
AND HARM OUR BUSINESS
The expansion and development of our business will require us to raise
significant additional capital in the future. We anticipate that our existing
cash and cash equivalents, the proceeds from this offering and any cash
generated from revenue will be sufficient to fund our operating activities,
capital expenditures and other obligations for at least the next 12 months. If
we need to raise additional capital, we cannot assure you that we will be able
to do so on favorable terms, if at all. If we are unable to raise capital in the
future on acceptable terms, we may not be able to expand our business, develop
or enhance our products and services, or respond to competitive pressures. Our
inability to do any of these things could harm our business and reduce our
ability to compete.
OUR GROWTH WILL PLACE A SIGNIFICANT STRAIN ON OUR RESOURCES AND, IF WE FAIL
TO MANAGE OUR GROWTH SUCCESSFULLY, OUR BUSINESS AND FINANCIAL PERFORMANCE
WILL BE HARMED
Our business plan anticipates that we will expand our operations
significantly in a short period of time. This expansion will involve hiring many
new employees and expanding our operations geographically. Rapid growth will
place a significant strain on our management, financial controls, operations,
personnel and other resources. Our future success will depend in part on our
ability to institute adequate management information and operations support
systems and effectively and efficiently integrate such systems into our
business. Most of the operations support systems we will employ to help manage
customer service, bill customers, process customer orders and coordinate with
vendors and contractors will be obtained from third party vendors. To manage our
growth effectively, we will need to identify and implement adequate operations
support systems on a timely basis, and expand and upgrade these systems as our
business grows. If we are unable to manage the expansion of our business
effectively, our financial performance will be harmed.
OUR SENIOR MANAGEMENT TEAM HAS WORKED TOGETHER FOR ONLY A LIMITED AMOUNT OF
TIME
Our success depends on Clifford H. Young, our Chairman of the Board and
President, John W. Combs, our Chief Executive Officer, and our other executive
officers and key employees. Mr. Young founded
6
<PAGE> 11
InternetConnect, LLC, our predecessor, in June 1996. Mr. Combs joined
InternetConnect in September 1999 and other members of our senior management
team have been with us for only a limited amount of time.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, OUR BUSINESS AND ABILITY TO COMPETE WILL BE HARMED
Our success depends on the performance of our officers and key employees,
especially Clifford H. Young, our President, and John W. Combs, our Chief
Executive Officer. We intend to carry $3.0 million of Directors and Officers
life insurance policies each on the lives of Clifford H. Young and John W.
Combs. In order to pursue our business expansion and product development plans,
we will need to hire, train and retain additional highly qualified management,
technical, sales, marketing and customer care personnel. We face intense
competition for qualified personnel, particularly in software development,
network engineering and product management. Moreover, our industry has a high
level of employee mobility and aggressive recruiting of skilled personnel. The
loss of any of our key personnel or our failure to recruit and retain additional
personnel will harm our business and our ability to compete.
IF WE DO NOT ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR IF WE
INFRINGE THE RIGHTS OF OTHERS, OUR ABILITY TO COMPETE COULD BE HARMED
We rely on a combination of trademark, copyright and trade secret laws, and
contractual arrangements to establish and protect our intellectual property
rights. We plan to apply to register those trademarks that we believe are
important for our business. We own the trademark INTERNETCONNECT, which was
registered with the United States Patent and Trademark Office in 1998. We are
aware of entities that may offer services that compete with ours using the name
"InternetConnect," some of which may have begun using that name as a mark in
commerce prior to the filing date of our application. Any of these parties could
challenge our continuing right to use INTERNETCONNECT in their market or require
us to obtain a license to use it in their market. We are also aware of entities
that may offer services that compete with ours using the name "InternetConnect,"
some of which may have begun using that name as a mark in commerce prior to the
date of our first use of INTERNETCONNECT as a mark. Such prior users could apply
to cancel our trademark registration during the five year period after the
registration was granted. After five years, a prior user could no longer apply
to cancel our registration based on its prior use, but could challenge our
continuing right to use INTERNETCONNECT in their market or require us to obtain
a license to use it in their market. We recently settled a claim by a prior user
of the name "Internet Connect" who challenged our right to use INTERNETCONNECT
in a number of eastern metropolitan areas and applied to cancel our
registration. If we are not able to resolve any similar future action on
acceptable terms, our registration for INTERNETCONNECT could be cancelled by the
United States Patent and Trademark office, and/or we could be required to stop
using the name in particular markets or obtain a license to use it in particular
markets. Effective trademark, copyright and trade secret protection may not be
available in other countries in which our services are made available online. If
we fail to adequately protect our intellectual property against use by others,
or if others assert that we have infringed their intellectual property rights,
our business could be harmed.
RISKS RELATED TO OUR INDUSTRY
OUR MARKET IS HIGHLY COMPETITIVE AND WE MAY NOT BE ABLE TO COMPETE
EFFECTIVELY
The market in which we compete is intensely competitive. Our current and
potential competitors include:
- network and business Internet service providers that offer high-speed
access and networking capabilities to complement their other products and
services, such as integrated services digital network, or ISDN;
- broadband connectivity providers;
- CLECs that provide DSL services;
- companies emerging as wireless data or satellite-based service providers;
and
- in-building service providers that supply office buildings with Internet
access and sell services through building management to end users.
7
<PAGE> 12
Many of our current and potential competitors have longer operating
histories, greater brand name recognition, larger customer bases and
substantially greater financial, technical, marketing, management, service,
support and other resources than we do. Our industry is also characterized by
rapid technological change and our existing or future competitors could develop
new products and technologies that are superior to, or incompatible with, our
services and technologies. If our competitors develop and market products and
services that are more effective or less expensive than ours, or if we fail to
adapt successfully to technological changes, our revenue may be reduced or
eliminated.
IF ACCESS TO HIGH-QUALITY TRANSMISSION LINES UNDER THE CONTROL OF
ESTABLISHED TELEPHONE COMPANIES IS NOT AVAILABLE OR COSTS MORE THAN WE
ANTICIPATE, OUR BUSINESS COULD BE HARMED
Our ability to provide our services depends on our securing cost-effective
access to high-quality copper telephone lines within the control of traditional
telephone companies. We also depend on these companies to maintain their
telephone lines in good operating condition. If we are unable to obtain adequate
and timely access to transmission facilities on acceptable terms and conditions
from established telephone companies, or if these companies do not maintain
their transmission lines in good operating condition, we may not be able to
provide our services affordably or at all.
A SYSTEM FAILURE OR BREACH OF NETWORK SECURITY COULD CAUSE DELAYS OR
INTERRUPTIONS OF SERVICE TO OUR CUSTOMERS
Our operations depend on our ability to avoid interruptions to our services
as a result of power losses, excessive sustained or peak-user demand,
telecommunications failures, network software flaws, transmission cable cuts and
similar events. A natural disaster or other unanticipated problem at our
facilities could also interrupt our services. Additionally, if an ILEC, CLEC or
other service provider fails to provide the communications capacity we require
for any reason, our services would be interrupted.
Despite our implementation of security measures to protect our networks,
our services may also be vulnerable to interruption caused by unauthorized
access, computer viruses, accidental actions of Internet users and other
disruptive problems. Unauthorized access to our network could also jeopardize
the security of confidential information stored in our customers' computer
systems, which could make us liable to our customers for resulting damages.
Eliminating computer viruses and alleviating other security problems may result
in interruptions, delays or cessation of service to our customers and our
customers' end users. If the services we provide to our customers are delayed or
interrupted or if our customers' security is violated as a result of any of
these factors, our reputation would be harmed, which could in turn negatively
affect our results of operations.
INTERFERENCE WITH OR FROM EXISTING TELECOMMUNICATIONS SERVICES COULD DELAY
OR PREVENT OUR EXPANSION AND HARM OUR BUSINESS
All transport technologies deployed on copper telephone lines have the
potential to interfere with, or suffer interference from, other traffic using
copper telephone lines. Such interference could degrade the performance of our
services or make us unable to provide services on some telephone lines. In
addition, ILECs may claim that the deployment of our services should be
restricted or delayed because of the potential for interference with their
services. Although procedures to resolve interference issues between new
transport technologies and ILECs are being developed, these procedures may not
be implemented or effective. If they are not, we may also be unable to
independently negotiate interference resolution procedures with ILECs.
Interference, or claims of interference, if widespread, would adversely affect
our speed of deployment, reputation, brand image, service quality and customer
satisfaction and retention.
GOVERNMENT REGULATION OF OUR SERVICES IS UNCERTAIN AND CHANGES IN
REGULATIONS COULD HARM OUR BUSINESS
Although we are not currently subject to direct government regulation other
than regulations applicable to businesses generally, changes in the regulatory
environment relating to the Internet connectivity market
8
<PAGE> 13
could affect our ability to operate our business. Because of the increasingly
widespread use of the Internet, it is likely that additional laws and
regulations will be adopted. Such additional laws could cover issues such as
content, user pricing, privacy, libel, intellectual property protection and
infringement, technology export and other controls.
The Federal Communications Commission, or FCC, is constantly reviewing its
regulatory position on the usage of basic network and communications facilities
by Internet connectivity providers. In an April 1998 report, the FCC stated that
certain services offered over the Internet, such as phone-to-phone Internet
protocol telephony, may be functionally indistinguishable from traditional
telecommunications service offerings. Although the report concluded that
Internet connectivity providers should not be treated or regulated as
telecommunications carriers, the FCC stated in it that the non-regulated status
of such businesses may have to be re-examined in the future. We believe,
therefore, that the future regulatory environment applicable to businesses such
as ours is highly uncertain.
Changes in the regulatory environment affecting the Internet connectivity
market, including changes that directly or indirectly affect telecommunications
costs or increase the likelihood of competition from regional bell operating
companies or other telecommunications companies, could harm our business. Some
telephone companies are currently seeking relief from competition by Internet
connectivity providers through the FCC and state regulatory agencies. Any rules
that are ultimately adopted by such agencies could affect our costs of serving
our customers and could harm our results of operations.
RISKS RELATED TO OUR OFFERING
OUR STOCK PRICE MAY BE VOLATILE BECAUSE OUR SHARES HAVE NOT BEEN PUBLICLY
TRADED PRIOR TO THIS OFFERING, AND YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT
Before this offering, there has not been a public market for our common
stock, and an active public market for our common stock may not develop or be
sustained after this offering. The initial public offering price for our common
stock will be determined through negotiations between us and the underwriters
and may not be indicative of future market prices. You may not be able to resell
your shares at or above the initial public offering price.
The price at which our common stock will trade could be highly volatile as
it will depend upon many factors, including period-to-period fluctuations in our
operating results, variations between our actual results and analyst and
investor expectations, announcements of technological innovations or new
commercial products or services by us or our competitors, and general market and
economic conditions. Any of these factors, some of which we have no ability to
control, could have a significant impact on the market price for our common
stock.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION AS A RESULT OF OUR
EXPECTED STOCK PRICE VOLATILITY
Securities class action litigation is often brought against a company
following a decline in the market price of its securities. This risk is
especially acute for us because technology companies have experienced greater
than average stock price volatility in recent years and, as a result, have
generally been subject to a greater number of securities class action claims
than companies in other industries. We may in the future be the target of
similar litigation. Securities litigation could result in substantial costs and
divert management's attention and resources, and could seriously harm our
business.
A SUBSTANTIAL NUMBER OF SHARES WILL BE ELIGIBLE FOR SALE IN THE NEAR
FUTURE, WHICH COULD CAUSE THE MARKET PRICE FOR OUR COMMON STOCK TO DECLINE
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 the holders of substantially all of
our outstanding shares of common stock and options and warrants to purchase
common stock will agree not to sell or otherwise dispose of any of their
9
<PAGE> 14
shares for a period of 180 days after the date of this prospectus without the
prior written consent of Morgan Stanley & Co. Incorporated. However, Morgan
Stanley & Co. Incorporated may, in its sole discretion and at any time without
notice, release all or any portion of the securities 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 our common stock or other
equity securities. As of the date of this prospectus, there were
shares of our common stock outstanding that will not be sold in this offering,
but which will be eligible for sale into the public market 180 days after the
date of this prospectus.
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION OF APPROXIMATELY $
PER SHARE
The assumed initial public offering price is substantially higher than the
pro forma net tangible book value per share of the outstanding common stock
immediately after this offering. Accordingly, assuming an initial public
offering price of $ per share, if you purchase common stock in this
offering, you will incur immediate and substantial dilution of $ in the
pro forma net tangible book value per share of the common stock. In addition,
investors will incur additional dilution upon the exercise of outstanding stock
options and warrants after this offering.
OUR PRINCIPAL STOCKHOLDERS AND MANAGEMENT OWN A SIGNIFICANT PERCENTAGE OF
OUR COMPANY AND WILL BE ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER OUR
COMPANY
Our executive officers and directors and principal stockholders together
will beneficially own % of the common stock after completion of this
offering, or % if the over-allotment option is exercised in full.
Accordingly, these stockholders will be able to determine the composition of our
board of directors, will retain the voting power to approve all matters
requiring stockholder approval and will continue to have significant influence
over our affairs. This concentration of ownership could have the effect of
delaying or preventing a change in our control or otherwise discouraging a
potential acquirer from attempting to obtain control of us, which in turn could
have a material and adverse effect on the market price of the common stock or
prevent our stockholders from realizing a premium over the market prices for
their shares of common stock.
WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS THAT COULD DISCOURAGE OR
PREVENT A TAKEOVER THAT MIGHT BENEFIT OUR STOCKHOLDERS
Provisions of our certificate of incorporation and bylaws, as well as
provisions of Delaware law, could make it more difficult for a third party to
acquire us, even if doing so may be beneficial to our stockholders. These
provisions:
- authorize the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
- provide for a classified board of directors with staggered, three-year
terms, which prevents a majority of the board from being elected at one
time;
- limit the ability of stockholders to call special meetings of
stockholders;
- prohibit stockholder action by written consent, thereby requiring all
stockholder actions to be taken at a meeting of stockholders; and
- require a super-majority stockholder vote to effect certain amendments.
WE HAVE BROAD DISCRETION TO USE THE PROCEEDS FROM THIS OFFERING, AND THE
FAILURE OF MANAGEMENT TO APPLY SUCH FUNDS EFFECTIVELY COULD HARM OUR
BUSINESS
We currently have no specific plans for a significant portion of our net
proceeds from this offering. Investors will be relying on the judgment of our
management on the application of the proceeds from this offering.
10
<PAGE> 15
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this prospectus, including under
the sections "Prospectus Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Conditions and Results of Operations," "Business" and
elsewhere in this prospectus, that are based on our management's beliefs and
assumptions and on information currently available to our management.
Forward-looking statements include the information concerning our possible or
assumed future results of operations, business strategies, financing plans,
competitive position, potential growth opportunities, this offering, the effects
of future regulation and the effects of competition. Forward-looking statements
include all statements that are not historical facts and, in some cases, can be
identified by the use of forward-looking terminology such as the words
"believes," "expects," "anticipates," "intends," "plans," "estimates" or similar
expressions.
Forward-looking statements involve risks, uncertainties and assumptions.
Actual results may differ materially from those expressed in these
forward-looking statements. You should not put undue reliance on any
forward-looking statements.
You should understand that many important factors, in addition to those
discussed elsewhere in this prospectus, could cause our results to differ
materially from those expressed in forward-looking statements. These factors
include our competitive environment, economic and other conditions in the
markets in which we operate, relationships with third-party suppliers,
performance of our services and continuation of strategic relationships with
third parties.
11
<PAGE> 16
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the
shares of common stock we are offering will be approximately $ million, or
$ million if the underwriters exercise their over-allotment option in
full, based on an assumed public offering price $ per share and after
deducting underwriting discounts and commissions and estimated offering
expenses. The primary purposes of this offering are to obtain additional equity
capital, create a public market for our common stock and facilitate future
access to public markets.
We intend to use the net proceeds we receive from this offering for sales
and marketing, working capital and general corporate purposes. Although we may
use a portion of the net proceeds to acquire technology or businesses that are
complementary to our business, we have no current plans to do so. Pending their
use, we plan to invest the net proceeds in interest-bearing, investment grade
securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain future earnings, if any, to finance the expansion of
our business, and we do not expect to pay any cash dividends in the foreseeable
future.
12
<PAGE> 17
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
- on an actual basis;
- on a pro forma basis to reflect: (1) the conversion of a $7.5 million
promissory note into 2,761,210 shares of Series C Preferred Stock in
March 2000; (2) the conversion of $250,000 of notes payable into 116,279
shares of common stock in March 2000; (3) the sale of approximately $52.6
million of Series D Preferred Stock in April 2000; (4) the conversion of
all outstanding shares of preferred stock and remaining convertible notes
into an aggregate of 32,444,157 shares of common stock upon completion of
this offering; and (5) the issuance of 6,500 shares of common stock; and
- on a pro forma as adjusted basis to reflect our receipt of the net
proceeds from the sale of the shares of common stock in this offering,
after deducting the underwriting discounts and commissions and estimated
offering expenses.
You should read this table with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Description of Capital Stock"
and the financial statements and the related notes.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
--------------------------------
PRO
FORMA
PRO AS
ACTUAL FORMA ADJUSTED
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term borrowings....................................... $ 8,358 $ $ --
======== ======== ========
Long-term debt, less current portion........................ $ 1,924 $ -- $ --
-------- -------- --------
Mandatorily redeemable convertible preferred stock:
Series A Convertible Preferred Stock: 13,333 shares
authorized; 13,333 shares issued and outstanding
(actual); no shares authorized, issued or outstanding
(pro forma and pro forma as adjusted)................... 10,367 -- --
Series B Convertible Preferred Stock: 10,151 shares
authorized; 10,151 shares issued and outstanding
(actual); no shares authorized, issued or outstanding
(pro forma and pro forma as adjusted)................... 10,002 -- --
-------- -------- --------
Total mandatorily redeemable convertible preferred
stock................................................. 20,369 -- --
-------- -------- --------
Stockholders' Equity (Deficit):
Preferred Stock, $.001 par value: 10,000 shares authorized
(pro forma as adjusted);................................ -- -- --
Common Stock, no par value:, $.001 par value (actual pro
forma as adjusted) 50,000 shares authorized (actual and
pro forma) and 100,000 shares authorized (pro forma as
adjusted); 12,782 shares issued and outstanding
(actual); 45,349 shares issued and outstanding (pro
forma); shares issued and outstanding (pro
forma as adjusted)...................................... 1,438
Additional paid-in capital.................................. 31,676
Deferred stock charges...................................... (19,129)
Accumulated deficit......................................... (25,344)
-------- -------- --------
Total stockholders' equity (deficit).................... (11,359)
-------- -------- --------
Total capitalization............................... $ 10,934 $ $
======== ======== ========
</TABLE>
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<PAGE> 18
DILUTION
Our pro forma net tangible book value at December 31, 1999, was
$ million, or $ per share, based on 45,349,243 shares of our common
stock outstanding after giving effect to the conversion of a $7.5 million
promissory note into 2,761,210 shares of Series C Preferred Stock in March 2000,
the conversion of $250,000 of notes payable into 116,279 shares of common stock
in March 2000, the sale of approximately $52.6 million of Series D Preferred
Stock in April 2000, the conversion of all outstanding shares of our preferred
stock and remaining convertible notes into common stock upon the completion of
this offering and the issuance of 6,500 shares of common stock.
Dilution per share to new investors represents the difference between the
amount per share paid by purchasers of our common stock in this offering and the
pro forma net tangible book value per share of common stock immediately after
completion of this offering. After giving effect to the sale of the
shares of common stock by us at the assumed initial public offering price of
$ per share, less the underwriting discounts and commissions and our
estimated offering expenses, our pro forma net tangible book value at December
31, 1999, would be $ million, or $ per share. This represents an
immediate increase in the pro forma net tangible book value of $ per share
to existing stockholders and an immediate dilution of $ per share to new
investors purchasing shares at the assumed initial public offering price of
$ per share. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share at December
31, 1999............................................... $
Increase per share attributable to new investors..........
--------
Pro forma net tangible book value per share after this
offering..................................................
--------
Dilution per share to new investors in this offering........ $
========
</TABLE>
The following table sets forth, at December 31, 1999 on a pro forma basis,
the differences between the number of shares of common stock purchased from us,
the total price paid and average price per share paid by our existing
stockholders and by the new investors in this offering and the private
placements at the assumed initial public offering price of per share, after
giving effect to: (1) the conversion of a $7.5 million promissory note into
2,761,210 shares of Series C Preferred Stock in March 2000; (2) the conversion
of $250,000 of notes payable into 116,279 shares of common stock in March 2000;
(3) the sale of approximately $52.6 million of Series D Preferred Stock in April
2000; (4) the conversion of all outstanding shares of our preferred stock and
remaining convertible notes into an aggregate of 32,444,157 shares of common
stock upon the completion of this offering and (5) the issuance of 6,500 shares
of common stock.
The table also shows the number of shares of common stock purchased from
us, the total consideration paid to us and the average price paid per share by
existing stockholders and by new investors purchasing common stock in this
offering:
<TABLE>
<CAPTION>
SHARES ISSUED TOTAL CONSIDERATION
------------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
----------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... % $ % $
New investors..............
----------- ----- ----------- -----
Total............ 100.0% 100.0%
=========== ===== =========== =====
</TABLE>
The above information is based on pro forma shares outstanding as of
December 31, 1999. It excludes 4,043,113 shares of common stock reserved for
issuance upon exercise of outstanding options at December 31, 1999 with a
weighted average exercise price of $.15 per share. It also excludes an aggregate
of 4,778,885 shares available for issuance under our 1999 Stock Plan and 178,002
shares available for issuance under our 1999 Executive Stock Plan. Assuming the
exercise of all options outstanding as of December 31, 1999, our pro forma net
tangible book value at December 31, 1999 would be $ million, or $ per
share, which would represent an immediate increase in the pro forma net tangible
book value of $ per share to existing stockholders and an immediate dilution
of $ per share to new investors.
14
<PAGE> 19
Our sale of additional shares of common stock upon exercise in full of the
underwriters' over-allotment option would reduce the percentage of common stock
held by all assumed existing stockholders to % of the total number of shares
of common stock to be outstanding upon completion of this offering and will
increase the number of shares of common stock held by new investors to
shares or % of the total number of shares of common stock to be
outstanding upon completion of this offering.
15
<PAGE> 20
SELECTED FINANCIAL DATA
The following selected financial data should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes included
elsewhere in this prospectus. The selected statement of operations data set
forth below for the years ended December 31, 1997, 1998 and 1999, and the
selected balance sheet data as of December 31, 1998 and 1999, are derived from
our financial statements included elsewhere in this prospectus, which have been
audited by PricewaterhouseCoopers LLP, independent accountants. The selected
statement of operations data for the period from inception through December 31,
1996, and the selected balance sheet data as of December 31, 1996 and 1997, are
derived from our unaudited financial statements not included in this prospectus.
The historical results are not necessarily indicative of results to be expected
for any future period. For an explanation of the determination of the shares
used to compute net loss per share, and pro forma net loss per share see Notes 2
and 11 of Notes to Financial Statements.
<TABLE>
<CAPTION>
INCEPTION
THROUGH YEARS ENDED DECEMBER 31,
DECEMBER 31, -----------------------------
1996 1997 1998 1999
------------ ------ ------- --------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C>
SELECTED STATEMENT OF OPERATIONS DATA:
Net revenue................................................. $ 98 $ 173 $ 434 $ 2,265
Cost of revenue(a).......................................... 5 119 320 6,084
----- ------ ------- --------
Gross profit (loss)..................................... 93 54 114 (3,819)
Operating expenses:
Product development(b).................................... 8 40 100 719
Sales and marketing(c).................................... 12 90 227 4,828
General and administrative(d)............................. 25 110 223 3,169
Stock-based charges....................................... -- -- -- 12,711
----- ------ ------- --------
Total operating expenses................................ 45 240 550 21,427
----- ------ ------- --------
Income (loss) from operations........................... 48 (186) (436) (25,246)
Other income (expense), net................................. -- (13) (41) (98)
----- ------ ------- --------
Net income (loss)....................................... 48 (199) (477) (25,344)
Charges relating to mandatorily redeemable convertible
preferred stock:
Equity charge for beneficial conversion feature........... -- -- -- (10,000)
Accretion of preferred stock to redemption value.......... -- -- -- (369)
----- ------ ------- --------
Net income (loss) attributable to common stockholders....... $ 48 $ (199) $ (477) $(35,713)
===== ====== ======= ========
Basic and diluted net income (loss) per share attributable
to common stockholders.................................... $ .01 $ (.02) $ (.05) $ (3.98)
===== ====== ======= ========
Weighted-average shares outstanding used in computing basic
and diluted net income (loss) per share................... 9,054 9,148 10,492 8,984
===== ====== ======= ========
Pro forma basic and diluted net loss per share
(unaudited)............................................... $ (1.62)
========
Weighted-average shares outstanding used to compute pro
forma basic and diluted net loss per share (unaudited).... 15,626
========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------
1996 1997 1998 1999
----- ----- ----- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents................................... $-- $12 $ 69 $ 10,755
Working capital (deficiency)................................ (5) (4) (49) 7,375
Total assets................................................ 91 82 297 22,652
Long-term obligations, excluding current portion............ -- 9 85 1,924
Mandatorily redeemable convertible preferred stock.......... -- -- -- 20,369
Total stockholders' equity (deficit)........................ $84 $44 $ 17 $(11,359)
</TABLE>
- -------------
(a) Includes a stock-based compensation charge of $142,000 in 1999.
(b) Excludes a stock-based compensation charge of $307,000 in 1999.
(c) Excludes a stock-based compensation charge of $9.7 million in 1999.
(d) Excludes a stock-based compensation charge of $2.7 million in 1999.
16
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations together with "Selected Financial Data" and
our financial statements and related notes appearing elsewhere in this
prospectus. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. The actual results may differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including, but not limited to, those presented under
"Risk Factors" beginning on page 4 and elsewhere in this prospectus.
We were organized as a California limited liability company in June
1996. From 1996 through 1998, we were primarily a provider of dial-up Internet
access services. We converted to a C corporation by merging into ICNT, Inc., a
California corporation, in May 1999 and reincorporated in Nevada in April 2000
under the name InternetConnect, Inc. We intend to reincorporate in Delaware
prior to the effective date of this offering.
OVERVIEW
InternetConnect is a leading provider of broadband networking solutions to
small and medium-sized businesses. We are also focused on providing broadband
solutions to remote users and branch locations of larger enterprises. Through
mid-1998, our net revenue was primarily derived from the sale of dial-up
Internet access and Web hosting services to consumers and small businesses. In
August 1998, we began to focus on providing DSL connectivity and integrated
network solutions to business customers. In October 1998, we began building a
nationwide ATM backbone network to support our integrated DSL services. We
launched our private network services in March 2000 on a nationwide scale and
expect to increase deployment of these network services throughout 2000.
Currently, Internet connectivity services comprise a majority of our total net
revenue. However, net revenue from networking services is expected to represent
an increasing percentage of total net revenue in future periods. We expect net
revenue from business customers to increase as a percentage of total net
revenue.
We have grown our customer base since our inception in 1996, and we have
experienced our greatest growth in the past six months. As of March 31, 2000, we
were operational in 34 metropolitan markets. We plan to continue rapidly
expanding our network infrastructure throughout the United States. As of March
31, 2000, we had more than 6,400 DSL lines in service and backlog of
approximately 3,500 DSL lines that were in the process of being installed.
We have entered into agreements with third-party suppliers for network
equipment, data transport facilities and DSL last mile connectivity. These
agreements provide us with leased transmission capacity on routes connecting our
facilities in the markets we currently serve, and access to key data local
exchange carriers. These agreements generally have initial terms of between two
and three years, with provisions for renewal.
Prices of telecommunications services and equipment, including the services
we offer, have decreased significantly during the past several years and we
expect this trend to continue for the foreseeable future.
We have incurred operating losses for each of the last three years. As of
December 31, 1999, we had an accumulated deficit of approximately $25.3 million.
We intend to substantially increase our operating expenses and capital
expenditures as we expand our network infrastructure and service areas and
increase our sales and marketing efforts. We expect to incur substantial
operating losses, net losses and net operating cash outflows for the foreseeable
future.
ACCOUNTING POLICIES
Net Revenue. We derive most of our revenue from the sale of broadband
connectivity and related networking services. Our customers typically sign
service contracts for 12 to 24 months that provide for fixed monthly service
charges. These charges vary depending on the type of service, the length of the
contract and local market conditions. Our fees generally consist of a base
monthly charge per connection for Internet access and connectivity to our core
network, plus additional fees for networking services. Fees and service charges
for networking services vary based upon the speed and complexity of service
provided. Revenue related to the installation of service is recognized upon the
completion of installation, and revenues for network connectivity,
17
<PAGE> 22
Internet access and value-added networking services are recognized as the
services are provided. Amounts billed relating to future periods are deferred
and amortized over the related services periods. Revenue from hardware sales is
recognized upon installation.
Cost of Revenue. Our cost of revenue includes cost of customer premises
equipment, customer line installation, costs related to personnel who maintain
and operate our network, DSL access line lease costs, telecommunications
capacity lease payments, Internet access charges, depreciation and amortization
of related assets and other costs. We expect that these costs will increase in
total dollars as we expand our network and increase our customer base, but we
expect that they will decrease as a percentage of net revenue over time.
The majority of our capital expenditures relate to building our network and
delivering service to our customers. Accordingly, the majority of our
depreciation and amortization expense, excluding amortization of deferred
stock-based charges, is included in our network and operations expenses.
Operating Expenses. Our product development staff focuses on development
of services that enable our customers to interact, transact and manage many of
their business operations in real-time. Our product development expenses consist
of costs relating to personnel and research equipment. These costs are expensed
as incurred. We expect these expenses to increase as we continue to develop new
product offerings, but to decrease as a percentage of net revenue over time.
Our sales and marketing expenses consist primarily of expenses for
advertising, sales commissions and incentives, and personnel. Sales and
marketing expenses are expected to increase significantly as we continue to
expand our business into new markets.
Our general and administrative expenses consist primarily of costs relating
to personnel, customer service, finance, billing, administrative services,
recruiting, insurance, bad debts, legal and other professional services and
depreciation expense. We expect these expenses to increase reflecting our growth
in operations and costs associated with being a publicly-held entity, but to
decrease as a percentage of net revenue over time.
Other Expense, Net. Historical other expense, net primarily relates to
interest expense on loans from stockholders. We may enter into additional
borrowing arrangements with institutional lenders and some of our vendors that
will substantially increase the amount of our interest expense. Other expense,
net also includes a provision for income taxes consisting of minimum state
franchise taxes.
STOCK-BASED CHARGES
Stock Options. When applicable, we record deferred compensation relating to
stock option grants to employees. Deferred compensation represents the
difference between the deemed fair value of our common stock for accounting
purposes at the grant date and the exercise price of the related stock options.
Deferred compensation is presented as a reduction of stockholders' equity
(deficit) and amortized over the vesting periods of the options, which is
generally four years. In connection with the grant of stock options to employees
during 1999 and the three months ended March 31, 2000, we recorded aggregate
deferred compensation of approximately $42.0 million. We currently expect to
amortize the following amounts of deferred compensation annually for our options
granted through March 31, 2000: approximately $18.2 million in 2000; $11.5
million in 2001; $6.2 million in 2002; $2.6 million in 2003; $200,000 in 2004
and thereafter.
Warrants. From time to time, we may issue warrants in exchange for goods
and services, or in connection with certain financing arrangements. In general,
we calculate the fair values of the warrants at the end of each reporting period
using the Black-Scholes option pricing model until the warrants are fully
vested, non-forfeitable and exercisable. We amortize the fair values to the
respective statement of operations' line items as the warrants vest or as
goods/services are received.
Beneficial Conversion Features. In connection with financing and/or
strategic partnership arrangements, we have issued convertible preferred stock
and convertible notes. We have determined that certain convertible instruments
have an associated beneficial conversion feature because they are convertible
into shares of our common stock at a discount to the deemed fair value of the
common stock at the commitment date, which is
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<PAGE> 23
generally the date of issuance. Depending on the nature and purpose of the
arrangement, we value the beneficial conversion feature by subtracting the
related conversion price from the deemed fair value of our common stock, and
then multiplying the difference by the number of shares of common stock that
would be issued upon conversion. The value of the beneficial conversion feature
is limited to the relative fair value of the convertible instrument. The fair
values of the beneficial conversion features are amortized and recorded as a
deduction to stockholders' equity or as an addition to the related statement of
operations' line item as the instruments become convertible.
In connection with the issuance of our Series B Preferred Stock in December
1999, we recorded additional paid-in capital of $10.0 million, which was offset
by a $10.0 million non-cash charge to equity relating to the beneficial
conversion feature of the preferred stock. This non-cash equity charge resulted
in an increase in our net loss per share attributable to holders of common stock
for 1999.
On April 13, 2000, we issued 6,174,123 shares of Series D Preferred Stock
for approximately $52.6 million, or $8.52 per share. Under the terms of our
Series D Preferred Stock agreement, the redemption features will terminate and
the shares will convert into shares of our common stock upon completion of this
offering. In the second quarter of 2000, we expect to record a non-cash charge
of approximately $21.5 million relating to the beneficial conversion feature of
these securities, which represents the difference between the aggregate purchase
price paid for the issued shares of Series D Preferred Stock and the aggregate
deemed fair value of these shares at the date of issuance.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Net Revenue. Net revenue for 1999 increased by $1.8 million, or 421.9%, to
$2.3 million from $434,000 for 1998. The increase reflects growth in our
customer base and a shift to broadband services.
Cost of Revenue. Cost of revenue for 1999 increased by $5.8 million to
$6.1 million from $320,000 for 1998. This increase is primarily attributable to
increased installations of customer premise equipment and cost of network
infrastructure. In addition, we amortized $142,000 of non-cash stock-based
charges related to stock options granted to employees during 1999.
Product Development. Product development expense for 1999 increased by
$619,000, or 619.0%, to $719,000 from $100,000 for 1998. This increase reflects
an overall increase in personnel to develop new and existing offerings. As a
percentage of net revenue, product development expenses increased to 31.7% for
1999 from 23.0% in 1998 due to an increased focus on developing value-added
services and products.
Sales and Marketing. Sales and marketing expense for 1999 increased by
$4.6 million to $4.8 million from $227,000 in 1998. The increase primarily
reflects a substantial increase in advertising. Sales and marketing expense as a
percentage of net revenue increased to 213.2% for 1999 from 52.3% in 1998 as a
result of our increased market focus on increasing the subscriber base.
General and Administrative. General and administrative expense for 1999
increased $2.9 million to $3.2 million from $223,000 for 1998. This reflects an
increase in personnel and professional fees necessary to manage the financial,
legal and administrative aspects of our business. For 1999, general and
administrative expenses increased to 139.9% as a percentage of net revenue as
compared to 51.4% for 1998 as a result of our infrastructure growth. In 1999, in
exchange for legal services, we issued warrants to purchase 33,000 shares of our
common stock at an exercise price of $.15 per share and 90,000 shares of our
common stock at $1.00 per share. The warrants are fully vested, non-forfeitable
and immediately exercisable. We incurred non-cash charges of approximately
$441,000 in connection with these warrants, which were recognized as general and
administrative expenses during 1999.
Stock-based Charges. In connection with the grant of stock options to
employees during 1999, we amortized approximately $3.1 million (excluding
$142,000 of charges included in cost of revenue) of non-cash stock-based
charges. In November 1999, we issued a convertible promissory note in exchange
for advances to purchase inventory of $7.5 million. The note is convertible into
shares of our Series C Preferred Stock at a
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<PAGE> 24
conversion price of approximately $2.72 per share. In March 2000, we issued
2,761,210 shares of Series C Preferred Stock upon the conversion of the note. We
have the right to repurchase shares of our stock after December 31, 2000 at the
original issuance price equal to the lesser of $3.5 million or the unused
inventory advances at December 31, 2000. We have determined that the note is
convertible at a discount to the deemed fair value of the Series C Preferred
Stock at the date of issuance. Since the note was issued to a supplier from whom
we purchase inventory and with whom we have other sales and marketing
arrangements, we recorded stock-based charges in our statement of operations.
For the year ended December 31, 1999, the total non-cash charge was $9.6
million, which was the difference between the deemed aggregate fair value of the
shares of Series C Preferred Stock issued and the aggregate conversion price of
such shares. This non-cash charge resulted in an increase in our net loss per
share for the year ended December 31, 1999. See Note 5 of Notes to Financial
Statements for a discussion of this non-cash charge. We may incur further
charges if additional inventory purchases are made against the remaining unused
advances on inventory.
Income Taxes. The provision for income taxes consists of minimum state
franchise taxes. As of December 31, 1999, we had approximately $11.8 million and
$5.9 million of federal and state net operating loss carryforwards,
respectively, available to offset future taxable income, if any. Use of our net
operating loss carryforwards, which begin to expire in 2004, may be subject to
limitations under the Internal Revenue Code of 1986, as amended. We have
provided a full valuation allowance on the deferred tax assets, consisting
primarily of net operating loss carryforwards, because of uncertainty regarding
our ability to use the loss carryforwards.
Other Expense, Net. Other expense, net increased $57,000, or 139.0%, to
$98,000 for 1999 from $41,000 for 1998. The increase is primarily due to a cost
of financing through our issuance of convertible debt instruments.
Net Loss. For 1999, our net loss totaled $25.3 million as compared to
$477,000 for 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Revenue. Net revenue increased $261,000, or 150.9%, to $434,000 for
1998 from $173,000 in 1997. This increase reflects continued growth in our
revenue derived from Internet access customers, as well as revenue from the
introduction of our DSL services.
Cost of Revenue. Cost of revenue increased $201,000, or 168.9%, to
$320,000 for 1998 from $119,000 for 1997. The largest component of this increase
was the cost of providing DSL services.
Product Development. Product development expense increased $60,000, or
150.0%, to $100,000 for 1998 from $40,000 for 1997. This increase primarily
reflects an overall increase in personnel, costs related to the development of
new service offerings and the enhancement of existing service offerings.
Sales and Marketing. Sales and marketing expense increased $137,000, or
152.2%, to $227,000 for 1998, as compared to $90,000 for 1997. This increase
reflects an investment in customer care and sales and marketing required to
support and grow our customer base. Additionally, the increase reflects the
growth of marketing efforts related to the introduction of DSL services.
General and Administrative. General and administrative expense increased
$113,000, or 102.7%, to $223,000 for 1998, as compared to $110,000 in 1997. This
increase reflects an increase in personnel and professional fees necessary to
manage the financial, legal and administrative aspects of our business.
Other Expense, Net. Other expense, net increased $28,000, or 215.4%, to
$41,000 for 1998, as compared to $13,000 for 1997. The increase is primarily due
to a cost of financing through our convertible debt instruments.
Net Loss. For 1998, our net loss was $477,000 as compared to $199,000 for
1997.
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SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth our unaudited statement of operations data
for each quarter of 1998 and 1999. Operating results for any quarter are not
necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF OPERATIONS DATA:
Net revenue............................. $ 77 $ 86 $ 113 $ 158 $ 215 $ 366 $ 680 $ 1,004
Cost of revenue......................... 41 60 73 146 390 1,018 1,761 2,915
---- ----- ----- ----- ----- ------- ------- --------
Gross profit (loss)................... 36 26 40 12 (175) (652) (1,081) (1,911)
Operating expenses:
Product development................... 14 21 24 41 63 87 169 400
Sales and marketing................... 24 64 64 75 142 534 1,712 2,440
General and administrative............ 39 52 53 79 203 408 825 1,733
Stock-based charges................... -- -- -- -- -- -- 444 12,267
---- ----- ----- ----- ----- ------- ------- --------
Total operating expenses............ 77 137 141 195 408 1,029 3,150 16,840
---- ----- ----- ----- ----- ------- ------- --------
Loss from operations................ (41) (111) (101) (183) (583) (1,681) (4,231) (18,751)
Other income (expense), net............. (8) (6) (13) (14) (21) (23) 14 (68)
---- ----- ----- ----- ----- ------- ------- --------
Net loss................................ (49) (117) (114) (197) (604) (1,704) (4,217) (18,819)
Charges relating to mandatorily
redeemable convertible preferred
stock:
Equity charge for beneficial
conversion feature.................. -- -- -- -- -- -- -- (10,000)
Accretion of preferred stock to
redemption value.................... -- -- -- -- -- -- (67) (302)
---- ----- ----- ----- ----- ------- ------- --------
Net loss attributable to common
stockholders.......................... $(49) $(117) $(114) $(197) $(604) $(1,704) $(4,284) $(29,121)
==== ===== ===== ===== ===== ======= ======= ========
AS A PERCENTAGE OF REVENUE:
Net revenue........................... 100% 100% 100% 100% 100% 100% 100% 100%
Cost of revenue....................... 53 70 65 92 181 278 259 290
---- ----- ----- ----- ----- ------- ------- --------
Gross profit (loss)................. 47% 30% 35% 8% (81)% (178)% (159)% (190)%
</TABLE>
Our net revenue has increased in each of the last eight quarters,
reflecting increases in the number of our customers. Our cost of revenue has
also increased in every quarter, reflecting costs associated with customer
growth and the building of our network in existing and new markets. Our product
development, sales and marketing and general and administrative expenses have
increased in every quarter and reflect costs associated with the development of
new services, sales and marketing costs associated with the acquisition of
customers, including sales commissions, and the development of a corporate
infrastructure. We have experienced increasing net losses on a quarterly basis
as we increased our capital expenditures and operating expenses, and we expect
to sustain increasing quarterly losses for the foreseeable future.
Our annual and quarterly operating results may fluctuate significantly in
the future as a result of numerous factors. Factors that may affect our
operating results include:
- demand for our services;
- the rate at which we add new customers and the ability to retain existing
customers;
- the prices paid for our services;
- capital expenditures and operating costs associated with our network
expansion; and
- costs associated with expanding our sales and marketing, product
development and customer care functions.
Other factors, many of which are outside our control, may add to the
variability in our annual or quarterly operating results.
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<PAGE> 26
LIQUIDITY AND CAPITAL RESOURCES
Our operations require significant capital investment for the expansion of
services and our network infrastructure, for funding operating losses and for
working capital purposes. Capital expenditures were approximately $1.5 million
for 1999. We expect that capital expenditures will be substantially higher in
the future periods as we expand our network and services into new markets.
Since 1996, we have funded our operations and met our capital expenditure
requirements through the sale of equity securities, proceeds from convertible
debt, equipment lease financing, product financing arrangements with vendors and
cash generated from the sale of our products and services.
We have had negative cash flows from operating activities since inception.
Net cash used in operating activities was $8.5 million for 1999 and $366,000 for
1998. Net cash used in operating activities in each of these years was primarily
the result of net operating losses and payments required to be made relating to
our vendor agreements entered into in 1999 and 1998. These operating cash
outflows were partially offset by increases in amortization of stock-based
charges, accounts payable, accrued liabilities and deferred revenues.
Net cash used in investing activities was $1.5 million for 1999 and $69,000
for 1998. To date, our investing activities have consisted of purchases of
property and equipment. During the year ended December 31, 1999, an additional
$2.4 million of capital expenditures were funded through an equipment lease
financing arrangement.
Net cash provided by financing activities was $20.7 million for 1999 and
$492,000 for 1998. Cash was provided primarily from net proceeds from the sale
of our common and preferred stock.
In November 1999, we issued a convertible promissory note in exchange for
advances to purchase inventory of $7.5 million. The note was convertible into
shares of our Series C Preferred Stock at a conversion price of approximately
$2.72 per share. The promissory note bore interest at a rate of 6.0% per annum,
with accrued interest payable on the fifteenth of each month, commencing January
1, 2000. In March 2000, the note was converted into 2,761,210 shares of Series C
Preferred Stock, which are convertible into an equivalent number of shares of
our common stock.
In September 1999, we entered into an agreement with Eller Media Company.
Under this agreement, we have the right to purchase up to $20.0 million in
advertising products and services through December 31, 2001. As of December 31,
1999, we had purchased approximately $443,000 in services under this agreement.
We account for the agreement as a non-interest bearing product financing
facility, which is discounted at a rate of 10%. Eller Media has agreed that, on
the effective date of this offering, it will exchange the aggregate amount due
under this agreement, representing purchases up to the effective date of this
offering, for a five year warrant. The warrant will represent the right to
purchase the number of shares of our common stock attainable by dividing the
aggregate amount outstanding under the credit facility on the effective date of
this offering by the initial public offering price. The exercise price per share
of the warrant will be equal to the initial public offering price of our common
stock.
In April 2000, we entered into a 3-year $7.5 million equipment lease
facility, which will be increased to $22.5 million if this offering is completed
by August 31, 2000, with one of our vendors. Under the terms of this agreement,
we can also receive $2.5 million as a bridge loan. Amounts borrowed under the
bridge loan bear interest at 12% per annum, however, no interest will be due if,
on or before March 29, 2001, the market value of our common stock exceeds $27.50
per share. All amounts borrowed under the agreement must be repaid by March 30,
2001. This loan and lease facility is primarily secured by all equipment leased
from the vendor under the agreement. In connection with this agreement, we
issued warrants to the vendor to purchase up to 117,371 shares of our common
stock at an exercise price of $8.52 per share. At April 26, 2000, no amounts
were outstanding under this facility.
In April 2000 we and a different vendor agreed to enter into a $25.0
million secured credit facility. Amounts borrowed under this facility will bear
interest at the rate of 12% per annum. All amounts borrowed must be repaid the
earlier of five days following the closing of our initial public offering or
March 30, 2001. If any amounts are borrowed under this facility prior to this
offering, we intend to use a portion of the net
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<PAGE> 27
proceeds of this offering to repay those amounts. This facility will be secured
by all of our general tangible and intangible assets except those assets pledged
under the credit facility described above. We also issued to this vendor
warrants to purchase up to 293,384 shares of our common stock at an exercise
price of $8.52 per share.
In August 1998 and May 1999, we issued two convertible notes totaling
$25,000 that are convertible into shares of our common stock at a conversion
price of $1.00 per share, and which bear interest at a rate of 10% per annum.
Between March and October 1999, we issued six convertible notes totaling
$250,000. The notes are convertible into shares of our common stock at a
conversion price of $2.15 per share and bear interest at a rate of 12% per
annum. In March 2000, $250,000 of convertible promissory notes were converted
into 116,279 shares of our common stock.
As of December 31, 1999, we had $10.8 million in cash and cash equivalents.
We currently anticipate that our existing cash and cash equivalents, proceeds
from this offering and any cash generated from operations will be sufficient to
fund our operating activities, capital expenditures and other obligations
through at least the next 12 months. However, we will likely need to raise
additional funds in order to finance our increasingly rapid expansion, increase
our marketing activities, develop new or enhance existing services or products,
respond to competitive pressures and/or acquire complementary services,
businesses or technologies. We expect to experience substantial negative cash
flow from operating activities and negative cash flow from investing activities
for the foreseeable future as a result of continued development and expansion of
our network, sales and marketing activities. Our future cash requirements will
depend on a number of factors, including:
- introduction of new products and services;
- expansion into new markets;
- building-out of our infrastructure;
- demand for, and pricing of, our products and services; and
- marketing expenditures and product and service development activities.
In addition, we may pursue acquisitions of businesses or technologies to
expand our geographic presence and achieve operating efficiencies. There can be
no assurance that we will have sufficient liquidity or be able to obtain
additional debt or equity financing on favorable terms or at all, in order to
finance such an acquisition. No acquisitions are currently contemplated.
MARKET RISK
Our exposure to financial market risk, including changes in interest rates
and marketable equity security prices, relates primarily to our investment
portfolio and outstanding debt obligations. We typically do not attempt to
reduce or eliminate market exposure on investment securities because a
substantial majority of investments are in fixed-rate, short-term securities. We
do not have any derivative instruments. The fair value of our investment
portfolio or related income would not be significantly impacted by either a 100
basis point increase or decrease in interest rates due mainly to the fixed-rate,
short-term nature of the substantial majority of the investment portfolio.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1
requires that entities capitalize costs related to internal-use software once
certain criteria have been met. We adopted Statement of Position 98-1 effective
January 1, 1999. The adoption of the statement did not have a material effect on
our financial statements.
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<PAGE> 28
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-5, "Reporting on the Costs of Start-Up
Activities." This statement of position requires that all start-up costs related
to new operations must be expensed as incurred. In addition, all start-up costs
that were capitalized in the past must be written off when this statement of
position is adopted. The adoption of this statement of position in the first
quarter of fiscal 1999 did not have a material impact on our financial position,
results of operations or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" or
SAB 101, which provides additional guidance in applying generally accepted
accounting principles to revenue recognition in the financial statements. We
adopted SAB 101 retroactively for all periods presented, and the implementation
of SAB 101 did not have a material effect on our financial statements.
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<PAGE> 29
BUSINESS
COMPANY OVERVIEW
InternetConnect is a leading provider of broadband networking solutions to
small and medium-sized businesses. We also provide a range of network access
solutions to remote users and branch locations of larger enterprises. We believe
that our services allow our customers to communicate, transact and manage their
businesses more efficiently. We own, manage and control a nationwide data
communications network that enables us to offer high-quality integrated turnkey
solutions. Our services combine the speed and efficiency of DSL technologies
with the reliability and security of our advanced private network. Our suite of
services includes wide-area private networking, high-speed DSL Internet access,
applications hosting, Web hosting and dial-up and remote access to the Internet
and private computer networks. By the end of 2000, we plan to roll out
additional value-added services, including video conferencing and voice services
over our data network.
The InternetConnect solution consists of five key elements:
- Integrated solutions for high-speed connectivity, private networking and
applications hosting services from a single provider;
- Robust wide-area networking capabilities at substantially lower prices
than available from traditional sources;
- High-speed dedicated connections to our network and the Internet,
primarily through DSL technology;
- Owned and managed nationwide ATM backbone that provides high-speed,
secure and reliable networking solutions; and
- Superior customer service 24 hours-a-day, seven days-a-week.
We currently operate in 34 major metropolitan markets, including the 10
largest cities in the United States. We began offering DSL connectivity in
August 1998. At the end of 1999, we had approximately 3,150 lines in service. As
of March 31, 2000, we had more than doubled the number of DSL lines in service
to greater than 6,400 and had a backlog of approximately 3,500 DSL lines that
were in the process of being installed.
Our management team is experienced in developing and rapidly growing
communications businesses serving business customers. Our Chairman and
President, Clifford H. Young has extensive experience in operating Internet and
network businesses and focuses his efforts on product, network and business
development. Our Chief Executive Officer, John W. Combs, served as Southwest
area president for Nextel Communications over the last seven years. The
Southwest area was Nextel's largest area and grew from fewer than 1,000 digital
subscribers to more than 500,000 subscribers during Mr. Comb's tenure. In
addition, our Chief Marketing Officer, Chief Financial Officer, Vice President
of Sales and Vice President of Customer Operations have more than 17 years
combined experience working in significant operating and management roles at
Nextel.
INDUSTRY
High-speed connectivity has become important to small and medium-sized
businesses as a result of the dramatic increase in Internet usage. According to
the International Data Corporation, or IDC, the number of Internet users
worldwide reached approximately 200 million in 1999 and is forecasted to grow to
approximately one billion by 2005. The popularity of the Internet has driven its
rapid growth as a commercial medium. Small and medium-sized businesses are
experiencing an increasing need for high-speed Internet connections to maintain
complex Web sites, access critical business information and communicate more
effectively with employees, customers and business partners.
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<PAGE> 30
We believe that demand for broadband connectivity is expanding rapidly as
businesses realize the benefits of high-speed, dedicated network connections to
both the Internet and their business partners. According to industry sources,
total retail subscription revenues for data services in the United States will
reach $66 billion by 2003, with DSL accounting for more than $18 billion of this
figure. Industry sources predict that, by 2003, network access revenues,
primarily driven by DSL, T-1, satellite, fiber and fixed wireless solutions,
will reach $43 billion, of which revenues from business customers will account
for approximately $23 billion and DSL revenues for approximately $8 billion.
According to a census conducted by the Small Business Association in 1998,
businesses with fewer than 100 employees represent more than 99% of United
States businesses. We believe that the Internet connectivity and networking
needs of smaller businesses have been under-served because dedicated high-speed
connections and access to secure private networks have been prohibitively
expensive.
According to the IDC, 41.8% of small businesses with 10 or more telephone
lines have at least one branch office. IDC predicts that, by 2003, small
businesses will use 76.6% of the projected 3.3 million business DSL lines.
Additionally, many large businesses have branch offices where a T-1 or ISDN
connection is not cost-efficient. These branch offices currently operate without
dedicated high-speed access to the Internet or their corporate networks. As
Internet usage grows, we believe that small and medium-sized businesses and
branch offices of larger companies will increasingly demand cost-effective and
high-speed connectivity and networking solutions.
INTERNET ACCESS AND DATA TRANSFER CHALLENGES
Lack of Integrated Solutions. Small and medium-sized enterprises that
require an array of networking services such as Internet access, applications
hosting, Web hosting and firewall services often must employ many separate
vendors to obtain the full suite of services they need. Screening vendors and
procuring and managing these services is expensive and inefficient.
Additionally, management and maintenance of hardware and software necessary to
provide these network solutions are complex and often require the employment of
in-house information technology personnel. These costs, in connection with the
prohibitive pricing of broadband access, have generally made high-speed Internet
services unaffordable for small and medium-sized businesses.
High Cost of High-Speed Access. Until recently, many small and
medium-sized businesses and branch locations of larger companies lacked a
cost-effective alternative to slow and unreliable dial-up modems or expensive
connections such as ISDN or T-1. Large businesses typically lease T-1 or T-3
lines to link their computers in private networks. Although large amounts of
data can be transferred quickly through these lines, they are generally too
expensive for smaller businesses, causing them to go without dedicated
networking services. Additionally, businesses lacked a high-speed means for
their workers to access their companies' local area networks while at remote
locations, such as branch offices or their homes.
Lack of Small Business Solutions. We believe that small and medium-sized
businesses are currently under-served by network solutions providers. Larger
providers are focused on serving larger enterprise customers and to date have
not offered affordable solutions to smaller businesses. Smaller service
providers typically do not have nationwide private networks.
THE INTERNETCONNECT SOLUTION
We believe our wide-area networking solutions effectively address many of
the unmet communications needs of today's businesses by offering a high-speed
integrated solution that is affordable, reliable, secure and customer-focused.
Key elements of our solution include:
- Integrated Solution. We offer our customers a single source for complete
private network solutions, including high-speed Internet access and other
value-added services. Our integrated turnkey solutions allow our
customers to outsource the management of their data communications
requirements.
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<PAGE> 31
- Affordable Connectivity. We believe that our Internet connectivity,
network and hosting services offer our customers an affordable way to
acquire a full suite of integrated network services. We primarily use DSL
technology to connect our customers to our privately-owned network, which
enables them to network their multiple locations, business partners and
remote users at considerably higher speeds and with greater security than
Internet-based virtual private networks, but at a fraction of the cost of
dedicated private networks and traditional networking solutions such as
frame relay. For example, a small business that wants to connect its Los
Angeles and New York City offices would currently pay approximately
$5,000 per month for a frame relay solution. This same customer, using
our private network, can obtain an equivalent solution having the same
speed from us for approximately $1,100 per month.
- High-Speed, Always-On Connections. We provide our customers with
dedicated Internet access and the ability to rapidly transfer information
across our private network among their branch offices, telecommuters and
business partners. Using DSL technology as the last mile connection, our
network is capable of delivering data at speeds ranging from 144 kilobits
per second, or Kbps, to 1.54 megabits per second, or Mbps. Customers who
subscribe at the 1.54 Mbps rate experience a transfer rate as fast as a
T-1 connection, which is approximately 50 times faster than a 28.8 Kbps
dial-up modem, and more than 15 times faster than an ISDN line.
- Network Architecture. We have designed our network to maximize security,
speed and customer convenience. Unlike our competitors, we transport our
on-net customers' data over our privately-owned and managed network,
without using the public Internet or any switches that are outside of our
control. Data transmitted to one of our customers from an Internet
location not on our network is passed to our network through our
centrally-controlled firewall gateway. This architecture is designed to
prevent unauthorized access to our customers' internal applications and
information. Customers on our network can safely transmit sensitive
information and applications to each other while also maintaining a
connection with the public Internet. This structure reduces the need for
customers to purchase expensive security and firewall solutions and
allows us to monitor network components and customer traffic from a
central location. Customers using our network experience reduced data
packet loss and latency compared to traditional frame relay services and
virtual private networks that use the public Internet, resulting in
improved performance of real-time applications, including video
conferencing and voice services using our data network.
- Superior Customer Care. We provide customer care 24 hours-a-day, seven
days-a-week. Customer support is important to many of our small and
medium-sized business customers because they do not typically have
dedicated internal technical support staff. Our remote network monitoring
and troubleshooting capabilities enable us to anticipate and react to
potential network problems, enhancing network quality, service and
performance.
STRATEGY
We combine the speed of DSL with the reliability of our private network to
provide our customers with affordable, secure broadband solutions. We believe
that our DSL/ATM data networking solution is well suited for small and
medium-sized businesses because of its high quality, low cost, ease and speed of
network implementation and ubiquitous availability of DSL through traditional
copper telephone lines. The following are the key components of our business
strategy:
- Rapidly Expand Our Customer Base: Through an aggressive sales campaign,
we intend to capitalize on the strong demand for high-speed Internet
access to add customers to our network quickly. Once these customers are
on our network, we will offer them additional value-added services. Our
sales strategy is to penetrate the 50 largest major metropolitan markets
and then expand into secondary and tertiary markets. Our sales effort is
focused on acquiring customers through direct marketing and through
development of strategic alliances with value-added resellers, wireless
dealers, systems consultants and information technology vendors.
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- Focus on the Under-Served Customer: We provide cost-effective turnkey
solutions to small and medium-sized businesses and branch offices of
large businesses. We believe that this segment of the market has been
largely ignored by providers of networking services to large corporate
customers.
- Provide High Quality, Reliable Networking Solutions: With our private
network, we offer exceptional speed, security, national reach and
flexibility at a price point considerably lower compared to traditional
private networks or frame relay services. Our network uses multi protocol
label switching, or MPLS, to ensure the rapid and secure transport of our
customers' data. MPLS transforms Internet protocol data into switched
packets at the edge of the network, enabling traffic to be switched
rather than routed across our backbone and thereby resulting in increased
data rates and reduced latency. We intend to expand our relationships
with current strategic partners, including Winstar Communications, Covad
Communications and NorthPoint Communications, to ensure and enhance the
quality and scalability of our networking solutions.
- Provide Superior Customer Care: Our customer support relationship with
each new customer begins on day one, when we assign an installation
account representative to manage and communicate with that customer. We
offer end-to-end proactive network monitoring and management through our
operations center 24 hours-a-day, seven days-a-week. To ensure
convenience for our customers, we schedule installations seven
days-a-week. To motivate our customer care team to provide superior
customer care, we reward them with cash and stock based on monthly
customer satisfaction measurements.
- Develop and Market New Products and Services: We intend to develop new
products and services that take advantage of our high-speed network
capabilities. Our product development staff focuses on creating products
that provide our customers the capability to interact, transact and
manage many of their business operations in real-time. We offer
cost-effective solutions to what we believe is an increasing number of
companies seeking to outsource their network-based applications. By the
end of 2000, we intend to offer additional network-based applications,
including video conferencing and voice services over our data network, as
well as outsourced hosting of high-bandwidth office applications.
INTERNETCONNECT SERVICES
We deliver a range of high performance services designed to help businesses
reduce costs, increase productivity and access new markets. The following is a
list of our current services:
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HIGH-SPEED CONNECTIVITY SOLUTIONS
The majority of our customers are connected to our network via dedicated
DSL access connections. DSL technology provides high speed at a lower cost than
most other dedicated access solutions. We offer several different DSL
connectivity solutions, as well as alternative access solutions for customers
who want to integrate our network with their existing networks.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
SERVICE SPEED CUSTOMER BENEFITS
-------------------------------------------------------------------------------------------
<S> <C> <C>
- Multi-user symmetrical DSL - Up to 1.5 Mbps - Provides access to all
upstream and users on an Ethernet LAN
downstream - Lower cost per user for
multiple users at a single
location
- Routable addressing allows
customers to connect up to
255 discrete Internet
protocol addresses through
a single DSL connection and
customer premise router
-------------------------------------------------------------------------------------------
- Single-user symmetrical DSL - Up to 1.5 Mbps - Low cost for a single user
upstream and downstream - Employs less costly bridge
as customer premise equipment
- Most effective for remote
business users
-------------------------------------------------------------------------------------------
- Single-user asymmetrical - Up to 1.5 Mbps - High-speed, low-cost
DSL downstream and 384 connection for less data-
Kbps upstream intensive business and
residential users
-------------------------------------------------------------------------------------------
- Multi-line high-speed DSL - Up to 9.0 Mbps - Provides higher available
- Aggregates multiple DSL upstream and bandwidth for
lines for higher downstream speed-sensitive
bandwidth at a single applications
location - Enhanced redundancy because
of multiple DSL connections
- Allows customers to reserve
private virtual circuits
for specific applications
-------------------------------------------------------------------------------------------
- Alternative access (T-1, - Up to 45 Mbps upstream - Allows dedicated connection
T3, ISDN and frame relay and downstream to legacy private networks
solutions) and frame relay networks
- Provide high-speed network
access in areas where DSL
is not yet available
-------------------------------------------------------------------------------------------
- Dial-up access for mobile - 56 Kbps - Provide network access from
workforce or traveling any telephone worldwide
users
-------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 34
VALUE-ADDED SERVICES
Customers on our network can benefit from the high quality networking and
value-added solutions we provide, which are optimized for our broadband network.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
SERVICES CUSTOMER BENEFITS
<S> <C>
----------------------------------------------------------------------------------------------------------------------------
NETWORKING SOLUTIONS - Fast -- MPLS enables data to travel faster than
- Virtual private networks using DSL connectivity and our traditional Internet protocol-based virtual private
proprietary ATM backbone networks
- Collocation of network servers - Secure -- Data traveling over our network is more secure
- Frame relay services for network connection than data traveling over the public Internet
- Point-to-point T-1 and T-3 solutions - Flexible and scalable -- Grows with the business; Allows
mobile personnel, telecommuters and branch offices to
access corporate network remotely; Nationwide coverage
- Reliable -- Uses our owned and controlled nationwide
communications network rather than the public Internet
- Simple -- Outsourced firewall management and network
configuration
- Affordable -- DSL/ATM solution is significantly less
expensive than traditional private networks
----------------------------------------------------------------------------------------------------------------------------
APPLICATIONS HOSTING - Affordable -- No capital investment
- Simple Web hosting - Outsourced service -- Customer does not need in-house
- Basic site hosting staff to manage server or software
- E-Commerce enabled site hosting - Reliable -- Redundant server maintained 24 hours-a-day,
- E-Mail seven days-a-week
- Unix Send Mail
- FTP Servers
- File management and transfer
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
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FUTURE SERVICES
We intend to leverage our network infrastructure to deliver and manage
additional value-added services for our existing and new customers. These
services are private label solutions comprised of bundled, off-the-shelf
applications designed to meet the needs of select vertical segments within the
small and medium-sized business market. Many of these new services will be
rolled out by the end of 2000. We are currently developing the following
services:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
SERVICES CUSTOMER BENEFITS
-------------------------------------------------------------------------------------
<S> <C>
- Video Conferencing - High quality with our ATM backbone
- Three levels of service quality - Low cost relative to leased line
providing up to 30 frame-per-second transport
full motion video - Flat rate pricing -- less costly than
per minute ISDN-based video conferencing
services
- Highly scalable to multiple users
- Uses inexpensive, off-the-shelf video
equipment
-------------------------------------------------------------------------------------
- Collaborative Applications - Outsourced solution reduces
- Lotus Notes information technology implementation
- Microsoft Exchange and maintenance costs
- Other real-time collaborative tools - Improved e-mail and collaboration
capabilities versus Internet-based
e-mail
- Reliable -- redundant server
maintained 24 hours-a-day, seven
days-a-week
- Leverages same application across
multiple locations
- Provides greater selection of
applications
-------------------------------------------------------------------------------------
- Voice Services - Predictable flat rate cost structure
- Interoffice voice flat rate - More reliable than public Internet
- On-net voice services telephony
- Significant cost savings
-------------------------------------------------------------------------------------
- Managed Network Services - Continuous monitoring and proactive
- Backup services fault response
- Proactive networking monitoring - Reduced information technology costs
- Managed financial services - Improved network security
-------------------------------------------------------------------------------------
</TABLE>
NETWORK ARCHITECTURE
Our network is specifically designed to optimize our current and future
broadband services, including high quality, real-time applications such as video
conferencing, voice and other collaborative applications.
The following diagram illustrates in a simplified manner how our network
interfaces with our DSL circuit providers and our customers. A typical customer
location is connected by a DSL local loop that connects a DSL router (provided
by InternetConnect) on the customer's premise to a DSL access multiplexer (owned
by one of our DSL circuit providers such as Covad or NorthPoint) located in the
local exchange carrier central office. The DSL circuit provider aggregates the
traffic from the customer and backhauls it to a central collocation facility
within the customer's metropolitan area, where the traffic is interfaced with
InternetConnect's collocated ATM switch.
From our ATM switch, our network carries our customer's traffic to all
other on-net locations, as well as to our Web servers and applications servers.
Traffic to Internet locations is routed through our centrally managed firewalls
to private peering connections we maintain with several major Internet backbone
network
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<PAGE> 36
providers, including InterNap, Level 3, and Winstar. In the following diagram,
shaded areas indicate the components of the network that we own, control and
manage. Although we use DSL circuits provided by third-party DSL providers for
last mile connectivity to our customers, our sophisticated network management
systems provide us with network visibility and control from our Network
Operations Center to our DSL edge routers located on our customers' premises.
[NETWORK ARCHITECTURE FLOW CHART]
Our 20-node ATM backbone currently supports 34 metropolitan markets. We
plan to expand our ATM backbone to 54 nodes, which will support additional
markets throughout the United States. Through our network, we support nationwide
DSL, ATM, frame relay, ISDN and dial-up services.
Today, our network is comprised of standards-based equipment from several
different providers. We use Lucent CBX500 series carrier-class ATM switches at
the core of our network and currently employ 28 of these switches. We currently
use Cisco 6400 series switches and routers at the edge of our network, and Cisco
7200 series routers for our managed firewall services. In addition, we provide
or sell the DSL customer interface units that connect our customers to DSL loops
at their premises. We currently use Flowpoint routers from Efficient Networks
for our multi-user SDSL service and SpeedStream bridges for our single-user SDSL
and ADSL customers. Using this fast, efficient and highly scalable architecture,
we rapidly deploy new network technology and services such as MPLS. MPLS allows
us to better manage our backbone, increase efficiency, redirect traffic quickly
and minimize network downtime.
We believe that our network strategy, which requires limited capital
investments, involves fewer implementation risks relative to strategies of other
network providers. We invest capital in network assets that allow us to control
and manage our nationwide network, such as ATM switches, routers and network
control systems, and lease or purchase indefeasible rights of use for the
physical transmission means from other providers. Investing in network assets
that enable high-margin services along with marketing and branding to capture
customers allows us to maximize the return on our capital. Our investments in
edge routers, servers and customer premise equipment are typically
"success-based," being conditioned upon us adding customers.
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<PAGE> 37
Our network has the following features:
- Scalable. Our multi-layer network architecture uses carrier-class,
high-capacity and high-speed Lucent ATM switches and Cisco routers that
can scale to support many more customers than we currently serve. We can
add backbone capacity and Internet access capacity very quickly with our
current architecture. We can also expand the network footprint
incrementally without modifying the current network infrastructure.
- High Capacity. Through indefeasible rights of use agreements and lease
agreements with telecommunications carriers, we own and lease fiber
backbone capacity at DS-3 (45 Mbps) and OC-3 (155 Mbps) between 19 points
of presence servicing 34 metropolitan markets. Under these agreements, we
have the right to upgrade our backbone capacity to OC-12 (620 Mbps) or
above. With our current network architecture, we have the ability to
serve a substantially larger customer base than we currently have with a
variety of real-time high-speed applications.
- Internet Interconnectivity. We buy Internet interconnectivity from a
variety of suppliers, including InterNap, Level 3 Communications, Winstar
and others, and connect to those suppliers via private peering and
collocation arrangements. We maintain top-tier access to the majority of
Internet hosts through these relationships.
- Flexible. Our network consists of an Internet protocol routing
infrastructure overlaid upon a fast cell-based ATM switching architecture
that enables us to provide reliable, high-speed private connections that
are point-to-point. The network allows for a variety of service types and
levels depending on the applications requirements and customer service
level demands. Our redundant network infrastructure is designed to
provide seamless uptime for customers who could otherwise be affected by
fiber cuts or other network failures.
- Fault Tolerant. Redundant design and adaptive technology in our network
reduces the impact of isolated network failures. We employ redundancy in
our core Internet routers and switch infrastructure to address failures
that might otherwise interrupt the flow of customer traffic.
- Standards Based. Our network supports Internet traffic over our
standards-based private ATM backbone. We are able to install a variety of
equipment types and capacities without impacting network
interoperability. As a result, our network can be upgraded incrementally
and benefit from multi-vendor supply strategies. We also have the ability
to easily integrate our network solutions within existing network service
provider applications.
- Manageable. From our network operations center, we are able to monitor
the network remotely, perform network diagnostics and equipment
surveillance, and report on performance to support customers. As a result
of our network architecture and our network operations management
platform, we can perform these tasks remotely regardless of point of
presence location or network status. This capability allows us to respond
quickly to network problems and to provision additional services to our
on-net customers remotely, thereby avoiding costs associated with on-site
network configuration and repair. Our network management platform also
gives us the ability to perform client device monitoring and provide
reports to customers on their network uptime.
- Data Centers. We currently have a data center located in Marina del Rey,
California. We also host our public servers in a Level 3 Communications
facility in Los Angeles. We have four additional hosting centers through
a strategic partnership with Winstar Communications. The additional data
centers are located in Los Angeles, San Francisco, New York and
Washington D.C. Each data center is specifically designed for dedicated
Web hosting, applications hosting, collocation services and high capacity
access to our network, and is equipped with uninterruptible power supply
and backup generators, fire suppression, operations and physical security
24 hours-per-day, seven days-per-week.
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<PAGE> 38
STRATEGIC ALLIANCES
We seek to establish strategic alliances with select network and
application service providers, consulting firms and telecommunications carriers
that will resell our services to their customers. We also strive to establish
strategic relationships with our key suppliers. To date, we have entered into
the following strategic alliances:
- Winstar Communications. Winstar has committed to offer our DSL and
private network services to its customers. Winstar will brand our
products and services under the Winstar name and handle all sales,
billing and collection activities. Winstar will provide certain
application hosting services that we intend to private label and sell
under the InternetConnect brand. We are responsible for all fulfillment
and advanced technical support activities on DSL sales to Winstar
customers. Under this agreement, Winstar has agreed to sell 2,000
InternetConnect DSL lines within a three-year period. We have agreed to
jointly market to Winstar's dial-up customer base in an effort to upgrade
them to our co-branded DSL solution. Winstar has invested $5.0 million in
our company and will sublease collocation facilities from us in Los
Angeles and lease collocation facilities to us in San Francisco, New York
and Washington, D.C.
- Covad Communications. We have agreed with Covad Communications to
jointly develop new market segments for DSL services and tailor products
to meet the needs of InternetConnect customers. Under our agreement, we
have committed to purchase 50,000 DSL lines from Covad, and Covad has
committed to provide us with market development funds.
- NorthPoint Communications. We have agreed with NorthPoint to jointly
develop new markets for DSL services and tailor product solutions to meet
the needs of InternetConnect customers. Under this agreement, we have
committed to purchase 15,000 DSL lines from NorthPoint. NorthPoint has
committed to provide us with market development funds as well as
additional funds paid for each installed line.
SALES, MARKETING AND CUSTOMER SUPPORT
SALES
Our sales force focuses on three distribution methods to target expanding
opportunities in the broadband networking and Internet access markets.
Inside Sales Channel. Our inside sales personnel service potential
customers attracted through our advertising in local newspapers, radio, trade
publications, billboards, online ads and direct mail. This team has enabled us
to rapidly expand our sales activities nationwide.
Indirect Sales Channels. Our indirect sales force targets value-added
resellers, wireless dealers, systems consultants and information technology
vendors. We supplement our distributors' sales efforts by offering marketing
support services that include training, proposal development, lead generation,
channel support materials, joint participation in national and regional customer
events and press announcements. We believe that value-added resellers and system
integrators will be an important channel for us, as we provide networking
solutions that will help drive sales of hardware and integration services.
Direct Sales Channels. This sales force consists of field commercial sales
representatives and major account executives. We intend to increase the size of
our sales and sales engineering force to sell and support our business customers
as we offer additional services and enter into new geographic markets. Our sales
staff is trained in the technical aspects of our solutions, as well as in
strategies for customer satisfaction. Direct sales methods include direct
contacts with potential corporate accounts by our sales representatives and
sales engineers, inbound and outbound telemarketing, direct mail efforts and
trade show participation.
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<PAGE> 39
MARKETING
Our key marketing objective is to position InternetConnect as the leading
provider of broadband networking solutions for businesses. We believe that being
an early leader in DSL access and nationwide secure private networking is an
important factor in enabling us to continue to attract new customers.
Our marketing objectives are to build national and local demand for our
services and positive awareness of the InternetConnect brand. As part of our
agreement with Eller Media, one of the largest outdoor media firms in the U.S.,
we have initiated a nationwide billboard and outdoor advertising media campaign.
We also advertise on the radio, in newspapers and in industry publications in
major markets to enhance awareness and drive inquiries to our inside sales team.
Our print advertisements are placed in trade magazines, small business
publications and major daily newspapers. We employ public relations personnel
in-house to provide broad coverage in the Internet and computer networking
sectors. We also create brand awareness by participating in industry trade shows
such as Internet World, Internet Commerce Expo, Interop and ISPCon. We also use
online Web advertising, including sponsorships and banner ads and e-mail
messages to targeted lists.
On our Website, customers can find extensive product information,
pre-qualify for service, and initiate orders on-line. We also use direct
mailings, telemarketing and joint promotional efforts with channel and strategic
partners, vendors and value-added resellers to reach new business customers. We
market to our existing customers through quarterly customer newsletters,
periodic e-mail and by offering value-added services through a sales team
dedicated to existing customers.
CUSTOMER CARE
Providing high quality customer care is a fundamental component in
servicing our customers and marketing additional services. We have made
significant investments in personnel, training and systems that enhance our
customer care initiative. We monitor and respond to customer needs with
technical support and service 24 hours-per-day, seven days-per-week. All
frontline service personnel are monitored by our quality assurance group to
ensure their technical competence and to improve their customer interaction and
issue resolution skills. We regularly train our customer service personnel in
troubleshooting and customer etiquette and use an internal solution workflow
management system to track, route, resolve and report on customer service
issues. We contact a representative sample of all customers to determine our
service quality in resolving customer issues. We have agreements with
third-parties to support our customers that cannot be serviced remotely by our
network operations team in the event of an equipment failure. These centralized
support services increase our operational efficiencies and enhance the quality,
consistency and scalability of our customer care.
Our operating support system resides on two high-capacity fully redundant
servers. The application is built on an SQL-based database and offers a
Web-based interface with different departments, including human resources,
billing, technical support, provisioning, sales and installation coordination.
We believe the application supports up to one million customers and provides
complete integration of our operating and accounting systems. The application is
based upon active server pages that are Web-enabled and allow us to manage
processes from remote locations. Our operating support system will provide a
Web-based interface with our channel partners, customers and key vendors.
Our operational support system architecture is designed to facilitate rapid
service responsiveness and reduce the cost of customer support. We use an
integrated set of standard, off-the-shelf operating systems with customized
applications to support our internal business processes. Our internal operations
systems and support team has designed all operations modules, using a single
database, to ensure that every business process has real-time and reliable
information. The use of client-server tools and scalable Compaq and Sun
Microsystems servers and Cisco Ethernet switches enables high level performance
within our information systems processes.
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COMPETITION
The market for our services is highly competitive, continuously evolving
and subject to rapid technological change. While we believe that none of our
competitors currently offers a solution that is identical to ours, we encounter
competition with respect to different elements of our solutions from a number of
companies. In addition, a number of our competitors, including some of our
strategic partners, have the potential to offer products that are substantially
identical to our solution. Our competitors may also develop alternative
products, services or technologies that are superior to, or more cost-effective
than, our solution.
We believe that the principal competitive factors affecting our market
include price, breadth of solution, reliability and performance of services,
interoperability of solution with existing and new applications, customer
service, strategic alliances and speed of installation and deployment of
services. We believe our solution currently competes favorably with respect to
all of these factors. However, we cannot assure you that we will be able to
maintain a competitive position against current and potential competitors in the
future, especially against companies with significantly greater financial,
marketing, technical and other resources. Our primary competitors are companies
who provide broadband connectivity and other related network solutions,
including:
Network and Business Internet Service Providers: We compete with companies
offering network solutions, including large global companies such as
MCIWorldCom/UUNet, AT&T and Qwest Communications. We also compete with national
business Internet service providers, such as GTE Internetworking, Concentric
Network, PSINet and Intermedia Communications.
Broadband Connectivity Providers: We compete against providers of retail
DSL services such as Rhythms NetConnections, Fastpoint, Flashcom, Zyan and the
regional bell operating companies including SBC, Bell Atlantic and GTE. Other
competitors include providers of cable modem services who primarily serve the
residential market. These providers include Continental Cablevision, Inc,
Tele-Communications, Inc., Cox Cable and At Home Corporation.
Competitive Local Exchange Carriers or CLECs: Although we do not currently
compete with DSL wholesalers such as Covad and Northpoint, we may compete with
them in the future should they target the retail market. We currently compete
with CLECs such as Rhythms NetConnections, Network Access Solutions, US West and
DSL.net, who provide DSL services to the business market on both a wholesale and
retail level.
Direct Broadcast Satellite and Wireless Communications Companies: We
compete with companies emerging as wireless data service providers, such as
Advanced Radio Telecom, Teligent and Winstar Communications. In addition, other
companies, including Motorola Satellite Systems and Hughes Communications, are
emerging as satellite-based service providers. These companies use a variety of
new and emerging technologies to provide high-speed data services.
In-building Service Providers: We compete with companies that supply
entire office buildings with Internet access and sell those services through
building management, such as Cypress Communications, Allied Riser Corporation,
Onsite Access and Eureka Broadband.
INTELLECTUAL PROPERTY
We rely on a combination of copyright, trademark, and trade secret laws and
contractual arrangements to establish and protect our intellectual property
rights. We plan to apply to register those trademarks that we believe are
important to our business. We own the trademark INTERNETCONNECT, which was
registered with the United States Patent and Trademark Office in 1998. We are
aware of entities that may offer services that compete with ours using the name
"Internet Connect," some of which may have begun using that name as a mark in
commerce prior to the filing date of our application. Any of these parties could
challenge our continuing right to use INTERNETCONNECT in their market or require
us to obtain a license to use it in their market. We are also aware of entities
that may offer services that compete with ours using the name
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<PAGE> 41
"Internet Connect," some of which may have begun using that name as a mark in
commerce prior to the date of our first use of INTERNETCONNECT as a mark. Such
prior users could apply to cancel our trademark registration during the five
year period after the registration was granted. If any such challenge were to
succeed, we could be required to stop using the mark in particular markets or
obtain a license from a prior user for permission to use it in particular
markets. See "Risk Factors."
REGULATORY MATTERS
The following summary of regulatory developments and legislation is not
complete. It does not describe all present and proposed federal, state, local
and foreign regulation and legislation affecting the Internet service providers
and telecommunications industries. Existing and proposed laws and regulations
are currently subject to judicial proceedings, legislative hearings, and
administrative proposals that could change, in varying degrees, the manner in
which our industries operate. We cannot predict the outcome of these proceedings
or their impact upon the Internet service providers and telecommunications
industries or upon us.
In recent years there have been a number of United States and foreign
legislative and other initiatives seeking to control or affect the content of
information provided over the Internet. Some of these initiatives would impose
criminal liability upon persons sending or displaying, in a manner available to
minors, obscene or indecent material or material harmful to minors. Liability
would also be imposed on an entity knowingly permitting facilities under its
control to be used for such activities. These initiatives may decrease demand
for Internet access, chill the development of Internet content, or have other
adverse effects on Internet access providers, including us.
Both the provision of Internet access service and the provision of
underling telecommunications services are affected by federal, state, local and
foreign regulation. The FCC exercises jurisdiction over all facilities of, and
services offered by, telecommunications carriers in the United States to the
extent that they involve the provision, origination and termination of
jurisdictionally interstate or international communications. The state
regulatory commissions retain jurisdiction over the same facilities and services
to the extent they involve origination or termination of jurisdictionally
intrastate communications. In addition, as a result of the passage of the
Telecommunications Act of 1996, which we refer to as the 1996 Act, state and
federal regulators share responsibility for implementing and enforcing the
domestic pro-competitive policies of the 1996 Act. In particular, state
regulatory commissions have substantial oversight over the provision of
interconnection and non-discriminatory network access by ILECs. Municipal
authorities generally have some jurisdiction over access to rights of way,
franchises, zoning and other matters of local concern.
Our Internet operations are not currently subject to direct regulation by
the FCC or any other United States governmental agency, other than regulations
applicable to business generally. However, the FCC continues to review its
regulatory position on the usage of the basic network and communications
facilities by Internet service providers. Although in an April 1998 Report, the
FCC determined that Internet service providers should not be treated as
telecommunications carriers and therefore should not be regulated, it is
expected that future Internet service provider regulatory status will continue
to be uncertain. Indeed, in that report, the FCC concluded that certain services
offered over the Internet, such as phone-to-phone Internet protocol telephony,
may be functionally indistinguishable from traditional telecommunications
service offerings, and their non-regulated status may have to be re-examined.
Our Internet operations outside the United States are subject to direct
regulation through licensing from foreign governmental agencies.
Changes in the regulatory structure and environment affecting the Internet
access market, including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood of competition from Regional
Bell Operating Companies or other telecommunications companies, could have an
adverse effect on our business. Although the FCC has decided not to allow local
telephone companies to impose per-minute access charges on Internet service
providers, and that decision has been upheld by the reviewing court, further
regulatory and legislative consideration of this issue is likely. In addition,
some telephone companies are seeking relief through state regulatory agencies.
We believe that such rules, if adopted, are likely to have a greater impact on
consumer-oriented Internet access providers than on business-
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<PAGE> 42
oriented Internet service providers, such as us. Nonetheless, the imposition of
access charges would affect our costs of serving dial-up customers and could
have a material adverse effect on our business, financial condition and results
of operations.
In a recent development, the FCC adopted rules that direct ILECs to share
their telephone lines with providers of high speed Internet access and other
data services. This ruling will enable competitive carriers to provide DSL-based
services over the same telephone lines simultaneously used by ILECs to provide
basic telephone service. The new rules are expected to place competitive
carriers on a more equal footing with ILECs in the offering of advanced
telecommunications services, including DSL services.
EMPLOYEES
As of March 31, 2000, we had approximately 237 employees including 79
persons in sales and marketing, 24 persons in network operations and
development, 108 in customer care and 26 in finance and administration.
PROPERTIES
Our headquarters are located in facilities consisting of approximately
7,000 and 25,000 square feet in Marina del Rey, California under leases that
expire in 2000 and 2004, respectively. In addition, we occupy 1,000 square feet
in San Diego under a lease that expires in 2001. We have also entered into a
ten-year lease for our new headquarters in Torrance, California, which
encompasses four buildings and more than 212,000 net square feet. We expect to
occupy these premises in the third quarter of 2000. Winstar has agreed to
sublease 23,000 square feet of our new facility for a period of ten years. We
also lease space for hosting our switching and routing equipment in 34
metropolitan markets.
LEGAL PROCEEDINGS
We are not a party to any pending material litigation.
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The following table sets forth the names, ages and positions of our
executive officers, key employees and directors as of the date hereof. The
background of each person listed in the table is described below.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
Clifford H. Young.................... 40 Chairman of the Board and President
John W. Combs........................ 52 Chief Executive Officer and Director
Deanne M. Campbell................... 32 Chief Financial Officer
Kevin Gavin.......................... 41 Chief Marketing Officer
Troy J. Knuckles..................... 36 Vice President, Sales
Walter Weisner....................... 44 Vice President, Customer Care
Linda R. Press....................... 34 Vice President, Investor Relations
Sally Ann Stewart.................... 42 Vice President, Public Relations
Steven F. Foster..................... 37 Director
Brion B. Applegate................... 46 Director
Frank J. Marshall.................... 53 Director
M. Bernard Puckett................... 55 Director
</TABLE>
Clifford H. Young founded InternetConnect and has served as our Chairman of
the Board and President since June 1996. From February 1995 to June 1996, Mr.
Young was the Founder and President of CDC Development Corp., an Internet
company. Mr. Young received his Bachelor of Science from University of
California, Los Angeles.
John W. Combs has served as the Chief Executive Officer and a Director of
InternetConnect since September 1999. From June 1993 to September 1999, Mr.
Combs was Southwest Area President for Nextel Communications, Inc., a
telecommunications wireless carrier. From October 1991 to April 1993, Mr. Combs
served as Executive Vice President of LA Cellular, a cellular communications
company and from October 1998 to September 1991 he served as President of Mitel,
Inc. a PBX manufacturing company. Mr. Combs serves as a director of Digital
Microwave and Hello Direct, Inc. Mr. Combs received his Bachelor of Science from
California Polytechnic State University in San Luis Obispo.
Deanne M. Campbell has served as our Chief Financial Officer since April
2000. From September 1994 to April 2000, Ms. Campbell held various financial
positions including Vice President of Financial Planning and Analysis at Nextel
Communications, Inc. Ms. Campbell holds a Bachelor of Science from University of
California, Riverside.
Kevin Gavin has served as our Chief Marketing Officer since March 2000.
From September 1998 to March 2000, Mr. Gavin served initially as Senior Vice
President of Marketing of SoftNet Systems, Inc., a broadband Internet provider,
and was promoted to President of SoftNet Asia. From January 1997 to September
1998, Mr. Gavin was regional Vice President of Teligent, a local exchange
carrier. From May 1996 to January 1997, he served as Vice President of Marketing
at Electric Classifieds. From November 1991 to January 1996, Mr. Gavin was
Corporate Vice President of Marketing and Product Development of Nextel
Communications, Inc. Mr. Gavin received his Bachelor of Science at the
University of Pennsylvania, Wharton School of Business.
39
<PAGE> 44
Troy J. Knuckles has served as our Vice President, Sales since October
1999. From January 1994 to October 1999, Mr. Knuckles served as the General
Manager in the greater Los Angeles area for Nextel Communications, Inc. Mr.
Knuckles received his Bachelor of Science from Idaho State University.
Walter Weisner has served as our Vice President, Customer Care since
October 1999. From December 1997 to October 1999, Mr. Weisner was Director of
Customer Operations and Support for the Southwest Area of Nextel Communications,
Inc. and from March 1996 to December 1997 he was Senior Product Marketing
Manager at Nextel. From April 1992 to March 1996, Mr. Weisner was Director of
Product Marketing for MFS Intelenet, a telecommunications company. Mr. Weisner
received a Bachelor of Business Administration from Cleveland State University.
Linda R. Press has served as our Vice President, Investors Relations since
February 2000. From February 1998 to February 2000, Ms. Press was a partner at
Sitrick And Company, a public relations firm, and was promoted to the head of
their Investor Relations Practice. From January 1995 to February 1998, Ms. Press
served as an investor relations consultant to various publicly-traded technology
companies. Ms. Press received a Bachelor of Science in Accounting from the
Pennsylvania State University.
Sally Ann Stewart has served as our Vice President, Public Relations since
February 2000. From January 1999 to February 2000, Ms. Stewart was a partner at
Sitrick And Company, where she specialized in corporate communications for
Internet companies. From June 1996 to January 1999, she served as Director of
Communications for Public Counsel Law Center. From June 1983 to May 1996, she
was a reporter at USA Today. Ms. Stewart earned a Bachelor of Arts from the
University of Florida.
Steven F. Foster has served on our board of directors since July 1999. Mr.
Foster has been a partner at Crosspoint Venture Partners since February 1998.
From November 1995 to February 1998, Mr. Foster was Director, Business
Development at 3Com Corporation. From January 1992 to October 1995, Mr. Foster
was Project Manager, Corporate Development, at Hewlett Packard. Mr. Foster
serves as a director of OnSite Access, Inc. He received his Bachelor of Science
in Accounting from Santa Clara University and he received his Masters of
Management from Northwestern University.
Brion B. Applegate has served on our board of directors since February
2000. Mr. Applegate is a co-founder of Spectrum Equity Investors and has served
as chairman and chief executive officer of Applegate and Collatos, the
management company for the Spectrum Equity investment funds since September
1993. Mr. Applegate is a director of Network Access Solutions, Inc. and Tut
Systems Inc. Mr. Applegate is also a trustee of The Trinity School. Mr.
Applegate holds a Masters of Business Administration degree from Harvard
University. He received his bachelor's degree from Colgate University.
Frank J. Marshall has served on our board of directors since March 2000.
Since October 1997 he has been a private investor through his family limited
partnerships, Timark LP and Big Basin Partners LP. From April 1992 to October
1997, Mr. Marshall held senior management positions at Cisco Systems, Inc.,
including Vice President of Engineering and Vice President and General Manager,
Core Products Division. Mr. Marshall currently serves as a director of
PMC-Sierra, Inc. and Covad Communications Group, Inc. Mr. Marshall is also a
member of the advisory committee at Interwest Partners, a venture capital firm,
and serves on the board of directors and advisory boards of several private
companies. Mr. Marshall holds engineering degrees from Carnegie Mellon
University and University of California, Irvine.
M. Bernard Puckett has served on our board of directors since April 2000.
From January 1996 to the present, Mr. Puckett has been a private investor. From
January 1994 to January 1996, Mr. Puckett was President and Chief Executive
Officer of Mobile Telecommunications Technologies. From April 1993 to December
1993, he was Senior Vice President of Corporate Strategy and Business
Development of IBM. From April 1991 to April 1993, he was General Manager of
IBM's Applications Solutions Group. From December 1988 to April 1991, Mr.
Puckett was President of IBM's Data Systems Division. Mr. Puckett is a director
of Software.com Inc., IMS Health, Inc. and P-Com, Inc. Mr. Puckett received his
Bachelor of Science in Mathematics from the University of Mississippi.
40
<PAGE> 45
BOARD OF DIRECTORS
Our board of directors currently consists of six members. We intend to
appoint another director to our board of directors prior to completion of this
offering. Our board of directors is divided into three classes, each serving
staggered three-year terms. Frank J. Marshall and M. Bernard Puckett have been
designated Class I Directors whose terms expire at the 2001 annual meeting of
stockholders. Steven F. Foster and Brion B. Applegate have been designated Class
II Directors, whose terms expire at the 2002 annual meeting of stockholders.
Clifford H. Young and John W. Combs have been designated Class III Directors,
whose terms expire at the 2003 annual meeting of stockholders. This
classification of our board of directors may delay or prevent a change in
control of our company or our management.
Our board of directors appoints our executive officers on an annual basis
to serve until their successors have been elected and qualified. There are no
family relationships among any of our board of directors or officers.
DIRECTOR COMPENSATION
Our directors do not currently receive any cash compensation from us for
their services as members of the Board of Directors, although they are
reimbursed for travel and lodging expenses in connection with attendance at
Board and Committee meetings. We have granted options to purchase 100,000 shares
of common stock with an exercise price of $.15 to Frank J. Marshall and options
to purchase 100,000 shares of common stock with an exercise price of $4.27 to M.
Bernard Puckett under our 1999 Stock Plan.
BOARD COMMITTEES
Our board of directors established the Compensation Committee and the Audit
Committee in April 2000.
Compensation Committee. The Compensation Committee reviews and recommends
to the Board of Directors the compensation and benefits of all our officers and
establishes and reviews general policies relating to compensation and benefits
of our employees. The Compensation Committee consists of Frank J. Marshall and
M. Bernard Puckett.
Audit Committee. The Audit Committee reviews our internal accounting
procedures and consults with and reviews the services provided by our
independent accountants. Currently, the Audit Committee consists of Frank J.
Marshall and M. Bernard Puckett.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the directors serving on the Compensation Committee has ever been
an officer or employee of InternetConnect. Prior to establishing the
Compensation Committee in April 2000, the Board of Directors as a whole
performed the functions delegated to the Compensation Committee. None of our
executive officers has served on a board of directors or on a compensation
committee of any other entity that had officers who served or will serve upon
the closing of this offering on our board of directors or on our Compensation
Committee.
41
<PAGE> 46
EXECUTIVE COMPENSATION
The following table indicates information concerning compensation of our
Chief Executive Officer and President for the fiscal year ended December 31,
1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS(#)
--------------------------- -------- ------- ------------
<S> <C> <C> <C>
Clifford H. Young(a)..................................... $102,346 -- 71,998
President and Chairman of the Board
John W. Combs(b)......................................... $ 67,308 -- 3,000,000
Chief Executive Officer and Director
</TABLE>
- -------------
(a) Mr. Young's base salary for 2000 is $175,000.
(b) Mr. Combs became Chief Executive Officer in September 1999. On an annual
basis, Mr. Comb's salary would have been $250,000.
EMPLOYMENT AGREEMENTS
In June 1999, we entered into an offer letter with Clifford H. Young, our
President and Chairman of the Board. The agreement entitles Mr. Young to a
salary of $150,000 per year, which will increase to $175,000 after the first
year, and to $200,000 after the second year. The agreement also entitles Mr.
Young to an incentive bonus to be established by our Board of Directors. If Mr.
Young is terminated without cause at any time during his first three years of
employment, he will receive severance benefits equal to salary and benefits due
from the date of termination through June 14, 2002 and the vesting of all
stockholdings.
In August 1999, we entered into an offer letter with John W. Combs, our
Chief Executive Officer. The agreement entitles Mr. Combs to a salary of
$250,000 per year. Mr. Combs was granted options to purchase 3,000,000 shares of
our common stock at an exercise price of $.15 per share. 12.5% of these options
vest on the six-month anniversary of the date of grant, and 2.1% vest each month
thereafter. Upon a change of control, 50% of any remaining unvested options will
vest. If Mr. Combs is involuntarily terminated within six months after a change
of control, then any remaining unvested options will vest. If Mr. Combs is
terminated by us without cause at any time, we will pay him 12 months salary and
benefits plus his annual bonus pro-rated through the date of termination and
provide him 12 months of additional vesting of his options.
In March 2000, we entered into an offer letter with Deanne M. Campbell, our
Chief Financial Officer. The agreement entitles Ms. Campbell to a salary of
$180,000 per year, which will increase to $200,000 30 days after the completion
of this offering. Ms. Campbell was granted an option to purchase 300,000 shares
of our common stock, which has an exercise price of $4.27 per share and which
vests 25% per year over four years. Ms. Campbell will receive a bonus of 40% of
her base salary, half of which will be paid quarterly based on the attainment of
specified goals. If Ms. Campbell is terminated without cause during the first 18
months of employment, then she will receive her salary, bonus and benefits for
up to one year or until she obtains employment elsewhere.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides summary information regarding stock options
granted to our Chief Executive Officer and President pursuant to our 1999
Executive Stock Plan during 1999.
42
<PAGE> 47
In 1999, we granted options to purchase up to an aggregate of 4,174,142
shares to employees, directors and consultants. These options were granted
pursuant to the 1999 Stock Plan and the 1999 Executive Stock Plan. These options
have a term of ten years.
The potential realizable values are based on an assumption that the price
of our common stock will appreciate at the compounded annual rate shown from the
date of grant until the end of the option term. These values do not take into
account amounts required to be paid as income taxes under the Internal Revenue
Code and any applicable state laws or option provisions providing for
termination of an option following termination of employment,
non-transferability or vesting. These amounts are calculated based on the
requirements promulgated by the Securities and Exchange Commission and do not
reflect our estimates of future stock price growth of the shares of our common
stock.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------ POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------------------
NAME GRANTED FISCAL YEAR(A) PER SHARE DATE 0% 5% 10%
---- ------------ -------------- --------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Clifford H. Young......... 71,998(a) 1.73% $.15 09/28/2009
John W. Combs............. 3,000,000(b) 71.92 .15 09/28/2009
</TABLE>
- -------------
(a) The options are immediately exercisable. Mr. Young also holds 7,786,625
shares of common stock.
(b) The options vest 12.5% after the first six months with the remainder vesting
2.1% per month.
OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE
The following table provides summary information concerning the shares of
common stock represented by outstanding stock options held by our named
executive officers as of December 31, 1999. No options were exercised by these
executive officers during 1999. Amounts described in the following table under
the heading "Value of Unexercised In-The-Money Options at December 31, 1999" are
based upon the fair market value of the common stock as of December 31, 1999,
which was $.15, as determined by the Board of Directors.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Clifford H. Young...................................... 71,998 -- -- --
John W. Combs.......................................... -- 3,000,000 -- --
</TABLE>
STOCK PLANS
1999 STOCK PLAN
Our 1999 Stock Option, Deferred Stock and Restricted Stock Plan (the "1999
Stock Plan") provides for the grant of qualified incentive stock options
("ISOs") that meet the requirements of Section 422 of the Internal Revenue Code,
stock options not so qualified ("NQSOs"), deferred stock and restricted stock
awards ("Awards"). Our board of directors adopted the 1999 Stock Plan in
September 1999 and our stockholders approved it in December 1999. We have
reserved a total of 5,750,000 shares of our common stock for issuance under the
1999 Stock Plan, which is subject to anti-dilution provisions for stock splits,
stock dividends, recapitalization and similar events.
The 1999 Stock Plan may be administered by our board of directors or a
committee appointed by our board of directors. The board of directors currently
administers the 1999 Stock Plan. The administrator of our
43
<PAGE> 48
1999 Stock Plan has the power to select participants among eligible persons and
to determine the terms of options or Awards. Under current law, ISOs may be
granted to any individual who is an officer or employee of InternetConnect or
any of its subsidiaries or any future subsidiaries.
The exercise price of any option granted under the 1999 Stock Plan is
payable in full in cash, or if approved by the administrator prior to exercise,
by surrender of shares of common stock already owned, cancellation of
indebtedness, a full recourse promissory note, withholding whole shares of
common stock then issuable upon exercise of an option, or any combination of the
foregoing.
Under the 1999 Stock Plan, we may make loans available to optionees,
subject the administrator's approval, in connection with the exercise of stock
options granted under the 1999 Stock Plan. If shares of common stock are pledged
as collateral for such indebtedness, such shares may be returned to us in
satisfaction of such indebtedness. If so returned, such shares shall again be
available for issuance in connection with future stock options and Awards under
the 1999 Stock Plan.
In the event of a change of control, unless otherwise determined by the
administrator or our board of directors, all stock options, restricted stock and
deferred stock will fully vest and any indebtedness will be forgiven. Pursuant
to the 1999 Stock Plan, a change of control is deemed to have occurred if any
person obtains beneficial ownership of 50% or more of the combined voting power
of outstanding securities, there is a change in our board of directors, there is
a merger or consolidation of the company or our stockholders approve a
liquidation of InternetConnect or an agreement to sell substantially all of our
assets.
Options and Awards granted under the 1999 Stock Plan are generally not
transferable by the optionee, and each option and Award is exercisable during
the lifetime of the optionee only by the optionee. Our board of directors may
from time to time revise or amend the 1999 Stock Plan, unless shareholder
approval is required, and may suspend or discontinue it at any time. Unless
terminated earlier, the 1999 Stock Plan will terminate automatically in
September 2009.
As of April 17, 2000, options to purchase 2,969,176 shares were outstanding
under the 1999 Stock Plan, at an average exercise price of $1.12 per share, none
of which had been exercised.
1999 EXECUTIVE STOCK PLAN
Our board of directors adopted our 1999 Executive Stock Option, Deferred
Stock and Restricted Stock Plan ("1999 Executive Stock Plan") in September 1999
and our stockholders approved it in December 1999. We have reserved a total of
3,250,000 shares of common stock for issuance under the 1999 Executive Stock
Option Plan. As of April 17, 2000, options to purchase at a total of 3,071,998
were outstanding at an average exercise price of $.15 per share, none of which
has been exercised. As of April 17, 2000, 178,002 shares remained available for
future grants to officers and directors. Unless terminated earlier, the 1999
Executive Stock Option Plan will terminate in September 2009.
The terms of the options issued under the 1999 Executives' Stock Plan are
generally the same as those which may be issued under the 1999 Stock Plan,
except that only our officers and directors are eligible to receive option
grants under the 1999 Executive Stock Option Plan.
2000 EMPLOYEE STOCK PURCHASE PLAN
Our Employee Stock Purchase Plan (the "2000 Purchase Plan") was adopted by
the board of directors and the stockholders in April 2000. The 2000 Purchase
Plan, which is intended to qualify under Section 423 of the Code, contains
consecutive, overlapping, twelve month offering periods. Each offering period
includes two six-month purchase periods. The offering periods generally start on
the first trading day on or after January 1 and July 1 of each year. The initial
offering period will commence on July 1, 2000. A total of 3,000,000 shares of
Common Stock have been reserved for issuance under the 2000 Purchase Plan, plus
annual increases equal to the lesser of (i) 1,000,000 shares, (ii) 1% of the
outstanding shares of common stock on such date, and (iii) such lesser amount as
may be determined by our board of directors.
44
<PAGE> 49
Employees are eligible to participate if they are customarily employed by
us or any designated subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, any employee who (i) immediately
after grant owns stock possessing 5.0% or more of the total combined voting
power or value of all classes of our capital stock or (ii) whose rights to
purchase stock under all our employee stock purchase plans accrue at a rate
which exceeds $25,000 worth of stock for each calendar year may not be granted
an option to purchase stock under the 2000 Purchase Plan.
The 2000 Purchase Plan permits participants to purchase common stock
through payroll deductions of up to 15.0% of the participant's "compensation."
Compensation is defined as the participant's base straight time gross earnings,
including commissions, payments for overtime, incentive bonuses and performance
bonuses. Amounts deducted and accumulated by the participant are used to
purchase shares of common stock at the end of each purchase period. The price of
stock purchased under the 2000 Purchase Plan is 85.0% of the lower of the fair
market value of the common stock at the beginning of the offering period or at
the end of the purchase period. The maximum number of shares a participant may
purchase during a single offering period is determined by dividing $25,000 by
the fair market value of a share of our common stock on the first day of the
offering period. In the event the fair market value at the end of a purchase
period is less than the fair market value at the beginning of the offering
period, the participants will be withdrawn from the current offering period
following exercise and automatically re-enrolled in a new offering period.
Participants may end their participation at any time during the offering period,
and they will be paid their payroll deductions to date. Participation ends
automatically upon termination of employment with us.
Rights granted under the 2000 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 2000 Purchase Plan. The 2000 Purchase Plan provides
that, in the event of our merger with or into another corporation or a sale of
all or substantially all of our assets, each outstanding option may be assumed
or substituted for by the successor corporation. If the successor corporation
refuses to assume or substitute for the outstanding options, the offering period
then in progress will be shortened and a new purchase date will be set so that
shares of common stock are purchased with the participant's accumulated payroll
deductions prior to the effective date of such transaction.
The board of directors has the authority to amend or terminate the 2000
Purchase Plan, except that no such action may adversely affect any outstanding
rights to purchase stock under the 2000 Purchase Plan, provided that the board
of directors may terminate an offering period on any exercise date if the Board
determines that the termination of the 2000 Purchase Plan is in our best
interests and that of our stockholders. Notwithstanding anything to the
contrary, the board of directors may in its sole discretion amend the 2000
Purchase Plan to the extent necessary and desirable to avoid unfavorable
financial accounting consequences by altering the purchase price for any
offering period, shortening any offering period or allocating remaining shares
among the participants. Unless sooner terminated by the board of directors, the
2000 Purchase Plan will terminate in April 2010.
45
<PAGE> 50
CERTAIN TRANSACTIONS
In June 1996, Clifford H. Young, our founder, received 872.456 membership
units in InternetConnect, LLC, our predecessor entity, as consideration for his
services in connection with founding and organizing InternetConnect, LLC. Mr.
Young's membership units were converted into an aggregate of 7,934,625 shares of
our common stock when InternetConnect, LLC merged into ICNT, Inc. in May 1999.
In October 1996, CDC Development Corporation assigned for no consideration
all rights, title and interest in the trademark INTERNETCONNECT to our
predecessor, InternetConnect, LLC. Clifford H. Young was an officer, director
and stockholder of CDC Development Corporation on the date of assignment.
In July 1999, we entered into a Founder's Stock Agreement with Mr. Young
that grants us a repurchase option with respect to the shares held by Mr. Young.
In the event of the termination of his employment because of certain specified
acts of gross negligence or misconduct, or voluntary termination, our repurchase
option enables us to repurchase, at $.01 per share, the number of Mr. Young's
shares that are subject to the repurchase option on the date of his termination.
Mr. Young's shares are released from our repurchase option over a three year
period according to the following schedule: 50% of such shares were released
from our repurchase option on July 16, 1999, and 2.8% of such total are released
from our repurchase option on the first day of each succeeding month, beginning
in August 1999. In addition, all shares are immediately released from our
repurchase option upon a change in control. This offering will not constitute
such a change in control. Currently 2,919,984 shares are subject to the
repurchase option.
In June 1999, Mr. Young loaned $174,400 to us which was secured by a
security agreement. We paid the note in full in July 1999.
On July 16, 1999, we sold our Series A Preferred Stock at a price of $.75
per share. Each share of Series A Preferred Stock is convertible into one share
of common stock. Purchasers included the following directors, 5% stockholders
and persons and entities affiliated with them:
<TABLE>
<CAPTION>
SHARES OF SERIES A
PURCHASER PREFERRED STOCK
--------- ------------------
<S> <C>
Crosspoint Venture Partners 1999, L.P. ..................... 6,666,667
Spectrum Equity Investors III, L.P. ........................ 6,208,000
SEI III Entrepreneurs' Fund, L.P. .......................... 194,000
SEI III Investment Managers' Fund, L.P. .................... 64,667
</TABLE>
Crosspoint Venture Partners 1999, L.P. is a holder of more than 5% of our
stock. Steven F. Foster, one of our directors, is a partner of Crosspoint
Venture Partners 1999, L.P. Spectrum Equity Investors III, L.P. is a holder of
more than 5% of our stock. Spectrum Equity Associates III, L.P. is a general
partner of Spectrum Equity Investors III, L.P., and Brion B. Applegate, one of
our directors, is a general partner of Spectrum Equity Associates III, L.P. SEI
III Entrepreneurs' Fund, LLC is a general partner of SEI III Entrepreneurs'
Fund, L.P., and Brion B. Applegate is a managing member of SEI III
Entrepreneurs' Fund, LLC. Brion B. Applegate is a general partner of SEI III
Investment Managers' Fund, L.P.
On December 21, 1999, we sold our Series B Preferred Stock at a price of
$.9852 per share. Each share of Series B Preferred Stock is convertible into one
share of common stock. Purchasers included the following directors, 5%
stockholders and persons and entities affiliated with them:
<TABLE>
<CAPTION>
SHARES OF SERIES B
PURCHASER PREFERRED STOCK
--------- ------------------
<S> <C>
Crosspoint Venture Partners 1999, L.P. ..................... 5,075,245
Spectrum Equity Investors III, L.P. ........................ 4,726,068
SEI III Entrepreneurs' Fund, L.P. .......................... 147,690
SEI III Investment Managers' Fund, L.P. .................... 49,230
</TABLE>
46
<PAGE> 51
On March 28, 2000, we sold to Cabletron Systems, Inc. 2,761,210 shares of
our Series C Preferred Stock at a price of approximately $2.72 per share. Each
share of Series C Preferred Stock is convertible into one share of common stock.
Cabletron Systems is a manufacturer of data networking hardware and software
used by our business. We agreed to issue and sell our shares of Series C
Preferred Stock to Cabletron Systems in exchange for products valued by the
Board of Directors at $7,500,000 (the aggregate purchase price of the Series C
Preferred Stock). Cabletron Systems is a holder of more than 5% of our stock.
On April 13, 2000, we sold our Series D Preferred Stock at a price of
approximately $8.52 per share. Each share of Series D Preferred Stock is
convertible into one share of common stock. Purchasers included the following
directors, 5% stockholders and persons and entities affiliated with them:
<TABLE>
<CAPTION>
SHARES OF SERIES D
PURCHASER PREFERRED STOCK
--------- ------------------
<S> <C>
Crosspoint Venture Partners 1999, L.P. ..................... 1,173,538
Spectrum Equity Investors III, L.P. ........................ 1,126,597
SEI III Entrepreneurs' Fund, L.P. .......................... 35,206
SEI III Investment Managers' Fund, L.P. .................... 11,737
Cabletron Systems, Inc. .................................... 441,388
Big Basin Partners, L.P. ................................... 117,354
M. Bernard Puckett.......................................... 29,338
</TABLE>
Frank J. Marshall, one of our directors, is a general partner of Big Basin
Partners, L.P. and a member of the Board of Directors of Covad Communications
Group, Inc., one of our primary suppliers of DSL circuitry.
In April 2000, we entered into a sales distribution agreement with Hello
Direct, Inc. John W. Combs, our Chief Executive Officer, is a member of the
Board of Directors of Hello Direct, Inc.
We believe that all transactions with affiliates described above were made
on terms no less favorable to us than could have been obtained from unaffiliated
third parties. Our policy is to require that a majority of independent and
disinterested outside directors on our Board of Directors approve all future
transactions between us and our officers, directors, principal stockholders and
their affiliates. These transactions will continue to be on terms no less
favorable to us than we could obtain from unaffiliated third parties.
47
<PAGE> 52
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of April 26, 2000, and as adjusted to reflect
the sale of shares in this offering and the conversion of all outstanding shares
of preferred stock into shares of common stock held by the following persons:
- each shareholder who we know to own beneficially more than 5% of our
common stock;
- each executive officer;
- each director; and
- all directors and executive officers as a group.
The number of shares of common stock outstanding after this offering
includes shares of common stock being offered for sale by us in this
offering. The percentage of beneficial ownership for the following table is
based on 45,349,243 shares of common stock outstanding as of April 26, 2000,
assuming automatic conversion of all outstanding shares of preferred stock into
common stock and conversion of all convertible notes and shares of
common stock outstanding after the completion of this offering, assuming no
exercise of the underwriters' over-allotment option.
Under the rules of the Securities and Exchange Commission, beneficial
ownership includes voting or investment power with respect to securities and
includes the shares issuable under stock options that are exercisable within 60
days after April 26, 2000. Shares issuable under stock options are deemed
outstanding for computing the percentage of the person holding options but are
not outstanding for computing the percentage of any other person.
Unless otherwise indicated, the address for each listed stockholders is:
c/o InternetConnect, Inc., 4499 Glencoe Avenue, Marina del Rey, California
90292. To our knowledge, except as indicated in the footnotes to this table and
under applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of common stock.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OUTSTANDING
----------------------
NUMBER OF SHARES BEFORE THE AFTER THE
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
------------------------------------ ------------------ ---------- ---------
<S> <C> <C> <C>
Crosspoint Venture Partners 1999, L.P.(a).................. 12,915,450 28.5%
18552 MacArthur Blvd., Suite 400
Irvine, California 92612
Spectrum Equity Investors III, L.P. ....................... 12,060,665 26.6%
333 Middlefield Road, Suite 200
Menlo Park, California 94025
Cabletron Systems, Inc..................................... 3,202,598 7.1%
35 Industrial Way
Rochester, New Hampshire 03887
Clifford H. Young(b)....................................... 7,858,623 17.3%
John W. Combs(c)........................................... 500,000 1.1%
Steven F. Foster........................................... -- --
Brion B. Applegate(d)...................................... 12,563,195 27.7%
Frank J. Marshall(e)....................................... 117,354 *
M. Bernard Puckett......................................... 29,338 *
All directors and executive officers as a group (6
persons)(f).............................................. 21,068,510 46.5%
</TABLE>
- -------------
* Indicates beneficial ownership of less than 1.0% of the common stock.
48
<PAGE> 53
(a) The general partner of Crosspoint Venture Partners 1999, L.P. is Crosspoint
Associates 1999. The general partners of Crosspoint Associates 1999 are John
Mumford, Rich Shapiro, Robert Hoff, Don Milder and Seth Neiman. Each of the
general partners of Crosspoint Associates 1999 disclaims beneficial
ownership of the shares held by Crosspoint Venture Partners 1999, L.P.,
except to the extent of his pecuniary interest in these shares.
(b) Includes 71,998 shares issuable upon exercise of an option which is
immediately exercisable and 2,919,984 shares subject to a repurchase option.
(c) Includes 500,000 shares issuable upon exercise of stock options exercisable
within 60 days of April 26, 2000. Does not include 2,500,000 shares not
exercisable within 60 days.
(d) Consists of 12,060,665 shares held by Spectrum Equity Investors III, 376,896
shares held by SEI III Entrepreneurs' Fund, and 125,634 shares held by
Spectrum III Investment Managers' Fund. Spectrum Equity Associates III, L.P.
is the general partner of Spectrum Equity Investors III, LP. Brion B.
Applegate is a general partner of Spectrum Equity Associates III, L.P. and
exercises voting power and investment power over Spectrum Equity Investors
III, L.P. SEI III Entrepreneurs' Fund LLC is the general partner of SEI III
Entrepreneurs' Fund, L.P. Brion B. Applegate is the managing member of SEI
III Entrepreneurs' Fund, LLC and exercises voting power and investment power
over SEI III Entrepreneurs' Fund L.P. Brion B. Applegate is a general
partner of SEI III Investment Managers' Fund, L.P. and exercises voting
power and investment power over such entity. He disclaims beneficial
ownership of the shares held by such entities except to the extent of his
proportionate interest therein.
(e) Represents shares held by Big Basin Partners, L.P., of which Mr. Marshall is
a general partner.
(f) Includes 500,000 shares issuable upon exercise of stock options exercisable
within 60 days of April 26, 2000.
49
<PAGE> 54
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, we will be authorized to issue
100,000,000 shares of common stock, $.001 par value per share, and 10,000,000
shares of undesignated preferred stock, $.001 par value per share. The following
is a summary of certain provisions of our capital stock, certificate of
incorporation and bylaws.
COMMON STOCK
As of April 26, 2000, assuming the conversion of all outstanding shares of
preferred stock into common stock and the conversion of all convertible notes,
there were 45,349,243 shares of common stock outstanding, which were held of
record by approximately 115 stockholders. In addition, as of April 26, 2000,
there were 600,341 shares subject to outstanding warrants and as of April 17,
2000, there were 6,041,174 shares of common stock subject to outstanding
options. Upon completion of this offering, there will be shares
of common stock outstanding, assuming no exercise of the underwriter's
over-allotment option nor any exercise of outstanding warrants and options.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably dividends, if any, as may be declared from time to
time by the board of directors out of funds legally available for that purpose.
In the event of our liquidation, dissolution or winding up of InternetConnect,
the holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior distribution rights of
preferred stock, if any, then outstanding. The common stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and non-assessable, and the shares of common
stock to be issued upon the closing of this offering will be fully paid and
non-assessable.
PREFERRED STOCK
As of April 26, 2000, we had four series of preferred stock including:
- 13,333,334 shares of Series A preferred stock;
- 10,150,490 shares of Series B preferred stock;
- 2,761,210 shares of Series C preferred stock; and
- 6,174,123 shares of Series D preferred stock.
Upon the closing of this offering, all outstanding shares of our preferred
stock will be automatically converted on a share by share basis into 32,419,157
shares of common stock. Thereafter, our board of directors has the authority,
without action by our stockholders, to issue up to 10,000,000 shares of
preferred stock in one or more series and to designate the rights, preferences
and privileges of each series, any or all of which may be greater than the
rights of the common stock. The effect of the issuance of any shares of
preferred stock upon the rights of holders of the common stock might include,
among other things, restricting dividends on the common stock, diluting the
voting power of the common stock, impairing the liquidation rights of the common
stock and delaying or preventing a change in control of InternetConnect without
further action by the stockholders. We have no plans to issue any shares of
preferred stock upon completion of this offering.
WARRANTS
At April 26, 2000, there were warrants outstanding to purchase a total of
600,341 shares of common stock.
REGISTRATION RIGHTS
The holders of 32,419,157 shares of common stock, which will be issued upon
automatic conversion of the preferred stock upon closing of this offering, are
entitled to certain rights with respect to registration of the
50
<PAGE> 55
shares under the Securities Act at any time after 180 days following the closing
of this offering. Under the terms of the agreements between us and the holders
of the registrable securities, by written consent of more than 50% of the
registrable securities then outstanding, the holders may require on two
occasions that we, at our expense, file a registration statement under the
Securities Act, with respect to the registrable securities. In addition, the
holders of at least 30% of the registrable securities then outstanding at any
time 12 months after the closing of this offering and at our expense, may
require that we register their shares for public resale on Form S-3 or similar
short-form registration, and provided further that the value of the securities
to be registered is at least $1.0 million. Furthermore, in the event we elect to
register any of our shares of common stock after this offering for purposes of
effecting any public offering, the holders of registrable securities are
entitled, at our expense, to include their shares of common stock in the
registration, subject to the right of the underwriters to reduce the number of
shares proposed to be registered in view of market conditions.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR CHARTER AND DELAWARE LAW
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make it more difficult to acquire us by means of a tender offer, a
proxy contest or otherwise and the removal of incumbent officers and directors.
These provisions, summarized below, are expected to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of us to first negotiate with us. We believe
that the benefits of increased protection of our potential ability to negotiate
with the proponent if an unfriendly or unsolicited proposal to acquire or
restructure us outweigh the disadvantages of discouraging takeover or
acquisition proposals because, among other things, negotiation of these
proposals could result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became an
interested stockholder, unless, with exceptions, the business combination or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. Generally, a business combination includes a merger, asset
or stock sale, or other transaction resulting in a financial benefit to the
interested stockholder. Generally, an interested stockholder is a person who,
together with affiliates and associates, owns, or within three years prior to
the determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision would be expected to
have an anti-takeover effect with respect to transactions not approved in
advance by the board of directors, including discouraging attempts that might
result in a premium over the market price for the shares of common stock held by
stockholders.
Our certificate of incorporation and bylaws require that any action
required or permitted to be taken by our stockholders must be effected at a duly
called annual or special meeting of the stockholders and may not be effected by
a consent in writing. In addition, special meetings of our stockholders may be
called only by the board of directors or certain of our officers. Our
certificate of incorporation and bylaws also provide that, beginning upon the
closing of this offering, our board of directors will be divided into three
classes, with each class serving staggered three-year terms, and that certain
amendments of the certificate of incorporation and of the bylaws require the
approval of holders of at least 66.7% of the voting power of all outstanding
stock. These provisions may have the effect of deterring hostile takeovers or
delaying changes in control or management of InternetConnect.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our restated certificate of incorporation provides that we will indemnify
our directors and officers to the fullest extent authorized by Delaware law, as
it now exists or may in the future be amended, against all expenses and
liabilities reasonably incurred in connection with the service for us or on our
behalf. The restated certificate of incorporation further provides that our
directors will not be personally liable for monetary damages to InternetConnect
for breaches of their fiduciary duty as directors, unless they acted in bad
faith or knowingly or intentionally violated the law. In addition,
InternetConnect plans to enter into indemnification agreements with its
directors containing provisions which may require InternetConnect, among other
things, to
51
<PAGE> 56
indemnify its directors against liabilities that may arise by virtue of their
status or service as directors, and to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified.
SECTION 2115 OF THE CALIFORNIA CORPORATIONS CODE
We are currently subject to Section 2115 of the California Corporations
Code. Section 2115 provides that, regardless of a company's legal domicile,
provisions of California corporate law relating to shareholder rights, election
and removal of directors and distributions to shareholders will apply to that
company if the company meets the requirements of Section 2115. We will not be
subject to Section 2115 if we are qualified for trading as a national market
security on the Nasdaq National Market, and we have at least 800 stockholders of
record as of the record date of our most recent annual meeting, or during any
income year, less than 50% of our outstanding voting securities are held of
record by persons having addresses in California.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is .
LISTING
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol of "INCN."
52
<PAGE> 57
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our
common stock. Future sales of substantial amounts of common stock in the public
market could adversely affect the market price of the common stock.
Upon completion of this offering, we will have outstanding
shares of common stock, which assumes
- the issuance of shares of common stock offered by us;
- no exercise of the underwriters' over-allotment option; and
- the conversion of all shares of preferred stock and convertible notes
outstanding as of April 26, 2000 into 32,444,157 shares of common stock
upon completion of this offering. All of the shares sold
in this offering will be freely tradable without restriction or further
registration under the Securities Act. If shares are purchased by our
"affiliates" as that term is defined in Rule 144 under the Securities
Act, their sales of shares would be subject to the limitations and
restrictions that are described below.
As of April 26, 2000, the remaining 12,905,086 shares of common stock held
by existing stockholders were issued and sold by us in reliance on exemptions
from the registration requirements of the Securities Act. Of these shares,
12,905,086 shares will be subject to lock-up agreements, described below, on the
date of this prospectus. In addition, holders of stock options could exercise
such options and sell certain of the shares issued upon exercise as described
below.
<TABLE>
<CAPTION>
APPROXIMATE SHARES
RELEVANT DATES ELIGIBLE FOR FUTURE SALE COMMENT
-------------- ------------------------ -------
<S> <C> <C>
On the date of this prospectus........... Freely tradable shares sold in this
offering
180 days after the date of this
prospectus............................. Initial public offering lock-up
expires; shares salable under Rule
144 or 701
</TABLE>
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this
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 other requirements regarding the
manner of sale, notice filing and the availability of current public information
about us.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the three months 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, notice
filing, volume limitation or notice provisions of Rule 144.
53
<PAGE> 58
Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately
upon the completion of this offering.
RULE 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchases shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of this offering is entitled to resell such shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with the holding period requirements or other restrictions contained in
Rule 701.
The Securities and Exchange Commission has indicated that Rule 701 will
apply to typical stock options granted by an issuer before it becomes subject to
the reporting requirements of the Securities Exchange Act, along with the shares
acquired upon exercise of such options, including exercises after the date of
this prospectus. Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions described above,
beginning 90 days after the date of this prospectus, may be sold by persons
other than "affiliates," as defined in Rule 144, subject only to the manner of
sale provisions of Rule 144 and by "affiliates" under Rule 144 without
compliance with its one-year minimum holding period requirement.
STOCK OPTIONS
As of April 17, 2000, there were a total of 6,041,174 shares of common
stock subject to outstanding options under our 1999 Stock Plans, 605,025 of
which were vested, and all of which are subject to lock-up agreements.
Immediately after the completion of the offering, we intend to file registration
statements on Form S-8 under the Securities Act to register all of the shares of
common stock issued or reserved for future issuance under our 1999 Stock Plan,
and our 1999 Executive Stock Plan. On the date 180 days after the effective date
of the offering, a total of shares of common stock subject to
outstanding options will be vested. After the effective dates of these
registration statements, shares purchased upon exercise of options granted under
the 1999 Stock Plan, as amended, and 1999 Executive Stock Plan would be
available for resale in the public market.
LOCK-UP AGREEMENTS
Our officers, directors and all of our stockholders, who hold an aggregate
of approximately shares of our common stock, on an as-converted
basis, have agreed not to offer, pledge, sell, contract to sell, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of our common stock or enter into any swap or
other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of any shares of our common stock or any
securities convertible into or exercisable or exchangeable for shares of our
common stock, for a period of 180 days after the date of this prospectus,
without the prior written consent of Morgan Stanley & Co. Incorporated, on
behalf of the underwriters.
Morgan Stanley & Co. Incorporated, on behalf of the underwriters, may in
its sole discretion choose to release any or all of these shares from these
restrictions prior to the expiration of either the 180-day period.
54
<PAGE> 59
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Bear, Stearns & Co. Inc. and Donaldson,
Lufkin & Jenrette Securities Corporation are acting as representatives, have
severally agreed to purchase, and we have agreed to sell to them, severally, the
number of shares indicated below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
Bear, Stearns & Co. Inc. ...................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
--------
Total.............................................
========
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from us and subject to prior sale. The underwriting
agreement provides that the obligations of the several underwriters to pay for
and accept delivery of the shares of common stock offered by this prospectus are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The underwriters are obligated to take and pay for all of the
shares of common stock offered by this prospectus, if any such shares are taken.
However, the underwriters are not required to take or pay for the shares covered
by the underwriters' over-allotment option described below.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the initial public offering price listed on the
cover page of this prospectus and part to certain dealers at a price that
represents a concession not in excess of $ a share under the initial
public offering price. Any underwriter may allow, and such dealers may re-allow,
a concession not in excess of $ a share to other underwriters or to
certain dealers. After the initial offering of the shares of common stock, the
offering price and other selling terms may from time to time be varied by the
representatives of the underwriters.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of
additional shares of common stock at the initial public offering
price listed on the cover page of this prospectus, less underwriting discounts
and commissions. The underwriters may exercise this option solely for the
purpose of covering over-allotments, if any, made in connection with the
offering of the shares of common stock offered by this prospectus. To the extent
this option is exercised, each underwriter will become obligated, subject to
limited conditions, to purchase approximately the same percentage of additional
shares of common stock as the number listed next to the underwriter's name in
the preceding table bears to the total number of shares of common stock listed
next to the names of all underwriters in the preceding table. If the
underwriters' option is exercised in full, the total price to the public would
be $ million, the total underwriters' discounts and commissions would
be $ million and total proceeds to us would be $ million.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "INCN."
55
<PAGE> 60
We, along with our directors, executive officers and all of our
stockholders, have agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated on behalf of the underwriters, we will not, during
the period ending 180 days after the date of this prospectus:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock, whether
these shares or any such securities are then owned by the person or are
thereafter acquired, directly from us; or
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of common
stock,
whether any transaction described above is to be settled by delivery of common
stock or such other securities, in cash or otherwise.
The restrictions described in this paragraph do not apply to:
- the sale of shares to the underwriters; or
- transactions by any person other than us relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own accounts. To cover over-allotments or to stabilize the price of the
common stock, the underwriters may bid for, and purchase, shares of common stock
in the open market. Finally, the underwriting syndicate may reclaim selling
concessions allowed to an underwriter or a dealer for distributing the common
stock in the offering if the syndicate repurchases previously distributed shares
of common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities and may
end any of these activities at any time.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to approximately shares of common stock
offered by this prospectus to our directors, officers, employees, customers and
other business associates. There can be no assurance that any of the reserved
shares will be purchased. The number of shares of common stock available for
sale to the general public will be reduced to the extent these parties purchase
the reserved shares. Any reserved shares that are not so purchased will be
offered by the underwriters to the general public on the same basis as the other
shares offered by this prospectus.
Morgan Stanley Dean Witter Equity Funding, Inc., an affiliate of Morgan
Stanley & Co. Incorporated, purchased 176,030 shares of our Series D preferred
stock at a price of approximately $8.52 per share in April 2000. BS-Metals B2B
Acquisition Corp., an affiliate of Bear, Stearns & Co. Inc., purchased 117,354
shares of our Series D preferred stock at a price of approximately $8.52 per
share in April 2000. Our Series D preferred stock will convert automatically
into an equivalent number of shares of common stock concurrently with the
consummation of our initial public offering.
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
56
<PAGE> 61
PRICING OF THIS OFFERING
Prior to this offering, there has been no public market for the shares of
common stock. The initial public offering price for the shares of common stock
offered by this prospectus was determined by negotiations between us and the
representatives of the underwriters. Among the factors considered in determining
the initial public offering price were:
- our record of operations, our current financial position and future
prospects;
- the experience of our management;
- sales, earnings and certain of our other financial and operating
information in recent periods; and
- the price-earnings ratios, price-sales ratios, market prices of
securities and financial and operating information of companies engaged
in activities similar to ours.
The estimated initial public offering price range set forth on the cover
page of this preliminary prospectus is subject to change as a result of market
conditions and other factors.
57
<PAGE> 62
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Kirkpatrick & Lockhart LLP, Los Angeles, California. Certain
legal matters will be passed upon for the underwriters by Gibson, Dunn &
Crutcher LLP, Los Angeles, California. A predecessor of Kirkpatrick & Lockhart
LLP holds a warrant to purchase 90,000 shares of common stock at an exercise
price of $1.00 per share and a warrant to purchase 33,000 shares of common stock
at an exercise price of $.15 per share.
EXPERTS
The financial statements as of December 31, 1998 and 1999 and for each of
the three years in the period ended December 31, 1999 included in this
prospectus have been so included in the 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 MORE INFORMATION ABOUT INTERNETCONNECT
We filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act for the shares of common stock in
this offering. This prospectus does not contain all of the information in the
registration statement and the exhibits and schedule that were filed with the
registration statement. For further information with respect to us and our
common stock, we refer you to the registration statement and the exhibits and
schedule that were filed with the registration statement. Any document we file
may be read and copied at the Commission's public reference room at 450 Fifth
Street, N.W., in Washington, D.C. 20549. Please call the Commission at
1-800-SEC-0330 for further information about the public reference room. Our
filings with the Commission are available to the public from the Commission's
Website at http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and, in
accordance with the requirements of the Securities Exchange Act will file
periodic reports, proxy statements and other information with the Commission.
These periodic reports, proxy statements and other information will be available
for inspection and copying at the regional offices, public reference facilities
and Website of the Commission referred to above.
58
<PAGE> 63
INTERNETCONNECT, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
FINANCIAL STATEMENTS:
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> 64
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
InternetConnect, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' equity (deficit) and cash flows present fairly, in
all material respects, the financial position of InternetConnect, Inc. (the
"Company") at December 31, 1998 and 1999, and the results of its operations and
its cash flows for each of the three 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 financial
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.
PricewaterhouseCoopers LLP
Woodland Hills, California
April 14, 2000 except for the subsequent events
described in Note 12, as to which
the date is April 26, 2000
F-2
<PAGE> 65
INTERNETCONNECT, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY
----------------- DECEMBER 31,
1998 1999 1999
----- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 69 $ 10,755
Restricted cash........................................... -- 350
Accounts receivable, net of allowance for doubtful
accounts of $0 (1998) and $44 (1999).................... 59 411
Inventories............................................... 16 1,986
Advances on inventory..................................... -- 5,514
Prepaid and other current assets.......................... 2 77
----- --------
Total current assets.................................... 146 19,093
Property and equipment, net................................. 148 3,509
Other assets................................................ 3 50
----- --------
Total assets............................................ $ 297 $ 22,652
===== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 138 $ 2,430
Accrued liabilities....................................... 5 662
Current portion of capital lease obligation............... 29 858
Current portion of convertible notes payable.............. -- 7,500
Deferred revenues......................................... 23... 268
----- --------
Total current liabilities............................... 195 11,718
Stock subscriptions payable................................. 45 --
Capital lease obligation, net of current portion............ 30 1,367
Product financing, net of discount.......................... -- 282
Convertible notes payable, net of current portion........... 10 275
----- --------
Total liabilities....................................... 280 13,642
----- --------
Commitments and contingencies (Note 8)
Mandatorily redeemable convertible preferred stock, no par
value; authorized -- 0 shares (1998) and 23,484 shares
(1999); issued and outstanding -- 23,484 shares (1999);
liquidation preference of $20,369 (1999).................. -- 20,369 --
Stockholders' equity (deficit):
LLC membership interests.................................. 575 -- --
Common stock, no par value; authorized -- 30,000 shares
(1998) and 50,000 shares (1999); issued and
outstanding -- 87 shares (1998) and 12,782 shares
(1999); pro forma -- $.001 par value; 100,000 shares
authorized; 36,407 shares issued and outstanding........ 145 1,438 $ 36
Stock subscriptions receivable............................ (75) -- --
Additional paid-in capital................................ -- 31,676 53,722
Deferred stock charges.................................... -- (19,129) (19,129)
Accumulated deficit....................................... (628) (25,344) (25,344)
----- -------- --------
Total stockholders' equity (deficit).................... 17 (11,359) $ 9,285
----- -------- ========
Total liabilities and stockholders' equity (deficit).... $ 297 $ 22,652
===== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 66
INTERNETCONNECT, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------ ------- --------
<S> <C> <C> <C>
Net revenue................................................. $ 173 $ 434 $ 2,265
Cost of revenue(1).......................................... 119 320 6,084
------ ------- --------
Gross profit (loss).................................... 54 114 (3,819)
Operating expenses:
Product development(2).................................... 40 100 719
Sales and marketing(3).................................... 90 227 4,828
General and administrative(4)............................. 110 223 3,169
Stock-based charges....................................... -- -- 12,711
------ ------- --------
Total operating expenses............................... 240 550 21,427
------ ------- --------
Loss from operations................................... (186) (436) (25,246)
------ ------- --------
Other income (expense):
Interest expense....................................... (12) (39) (173)
Interest income........................................ -- 1 143
Other income (expense)................................. -- (2) (67)
------ ------- --------
Total other expense.................................... (12) (40) (97)
------ ------- --------
Loss before provision for income taxes................. (198) (476) (25,343)
Provision for income taxes.................................. 1 1 1
------ ------- --------
Net loss............................................... (199) (477) (25,344)
Charges relating to mandatorily redeemable convertible
preferred stock:
Equity charge for beneficial conversion feature........ -- -- (10,000)
Accretion of preferred stock to redemption value....... -- -- (369)
------ ------- --------
Net loss attributable to common stockholders........... $ (199) $ (477) $(35,713)
====== ======= ========
Basic and diluted net loss per share attributable to common
stockholders.............................................. $ (.02) $ (.05) $ (3.98)
====== ======= ========
Weighted-average shares outstanding used to compute basic
and diluted net loss per share attributable to common
stockholders.............................................. 9,148 10,492 8,984
====== ======= ========
Pro forma basic and diluted net loss per share
(unaudited)............................................... $ (1.62)
========
Weighted-average shares outstanding used to compute pro
forma basic and diluted net loss per share (unaudited).... 15,626
========
</TABLE>
- -------------
(1) Includes stock-based charges of $142 in 1999.
(2) Excludes stock-based charges of $307 in 1999.
(3) Excludes stock-based charges of $9,746 in 1999.
(4) Excludes stock-based charges of $2,658 in 1999.
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 67
INTERNETCONNECT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT UNITS)
<TABLE>
<CAPTION>
LLC
MEMBERSHIP RETAINED
INTERESTS COMMON STOCK STOCK ADDITIONAL DEFERRED EARNINGS/
--------------- ---------------- SUBSCRIPTIONS PAID-IN STOCK ACCUMULATED
UNITS AMOUNT SHARES AMOUNT RECEIVABLE CAPITAL CHARGES (DEFICIT)
------ ------ ------ ------- ------------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996....... 1,000 $ 36 -- $ -- $ -- $ -- $ -- $ 48
Contributed capital.............. 39 195 -- -- -- -- -- --
Distribution of capital.......... -- (36) -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- -- (199)
------ ----- ------ ------- ---- ------- -------- --------
Balance at December 31, 1997....... 1,039 195 -- -- -- -- -- (151)
Contributed capital.............. 312 380 -- -- -- -- -- --
Issuance of common stock......... -- -- 87 145 (75) -- -- --
Net loss......................... -- -- -- -- -- -- -- (477)
------ ----- ------ ------- ---- ------- -------- --------
Balance at December 31, 1998....... 1,351 575 87 145 (75) -- -- (628)
Exercise of warrants............. -- -- 321 321 -- -- -- --
Issuance of common stock......... -- -- 385 667 75 -- -- --
Exchange of LLC membership
interests to convertible notes
in the C-Corporation........... (61) (300) -- -- -- -- -- --
Conversion of convertible notes
to equity...................... -- -- 305 305 -- -- -- --
Distribution of capital.......... -- (25) -- -- -- -- -- --
Exchange of LLC membership
interests to stock in the
C-Corporation upon merger...... (1,290) (250) 11,684 -- -- (378) -- 628
Beneficial conversion feature on
Series A and B preferred stock
(Note 9)....................... -- -- -- -- -- -- -- --
Stock-based charge relating to
convertible promissory note.... -- -- -- -- -- 9,593 -- --
Issuance of warrants for
services....................... -- -- -- -- -- 441 -- --
Accretion of preferred stock to
redemption values.............. -- -- -- -- -- (369) -- --
Deferred stock charges........... -- -- -- -- -- 22,389 (22,389) --
Amortization of deferred stock
charges........................ -- -- -- -- -- -- 3,260 --
Net loss......................... -- -- -- -- -- -- -- (25,344)
------ ----- ------ ------- ---- ------- -------- --------
Balance at December 31, 1999....... -- -- 12,782 1,438 -- 31,676 (19,129) (25,344)
Reincorporation into Nevada and
change in par value of common
stock (unaudited).............. -- -- -- (1,425) -- 1,425 -- --
Assumed conversion of mandatorily
redeemable convertible
preferred stock (unaudited).... -- -- 23,484 23 -- 20,346 -- --
Assumed conversion of convertible
notes payable (unaudited)...... -- -- 141 -- -- 275 -- --
------ ----- ------ ------- ---- ------- -------- --------
Balance at December 31, 1999, pro
forma (unaudited)................ -- $ -- 36,407 $ 36 $ -- $53,722 $(19,129) $(25,344)
====== ===== ====== ======= ==== ======= ======== ========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
Balance at December 31, 1996....... $ 84
Contributed capital.............. 195
Distribution of capital.......... (36)
Net loss......................... (199)
--------
Balance at December 31, 1997....... 44
Contributed capital.............. 380
Issuance of common stock......... 70
Net loss......................... (477)
--------
Balance at December 31, 1998....... 17
Exercise of warrants............. 321
Issuance of common stock......... 742
Exchange of LLC membership
interests to convertible notes
in the C-Corporation........... (300)
Conversion of convertible notes
to equity...................... 305
Distribution of capital.......... (25)
Exchange of LLC membership
interests to stock in the
C-Corporation upon merger...... --
Beneficial conversion feature on
Series A and B preferred stock
(Note 9)....................... --
Stock-based charge relating to
convertible promissory note.... 9,593
Issuance of warrants for
services....................... 441
Accretion of preferred stock to
redemption values.............. (369)
Deferred stock charges........... --
Amortization of deferred stock
charges........................ 3,260
Net loss......................... (25,344)
--------
Balance at December 31, 1999....... (11,359)
Reincorporation into Nevada and
change in par value of common
stock (unaudited).............. --
Assumed conversion of mandatorily
redeemable convertible
preferred stock (unaudited).... 20,369
Assumed conversion of convertible
notes payable (unaudited)...... 275
--------
Balance at December 31, 1999, pro
forma (unaudited)................ $ 9,285
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 68
INTERNETCONNECT, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1998 1999
----- ----- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $(199) $(477) $(25,344)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 11 33 522
Provision for doubtful accounts........................ -- -- 44
Advertising expense from product financing............. -- -- 282
Issuance of warrant for services....................... -- -- 441
Stock-based charges.................................... -- -- 12,853
Changes in current assets and liabilities:
Accounts receivable.................................. (10) (48) (396)
Inventories.......................................... -- (16) 16
Prepaid and other current assets..................... 61 (1) (122)
Accounts payable..................................... 15 116 2,292
Accrued liabilities.................................. -- 4 657
Deferred revenues.................................... -- 23 245
----- ----- --------
Net cash (used in) operating activities.............. (122) (366) (8,510)
----- ----- --------
INVESTING ACTIVITIES:
Purchases of property and equipment....................... (23) (69) (1,526)
----- ----- --------
Net cash (used in) investing activities.............. (23) (69) (1,526)
----- ----- --------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 70 1,018
Proceeds from issuance of mandatorily redeemable
convertible preferred stock............................ -- -- 20,000
Proceeds from issuance of convertible notes payable....... -- 10 269
Increase in restricted cash............................... -- -- (350)
Payments under capital lease obligation................... (2) (13) (190)
Proceeds from stock subscriptions......................... -- 45 --
Proceeds from contributed capital in LLC.................. 195 380 --
Repayments of contributed capital......................... (36) -- (25)
----- ----- --------
Net cash provided by financing activities......... 157 492 20,722
----- ----- --------
Net increase in cash and cash equivalents......... 12 57 10,686
Cash and cash equivalents at beginning of period............ -- 12 69
----- ----- --------
Cash and cash equivalents at end of period.................. $ 12 $ 69 $ 10,755
===== ===== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest............................................... $ 12 $ 39 $ 173
Income taxes........................................... $ 1 $ 1 $ 1
Supplemental disclosure of noncash transactions:
Equipment under capital leases............................ $ 18 $ 57 $ 2,356
Inventory and advances on inventory acquired under
convertible note payable............................... $ -- $ -- $ 7,500
Conversion of notes payable to common stock............... $ -- $ -- $ 305
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 69
INTERNETCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND BASIS OF PRESENTATION
InternetConnect, Inc. (the "Company") is a provider of broadband networking
solutions for small and medium sized businesses and branch locations of larger
enterprises. InternetConnect, LLC ("LLC") was formed as a California Limited
Liability Company in June 1996. ICNT, Inc., was incorporated in California in
October 1998. The LLC and ICNT, Inc. entered into an Agreement of Merger (the
"Merger Agreement") dated as of December 23, 1998, which was consummated on May
26, 1999. The LLC ceased operations in December 1998. The Company was
reincorporated in Nevada on April 13, 2000 under the name InternetConnect, Inc.
The Company's business is extremely competitive and is characterized by
rapid technological change, new product development and product obsolescence and
a competitive business environment for the attraction and retention of
personnel.
The accompanying financial statements have been prepared on the basis that
the Company will continue as a going concern. The Company has incurred
significant operating losses since inception of operations and has had negative
cash flows from operations. The Company has funded operations primarily through
debt borrowings and the sale of equity securities. Management believes that the
proceeds received through the sale of equity securities and debt borrowings (as
described in notes 5, 9 and 12) will be adequate to support the Company's
operations through May of 2001.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INITIAL PUBLIC OFFERING AND UNAUDITED PRO FORMA BALANCE SHEET
In April 2000, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission ("SEC") that
would permit the Company to sell shares of the Company's common stock in
connection with a proposed initial public offering ("IPO"). If the IPO is
consummated under the terms presently anticipated, upon the closing of the
proposed IPO, all of the then outstanding shares of the Company's mandatorily
redeemable convertible preferred stock and convertible notes payable will
automatically convert into shares of common stock. The conversion of the
mandatorily redeemable convertible preferred stock and convertible notes payable
have been reflected in the accompanying unaudited pro forma balance sheet as if
it had occurred on December 31, 1999.
USE OF ESTIMATES
In the normal course of preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Cash and cash
equivalents are carried at cost, which approximates fair value.
F-7
<PAGE> 70
INTERNETCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or
market.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
restricted cash, accounts receivable, accounts payable and amounts due under
capital leases and credit facilities are carried at cost, which approximates
their fair value because of the short-term nature of these instruments and the
relatively stable interest rate environment.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method based upon the estimated
useful lives of the assets of generally three to seven years. Leasehold
improvements and equipment under capital leases are depreciated over the shorter
of the estimated useful life or the term of the lease. Useful lives are
evaluated regularly by management in order to determine recoverability in light
of current technological conditions. Maintenance and repairs are charged to
expense as incurred while renewals and improvements are capitalized. Upon the
sale or retirement of property and equipment, the accounts are relieved of the
cost and the related accumulated depreciation, with any resulting gain or loss
included in the Statement of Operations.
LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate the carrying amount of such assets may not be
recoverable. Recoverability of these assets is determined by comparing the
forecasted undiscounted cash flows attributable to such assets to their carrying
value. If the carrying value of the assets exceeds the forecasted undiscounted
cash flows, then the assets are written down to their fair value. Fair value is
determined based on discounted cash flows or appraised values, depending upon
the nature of the assets. To date, there have been no such impairments.
REVENUE RECOGNITION
The Company derives most of its revenue from the sale of broadband
connectivity and related networking services. Revenue related to broadband
connectivity is recognized upon installation and related networking services are
recognized as the services are provided. Billings for amounts relating to future
periods are deferred and amortized over the related service periods. Revenue
from hardware sales is recognized upon installation.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees," and complies with the disclosure
requirements of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation." Under APB No. 25, compensation cost,
if any, is recognized over the respective vesting period based on the
difference, on the date of grant, between the fair value of the Company's common
stock and the grant price. The Company accounts for stock issued to non-
employees in accordance with the provisions of SFAS No. 123 and Emerging Issues
Task Force ("EITF") 96-18 "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services."
F-8
<PAGE> 71
INTERNETCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING
Advertising costs are expensed as incurred and amounted to $38,000, $98,000
and $3.6 million for the years ended December 31, 1997, 1998 and 1999,
respectively.
RESEARCH AND PRODUCT DEVELOPMENT
Costs incurred in the research and development of products are expensed as
incurred.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes.
Under this method, deferred tax liabilities and assets are determined based on
the difference between the financial statement and the tax bases of assets and
liabilities using enacted tax rates in effect for the period in which the
differences are expected to reverse.
Valuation allowances are established, when necessary, to reduce deferred
tax assets to the amount expected to be realized.
NET LOSS PER COMMON SHARE
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under
the provisions of SFAS No. 128 and SAB 98, basic net loss per share is computed
by dividing the net loss available to common stockholders for the period by the
weighted average number of shares of common stock outstanding during the period.
The calculation of diluted net loss per share gives effect to common stock
equivalents; however, potential common shares are excluded if their effect is
antidilutive. Potential common shares are composed of common stock subject to
repurchase rights and incremental shares of common stock issuable upon the
exercise of stock options and warrants and upon conversion of the convertible
notes payable and mandatorily redeemable convertible preferred stock into common
stock.
UNAUDITED PRO FORMA NET LOSS PER SHARE
Unaudited pro forma net loss per share for the year ended December 31,
1999, is computed by dividing the net loss for the period by the weighted
average number of shares of common stock outstanding, including the pro forma
effects of the automatic conversion of the convertible notes payable and
mandatorily redeemable convertible preferred stock into shares of common stock
effective at the time of the Company's initial public offering as if such
conversion occurred on January 1, 1999 or at the date of original issuance, if
later.
COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." Comprehensive income generally represents all changes in stockholders'
equity (deficit) during the period except those resulting from investments by,
or distributions to, stockholders. For the years ended December 31, 1997, 1998
and 1999, there were no such significant changes in stockholders' equity
(deficit) other than net loss amounts.
SEGMENT INFORMATION
In 1998, the Company adopted the provisions of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the way companies report information about operating
segments in interim and annual financial statements. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. The Company
F-9
<PAGE> 72
INTERNETCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
determined that it operated within one discrete reportable business segment for
the years ended December 31, 1997, 1998 and 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," SOP 98-1
requires that entities capitalize costs related to internal-use software once
certain criteria have been met. The Company adopted the SOP 98-1 effective
January 1, 1999. The adoption of the statement did not have a material effect on
the financial statements.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities." SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. The Company adopted the SOP 98-5
effective January 1, 1999. The implementation of SOP 98-5 did not have a
material effect on the financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), which provides additional guidance in applying generally accepted
accounting principles to revenue recognition in the financial statements. The
Company adopted SAB 101 retroactively for all periods presented and the
implementation of SAB 101 did not have a material effect on the financial
statements.
3. INVENTORIES
Inventories at December 31, 1998 and 1999 consisted of purchased finished
goods available for resale with a cost of $16,000 and $2.0 million,
respectively.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consists of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1999
---- ------
<S> <C> <C>
Equipment and software, including assets under capital
leases of $75 at 1998 and $2,431 at 1999.................. $174 $3,429
Furniture and fixtures...................................... 16 468
Leasehold improvements...................................... -- 176
---- ------
190 4,073
Less: Accumulated depreciation and amortization, including
amounts related to assets under capital leases of $17 at
1998 and $388 at 1999..................................... (42) (564)
---- ------
Total............................................. $148 $3,509
==== ======
</TABLE>
F-10
<PAGE> 73
INTERNETCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. DEBT
CONVERTIBLE NOTES PAYABLE
Convertible notes payable at December 31 consists of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1999
---- ------
<S> <C> <C>
10% Convertible subordinated note........................... $10 $ 10
10-12% Convertible subordinated notes....................... -- 265
6% Convertible promissory note.............................. -- 7,500
--- ------
Total............................................. $10 $7,775
=== ======
</TABLE>
In August 1998, the Company issued a convertible subordinated note (the
"Note") in exchange for $10,000. As defined in the agreement, the Note is
convertible into common stock at a conversion price of $1.00 per share upon the
occurrence of certain events, bears interest at 10% per annum and matures in
August 2003, if not converted.
During March through October of 1999, the Company issued seven convertible
notes (the "Notes") in exchange for $265,000. As defined in the agreement, the
Notes are convertible into common stock of the Company at a conversion price
ranging from $1.00 to $2.15 per share upon the occurrence of an IPO or a sale of
the Company, bear interest ranging from 10% to 12% per annum and mature from
March 2002 to May 2003, if not converted. In March 2000, $250,000 of convertible
promissory notes were converted into 116,279 shares of the Company's common
stock.
In November 1999, the Company issued a convertible promissory note in
exchange for advances to purchase inventory of $7.5 million. As defined in the
agreement, this promissory note is convertible into 2,761,210 shares of Series C
mandatorily redeemable convertible preferred stock (the "Series C Preferred
Stock") based on a conversion price of $2.7162 per share. This promissory note
bears interest at a rate of 6.0% per annum, with accrued interest payable on the
15th of each month, commencing January 1, 2000. During 1999, the Company
purchased product totaling $2.0 million in connection with the convertible
promissory note. During March 2000, this note was converted into 2,761,210
shares of Series C Preferred Stock (see Note 12). Under the product financing
agreement, the Company has the right to repurchase securities at the original
issuance price equal to the lesser of $3,500,000 or the unused inventory
advances at December 31, 2000. Since the Note was issued to a supplier from whom
the Company purchases inventory and has other sales and marketing arrangements,
the Company is accounting for this transaction under the provisions of EITF
96-18. Accordingly, the Company recorded the stock-based charge in the statement
of operations. For the year ended December 31, 1999, the total non-cash charge
was $9.6 million which was based on the deemed fair value of the Series C
Preferred Stock less the $2.7162 conversion price and multiplied by the
1,472,645 shares issuable under a fixed commitment to convert $4.0 million of
convertible promissory notes into Series C Preferred Stock. This non-cash charge
resulted in an increase in the Company's net loss per share for the year ended
December 31, 1999. The Company may incur further charges if additional inventory
purchases are made against unused advances on inventory through December 31,
2000.
F-11
<PAGE> 74
INTERNETCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. DEBT (CONTINUED)
The aggregate amount of required principal payments under the Company's
convertible notes payable at December 31, 1999 is as follows (in thousands):
<TABLE>
<S> <C>
2000........................................ $7,500
2001........................................ --
2002........................................ 250
2003........................................ 25
------
$7,775
======
</TABLE>
PRODUCT FINANCING
In September 1999, the Company entered into an agreement with a media
company for the right to purchase up to $20 million in advertising products
and/or services through December 31, 2001. As of December 31, 1999, $443,000 of
purchases were made by the Company under the terms of the agreement.
The agreement is a non-interest bearing credit facility which is being
discounted at 10%. Payments for amounts due under the agreement are payable in
three annual installments commencing on the fourth anniversary of the date of
the agreement. Accordingly, the amortized balance of the debt of $282,000, net
of $161,000 of discount, is classified as non-current product financing debt in
the balance sheet.
In the event the Company effects the IPO, the media company has a one-time
option, at the IPO date, to accept payment for the unpaid facility amount
representing purchases up to the IPO date in the form of (i) cash in three equal
installments commencing on the first anniversary of the effective date of the
IPO or (ii) exchange the unpaid facility amount at the IPO date (the "Exchanged
Facility Amount") for a five year warrant to purchase up to the number of shares
of the Company's common stock attainable by dividing amounts outstanding under
the credit facility up to the IPO date by the IPO price of the Company's common
stock. The exercise price of the warrant would be the IPO price of the Company's
common stock.
If the warrant exchange option is elected (in lieu of receiving cash
installments), after two years from the effective date of the IPO, a true up
will be performed. If the highest closing sales price of the Company's common
stock (during the period 180 days after the IPO and the two years following the
warrant's issuance date) multiplied by the number of warrants less the aggregate
exercise price equals or exceeds the Exchanged Facility Amount, no monies from
the Company are due to the media company. If the aforementioned calculation is
less than the Exchanged Facility Amount, then the Company will owe the
difference to the media company. This difference cannot exceed the Exchange
Facility Amount.
Since the warrants are contingently issuable upon the occurrence of an IPO,
no value has been recognized in the accompanying financial statements. When
issued, the warrants will be accounted for in accordance with EITF 96-18. The
then fair value of the warrants based on the Black-Scholes option pricing model,
if issued, will be recorded as a charge to the results of operations. In April
2000, the media company agreed to exchange the unpaid facility amount (at the
IPO date) for warrants as described above. Such election will not be effective
if the IPO effective date is later than August 1, 2000.
F-12
<PAGE> 75
INTERNETCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. DEBT (CONTINUED)
The required principal payments on the amount outstanding under the product
financing facility at December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
-----------------------
<S> <C>
2000.............................................. $ --
2001.............................................. --
2002.............................................. --
2003.............................................. 148
2004 and thereafter............................... 295
--------
$ 443
========
</TABLE>
6. INCOME TAXES
Through December 23, 1998, the Company operated as a California limited
liability company whose earnings and losses flowed to and were taxed solely at
the limited liability company member level. The Company's conversion from a
limited liability company to a C-Corporation did not have a material impact on
the Company's financial position or results of operations. The provision for
income taxes reflects the minimum California franchise tax for 1997, 1998 and
1999.
Deferred tax assets and liabilities at December 31, 1998 were not material.
The primary components of deferred tax assets and liabilities at December 31,
1999 are (in thousands):
<TABLE>
<CAPTION>
1999
-------
<S> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 4,521
Product financing......................................... 112
Accrued liabilities....................................... 55
Accrued vacation.......................................... 33
Allowance for doubtful accounts........................... 17
Other..................................................... 5
-------
4,743
Less: Valuation allowance................................... (4,724)
-------
19
Deferred tax liabilities:
Depreciation and amortization............................. (19)
-------
Net deferred tax assets..................................... $ --
=======
</TABLE>
Because management believes it is more likely than not that the deferred
tax assets will not be realized, a full valuation allowance has been
established. At December 31, 1999, the Company had federal and state net
operating loss carryforwards of approximately $11.8 million and $5.9 million
which begin to expire in 2019 and 2004, respectively. The Internal Revenue Code
of 1986, as amended, includes provisions which may limit the net operating loss
carryforwards available for use in any given year if certain events occur,
including changes in ownership. Utilization of the Company's net operating loss
carryforwards to offset future income may be limited.
F-13
<PAGE> 76
INTERNETCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. CONCENTRATION OF CREDIT RISK, SIGNIFICANT VENDORS AND SEGMENT REPORTING
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains its cash and cash equivalents with major
financial institutions; at times, such balances with any one financial
institution may exceed FDIC insurance limits. The Company's accounts receivable
are derived from revenue earned from customers located in the United States. The
Company extends differing levels of credit to customers and generally does not
require collateral. The Company maintains reserves for potential credit losses
based upon the expected collectibility of accounts receivable. To date, such
losses have been within management's expectations.
For the year ended December 31, 1999, the Company purchased inventory from
one supplier totalling $2.4 million, which accounted for 76.6% of all inventory
purchases.
The Company operates in one industry segment providing integrated broadband
access to the Internet. The Company's business operations are currently
conducted solely in the United States.
8. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its facilities and certain assets under noncancellable
leases through 2002, excluding various renewal options. The following are the
minimum lease payments under these leases (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ ------- ---------
<S> <C> <C>
2000...................................................... $1,079 $ 604
2001...................................................... 1,033 466
2002...................................................... 504 419
2003...................................................... -- 433
2004...................................................... -- 257
------ ------
Minimum lease payments...................................... 2,616 $2,179
======
Less: Amount representing interest.......................... 391
------
Present value of minimum lease payments..................... 2,225
Less: Current portion....................................... 858
------
Long-term portion........................................... $1,367
======
</TABLE>
Total rental expense pertaining to operating leases for the years ended
December 31, 1997, 1998 and 1999 was approximately $28,000, $41,000 and
$270,000, respectively.
LITIGATION
From time to time, the Company has been party to various litigation and
administrative proceedings relating to claims arising in the normal course of
business. Management believes that the resolution of these matters will not have
a material adverse effect on the Company's financial position, results of
operations or cash flows.
VENDOR AGREEMENTS
The Company has entered into services agreements with two of its DSL
circuitry providers. The Company has committed to purchase 50,000 and 15,000 DSL
lines through December 1, 2001 and March 8, 2001, respectively. If the Company
fails to meet these volume commitments, the Company is subject to
F-14
<PAGE> 77
INTERNETCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
penalties consisting of increased pricing on monthly service charges for
installed lines or additional payments based on the shortfall of actual compared
to committed lines.
9. CAPITALIZATION
LLC MEMBERSHIP INTERESTS AND COMMON STOCK
During 1997 and 1998, the LLC received total proceeds of $575,000 through
the issuance of Class A ($300,000) and Class B ($275,000) Capital Units. The
Class A units were issued with 14% preferred return rights. In January 1999,
pursuant to an exchange offer (the "Agreement") the Class A Units were exchanged
into 14% convertible subordinated notes of the Company which were convertible
into one share of the Company's common stock for each dollar of principal amount
of the note. In connection with the Agreement, the Company issued 387,000 shares
of common stock for $321,000. During September 1999, the 14% convertible
subordinated notes were converted into 305,000 shares of common stock. In May
1999, under the terms of the Merger Agreement (see Note 1) the Company issued to
the founding members of LLC 11,684,000 shares of common stock, based on the
conversion ratio of 9,094.5837 shares of common stock to each LLC membership
unit.
During 1998 and 1999, the Company completed a private placement offering
and issued 406,000 shares at $2.00 per share.
In July 1999, the Company entered into a founder's stock agreement with one
of the major shareholders which granted the Company a repurchase option on
7,786,625 shares. In the event of the termination of employment, the repurchase
option enables the Company to repurchase a specific number of shares over three
years according to the following schedule: 50% of such shares were released on
July 16, 1999, and 1/36 of such total are released from the repurchase option on
the first day of each succeeding month, beginning in August 1999. In addition,
all shares are immediately released from the repurchase option upon a change in
control. At December 31, 1999, 3,352,575 shares of common stock were subject to
repurchase.
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
Preferred stock at December 31, 1999 consisted of the following (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
ISSUANCE
SHARES SHARES VALUE PER REDEMPTION LIQUIDATION
SERIES AUTHORIZED OUTSTANDING SHARE AMOUNT AMOUNT
------ ---------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
A............................. 13,333 13,333 $0.7500 $10,367 $10,367
B............................. 10,151 10,151 0.9852 10,002 10,002
------ ------ ------- -------
Total......................... 23,484 23,484 $20,369 $20,369
====== ====== ======= =======
</TABLE>
In connection with the issuance of the Series B mandatorily redeemable
convertible preferred stock ("Preferred Stock") for $10.0 million in December
1999, the Company recorded additional paid in capital of $10.0 million offset by
a non-cash charge to equity relating to the beneficial conversion feature of the
Preferred Stock. This charge is calculated using the deemed fair value of common
stock on the commitment date for the issuance of the Preferred Stock,
subtracting the conversion price and then multiplying the resulting amount by
the number of shares of common stock (10,150,490) into which the shares of
Preferred Stock are convertible. This non-cash equity charge resulted in an
increase in the Company's net loss per share attributable to common stockholders
for the year ended December 31, 1999. There was no beneficial conversion feature
relating to the issuance of the Series A mandatorily redeemable convertible
preferred stock.
F-15
<PAGE> 78
INTERNETCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. CAPITALIZATION (CONTINUED)
The holders of the Preferred Stock have various rights and preferences as
follows:
Conversion
Each share of Preferred Stock shall be convertible, at the option of the
holder (and automatically on the effective date of an IPO), into fully paid and
nonassessable shares of common stock at the conversion rate. The conversion rate
is determined by dividing the original issue price by the conversion price, as
defined in the Company's Certificate of Incorporation, in effect on the date the
certificate is surrendered for conversion. Each share of Preferred Stock is
convertible into one share of the Company's common stock at December 31, 1999.
Each share of Preferred Stock will automatically convert into shares of
common stock, at the conversion price, as defined in the Certificate of
Incorporation, in effect at the time of the earlier of (i) a firm commitment
underwritten public offering, as defined in the Company's Certificate of
Incorporation, at a price not less than $5.00 per share and not less than $20
million aggregate, or (ii) the date specified by written consent or agreement of
the holders of 60% percent of the outstanding shares of such preferred series.
Dividends
Each share of Series A Preferred Stock and Series B Preferred Stock
provides for discretionary cumulative dividends of $.06 and $.078816 per share
per annum, respectively.
Voting
Each share of Preferred Stock is entitled to the number of votes equal to
the number of shares of common stock that could be converted on the date of the
vote.
Redemption
Upon receipt by the Company of a written request, as defined in the
Certificate of Incorporation, from the holders of a majority of the
then-outstanding Preferred Stock, the Company shall redeem each share of the
then-outstanding Preferred Stock at market value as defined in the Certificate
of Incorporation, but not less than the original issuance price, plus (i) an
amount equal to 8% per annum on the original per share issue price and (ii)
accrued dividends, if any. Such redemption shall be payable in three
installments, commencing on July 1, 2005 for Series A and December 1, 2005 for
Series B. If written request for repayment were made on July 1, 2005 and
December 31, 2005, for Series A and Series B, respectively, redemption amounts
for Series A and Series B would each be approximately $14.8 million.
Liquidation Preference
Upon liquidation, the holders of Series A and Series B would receive $.75
and $.9852 per share, respectively, plus any declared but unpaid dividends. If
at the time of liquidation the assets and funds to be distributed are
insufficient to permit the above disbursement, then the entire available assets
and funds shall be distributed ratably among the preferred stockholders. Upon
the completion of the above distribution, any remaining assets would be
distributed among the Series A and Series B stockholders and common stockholders
ratably, based on the number of shares held by each; with a maximum per share
amount of $.75 and $.9852, respectively.
F-16
<PAGE> 79
INTERNETCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTIONS AND WARRANTS
In September 1999, the Company adopted the 1999 Stock Option, Deferred
Stock and Restricted Stock Plan ("Plan") and the Executive Stock Option,
Deferred Stock and Restricted Stock Plan ("Executive Plan" and collectively,
"Plans").
Under the terms of the Plans, as amended in December 1999, options to
purchase 9,000,000 shares of common stock were reserved. As of December 31,
1999, 4,956,887 options to purchase shares of common stock were available for
future grant.
The Plans provide for the issuance of non-qualified and incentive stock
options to employees, non-employee members of the board of directors and
consultants. The exercise price per share is not to be less than 85% of the fair
market value per share of the Company's common stock on the date of grant for
non-qualified and 100% for incentive stock options. The purchase price, if
granted to an employee who owns 10% or more of the common stock, must be granted
at no less than 110% of the fair market value of the Company's common stock on
the date of grant. The Board of Directors has the discretion to determine the
vesting schedule. Options may be either immediately exercisable or in
installments, but generally vest over a four-year period from the date of grant.
In the event of a change in control, unless otherwise determined by the
Administrator or the Board of Directors, all stock options, restricted stock and
deferred stock will fully vest and any indebtedness will be forgiven. In the
event the holder ceases to be employed by the Company, all unvested options
terminate and all vested installment options may be exercised within an
installment period following termination. In general, options expire ten years
from the date of grant.
A summary of the status of the Company's stock options, as of December 31,
1999, is presented below (shares in thousands):
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
------ ---------
<S> <C> <C>
Outstanding at beginning of year............................ -- $ --
Granted -- price equals fair value........................ -- --
Granted -- price less than fair value..................... 4,174 .15
Exercised................................................. -- --
Cancelled................................................. (131) .15
----- ----
Outstanding at year-end..................................... 4,043 $.15
===== ====
Options exercisable at year-end............................. 176 $.15
===== ====
</TABLE>
The weighted-average deemed fair value of options granted to employees for
the year ended December 31, 1999 was $5.57 per share.
Additional information with respect to the outstanding options as of
December 31, 1999 is as follows (shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------- OPTIONS EXERCISABLE
NUMBER RANGE AND -------------------
OUTSTANDING AT WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
DECEMBER 31, REMAINING EXERCISE NUMBER EXERCISE
PRICE CONTRACTUAL LIFE PRICE OF SHARES PRICE
- -------------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
4,043 9.76 $.15 176 $.15
----- ---
</TABLE>
F-17
<PAGE> 80
INTERNETCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTIONS AND WARRANTS (CONTINUED)
In connection with its grants of options to employees and officers, the
Company recorded unearned deferred compensation of $22.4 million. This amount
will be amortized over the related vesting periods (generally four years). The
Company recognized compensation expense of $3.3 million relating to these stock
option grants during 1999.
Pursuant to the additional disclosure requirements of SFAS No. 123, the
fair values of options and warrants granted to directors, employees and officers
during 1999 were calculated on the respective grant dates using the minimum
value method using the following assumptions: (i) dividend yield of 0%, (ii)
expected volatility of 0%, (iii) weighted-average risk-free interest rate of
5.8% (iv) weighted-average expected life of four years, and (v) assumed
forfeiture rate of 0%. If the Company had elected to recognize compensation cost
based on the fair value at the date of grant, consistent with the method as
prescribed by SFAS No. 123, net loss for the year ended December 31, 1999 would
have changed to the pro forma amounts indicated below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
Net loss:
As reported........................................ $(25,344)
========
Pro forma.......................................... $(25,365)
========
Net loss attributable to common stockholders:
As reported........................................ $ (3.98)
========
Pro forma.......................................... $ (3.98)
========
</TABLE>
WARRANTS
During 1999, the Company issued warrants to purchase a total of 123,000
shares of common stock for services rendered by a law firm. The warrants issued
with exercise prices of $0.15 and $1.00 per share are fully vested,
non-forfeitable and are immediately exercisable and expire in 2004. The fair
value of warrants was determined using a Black-Scholes option pricing model and
resulted in a non-cash charge of approximately $441,000, which was recognized as
expense during the year ended December 31, 1999.
11. NET LOSS PER SHARE
As discussed in Note 1, the Company changed its legal structure from a
limited liability company to a C-Corporation. Accordingly, the historical net
loss per share for the periods prior to conversion have been presented as if the
Company had been a C-Corporation.
F-18
<PAGE> 81
INTERNETCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. NET LOSS PER SHARE (CONTINUED)
The following table sets forth the computation of basic, diluted and pro
forma net loss per share for the years ended December 31 (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ --------
<S> <C> <C> <C>
Historical presentation
Numerator:
Net loss.................................................. $ (199) $ (477) $(25,344)
Charges relating to mandatorily redeemable convertible
preferred stock:
Equity charge for beneficial conversion feature........ -- -- (10,000)
Accretion of redemption value on convertible preferred
stock................................................ -- -- (369)
------ ------ --------
Net loss attributable to common stockholders.............. $ (199) $ (477) $(35,713)
====== ====== ========
Denominator:
Weighted average shares................................... 9,148 10,492 12,337
Common shares subject to repurchase....................... -- -- (3,353)
------ ------ --------
Adjusted weighted average shares.......................... 9,148 10,492 8,984
====== ====== ========
Basic and diluted net loss per share attributable to common
stockholders.............................................. $ (.02) $ (.05) $ (3.98)
====== ====== ========
Pro forma presentation
Numerator:
Net loss attributable to common stockholders.............. $(35,713)
Charges relating to mandatorily redeemable convertible
preferred stock:
Equity charge for beneficial conversion feature........ 10,000
Accretion of redemption value on convertible preferred
stock................................................ 369
--------
$(25,344)
========
Denominator:
Shares used above......................................... 8,984
Weighted average effect of pro forma conversion of
securities (unaudited):
Series A mandatorily redeemable convertible preferred
stock................................................ 6,137
Series B mandatorily redeemable convertible preferred
stock................................................ 278
Convertible notes payable.............................. 227
--------
Denominator for pro forma basic and diluted calculation
(unaudited)............................................... 15,626
========
Pro forma basic and diluted net loss per share
(unaudited)............................................... $ (1.62)
========
</TABLE>
F-19
<PAGE> 82
INTERNETCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. NET LOSS PER SHARE (CONTINUED)
The following table sets forth common stock equivalents (potential common
stock) that are not included in the diluted net loss per share attributable to
common stockholders calculation above because their effect would be antidilutive
for the periods indicated (in thousands):
<TABLE>
<CAPTION>
1999
------
<S> <C>
Series A preferred stock.................................... 13,333
Series B preferred stock.................................... 10,151
Common shares subject to repurchase......................... 3,353
Convertible notes payable................................... 2,902
Warrants.................................................... 123
Stock options............................................... 4,043
------
33,905
======
</TABLE>
12. SUBSEQUENT EVENTS
In March 2000, the Company issued 2,761,210 shares of mandatorily
redeemable convertible Series C preferred stock upon the conversion of the $7.5
million convertible note payable (see Note 5) at $2.7162 per share.
During the three months ended March 31, 2000, the Company granted stock
options to employees and non-employee directors and will continue to grant
options under the Plan and the Executive Plan. The Company recorded unearned
deferred compensation of approximately $19.6 million as a result of such grants
of stock options with exercise prices per share below the deemed fair value per
share of common stock at the dates of grant.
In March 2000, the Company entered into a ten year lease agreement for its
new headquarter facilities. The Company has committed to issue five-year
warrants to purchase shares of the Company's common stock in the event that the
Company completes its IPO. The aggregate number of shares of common stock
issuable upon exercise of the warrants is the product of $1.0 million divided by
the IPO price of the Company's common stock. When issued, the Company will
record additional rent expense based on the fair value of the warrants.
In March 2000, the Company entered into a strategic relationship and
agreement with a third party. Under the terms of the agreement, the Company has
committed to purchase a minimum of $41.8 million of data transport facilities
and other services from the third party over the 20 year term of the agreement.
In April 2000, the Company purchased $10.0 million of indefeasible rights of use
of certain fiber optic circuits against the commitment. In addition, the third
party has committed to offer the Company's DSL and private network services to
its customers and to sell 2,000 InternetConnect DSL lines within a three-year
period. The third party invested $5.0 million in the Company's Series D
Preferred Stock financing. The Company has agreed to jointly market to the third
party's dial-up customer base. The two companies will also sublease collocation
facilities from each other for terms ranging from five to eleven years.
In April 2000, the Company issued 6,174,123 shares of mandatorily
redeemable convertible Series D Preferred Stock for approximately $52.6 million
at $8.52124 per share. In connection with the issuance of the Series D Preferred
Stock, the Company expects to incur substantial non-cash charges relating to the
beneficial conversion features on the preferred stock issuances.
In April 2000, the Company entered into a 3-year $7.5 million equipment
lease facility, which will be increased to $22.5 million upon completion of an
IPO by August 31, 2000, with a vendor. The Company also has the ability to
receive $2.5 million as a bridge loan. Amounts borrowed under the bridge loan
bear interest
F-20
<PAGE> 83
INTERNETCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENTS (CONTINUED)
at 12% per annum, however, no interest will be due if, on or before March 29,
2001, the market value of the Company's common stock exceeds $27.50 per share.
All amounts borrowed must be repaid by March 30, 2001. This loan and lease
facility is primarily secured by all equipment leased from the vendor under the
agreement. In connection with this arrangement, the Company issued warrants to
the vendor to purchase up to 117,371 shares of common stock at an exercise price
of $8.52 per share. The Company estimated the fair value of these warrants as
$1.5 million using the Black-Scholes option pricing model and will amortize this
charge over the life of the lease facility as additional interest expense.
In April 2000, the Company and a supplier agreed to enter into a $25.0
million secured credit facility. Amounts borrowed under this facility will bear
interest at the rate of 12% per annum. All amounts borrowed are to be repaid the
earlier of five days following the closing of an effective IPO or March 30,
2001. The Company also issued to this vendor warrants to purchase up to 293,384
shares of common stock at an exercise price of $8.52 per share. The Company
estimated the fair value of these warrants as $2.4 million using the
Black-Scholes option pricing model and will amortize this charge over the life
of the credit facility as additional interest expense.
In April 2000, the Board approved the Employee Stock Purchase Plan, under
which 3,000,000 shares of the Company's common stock were reserved for issuance
which will become effective upon completion of the IPO, plus annual increases
equal to the lesser of (i) 1,000,000 shares, (ii) 1% of the outstanding shares
of common stock on such date, and (iii) such lesser amount as may be determined
by the Board. Unless sooner terminated by the Board, the Plan will terminate in
March 2010.
F-21
<PAGE> 84
[INSIDE BACK COVER]
[ARTWORK TO BE INSERTED]
[LOGO]
[OUTSIDE BACK COVER -- TO BE DISCUSSED]
<PAGE> 85
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of common stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $26,400
NASD filing fee............................................. $
Nasdaq National Market listing fee.......................... $
Printing and engraving costs................................ $
Legal fees and expenses..................................... $
Accounting fees and expenses................................ $
Blue Sky fees and expenses.................................. $
Directors and Officers Insurance............................ $
Transfer Agent and Registrar fees........................... $
Miscellaneous expenses...................................... $
-------
Total.................................................. $
=======
</TABLE>
ITEM 14 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Nevada Corporation Law provides for indemnification by a corporation of
its directors and officers. Our amended and restated certificate of
incorporation provides for the indemnification of directors and officers to the
fullest extent permissible under Nevada law. Our bylaws provide for the
indemnification of officers, directors and third parties acting on behalf of
InternetConnect, Inc., if, as required under Nevada law, such person acted in
good faith and in a manner reasonably believed to be in and not opposed to our
best interest, and, with respect to any criminal action or proceeding, the
indemnified such person had no reason to believe his or her conduct was
unlawful.
We have entered into indemnification agreements with our directors and
executive officers, in addition to indemnification provided for in our bylaws,
and intend to enter into indemnification agreements with any new directors and
executive officers in the future. The indemnification agreements may require us,
among other things, to indemnify our directors and officers against certain
liability that may arise by reason of their status or service as directors and
officers (other than liabilities arising from willful misconduct of a culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to obtain directors and
officers' insurance, if available on reasonable terms.
Reference is also made to Section of the form of Underwriting Agreement
contained in Exhibit 1.1 hereto, indemnifying officers and directors of
InternetConnect, Inc. against certain liabilities.
ITEM 15 RECENT SALES OF UNREGISTERED SECURITIES
Since inception, we have issued unregistered securities to the persons, as
described below. None of these transactions involved any underwriters,
underwriting discounts or commissions, or any public offering, and we believe
that each transaction was exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof, Regulation D promulgated
thereunder or Rule 701 pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients of
securities in
II-1
<PAGE> 86
each such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with us, or otherwise, to
information about us.
(1) Pursuant to an exchange offer beginning October 31, 1998 and
ending June 1, 1999, we issued an aggregate of $305,000 in 14% convertible
subordinated notes, 66,063 shares of our common stock and an aggregate of
900,000 warrants to purchase an aggregate of 900,000 shares of common stock
at an exercise price of $1.00 per share.
(2) From the period beginning October 31, 1998 and ending June 1,
1999, we issued an aggregate of 320,917 shares of common stock pursuant to
the exercise of the warrants referred to in paragraph (1) above at an
exercise price of $1.00 per share.
(3) In September 1999, we issued an aggregate of 305,000 shares of our
common stock to certain investors pursuant to the conversion of the 14%
convertible subordinated notes with a conversion of one share for each
$1.00 principal amount of note.
(4) From the period beginning November 2, 1998 and ending June 1,
1999, we issued and sold an aggregate of 406,000 shares of our common stock
at $2.00 per share to employees, consultants and certain investors for an
aggregate purchase price of $812,000.
(5) In July 1999, we sold an aggregate of 13,333,334 shares of our
Series A Preferred Stock for $0.75 per share to a group of private
investors for an aggregate purchase price of $10,000,000.
(6) In March 2000, we issued an aggregate of 116,279 shares of our
common stock to certain investors pursuant to the conversion of notes with
a conversion price of one share for each $2.15 principal amount of note.
The notes were issued in March 1999.
(7) In December 1999, we sold an aggregate of 10,150,490 shares of our
Series B Preferred Stock for $0.9852 per share to a group of private
investors for an aggregate purchase price of $10,000,000.
(8) In March 2000, we issued an aggregate of 2,761,210 shares of our
Series C Preferred Stock for $2.7162 per share to a certain investor, which
was paid through the conversion of a $7,500,000 convertible promissory
note. The convertible promissory note was issued in November 1999.
(9) In April 2000, we sold an aggregate of 6,174,123 shares of our
Series D Preferred Stock for $8.52124 per share to a group of private
investors for an aggregate purchase price of $52,611,184.
II-2
<PAGE> 87
ITEM 16 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement
2.1* Agreement and Plan of Merger of ICNT, Inc. (a California
corporation) and InternetConnect, Inc. (a Nevada
corporation)
2.2* Agreement and Plan of Merger of InternetConnect, Inc. (a
Delaware Corporation) and InternetConnect, Inc. (a Nevada
Corporation)
3.1* Amended and Restated Certificate of Incorporation
3.2* Bylaws of the Registrant
4.1* Specimen Common Stock Certificate
4.2 Warrant to Purchase Shares of Common Stock, dated June 1,
1999, between the Registrant and Freshman, Marantz,
Orlanski, Cooper & Klein
4.3 Warrant to Purchase Shares of Common Stock, dated December
1, 1999, between the Registrant and Freshman, Marantz,
Orlanski, Cooper & Klein
4.4 Warrant to Purchase Shares of Common Stock, dated January 6,
2000, between the Registrant and Cary Sacks
4.5 Warrant to Purchase Shares of Common Stock, dated February
23, 2000, between the Registrant and Howard Fisher
4.6 Warrant to Purchase Shares of Common Stock, dated March 28,
2000, between the Registrant and Kevin Herbert
4.7 Warrant to Purchase Shares of Common Stock, dated March 28,
2000, between the Registrant and Howard Fisher
4.8 Warrant to Purchase Shares of Common Stock, dated April 2,
2000, between the Registrant and Michael Robert
5.1* Opinion of Kirkpatrick & Lockhart LLP
10.1 1999 Stock Option, Deferred Stock and Restricted Stock Plan
10.1(a)* Amendment No. 1 to 1999 Stock Option, Deferred Stock and
Restricted Stock Plan
10.2 1999 Executive Stock Option, Deferred Stock and Restricted
Stock Plan
10.3* 2000 Employee Stock Purchase Plan
10.4 Series A Stock Purchase Agreement, dated July 16, 1999, by
and among the Registrant and Investors listed on Exhibit A
thereto
10.5 Founder's Stock Purchase Agreement, dated July 16, 1999, by
and between the Registrant and Clifford H. Young
10.6 Series B Stock Purchase Agreement, dated December 21, 1999,
by and among the Registrant and Investors listed on Exhibit
A thereto
10.7 Series C Stock Purchase Agreement, dated March 28, 2000, by
and among the Registrant and Cabletron Systems, Inc.
10.8 Series D Stock Purchase Agreement, dated April 13, 2000, by
and among the Registrant and Investors listed on Exhibit A
thereto
10.9 Third Restated Investors Rights Agreement, dated April 13,
2000, by and among the Registrant and Investors listed on
Exhibit A thereto
10.10 Third Restated Shareholders Agreement, dated April 13, 2000,
by and among the Registrant and Investors listed on Exhibit
A thereto
</TABLE>
II-3
<PAGE> 88
<TABLE>
<C> <S>
10.11 Offer Letter from Registrant to John W. Combs dated August
2, 1999
10.12 Offer Letter from Registrant to Clifford H. Young dated June
14, 1999
10.13* Form of Indemnification Agreement between the Registrant and
its directors and its executive officers
10.14* Lease Agreement by and between the Registrant and Cisco
Systems Capital Corporation.
10.15* Services Agreement between the Registrant and Covad
Communications Company, dated March 16, 1999.
10.16* XDSL Joint Market Development Agreement dated March 8, 1999,
between the Registrant and NorthPoint Communications, Inc.
10.17* Master Purchase Agreement dated March 31, 2000 by and
between Winstar Wireless, Inc. and the Registrant
10.18* Business Lease between Registrant and Spieker Properties,
L.P., dated March 19, 1999
10.19* First Amendment to Business Lease between the Registrant and
Spieker Properties L.P., dated July 22, 1999
10.20* Office Lease dated March 30, 2000 between the Registrant and
20770 Madrona, LLC
10.21* Eller Outdoor Advertising Agreement dated September 1999
between the Registrant and Eller Media Company
23.1 Consent of PricewaterhouseCoopers LLP
23.2* Consent of Kirkpatrick & Lockhart LLP (contained in exhibit
5.1)
24.1 Power of attorney (included on signature page of
Registration Statement)
27 Financial Data Schedules
</TABLE>
- ---------------
* To be filed by Amendment.
(b) FINANCIAL STATEMENT SCHEDULES
All such schedules have been omitted because the information required to be
set forth therein is not applicable or is shown in the financial statements or
notes thereto.
ITEM 17 UNDERTAKINGS
We hereby undertake 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 by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. 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 director,
officer or controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE> 89
We hereby undertake that:
1. For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 90
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on the 26th day of April, 2000.
InternetConnect, Inc.
By: /s/ CLIFFORD H. YOUNG
------------------------------------
Clifford H. Young
Chairman of the Board and President
POWER OF ATTORNEY
We, the undersigned officers and directors of InternetConnect, Inc. do
hereby constitute and appoint Clifford H. Young, John W. Combs or Deanne M.
Campbell, or either of them, our true and lawful attorneys and agents, to do any
and all acts and things in our names in the capacities indicated below, which
said attorneys and agents, or either of them, may deem necessary or advisable to
enable said corporation to comply with the Securities Act of 1933, as amended,
and any rules, regulations, and requirements of the Securities and Exchange
Commission, in connection with this Registration Statement, including
specifically, but without limitation, power and authority to sign for us or any
of us in our names and in the capacities indicated below, any and all amendments
(including any post-effective amendment) to this Registration Statement, or any
related registration statement that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, as amended; and we do hereby
ratify and confirm all that the said attorneys and agents, or either of them,
shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ CLIFFORD H. YOUNG Chairman of the Board and April 26, 2000
- --------------------------------------------------- President
Clifford H. Young
/s/ JOHN W. COMBS Chief Executive Officer April 26, 2000
- --------------------------------------------------- (Principal Executive Officer) and
John W. Combs Director
/s/ DEANNE M. CAMPBELL Chief Financial Officer April 26, 2000
- --------------------------------------------------- (Principal Financial and
Deanne M. Campbell Accounting Officer)
/s/ STEVEN F. FOSTER Director April 26, 2000
- ---------------------------------------------------
Steven F. Foster
/s/ BRION B. APPLEGATE Director April 26, 2000
- ---------------------------------------------------
Brion B. Applegate
</TABLE>
II-6
<PAGE> 91
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ FRANK J. MARSHALL Director April 26, 2000
- ---------------------------------------------------
Frank J. Marshall
/s/ M. BERNARD PUCKETT Director April 26, 2000
- ---------------------------------------------------
M. Bernard Puckett
</TABLE>
II-7
<PAGE> 92
EXHIBIT INDEX
<TABLE>
<S> <C>
1.1* Form of Underwriting Agreement
2.1* Agreement and Plan of Merger of ICNT, Inc. (a California
corporation) and InternetConnect, Inc. (a Nevada
corporation)
2.2* Agreement and Plan of Merger of InternetConnect, Inc. (a
Delaware Corporation) and InternetConnect, Inc. (a
California Corporation)
3.1* Amended and Restated Certificate of Incorporation
3.2* Bylaws of the Registrant
4.1* Specimen Common Stock Certificate
4.2 Warrant to Purchase Shares of Common Stock, dated June 1,
1999, between the Registrant and Freshman, Marantz,
Orlanski, Cooper & Klein
4.3 Warrant to Purchase Shares of Common Stock, dated December
1, 1999, between the Registrant and Freshman, Marantz,
Orlanski, Cooper & Klein
4.4 Warrant to Purchase Shares of Common Stock, dated January 6,
2000, between the Registrant and Cary Sacks
4.5 Warrant to Purchase Shares of Common Stock, dated February
23, 2000, between the Registrant and Howard Fisher
4.6 Warrant to Purchase Shares of Common Stock, dated March 28,
2000, between the Registrant and Kevin Herbert
4.7 Warrant to Purchase Shares of Common Stock, dated March 28,
2000, between the Registrant and Howard Fisher
4.8 Warrant to Purchase Shares of Common Stock, dated April 2,
2000, between the Registrant and Michael Robert
5.1* Opinion of Kirkpatrick & Lockhart LLP
10.1 1999 Stock Option, Deferred Stock and Restricted Stock Plan
10.1(a)* Amendment No. 1 to 1999 Stock Option, Deferred Stock and
Restricted Stock Plan
10.2 1999 Executive Stock Option, Deferred Stock and Restricted
Stock Plan
10.3* 2000 Employee Stock Purchase Plan
10.4 Series A Stock Purchase Agreement, dated July 16, 1999, by
and among the Registrant and Investors listed on Exhibit A
thereto
10.5 Founder's Stock Purchase Agreement, dated July 16, 1999, by
and between the Registrant and Clifford H. Young
10.6 Series B Stock Purchase Agreement, dated December 21, 1999,
by and among the Registrant and Investors listed on Exhibit
A thereto
10.7 Series C Stock Purchase Agreement, dated March 28, 2000, by
and among the Registrant and Cabletron Systems, Inc.
10.8 Series D Stock Purchase Agreement, dated April 13, 2000, by
and among the Registrant and Investors listed on Exhibit A
thereto
10.9 Third Restated Investors Rights Agreement, dated April 13,
2000, by and among the Registrant and Investors listed on
Exhibit A thereto
10.10 Third Restated Shareholders Agreement, dated April 13, 2000,
by and among the Registrant and Investors listed on Exhibit
A thereto
10.11 Offer Letter from Registrant to John W. Combs dated August
2, 1999
</TABLE>
<PAGE> 93
<TABLE>
<S> <C>
10.12 Offer Letter from Registrant to Clifford H. Young dated June
14, 1999
10.13* Form of Indemnification Agreement between the Registrant and
its directors and its executive officers
10.14* Lease Agreement by and between the Registrant and Cisco
Systems Capital Corporation.
10.15* Services Agreement between the Registrant and Covad
Communications Company, dated March 16, 1999.
10.16* XDSL Joint Market Development Agreement dated March 8, 1999,
between the Registrant and NorthPoint Communications, Inc.
10.17* Master Purchase Agreement dated March 31, 2000 between
Winstar Wireless, Inc. and the Registrant.
10.18* Business Lease between Registrant and Spieker Properties,
L.P., dated March 19, 1999
10.19* First Amendment to Business Lease between the Registrant and
Spieker Properties L.P., dated July 22, 1999
10.20* Office Lease dated March 30, 2000 between the Registrant and
20770 Madrona, LLC
10.21* Eller Outdoor Advertising Agreement dated September 1999
between the Registrant and Eller Media Company
23.1 Consent of PricewaterhouseCoopers LLP
23.2* Consent of Kirkpatrick & Lockhart LLP (contained in exhibit
5.1)
24.1 Power of attorney (included on signature page of
Registration Statement)
27 Financial Data Schedules
</TABLE>
- ---------------
* To be filed by Amendment.
<PAGE> 1
EXHIBIT 4.2
THIS WARRANT MAY BE TRANSFERRED ONLY
IN ACCORDANCE WITH SECTION 3 HEREOF
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND SHALL NOT BE (1) SOLD,
PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED FOR CONSIDERATION, BY THE
HOLDER, EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF
ITS COUNSEL AND/OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS
MAY BE SATISFACTORY TO COUNSEL FOR THE CORPORATION, IN EITHER CASE TO THE EFFECT
THAT ANY SUCH TRANSFER FOR CONSIDERATION SHALL NOT BE IN VIOLATION OF THE ACT OR
RULE 144 PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE ACT AND
APPLICABLE STATE SECURITIES LAWS; OR (2) TRANSFERRED WITHOUT CONSIDERATION BY
THE HOLDER EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF
ITS COUNSEL OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS MAY
BE SATISFACTORY TO COUNSEL TO THE CORPORATION, IN EITHER CASE TO THE EFFECT THAT
ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE ACT AND APPLICABLE STATE
SECURITIES LAWS.
THIS WARRANT IS ONLY EXERCISABLE
WITHIN FIVE YEARS OF THE DATE
OF ITS INITIAL ISSUANCE.
W-1 WARRANT TO PURCHASE 90,000 SHARES OF
COMMON STOCK
ISSUED AS OF: JUNE 1, 1999 ("DATE OF THE INITIAL ISSUANCE")
ICNT, INC.
ORGANIZED UNDER THE LAWS OF THE STATE OF CALIFORNIA
THIS CERTIFIES THAT for value received, Freshman, Marantz, Orlanski,
Cooper & Klein, a law corporation, the registered holder hereof (the "Holder")
is entitled to purchase from ICNT, Inc. (the "Corporation"), at the purchase
price of one dollar ($1.00) per share (the " Exercise Price"), within five years
(60 months) from the date of the initial issuance of this Warrant (the "Exercise
Period"), up to 90,000 shares of Common Stock, no par value per share, of the
Corporation ("Common Stock"). The Exercise Price per share shall be subject to
adjustment from time to time as set forth herein.
This Warrant evidences the right to purchase an aggregate of up to 90,000
shares of Common Stock. The shares of Common Stock to be issued upon exercise of
the Warrant are referred to herein as "Warrant Shares."
1. EXPIRATION DATE. The Warrant represented hereby will expire in its
entirety and no longer be exercisable after 5:00 p.m. PDT on the last day of the
sixty (60) consecutive month period beginning on the date of the initial
issuance of the Warrant, unless extended ("Expiration Date").
2. MANNER OF EXERCISE. The Warrant may be exercised at the Corporation's
Office at 3250 Wilshire Blvd., Suite 2008, Los Angeles, California 90010, or
upon such other location designated by the Corporation, upon presentation and
surrender hereof, together with the Warrant Purchase Form at the end hereof,
duly completed and signed, and upon payment to the Corporation of the Exercise
Price (subject to adjustment in accordance with the provisions of Section 8
hereof), for the number of full Warrant Shares in respect of which such Warrants
are then exercised. Payment of the aggregate Exercise Price may be: (i) in cash
or cash equivalents, (ii) in the form of unrestricted Stock already owned by the
Holder (based upon the Fair Market Value of the Stock on the date the Warrant is
exercised, as determined by the Board of Directors of the Corporation in its
sole discretion. However, if the Common Stock is traded on a national securities
exchange or on Nasdaq, the Fair Market Value of the Stock shall be based on the
closing sales price of the Common Stock on the date the Warrant is exercised as
reported in the Western edition of the Wall Street Journal), (iii) by
cancellation of any indebtedness owed by the Corporation to the Holder, (iv) by
requesting that the Corporation withhold whole shares of Common Stock then
issuable upon exercise of the Warrant (based on the Fair Market Value of the
Stock on the date the Warrant is exercised, as determined by
<PAGE> 2
the Board of Directors of the Corporation in its sole discretion. However, if
the Common Stock is traded on a national securities exchange or on Nasdaq, the
Fair Market Value of the Stock shall be based on the closing sales price of the
Common Stock on the date the Warrant is exercised as reported in the Western
edition of the Wall Street Journal), (v) in the event the Corporation's Common
Stock is registered under the Securities Exchange Act of 1934, as amended, by
arrangement with a broker which is acceptable to the Corporation where payment
of the Exercise Price is made pursuant to an irrevocable direction to the broker
to deliver all or part of the proceeds from the sale of the shares underlying
the Warrant to the Corporation, or (vi) by any combination of the foregoing.
The Corporation shall not be required to issue fractional Warrant Shares
on the exercise of Warrants. When Warrants are presented for exercise in full at
the same time by the same Holder, the number of full Warrant Shares which shall
be issuable upon the exercise thereof shall be computed on the basis of the
aggregate number of Warrant Shares purchasable on exercise of the Warrants so
presented. If any fraction of a Warrant Share would be issuable on the exercise
of any Warrants in full, the Corporation shall pay an amount in cash equal to
the then current market price per Warrant Share (as determined in the sole
discretion of the Corporation's Board of Directors, unless the Common Stock is
traded on a national securities exchange or Nasdaq, in which case, the Fair
Market Value of the Stock shall be based on the closing sales price of the
Common Stock on the date the Warrant is exercised as reported in the Western
edition of the Wall Street Journal) multiplied by such fraction. When Warrants
are presented for exercise as to a specified portion, only full Warrant Shares
shall be issuable and a new Warrant bearing the original initial issuance date
shall be issuable evidencing the remaining Warrant or Warrants.
Upon such surrender of Warrants and payment of the Exercise Price as
aforesaid, the Corporation shall issue and cause to be delivered with all
reasonable speed to or upon the written order of the Holder and in such name or
names as the Holder may designate, a certificate or certificates for the number
of full Warrant Shares so purchased together with payment for any fractional
shares as provided above in this Section 2, and any person so designated to be
named therein shall be deemed to have become a holder of record of such Warrant
Shares as of the date of the surrender of such Warrants and payment of the
Exercise Price, as aforesaid; provided, however, that if, at the date of
surrender of such Warrants and payment of the Exercise Price, the transfer books
for the Warrant Shares or other class of stock purchasable upon the exercise of
such Warrants shall be closed, the certificates for the Warrant Shares in
respect of which such Warrants are then exercised shall be issuable as of the
date on which such books shall next be opened (whether before or after the
Expiration Date) and until such date the Corporation shall be under no duty to
deliver any certificate for such Warrant Shares. The rights of purchase
represented by the Warrants shall be exercisable, at the election of the Holders
thereof, either in full or from time to time in part and, in the event that a
Warrant is exercised in respect of less than all of the Warrant Shares
purchasable on such exercise at any time prior to the Expiration Date of the
Warrants, a new Warrant evidencing the remaining Warrant or Warrants will be
issued; provided, however, the Corporation shall not be required to issue
fractional Warrants. All Warrants surrendered in the exercise of the rights
thereby evidenced shall be canceled by the Corporation.
3. LIMITATIONS ON THE TRANSFERABILITY OF WARRANTS. The Warrants shall not
be transferable unless the Holder complies with this paragraph. Any purported
transfer not in compliance with this paragraph shall be null and void. The
Warrants shall be transferable only on the books of the Corporation maintained
at its office at 3250 Wilshire Blvd., Suite 2008, Los Angeles, California 90010,
or at such other address as the Corporation may designate to the Holder in
writing, upon delivery thereof duly endorsed with signatures properly guaranteed
by a commercial bank or securities brokerage firm or accompanied by proper
evidence of succession, assignment or authority to transfer. Upon any
registration of transfer, the Corporation shall deliver a new Warrant or
Warrants to the persons entitled thereto bearing the following or similar legend
if such Warrant or Warrants are not registered under the Act:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND SHALL NOT BE (1) SOLD,
PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED FOR CONSIDERATION, BY THE
HOLDER, EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF
ITS COUNSEL AND/OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS
MAY BE SATISFACTORY TO COUNSEL FOR THE CORPORATION, IN EITHER CASE TO THE EFFECT
THAT ANY SUCH TRANSFER FOR CONSIDERATION SHALL NOT BE IN VIOLATION OF THE ACT OR
RULE 144 PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE ACT AND
APPLICABLE STATE SECURITIES LAWS; OR (2)
2
<PAGE> 3
TRANSFERRED WITHOUT CONSIDERATION BY THE HOLDER EXCEPT UPON THE ISSUANCE TO THE
CORPORATION OF A FAVORABLE OPINION OF ITS COUNSEL OR THE SUBMISSION TO THE
CORPORATION OF SUCH OTHER EVIDENCE AS MAY BE SATISFACTORY TO COUNSEL TO THE
CORPORATION, IN EITHER CASE TO THE EFFECT THAT ANY SUCH TRANSFER SHALL NOT BE IN
VIOLATION OF THE ACT AND APPLICABLE STATE SECURITIES LAWS.
4. PAYMENT OF TAXES. The Corporation will pay all documentary stamp taxes,
if any, attributable to the initial issuance of Warrant Shares upon the exercise
of Warrants; provided, however, that the Corporation shall not be required to
pay any other tax or taxes which may be payable in respect of any transfers
involved in the issuance or delivery of any Warrants or certificates for Warrant
Shares in a name other than that of the registered Holder of the Warrants in
respect of which such Warrant Shares are issued, and in such case the
Corporation shall not be required to issue or deliver any certificate for shares
of Common Stock or any Warrant until the person requesting the same has paid to
the Corporation the amount of such tax or has established to the Corporation's
satisfaction that such tax has been paid.
5. MUTILATED, LOST, STOLEN OR DESTROYED. In case any of the Warrants shall
be mutilated, lost, stolen or destroyed, the Corporation may at its discretion
issue, upon cancellation of the mutilated Warrant, or in lieu of and in
substitution for the Warrant lost, stolen or destroyed, a new Warrant of like
tenor and representing an equivalent right or interest; but only upon receipt of
evidence satisfactory to the Corporation of such loss, theft or destruction of
such Warrant, and indemnity, if requested, also satisfactory to the Corporation.
An applicant for such a substitute Warrant shall also comply with such other
reasonable regulations as the Corporation may prescribe.
6. RESERVATION OF WARRANT SHARES. The Corporation shall at all times,
while the Warrants are exercisable, keep reserved, out of its authorized Common
Stock, a number of shares of Common Stock sufficient to provide for the exercise
of the rights of purchase represented by the outstanding Warrants. Immediately
after the Expiration Date, however, no shares shall be subject to reservation in
respect of such Warrants.
7. CANCELLATION OF WARRANTS. The Corporation shall cancel any Warrants
surrendered for exchange, substitution, transfer or exercise in whole or in
part.
8. ADJUSTMENTS. The Warrant Shares purchasable hereunder and the Exercise
Price shall be subject to adjustments from time to time upon the happening of
certain events, as hereinafter defined:
8.1. MECHANICAL ADJUSTMENTS. The number of Warrant Shares purchasable upon
the exercise of each Warrant and the Exercise Price shall be subject to
adjustment as follows:
(a) In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split, or other change in
corporate structure affecting the Common Stock of the Corporation, an
appropriate adjustment will be made in (i) the aggregate number of shares
reserved for issuance under the Warrants, and (ii) the kind, number and
exercise price of shares subject to the Warrants, provided that the number
of shares subject to the Warrants shall always be a whole number. The
number of Warrant Shares purchasable upon exercise of each Warrant
immediately prior thereto shall be adjusted so that the Holder of each
Warrant shall be entitled to receive the kind and number of Warrant Shares
or other securities of the Corporation which the Holder would have owned
or have been entitled to receive after the happening of any of the events
described above, had such Warrant been exercised immediately prior to the
happening of such event or any record date with respect thereto. An
adjustment made pursuant to this paragraph (a) shall become effective
immediately after the effective date of such event retroactive to the
record date, if any, for such event.
(b) No adjustment in the number of Warrant Shares purchasable
hereunder shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the number of Warrant
Shares purchasable upon the exercise of each Warrant; provided, however,
that any adjustments which by reason of this paragraph (b) are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations shall be made to the nearest
one-hundredth of a share.
3
<PAGE> 4
(c) Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant is adjusted, as herein provided, the Exercise
Price payable upon the exercise of each Warrant shall be adjusted by
multiplying the Exercise Price immediately prior to the adjustment by a
fraction, of which the numerator shall be the number of Warrant Shares
purchasable upon the exercise of each Warrant immediately prior to the
adjustment, and of which the denominator shall be the number of Warrant
Shares so purchasable immediately thereafter.
(d) For the purpose of this Subsection 8.1, the term "shares of
Common Stock" shall mean (i) the class of stock designated as the Common
Stock of the Corporation at the date of this Warrant, or (ii) any other
class of stock resulting from successive changes or reclassification of
such shares consisting solely of changes in par value, or from par value
to no par value, or from no par value to par value. In the event that at
any time, as a result of an adjustment made pursuant to paragraph (a)
above, the Holder shall become entitled to purchase any shares of the
Corporation other than shares of Common Stock, thereafter the number of
such other shares so purchasable upon exercise of each warrant and the
Exercise Price of such shares shall be subject to adjustment from time to
time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Warrant Shares contained in paragraphs (a)
through (c) above, and the provisions of Sections 1 and 2 and Subsections
8.2 through 8.4, with respect to the Warrant Shares, shall apply on like
terms to any such other shares.
8.2. VOLUNTARY ADJUSTMENT BY THE CORPORATION. The Corporation may at any
time during the term of the Warrants, reduce the then current Exercise Price to
any amount deemed appropriate by the Board of Directors of the Corporation,
approve additional periods for exercise of the Warrants or extend the Expiration
Date to any time deemed appropriate by the Board of Directors of the
Corporation.
8.3. NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares
purchasable upon the exercise of each Warrant or the Exercise Price of such
Warrant Shares is adjusted, as herein provided, the Corporation shall cause to
be mailed by first class mail, postage prepaid, to each Holder notice of such
adjustment or adjustments setting forth the number of Warrant Shares purchasable
upon the exercise of each Warrant and the Exercise Price of such Warrant Shares
after such adjustment, setting forth a brief statement of the facts requiring
such adjustment and setting forth the computation by which such adjustment was
made. Any failure by the Corporation to give notice to the Holder or any defect
therein shall not affect the validity of such adjustment or of the event
resulting in the adjustment, nor of the Holder's rights to such adjustment.
8.4. NO ADJUSTMENT FOR DIVIDENDS OR DISTRIBUTIONS. Except as provided in
Subsections 8.1 and 8.6, no adjustments in respect of any dividends or
distributions shall be made during the term of a Warrant or upon the exercise of
a Warrant.
8.5. RIGHTS UPON CONSOLIDATION, MERGER, ETC.
(a) In case of any consolidation of the Corporation with or merger
of the Corporation into another corporation or in case of any sale or
conveyance to another corporation of the property of the Corporation as an
entirety or substantially as an entirety ("Sale"), such successor or
purchasing corporation may assume the obligations hereunder, and may
execute with the Corporation an agreement that each Holder shall have the
right thereafter upon payment of the Exercise Price to purchase upon
exercise of each Warrant the kind and amount of shares and other
securities and property (including cash) which he would have owned or have
been entitled to receive after the consummation of such Sale had such
Warrant been exercised immediately prior to the Sale. The Corporation
shall mail by first class mail, postage prepaid, to each Holder notice of
the execution of any Sale agreement. Such agreement shall provide for
adjustments, which shall be as nearly equivalent as may be practicable to
the adjustments provided for in this Section 8. The provisions of this
Subsection 8.5 shall similarly apply to successive consolidations,
mergers, sales or conveyances.
(b) In the event that such successor corporation does not execute an
agreement with the Corporation as provided in paragraph (a) above, then
each Holder shall be entitled to exercise outstanding Warrants upon the
payment of the Exercise Price during a period of at least thirty (30) days
(or such lesser number of days then remaining in the Exercise Period)
which period shall terminate not less than ten (10)
4
<PAGE> 5
days prior to consummation of the Sale, and thereby receive consideration
in the transaction on the same basis as other previously outstanding
shares of the same class as the Warrant Shares acquired upon exercise.
Warrants not exercised in accordance with this paragraph (b) before
consummation of the Sale will be canceled and become null and void. The
Corporation shall mail by first class mail, postage prepaid, to each
Holder, at least ten (10) days prior to the first date on which the
Warrants are exercisable pursuant to this paragraph (b), notice of the
proposed transaction setting forth the first and last date on which the
Holder may exercise outstanding Warrants and a description of the terms of
this Warrant providing for cancellation of the Warrants in the event the
Warrants are not exercised by the prescribed date.
(c) The Corporation's failure to give any notice required by this
Subsection 8.5 or any defect therein shall not affect the validity of any
Sale.
8.6. RIGHTS UPON LIQUIDATION. In case (i) the Corporation shall make any
distribution of its assets to holders of its shares of Common Stock as a
liquidation or partial liquidation dividend or by way of return of capital; or
(ii) the Corporation shall liquidate, dissolve or wind up its affairs (other
than in connection with a Sale); or (iii) an involuntary liquidation occurs,
then the Corporation shall cause to be mailed to each Holder, by first class
mail, at least twenty (20) days prior to the applicable record date, a notice
stating the date on which such distribution, liquidation, dissolution or winding
up is expected to become effective, and the date on which it is expected that
holders of shares of Common Stock of record shall be entitled to exchange their
shares of Common Stock for securities or other property or assets (including
cash) deliverable upon such distribution, liquidation, dissolution or winding
up. The Corporation's failure to give the notice required by this Subsection 8.6
or any defect therein shall not affect the validity of such distribution,
liquidation, dissolution or winding up.
8.7. STATEMENT ON WARRANTS. Irrespective of any adjustments in the
Exercise Price, Warrants theretofore or thereafter issued may continue to
express the same price as is stated in the Warrants initially issued.
9. NO RIGHTS AS STOCKHOLDERS. Nothing contained in this Warrant shall be
construed as conferring upon the Holder hereof the right to vote or to receive
dividends or to consent or to receive notice as stockholders in respect of any
meeting of stockholders called for the election of directors of the Corporation
or any other matter, or any rights whatsoever as stockholders of the
Corporation.
10. NOTICES. Any notice pursuant to this Warrant by any Holder to the
Corporation or by the Corporation to any Holder, shall be in writing and shall
be mailed first class, postage prepaid, or delivered: (i) to the Corporation, at
its office at 3250 Wilshire Blvd., Suite 2008, Los Angeles, California 90010, or
such other address as the Corporation may designate in writing to the Holder; or
(ii) to the Holder, at the Holder's address on the books of the Corporation. The
Corporation's failure to give any notice required by this Warrant or any defect
therein shall not affect the validity of the action taken by the Corporation in
connection therewith.
11. APPLICABLE LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of California, to the extent not preempted
by federal law, without giving effect to principles of conflict of laws.
12. SECURITIES LAWS. The exercise of Warrants is prohibited unless the
issuance of the Warrant Shares has been registered or qualified under applicable
federal and state laws or unless there is an exemption available from such
requirements.
13. CAPTIONS. The captions of the sections and subsections of this Warrant
have been inserted for convenience only and shall have no substantive effect.
14. FORUM DESIGNATION. Any action or proceeding against any of the parties
hereto relating in any way to this Warrant or the subject matter hereof shall be
brought and enforced exclusively in the competent courts of California, and the
parties hereto consent to the exclusive jurisdiction of such courts in respect
of such action or proceeding.
5
<PAGE> 6
WITNESS the seal of the Corporation and the signatures of its duly
authorized officers.
ICNT, INC.
a California corporation
By: /s/ CLIFFORD YOUNG
-------------------------------------
Name: Clifford Young
Title: President
By: /s/ CLIFFORD YOUNG
-------------------------------------
Name: Clifford Young
Title: Secretary
Initial Date of Issuance:
June 1, 1999
(Corporate Seal)
6
<PAGE> 7
SUBSCRIPTION FORM
(TO BE EXECUTED UPON EXERCISE OF THE WARRANT PURSUANT TO SECTION 2)
THE UNDERSIGNED HEREBY IRREVOCABLY ELECTS TO EXERCISE THE RIGHT OF
PURCHASE REPRESENTED BY THE WITHIN WARRANT CERTIFICATE FOR, AND TO PURCHASE
THEREUNDER ______________ SHARES OF COMMON STOCK, AS PROVIDED FOR THEREIN, AND
TENDERS HEREWITH PAYMENT OF THE PURCHASE PRICE IN FULL IN THE FORM OF CASH OR A
CERTIFIED OR OFFICIAL BANK CHECK IN THE AMOUNT OF $____________.
PLEASE ISSUE A CERTIFICATE OR CERTIFICATES FOR SUCH COMMON STOCK IN THE
NAME OF:
NAME:
------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
(PLEASE PRINT NAME, ADDRESS AND
SOCIAL SECURITY NUMBER)
SIGNATURE
-------------------------
NOTE: THE ABOVE SIGNATURE SHOULD CORRESPOND EXACTLY WITH THE NAME ON THE FIRST
PAGE OF THIS WARRANT CERTIFICATE OR WITH THE NAME OF THE ASSIGNEE APPEARING IN
THE ASSIGNMENT FORM BELOW.
IF SAID NUMBER OF SHARES SHALL NOT BE ALL OF THE SHARES PURCHASABLE UNDER
THE WITHIN WARRANT CERTIFICATE, A NEW WARRANT CERTIFICATE IS TO BE ISSUED IN THE
NAME OF AFOREMENTIONED FOR THE BALANCE OF THE REMAINING SHARES PURCHASABLE
THEREUNDER, ROUNDED UP TO THE NEAREST WHOLE NUMBER OF SHARES, IF APPLICABLE.
7
<PAGE> 1
EXHIBIT 4.3
THIS WARRANT MAY BE TRANSFERRED ONLY
IN ACCORDANCE WITH SECTION 3 HEREOF
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND SHALL NOT BE (1) SOLD,
PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED FOR CONSIDERATION, BY THE
HOLDER, EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF
ITS COUNSEL AND/OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS
MAY BE SATISFACTORY TO COUNSEL FOR THE CORPORATION, IN EITHER CASE TO THE EFFECT
THAT ANY SUCH TRANSFER FOR CONSIDERATION SHALL NOT BE IN VIOLATION OF THE ACT OR
RULE 144 PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE ACT AND
APPLICABLE STATE SECURITIES LAWS; OR (2) TRANSFERRED WITHOUT CONSIDERATION BY
THE HOLDER EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF
ITS COUNSEL OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS MAY
BE SATISFACTORY TO COUNSEL TO THE CORPORATION, IN EITHER CASE TO THE EFFECT THAT
ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE ACT AND APPLICABLE STATE
SECURITIES LAWS.
THIS WARRANT IS ONLY EXERCISABLE
WITHIN FIVE YEARS OF THE DATE
OF ITS INITIAL ISSUANCE.
W-2 WARRANT TO PURCHASE
33,000 SHARES OF
COMMON STOCK
ISSUED AS OF: DECEMBER 1, 1999 ("DATE OF THE INITIAL ISSUANCE")
ICNT, INC.
ORGANIZED UNDER THE LAWS OF THE STATE OF CALIFORNIA
THIS CERTIFIES THAT for value received, Freshman, Marantz, Orlanski,
Cooper & Klein, a law corporation, the registered holder hereof (the "Holder"),
is entitled to purchase from ICNT, Inc. (the "Corporation"), at a purchase price
of $0.15 per share (the "Exercise Price"), within five years (60 months) from
the date of the initial issuance of this Warrant (the "Exercise Period"), up to
33,000 shares of Common Stock, no par value per share, of the Corporation
("Common Stock"). The Exercise Price per share shall be subject to adjustment
from time to time as set forth herein.
This Warrant evidences the right to purchase an aggregate of up to
33,000 shares of Common Stock. The shares of Common Stock to be issued upon
exercise of the Warrant are referred to herein as "Warrant Shares."
-1-
<PAGE> 2
1. EXPIRATION DATE. The Warrant represented hereby will expire in its
entirety and no longer be exercisable after 5:00 p.m. Pacific Time on the last
day of the sixty (60) consecutive month period beginning on the date of the
initial issuance of the Warrant, unless extended ("Expiration Date").
2. MANNER OF EXERCISE. The Warrant may be exercised at the Corporation's
Office at 4499 Glencoe Avenue, Marina Del Rey, California 90292, or upon such
other location designated by the Corporation, upon presentation and surrender
hereof, together with the Warrant Purchase Form at the end hereof, duly
completed and signed, and upon payment to the Corporation of the Exercise Price
(subject to adjustment in accordance with the provisions of Section 8 hereof),
for the number of full Warrant Shares in respect of which such Warrants are then
exercised. Payment of the aggregate Exercise Price may be: (i) in cash or cash
equivalents, (ii) in the form of unrestricted Stock already owned by the Holder
(based upon the Fair Market Value of the Stock on the date the Warrant is
exercised, as determined by the Board of Directors of the Corporation in its
sole discretion. However, if the Common Stock is traded on a national securities
exchange or on Nasdaq, the Fair Market Value of the Stock shall be based on the
closing sales price, or if no closing sales price is reported, on the most
recently reported closing sales price, of the Common Stock on the date the
Warrant is exercised as reported in the western edition of the Wall Street
Journal or such other medium acceptable to the Corporation), (iii) by
cancellation of any indebtedness owed by the Corporation to the Holder, (iv) by
requesting that the Corporation withhold whole shares of Common Stock then
issuable upon exercise of the Warrant (based on the Fair Market Value of the
Stock on the date the Warrant is exercised, as determined by the Board of
Directors of the Corporation in its sole discretion. However, if the Common
Stock is traded on a national securities exchange or on Nasdaq, the Fair Market
Value of the Stock shall be based on the closing sales price, or if no closing
sales price is reported, on the most recently reported closing sales price, of
the Common Stock on the date the Warrant is exercised as reported in the Western
edition of the Wall Street Journal or such other medium acceptable to the
Corporation), (v) in the event the Corporation's Common Stock is registered
under the Securities Exchange Act of 1934, as amended, by arrangement with a
broker which is acceptable to the Corporation where payment of the Exercise
Price is made pursuant to an irrevocable direction to the broker to deliver all
or part of the proceeds from the sale of the shares underlying the Warrant to
the Corporation, or (vi) by any combination of the foregoing.
The Corporation shall not be required to issue fractional Warrant Shares
on the exercise of Warrants. When Warrants are presented for exercise in full at
the same time by the same Holder, the number of full Warrant Shares which shall
be issuable upon the exercise thereof shall be computed on the basis of the
aggregate number of Warrant Shares purchasable on exercise of the Warrants so
presented. If any fraction of a Warrant Share would be issuable on the exercise
of any Warrants in full, the Corporation shall pay an amount in cash equal to
the then current market price per Warrant Share (as determined in the sole
discretion of the Corporation's Board of Directors, unless the Common Stock is
traded on a national securities exchange or Nasdaq, in which case, the Fair
Market Value of the Stock shall be based on the closing sales price, or if no
closing sales price is reported, on the most recently reported closing sales
price, of the Common Stock on the date the Warrant is exercised as reported in
the western edition of the Wall Street Journal or such other medium acceptable
to the Corporation) multiplied by such
-2-
<PAGE> 3
fraction. When Warrants are presented for exercise as to a specified portion,
only full Warrant Shares shall be issuable and a new Warrant bearing the
original initial issuance date shall be issuable evidencing the remaining
Warrant or Warrants.
Upon such surrender of Warrants and payment of the Exercise Price as
aforesaid, the Corporation shall issue and cause to be delivered with all
reasonable speed to or upon the written order of the Holder and in such name or
names as the Holder may designate, a certificate or certificates for the number
of full Warrant Shares so purchased together with payment for any fractional
shares as provided above in this Section 2, and any person so designated to be
named therein shall be deemed to have become a holder of record of such Warrant
Shares as of the date of the surrender of such Warrants and payment of the
Exercise Price, as aforesaid; provided, however, that if, at the date of
surrender of such Warrants and payment of the Exercise Price, the transfer books
for the Warrant Shares or other class of stock purchasable upon the exercise of
such Warrants shall be closed, the certificates for the Warrant Shares in
respect of which such Warrants are then exercised shall be issuable as of the
date on which such books shall next be opened (whether before or after the
Expiration Date) and until such date the Corporation shall be under no duty to
deliver any certificate for such Warrant Shares. The rights of purchase
represented by the Warrants shall be exercisable, at the election of the Holders
thereof, either in full or from time to time in part and, in the event that a
Warrant is exercised in respect of less than all of the Warrant Shares
purchasable on such exercise at any time prior to the Expiration Date of the
Warrants, a new Warrant evidencing the remaining Warrant or Warrants will be
issued; provided, however, the Corporation shall not be required to issue
fractional Warrants. All Warrants surrendered in the exercise of the rights
thereby evidenced shall be canceled by the Corporation.
3. LIMITATIONS ON THE TRANSFERABILITY OF WARRANTS. The Warrants shall
not be transferable unless the Holder complies with this paragraph. Any
purported transfer not in compliance with this paragraph shall be null and void.
The Warrants shall be transferable only on the books of the Corporation
maintained at its office at 4499 Glencoe Avenue, Marina Del Rey, California
90292, or at such other address as the Corporation may designate to the Holder
in writing, upon delivery thereof duly endorsed with signatures properly
guaranteed by a commercial bank or securities brokerage firm or accompanied by
proper evidence of succession, assignment or authority to transfer. Upon any
registration of transfer, the Corporation shall deliver a new Warrant or
Warrants to the persons entitled thereto bearing the following or similar legend
if such Warrant or Warrants are not registered under the Act:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT", AND SHALL NOT BE (1) SOLD,
PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED FOR CONSIDERATION, BY THE
HOLDER, EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF
ITS COUNSEL AND/OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS
MAY BE SATISFACTORY TO COUNSEL FOR THE CORPORATION, IN EITHER CASE TO THE EFFECT
THAT ANY SUCH TRANSFER FOR CONSIDERATION SHALL NOT BE IN VIOLATION OF THE ACT OR
RULE 144 PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE ACT AND
APPLICABLE STATE
-3-
<PAGE> 4
SECURITIES LAWS; OR (2) TRANSFERRED WITHOUT CONSIDERATION BY THE HOLDER EXCEPT
UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF ITS COUNSEL OR
THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS MAY BE SATISFACTORY
TO COUNSEL TO THE CORPORATION, IN EITHER CASE TO THE EFFECT THAT ANY SUCH
TRANSFER SHALL NOT BE IN VIOLATION OF THE ACT AND APPLICABLE STATE SECURITIES
LAWS.
4. PAYMENT OF TAXES. The Corporation will pay all documentary stamp
taxes, if any, attributable to the initial issuance of Warrant Shares upon the
exercise of Warrants; provided, however, that the Corporation shall not be
required to pay any other tax or taxes which may be payable in respect of any
transfers involved in the issuance or delivery of any Warrants or certificates
for Warrant Shares in a name other than that of the registered Holder of the
Warrants in respect of which such Warrant Shares are issued, and in such case
the Corporation shall not be required to issue or deliver any certificate for
shares of Common Stock or any Warrant until the person requesting the same has
paid to the Corporation the amount of such tax or has established to the
Corporation's satisfaction that such tax has been paid.
5. MUTILATED, LOST, STOLEN OR DESTROYED. In case any of the Warrants
shall be mutilated, lost, stolen or destroyed, the Corporation may at its
discretion issue, upon cancellation of the mutilated Warrant, or in lieu of and
in substitution for the Warrant lost, stolen or destroyed, a new Warrant of like
tenor and representing an equivalent right or interest; but only upon receipt of
evidence satisfactory to the Corporation of such loss, theft or destruction of
such Warrant, and indemnity, if requested, also satisfactory to the Corporation.
An applicant for such a substitute Warrant shall also comply with such other
reasonable regulations as the Corporation may prescribe.
6. Reservation of Warrant Shares. The Corporation shall at all times,
while the Warrants are exercisable, keep reserved, out of its authorized Common
Stock, a number of shares of Common Stock sufficient to provide for the exercise
of the rights of purchase represented by the outstanding Warrants. Immediately
after the Expiration Date, however, no shares shall be subject to reservation in
respect of such Warrants.
7. Cancellation of Warrants. The Corporation shall cancel any Warrants
surrendered for exchange, substitution, transfer or exercise in whole or in
part.
8. Adjustments. The Warrant Shares purchasable hereunder and the
Exercise Price shall be subject to adjustments from time to time upon the
happening of certain events, as hereinafter defined:
8.1 Mechanical Adjustments. The number of Warrant Shares purchasable
upon the exercise of each Warrant and the Exercise Price shall be
subject to adjustment as follows:
(a) In the event of any merger, reorganization, consolidation,
recapitalization,stock dividend, stock split, or other change in
corporate structure affecting the Common Stock of the Corporation, an
appropriate adjustment will be
-4-
<PAGE> 5
made in (i) the aggregate number of shares reserved for issuance under
the Warrants, and (ii) the kind, number and exercise price of shares
subject to the Warrants, provided that the number of shares subject to
the Warrants shall always be a whole number. The number of Warrant
Shares purchasable upon exercise of each Warrant immediately prior
thereto shall be adjusted so that the Holder of each Warrant shall be
entitled to receive the kind and number of Warrant Shares or other
securities of the Corporation which the Holder would have owned or have
been entitled to receive after the happening of any of the events
described above, had such Warrant been exercised immediately prior to
the happening of such event or any record date with respect thereto. An
adjustment made pursuant to this paragraph (a) shall become effective
immediately after the effective date of such event retroactive to the
record date, if any, for such event.
(b) No adjustment in the number of Warrant Shares purchasable
hereunder shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the number of
Warrant Shares purchasable upon the exercise of each Warrant; provided,
however, that any adjustments which by reason of this paragraph (b) are
not required to be made shall be carried forward and taken into account
in any subsequent adjustment. All calculations shall be made to the
nearest one-hundredth of a share.
(c) Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant is adjusted, as herein provided, the Exercise
Price payable upon the exercise of each Warrant shall be adjusted by
multiplying the Exercise Price immediately prior to the adjustment by a
fraction, of which the numerator shall be the number of Warrant Shares
purchasable upon the exercise of each Warrant immediately prior to the
adjustment, and of which the denominator shall be the number of Warrant
Shares so purchasable immediately thereafter.
(d) For the purpose of this Subsection 8.1, the term "shares of
Common Stock" shall mean (i) the class of stock designated as the Common
Stock of the Corporation at the date of this Warrant, or (ii) any other
class of stock resulting from successive changes or reclassification of
such shares consisting solely of changes in par value, or from par value
to no par value, or from no par value to par value. In the event that at
any time, as a result of an adjustment made pursuant to paragraph (a)
above, the Holder shall become entitled to purchase any shares of the
Corporation other than shares of Common Stock, thereafter the number of
such other shares so purchasable upon exercise of each warrant and the
Exercise Price of such shares shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to
the provisions with respect to the Warrant Shares contained in
paragraphs (a) through (c) above, and the provisions of Sections 1 and 2
and Subsections 8.2 through 8.4, with respect to the Warrant Shares,
shall apply on like terms to any such other shares.
8.2. VOLUNTARY ADJUSTMENT BY THE CORPORATION. The Corporation may at any
time during the term of the Warrants, reduce the then current Exercise Price to
any amount deemed appropriate by the Board of Directors of the Corporation,
approve additional
-5-
<PAGE> 6
periods for exercise of the Warrants or extend the Expiration Date to any time
deemed appropriate by the Board of Directors of the Corporation.
8.3. NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares
purchasable upon the exercise of each Warrant or the Exercise Price of such
Warrant Shares is adjusted, as herein provided, the Corporation shall cause to
be mailed by first class mail, postage prepaid, to each Holder notice of such
adjustment or adjustments setting forth the number of Warrant Shares purchasable
upon the exercise of each Warrant and the Exercise Price of such Warrant Shares
after such adjustment, setting forth a brief statement of the facts requiring
such adjustment and setting forth the computation by which such adjustment was
made. Any failure by the Corporation to give notice to the Holder or any defect
therein shall not affect the validity of such adjustment or of the event
resulting in the adjustment, nor of the Holder's rights to such adjustment.
8.4. NO ADJUSTMENT FOR DIVIDENDS OR DISTRIBUTIONS. Except as provided in
Subsections 8.1 and 8.6, no adjustments in respect of any dividends or
distributions shall be made during the term of a Warrant or upon the exercise of
a Warrant.
8.5. RIGHTS UPON CONSOLIDATION, MERGER, ETC.
(a) In case of any consolidation of the Corporation with or merger
of the Corporation into another corporation or in case of any sale or
conveyance to another corporation of the property of the Corporation as
an entirety or substantially as an entirety ("Sale"), such successor or
purchasing corporation may assume the obligations hereunder, and may
execute with the Corporation an agreement that each Holder shall have
the right thereafter upon payment of the Exercise Price to purchase upon
exercise of each Warrant the kind and amount of shares and other
securities and property (including cash) which he would have owned or
have been entitled to receive after the consummation of such Sale had
such Warrant been exercised immediately prior to the Sale. The
Corporation shall mail by first class mail, postage prepaid, to each
Holder notice of the execution of any Sale agreement. Such agreement
shall provide for adjustments, which shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Section 8.
The provisions of this Subsection 8.5 shall similarly apply to
successive consolidations, mergers, sales or conveyances.
(b) In the event that such successor corporation does not execute
an agreement with the Corporation as provided in paragraph (a) above,
then each Holder shall be entitled to exercise outstanding Warrants upon
the payment of the Exercise Price during a period of at least thirty
(30) days (or such lesser number of days then remaining in the Exercise
Period) which period shall terminate not less than ten (10) days prior
to consummation of the Sale, and thereby receive consideration in the
transaction on the same basis as other previously outstanding shares of
the same class as the Warrant Shares acquired upon exercise. Warrants
not exercised in accordance with this paragraph (b) before consummation
of the Sale will be canceled and become null and void. The Corporation
shall mail by first class mail, postage prepaid, to each Holder, at
least ten (10) days prior to the first date on which the Warrants are
exercisable pursuant to this paragraph (b), notice
-6-
<PAGE> 7
of the proposed transaction setting forth the first and last date on
which the Holder may exercise outstanding Warrants and a description of
the terms of this Warrant providing for cancellation of the Warrants in
the event the Warrants are not exercised by the prescribed date.
(c) The Corporation's failure to give any notice required by this
Subsection 8.5 or any defect therein shall not affect the validity of
any Sale.
8.6. RIGHTS UPON LIQUIDATION. In case (i) the Corporation shall make any
distribution of its assets to holders of its shares of Common Stock as a
liquidation or partial liquidation dividend or by way of return of capital; or
(ii) the Corporation shall liquidate, dissolve or wind up its affairs (other
than in connection with a Sale); or (iii) an involuntary liquidation occurs,
then the Corporation shall cause to be mailed to each Holder, by first class
mail, at least twenty (20) days prior to the applicable record date, a notice
stating the date on which such distribution, liquidation, dissolution or winding
up is expected to become effective, and the date on which it is expected that
holders of shares of Common Stock of record shall be entitled to exchange their
shares of Common Stock for securities or other property or assets (including
cash) deliverable upon such distribution, liquidation, dissolution or winding
up. The Corporation=s failure to give the notice required by this Subsection 8.6
or any defect therein shall not affect the validity of such distribution,
liquidation, dissolution or winding up.
8.7. STATEMENT ON WARRANTS. Irrespective of any adjustments in the
Exercise Price, Warrants theretofore or thereafter issued may continue to
express the same price as is stated in the Warrants initially issued.
9. NO RIGHTS AS STOCKHOLDERS. Nothing contained in this Warrant shall be
construed as conferring upon the Holder hereof the right to vote or to receive
dividends or to consent or to receive notice as stockholders in respect of any
meeting of stockholders called for the election of directors of the Corporation
or any other matter, or any rights whatsoever as stockholders of the
Corporation.
10. NOTICES. Any notice pursuant to this Warrant by any Holder to the
Corporation or by the Corporation to any Holder, shall be in writing and shall
be mailed first class, postage prepaid, or delivered: (i) to the Corporation, at
its office at 4499 Glencoe Avenue, Marina Del Rey, California 90292 or such
other address as the Corporation may designate in writing to the Holder; or (ii)
to the Holder, at the Holder's address on the books of the Corporation. The
Corporation's failure to give any notice required by this Warrant or any defect
therein shall not affect the validity of the action taken by the Corporation in
connection therewith.
11. APPLICABLE LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of California, to the extent not preempted
by federal law, without giving effect to principles of conflict of laws.
12. SECURITIES LAWS. The exercise of Warrants is prohibited unless the
issuance of the Warrant Shares has been registered or qualified under applicable
federal and state laws or unless there is an exemption available from such
requirements.
-7-
<PAGE> 8
13. CAPTIONS. The captions of the sections and subsections of this
Warrant have been inserted for convenience only and shall have no substantive
effect.
14. FORUM DESIGNATION. Any action or proceeding against any of the
parties hereto relating in any way to this Warrant or the subject matter hereof
shall be brought and enforced exclusively in the competent courts of California,
and the parties hereto consent to the exclusive jurisdiction of such courts in
respect of such action or proceeding.
-8-
<PAGE> 9
WITNESS the seal of the Corporation and the signatures of its duly
authorized officers.
ICNT, INC.
a California corporation
By: /s/ JOHN W. COMBS
------------------------------------
Name: John W. Combs
Title: Chief Executive Officer
By: /s/ CLIFFORD H. YOUNG
------------------------------------
Name: Clifford H. Young
Title: President and Secretary
Initial Date of Issuance:
December 1, 1999
(Corporate Seal)
-9-
<PAGE> 10
SUBSCRIPTION FORM
(TO BE EXECUTED UPON EXERCISE OF THE WARRANT PURSUANT TO SECTION 2)
THE UNDERSIGNED HEREBY IRREVOCABLY ELECTS TO EXERCISE THE RIGHT OF
PURCHASE REPRESENTED BY THE WITHIN WARRANT CERTIFICATE FOR, AND TO PURCHASE
THEREUNDER ______________ SHARES OF COMMON STOCK, AS PROVIDED FOR THEREIN, AND
TENDERS HEREWITH PAYMENT OF THE PURCHASE PRICE IN FULL IN THE FORM OF CASH OR A
CERTIFIED OR OFFICIAL BANK CHECK IN THE AMOUNT OF $____________.
PLEASE ISSUE A CERTIFICATE OR CERTIFICATES FOR SUCH COMMON STOCK IN THE
NAME OF:
NAME:
-----------------------------
-----------------------------------
-----------------------------------
-----------------------------------
(PLEASE PRINT NAME, ADDRESS AND
SOCIAL SECURITY NUMBER)
SIGNATURE
-------------------------
NOTE: THE ABOVE SIGNATURE SHOULD CORRESPOND EXACTLY WITH THE NAME ON THE FIRST
PAGE OF THIS WARRANT CERTIFICATE OR WITH THE NAME OF THE ASSIGNEE APPEARING IN
THE ASSIGNMENT FORM BELOW.
IF SAID NUMBER OF SHARES SHALL NOT BE ALL OF THE SHARES PURCHASABLE
UNDER THE WITHIN WARRANT CERTIFICATE, A NEW WARRANT CERTIFICATE IS TO BE ISSUED
IN THE NAME OF AFOREMENTIONED FOR THE BALANCE OF THE REMAINING SHARES
PURCHASABLE THEREUNDER, ROUNDED UP TO THE NEAREST WHOLE NUMBER OF SHARES, IF
APPLICABLE.
-10-
<PAGE> 1
EXHIBIT 4.4
THIS WARRANT MAY BE TRANSFERRED ONLY
IN ACCORDANCE WITH SECTION 3 HEREOF
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND SHALL NOT BE (1) SOLD,
PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED FOR CONSIDERATION, BY THE
HOLDER, EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF
ITS COUNSEL AND/OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS
MAY BE SATISFACTORY TO COUNSEL FOR THE CORPORATION, IN EITHER CASE TO THE EFFECT
THAT ANY SUCH TRANSFER FOR CONSIDERATION SHALL NOT BE IN VIOLATION OF THE ACT OR
RULE 144 PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE ACT AND
APPLICABLE STATE SECURITIES LAWS; OR (2) TRANSFERRED WITHOUT CONSIDERATION BY
THE HOLDER EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF
ITS COUNSEL OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS MAY
BE SATISFACTORY TO COUNSEL TO THE CORPORATION, IN EITHER CASE TO THE EFFECT THAT
ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE ACT AND APPLICABLE STATE
SECURITIES LAWS.
THIS WARRANT IS ONLY EXERCISABLE
WITHIN FIVE YEARS OF THE DATE
OF ITS INITIAL ISSUANCE.
W-2 WARRANT TO PURCHASE
33,000 SHARES OF
COMMON STOCK
ISSUED AS OF: DECEMBER 1, 1999 ("DATE OF THE INITIAL ISSUANCE")
ICNT, INC.
ORGANIZED UNDER THE LAWS OF THE STATE OF CALIFORNIA
THIS CERTIFIES THAT for value received, Freshman, Marantz, Orlanski,
Cooper & Klein, a law corporation, the registered holder hereof (the "Holder"),
is entitled to purchase from ICNT, Inc. (the "Corporation"), at a purchase price
of $0.15 per share (the "Exercise Price"), within five years (60 months) from
the date of the initial issuance of this Warrant (the "Exercise Period"), up to
33,000 shares of Common Stock, no par value per share, of the Corporation
("Common Stock"). The Exercise Price per share shall be subject to adjustment
from time to time as set forth herein.
This Warrant evidences the right to purchase an aggregate of up to
33,000 shares of Common Stock. The shares of Common Stock to be issued upon
exercise of the Warrant are referred to herein as "Warrant Shares."
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<PAGE> 2
1. EXPIRATION DATE. The Warrant represented hereby will expire in its
entirety and no longer be exercisable after 5:00 p.m. Pacific Time on the last
day of the sixty (60) consecutive month period beginning on the date of the
initial issuance of the Warrant, unless extended ("Expiration Date").
2. MANNER OF EXERCISE. The Warrant may be exercised at the Corporation's
Office at 4499 Glencoe Avenue, Marina Del Rey, California 90292, or upon such
other location designated by the Corporation, upon presentation and surrender
hereof, together with the Warrant Purchase Form at the end hereof, duly
completed and signed, and upon payment to the Corporation of the Exercise Price
(subject to adjustment in accordance with the provisions of Section 8 hereof),
for the number of full Warrant Shares in respect of which such Warrants are then
exercised. Payment of the aggregate Exercise Price may be: (i) in cash or cash
equivalents, (ii) in the form of unrestricted Stock already owned by the Holder
(based upon the Fair Market Value of the Stock on the date the Warrant is
exercised, as determined by the Board of Directors of the Corporation in its
sole discretion. However, if the Common Stock is traded on a national securities
exchange or on Nasdaq, the Fair Market Value of the Stock shall be based on the
closing sales price, or if no closing sales price is reported, on the most
recently reported closing sales price, of the Common Stock on the date the
Warrant is exercised as reported in the western edition of the Wall Street
Journal or such other medium acceptable to the Corporation), (iii) by
cancellation of any indebtedness owed by the Corporation to the Holder, (iv) by
requesting that the Corporation withhold whole shares of Common Stock then
issuable upon exercise of the Warrant (based on the Fair Market Value of the
Stock on the date the Warrant is exercised, as determined by the Board of
Directors of the Corporation in its sole discretion. However, if the Common
Stock is traded on a national securities exchange or on Nasdaq, the Fair Market
Value of the Stock shall be based on the closing sales price, or if no closing
sales price is reported, on the most recently reported closing sales price, of
the Common Stock on the date the Warrant is exercised as reported in the Western
edition of the Wall Street Journal or such other medium acceptable to the
Corporation), (v) in the event the Corporation's Common Stock is registered
under the Securities Exchange Act of 1934, as amended, by arrangement with a
broker which is acceptable to the Corporation where payment of the Exercise
Price is made pursuant to an irrevocable direction to the broker to deliver all
or part of the proceeds from the sale of the shares underlying the Warrant to
the Corporation, or (vi) by any combination of the foregoing.
The Corporation shall not be required to issue fractional Warrant Shares
on the exercise of Warrants. When Warrants are presented for exercise in full at
the same time by the same Holder, the number of full Warrant Shares which shall
be issuable upon the exercise thereof shall be computed on the basis of the
aggregate number of Warrant Shares purchasable on exercise of the Warrants so
presented. If any fraction of a Warrant Share would be issuable on the exercise
of any Warrants in full, the Corporation shall pay an amount in cash equal to
the then current market price per Warrant Share (as determined in the sole
discretion of the Corporation's Board of Directors, unless the Common Stock is
traded on a national securities exchange or Nasdaq, in which case, the Fair
Market Value of the Stock shall be based on the closing sales price, or if no
closing sales price is reported, on the most recently reported closing sales
price, of the Common Stock on the date the Warrant is exercised as reported in
the western edition of the Wall Street Journal or such other medium acceptable
to the Corporation) multiplied by such
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<PAGE> 3
fraction. When Warrants are presented for exercise as to a specified portion,
only full Warrant Shares shall be issuable and a new Warrant bearing the
original initial issuance date shall be issuable evidencing the remaining
Warrant or Warrants.
Upon such surrender of Warrants and payment of the Exercise Price as
aforesaid, the Corporation shall issue and cause to be delivered with all
reasonable speed to or upon the written order of the Holder and in such name or
names as the Holder may designate, a certificate or certificates for the number
of full Warrant Shares so purchased together with payment for any fractional
shares as provided above in this Section 2, and any person so designated to be
named therein shall be deemed to have become a holder of record of such Warrant
Shares as of the date of the surrender of such Warrants and payment of the
Exercise Price, as aforesaid; provided, however, that if, at the date of
surrender of such Warrants and payment of the Exercise Price, the transfer books
for the Warrant Shares or other class of stock purchasable upon the exercise of
such Warrants shall be closed, the certificates for the Warrant Shares in
respect of which such Warrants are then exercised shall be issuable as of the
date on which such books shall next be opened (whether before or after the
Expiration Date) and until such date the Corporation shall be under no duty to
deliver any certificate for such Warrant Shares. The rights of purchase
represented by the Warrants shall be exercisable, at the election of the Holders
thereof, either in full or from time to time in part and, in the event that a
Warrant is exercised in respect of less than all of the Warrant Shares
purchasable on such exercise at any time prior to the Expiration Date of the
Warrants, a new Warrant evidencing the remaining Warrant or Warrants will be
issued; provided, however, the Corporation shall not be required to issue
fractional Warrants. All Warrants surrendered in the exercise of the rights
thereby evidenced shall be canceled by the Corporation.
3. LIMITATIONS ON THE TRANSFERABILITY OF WARRANTS. The Warrants shall
not be transferable unless the Holder complies with this paragraph. Any
purported transfer not in compliance with this paragraph shall be null and void.
The Warrants shall be transferable only on the books of the Corporation
maintained at its office at 4499 Glencoe Avenue, Marina Del Rey, California
90292, or at such other address as the Corporation may designate to the Holder
in writing, upon delivery thereof duly endorsed with signatures properly
guaranteed by a commercial bank or securities brokerage firm or accompanied by
proper evidence of succession, assignment or authority to transfer. Upon any
registration of transfer, the Corporation shall deliver a new Warrant or
Warrants to the persons entitled thereto bearing the following or similar legend
if such Warrant or Warrants are not registered under the ACT:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT", AND SHALL NOT BE (1) SOLD,
PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED FOR CONSIDERATION, BY THE
HOLDER, EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF
ITS COUNSEL AND/OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS
MAY BE SATISFACTORY TO COUNSEL FOR THE CORPORATION, IN EITHER CASE TO THE EFFECT
THAT ANY SUCH TRANSFER FOR CONSIDERATION SHALL NOT BE IN VIOLATION OF THE ACT OR
RULE 144 PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE ACT AND
APPLICABLE STATE
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<PAGE> 4
SECURITIES LAWS; OR (2) TRANSFERRED WITHOUT CONSIDERATION BY THE HOLDER EXCEPT
UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF ITS COUNSEL OR
THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS MAY BE SATISFACTORY
TO COUNSEL TO THE CORPORATION, IN EITHER CASE TO THE EFFECT THAT ANY SUCH
TRANSFER SHALL NOT BE IN VIOLATION OF THE ACT AND APPLICABLE STATE SECURITIES
LAWS.
4. PAYMENT OF TAXES. The Corporation will pay all documentary stamp
taxes, if any, attributable to the initial issuance of Warrant Shares upon the
exercise of Warrants; provided, however, that the Corporation shall not be
required to pay any other tax or taxes which may be payable in respect of any
transfers involved in the issuance or delivery of any Warrants or certificates
for Warrant Shares in a name other than that of the registered Holder of the
Warrants in respect of which such Warrant Shares are issued, and in such case
the Corporation shall not be required to issue or deliver any certificate for
shares of Common Stock or any Warrant until the person requesting the same has
paid to the Corporation the amount of such tax or has established to the
Corporation's satisfaction that such tax has been paid.
5. MUTILATED, LOST, STOLEN OR DESTROYED. In case any of the Warrants
shall be mutilated, lost, stolen or destroyed, the Corporation may at its
discretion issue, upon cancellation of the mutilated Warrant, or in lieu of and
in substitution for the Warrant lost, stolen or destroyed, a new Warrant of like
tenor and representing an equivalent right or interest; but only upon receipt of
evidence satisfactory to the Corporation of such loss, theft or destruction of
such Warrant, and indemnity, if requested, also satisfactory to the Corporation.
An applicant for such a substitute Warrant shall also comply with such other
reasonable regulations as the Corporation may prescribe.
6. Reservation of Warrant Shares. The Corporation shall at all times,
while the Warrants are exercisable, keep reserved, out of its authorized Common
Stock, a number of shares of Common Stock sufficient to provide for the exercise
of the rights of purchase represented by the outstanding Warrants. Immediately
after the Expiration Date, however, no shares shall be subject to reservation in
respect of such Warrants.
7. Cancellation of Warrants. The Corporation shall cancel any Warrants
surrendered for exchange, substitution, transfer or exercise in whole or in
part.
8. Adjustments. The Warrant Shares purchasable hereunder and the
Exercise Price shall be subject to adjustments from time to time upon the
happening of certain events, as hereinafter defined:
8.1 Mechanical Adjustments. The number of Warrant Shares purchasable
upon the exercise of each Warrant and the Exercise Price shall
be subject to adjustment as follows:
(a) In the event of any merger, reorganization, consolidation,
recapitalization,stock dividend, stock split, or other change in
corporate structure affecting the Common Stock of the Corporation, an
appropriate adjustment will be
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<PAGE> 5
made in (i) the aggregate number of shares reserved for issuance under
the Warrants, and (ii) the kind, number and exercise price of shares
subject to the Warrants, provided that the number of shares subject to
the Warrants shall always be a whole number. The number of Warrant
Shares purchasable upon exercise of each Warrant immediately prior
thereto shall be adjusted so that the Holder of each Warrant shall be
entitled to receive the kind and number of Warrant Shares or other
securities of the Corporation which the Holder would have owned or have
been entitled to receive after the happening of any of the events
described above, had such Warrant been exercised immediately prior to
the happening of such event or any record date with respect thereto. An
adjustment made pursuant to this paragraph (a) shall become effective
immediately after the effective date of such event retroactive to the
record date, if any, for such event.
(b) No adjustment in the number of Warrant Shares purchasable
hereunder shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the number of
Warrant Shares purchasable upon the exercise of each Warrant; provided,
however, that any adjustments which by reason of this paragraph (b) are
not required to be made shall be carried forward and taken into account
in any subsequent adjustment. All calculations shall be made to the
nearest one-hundredth of a share.
(c) Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant is adjusted, as herein provided, the Exercise
Price payable upon the exercise of each Warrant shall be adjusted by
multiplying the Exercise Price immediately prior to the adjustment by a
fraction, of which the numerator shall be the number of Warrant Shares
purchasable upon the exercise of each Warrant immediately prior to the
adjustment, and of which the denominator shall be the number of Warrant
Shares so purchasable immediately thereafter.
(d) For the purpose of this Subsection 8.1, the term "shares of
Common Stock" shall mean (i) the class of stock designated as the Common
Stock of the Corporation at the date of this Warrant, or (ii) any other
class of stock resulting from successive changes or reclassification of
such shares consisting solely of changes in par value, or from par value
to no par value, or from no par value to par value. In the event that at
any time, as a result of an adjustment made pursuant to paragraph (a)
above, the Holder shall become entitled to purchase any shares of the
Corporation other than shares of Common Stock, thereafter the number of
such other shares so purchasable upon exercise of each warrant and the
Exercise Price of such shares shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to
the provisions with respect to the Warrant Shares contained in
paragraphs (a) through (c) above, and the provisions of Sections 1 and 2
and Subsections 8.2 through 8.4, with respect to the Warrant Shares,
shall apply on like terms to any such other shares.
8.2. VOLUNTARY ADJUSTMENT BY THE CORPORATION. The Corporation may at any
time during the term of the Warrants, reduce the then current Exercise Price to
any amount deemed appropriate by the Board of Directors of the Corporation,
approve additional
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<PAGE> 6
periods for exercise of the Warrants or extend the Expiration Date to any time
deemed appropriate by the Board of Directors of the Corporation.
8.3. NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares
purchasable upon the exercise of each Warrant or the Exercise Price of such
Warrant Shares is adjusted, as herein provided, the Corporation shall cause to
be mailed by first class mail, postage prepaid, to each Holder notice of such
adjustment or adjustments setting forth the number of Warrant Shares purchasable
upon the exercise of each Warrant and the Exercise Price of such Warrant Shares
after such adjustment, setting forth a brief statement of the facts requiring
such adjustment and setting forth the computation by which such adjustment was
made. Any failure by the Corporation to give notice to the Holder or any defect
therein shall not affect the validity of such adjustment or of the event
resulting in the adjustment, nor of the Holder's rights to such adjustment.
8.4. NO ADJUSTMENT FOR DIVIDENDS OR DISTRIBUTIONS. Except as provided in
Subsections 8.1 and 8.6, no adjustments in respect of any dividends or
distributions shall be made during the term of a Warrant or upon the exercise of
a Warrant.
8.5. RIGHTS UPON CONSOLIDATION, MERGER, ETC.
(a) In case of any consolidation of the Corporation with or
merger of the Corporation into another corporation or in case of any
sale or conveyance to another corporation of the property of the
Corporation as an entirety or substantially as an entirety ("Sale"),
such successor or purchasing corporation may assume the obligations
hereunder, and may execute with the Corporation an agreement that each
Holder shall have the right thereafter upon payment of the Exercise
Price to purchase upon exercise of each Warrant the kind and amount of
shares and other securities and property (including cash) which he would
have owned or have been entitled to receive after the consummation of
such Sale had such Warrant been exercised immediately prior to the Sale.
The Corporation shall mail by first class mail, postage prepaid, to each
Holder notice of the execution of any Sale agreement. Such agreement
shall provide for adjustments, which shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Section 8.
The provisions of this Subsection 8.5 shall similarly apply to
successive consolidations, mergers, sales or conveyances.
(b) In the event that such successor corporation does not
execute an agreement with the Corporation as provided in paragraph (a)
above, then each Holder shall be entitled to exercise outstanding
Warrants upon the payment of the Exercise Price during a period of at
least thirty (30) days (or such lesser number of days then remaining in
the Exercise Period) which period shall terminate not less than ten (10)
days prior to consummation of the Sale, and thereby receive
consideration in the transaction on the same basis as other previously
outstanding shares of the same class as the Warrant Shares acquired upon
exercise. Warrants not exercised in accordance with this paragraph (b)
before consummation of the Sale will be canceled and become null and
void. The Corporation shall mail by first class mail, postage prepaid,
to each Holder, at least ten (10) days prior to the first date on which
the Warrants are exercisable pursuant to this paragraph (b), notice
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<PAGE> 7
of the proposed transaction setting forth the first and last date on
which the Holder may exercise outstanding Warrants and a description of
the terms of this Warrant providing for cancellation of the Warrants in
the event the Warrants are not exercised by the prescribed date.
(c) The Corporation's failure to give any notice required by this
Subsection 8.5 or any defect therein shall not affect the validity of
any Sale.
8.6. RIGHTS UPON LIQUIDATION. In case (i) the Corporation shall make any
distribution of its assets to holders of its shares of Common Stock as a
liquidation or partial liquidation dividend or by way of return of capital; or
(ii) the Corporation shall liquidate, dissolve or wind up its affairs (other
than in connection with a Sale); or (iii) an involuntary liquidation occurs,
then the Corporation shall cause to be mailed to each Holder, by first class
mail, at least twenty (20) days prior to the applicable record date, a notice
stating the date on which such distribution, liquidation, dissolution or winding
up is expected to become effective, and the date on which it is expected that
holders of shares of Common Stock of record shall be entitled to exchange their
shares of Common Stock for securities or other property or assets (including
cash) deliverable upon such distribution, liquidation, dissolution or winding
up. The Corporation=s failure to give the notice required by this Subsection 8.6
or any defect therein shall not affect the validity of such distribution,
liquidation, dissolution or winding up.
8.7. STATEMENT ON WARRANTS. Irrespective of any adjustments in the
Exercise Price, Warrants theretofore or thereafter issued may continue to
express the same price as is stated in the Warrants initially issued.
9. NO RIGHTS AS STOCKHOLDERS. Nothing contained in this Warrant shall be
construed as conferring upon the Holder hereof the right to vote or to receive
dividends or to consent or to receive notice as stockholders in respect of any
meeting of stockholders called for the election of directors of the Corporation
or any other matter, or any rights whatsoever as stockholders of the
Corporation.
10. NOTICES. Any notice pursuant to this Warrant by any Holder to the
Corporation or by the Corporation to any Holder, shall be in writing and shall
be mailed first class, postage prepaid, or delivered: (i) to the Corporation, at
its office at 4499 Glencoe Avenue, Marina Del Rey, California 90292 or such
other address as the Corporation may designate in writing to the Holder; or (ii)
to the Holder, at the Holder's address on the books of the Corporation. The
Corporation's failure to give any notice required by this Warrant or any defect
therein shall not affect the validity of the action taken by the Corporation in
connection therewith.
11. APPLICABLE LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of California, to the extent not preempted
by federal law, without giving effect to principles of conflict of laws.
12. SECURITIES LAWS. The exercise of Warrants is prohibited unless the
issuance of the Warrant Shares has been registered or qualified under applicable
federal and state laws or unless there is an exemption available from such
requirements.
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<PAGE> 8
13. CAPTIONS. The captions of the sections and subsections of this
Warrant have been inserted for convenience only and shall have no substantive
effect.
14. FORUM DESIGNATION. Any action or proceeding against any of the
parties hereto relating in any way to this Warrant or the subject matter hereof
shall be brought and enforced exclusively in the competent courts of California,
and the parties hereto consent to the exclusive jurisdiction of such courts in
respect of such action or proceeding.
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<PAGE> 9
WITNESS the seal of the Corporation and the signatures of its duly
authorized officers.
ICNT, INC.
a California corporation
By: /s/ John Combs
-----------------------------------
Name: John Combs
Title: Chief Executive Officer
By: /s/ Clifford Young
-----------------------------------
Name: Clifford Young
Title: President
Initial Date of Issuance:
December 1, 1999
(Corporate Seal)
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SUBSCRIPTION FORM
(TO BE EXECUTED UPON EXERCISE OF THE WARRANT PURSUANT TO SECTION 2)
THE UNDERSIGNED HEREBY IRREVOCABLY ELECTS TO EXERCISE THE RIGHT OF
PURCHASE REPRESENTED BY THE WITHIN WARRANT CERTIFICATE FOR, AND TO PURCHASE
THEREUNDER ______________ SHARES OF COMMON STOCK, AS PROVIDED FOR THEREIN, AND
TENDERS HEREWITH PAYMENT OF THE PURCHASE PRICE IN FULL IN THE FORM OF CASH OR A
CERTIFIED OR OFFICIAL BANK CHECK IN THE AMOUNT OF $____________.
PLEASE ISSUE A CERTIFICATE OR CERTIFICATES FOR SUCH COMMON STOCK IN THE
NAME OF:
NAME:
------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
(PLEASE PRINT NAME, ADDRESS AND
SOCIAL SECURITY NUMBER)
SIGNATURE
--------------------------
NOTE: THE ABOVE SIGNATURE SHOULD CORRESPOND EXACTLY WITH THE NAME ON THE FIRST
PAGE OF THIS WARRANT CERTIFICATE OR WITH THE NAME OF THE ASSIGNEE APPEARING IN
THE ASSIGNMENT FORM BELOW.
IF SAID NUMBER OF SHARES SHALL NOT BE ALL OF THE SHARES PURCHASABLE
UNDER THE WITHIN WARRANT CERTIFICATE, A NEW WARRANT CERTIFICATE IS TO BE ISSUED
IN THE NAME OF AFOREMENTIONED FOR THE BALANCE OF THE REMAINING SHARES
PURCHASABLE THEREUNDER, ROUNDED UP TO THE NEAREST WHOLE NUMBER OF SHARES, IF
APPLICABLE.
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EXHIBIT 4.5
THIS WARRANT MAY BE TRANSFERRED ONLY
IN ACCORDANCE WITH SECTION 3 HEREOF
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND SHALL NOT BE (1) SOLD,
PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED FOR CONSIDERATION, BY THE
HOLDER, EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF
ITS COUNSEL AND/OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS
MAY BE SATISFACTORY TO COUNSEL FOR THE CORPORATION, IN EITHER CASE TO THE EFFECT
THAT ANY SUCH TRANSFER FOR CONSIDERATION SHALL NOT BE IN VIOLATION OF THE ACT OR
RULE 144 PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE ACT AND
APPLICABLE STATE SECURITIES LAWS; OR (2) TRANSFERRED WITHOUT CONSIDERATION BY
THE HOLDER EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF
ITS COUNSEL OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS MAY
BE SATISFACTORY TO COUNSEL TO THE CORPORATION, IN EITHER CASE TO THE EFFECT THAT
ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE ACT AND APPLICABLE STATE
SECURITIES LAWS.
THIS WARRANT IS ONLY EXERCISABLE
WITHIN FIVE YEARS OF THE DATE
OF ITS INITIAL ISSUANCE.
WARRANT TO PURCHASE
14,706 SHARES OF
COMMON STOCK
ISSUED AS OF: FEBRUARY 23, 2000 ("DATE OF THE INITIAL ISSUANCE")
ICNT, INC.
ORGANIZED UNDER THE LAWS OF THE STATE OF CALIFORNIA
THIS CERTIFIES THAT for value received, Howard Fischer & Associates
International, the registered holder hereof (the "Holder"), is entitled to
purchase from ICNT, Inc. (the "Corporation"), at an aggregate purchase price of
Forty-Thousand Dollars ($2.72 per share) (the "Exercise Price"), within five
years (60 months) from the date of the initial issuance of this Warrant (the
"Exercise Period"), up to 14,706 shares of Common Stock, no par value per share,
of the Corporation ("Common Stock"). The Exercise Price per share shall be
subject to adjustment from time to time as set forth herein.
This Warrant evidences the right to purchase an aggregate of up to
14.706 shares of Common Stock. The shares of Common Stock to be issued upon
exercise of the Warrant are referred to herein as "Warrant Shares."
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<PAGE> 2
1. EXPIRATION DATE. The Warrant represented hereby will expire in its
entirety and no longer be exercisable after 5:00 p.m. Pacific Time on the last
day of the sixty (60) consecutive month period beginning on the date of the
initial issuance of the Warrant, unless extended ("Expiration Date").
2. MANNER OF EXERCISE. The Warrant may be exercised at the Corporation's
Office at 4499 Glencoe Avenue, Marina Del Rey, California 90292, or upon such
other location designated by the Corporation, upon presentation and surrender
hereof, together with the Warrant Purchase Form at the end hereof, duly
completed and signed, and upon payment to the Corporation of the Exercise Price
(subject to adjustment in accordance with the provisions of Section 9 hereof),
for the number of full Warrant Shares in respect of which such Warrants are then
exercised. Payment of the aggregate Exercise Price may be: (i) in cash or cash
equivalents, (ii) in the form of unrestricted Stock already owned by the Holder
(based upon the Fair Market Value of the Stock on the date the Warrant is
exercised, as determined by the Board of Directors of the Corporation in its
sole discretion. However, if the Common Stock is traded on a national securities
exchange or on Nasdaq, the Fair Market Value of the Stock shall be based on the
closing sales price, or if no closing sales price is reported, on the most
recently reported closing sales price, of the Common Stock on the date the
Warrant is exercised as reported in the western edition of the Wall Street
Journal or such other medium acceptable to the Corporation), (iii) by
cancellation of any indebtedness owed by the Corporation to the Holder, (iv) by
requesting that the Corporation withhold whole shares of Common Stock then
issuable upon exercise of the Warrant (based on the Fair Market Value of the
Stock on the date the Warrant is exercised, as determined by the Board of
Directors of the Corporation in its sole discretion. However, if the Common
Stock is traded on a national securities exchange or on Nasdaq, the Fair Market
Value of the Stock shall be based on the closing sales price, or if no closing
sales price is reported, on the most recently reported closing sales price, of
the Common Stock on the date the Warrant is exercised as reported in the Western
edition of the Wall Street Journal or such other medium acceptable to the
Corporation), (v) in the event the Corporation's Common Stock is registered
under the Securities Exchange Act of 1934, as amended, by arrangement with a
broker which is acceptable to the Corporation where payment of the Exercise
Price is made pursuant to an irrevocable direction to the broker to deliver all
or part of the proceeds from the sale of the shares underlying the Warrant to
the Corporation, or (vi) by any combination of the foregoing.
The Corporation shall not be required to issue fractional Warrant Shares on
the exercise of Warrants. When Warrants are presented for exercise in full at
the same time by the same Holder, the number of full Warrant Shares which shall
be issuable upon the exercise thereof shall be computed on the basis of the
aggregate number of Warrant Shares purchasable on exercise of the Warrants so
presented. If any fraction of a Warrant Share would be issuable on the exercise
of any Warrants in full, the Corporation shall pay an amount in cash equal to
the then current market price per Warrant Share (as determined in the sole
discretion of the Corporation's Board of Directors, unless the Common Stock is
traded on a national securities exchange or Nasdaq, in which case, the Fair
Market Value of the Stock shall be based on the closing sales price, or if no
closing sales price is reported, on the most recently reported closing sales
price, of the Common Stock on the date the Warrant is exercised as reported in
the western edition of the Wall Street Journal or such other medium acceptable
to the Corporation) multiplied by such
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fraction. When Warrants are presented for exercise as to a specified portion,
only full Warrant Shares shall be issuable and a new Warrant bearing the
original initial issuance date shall be issuable evidencing the remaining
Warrant or Warrants.
Upon such surrender of Warrants and payment of the Exercise Price as
aforesaid, the Corporation shall issue and cause to be delivered with all
reasonable speed to or upon the written order of the Holder and in such name or
names as the Holder may designate, a certificate or certificates for the number
of full Warrant Shares so purchased together with payment for any fractional
shares as provided above in this Section 2, and any person so designated to be
named therein shall be deemed to have become a holder of record of such Warrant
Shares as of the date of the surrender of such Warrants and payment of the
Exercise Price, as aforesaid; provided, however, that if, at the date of
surrender of such Warrants and payment of the Exercise Price, the transfer books
for the Warrant Shares or other class of stock purchasable upon the exercise of
such Warrants shall be closed, the certificates for the Warrant Shares in
respect of which such Warrants are then exercised shall be issuable as of the
date on which such books shall next be opened (whether before or after the
Expiration Date) and until such date the Corporation shall be under no duty to
deliver any certificate for such Warrant Shares. The rights of purchase
represented by the Warrants shall be exercisable, at the election of the Holders
thereof, either in full or from time to time in part and, in the event that a
Warrant is exercised in respect of less than all of the Warrant Shares
purchasable on such exercise at any time prior to the Expiration Date of the
Warrants, a new Warrant evidencing the remaining Warrant or Warrants will be
issued; provided, however, the Corporation shall not be required to issue
fractional Warrants. All Warrants surrendered in the exercise of the rights
thereby evidenced shall be canceled by the Corporation.
3. LIMITATIONS ON THE TRANSFERABILITY OF WARRANTS. The Warrants shall
not be transferable unless the Holder complies with this paragraph. Any
purported transfer not in compliance with this paragraph shall be null and void.
The Warrants shall be transferable only on the books of the Corporation
maintained at its office at 4499 Glencoe Avenue, Marina Del Rey, California
90292, or at such other address as the Corporation may designate to the Holder
in writing, upon delivery thereof duly endorsed with signatures properly
guaranteed by a commercial bank or securities brokerage firm or accompanied by
proper evidence of succession, assignment or authority to transfer. Upon any
registration of transfer, the Corporation shall deliver a new Warrant or
Warrants to the persons entitled thereto bearing the following or similar legend
if such Warrant or Warrants are not registered under the Act:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT", AND SHALL NOT BE (1) SOLD,
PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED FOR CONSIDERATION, BY THE
HOLDER, EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF
ITS COUNSEL AND/OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS
MAY BE SATISFACTORY TO COUNSEL FOR THE CORPORATION, IN EITHER CASE TO THE EFFECT
THAT ANY SUCH TRANSFER FOR CONSIDERATION SHALL NOT BE IN VIOLATION OF THE ACT OR
RULE 144 PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE ACT AND
APPLICABLE STATE
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<PAGE> 4
SECURITIES LAWS; OR (2) TRANSFERRED WITHOUT CONSIDERATION BY THE HOLDER EXCEPT
UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF ITS COUNSEL OR
THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS MAY BE SATISFACTORY
TO COUNSEL TO THE CORPORATION, IN EITHER CASE TO THE EFFECT THAT ANY SUCH
TRANSFER SHALL NOT BE IN VIOLATION OF THE ACT AND APPLICABLE STATE SECURITIES
LAWS.
4. COVENANT OF THE HOLDER. The Holder covenants and agrees that, during
a period of not less that 180 days from the date of an initial public offering
registered and declared effective by the Securities and Exchange Commission
under the Act, the Holder will not, without the prior written consent of the
underwriter (which consent may be unreasonably withheld), directly or
indirectly, sell, offer to sell, grant any option for the sale of, or otherwise
dispose of or transfer, whether directly, indirectly or synthetically, any
Warrant Shares. The Holder further agrees that it will execute all documentation
with any underwriter of said offering as and if required reflecting the covenant
as provided in this Section 4.
5. PAYMENT OF TAXES. The Corporation will pay all documentary stamp
taxes, if any, attributable to the initial issuance of Warrant Shares upon the
exercise of Warrants; provided, however, that the Corporation shall not be
required to pay any other tax or taxes which may be payable in respect of any
transfers involved in the issuance or delivery of any Warrants or certificates
for Warrant Shares in a name other than that of the registered Holder of the
Warrants in respect of which such Warrant Shares are issued, and in such case
the Corporation shall not be required to issue or deliver any certificate for
shares of Common Stock or any Warrant until the person requesting the same has
paid to the Corporation the amount of such tax or has established to the
Corporation's satisfaction that such tax has been paid.
6. MUTILATED, LOST, STOLEN OR DESTROYED. In case any of the Warrants
shall be mutilated, lost, stolen or destroyed, the Corporation may at its
discretion issue, upon cancellation of the mutilated Warrant, or in lieu of and
in substitution for the Warrant lost, stolen or destroyed, a new Warrant of like
tenor and representing an equivalent right or interest; but only upon receipt of
evidence satisfactory to the Corporation of such loss, theft or destruction of
such Warrant, and indemnity, if requested, also satisfactory to the Corporation.
An applicant for such a substitute Warrant shall also comply with such other
reasonable regulations as the Corporation may prescribe.
7. RESERVATION OF WARRANT SHARES. The Corporation shall at all times,
while the Warrants are exercisable, keep reserved, out of its authorized Common
Stock, a number of shares of Common Stock sufficient to provide for the exercise
of the rights of purchase represented by the outstanding Warrants. Immediately
after the Expiration Date, however, no shares shall be subject to reservation in
respect of such Warrants.
8. CANCELLATION OF WARRANTS. The Corporation shall cancel any Warrants
surrendered for exchange, substitution, transfer or exercise in whole or in
part.
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<PAGE> 5
9. ADJUSTMENTS. The Warrant Shares purchasable hereunder and the
Exercise Price shall be subject to adjustments from time to time upon the
happening of certain events, as hereinafter defined:
9.1. MECHANICAL ADJUSTMENTS. The number of Warrant Shares purchasable
upon the exercise of each Warrant and the Exercise Price shall be subject to
adjustment as follows:
(a) In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split, or other change in
corporate structure affecting the Common Stock of the Corporation, an
appropriate adjustment will be made in (i) the aggregate number of
shares reserved for issuance under the Warrants, and (ii) the kind,
number and exercise price of shares subject to the Warrants, provided
that the number of shares subject to the Warrants shall always be a
whole number. The number of Warrant Shares purchasable upon exercise of
each Warrant immediately prior thereto shall be adjusted so that the
Holder of each Warrant shall be entitled to receive the kind and number
of Warrant Shares or other securities of the Corporation which the
Holder would have owned or have been entitled to receive after the
happening of any of the events described above, had such Warrant been
exercised immediately prior to the happening of such event or any record
date with respect thereto. An adjustment made pursuant to this paragraph
(a) shall become effective immediately after the effective date of such
event retroactive to the record date, if any, for such event.
(b) No adjustment in the number of Warrant Shares purchasable
hereunder shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the number of
Warrant Shares purchasable upon the exercise of each Warrant; provided,
however, that any adjustments which by reason of this paragraph (b) are
not required to be made shall be carried forward and taken into account
in any subsequent adjustment. All calculations shall be made to the
nearest one-hundredth of a share.
(c) Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant is adjusted, as herein provided, the Exercise
Price payable upon the exercise of each Warrant shall be adjusted by
multiplying the Exercise Price immediately prior to the adjustment by a
fraction, of which the numerator shall be the number of Warrant Shares
purchasable upon the exercise of each Warrant immediately prior to the
adjustment, and of which the denominator shall be the number of Warrant
Shares so purchasable immediately thereafter.
(d) For the purpose of this Subsection 9.1, the term "shares of
Common Stock" shall mean (i) the class of stock designated as the
Common Stock of the Corporation at the date of this Warrant, or (ii)
any other class of stock resulting from successive changes or
reclassification of such shares consisting solely of changes in par
value, or from par value to no par value, or from no par value to par
value. In the event that at any time, as a result of an adjustment
made pursuant to paragraph (a) above, the Holder shall become entitled
to purchase any shares of the Corporation other than shares of Common
Stock, thereafter the number of such
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<PAGE> 6
other shares so purchasable upon exercise of each warrant and the
Exercise Price of such shares shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to
the provisions with respect to the Warrant Shares contained in
paragraphs (a) through (c) above, and the provisions of Sections 1 and 2
and Subsections 9.2 through 9.4, with respect to the Warrant Shares,
shall apply on like terms to any such other shares.
9.2. VOLUNTARY ADJUSTMENT BY THE CORPORATION. The Corporation may at any
time during the term of the Warrants, reduce the then current Exercise Price to
any amount deemed appropriate by the Board of Directors of the Corporation,
approve additional periods for exercise of the Warrants or extend the Expiration
Date to any time deemed appropriate by the Board of Directors of the
Corporation.
9.3. NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares
purchasable upon the exercise of each Warrant or the Exercise Price of such
Warrant Shares is adjusted, as herein provided, the Corporation shall cause to
be mailed by first class mail, postage prepaid, to each Holder notice of such
adjustment or adjustments setting forth the number of Warrant Shares purchasable
upon the exercise of each Warrant and the Exercise Price of such Warrant Shares
after such adjustment, setting forth a brief statement of the facts requiring
such adjustment and setting forth the computation by which such adjustment was
made. Any failure by the Corporation to give notice to the Holder or any defect
therein shall not affect the validity of such adjustment or of the event
resulting in the adjustment, nor of the Holder's rights to such adjustment.
9.4. NO ADJUSTMENT FOR DIVIDENDS OR DISTRIBUTIONS. Except as provided
in Subsections 9.1 and 9.6, no adjustments in respect of any dividends or
distributions shall be made during the term of a Warrant or upon the exercise of
a Warrant.
9.5. RIGHTS UPON CONSOLIDATION, MERGER, ETC.
(a) In case of any consolidation of the Corporation with or
merger of the Corporation into another corporation or in case of any
sale or conveyance to another corporation of the property of the
Corporation as an entirety or substantially as an entirety ("Sale"),
such successor or purchasing corporation may assume the obligations
hereunder, and may execute with the Corporation an agreement that each
Holder shall have the right thereafter upon payment of the Exercise
Price to purchase upon exercise of each Warrant the kind and amount of
shares and other securities and property (including cash) which he would
have owned or have been entitled to receive after the consummation of
such Sale had such Warrant been exercised immediately prior to the Sale.
The Corporation shall mail by first class mail, postage prepaid, to each
Holder notice of the execution of any Sale agreement. Such agreement
shall provide for adjustments, which shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Section 9.
The provisions of this Subsection 9.5 shall similarly apply to
successive consolidations, mergers, sales or conveyances.
(b) In the event that such successor corporation does not execute
an agreement with the Corporation as provided in paragraph (a) above,
then each
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<PAGE> 7
Holder shall be entitled to exercise outstanding Warrants upon
the payment of the Exercise Price during a period of at least thirty
(30) days (or such lesser number of days then remaining in the Exercise
Period) which period shall terminate not less than ten (10) days prior
to consummation of the Sale, and thereby receive consideration in the
transaction on the same basis as other previously outstanding shares of
the same class as the Warrant Shares acquired upon exercise. Warrants
not exercised in accordance with this paragraph (b) before consummation
of the Sale will be canceled and become null and void. The Corporation
shall mail by first class mail, postage prepaid, to each Holder, at
least ten (10) days prior to the first date on which the Warrants are
exercisable pursuant to this paragraph (b), notice of the proposed
transaction setting forth the first and last date on which the Holder
may exercise outstanding Warrants and a description of the terms of this
Warrant providing for cancellation of the Warrants in the event the
Warrants are not exercised by the prescribed date.
(c) The Corporation's failure to give any notice required by this
Subsection 9.5 or any defect therein shall not affect the validity of
any Sale.
9.6. RIGHTS UPON LIQUIDATION. In case (i) the Corporation shall make any
distribution of its assets to holders of its shares of Common Stock as a
liquidation or partial liquidation dividend or by way of return of capital; or
(ii) the Corporation shall liquidate, dissolve or wind up its affairs (other
than in connection with a Sale); or (iii) an involuntary liquidation occurs,
then the Corporation shall cause to be mailed to each Holder, by first class
mail, at least twenty (20) days prior to the applicable record date, a notice
stating the date on which such distribution, liquidation, dissolution or winding
up is expected to become effective, and the date on which it is expected that
holders of shares of Common Stock of record shall be entitled to exchange their
shares of Common Stock for securities or other property or assets (including
cash) deliverable upon such distribution, liquidation, dissolution or winding
up. The Corporation=s failure to give the notice required by this Subsection 9.6
or any defect therein shall not affect the validity of such distribution,
liquidation, dissolution or winding up.
9.7. STATEMENT ON WARRANTS. Irrespective of any adjustments in the
Exercise Price, Warrants theretofore or thereafter issued may continue to
express the same price as is stated in the Warrants initially issued.
10. NO RIGHTS AS STOCKHOLDERS. Nothing contained in this Warrant shall
be construed as conferring upon the Holder hereof the right to vote or to
receive dividends or to consent or to receive notice as stockholders in respect
of any meeting of stockholders called for the election of directors of the
Corporation or any other matter, or any rights whatsoever as stockholders of the
Corporation.
11. NOTICES. Any notice pursuant to this Warrant by any Holder to the
Corporation or by the Corporation to any Holder, shall be in writing and shall
be mailed first class, postage prepaid, or delivered: (i) to the Corporation, at
its office at 4499 Glencoe Avenue, Marina Del Rey, California 90292 or such
other address as the Corporation may designate in writing to the Holder; or (ii)
to the Holder, at the Holder's address on the books of the Corporation. The
Corporation's failure to give any notice required by this Warrant
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<PAGE> 8
or any defect therein shall not affect the validity of the action taken by the
Corporation in connection therewith.
12. APPLICABLE LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of California, to the extent not preempted
by federal law, without giving effect to principles of conflict of laws.
13. SECURITIES LAWS. The exercise of Warrants is prohibited unless the
issuance of the Warrant Shares has been registered or qualified under applicable
federal and state laws or unless there is an exemption available from such
requirements.
14. CAPTIONS. The captions of the sections and subsections of this Warrant
have been inserted for convenience only and shall have no substantive effect.
15. FORUM DESIGNATION. Any action or proceeding against any of the parties
hereto relating in any way to this Warrant or the subject matter hereof shall be
brought and enforced exclusively in the competent courts of California, and the
parties hereto consent to the exclusive jurisdiction of such courts in respect
of such action or proceeding.
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<PAGE> 9
WITNESS the seal of the Corporation and the signatures of its duly
authorized officers.
ICNT, INC.
a California corporation
By: /s/ JOHN COMBS
------------------------------------
Name: John Combs
Title: Chief Executive Officer
By: /s/ CLIFFORD YOUNG
-----------------------------------
Name: Clifford Young
Title: President
Initial Date of Issuance:
February 23, 2000
(Corporate Seal)
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<PAGE> 10
SUBSCRIPTION FORM
(TO BE EXECUTED UPON EXERCISE OF THE WARRANT PURSUANT TO SECTION 2)
THE UNDERSIGNED HEREBY IRREVOCABLY ELECTS TO EXERCISE THE RIGHT OF
PURCHASE REPRESENTED BY THE WITHIN WARRANT CERTIFICATE FOR, AND TO PURCHASE
THEREUNDER ______________ SHARES OF COMMON STOCK, AS PROVIDED FOR THEREIN, AND
TENDERS HEREWITH PAYMENT OF THE PURCHASE PRICE IN FULL IN THE FORM OF CASH OR A
CERTIFIED OR OFFICIAL BANK CHECK IN THE AMOUNT OF $____________.
PLEASE ISSUE A CERTIFICATE OR CERTIFICATES FOR SUCH COMMON STOCK IN THE
NAME OF:
NAME: _____________________________
-----------------------------------
-----------------------------------
-----------------------------------
(PLEASE PRINT NAME, ADDRESS AND
SOCIAL SECURITY NUMBER)
SIGNATURE ___________________________
NOTE: THE ABOVE SIGNATURE SHOULD CORRESPOND EXACTLY WITH THE NAME ON THE FIRST
PAGE OF THIS WARRANT CERTIFICATE OR WITH THE NAME OF THE ASSIGNEE APPEARING IN
THE ASSIGNMENT FORM BELOW.
IF SAID NUMBER OF SHARES SHALL NOT BE ALL OF THE SHARES PURCHASABLE
UNDER THE WITHIN WARRANT CERTIFICATE, A NEW WARRANT CERTIFICATE IS TO BE ISSUED
IN THE NAME OF AFOREMENTIONED FOR THE BALANCE OF THE REMAINING SHARES
PURCHASABLE THEREUNDER, ROUNDED UP TO THE NEAREST WHOLE NUMBER OF SHARES, IF
APPLICABLE.
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<PAGE> 1
EXHIBIT 4.6
THIS WARRANT MAY BE TRANSFERRED ONLY
IN ACCORDANCE WITH SECTION 3 HEREOF
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND SHALL NOT BE (1) SOLD,
PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED FOR CONSIDERATION, BY THE
HOLDER, EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF
ITS COUNSEL AND/OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS
MAY BE SATISFACTORY TO COUNSEL FOR THE CORPORATION, IN EITHER CASE TO THE EFFECT
THAT ANY SUCH TRANSFER FOR CONSIDERATION SHALL NOT BE IN VIOLATION OF THE ACT OR
RULE 144 PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE ACT AND
APPLICABLE STATE SECURITIES LAWS; OR (2) TRANSFERRED WITHOUT CONSIDERATION BY
THE HOLDER EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF
ITS COUNSEL OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS MAY
BE SATISFACTORY TO COUNSEL TO THE CORPORATION, IN EITHER CASE TO THE EFFECT THAT
ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE ACT AND APPLICABLE STATE
SECURITIES LAWS.
THIS WARRANT IS ONLY EXERCISABLE
WITHIN FIVE YEARS OF THE DATE
OF ITS INITIAL ISSUANCE.
W-5 WARRANT TO PURCHASE
2,700 SHARES OF
COMMON STOCK
ISSUED AS OF: MARCH 28, 2000 ("DATE OF THE INITIAL ISSUANCE")
ICNT, INC.
ORGANIZED UNDER THE LAWS OF THE STATE OF CALIFORNIA
THIS CERTIFIES THAT for value received, Pacific Finance Search, the
registered holder hereof (the "Holder"), is entitled to purchase from ICNT, Inc.
(the "Corporation"), at an aggregate purchase price of $23,000 ($8.52 per share)
(the "Exercise Price"), within five years (60 months) from the date of the
initial issuance of this Warrant (the "Exercise Period"), up to 2,700 shares of
Common Stock, no par value per share, of the Corporation ("Common Stock"). The
Exercise Price per share shall be subject to adjustment from time to time as set
forth herein.
This Warrant evidences the right to purchase an aggregate of up to 2,700
shares of Common Stock. The shares of Common Stock to be issued upon exercise of
the Warrant are referred to herein as "Warrant Shares."
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<PAGE> 2
1. EXPIRATION DATE. The Warrant represented hereby will expire in its
entirety and no longer be exercisable after 5:00 p.m. Pacific Time on the last
day of the sixty (60) consecutive month period beginning on the date of the
initial issuance of the Warrant, unless extended ("Expiration Date").
2. MANNER OF EXERCISE. The Warrant may be exercised at the Corporation's
Office at 4499 Glencoe Avenue, Marina Del Rey, California 90292, or upon such
other location designated by the Corporation, upon presentation and surrender
hereof, together with the Warrant Purchase Form at the end hereof, duly
completed and signed, and upon payment to the Corporation of the Exercise Price
(subject to adjustment in accordance with the provisions of Section 9 hereof),
for the number of full Warrant Shares in respect of which such Warrants are then
exercised. Payment of the aggregate Exercise Price may be: (i) in cash or cash
equivalents, (ii) in the form of unrestricted Stock already owned by the Holder
(based upon the Fair Market Value of the Stock on the date the Warrant is
exercised, as determined by the Board of Directors of the Corporation in its
sole discretion. However, if the Common Stock is traded on a national securities
exchange or on Nasdaq, the Fair Market Value of the Stock shall be based on the
closing sales price, or if no closing sales price is reported, on the most
recently reported closing sales price, of the Common Stock on the date the
Warrant is exercised as reported in the western edition of the Wall Street
Journal or such other medium acceptable to the Corporation), (iii) by
cancellation of any indebtedness owed by the Corporation to the Holder, (iv) by
requesting that the Corporation withhold whole shares of Common Stock then
issuable upon exercise of the Warrant (based on the Fair Market Value of the
Stock on the date the Warrant is exercised, as determined by the Board of
Directors of the Corporation in its sole discretion. However, if the Common
Stock is traded on a national securities exchange or on Nasdaq, the Fair Market
Value of the Stock shall be based on the closing sales price, or if no closing
sales price is reported, on the most recently reported closing sales price, of
the Common Stock on the date the Warrant is exercised as reported in the Western
edition of the Wall Street Journal or such other medium acceptable to the
Corporation), (v) in the event the Corporation's Common Stock is registered
under the Securities Exchange Act of 1934, as amended, by arrangement with a
broker which is acceptable to the Corporation where payment of the Exercise
Price is made pursuant to an irrevocable direction to the broker to deliver all
or part of the proceeds from the sale of the shares underlying the Warrant to
the Corporation, or (vi) by any combination of the foregoing.
The Corporation shall not be required to issue fractional Warrant Shares
on the exercise of Warrants. When Warrants are presented for exercise in full at
the same time by the same Holder, the number of full Warrant Shares which shall
be issuable upon the exercise thereof shall be computed on the basis of the
aggregate number of Warrant Shares purchasable on exercise of the Warrants so
presented. If any fraction of a Warrant Share would be issuable on the exercise
of any Warrants in full, the Corporation shall pay an amount in cash equal to
the then current market price per Warrant Share (as determined in the sole
discretion of the Corporation's Board of Directors, unless the Common Stock is
traded on a national securities exchange or Nasdaq, in which case, the Fair
Market Value of the Stock shall be based on the closing sales price, or if no
closing sales price is reported, on the most recently reported closing sales
price, of the Common Stock on the date the Warrant is exercised as reported in
the western edition of the Wall Street Journal or such other medium acceptable
to the Corporation) multiplied by such
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<PAGE> 3
fraction. When Warrants are presented for exercise as to a specified portion,
only full Warrant Shares shall be issuable and a new Warrant bearing the
original initial issuance date shall be issuable evidencing the remaining
Warrant or Warrants.
Upon such surrender of Warrants and payment of the Exercise Price as
aforesaid, the Corporation shall issue and cause to be delivered with all
reasonable speed to or upon the written order of the Holder and in such name or
names as the Holder may designate, a certificate or certificates for the number
of full Warrant Shares so purchased together with payment for any fractional
shares as provided above in this Section 2, and any person so designated to be
named therein shall be deemed to have become a holder of record of such Warrant
Shares as of the date of the surrender of such Warrants and payment of the
Exercise Price, as aforesaid; provided, however, that if, at the date of
surrender of such Warrants and payment of the Exercise Price, the transfer books
for the Warrant Shares or other class of stock purchasable upon the exercise of
such Warrants shall be closed, the certificates for the Warrant Shares in
respect of which such Warrants are then exercised shall be issuable as of the
date on which such books shall next be opened (whether before or after the
Expiration Date) and until such date the Corporation shall be under no duty to
deliver any certificate for such Warrant Shares. The rights of purchase
represented by the Warrants shall be exercisable, at the election of the Holders
thereof, either in full or from time to time in part and, in the event that a
Warrant is exercised in respect of less than all of the Warrant Shares
purchasable on such exercise at any time prior to the Expiration Date of the
Warrants, a new Warrant evidencing the remaining Warrant or Warrants will be
issued; provided, however, the Corporation shall not be required to issue
fractional Warrants. All Warrants surrendered in the exercise of the rights
thereby evidenced shall be canceled by the Corporation.
3. LIMITATIONS ON THE TRANSFERABILITY OF WARRANTS. The Warrants shall
not be transferable unless the Holder complies with this paragraph. Any
purported transfer not in compliance with this paragraph shall be null and void.
The Warrants shall be transferable only on the books of the Corporation
maintained at its office at 4499 Glencoe Avenue, Marina Del Rey, California
90292, or at such other address as the Corporation may designate to the Holder
in writing, upon delivery thereof duly endorsed with signatures properly
guaranteed by a commercial bank or securities brokerage firm or accompanied by
proper evidence of succession, assignment or authority to transfer. Upon any
registration of transfer, the Corporation shall deliver a new Warrant or
Warrants to the persons entitled thereto bearing the following or similar legend
if such Warrant or Warrants are not registered under the Act:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT", AND SHALL NOT BE (1) SOLD,
PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED FOR CONSIDERATION, BY THE
HOLDER, EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF
ITS COUNSEL AND/OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS
MAY BE SATISFACTORY TO COUNSEL FOR THE CORPORATION, IN EITHER CASE TO THE EFFECT
THAT ANY SUCH TRANSFER FOR CONSIDERATION SHALL NOT BE IN VIOLATION OF THE ACT OR
RULE 144 PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE ACT AND
APPLICABLE STATE
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<PAGE> 4
SECURITIES LAWS; OR (2) TRANSFERRED WITHOUT CONSIDERATION BY THE HOLDER EXCEPT
UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF ITS COUNSEL OR
THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS MAY BE SATISFACTORY
TO COUNSEL TO THE CORPORATION, IN EITHER CASE TO THE EFFECT THAT ANY SUCH
TRANSFER SHALL NOT BE IN VIOLATION OF THE ACT AND APPLICABLE STATE SECURITIES
LAWS.
4. COVENANT OF THE HOLDER. The Holder covenants and agrees that, during
a period of not less that 180 days from the date of an initial public offering
registered and declared effective by the Securities and Exchange Commission
under the Act, the Holder will not, without the prior written consent of the
underwriter (which consent may be unreasonably withheld), directly or
indirectly, sell, offer to sell, grant any option for the sale of, or otherwise
dispose of or transfer, whether directly, indirectly or synthetically, any
Warrant Shares. The Holder further agrees that it will execute all documentation
with any underwriter of said offering as and if required reflecting the covenant
as provided in this Section 4.
5. PAYMENT OF TAXES. The Corporation will pay all documentary stamp
taxes, if any, attributable to the initial issuance of Warrant Shares upon the
exercise of Warrants; provided, however, that the Corporation shall not be
required to pay any other tax or taxes which may be payable in respect of any
transfers involved in the issuance or delivery of any Warrants or certificates
for Warrant Shares in a name other than that of the registered Holder of the
Warrants in respect of which such Warrant Shares are issued, and in such case
the Corporation shall not be required to issue or deliver any certificate for
shares of Common Stock or any Warrant until the person requesting the same has
paid to the Corporation the amount of such tax or has established to the
Corporation's satisfaction that such tax has been paid.
6. MUTILATED, LOST, STOLEN OR DESTROYED. In case any of the Warrants
shall be mutilated, lost, stolen or destroyed, the Corporation may at its
discretion issue, upon cancellation of the mutilated Warrant, or in lieu of and
in substitution for the Warrant lost, stolen or destroyed, a new Warrant of like
tenor and representing an equivalent right or interest; but only upon receipt of
evidence satisfactory to the Corporation of such loss, theft or destruction of
such Warrant, and indemnity, if requested, also satisfactory to the Corporation.
An applicant for such a substitute Warrant shall also comply with such other
reasonable regulations as the Corporation may prescribe.
7. RESERVATION OF WARRANT SHARES. The Corporation shall at all times,
while the Warrants are exercisable, keep reserved, out of its authorized Common
Stock, a number of shares of Common Stock sufficient to provide for the exercise
of the rights of purchase represented by the outstanding Warrants. Immediately
after the Expiration Date, however, no shares shall be subject to reservation in
respect of such Warrants.
8. CANCELLATION OF WARRANTS. The Corporation shall cancel any Warrants
surrendered for exchange, substitution, transfer or exercise in whole or in
part.
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<PAGE> 5
9. ADJUSTMENTS. The Warrant Shares purchasable hereunder and the
Exercise Price shall be subject to adjustments from time to time upon the
happening of certain events, as hereinafter defined:
9.1. MECHANICAL ADJUSTMENTS. The number of Warrant Shares purchasable
upon the exercise of each Warrant and the Exercise Price shall be
subject to adjustment as follows:
(a) In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split, or other change in
corporate structure affecting the Common Stock of the Corporation, an
appropriate adjustment will be made in (i) the aggregate number of
shares reserved for issuance under the Warrants, and (ii) the kind,
number and exercise price of shares subject to the Warrants, provided
that the number of shares subject to the Warrants shall always be a
whole number. The number of Warrant Shares purchasable upon exercise of
each Warrant immediately prior thereto shall be adjusted so that the
Holder of each Warrant shall be entitled to receive the kind and number
of Warrant Shares or other securities of the Corporation which the
Holder would have owned or have been entitled to receive after the
happening of any of the events described above, had such Warrant been
exercised immediately prior to the happening of such event or any record
date with respect thereto. An adjustment made pursuant to this paragraph
(a) shall become effective immediately after the effective date of such
event retroactive to the record date, if any, for such event.
(b) No adjustment in the number of Warrant Shares purchasable
hereunder shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the number of
Warrant Shares purchasable upon the exercise of each Warrant; provided,
however, that any adjustments which by reason of this paragraph (b) are
not required to be made shall be carried forward and taken into account
in any subsequent adjustment. All calculations shall be made to the
nearest one-hundredth of a share.
(c) Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant is adjusted, as herein provided, the Exercise
Price payable upon the exercise of each Warrant shall be adjusted by
multiplying the Exercise Price immediately prior to the adjustment by a
fraction, of which the numerator shall be the number of Warrant Shares
purchasable upon the exercise of each Warrant immediately prior to the
adjustment, and of which the denominator shall be the number of Warrant
Shares so purchasable immediately thereafter.
(d) For the purpose of this Subsection 9.1, the term "shares of
Common Stock" shall mean (i) the class of stock designated as the Common
Stock of the Corporation at the date of this Warrant, or (ii) any other
class of stock resulting from successive changes or reclassification of
such shares consisting solely of changes in par value, or from par value
to no par value, or from no par value to par value. In the event that at
any time, as a result of an adjustment made pursuant to paragraph (a)
above, the Holder shall become entitled to purchase any shares of the
Corporation other than shares of Common Stock, thereafter the number of
such
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<PAGE> 6
other shares so purchasable upon exercise of each warrant and the
Exercise Price of such shares shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to
the provisions with respect to the Warrant Shares contained in
paragraphs (a) through (c) above, and the provisions of Sections 1 and 2
and Subsections 9.2 through 9.4, with respect to the Warrant Shares,
shall apply on like terms to any such other shares.
9.2. VOLUNTARY ADJUSTMENT BY THE CORPORATION. The Corporation may at any
time during the term of the Warrants, reduce the then current Exercise Price to
any amount deemed appropriate by the Board of Directors of the Corporation,
approve additional periods for exercise of the Warrants or extend the Expiration
Date to any time deemed appropriate by the Board of Directors of the
Corporation.
9.3. NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares
purchasable upon the exercise of each Warrant or the Exercise Price of such
Warrant Shares is adjusted, as herein provided, the Corporation shall cause to
be mailed by first class mail, postage prepaid, to each Holder notice of such
adjustment or adjustments setting forth the number of Warrant Shares purchasable
upon the exercise of each Warrant and the Exercise Price of such Warrant Shares
after such adjustment, setting forth a brief statement of the facts requiring
such adjustment and setting forth the computation by which such adjustment was
made. Any failure by the Corporation to give notice to the Holder or any defect
therein shall not affect the validity of such adjustment or of the event
resulting in the adjustment, nor of the Holder's rights to such adjustment.
9.4. NO ADJUSTMENT FOR DIVIDENDS OR DISTRIBUTIONS. Except as provided in
Subsections 9.1 and 9.6, no adjustments in respect of any dividends or
distributions shall be made during the term of a Warrant or upon the exercise of
a Warrant.
9.5. RIGHTS UPON CONSOLIDATION, MERGER, ETC.
(a) In case of any consolidation of the Corporation with or merger
of the Corporation into another corporation or in case of any sale or
conveyance to another corporation of the property of the Corporation as
an entirety or substantially as an entirety ("Sale"), such successor or
purchasing corporation may assume the obligations hereunder, and may
execute with the Corporation an agreement that each Holder shall have
the right thereafter upon payment of the Exercise Price to purchase upon
exercise of each Warrant the kind and amount of shares and other
securities and property (including cash) which he would have owned or
have been entitled to receive after the consummation of such Sale had
such Warrant been exercised immediately prior to the Sale. The
Corporation shall mail by first class mail, postage prepaid, to each
Holder notice of the execution of any Sale agreement. Such agreement
shall provide for adjustments, which shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Section 9.
The provisions of this Subsection 9.5 shall similarly apply to
successive consolidations, mergers, sales or conveyances.
(b) In the event that such successor corporation does not execute
an agreement with the Corporation as provided in paragraph (a) above,
then each
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<PAGE> 7
Holder shall be entitled to exercise outstanding Warrants upon the
payment of the Exercise Price during a period of at least thirty (30)
days (or such lesser number of days then remaining in the Exercise
Period) which period shall terminate not less than ten (10) days prior
to consummation of the Sale, and thereby receive consideration in the
transaction on the same basis as other previously outstanding shares of
the same class as the Warrant Shares acquired upon exercise. Warrants
not exercised in accordance with this paragraph (b) before consummation
of the Sale will be canceled and become null and void. The Corporation
shall mail by first class mail, postage prepaid, to each Holder, at
least ten (10) days prior to the first date on which the Warrants are
exercisable pursuant to this paragraph (b), notice of the proposed
transaction setting forth the first and last date on which the Holder
may exercise outstanding Warrants and a description of the terms of this
Warrant providing for cancellation of the Warrants in the event the
Warrants are not exercised by the prescribed date.
(c) The Corporation's failure to give any notice required by this
Subsection 9.5 or any defect therein shall not affect the validity of
any Sale.
9.6. RIGHTS UPON LIQUIDATION. In case (i) the Corporation shall make any
distribution of its assets to holders of its shares of Common Stock as a
liquidation or partial liquidation dividend or by way of return of capital; or
(ii) the Corporation shall liquidate, dissolve or wind up its affairs (other
than in connection with a Sale); or (iii) an involuntary liquidation occurs,
then the Corporation shall cause to be mailed to each Holder, by first class
mail, at least twenty (20) days prior to the applicable record date, a notice
stating the date on which such distribution, liquidation, dissolution or winding
up is expected to become effective, and the date on which it is expected that
holders of shares of Common Stock of record shall be entitled to exchange their
shares of Common Stock for securities or other property or assets (including
cash) deliverable upon such distribution, liquidation, dissolution or winding
up. The Corporation's failure to give the notice required by this Subsection 9.6
or any defect therein shall not affect the validity of such distribution,
liquidation, dissolution or winding up.
9.7. STATEMENT ON WARRANTS. Irrespective of any adjustments in the
Exercise Price, Warrants theretofore or thereafter issued may continue to
express the same price as is stated in the Warrants initially issued.
10. NO RIGHTS AS STOCKHOLDERS. Nothing contained in this Warrant shall
be construed as conferring upon the Holder hereof the right to vote or to
receive dividends or to consent or to receive notice as stockholders in respect
of any meeting of stockholders called for the election of directors of the
Corporation or any other matter, or any rights whatsoever as stockholders of the
Corporation.
11. NOTICES. Any notice pursuant to this Warrant by any Holder to the
Corporation or by the Corporation to any Holder, shall be in writing and shall
be mailed first class, postage prepaid, or delivered: (i) to the Corporation, at
its office at 4499 Glencoe Avenue, Marina Del Rey, California 90292 or such
other address as the Corporation may designate in writing to the Holder; or (ii)
to the Holder, at the Holder's address on the books of the Corporation. The
Corporation's failure to give any notice required by this Warrant
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<PAGE> 8
or any defect therein shall not affect the validity of the action taken by the
Corporation in connection therewith.
12. APPLICABLE LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of California, to the extent not preempted
by federal law, without giving effect to principles of conflict of laws.
13. SECURITIES LAWS. The exercise of Warrants is prohibited unless the
issuance of the Warrant Shares has been registered or qualified under applicable
federal and state laws or unless there is an exemption available from such
requirements.
14. CAPTIONS. The captions of the sections and subsections of this
Warrant have been inserted for convenience only and shall have no substantive
effect.
15. FORUM DESIGNATION. Any action or proceeding against any of the
parties hereto relating in any way to this Warrant or the subject matter hereof
shall be brought and enforced exclusively in the competent courts of California,
and the parties hereto consent to the exclusive jurisdiction of such courts in
respect of such action or proceeding.
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<PAGE> 9
WITNESS the seal of the Corporation and the signatures of its duly
authorized officers.
ICNT, INC.
a California corporation
By: /s/ JOHN COMBS
------------------------------------
Name: John Combs
Title: Chief Executive Officer
By: /s/ CLIFFORD YOUNG
------------------------------------
Name: Clifford Young
Title: President
Initial Date of Issuance:
March 28, 2000
(Corporate Seal)
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<PAGE> 10
SUBSCRIPTION FORM
(TO BE EXECUTED UPON EXERCISE OF THE WARRANT PURSUANT TO SECTION 2)
THE UNDERSIGNED HEREBY IRREVOCABLY ELECTS TO EXERCISE THE RIGHT OF
PURCHASE REPRESENTED BY THE WITHIN WARRANT CERTIFICATE FOR, AND TO PURCHASE
THEREUNDER ______________ SHARES OF COMMON STOCK, AS PROVIDED FOR THEREIN, AND
TENDERS HEREWITH PAYMENT OF THE PURCHASE PRICE IN FULL IN THE FORM OF CASH OR A
CERTIFIED OR OFFICIAL BANK CHECK IN THE AMOUNT OF $____________.
PLEASE ISSUE A CERTIFICATE OR CERTIFICATES FOR SUCH COMMON STOCK IN THE
NAME OF:
NAME:
-----------------------------
-----------------------------------
-----------------------------------
-----------------------------------
(PLEASE PRINT NAME, ADDRESS AND
SOCIAL SECURITY NUMBER)
SIGNATURE
-------------------------
NOTE: THE ABOVE SIGNATURE SHOULD CORRESPOND EXACTLY WITH THE NAME ON THE FIRST
PAGE OF THIS WARRANT CERTIFICATE OR WITH THE NAME OF THE ASSIGNEE APPEARING IN
THE ASSIGNMENT FORM BELOW.
IF SAID NUMBER OF SHARES SHALL NOT BE ALL OF THE SHARES PURCHASABLE
UNDER THE WITHIN WARRANT CERTIFICATE, A NEW WARRANT CERTIFICATE IS TO BE ISSUED
IN THE NAME OF AFOREMENTIONED FOR THE BALANCE OF THE REMAINING SHARES
PURCHASABLE THEREUNDER, ROUNDED UP TO THE NEAREST WHOLE NUMBER OF SHARES, IF
APPLICABLE.
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<PAGE> 1
EXHIBIT 4.7
THIS WARRANT MAY BE TRANSFERRED ONLY
IN ACCORDANCE WITH SECTION 3 HEREOF
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND SHALL NOT BE (1) SOLD,
PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED FOR CONSIDERATION, BY THE
HOLDER, EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF
ITS COUNSEL AND/OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS
MAY BE SATISFACTORY TO COUNSEL FOR THE CORPORATION, IN EITHER CASE TO THE EFFECT
THAT ANY SUCH TRANSFER FOR CONSIDERATION SHALL NOT BE IN VIOLATION OF THE ACT OR
RULE 144 PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE ACT AND
APPLICABLE STATE SECURITIES LAWS; OR (2) TRANSFERRED WITHOUT CONSIDERATION BY
THE HOLDER EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF
ITS COUNSEL OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS MAY
BE SATISFACTORY TO COUNSEL TO THE CORPORATION, IN EITHER CASE TO THE EFFECT THAT
ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE ACT AND APPLICABLE STATE
SECURITIES LAWS.
THIS WARRANT IS ONLY EXERCISABLE
WITHIN FIVE YEARS OF THE DATE
OF ITS INITIAL ISSUANCE.
W- WARRANT TO PURCHASE
4,695 SHARES OF
COMMON STOCK
ISSUED AS OF: MARCH 28, 2000 ("DATE OF THE INITIAL ISSUANCE")
ICNT, INC.
ORGANIZED UNDER THE LAWS OF THE STATE OF CALIFORNIA
THIS CERTIFIES THAT for value received, Howard Fischer & Associates
International, the registered holder hereof (the "Holder"), is entitled to
purchase from ICNT, Inc. (the "Corporation"), at an aggregate purchase price of
Forty-Thousand Dollars ($8.52 per share) (the "Exercise Price"), within five
years (60 months) from the date of the initial issuance of this Warrant (the
"Exercise Period"), up to 4,695 shares of Common Stock, no par value per share,
of the Corporation ("Common Stock"). The Exercise Price per share shall be
subject to adjustment from time to time as set forth herein.
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<PAGE> 2
This Warrant evidences the right to purchase an aggregate of up to 4,695
shares of Common Stock. The shares of Common Stock to be issued upon exercise of
the Warrant are referred to herein as "Warrant Shares."
1. EXPIRATION DATE. The Warrant represented hereby will expire in its
entirety and no longer be exercisable after 5:00 p.m. Pacific Time on the last
day of the sixty (60) consecutive month period beginning on the date of the
initial issuance of the Warrant, unless extended ("Expiration Date").
2. MANNER OF EXERCISE. The Warrant may be exercised at the Corporation's
Office at 4499 Glencoe Avenue, Marina Del Rey, California 90292, or upon such
other location designated by the Corporation, upon presentation and surrender
hereof, together with the Warrant Purchase Form at the end hereof, duly
completed and signed, and upon payment to the Corporation of the Exercise Price
(subject to adjustment in accordance with the provisions of Section 9 hereof),
for the number of full Warrant Shares in respect of which such Warrants are then
exercised. Payment of the aggregate Exercise Price may be: (i) in cash or cash
equivalents, (ii) in the form of unrestricted Stock already owned by the Holder
(based upon the Fair Market Value of the Stock on the date the Warrant is
exercised, as determined by the Board of Directors of the Corporation in its
sole discretion. However, if the Common Stock is traded on a national securities
exchange or on Nasdaq, the Fair Market Value of the Stock shall be based on the
closing sales price, or if no closing sales price is reported, on the most
recently reported closing sales price, of the Common Stock on the date the
Warrant is exercised as reported in the western edition of the Wall Street
Journal or such other medium acceptable to the Corporation), (iii) by
cancellation of any indebtedness owed by the Corporation to the Holder, (iv) by
requesting that the Corporation withhold whole shares of Common Stock then
issuable upon exercise of the Warrant (based on the Fair Market Value of the
Stock on the date the Warrant is exercised, as determined by the Board of
Directors of the Corporation in its sole discretion. However, if the Common
Stock is traded on a national securities exchange or on Nasdaq, the Fair Market
Value of the Stock shall be based on the closing sales price, or if no closing
sales price is reported, on the most recently reported closing sales price, of
the Common Stock on the date the Warrant is exercised as reported in the Western
edition of the Wall Street Journal or such other medium acceptable to the
Corporation), (v) in the event the Corporation's Common Stock is registered
under the Securities Exchange Act of 1934, as amended, by arrangement with a
broker which is acceptable to the Corporation where payment of the Exercise
Price is made pursuant to an irrevocable direction to the broker to deliver all
or part of the proceeds from the sale of the shares underlying the Warrant to
the Corporation, or (vi) by any combination of the foregoing.
The Corporation shall not be required to issue fractional Warrant Shares
on the exercise of Warrants. When Warrants are presented for exercise in full at
the same time by the same Holder, the number of full Warrant Shares which shall
be issuable upon the exercise thereof shall be computed on the basis of the
aggregate number of Warrant Shares purchasable on exercise of the Warrants so
presented. If any fraction of a Warrant Share would be issuable on the exercise
of any Warrants in full, the Corporation shall pay an amount in cash equal to
the then current market price per Warrant Share (as
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<PAGE> 3
determined in the sole discretion of the Corporation's Board of Directors,
unless the Common Stock is traded on a national securities exchange or Nasdaq,
in which case, the Fair Market Value of the Stock shall be based on the closing
sales price, or if no closing sales price is reported, on the most recently
reported closing sales price, of the Common Stock on the date the Warrant is
exercised as reported in the western edition of the Wall Street Journal or such
other medium acceptable to the Corporation) multiplied by such fraction. When
Warrants are presented for exercise as to a specified portion, only full Warrant
Shares shall be issuable and a new Warrant bearing the original initial issuance
date shall be issuable evidencing the remaining Warrant or Warrants.
Upon such surrender of Warrants and payment of the Exercise Price as
aforesaid, the Corporation shall issue and cause to be delivered with all
reasonable speed to or upon the written order of the Holder and in such name or
names as the Holder may designate, a certificate or certificates for the number
of full Warrant Shares so purchased together with payment for any fractional
shares as provided above in this Section 2, and any person so designated to be
named therein shall be deemed to have become a holder of record of such Warrant
Shares as of the date of the surrender of such Warrants and payment of the
Exercise Price, as aforesaid; provided, however, that if, at the date of
surrender of such Warrants and payment of the Exercise Price, the transfer books
for the Warrant Shares or other class of stock purchasable upon the exercise of
such Warrants shall be closed, the certificates for the Warrant Shares in
respect of which such Warrants are then exercised shall be issuable as of the
date on which such books shall next be opened (whether before or after the
Expiration Date) and until such date the Corporation shall be under no duty to
deliver any certificate for such Warrant Shares. The rights of purchase
represented by the Warrants shall be exercisable, at the election of the Holders
thereof, either in full or from time to time in part and, in the event that a
Warrant is exercised in respect of less than all of the Warrant Shares
purchasable on such exercise at any time prior to the Expiration Date of the
Warrants, a new Warrant evidencing the remaining Warrant or Warrants will be
issued; provided, however, the Corporation shall not be required to issue
fractional Warrants. All Warrants surrendered in the exercise of the rights
thereby evidenced shall be canceled by the Corporation.
3. LIMITATIONS ON THE TRANSFERABILITY OF WARRANTS. The Warrants shall
not be transferable unless the Holder complies with this paragraph. Any
purported transfer not in compliance with this paragraph shall be null and void.
The Warrants shall be transferable only on the books of the Corporation
maintained at its office at 4499 Glencoe Avenue, Marina Del Rey, California
90292, or at such other address as the Corporation may designate to the Holder
in writing, upon delivery thereof duly endorsed with signatures properly
guaranteed by a commercial bank or securities brokerage firm or accompanied by
proper evidence of succession, assignment or authority to transfer. Upon any
registration of transfer, the Corporation shall deliver a new Warrant or
Warrants to the persons entitled thereto bearing the following or similar legend
if such Warrant or Warrants are not registered under the Act:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT",
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<PAGE> 4
AND SHALL NOT BE (1) SOLD, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED FOR
CONSIDERATION, BY THE HOLDER, EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A
FAVORABLE OPINION OF ITS COUNSEL AND/OR THE SUBMISSION TO THE CORPORATION OF
SUCH OTHER EVIDENCE AS MAY BE SATISFACTORY TO COUNSEL FOR THE CORPORATION, IN
EITHER CASE TO THE EFFECT THAT ANY SUCH TRANSFER FOR CONSIDERATION SHALL NOT BE
IN VIOLATION OF THE ACT OR RULE 144 PROMULGATED BY THE SECURITIES AND EXCHANGE
COMMISSION UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS; OR (2)
TRANSFERRED WITHOUT CONSIDERATION BY THE HOLDER EXCEPT UPON THE ISSUANCE TO THE
CORPORATION OF A FAVORABLE OPINION OF ITS COUNSEL OR THE SUBMISSION TO THE
CORPORATION OF SUCH OTHER EVIDENCE AS MAY BE SATISFACTORY TO COUNSEL TO THE
CORPORATION, IN EITHER CASE TO THE EFFECT THAT ANY SUCH TRANSFER SHALL NOT BE IN
VIOLATION OF THE ACT AND APPLICABLE STATE SECURITIES LAWS.
4. COVENANT OF THE HOLDER. The Holder covenants and agrees that, during
a period of not less that 180 days from the date of an initial public offering
registered and declared effective by the Securities and Exchange Commission
under the Act, the Holder will not, without the prior written consent of the
underwriter (which consent may be unreasonably withheld), directly or
indirectly, sell, offer to sell, grant any option for the sale of, or otherwise
dispose of or transfer, whether directly, indirectly or synthetically, any
Warrant Shares. The Holder further agrees that it will execute all documentation
with any underwriter of said offering as and if required reflecting the covenant
as provided in this Section 4.
5. PAYMENT OF TAXES. The Corporation will pay all documentary stamp
taxes, if any, attributable to the initial issuance of Warrant Shares upon the
exercise of Warrants; provided, however, that the Corporation shall not be
required to pay any other tax or taxes which may be payable in respect of any
transfers involved in the issuance or delivery of any Warrants or certificates
for Warrant Shares in a name other than that of the registered Holder of the
Warrants in respect of which such Warrant Shares are issued, and in such case
the Corporation shall not be required to issue or deliver any certificate for
shares of Common Stock or any Warrant until the person requesting the same has
paid to the Corporation the amount of such tax or has established to the
Corporation's satisfaction that such tax has been paid.
6. MUTILATED, LOST, STOLEN OR DESTROYED. In case any of the Warrants
shall be mutilated, lost, stolen or destroyed, the Corporation may at its
discretion issue, upon cancellation of the mutilated Warrant, or in lieu of and
in substitution for the Warrant lost, stolen or destroyed, a new Warrant of like
tenor and representing an equivalent right or interest; but only upon receipt of
evidence satisfactory to the Corporation of such loss, theft or destruction of
such Warrant, and indemnity, if requested, also satisfactory to the Corporation.
An applicant for such a substitute Warrant shall also comply with such other
reasonable regulations as the Corporation may prescribe.
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<PAGE> 5
7. RESERVATION OF WARRANT SHARES. The Corporation shall at all times,
while the Warrants are exercisable, keep reserved, out of its authorized Common
Stock, a number of shares of Common Stock sufficient to provide for the exercise
of the rights of purchase represented by the outstanding Warrants. Immediately
after the Expiration Date, however, no shares shall be subject to reservation in
respect of such Warrants.
8. CANCELLATION OF WARRANTS. The Corporation shall cancel any Warrants
surrendered for exchange, substitution, transfer or exercise in whole or in
part.
9. ADJUSTMENTS. The Warrant Shares purchasable hereunder and the
Exercise Price shall be subject to adjustments from time to time upon the
happening of certain events, as hereinafter defined:
9.1. MECHANICAL ADJUSTMENTS. The number of Warrant Shares purchasable
upon the exercise of each Warrant and the Exercise Price shall
be subject to adjustment as follows:
(a) In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split, or other change in
corporate structure affecting the Common Stock of the Corporation, an
appropriate adjustment will be made in (i) the aggregate number of
shares reserved for issuance under the Warrants, and (ii) the kind,
number and exercise price of shares subject to the Warrants, provided
that the number of shares subject to the Warrants shall always be a
whole number. The number of Warrant Shares purchasable upon exercise of
each Warrant immediately prior thereto shall be adjusted so that the
Holder of each Warrant shall be entitled to receive the kind and number
of Warrant Shares or other securities of the Corporation which the
Holder would have owned or have been entitled to receive after the
happening of any of the events described above, had such Warrant been
exercised immediately prior to the happening of such event or any record
date with respect thereto. An adjustment made pursuant to this paragraph
(a) shall become effective immediately after the effective date of such
event retroactive to the record date, if any, for such event.
(b) No adjustment in the number of Warrant Shares purchasable
hereunder shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the number of
Warrant Shares purchasable upon the exercise of each Warrant; provided,
however, that any adjustments which by reason of this paragraph (b) are
not required to be made shall be carried forward and taken into account
in any subsequent adjustment. All calculations shall be made to the
nearest one-hundredth of a share.
(c) Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant is adjusted, as herein provided, the Exercise
Price payable upon the exercise of each Warrant shall be adjusted by
multiplying the Exercise Price immediately prior to the adjustment by a
fraction, of which the numerator shall be the number of Warrant Shares
purchasable upon the exercise
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<PAGE> 6
of each Warrant immediately prior to the adjustment, and of which the
denominator shall be the number of Warrant Shares so purchasable
immediately thereafter.
(d) For the purpose of this Subsection 9.1, the term "shares of
Common Stock" shall mean (i) the class of stock designated as the Common
Stock of the Corporation at the date of this Warrant, or (ii) any other
class of stock resulting from successive changes or reclassification of
such shares consisting solely of changes in par value, or from par value
to no par value, or from no par value to par value. In the event that at
any time, as a result of an adjustment made pursuant to paragraph (a)
above, the Holder shall become entitled to purchase any shares of the
Corporation other than shares of Common Stock, thereafter the number of
such other shares so purchasable upon exercise of each warrant and the
Exercise Price of such shares shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to
the provisions with respect to the Warrant Shares contained in
paragraphs (a) through (c) above, and the provisions of Sections 1 and 2
and Subsections 9.2 through 9.4, with respect to the Warrant Shares,
shall apply on like terms to any such other shares.
9.2. VOLUNTARY ADJUSTMENT BY THE CORPORATION. The Corporation may at any
time during the term of the Warrants, reduce the then current Exercise Price to
any amount deemed appropriate by the Board of Directors of the Corporation,
approve additional periods for exercise of the Warrants or extend the Expiration
Date to any time deemed appropriate by the Board of Directors of the
Corporation.
9.3. NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares
purchasable upon the exercise of each Warrant or the Exercise Price of such
Warrant Shares is adjusted, as herein provided, the Corporation shall cause to
be mailed by first class mail, postage prepaid, to each Holder notice of such
adjustment or adjustments setting forth the number of Warrant Shares purchasable
upon the exercise of each Warrant and the Exercise Price of such Warrant Shares
after such adjustment, setting forth a brief statement of the facts requiring
such adjustment and setting forth the computation by which such adjustment was
made. Any failure by the Corporation to give notice to the Holder or any defect
therein shall not affect the validity of such adjustment or of the event
resulting in the adjustment, nor of the Holder's rights to such adjustment.
9.4. NO ADJUSTMENT FOR DIVIDENDS OR DISTRIBUTIONS. Except as provided in
Subsections 9.1 and 9.6, no adjustments in respect of any dividends or
distributions shall be made during the term of a Warrant or upon the exercise of
a Warrant.
9.5. RIGHTS UPON CONSOLIDATION, MERGER, ETC.
(a) In case of any consolidation of the Corporation with or
merger of the Corporation into another corporation or in case of any
sale or conveyance to another corporation of the property of the
Corporation as an entirety or substantially as an entirety ("Sale"),
such successor or purchasing corporation may assume the obligations
hereunder, and may execute with the Corporation an agreement that
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<PAGE> 7
each Holder shall have the right thereafter upon payment of the Exercise
Price to purchase upon exercise of each Warrant the kind and amount of
shares and other securities and property (including cash) which he would
have owned or have been entitled to receive after the consummation of
such Sale had such Warrant been exercised immediately prior to the Sale.
The Corporation shall mail by first class mail, postage prepaid, to each
Holder notice of the execution of any Sale agreement. Such agreement
shall provide for adjustments, which shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Section 9.
The provisions of this Subsection 9.5 shall similarly apply to
successive consolidations, mergers, sales or conveyances.
(b) In the event that such successor corporation does not execute
an agreement with the Corporation as provided in paragraph (a) above,
then each Holder shall be entitled to exercise outstanding Warrants upon
the payment of the Exercise Price during a period of at least thirty
(30) days (or such lesser number of days then remaining in the Exercise
Period) which period shall terminate not less than ten (10) days prior
to consummation of the Sale, and thereby receive consideration in the
transaction on the same basis as other previously outstanding shares of
the same class as the Warrant Shares acquired upon exercise. Warrants
not exercised in accordance with this paragraph (b) before consummation
of the Sale will be canceled and become null and void. The Corporation
shall mail by first class mail, postage prepaid, to each Holder, at
least ten (10) days prior to the first date on which the Warrants are
exercisable pursuant to this paragraph (b), notice of the proposed
transaction setting forth the first and last date on which the Holder
may exercise outstanding Warrants and a description of the terms of this
Warrant providing for cancellation of the Warrants in the event the
Warrants are not exercised by the prescribed date.
(c) The Corporation's failure to give any notice required by this
Subsection 9.5 or any defect therein shall not affect the validity of
any Sale.
9.6. RIGHTS UPON LIQUIDATION. In case (i) the Corporation shall make any
distribution of its assets to holders of its shares of Common Stock as a
liquidation or partial liquidation dividend or by way of return of capital; or
(ii) the Corporation shall liquidate, dissolve or wind up its affairs (other
than in connection with a Sale); or (iii) an involuntary liquidation occurs,
then the Corporation shall cause to be mailed to each Holder, by first class
mail, at least twenty (20) days prior to the applicable record date, a notice
stating the date on which such distribution, liquidation, dissolution or winding
up is expected to become effective, and the date on which it is expected that
holders of shares of Common Stock of record shall be entitled to exchange their
shares of Common Stock for securities or other property or assets (including
cash) deliverable upon such distribution, liquidation, dissolution or winding
up. The Corporation=s failure to give the notice required by this Subsection 9.6
or any defect therein shall not affect the validity of such distribution,
liquidation, dissolution or winding up.
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<PAGE> 8
9.7. STATEMENT ON WARRANTS. Irrespective of any adjustments in the
Exercise Price, Warrants theretofore or thereafter issued may continue to
express the same price as is stated in the Warrants initially issued.
10. NO RIGHTS AS STOCKHOLDERS. Nothing contained in this Warrant shall
be construed as conferring upon the Holder hereof the right to vote or to
receive dividends or to consent or to receive notice as stockholders in respect
of any meeting of stockholders called for the election of directors of the
Corporation or any other matter, or any rights whatsoever as stockholders of the
Corporation.
11. NOTICES. Any notice pursuant to this Warrant by any Holder to the
Corporation or by the Corporation to any Holder, shall be in writing and shall
be mailed first class, postage prepaid, or delivered: (i) to the Corporation, at
its office at 4499 Glencoe Avenue, Marina Del Rey, California 90292 or such
other address as the Corporation may designate in writing to the Holder; or (ii)
to the Holder, at the Holder's address on the books of the Corporation. The
Corporation's failure to give any notice required by this Warrant or any defect
therein shall not affect the validity of the action taken by the Corporation in
connection therewith.
12. APPLICABLE LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of California, to the extent not preempted
by federal law, without giving effect to principles of conflict of laws.
13. SECURITIES LAWS. The exercise of Warrants is prohibited unless the
issuance of the Warrant Shares has been registered or qualified under applicable
federal and state laws or unless there is an exemption available from such
requirements.
14. CAPTIONS. The captions of the sections and subsections of this
Warrant have been inserted for convenience only and shall have no substantive
effect.
15. FORUM DESIGNATION. Any action or proceeding against any of the
parties hereto relating in any way to this Warrant or the subject matter hereof
shall be brought and enforced exclusively in the competent courts of California,
and the parties hereto consent to the exclusive jurisdiction of such courts in
respect of such action or proceeding.
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<PAGE> 9
WITNESS the seal of the Corporation and the signatures of its duly
authorized officers.
ICNT, INC.
a California corporation
By: /s/ JOHN COMBS
---------------------------------------
Name: John Combs
Title: Chief Executive Officer
By: /s/ CLIFFORD YOUNG
---------------------------------------
Name: Clifford Young
Title: President
Initial Date of Issuance:
March 28, 2000
(Corporate Seal)
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<PAGE> 10
SUBSCRIPTION FORM
(TO BE EXECUTED UPON EXERCISE OF THE WARRANT PURSUANT TO SECTION 2)
THE UNDERSIGNED HEREBY IRREVOCABLY ELECTS TO EXERCISE THE RIGHT OF
PURCHASE REPRESENTED BY THE WITHIN WARRANT CERTIFICATE FOR, AND TO PURCHASE
THEREUNDER ______________ SHARES OF COMMON STOCK, AS PROVIDED FOR THEREIN, AND
TENDERS HEREWITH PAYMENT OF THE PURCHASE PRICE IN FULL IN THE FORM OF CASH OR A
CERTIFIED OR OFFICIAL BANK CHECK IN THE AMOUNT OF $____________.
PLEASE ISSUE A CERTIFICATE OR CERTIFICATES FOR SUCH COMMON STOCK IN THE
NAME OF:
NAME: _____________________________
___________________________________
___________________________________
___________________________________
(PLEASE PRINT NAME, ADDRESS AND
SOCIAL SECURITY NUMBER)
SIGNATURE ___________________________
NOTE: THE ABOVE SIGNATURE SHOULD CORRESPOND EXACTLY WITH THE NAME ON THE FIRST
PAGE OF THIS WARRANT CERTIFICATE OR WITH THE NAME OF THE ASSIGNEE APPEARING IN
THE ASSIGNMENT FORM BELOW.
IF SAID NUMBER OF SHARES SHALL NOT BE ALL OF THE SHARES PURCHASABLE
UNDER THE WITHIN WARRANT CERTIFICATE, A NEW WARRANT CERTIFICATE IS TO BE ISSUED
IN THE NAME OF AFOREMENTIONED FOR THE BALANCE OF THE REMAINING SHARES
PURCHASABLE THEREUNDER, ROUNDED UP TO THE NEAREST WHOLE NUMBER OF SHARES, IF
APPLICABLE.
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<PAGE> 1
EXHIBIT 4.8
THIS WARRANT MAY BE TRANSFERRED ONLY
IN ACCORDANCE WITH SECTION 3 HEREOF
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND SHALL NOT BE (1) SOLD,
PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED FOR CONSIDERATION, BY THE
HOLDER, EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF
ITS COUNSEL AND/OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS
MAY BE SATISFACTORY TO COUNSEL FOR THE CORPORATION, IN EITHER CASE TO THE EFFECT
THAT ANY SUCH TRANSFER FOR CONSIDERATION SHALL NOT BE IN VIOLATION OF THE ACT OR
RULE 144 PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE ACT AND
APPLICABLE STATE SECURITIES LAWS; OR (2) TRANSFERRED WITHOUT CONSIDERATION BY
THE HOLDER EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF
ITS COUNSEL OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS MAY
BE SATISFACTORY TO COUNSEL TO THE CORPORATION, IN EITHER CASE TO THE EFFECT THAT
ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE ACT AND APPLICABLE STATE
SECURITIES LAWS.
THIS WARRANT IS ONLY EXERCISABLE
WITHIN FIVE YEARS OF THE DATE
OF ITS INITIAL ISSUANCE.
W- 6 WARRANT TO PURCHASE
5,575 SHARES OF
COMMON STOCK
ISSUED AS OF: MARCH 28, 2000 ("DATE OF THE INITIAL ISSUANCE")
ICNT, INC.
ORGANIZED UNDER THE LAWS OF THE STATE OF CALIFORNIA
THIS CERTIFIES THAT for value received, Michael Robert, the registered
holder hereof (the "Holder"), is entitled to purchase from ICNT, Inc. (the
"Corporation"), at an aggregate purchase price of $47,500 ($8.52 per share) (the
"Exercise Price"), within five years (60 months) from the date of the initial
issuance of this Warrant (the "Exercise Period"), up to 5,575 shares of Common
Stock, no par value per share, of the Corporation ("Common Stock"). The Exercise
Price per share shall be subject to adjustment from time to time as set forth
herein.
This Warrant evidences the right to purchase an aggregate of up to 5,575
shares of Common Stock. The shares of Common Stock to be issued upon exercise of
the Warrant are referred to herein as "Warrant Shares."
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<PAGE> 2
1. EXPIRATION DATE. The Warrant represented hereby will expire in its
entirety and no longer be exercisable after 5:00 p.m. Pacific Time on the last
day of the sixty (60) consecutive month period beginning on the date of the
initial issuance of the Warrant, unless extended ("Expiration Date").
2. MANNER OF EXERCISE. The Warrant may be exercised at the Corporation's
Office at 4499 Glencoe Avenue, Marina Del Rey, California 90292, or upon such
other location designated by the Corporation, upon presentation and surrender
hereof, together with the Warrant Purchase Form at the end hereof, duly
completed and signed, and upon payment to the Corporation of the Exercise Price
(subject to adjustment in accordance with the provisions of Section 9 hereof),
for the number of full Warrant Shares in respect of which such Warrants are then
exercised. Payment of the aggregate Exercise Price may be: (i) in cash or cash
equivalents, (ii) in the form of unrestricted Stock already owned by the Holder
(based upon the Fair Market Value of the Stock on the date the Warrant is
exercised, as determined by the Board of Directors of the Corporation in its
sole discretion. However, if the Common Stock is traded on a national securities
exchange or on Nasdaq, the Fair Market Value of the Stock shall be based on the
closing sales price, or if no closing sales price is reported, on the most
recently reported closing sales price, of the Common Stock on the date the
Warrant is exercised as reported in the western edition of the Wall Street
Journal or such other medium acceptable to the Corporation), (iii) by
cancellation of any indebtedness owed by the Corporation to the Holder, (iv) by
requesting that the Corporation withhold whole shares of Common Stock then
issuable upon exercise of the Warrant (based on the Fair Market Value of the
Stock on the date the Warrant is exercised, as determined by the Board of
Directors of the Corporation in its sole discretion. However, if the Common
Stock is traded on a national securities exchange or on Nasdaq, the Fair Market
Value of the Stock shall be based on the closing sales price, or if no closing
sales price is reported, on the most recently reported closing sales price, of
the Common Stock on the date the Warrant is exercised as reported in the Western
edition of the Wall Street Journal or such other medium acceptable to the
Corporation), (v) in the event the Corporation's Common Stock is registered
under the Securities Exchange Act of 1934, as amended, by arrangement with a
broker which is acceptable to the Corporation where payment of the Exercise
Price is made pursuant to an irrevocable direction to the broker to deliver all
or part of the proceeds from the sale of the shares underlying the Warrant to
the Corporation, or (vi) by any combination of the foregoing.
The Corporation shall not be required to issue fractional Warrant Shares on the
exercise of Warrants. When Warrants are presented for exercise in full at the
same time by the same Holder, the number of full Warrant Shares which shall be
issuable upon the exercise thereof shall be computed on the basis of the
aggregate number of Warrant Shares purchasable on exercise of the Warrants so
presented. If any fraction of a Warrant Share would be issuable on the exercise
of any Warrants in full, the Corporation shall pay an amount in cash equal to
the then current market price per Warrant Share (as determined in the sole
discretion of the Corporation's Board of Directors, unless the Common Stock is
traded on a national securities exchange or Nasdaq, in which case, the Fair
Market Value of the Stock shall be based on the closing sales price, or if no
closing sales price is reported, on the most recently reported closing sales
price, of the Common Stock on the date the Warrant is exercised as reported in
the western edition of the Wall Street Journal or such other medium acceptable
to the Corporation) multiplied by such
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<PAGE> 3
fraction. When Warrants are presented for exercise as to a specified portion,
only full Warrant Shares shall be issuable and a new Warrant bearing the
original initial issuance date shall be issuable evidencing the remaining
Warrant or Warrants.
Upon such surrender of Warrants and payment of the Exercise Price as
aforesaid, the Corporation shall issue and cause to be delivered with all
reasonable speed to or upon the written order of the Holder and in such name or
names as the Holder may designate, a certificate or certificates for the number
of full Warrant Shares so purchased together with payment for any fractional
shares as provided above in this Section 2, and any person so designated to be
named therein shall be deemed to have become a holder of record of such Warrant
Shares as of the date of the surrender of such Warrants and payment of the
Exercise Price, as aforesaid; provided, however, that if, at the date of
surrender of such Warrants and payment of the Exercise Price, the transfer books
for the Warrant Shares or other class of stock purchasable upon the exercise of
such Warrants shall be closed, the certificates for the Warrant Shares in
respect of which such Warrants are then exercised shall be issuable as of the
date on which such books shall next be opened (whether before or after the
Expiration Date) and until such date the Corporation shall be under no duty to
deliver any certificate for such Warrant Shares. The rights of purchase
represented by the Warrants shall be exercisable, at the election of the Holders
thereof, either in full or from time to time in part and, in the event that a
Warrant is exercised in respect of less than all of the Warrant Shares
purchasable on such exercise at any time prior to the Expiration Date of the
Warrants, a new Warrant evidencing the remaining Warrant or Warrants will be
issued; provided, however, the Corporation shall not be required to issue
fractional Warrants. All Warrants surrendered in the exercise of the rights
thereby evidenced shall be canceled by the Corporation.
3. LIMITATIONS ON THE TRANSFERABILITY OF WARRANTS. The Warrants shall
not be transferable unless the Holder complies with this paragraph. Any
purported transfer not in compliance with this paragraph shall be null and void.
The Warrants shall be transferable only on the books of the Corporation
maintained at its office at 4499 Glencoe Avenue, Marina Del Rey, California
90292, or at such other address as the Corporation may designate to the Holder
in writing, upon delivery thereof duly endorsed with signatures properly
guaranteed by a commercial bank or securities brokerage firm or accompanied by
proper evidence of succession, assignment or authority to transfer. Upon any
registration of transfer, the Corporation shall deliver a new Warrant or
Warrants to the persons entitled thereto bearing the following or similar legend
if such Warrant or Warrants are not registered under the ACT:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT", AND SHALL NOT BE (1) SOLD,
PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED FOR CONSIDERATION, BY THE
HOLDER, EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF
ITS COUNSEL AND/OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS
MAY BE SATISFACTORY TO COUNSEL FOR THE CORPORATION, IN EITHER CASE TO THE EFFECT
THAT ANY SUCH TRANSFER FOR CONSIDERATION SHALL NOT BE IN VIOLATION OF THE ACT OR
RULE 144 PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE ACT AND
APPLICABLE STATE
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<PAGE> 4
SECURITIES LAWS; OR (2) TRANSFERRED WITHOUT CONSIDERATION BY THE HOLDER EXCEPT
UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF ITS COUNSEL OR
THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS MAY BE SATISFACTORY
TO COUNSEL TO THE CORPORATION, IN EITHER CASE TO THE EFFECT THAT ANY SUCH
TRANSFER SHALL NOT BE IN VIOLATION OF THE ACT AND APPLICABLE STATE SECURITIES
LAWS.
4. COVENANT OF THE HOLDER. The Holder covenants and agrees that, during
a period of not less that 180 days from the date of an initial public offering
registered and declared effective by the Securities and Exchange Commission
under the Act, the Holder will not, without the prior written consent of the
underwriter (which consent may be unreasonably withheld), directly or
indirectly, sell, offer to sell, grant any option for the sale of, or otherwise
dispose of or transfer, whether directly, indirectly or synthetically, any
Warrant Shares. The Holder further agrees that it will execute all documentation
with any underwriter of said offering as and if required reflecting the covenant
as provided in this Section 4.
5. PAYMENT OF TAXES. The Corporation will pay all documentary stamp
taxes, if any, attributable to the initial issuance of Warrant Shares upon the
exercise of Warrants; provided, however, that the Corporation shall not be
required to pay any other tax or taxes which may be payable in respect of any
transfers involved in the issuance or delivery of any Warrants or certificates
for Warrant Shares in a name other than that of the registered Holder of the
Warrants in respect of which such Warrant Shares are issued, and in such case
the Corporation shall not be required to issue or deliver any certificate for
shares of Common Stock or any Warrant until the person requesting the same has
paid to the Corporation the amount of such tax or has established to the
Corporation's satisfaction that such tax has been paid.
6. MUTILATED, LOST, STOLEN OR DESTROYED. In case any of the Warrants
shall be mutilated, lost, stolen or destroyed, the Corporation may at its
discretion issue, upon cancellation of the mutilated Warrant, or in lieu of and
in substitution for the Warrant lost, stolen or destroyed, a new Warrant of like
tenor and representing an equivalent right or interest; but only upon receipt of
evidence satisfactory to the Corporation of such loss, theft or destruction of
such Warrant, and indemnity, if requested, also satisfactory to the Corporation.
An applicant for such a substitute Warrant shall also comply with such other
reasonable regulations as the Corporation may prescribe.
7. RESERVATION OF WARRANT SHARES. The Corporation shall at all times,
while the Warrants are exercisable, keep reserved, out of its authorized Common
Stock, a number of shares of Common Stock sufficient to provide for the exercise
of the rights of purchase represented by the outstanding Warrants. Immediately
after the Expiration Date, however, no shares shall be subject to reservation in
respect of such Warrants.
8. CANCELLATION OF WARRANTS. The Corporation shall cancel any Warrants
surrendered for exchange, substitution, transfer or exercise in whole or in
part.
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<PAGE> 5
9. ADJUSTMENTS. The Warrant Shares purchasable hereunder and the
Exercise Price shall be subject to adjustments from time to time upon the
happening of certain events, as hereinafter defined:
9.1. MECHANICAL ADJUSTMENTS. The number of Warrant Shares purchasable
upon the exercise of each Warrant and the Exercise Price shall be
subject to adjustment as follows:
(a) In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split, or other change in
corporate structure affecting the Common Stock of the Corporation, an
appropriate adjustment will be made in (i) the aggregate number of
shares reserved for issuance under the Warrants, and (ii) the kind,
number and exercise price of shares subject to the Warrants, provided
that the number of shares subject to the Warrants shall always be a
whole number. The number of Warrant Shares purchasable upon exercise of
each Warrant immediately prior thereto shall be adjusted so that the
Holder of each Warrant shall be entitled to receive the kind and number
of Warrant Shares or other securities of the Corporation which the
Holder would have owned or have been entitled to receive after the
happening of any of the events described above, had such Warrant been
exercised immediately prior to the happening of such event or any record
date with respect thereto. An adjustment made pursuant to this paragraph
(a) shall become effective immediately after the effective date of such
event retroactive to the record date, if any, for such event.
(b) No adjustment in the number of Warrant Shares purchasable
hereunder shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the number of
Warrant Shares purchasable upon the exercise of each Warrant; provided,
however, that any adjustments which by reason of this paragraph (b) are
not required to be made shall be carried forward and taken into account
in any subsequent adjustment. All calculations shall be made to the
nearest one-hundredth of a share.
(c) Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant is adjusted, as herein provided, the Exercise
Price payable upon the exercise of each Warrant shall be adjusted by
multiplying the Exercise Price immediately prior to the adjustment by a
fraction, of which the numerator shall be the number of Warrant Shares
purchasable upon the exercise of each Warrant immediately prior to the
adjustment, and of which the denominator shall be the number of Warrant
Shares so purchasable immediately thereafter.
(d) For the purpose of this Subsection 9.1, the term "shares of
Common Stock" shall mean (i) the class of stock designated as the Common
Stock of the Corporation at the date of this Warrant, or (ii) any other
class of stock resulting from successive changes or reclassification of
such shares consisting solely of changes in par value, or from par value
to no par value, or from no par value to par value. In the event that at
any time, as a result of an adjustment made pursuant to paragraph (a)
above, the Holder shall become entitled to purchase any shares of the
Corporation other than shares of Common Stock, thereafter the number of
such
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<PAGE> 6
other shares so purchasable upon exercise of each warrant and the
Exercise Price of such shares shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to
the provisions with respect to the Warrant Shares contained in
paragraphs (a) through (c) above, and the provisions of Sections 1 and 2
and Subsections 9.2 through 9.4, with respect to the Warrant Shares,
shall apply on like terms to any such other shares.
9.2. VOLUNTARY ADJUSTMENT BY THE CORPORATION. The Corporation may at any
time during the term of the Warrants, reduce the then current Exercise Price to
any amount deemed appropriate by the Board of Directors of the Corporation,
approve additional periods for exercise of the Warrants or extend the Expiration
Date to any time deemed appropriate by the Board of Directors of the
Corporation.
9.3. NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares
purchasable upon the exercise of each Warrant or the Exercise Price of such
Warrant Shares is adjusted, as herein provided, the Corporation shall cause to
be mailed by first class mail, postage prepaid, to each Holder notice of such
adjustment or adjustments setting forth the number of Warrant Shares purchasable
upon the exercise of each Warrant and the Exercise Price of such Warrant Shares
after such adjustment, setting forth a brief statement of the facts requiring
such adjustment and setting forth the computation by which such adjustment was
made. Any failure by the Corporation to give notice to the Holder or any defect
therein shall not affect the validity of such adjustment or of the event
resulting in the adjustment, nor of the Holder's rights to such adjustment.
9.4. NO ADJUSTMENT FOR DIVIDENDS OR DISTRIBUTIONS. Except as provided in
Subsections 9.1 and 9.6, no adjustments in respect of any dividends or
distributions shall be made during the term of a Warrant or upon the exercise of
a Warrant.
9.5. RIGHTS UPON CONSOLIDATION, MERGER, ETC.
(a) In case of any consolidation of the Corporation with or merger
of the Corporation into another corporation or in case of any sale or
conveyance to another corporation of the property of the Corporation as
an entirety or substantially as an entirety ("Sale"), such successor or
purchasing corporation may assume the obligations hereunder, and may
execute with the Corporation an agreement that each Holder shall have
the right thereafter upon payment of the Exercise Price to purchase upon
exercise of each Warrant the kind and amount of shares and other
securities and property (including cash) which he would have owned or
have been entitled to receive after the consummation of such Sale had
such Warrant been exercised immediately prior to the Sale. The
Corporation shall mail by first class mail, postage prepaid, to each
Holder notice of the execution of any Sale agreement. Such agreement
shall provide for adjustments, which shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Section 9.
The provisions of this Subsection 9.5 shall similarly apply to
successive consolidations, mergers, sales or conveyances.
(b) In the event that such successor corporation does not execute
an agreement with the Corporation as provided in paragraph (a) above,
then each
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<PAGE> 7
Holder shall be entitled to exercise outstanding Warrants upon the
payment of the Exercise Price during a period of at least thirty (30)
days (or such lesser number of days then remaining in the Exercise
Period) which period shall terminate not less than ten (10) days prior
to consummation of the Sale, and thereby receive consideration in the
transaction on the same basis as other previously outstanding shares of
the same class as the Warrant Shares acquired upon exercise. Warrants
not exercised in accordance with this paragraph (b) before consummation
of the Sale will be canceled and become null and void. The Corporation
shall mail by first class mail, postage prepaid, to each Holder, at
least ten (10) days prior to the first date on which the Warrants are
exercisable pursuant to this paragraph (b), notice of the proposed
transaction setting forth the first and last date on which the Holder
may exercise outstanding Warrants and a description of the terms of this
Warrant providing for cancellation of the Warrants in the event the
Warrants are not exercised by the prescribed date.
(c) The Corporation's failure to give any notice required by this
Subsection 9.5 or any defect therein shall not affect the validity of
any Sale.
9.6. RIGHTS UPON LIQUIDATION. In case (i) the Corporation shall make any
distribution of its assets to holders of its shares of Common Stock as a
liquidation or partial liquidation dividend or by way of return of capital; or
(ii) the Corporation shall liquidate, dissolve or wind up its affairs (other
than in connection with a Sale); or (iii) an involuntary liquidation occurs,
then the Corporation shall cause to be mailed to each Holder, by first class
mail, at least twenty (20) days prior to the applicable record date, a notice
stating the date on which such distribution, liquidation, dissolution or winding
up is expected to become effective, and the date on which it is expected that
holders of shares of Common Stock of record shall be entitled to exchange their
shares of Common Stock for securities or other property or assets (including
cash) deliverable upon such distribution, liquidation, dissolution or winding
up. The Corporation=s failure to give the notice required by this Subsection 9.6
or any defect therein shall not affect the validity of such distribution,
liquidation, dissolution or winding up.
9.7. STATEMENT ON WARRANTS. Irrespective of any adjustments in the
Exercise Price, Warrants theretofore or thereafter issued may continue to
express the same price as is stated in the Warrants initially issued.
10. NO RIGHTS AS STOCKHOLDERS. Nothing contained in this Warrant shall
be construed as conferring upon the Holder hereof the right to vote or to
receive dividends or to consent or to receive notice as stockholders in respect
of any meeting of stockholders called for the election of directors of the
Corporation or any other matter, or any rights whatsoever as stockholders of the
Corporation.
11. NOTICES. Any notice pursuant to this Warrant by any Holder to the
Corporation or by the Corporation to any Holder, shall be in writing and shall
be mailed first class, postage prepaid, or delivered: (i) to the Corporation, at
its office at 4499 Glencoe Avenue, Marina Del Rey, California 90292 or such
other address as the Corporation may designate in writing to the Holder; or (ii)
to the Holder, at the Holder's address on the books of the Corporation. The
Corporation's failure to give any notice required by this Warrant
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<PAGE> 8
or any defect therein shall not affect the validity of the action taken by the
Corporation in connection therewith.
12. APPLICABLE LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of California, to the extent not preempted
by federal law, without giving effect to principles of conflict of laws.
13. SECURITIES LAWS. The exercise of Warrants is prohibited unless the
issuance of the Warrant Shares has been registered or qualified under applicable
federal and state laws or unless there is an exemption available from such
requirements.
14. CAPTIONS. The captions of the sections and subsections of this
Warrant have been inserted for convenience only and shall have no substantive
effect.
15. FORUM DESIGNATION. Any action or proceeding against any of the
parties hereto relating in any way to this Warrant or the subject matter hereof
shall be brought and enforced exclusively in the competent courts of California,
and the parties hereto consent to the exclusive jurisdiction of such courts in
respect of such action or proceeding.
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<PAGE> 9
WITNESS the seal of the Corporation and the signatures of its duly
authorized officers.
ICNT, INC.
a California corporation
By: /s/ JOHN COMBS
------------------------------------
Name: John Combs
Title: Chief Executive Officer
By: /s/ CLIFFORD YOUNG
------------------------------------
Name: Clifford Young
Title: President
Initial Date of Issuance:
March 28, 2000
(Corporate Seal)
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<PAGE> 10
SUBSCRIPTION FORM
(TO BE EXECUTED UPON EXERCISE OF THE WARRANT PURSUANT TO SECTION 2)
THE UNDERSIGNED HEREBY IRREVOCABLY ELECTS TO EXERCISE THE RIGHT OF
PURCHASE REPRESENTED BY THE WITHIN WARRANT CERTIFICATE FOR, AND TO PURCHASE
THEREUNDER ______________ SHARES OF COMMON STOCK, AS PROVIDED FOR THEREIN, AND
TENDERS HEREWITH PAYMENT OF THE PURCHASE PRICE IN FULL IN THE FORM OF CASH OR A
CERTIFIED OR OFFICIAL BANK CHECK IN THE AMOUNT OF $____________.
PLEASE ISSUE A CERTIFICATE OR CERTIFICATES FOR SUCH COMMON STOCK IN THE
NAME OF:
NAME:
-----------------------------
-----------------------------------
-----------------------------------
-----------------------------------
(PLEASE PRINT NAME, ADDRESS AND
SOCIAL SECURITY NUMBER)
SIGNATURE
-------------------------
NOTE: THE ABOVE SIGNATURE SHOULD CORRESPOND EXACTLY WITH THE NAME ON THE FIRST
PAGE OF THIS WARRANT CERTIFICATE OR WITH THE NAME OF THE ASSIGNEE APPEARING IN
THE ASSIGNMENT FORM BELOW.
IF SAID NUMBER OF SHARES SHALL NOT BE ALL OF THE SHARES PURCHASABLE
UNDER THE WITHIN WARRANT CERTIFICATE, A NEW WARRANT CERTIFICATE IS TO BE ISSUED
IN THE NAME OF AFOREMENTIONED FOR THE BALANCE OF THE REMAINING SHARES
PURCHASABLE THEREUNDER, ROUNDED UP TO THE NEAREST WHOLE NUMBER OF SHARES, IF
APPLICABLE.
-10-
<PAGE> 1
EXHIBIT 10.1
ICNT, INC.
1999 STOCK OPTION, DEFERRED STOCK
AND
RESTRICTED STOCK PLAN
SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS.
(a) This plan is intended to implement and govern the 1999 Stock Option,
Deferred Stock and Restricted Stock Plan (the "Plan") of ICNT, Inc., a
California corporation (the "Company"). The Plan was adopted by the Board of
Directors as of September 28, 1999, subject to shareholder approval within 12
months from such date. The purpose of the Plan is to enable the Company to
obtain and retain competent personnel who will contribute to the Company's
success by their ability, ingenuity and industry, and to provide incentives to
such personnel and members that are linked directly to increases in shareholder
value, and will therefore, inure to the benefit of all shareholders of the
Company.
(b) For purposes of the Plan, the following terms shall be defined as
set forth below:
(1) "Administrator" means the Board, or if the Board does not
administer the Plan, the Committee, in accordance with Section 2.
(2) "Award" means any award of Deferred Stock, Restricted
Stock or Stock Option.
(3) "Board" means the Board of Directors of the Company.
(4) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, or any successor thereto.
(5) "Commission" means the Securities and Exchange Commission.
(6) "Committee" means the Compensation Committee of the Board, or
any other Committee the Board may subsequently appoint to administer the Plan.
If at any time the Board shall administer the Plan, then the functions of the
Committee specified in the Plan shall be exercised by the Board.
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(7) "Company" means ICNT, Inc., a corporation organized under
the laws of California (or any successor corporation).
(8) "Deferred Stock" means an award made granted pursuant to
Section 6 below of the right to receive Stock at the end of a specified deferral
period.
(9) "Disability" means permanent and total disability as
determined under the Company's disability program or policy, or if such
disability program or policy does not exist, then any disability that renders an
Eligible Employee unable to serve the Company or any future Subsidiary or Parent
Corporation in the capacity for which such Eligible Employee served immediately
prior to such disability.
(10) "Effective Date" shall mean the date provided pursuant to
Section 15.
(11) "Eligible Employee" means an employee, consultant or advisor
of the Company, any future Subsidiary, any future Parent Corporation or any
majority-owned subsidiaries of any Parent Corporation eligible to participate in
the Plan pursuant to Section 4.
(12) "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
(13) "Fair Market Value" means, as of any given date, with
respect to any Awards granted hereunder, at the discretion of the Administrator
and subject to such limitations as the Administrator may impose, (A) the closing
sales price of the Stock on such date, or (B) the average of the closing sales
price of the Stock on each day on which the Stock was traded over a period of up
to twenty trading days immediately prior to such date, or (C) if the Stock is
not publicly traded, the fair market value of the Stock as otherwise determined
by the Administrator in the good faith exercise of its discretion.
(14) "Incentive Stock Option" means any Stock option intended to
be designated as an "incentive stock option" within the meaning of Section 422
of the Code.
(15) "Non-Qualified Stock Option" means any Stock Option that is
not an Incentive Stock Option, including any Stock Option that provides (as of
the time such option is granted) that it will not be treated as an Incentive
Stock Option.
(16) "Parent Corporation" means any corporation (other than the
Company) in an unbroken chain of corporations ending with the Company, if each
of the corporations other than the Company owns stock possessing 50% or more of
the total combined voting power of all classes of stock in one of the other
corporations in the chain.
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(17) "Participant" means any Eligible Employee selected by the
Administrator pursuant to the Administrator's authority in Section 2 below to
receive grants of Stock Options or Awards or any combination of the foregoing.
(18) "Restricted Period" means the period set by the
Administrator as it pertains to Deferred Stock or Restricted Stock awards
pursuant to Section 6.
(19) "Restricted Stock" means an award of shares of Stock granted
pursuant to Section 6 subject to restrictions that will lapse with the passage
of time or upon the attainment of performance objectives.
(20) "Securities Act" means the Securities Act of 1933, as
amended.
(21) "Stock" means the common stock, no par value, of the
Company.
(22) "Stock Option" means an option to purchase shares of Stock
granted pursuant to Section 5.
(23) "Subsidiary" means any corporation (other than the Company)
in an unbroken chain of corporations beginning with the Company, if each of the
corporations (other than the last corporation) in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in the chain.
SECTION 2. ADMINISTRATION.
(a) The Plan shall be administered by the Board or by a Committee
appointed by the Board, which shall serve at the pleasure of the Board;
provided, however, that if the Stock is registered under Section 12 of the
Securities Act and if the Committee does not consist solely of "Non-Employee
Directors," as defined in Rule 16b-3 as promulgated by the Commission under the
Exchange Act, and as such Rule may be amended from time to time, or any
successor definition adopted by the Commission, then the Plan shall be
administered, and each grant shall be approved, by the Board.
(b) The Administrator shall have the power and authority to grant to
Eligible Employees, pursuant to the terms of the Plan: (i) Stock Options, (ii)
Deferred Stock, (iii) Restricted Stock, or (iv) any combination of the
foregoing.
In particular, the Administrator shall have the authority;
(1) to select those employees of the Company or any future Subsidiary
or any
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<PAGE> 4
future Parent Corporation who are Eligible Employees;
(2) to determine whether and to what extent Stock Options,
Deferred Stock, Restricted Stock or a combination of the foregoing, are to be
granted to Eligible Employees of the Company or any future Subsidiary hereunder;
(3) to determine the number of shares of Stock to be covered by
each such Award;
(4) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any such Award including, but not limited to, (i) the
restricted period applicable to Deferred Stock or Restricted Stock awards, (ii)
the date or dates on which restrictions applicable to such Deferred Stock or
Restricted Stock shall lapse during such period, and (iii) when and in what
increments shares covered by Stock Options may be purchased; and
(5) to determine the terms and conditions, not inconsistent with
the terms of the Plan, which shall govern all written instruments evidencing the
Stock Options, Deferred Stock, Restricted Stock or any combination of the
foregoing.
(c) The Administrator shall have the authority, in its discretion, to
adopt, alter and repeal such administrative rules, guidelines and practices
governing the Plan as it shall from time to time deem advisable; to interpret
the terms and provisions of the Plan and any Award issued under the Plan (and
any agreements relating thereto); and to otherwise supervise the administration
of the Plan.
(d) All decisions made by the Administrator pursuant to the provisions
of the Plan shall be final and binding on all persons, including the Company,
any future Subsidiaries or Parent Corporation and the Participants.
SECTION 3. STOCK SUBJECT TO PLAN.
(a) The total number of shares of Stock reserved and available for
issuance under the Plan shall be 5,333,334 shares. Such shares shall consist of
authorized but unissued shares.
(b) To the extent that (i) a Stock Option expires or is otherwise
terminated without being exercised or (ii) any shares of Stock subject to any
Deferred Stock or Restricted Stock award granted hereunder are forfeited, such
shares shall again be available for issuance in connection with future Awards
under the Plan. If any shares of Stock have been pledged as collateral for
indebtedness incurred by a Participant in connection with the exercise of a
Stock Option and such shares are returned to the Company in satisfaction of such
indebtedness, such
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<PAGE> 5
shares shall again be available for issuance in connection with future
Awards under the Plan.
(c) In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, or other change in corporate structure
affecting the Stock, an appropriate substitution or adjustment shall be made in
(i) the aggregate number of shares reserved for issuance under the Plan, and
(ii) the kind, number and option price of shares subject to outstanding Stock
Options or Awards granted under the Plan as may be determined by the
Administrator, in its sole discretion, provided that the number of shares
subject to any Award shall always be a whole number. Such other substitutions or
adjustments shall be made as may be determined by the Administrator, in its sole
discretion; provided, however, that with respect to Incentive Stock Options,
such adjustment shall be made in accordance with Section 424 of the Code.
Section 4. Eligibility.
Officers and other key employees, directors and consultants and advisors
of the Company, any future Subsidiary or any future Parent Corporation who are
responsible for or contribute to the management, growth and/or profitability of
the business of the Company, shall be eligible to be granted Non-Qualified Stock
Options, Deferred Stock or Restricted Stock awards hereunder. Officers and other
key employees of the Company, any future Subsidiary or any future Parent
Corporation shall also be eligible to be granted Incentive Stock Options
hereunder. The Participants under the Plan shall be selected from time to time
by the Administrator, in its sole discretion, from among the Eligible Employees
recommended by the senior management of the Company, and the Administrator shall
determine, in its sole discretion, the number of shares covered by each Award.
Section 5. Stock Options for Eligible Employees.
(a) Stock Options may be granted to Eligible Employees alone or in
addition to other Awards granted under the Plan. Any Stock Option granted under
the Plan shall be in such form as the Administrator may from time to time
approve, and the provisions of Stock Option awards need not be the same with
respect to each optionee. Recipients of Stock Options shall enter into a stock
option agreement with the Company, in such form as the Administrator shall
determine, which agreement shall set forth, among other things, the exercise
price of the option, the term of the option and provisions regarding
exercisability of the option granted thereunder.
(b) The Stock Options granted under the Plan to Eligible Employees may
be of two types: (x) Incentive Stock Options and (y) Non-Qualified Stock
Options.
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<PAGE> 6
The Administrator shall have the authority under this Section 5 to grant
any optionee Incentive Stock Options, Non-Qualified Stock Options, or both types
of Stock Options; provided, however, that Incentive Stock Options may not be
granted to any individual who is not an employee of the Company, any future
Subsidiaries or any future Parent Corporation. To the extent that any Stock
Option does not qualify as an Incentive Stock Option, it shall constitute a
separate Non-Qualified Stock Option. More than one option may be granted to the
same optionee and be outstanding concurrently hereunder.
(c) Stock Options granted under the Plan shall be subject to the
following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of the Plan, as the Administrator
shall, in its sole discretion, deem desirable:
(i) Option Price. The option price per share of Stock purchasable
under an Incentive Stock Option shall be determined by the Administrator, in its
sole discretion, at the time of grant but shall be not less than 100% of the
Fair Market Value of the Stock on such date, and shall not, in any event, be
less than the par value of the Stock, if any. The option price per share of
Stock purchasable under a Non-Qualified Stock Option may be less than 100% of
such Fair Market Value, but in no event less than 85% of such Fair Market Value.
If an employee owns or is deemed to own (by reason of the attribution rules
applicable under Section 424(d) of the Code) more than 10% of the combined
voting power of all classes of stock of the Company or any future Parent
Corporation or any future Subsidiary and an Incentive Stock Option is granted to
such employee, the option price of such Incentive Stock Option (to the extent
required by the Code at the time of grant) shall be no less than 110% of the
Fair Market Value of the Stock on the date such Incentive Stock Option is
granted.
(ii) Option Term. The term of each Stock Option shall be fixed by
the Administrator, but no Stock Option shall be exercisable more than ten years
after the date such Stock Option is granted; provided, however, that if an
employee owns or is deemed to own (by reason of the attribution rules of Section
424(d) of the Code) more than 10% of the combined voting power of all classes of
stock of the Company or any future Parent Corporation or any future Subsidiary
and an Incentive Stock Option is granted to such employee, the term of such
Incentive Stock Option (to the extent required by the Code at the time of grant)
shall be no more than five years from the date of grant.
(iii) Exercisability. Stock Options shall be exercisable at such
time or times and subject to such terms and conditions as shall be determined by
the Administrator at or after grant; provided, however, that, except as provided
herein or unless otherwise determined by the Administrator at or after grant,
Stock Options shall be exercisable one year following the date of grant of the
option, but in no case, less than six (6) months following the date of the grant
of the option. With respect to Stock Options issued to non-officer employees of
the Company, any
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<PAGE> 7
future Subsidiary or Parent Corporation, such Stock Options shall vest at least
20% per year over the five-year period commencing from the date of grant. To the
extent not exercised, installments shall accumulate and be exercisable in whole
or in part at any time after becoming exercisable but not later than the date
the Stock Option expires. The Administrator may provide, in its discretion, that
any Stock Option shall be exercisable only in installments, and the
Administrator may waive such installment exercise provisions at any time in
whole or in part based on such factors as the Administrator may determine in its
sole discretion.
(iv) Method of Exercise. Subject to Subsection 5(c)(iii), Stock
Options may be exercised in whole or in part at any time during the option
period by giving written notice of exercise to the Company specifying the number
of shares to be purchased, accompanied by payment in full of the purchase price
in cash or its cash equivalent, as determined by the Administrator. The
Administrator may, in its sole discretion, accept payment in whole or in part on
behalf of the Company (i) in the form of unrestricted Stock already owned by the
optionee, or, in the case of the exercise of a Non-Qualified Stock Option,
Restricted Stock subject to an Award hereunder (based, in each case, on the Fair
Market Value of the Stock on the date the option is exercised), (ii) by
cancellation of any indebtedness owed by the Company to the optionee, (iii) by a
full recourse promissory note executed by the optionee, (iv) by requesting that
the Company withhold whole shares of Common Stock then issuable upon exercise of
the Stock Option (based on the Fair Market Value of the Stock on the date the
option is exercised), (v) by arrangement with a broker which is acceptable to
the Administrator where payment of the option price is made pursuant to an
irrevocable direction to the broker to deliver all or part of the proceeds from
the sale of the shares underlying the option to the Company, or (vi) by any
combination of the foregoing; provided, however, that in the case of an
Incentive Stock Option, the right to make payment in the form of already owned
shares may be authorized only at the time of grant. Any payment in the form of
stock already owned by the optionee may be effected by use of an attestation
form approved by the Administrator. If payment of the option exercise price of a
Non-Qualified Stock Option is made in whole or in part in the form of Restricted
Stock, the shares received upon the exercise of such Stock Option (to the extent
of the number of shares of Restricted Stock surrendered upon exercise of such
Stock Option) shall be restricted in accordance with the original terms of the
Restricted Stock award in question, except that the Administrator may direct
that such restrictions shall apply only to that number of shares equal to the
number of shares surrendered upon the exercise of such option. An optionee shall
generally have the rights to dividends and other rights of a shareholder with
respect to shares subject to the option only after the optionee has given
written notice of exercise, has paid in full for such shares, and, if requested,
has given the representation described in paragraph (a) of Section 10.
(d) The Administrator may require the voluntary surrender of all or a
portion of any Stock Option granted under the Plan as a condition precedent to a
grant of a new Stock Option. Subject to the provisions of the Plan, such new
Stock Option shall be exercisable at the price,
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<PAGE> 8
during such period and on such other terms and conditions as are specified by
the Administrator at the time the new Stock Option is granted; provided,
however, that should the Administrator so require, the number of shares subject
to such new Stock Option shall not be greater than the number of shares subject
to the surrendered Stock Option. Upon their surrender, the Stock Options shall
be canceled and the shares previously subject to such canceled Stock Options
shall again be available for grants of Stock Options and other Awards hereunder.
(e) The Company may make loans available to Stock Option holders in
connection with the exercise of outstanding options granted under the Plan, as
the Administrator, in its discretion, may determine. Such loans shall (i) be
evidenced by promissory notes entered into by the Stock Option holders in favor
of the Company, (ii) be subject to the terms and conditions set forth in this
paragraph and such other terms and conditions, not inconsistent with the Plan,
as the Administrator shall determine, (iii) bear interest, if any, at such rate
as the Administrator shall determine and (iv) be subject to Board approval. In
no event may the principal amount of any such loan exceed the sum of (x) the
exercise price less the par value of the shares of Stock covered by the option,
or portion thereof, exercised by the holder and (y) any Federal, state, and
local income tax attributable to such exercise. The initial term of the loan,
the schedule of payments of principal and interest under the loan, the extent to
which the loan is to be with or without recourse against the holder with respect
to principal or interest and the conditions upon which the loan will become
payable in the event of the holder's termination of employment shall be
determined by the Administrator; provided, however, that the term of the loan,
including extensions, shall not exceed seven (7) years. Unless the Administrator
determines otherwise, when a loan is made, shares of Common Stock having a Fair
Market Value at least equal to the principal amount of the loan shall be pledged
by the holder to the Company as security for payment of the unpaid balance of
the loan, and such pledge shall be evidenced by a pledge agreement, the terms of
which shall be determined by the Administrator, in its discretion; provided,
however, that each loan shall comply with all applicable laws, regulations and
rules of the Board of Governors of the Federal Reserve System and any other
governmental agency having jurisdiction.
(f) No Stock Option shall be transferable by the optionee otherwise than
by will or by the laws of descent and distribution. Incentive Stock Options
shall be exercisable, during the optionee's lifetime, only by the optionee.
(g) If an optionee's employment with the Company, any future Subsidiary
or Parent Corporation terminates by reason of death or Disability, the Stock
Option may thereafter be immediately exercised, to the extent then exercisable
(or on such accelerated basis as the Administrator shall determine at or after
grant), by the legal representative of the optionee, by the legal representative
of the estate of the optionee, or by the legatee of the optionee under the will
of the optionee, for a period of at least six (6) months from the date of such
death or disability. In
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the event of a termination of employment by reason of Disability, if an
Incentive Stock Option is exercised after the expiration of the exercise periods
that apply for purposes of Section 422 of the Code, such Stock Option shall
thereafter be treated as a Non-Qualified Stock Option.
(h) Except as otherwise provided in this paragraph or otherwise
determined by the Administrator, if an optionee's employment with the Company,
any future Subsidiary or any future Parent Corporation terminates for any reason
other than death or Disability, the optionee must exercise his or her Stock
Options within thirty (30) days from the date of such termination. If the
optionee does not exercise his or her Stock Options within this thirty (30) day
period, the Stock Options automatically terminate, and such Stock Options become
null and void.
(i) To the extent that the aggregate Fair Market Value (determined as of
the date the Incentive Stock Option is granted) of the shares of Stock with
respect to which Incentive Stock Options granted to an optionee under this Plan
and all other option plans of the Company, any future Parent Corporation and any
future Subsidiary become exercisable for the first time by the optionee during
any calendar year exceeds $100,000, such Stock Options shall be treated as
Non-Qualified Stock Options.
Section 6. Deferred Stock and Restricted Stock.
(a) Deferred Stock and Restricted Stock awards may be issued to Eligible
Employees either alone or in addition to other Awards granted under the Plan.
The Administrator shall determine the Eligible Employees, and the time or times
at which grants of Deferred Stock or Restricted Stock awards shall be made; the
number of shares to be awarded; the price, if any, to be paid by the recipient
of Deferred Stock or Restricted Stock awards; the Restricted Period (as defined
in paragraph 6(c) hereof) applicable to Deferred Stock or Restricted Stock
awards; the performance objectives applicable to Deferred Stock or Restricted
Stock awards; the date or dates on which restrictions applicable to such
Deferred Stock or Restricted Stock awards shall lapse during such Restricted
Period; and all other conditions of the Deferred Stock or Restricted Stock
awards. The Administrator may also condition the grant of Deferred Stock or
Restricted Stock awards upon the exercise of Stock Options, or upon such other
criteria as the Administrator may determine, in its sole discretion. The
provisions of Deferred Stock or Restricted Stock awards need not be the same
with respect to each recipient.
(b) The prospective recipient of a Deferred Stock or Restricted Stock
award shall not have any rights with respect to such Award, unless and until
such recipient has executed an agreement evidencing the Award (a "Deferred Stock
Award Agreement" or Restricted Stock Award Agreement" as appropriate) and has
delivered a fully executed copy thereof to the Company, within a period of sixty
days (or such other period as the Administrator may specify) after the Award
date.
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Except as provided below in this paragraph (b) of Section 6, (i)
each Participant who is awarded Restricted Stock shall be issued a stock
certificate in respect of such shares of Restricted Stock; and (ii) such
certificate shall be registered in the name of the Participant, and shall bear
an appropriate legend referring to the terms, conditions, and restrictions
applicable to such Award, substantially in the following form:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) of the ICNT, Inc. 1999 Stock Option, Deferred Stock and
Restricted Stock Plan and a Restricted Stock Award Agreement entered
into between the registered owner and ICNT, Inc. Copies of such Plan and
Agreement are on file in the offices of ICNT, Inc."
The Company shall require that the stock certificates evidencing such
shares be held in the custody of the Company until the restrictions thereon
shall have lapsed, and, as a condition of any Restricted Stock award, the
Participant shall have delivered a stock power, endorsed in blank, relating to
the Stock covered by such Award.
With respect to Deferred Stock awards, at the expiration of the
Restricted Period, stock certificates in respect of such shares of Deferred
Stock shall be delivered to the Participant, or his legal representative, in a
number equal to the shares of Stock covered by the Deferred Stock award.
(c) The Deferred Stock or Restricted Stock awards granted pursuant to
this Section 6 shall be subject to the following restrictions and conditions:
(i) Subject to the provisions of the Plan and the Deferred Stock
or Restricted Stock Award Agreements, during such period as may be set by the
Administrator commencing on the grant date (the "Restricted Period"), the
Participant shall not be permitted to sell, transfer, pledge or assign shares of
Deferred Stock or Restricted Stock awarded under the Plan. Within these limits,
the Administrator may, in its sole discretion, provide for the lapse of such
restrictions in installments and may accelerate or waive such restrictions in
whole or in part based on such factors and such circumstances as the
Administrator may determine, in its sole discretion, including, but not limited
to, the attainment of certain performance related goals, the Participant's
termination, death or Disability or the occurrence of a "Change of Control" as
defined in Section 9 below.
(ii) Except as provided in paragraph (c)(i) of this Section 6,
the Participant shall have, with respect to the shares of Restricted Stock, all
of the rights of a shareholder of the Company, including the right to vote the
shares, and the right to receive any dividends thereon during the Restricted
Period. With respect to Deferred Stock awards, the Participant shall
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generally not have the rights of a shareholder of the Company, including the
right to vote the shares during the Restricted Period; provided, however, that
dividends declared during the Restricted Period with respect to the number of
shares covered by a Deferred Stock award shall be paid to the Participant.
Certificates for shares of unrestricted Stock shall be delivered to the
Participant promptly after, and only after, the Restricted Period shall expire
without forfeiture in respect of such shares of Deferred Stock or Restricted
Stock, except as the Administrator, in its sole discretion, shall otherwise
determine.
(iii) Subject to the provisions of the Deferred Stock or
Restricted Stock Award Agreement and this Section 6, upon termination of
employment for any reason during the Restricted Period, all shares subject to
any restriction as of the date of such termination shall be forfeited by the
Participant, and the Participant shall only receive the amount, if any, paid by
the Participant for such Deferred Stock or Restricted Stock, plus simple
interest on such amount at the rate of 8% per year.
Section 7. Amendment and Termination.
(a) The Board may amend, alter or discontinue the Plan, but no
amendment, alteration, or discontinuation shall be made that would impair the
rights of the Participant under any Award theretofore granted without such
Participant's consent, or that without the approval of the shareholders (as
described below) would:
(i) except as provided in Section 3, increase the total number
of shares of Stock reserved for the purpose of the Plan;
(ii) change the employees or class of employees eligible to
participate in the Plan;
(iii) extend the maximum option period under Section 5 of the
Plan.
(b) Notwithstanding the foregoing, shareholder approval under this
Section 7 shall only be required at such time and under such circumstances as
shareholder approval would be required under applicable federal and state laws,
regulations and exchange requirements.
(c) The Administrator may amend the terms of any Award theretofore
granted, prospectively or retroactively, but, subject to Section 3, no such
amendment shall impair the rights of any holder without his or her consent.
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Section 8. Unfunded Status of Plan.
The Plan is intended to constitute an "unfunded" plan for incentive
compensation. With respect to any payments not yet made to a Participant or
optionee by the Company, nothing contained herein shall give any such
Participant or optionee any rights that are greater than those of a general
creditor of the Company.
Section 9. Change of Control.
The following acceleration and valuation provisions shall apply in the
event of a "Change of Control", as defined in paragraph (b) of this Section 9:
(a) In the event of a "Change of Control," unless otherwise determined
by the Administrator or the Board in writing at or after grant (including under
any individual agreement), but prior to the occurrence of such Change of
Control;
(i) the restrictions applicable to any Restricted Stock or
Deferred Stock awards under the Plan shall lapse, and such shares and all
outstanding Awards, including but not limited to all outstanding Stock Options,
shall be deemed fully vested;
(ii) any indebtedness incurred pursuant to paragraph (e) of
Section 5 above shall be forgiven and the collateral pledged in connection with
any such loan shall be released; and
(iii) the value of all outstanding Stock Options, Restricted
Stock and Deferred Stock awards shall, to the extent determined by the
Administrator at or after grant, be cashed out by a payment of cash or other
property, as the Administrator may determine, on the basis of the "Change of
Control Price" (as defined in paragraph (c) of this Section 9) as of the date
the Change of Control occurs or such other date as the Administrator may
determine prior to the Change of Control.
(b) For purposes of paragraph (a) of this Section 9, a "Change of
Control" shall be deemed to have occurred if:
(i) any "person," as such term is used in Sections 13(d) and
14(d) of the Exchange Act (other than the Company; any trustee or other
fiduciary holding securities under an employee benefit plan of the Company; or
any company owned, directly or indirectly, by the shareholders of the Company in
substantially the same proportions as their ownership of the Stock of the
Company) is or becomes after the Effective Date the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company (not including in the securities beneficially owned by
such person or any securities acquired directly
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from the Company or its affiliates) representing 50% or more of the combined
voting power of the Company's then outstanding securities; or
(ii) during any period of two consecutive years (not including
any period prior to the Effective Date), individuals who at the beginning of
such period constitute the Board, and any new director (other than a director
designated by a person who has entered into an agreement with the Company to
effect a transaction described in clause (i), (iii) or (iv) of this paragraph
(b) of Section 9) whose election by the Board or nomination for election by the
Company's shareholders was approved by a vote of at least two-thirds (2/3) of
the directors then still in office who either were directors at the beginning of
the period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority thereof; or
(iii) the shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than (A) a merger
or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity), in combination with the ownership of any trustee or other
fiduciary holding securities under an employee benefit plan of the Company, at
least 75% of the combined voting power of the voting securities of the Company
or such surviving entity outstanding immediately after such merger or
consolidation or (B) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no person
acquires more than 50% of the combined voting power of the Company's then
outstanding securities; or
(iv) the shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
(c) For purposes of this Section 9, "Change of Control Price" means the
higher of (i) the highest price per share paid or offered in any transaction
related to a Change of Control of the Company or (ii) the highest price per
share paid in any transaction reported on the exchange or national market system
on which the Stock is listed, at any time during the preceding sixty day period
as determined by the Administrator, except that, in the case of Incentive Stock
Options and Stock Appreciation Rights or Limited Stock Appreciation Rights
relating to Incentive Stock Options, such price shall be based only on
transactions reported for the date on which the Administrator decides to cash
out such options.
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Section 10. General Provisions.
(a) The Administrator may require each person purchasing shares pursuant
to a Stock Option to represent to and agree with the Company in writing that
such person is acquiring the shares without a view to distribution thereof. The
certificates for such shares may include any legend which the Administrator
deems appropriate to reflect any restrictions on transfer.
All certificates for shares of Stock delivered under the Plan shall be
subject to such stock-transfer orders and other restrictions as the
Administrator may deem advisable under the rules, regulations, and other
requirements of the Commission, any stock exchange upon which the Stock is then
listed, and any applicable Federal or state securities law, and the
Administrator may cause a legend or legends to be placed on any such
certificates to make appropriate reference to such restrictions.
(b) Nothing contained in the Plan shall prevent the Board from adopting
other or additional compensation arrangements, subject to shareholder approval
if such approval is required; and such arrangements may be either generally
applicable or applicable only in specific cases.
(c) Each Participant shall, no later than the date as of which the value
of an Award first becomes includable in the gross income of the Participant for
Federal income tax purposes, pay to the Company, or make arrangements
satisfactory to the Administrator regarding payment of, any Federal, state, or
local taxes of any kind required by law to be withheld with respect to the
Award. The obligations of the Company under the Plan shall be conditional on the
making of such payments or arrangements, and the Company (and, where applicable,
its Subsidiaries) shall, to the extent permitted by law, have the right to
deduct any such taxes from any payment of any kind otherwise due to the
Participant.
(d) No member of the Board or the Administrator, nor any officer or
employee of the Company acting on behalf of the Board or the Administrator,
shall be personally liable for any action, determination, or interpretation
taken or made in good faith with respect to the Plan, and all members of the
Board or the Administrator and each and any officer or employee of the Company
acting on their behalf shall, to the extent permitted by law, be fully
indemnified and protected by the Company in respect of any such action,
determination or interpretation.
(e) This Plan is purely voluntary on the part of the Company, and while
the Company hopes to continue it indefinitely, the continuance of the Plan shall
not be deemed to constitute a contract between the Company and any employee, or
to be consideration for or a condition of the employment of any employee.
Nothing contained in the Plan shall be deemed to give any employee the right to
be retained in the employ of the Company, any future Subsidiaries, or any
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future Parent Corporation to interfere with the right of the Company to
discharge or retire any employee thereof at any time. No employee shall have any
right to or interest in Stock Options, Restricted Stock, or Deferred Stock,
authorized hereunder prior to the grant of such a Stock Option or other award
described herein to such employee, and upon such grant he or she shall have only
such rights and interests as are expressly provided herein, subject, however, to
all applicable provisions of the Company's Articles of Incorporation, as the
same may be amended from time to time.
Section 11. Specific Performance.
The Stock Options granted under this Plan and the Shares issued pursuant
to the exercise of such Stock Options cannot be readily purchased or sold in the
open market, and, for that reason among others, the Company and its shareholders
will be irreparably damaged in the event that this Plan is not specifically
enforced. In the event of any controversy concerning the right or obligation to
purchase or sell any such Option or Optioned Stock, such right or obligation
shall be enforceable in a court of equity by a decree of a specific performance.
Such remedy shall, however, be cumulative and not exclusive, and shall be in
addition to any other remedy which the parties may have.
Section 12. Invalid Provision.
In the event that any provision of this Plan is found to be invalid or
otherwise unenforceable under any applicable law, such invalidity or
unenforceability shall not be construed as rendering any other provisions
contained herein invalid or unenforceable, and all such other provisions shall
be given full force and effect to the same extent as though the invalid
unenforceable provision was not contained herein.
Section 13. Applicable Law.
This Plan shall be governed by and construed in accordance with the laws
of the State of California.
Section 14. Successors and Assigns.
This Plan shall be binding on and inure to the benefit of the Company
and the employees to whom an Option is granted hereunder, and such employees'
heirs, executors, administrators, legatees, personal representatives, assignees
and transferees.
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Section 15. Effective Date of Plan.
The Plan became effective (the "Effective Date") on September 28, 1999.
If shareholder approval of the plan is not obtained within 12 months from the
Effective Date, all Awards granted hereunder shall be rescinded and declared
void ab initio.
Section 16. Term of Plan.
No Stock Option, Deferred Stock or Restricted Stock award shall be
granted pursuant to the Plan on or after the tenth anniversary of the Effective
Date, but Awards theretofore granted may extend beyond that date.
Section 17. Annual Financial Statements.
The Company shall deliver annual financial statements to each employee
granted a Stock Option, Deferred Stock or Restricted Stock hereunder until such
Award expires or is otherwise canceled.
Section 18. Limitation on Amount of Securities Offered.
Until such time as the Company becomes subject to the reporting
requirements of Sections 13 or 15(d) of the Exchange Act, the aggregate offering
price of securities subject to a current offer and sold, or amount of securities
sold, as the case may be, within the preceding twelve (12) months under this
Plan and any other agreement granting options under Rule 701 of the Securities
Act shall not exceed the greater of: (i) $1,000,000, (ii) 15% of the total
assets of the Company, measured as of the end of its most recently completed
fiscal year or (iii) 15% of the outstanding Stock, including securities (other
than securities issued pursuant to this Plan or any agreement granted under Rule
701) convertible or exchangeable for Stock.
Section 19. Disclosure Requirements
In the event the aggregate offering price of securities subject to
outstanding offers plus the offering price of securities sold in the preceding
twelve (12) months, as a result of Awards issued under this Plan, exceeds
$5,000,000, the Company shall deliver the following disclosure documents to the
Participant or optionee within a reasonable period of time before the applicable
date of exercise, conversion or sale:
(a) A summary of the material terms of this Plan;
(b) Information about the risks associated with purchasing the shares
of stock in the
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Company; and
(c) Financial statements as of a date no more than 180 days before the
sale of securities pursuant to this Section 19.
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IN WITNESS WHEREOF, pursuant to the due authorization and adoption of
this Plan by the Board on the day and year first above written, the Company has
caused this Plan to be duly executed by its duly authorized officers.
ICNT, Inc.
By: /s/ JOHN COMBS
--------------------------------
Name: John Combs
Title: Chief Executive Officer
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<PAGE> 1
EXHIBIT 10.2
ICNT, INC.
1999 EXECUTIVE
STOCK OPTION, DEFERRED STOCK
AND
RESTRICTED STOCK PLAN
SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS.
(a) This plan is intended to implement and govern the 1999 Executive
Stock Option, Deferred Stock and Restricted Stock Plan (the "Plan") of ICNT,
Inc., a California corporation (the "Company"). The Plan was adopted by the
Board of Directors as of September 28, 1999, subject to shareholder approval
within 12 months from such date. The purpose of the Plan is to enable the
Company to obtain and retain competent personnel who will contribute to the
Company's success by their ability, ingenuity and industry, and to provide
incentives to such personnel and members that are linked directly to increases
in shareholder value, and will therefore, inure to the benefit of all
shareholders of the Company.
(b) For purposes of the Plan, the following terms shall be defined as
set forth below:
(1) "Administrator" means the Board, or if the Board does not
administer the Plan, the Committee, in accordance with Section 2.
(2) "Award" means any award of Deferred Stock, Restricted Stock or
Stock Option.
(3) "Board" means the Board of Directors of the Company.
(4) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, or any successor thereto.
(5) "Commission" means the Securities and Exchange Commission.
(6) "Committee" means the Compensation Committee of the Board, or
any other Committee the Board may subsequently appoint to administer the Plan.
If at any time the Board shall administer the Plan, then the functions of the
Committee specified in the Plan shall be exercised by the Board.
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(7) "Company" means ICNT, Inc., a corporation organized under the
laws of California (or any successor corporation).
(8) "Deferred Stock" means an award made granted pursuant to Section
6 below of the right to receive Stock at the end of a specified deferral period.
(9) "Disability" means permanent and total disability as determined
under the Company's disability program or policy, or if such disability program
or policy does not exist, then any disability that renders an Eligible
Participant unable to serve the Company or any future Subsidiary or Parent
Corporation in the capacity for which such Eligible Participant served
immediately prior to such disability.
(10) "Effective Date" shall mean the date provided pursuant to
Section 15.
(11) "Eligible Participant" means an Officer or a director
(including a non-employee director) of the Company, any future Subsidiary, any
future Parent Corporation or any majority-owned subsidiaries of any Parent
Corporation eligible to participate in the Plan pursuant to Section 4.
(12) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(13) "Fair Market Value" means, as of any given date, with respect
to any Awards granted hereunder, at the discretion of the Administrator and
subject to such limitations as the Administrator may impose, (A) the closing
sales price of the Stock on such date, or (B) the average of the closing sales
price of the Stock on each day on which the Stock was traded over a period of up
to twenty trading days immediately prior to such date, or (C) if the Stock is
not publicly traded, the fair market value of the Stock as otherwise determined
by the Administrator in the good faith exercise of its discretion.
(14) "Incentive Stock Option" means any Stock option intended to be
designated as an "incentive stock option" within the meaning of Section 422 of
the Code.
(15) "Non-Qualified Stock Option" means any Stock Option that is not
an Incentive Stock Option, including any Stock Option that provides (as of the
time such option is granted) that it will not be treated as an Incentive Stock
Option.
(16) "Parent Corporation" means any corporation (other than the
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<PAGE> 3
Company) in an unbroken chain of corporations ending with the Company, if each
of the corporations other than the Company owns stock possessing 50% or more of
the total combined voting power of all classes of stock in one of the other
corporations in the chain.
(17) "Officer" means the Chief Executive Officer, Chairman of the
Board, President, Chief Financial Officer, Chief Accounting Officer, any vice
president in charge of a principal business function (such as sales,
administration, or finance) and any other person who performs similar
policy-making function for the Company.
(18) "Participant" means any Eligible Participant selected by the
Administrator pursuant to the Administrator's authority in Section 2 below to
receive grants of Stock Options or Awards or any combination of the foregoing.
(19) "Restricted Period" means the period set by the Administrator
as it pertains to Deferred Stock or Restricted Stock awards pursuant to Section
6.
(20) "Restricted Stock" means an award of shares of Stock granted
pursuant to Section 6 subject to restrictions that will lapse with the passage
of time or upon the attainment of performance objectives.
(21) "Securities Act" means the Securities Act of 1933, as amended.
(22) "Stock" means the common stock, no par value, of the Company.
(23) "Stock Option" means an option to purchase shares of Stock
granted pursuant to Section 5.
(24) "Subsidiary" means any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company, if each of the
corporations (other than the last corporation) in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in the chain.
SECTION 2. ADMINISTRATION.
(a) The Plan shall be administered by the Board or by a Committee
appointed by the Board, which shall serve at the pleasure of the Board;
provided, however, that if the Stock is registered under Section 12 of the
Securities Act and if the Committee does not consist solely of "Non-Employee
Directors," as defined in Rule 16b-3 as promulgated by the Commission under the
Exchange Act, and as such Rule may be amended from time to time, or any
successor definition adopted by the Commission, then the Plan shall be
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<PAGE> 4
administered, and each grant shall be approved, by the Board.
(b) The Administrator shall have the power and authority to grant to
Eligible Participants, pursuant to the terms of the Plan: (i) Stock Options,
(ii) Deferred Stock, (iii) Restricted Stock, or (iv) any combination of the
foregoing.
In particular, the Administrator shall have the authority;
(1) to select those employees of the Company or any future
Subsidiary or any future Parent Corporation who are Eligible Participants;
(2) to determine whether and to what extent Stock Options, Deferred
Stock, Restricted Stock or a combination of the foregoing, are to be granted to
Eligible Participants of the Company or any future Subsidiary hereunder;
(3) to determine the number of shares of Stock to be covered by each
such Award;
(4) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any such Award including, but not limited to, (i) the
restricted period applicable to Deferred Stock or Restricted Stock awards, (ii)
the date or dates on which restrictions applicable to such Deferred Stock or
Restricted Stock shall lapse during such period, and (iii) when and in what
increments shares covered by Stock Options may be purchased; and
(5) to determine the terms and conditions, not inconsistent with the
terms of the Plan, which shall govern all written instruments evidencing the
Stock Options, Deferred Stock, Restricted Stock or any combination of the
foregoing.
(c) The Administrator shall have the authority, in its discretion, to
adopt, alter and repeal such administrative rules, guidelines and practices
governing the Plan as it shall from time to time deem advisable; to interpret
the terms and provisions of the Plan and any Award issued under the Plan (and
any agreements relating thereto); and to otherwise supervise the administration
of the Plan.
(d) All decisions made by the Administrator pursuant to the provisions
of the Plan shall be final and binding on all persons, including the Company,
any future Subsidiaries or Parent Corporation and the Participants.
SECTION 3. STOCK SUBJECT TO PLAN.
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(a) The total number of shares of Stock reserved and available for
issuance under the Plan shall be 3,250,000 shares. Such shares shall consist of
authorized but unissued shares.
(b) To the extent that (i) a Stock Option expires or is otherwise
terminated without being exercised or (ii) any shares of Stock subject to any
Deferred Stock or Restricted Stock award granted hereunder are forfeited, such
shares shall again be available for issuance in connection with future Awards
under the Plan. If any shares of Stock have been pledged as collateral for
indebtedness incurred by a Participant in connection with the exercise of a
Stock Option and such shares are returned to the Company in satisfaction of such
indebtedness, such shares shall again be available for issuance in connection
with future Awards under the Plan.
(c) In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, or other change in corporate structure
affecting the Stock, an appropriate substitution or adjustment shall be made in
(i) the aggregate number of shares reserved for issuance under the Plan, and
(ii) the kind, number and option price of shares subject to outstanding Stock
Options or Awards granted under the Plan as may be determined by the
Administrator, in its sole discretion, provided that the number of shares
subject to any Award shall always be a whole number. Such other substitutions or
adjustments shall be made as may be determined by the Administrator, in its sole
discretion; provided, however, that with respect to Incentive Stock Options,
such adjustment shall be made in accordance with Section 424 of the Code.
SECTION 4. ELIGIBILITY.
Officers and directors (including non-employee directors) of the
Company, any future Subsidiary or any future Parent Corporation who are
responsible for or contribute to the management, growth and/or profitability of
the business of the Company, shall be eligible to be granted Non-Qualified Stock
Options, Deferred Stock or Restricted Stock awards hereunder. Officers of the
Company, any future Subsidiary or any future Parent Corporation shall also be
eligible to be granted Incentive Stock Options hereunder. The Participants under
the Plan shall be selected from time to time by the Administrator, in its sole
discretion, from among the Eligible Participants recommended by the senior
management of the Company, and the Administrator shall determine, in its sole
discretion, the number of shares covered by each Award.
SECTION 5. STOCK OPTIONS FOR ELIGIBLE PARTICIPANTS.
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<PAGE> 6
(a) Stock Options may be granted to Eligible Participants alone or in
addition to other Awards granted under the Plan. Any Stock Option granted under
the Plan shall be in such form as the Administrator may from time to time
approve, and the provisions of Stock Option awards need not be the same with
respect to each optionee. Recipients of Stock Options shall enter into a stock
option agreement with the Company, in such form as the Administrator shall
determine, which agreement shall set forth, among other things, the exercise
price of the option, the term of the option and provisions regarding
exercisability of the option granted thereunder.
(b) The Stock Options granted under the Plan to Eligible Participants
may be of two types: (x) Incentive Stock Options and (y) Non-Qualified Stock
Options.
The Administrator shall have the authority under this Section 5 to
grant any optionee Incentive Stock Options, Non-Qualified Stock Options, or both
types of Stock Options; provided, however, that Incentive Stock Options may not
be granted to any individual who is not an employee of the Company, any future
Subsidiaries or any future Parent Corporation. To the extent that any Stock
Option does not qualify as an Incentive Stock Option, it shall constitute a
separate Non-Qualified Stock Option. More than one option may be granted to the
same optionee and be outstanding concurrently hereunder.
(c) Stock Options granted under the Plan shall be subject to the
following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of the Plan, as the Administrator
shall, in its sole discretion, deem desirable:
(i) Option Price. The option price per share of Stock purchasable
under an Incentive Stock Option shall be determined by the Administrator, in its
sole discretion, at the time of grant but shall be not less than 100% of the
Fair Market Value of the Stock on such date, and shall not, in any event, be
less than the par value of the Stock, if any. The option price per share of
Stock purchasable under a Non-Qualified Stock Option may be less than 100% of
such Fair Market Value, but in no event less than 85% of such Fair Market Value.
If an employee owns or is deemed to own (by reason of the attribution rules
applicable under Section 424(d) of the Code) more than 10% of the combined
voting power of all classes of stock of the Company or any future Parent
Corporation or any future Subsidiary and an Incentive Stock Option is granted to
such employee, the option price of such Incentive Stock Option (to the extent
required by the Code at the time of grant) shall be no less than 110% of the
Fair Market Value of the Stock on the date such Incentive Stock Option is
granted.
(ii) Option Term. The term of each Stock Option shall be fixed by
the Administrator, but no Stock Option shall be exercisable more than ten years
after the date
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<PAGE> 7
such Stock Option is granted; provided, however, that if an employee owns or is
deemed to own (by reason of the attribution rules of Section 424(d) of the Code)
more than 10% of the combined voting power of all classes of stock of the
Company or any future Parent Corporation or any future Subsidiary and an
Incentive Stock Option is granted to such employee, the term of such Incentive
Stock Option (to the extent required by the Code at the time of grant) shall be
no more than five years from the date of grant.
(iii) Exercisability. Stock Options shall be exercisable at such
time or times and subject to such terms and conditions as shall be determined by
the Administrator at or after grant; provided, however, that, except as provided
herein or unless otherwise determined by the Administrator at or after grant,
Stock Options shall be exercisable one year following the date of grant of the
option, but in no case, less than six (6) months following the date of the grant
of the option. To the extent not exercised, installments shall accumulate and be
exercisable in whole or in part at any time after becoming exercisable but not
later than the date the Stock Option expires. The Administrator may provide, in
its discretion, that any Stock Option shall be exercisable only in installments,
and the Administrator may waive such installment exercise provisions at any time
in whole or in part based on such factors as the Administrator may determine in
its sole discretion.
(iv) Method of Exercise. Subject to Subsection 5(c)(iii), Stock
Options may be exercised in whole or in part at any time during the option
period by giving written notice of exercise to the Company specifying the number
of shares to be purchased, accompanied by payment in full of the purchase price
in cash or its cash equivalent, as determined by the Administrator. The
Administrator may, in its sole discretion, accept payment in whole or in part on
behalf of the Company (i) in the form of unrestricted Stock already owned by the
optionee, or, in the case of the exercise of a Non-Qualified Stock Option,
Restricted Stock subject to an Award hereunder (based, in each case, on the Fair
Market Value of the Stock on the date the option is exercised), (ii) by
cancellation of any indebtedness owed by the Company to the optionee, (iii) by a
full recourse promissory note executed by the optionee, (iv) by requesting that
the Company withhold whole shares of Common Stock then issuable upon exercise of
the Stock Option (based on the Fair Market Value of the Stock on the date the
option is exercised), (v) by arrangement with a broker which is acceptable to
the Administrator where payment of the option price is made pursuant to an
irrevocable direction to the broker to deliver all or part of the proceeds from
the sale of the shares underlying the option to the Company, or (vi) by any
combination of the foregoing; provided, however, that in the case of an
Incentive Stock Option, the right to make payment in the form of already owned
shares may be authorized only at the time of grant. Any payment in the form of
stock already owned by the optionee may be effected by use of an attestation
form approved by the Administrator. If payment of the option exercise price of a
Non-Qualified Stock Option is made in whole or in part in
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<PAGE> 8
the form of Restricted Stock, the shares received upon the exercise of such
Stock Option (to the extent of the number of shares of Restricted Stock
surrendered upon exercise of such Stock Option) shall be restricted in
accordance with the original terms of the Restricted Stock award in question,
except that the Administrator may direct that such restrictions shall apply only
to that number of shares equal to the number of shares surrendered upon the
exercise of such option. An optionee shall generally have the rights to
dividends and other rights of a shareholder with respect to shares subject to
the option only after the optionee has given written notice of exercise, has
paid in full for such shares, and, if requested, has given the representation
described in paragraph (a) of Section 10.
(d) The Administrator may require the voluntary surrender of all or a
portion of any Stock Option granted under the Plan as a condition precedent to a
grant of a new Stock Option. Subject to the provisions of the Plan, such new
Stock Option shall be exercisable at the price, during such period and on such
other terms and conditions as are specified by the Administrator at the time the
new Stock Option is granted; provided, however, that should the Administrator so
require, the number of shares subject to such new Stock Option shall not be
greater than the number of shares subject to the surrendered Stock Option. Upon
their surrender, the Stock Options shall be canceled and the shares previously
subject to such canceled Stock Options shall again be available for grants of
Stock Options and other Awards hereunder.
(e) The Company may make loans available to Stock Option holders in
connection with the exercise of outstanding options granted under the Plan, as
the Administrator, in its discretion, may determine. Such loans shall (i) be
evidenced by promissory notes entered into by the Stock Option holders in favor
of the Company, (ii) be subject to the terms and conditions set forth in this
paragraph and such other terms and conditions, not inconsistent with the Plan,
as the Administrator shall determine, (iii) bear interest, if any, at such rate
as the Administrator shall determine and (iv) be subject to Board approval. In
no event may the principal amount of any such loan exceed the sum of (x) the
exercise price less the par value of the shares of Stock covered by the option,
or portion thereof, exercised by the holder and (y) any Federal, state, and
local income tax attributable to such exercise. The initial term of the loan,
the schedule of payments of principal and interest under the loan, the extent to
which the loan is to be with or without recourse against the holder with respect
to principal or interest and the conditions upon which the loan will become
payable in the event of the holder's termination of employment shall be
determined by the Administrator; provided, however, that the term of the loan,
including extensions, shall not exceed seven (7) years. Unless the Administrator
determines otherwise, when a loan is made, shares of Common Stock having a Fair
Market Value at least equal to the principal amount of the loan shall be pledged
by the holder to the Company as security for payment of the unpaid balance of
the loan, and such pledge shall
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be evidenced by a pledge agreement, the terms of which shall be determined by
the Administrator, in its discretion; provided, however, that each loan shall
comply with all applicable laws, regulations and rules of the Board of Governors
of the Federal Reserve System and any other governmental agency having
jurisdiction.
(f) No Stock Option shall be transferable by the optionee otherwise than
by will or by the laws of descent and distribution. Incentive Stock Options
shall be exercisable, during the optionee's lifetime, only by the optionee.
(g) If an optionee's employment or directorship with the Company, any
future Subsidiary or Parent Corporation terminates by reason of death or
Disability, the Stock Option may thereafter be immediately exercised, to the
extent then exercisable (or on such accelerated basis as the Administrator shall
determine at or after grant), by the legal representative of the optionee, by
the legal representative of the estate of the optionee, or by the legatee of the
optionee under the will of the optionee, for a period of at least six (6) months
from the date of such death or disability. In the event of a termination of
employment or directorship by reason of Disability, if an Incentive Stock Option
is exercised after the expiration of the exercise periods that apply for
purposes of Section 422 of the Code, such Stock Option shall thereafter be
treated as a Non-Qualified Stock Option.
(h) Except as otherwise provided in this paragraph or otherwise
determined by the Administrator, if an optionee's employment with the Company,
any future Subsidiary or any future Parent Corporation terminates for any reason
other than death or Disability, the optionee must exercise his or her Stock
Options within thirty (30) days from the date of such termination. If the
optionee does not exercise his or her Stock Options within this thirty (30) day
period, the Stock Options automatically terminate, and such Stock Options become
null and void.
(i) To the extent that the aggregate Fair Market Value (determined as of
the date the Incentive Stock Option is granted) of the shares of Stock with
respect to which Incentive Stock Options granted to an optionee under this Plan
and all other option plans of the Company, any future Parent Corporation and any
future Subsidiary become exercisable for the first time by the optionee during
any calendar year exceeds $100,000, such Stock Options shall be treated as
Non-Qualified Stock Options.
SECTION 6. DEFERRED STOCK AND RESTRICTED STOCK.
(a) Deferred Stock and Restricted Stock awards may be issued to Eligible
Participants either alone or in addition to other Awards granted under the Plan.
The Administrator shall determine the Eligible Participants, and the time or
times at which
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grants of Deferred Stock or Restricted Stock awards shall be made; the number of
shares to be awarded; the price, if any, to be paid by the recipient of Deferred
Stock or Restricted Stock awards; the Restricted Period (as defined in paragraph
6(c) hereof) applicable to Deferred Stock or Restricted Stock awards; the
performance objectives applicable to Deferred Stock or Restricted Stock awards;
the date or dates on which restrictions applicable to such Deferred Stock or
Restricted Stock awards shall lapse during such Restricted Period; and all other
conditions of the Deferred Stock or Restricted Stock awards. The Administrator
may also condition the grant of Deferred Stock or Restricted Stock awards upon
the exercise of Stock Options, or upon such other criteria as the Administrator
may determine, in its sole discretion. The provisions of Deferred Stock or
Restricted Stock awards need not be the same with respect to each recipient.
(b) The prospective recipient of a Deferred Stock or Restricted Stock
award shall not have any rights with respect to such Award, unless and until
such recipient has executed an agreement evidencing the Award (a "Deferred Stock
Award Agreement" or Restricted Stock Award Agreement" as appropriate) and has
delivered a fully executed copy thereof to the Company, within a period of sixty
days (or such other period as the Administrator may specify) after the Award
date.
Except as provided below in this paragraph (b) of Section 6, (i)
each Participant who is awarded Restricted Stock shall be issued a stock
certificate in respect of such shares of Restricted Stock; and (ii) such
certificate shall be registered in the name of the Participant, and shall bear
an appropriate legend referring to the terms, conditions, and restrictions
applicable to such Award, substantially in the following form:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) of the ICNT, Inc. 1999 Executive Stock Option, Deferred
Stock and Restricted Stock Plan and a Restricted Stock Award Agreement
entered into between the registered owner and ICNT, Inc. Copies of such
Plan and Agreement are on file in the offices of ICNT, Inc."
The Company shall require that the stock certificates evidencing such
shares be held in the custody of the Company until the restrictions thereon
shall have lapsed, and, as a condition of any Restricted Stock award, the
Participant shall have delivered a stock power, endorsed in blank, relating to
the Stock covered by such Award.
With respect to Deferred Stock awards, at the expiration of the
Restricted Period, stock certificates in respect of such shares of Deferred
Stock shall be delivered to the Participant, or his legal representative, in a
number equal to the shares of Stock covered by
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the Deferred Stock award.
(c) The Deferred Stock or Restricted Stock awards granted pursuant to
this Section 6 shall be subject to the following restrictions and conditions:
(i) Subject to the provisions of the Plan and the Deferred Stock or
Restricted Stock Award Agreements, during such period as may be set by the
Administrator commencing on the grant date (the "Restricted Period"), the
Participant shall not be permitted to sell, transfer, pledge or assign shares of
Deferred Stock or Restricted Stock awarded under the Plan. Within these limits,
the Administrator may, in its sole discretion, provide for the lapse of such
restrictions in installments and may accelerate or waive such restrictions in
whole or in part based on such factors and such circumstances as the
Administrator may determine, in its sole discretion, including, but not limited
to, the attainment of certain performance related goals, the Participant's
termination, death or Disability or the occurrence of a "Change of Control" as
defined in Section 9 below.
(ii) Except as provided in paragraph (c)(i) of this Section 6, the
Participant shall have, with respect to the shares of Restricted Stock, all of
the rights of a shareholder of the Company, including the right to vote the
shares, and the right to receive any dividends thereon during the Restricted
Period. With respect to Deferred Stock awards, the Participant shall generally
not have the rights of a shareholder of the Company, including the right to vote
the shares during the Restricted Period; provided, however, that dividends
declared during the Restricted Period with respect to the number of shares
covered by a Deferred Stock award shall be paid to the Participant. Certificates
for shares of unrestricted Stock shall be delivered to the Participant promptly
after, and only after, the Restricted Period shall expire without forfeiture in
respect of such shares of Deferred Stock or Restricted Stock, except as the
Administrator, in its sole discretion, shall otherwise determine.
(iii) Subject to the provisions of the Deferred Stock or Restricted
Stock Award Agreement and this Section 6, upon termination of employment for any
reason during the Restricted Period, all shares subject to any restriction as of
the date of such termination shall be forfeited by the Participant, and the
Participant shall only receive the amount, if any, paid by the Participant for
such Deferred Stock or Restricted Stock, plus simple interest on such amount at
the rate of 8% per year.
SECTION 7. AMENDMENT AND TERMINATION.
(a) The Board may amend, alter or discontinue the Plan, but no
amendment,
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alteration, or discontinuation shall be made that would impair the rights of the
Participant under any Award theretofore granted without such Participant's
consent, or that without the approval of the shareholders (as described below)
would:
(i) except as provided in Section 3, increase the total number of
shares of Stock reserved for the purpose of the Plan;
(ii) change the employees or class of employees eligible to
participate in the Plan;
(iii) extend the maximum option period under Section 5 of the Plan.
(b) Notwithstanding the foregoing, shareholder approval under this
Section 7 shall only be required at such time and under such circumstances as
shareholder approval would be required under applicable federal and state laws,
regulations and exchange requirements.
(c) The Administrator may amend the terms of any Award theretofore
granted, prospectively or retroactively, but, subject to Section 3, no such
amendment shall impair the rights of any holder without his or her consent.
SECTION 8. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for incentive
compensation. With respect to any payments not yet made to a Participant or
optionee by the Company, nothing contained herein shall give any such
Participant or optionee any rights that are greater than those of a general
creditor of the Company.
SECTION 9. CHANGE OF CONTROL.
The following acceleration and valuation provisions shall apply in the
event of a "Change of Control", as defined in paragraph (b) of this Section 9:
(a) In the event of a "Change of Control," unless otherwise determined
by the Administrator or the Board in writing at or after grant (including under
any individual agreement), but prior to the occurrence of such Change of
Control;
(i) the restrictions applicable to any Restricted Stock or Deferred
Stock awards under the Plan shall lapse, and such shares and all outstanding
Awards, including but not limited to all outstanding Stock Options, shall be
deemed fully vested;
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(ii) any indebtedness incurred pursuant to paragraph (e) of Section
5 above shall be forgiven and the collateral pledged in connection with any such
loan shall be released; and
(iii) the value of all outstanding Stock Options, Restricted Stock
and Deferred Stock awards shall, to the extent determined by the Administrator
at or after grant, be cashed out by a payment of cash or other property, as the
Administrator may determine, on the basis of the "Change of Control Price" (as
defined in paragraph (c) of this Section 9) as of the date the Change of Control
occurs or such other date as the Administrator may determine prior to the Change
of Control.
(b) For purposes of paragraph (a) of this Section 9, a "Change of
Control" shall be deemed to have occurred if:
(i) any "person," as such term is used in Sections 13(d) and 14(d)
of the Exchange Act (other than the Company; any trustee or other fiduciary
holding securities under an employee benefit plan of the Company; or any company
owned, directly or indirectly, by the shareholders of the Company in
substantially the same proportions as their ownership of the Stock of the
Company) is or becomes after the Effective Date the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company (not including in the securities beneficially owned by
such person or any securities acquired directly from the Company or its
affiliates) representing 50% or more of the combined voting power of the
Company's then outstanding securities; or
(ii) during any period of two consecutive years (not including any
period prior to the Effective Date), individuals who at the beginning of such
period constitute the Board, and any new director (other than a director
designated by a person who has entered into an agreement with the Company to
effect a transaction described in clause (i), (iii) or (iv) of this paragraph
(b) of Section 9) whose election by the Board or nomination for election by the
Company's shareholders was approved by a vote of at least two-thirds (2/3) of
the directors then still in office who either were directors at the beginning of
the period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority thereof; or
(iii) the shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than (A) a merger
or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted
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into voting securities of the surviving entity), in combination with the
ownership of any trustee or other fiduciary holding securities under an employee
benefit plan of the Company, at least 75% of the combined voting power of the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation or (B) a merger or consolidation
effected to implement a recapitalization of the Company (or similar transaction)
in which no person acquires more than 50% of the combined voting power of the
Company's then outstanding securities; or
(iv) the shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
(c) For purposes of this Section 9, "Change of Control Price" means the
higher of (i) the highest price per share paid or offered in any transaction
related to a Change of Control of the Company or (ii) the highest price per
share paid in any transaction reported on the exchange or national market system
on which the Stock is listed, at any time during the preceding sixty day period
as determined by the Administrator, except that, in the case of Incentive Stock
Options and Stock Appreciation Rights or Limited Stock Appreciation Rights
relating to Incentive Stock Options, such price shall be based only on
transactions reported for the date on which the Administrator decides to cash
out such options.
SECTION 10. GENERAL PROVISIONS.
(a) The Administrator may require each person purchasing shares pursuant
to a Stock Option to represent to and agree with the Company in writing that
such person is acquiring the shares without a view to distribution thereof. The
certificates for such shares may include any legend which the Administrator
deems appropriate to reflect any restrictions on transfer.
All certificates for shares of Stock delivered under the Plan shall be
subject to such stock-transfer orders and other restrictions as the
Administrator may deem advisable under the rules, regulations, and other
requirements of the Commission, any stock exchange upon which the Stock is then
listed, and any applicable Federal or state securities law, and the
Administrator may cause a legend or legends to be placed on any such
certificates to make appropriate reference to such restrictions.
(b) Nothing contained in the Plan shall prevent the Board from adopting
other or additional compensation arrangements, subject to shareholder approval
if such approval is required; and such arrangements may be either generally
applicable or
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applicable only in specific cases.
(c) Each Participant shall, no later than the date as of which the value
of an Award first becomes includable in the gross income of the Participant for
Federal income tax purposes, pay to the Company, or make arrangements
satisfactory to the Administrator regarding payment of, any Federal, state, or
local taxes of any kind required by law to be withheld with respect to the
Award. The obligations of the Company under the Plan shall be conditional on the
making of such payments or arrangements, and the Company (and, where applicable,
its Subsidiaries) shall, to the extent permitted by law, have the right to
deduct any such taxes from any payment of any kind otherwise due to the
Participant.
(d) No member of the Board or the Administrator, nor any officer or
employee of the Company acting on behalf of the Board or the Administrator,
shall be personally liable for any action, determination, or interpretation
taken or made in good faith with respect to the Plan, and all members of the
Board or the Administrator and each and any officer or employee of the Company
acting on their behalf shall, to the extent permitted by law, be fully
indemnified and protected by the Company in respect of any such action,
determination or interpretation.
(e) This Plan is purely voluntary on the part of the Company, and while
the Company hopes to continue it indefinitely, the continuance of the Plan shall
not be deemed to constitute a contract between the Company and any employee, or
to be consideration for or a condition of the employment of any employee.
Nothing contained in the Plan shall be deemed to give any employee the right to
be retained in the employ of the Company, any future Subsidiaries, or any future
Parent Corporation to interfere with the right of the Company to discharge or
retire any employee thereof at any time. No employee shall have any right to or
interest in Stock Options, Restricted Stock, or Deferred Stock, authorized
hereunder prior to the grant of such a Stock Option or other award described
herein to such employee, and upon such grant he or she shall have only such
rights and interests as are expressly provided herein, subject, however, to all
applicable provisions of the Company's Articles of Incorporation, as the same
may be amended from time to time.
SECTION 11. SPECIFIC PERFORMANCE.
The Stock Options granted under this Plan and the Shares issued pursuant
to the exercise of such Stock Options cannot be readily purchased or sold in the
open market, and, for that reason among others, the Company and its shareholders
will be irreparably damaged in the event that this Plan is not specifically
enforced. In the event of any controversy concerning the right or obligation to
purchase or sell any such Option or Optioned Stock, such right or obligation
shall be enforceable in a court of equity by a
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decree of a specific performance. Such remedy shall, however, be cumulative and
not exclusive, and shall be in addition to any other remedy which the parties
may have.
SECTION 12. INVALID PROVISION.
In the event that any provision of this Plan is found to be invalid or
otherwise unenforceable under any applicable law, such invalidity or
unenforceability shall not be construed as rendering any other provisions
contained herein invalid or unenforceable, and all such other provisions shall
be given full force and effect to the same extent as though the invalid
unenforceable provision was not contained herein.
SECTION 13. APPLICABLE LAW.
This Plan shall be governed by and construed in accordance with the laws
of the State of California.
SECTION 14. SUCCESSORS AND ASSIGNS.
This Plan shall be binding on and inure to the benefit of the Company
and the employees to whom an Option is granted hereunder, and such employees'
heirs, executors, administrators, legatees, personal representatives, assignees
and transferees.
SECTION 15. EFFECTIVE DATE OF PLAN.
The Plan became effective (the "Effective Date") on September 28, 1999.
If shareholder approval of the plan is not obtained within 12 months from the
Effective Date, all Awards granted hereunder shall be rescinded and declared
void ab initio.
SECTION 16. TERM OF PLAN.
No Stock Option, Deferred Stock or Restricted Stock award shall be
granted pursuant to the Plan on or after the tenth anniversary of the Effective
Date, but Awards theretofore granted may extend beyond that date.
SECTION 17. ANNUAL FINANCIAL STATEMENTS.
The Company shall deliver annual financial statements to each employee
granted a Stock Option, Deferred Stock or Restricted Stock hereunder until such
Award expires or is
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otherwise canceled.
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IN WITNESS WHEREOF, pursuant to the due authorization and adoption of this Plan
by the Board on the day and year first above written, the Company has caused
this Plan to be duly executed by its duly authorized officers.
ICNT, Inc.
By: /s/ JOHN COMBS
------------------------------
Name: John Combs
Title: Chief Executive Officer
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EXHIBIT 10.4
ICNT, INC.
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES A PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement") is
entered into as of July 16, 1999, by and among ICNT, Inc., a California
corporation (the "Company"), and each of the undersigned purchasers of Series A
Preferred Stock of the Company (each, a "Purchaser," and collectively, the
"Purchasers") listed on the Schedule of Purchasers attached hereto as Exhibit A.
In consideration for and of the mutual promises, covenants and
conditions hereinafter set forth and other good and valuable consideration the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. Authorization and Sale of the Shares.
1.1 Authorization; Amended and Restated Articles of Incorporation.
The Company has authorized the issuance and sale pursuant to the terms and
conditions hereof of up to thirteen million three hundred thirty-three thousand
three hundred thirty-four (13,333,334) shares of its Series A Preferred Stock
(the "Series A Preferred Shares"), having the rights, preferences, privileges
and restrictions as set forth in the form of Amended and Restated Articles of
Incorporation of the Company (the "Restated Articles") attached hereto as
Exhibit B.
1.2 Issuance and Sale. Subject to the terms and conditions set
forth in this Agreement, each Purchaser agrees, severally and not jointly, to
purchase from the Company, and the Company agrees to sell and issue to each
Purchaser, severally and not jointly, at the Closing the respective number of
Series A Preferred Shares set forth opposite each Purchaser's name on Exhibit A
hereto at a purchase price of Seventy-Five Cents ($.75) per share. The Series A
Preferred Shares will have the rights, preferences, privileges and restrictions
set forth in the Restated Articles.
2. Closing; Delivery.
2.1 Closing. The closing of the purchase and sale of the Series A
Preferred Shares hereunder (the "Closing") shall take place at the offices of
Wilson Sonsini Goodrich & Rosati, A Professional Corporation, counsel to the
Company ("WSGR"), 650 Page Mill Road, Palo Alto, California at 3:00 p.m. on July
16, 1999 or at such other date, time and place as the Company and the Purchasers
participating in such closing mutually agree upon, orally or in writing. The
date of the closing of the transactions contemplated in this Agreement is
sometimes also referred to herein as the "Closing Date."
2.2 Delivery. Subject to the terms and conditions set forth in
this Agreement, at the Closing the Company will deliver to each Purchaser a
stock certificate representing the number of Series A Preferred Shares set forth
beside such Purchaser's name on Exhibit A hereto, against delivery by each
Purchaser of payment of the purchase price therefor by check or wire transfer
payable to the Company, by cancellation of outstanding indebtedness of the
Company to such Purchaser, or a combination thereof in the amount specified
opposite such Purchaser's name on Exhibit A hereto. In the event that payment by
a Purchaser is made, in whole or in part, by cancellation of indebtedness, then
such Purchaser shall
<PAGE> 2
surrender to the Company for cancellation at the Closing any evidence of such
indebtedness or shall execute an instrument of cancellation in form and
substance acceptable to the Company. In addition, the Company at the Closing
shall deliver to any Purchaser choosing to pay any part of the purchase price of
the Series A Preferred Shares by cancellation of indebtedness, a check in the
amount of any interest accrued on such indebtedness through the Closing Date.
3. Representations and Warranties of the Company. Except as set forth on
Exhibit C attached hereto, the Company hereby represents and warrants to each
Purchaser as follows:
3.1 Organization; Good Standing; Qualification. The Company is a
corporation duly organized and validly existing under, and by virtue of, the
laws of the State of California and is in good standing under such laws. The
Company has the requisite corporate power to own and operate its properties and
assets, and to carry on its business as presently conducted and as proposed to
be conducted. The Company is in good standing and qualified to do business as a
foreign corporation in California and in every other jurisdiction where the
failure to so qualify would have a material adverse impact on the Company's
business, properties, financial condition or results of operations. The Company
has furnished to special counsel to the Purchasers true and complete copies of
its Articles of Incorporation and Bylaws, each as amended to date and presently
in effect.
3.2 Corporate Power. The Company has all requisite legal and
corporate power and authority to enter into this Agreement, the Investors Rights
Agreement and the Shareholders Agreement, and to sell the Series A Preferred
Shares hereunder and to carry out and perform its obligations under the terms of
this Agreement, the Investors Rights Agreement and the Shareholders Agreement.
3.3 Subsidiaries. The Company does not control, directly or
indirectly, or have an interest in, any other corporation, association or
business entity.
3.4 Capitalization. The authorized capital stock of the Company
consists, or will consist immediately prior to the Closing of 50,000,000 shares
of Common Stock and 26,666,668 shares of Preferred Stock of which 13,333,334
have been designated Series A Preferred Stock and 13,333,334 have been
designated Series B Preferred Stock. The Series A Preferred Stock have the
rights, preferences, privileges and restrictions set forth in the Restated
Articles. Immediately prior to the Closing, there are 12,465,057 shares of
Common Stock issued and outstanding and no shares of Series A Preferred Stock or
Series B Preferred Stock issued and outstanding. All such issued and outstanding
shares have been duly authorized and validly issued, are fully paid and
nonassessable and were issued in compliance with all applicable state and
federal laws concerning the issuance of securities. Except as set forth in this
Agreement, the Investors Rights Agreement or the Shareholders Agreement, there
are no outstanding preemptive or other rights, plans, options, warrants,
conversion rights or agreements for the purchase or acquisition from the Company
of any shares of its capital stock, except that a sufficient number of shares of
Common Stock have been duly and validly reserved for issuance upon conversion of
the Series A Preferred Shares (the "Conversion Shares").
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3.5 Authorization.
(a) All corporate actions on the part of the Company, its
officers, directors and shareholders necessary for (i) the authorization, sale
and issuance of the Series A Preferred Shares pursuant hereto, (ii) the
authorization and issuance of the Conversion Shares, and (iii) the
authorization, execution, delivery and performance by the Company of this
Agreement, the Investors Rights Agreement and the Shareholders Agreement, have
been taken or will be taken prior to the Closing hereunder. This Agreement, the
Investors Rights Agreement and the Shareholders Agreement, when executed and
delivered, will constitute valid and binding obligations of the Company
enforceable against it in accordance with their terms except (A) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of
general application affecting enforcement of creditors' rights generally, and
(B) as limited by laws relating to the availability of specific performance,
injunctive relief, or other equitable remedies.
(b) The Series A Preferred Shares and the Conversion
Shares, when issued in compliance with the provisions of this Agreement and the
Restated Articles, will be duly and validly issued, fully paid and
nonassessable, and will be free of any liens or encumbrances; provided, however,
that the Series A Preferred Shares and the Conversion Shares may be subject to
restrictions on transfer under state and/or federal securities laws, as set
forth herein or in the Investors Rights Agreement or Shareholders Agreement or
otherwise required by such laws at the time a transfer is proposed.
3.6 Title to Properties and Assets; Liens, etc. The Company has
good and marketable title to all its properties and assets and good title to all
its leasehold estates, in each case subject to no mortgage, pledge, lien,
encumbrance or charge, other than or resulting from taxes which have not yet
become delinquent and liens and encumbrances which do not in any case materially
detract from the value of the property subject thereto or materially impair the
operations of the Company, and which have not arisen otherwise than in the
ordinary course of business. The Company is not in default of any provision of
any leases pursuant to which it holds its leasehold estates. Except as set forth
in this Agreement, the Company does not use any properties or assets in the
conduct of its business that it does not own or lease.
3.7 Material Contracts. Exhibit C sets forth a list of all
material agreements or commitments of any nature to which the Company is a party
or by which it is bound, including without limitation (a) each agreement which
requires future expenditures by the Company in excess of $25,000 or which might
result in payments to the Company in excess of $25,000, (b) all employment and
consulting agreements, employee benefit, bonus, pension, profit-sharing, stock
option, stock purchase and similar plans and arrangements, and distributor and
sales representative agreements, (c) any agreement with any officer or director
of the Company, or any "affiliate" or "associate" of such persons (as such terms
are defined in the rules and regulations promulgated under the Securities Act),
including without limitation any agreement or other arrangement providing for
the furnishing of services by, rental of real or personal property from, or
otherwise requiring payments to, any such person or entity and (d) any agreement
relating to the Company's intellectual property rights. The Company has
delivered
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to special counsel to the Purchasers copies of such of the foregoing agreements
as such counsel has requested. All of such agreements and contracts are valid,
binding and in full force and effect with respect to the Company. The Company is
not in breach or default of any provision or term of any such agreement or
commitment and, to the Company's knowledge, no other party to any such
agreements or commitments is in breach or default thereof. The Company is not
bound by any agreement or commitment that places any restriction on the ability
of the Company to conduct its business as presently conducted or as proposed to
be conducted.
3.8 Patents, Trademarks, etc. The Company owns, or has the right
to use, all patents, trademarks, service marks, trade names, copyrights,
licenses, trade secrets or other proprietary rights necessary to its business as
now conducted without conflicting with or infringing upon the right or claimed
right of any person under or with respect to any of the foregoing. There are no
outstanding options, licenses or agreements of any kind relating to the
Company's intellectual property rights, nor is the Company bound by or a party
to any options, licenses or agreements of any kind with respect to the patents,
trademarks, service marks, trade names, copyrights, licenses, trade secrets or
other proprietary rights of any other person or entity. The Company has not
received any communications alleging that the Company has violated or, by
conducting its business as presently conducted or proposed to be conducted,
would violate, any of the patents, trademarks, service marks, trade names,
copyrights or trade secrets or other proprietary rights of any other person or
entity. The Company is not aware of any violation by a third party of any of the
Company's patents, trademarks, service marks, trade names, copyrights, trade
secrets or other proprietary rights. 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
such employee's duties to the Company or that would conflict with the Company's
business as now conducted or as proposed to be conducted. Neither the execution
nor delivery of this Agreement, nor the carrying on of the Company's business by
the employees of the Company, nor the conduct of the Company's business, will,
to the Company's knowledge, conflict with or result in a material breach of the
terms, conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any employee is now obligated. The Company is
not utilizing and it will not be necessary for the Company to utilize any
inventions of any of its employees made prior to their employment by the
Company, except for inventions that have been assigned to the Company.
3.9 Compliance with Other Instruments. The Company is not in
violation or default in any respect of any term of the Restated Articles or its
bylaws, as amended, or any judgment, decree or order by which the Company is
bound or to which its properties are subject or, to its knowledge, any statute,
rule, or regulation applicable to the Company which would materially and
adversely affect the business, properties, financial condition and results of
operations of the Company. The execution, delivery and performance of and
compliance with this Agreement, the Investors Rights Agreement and the
Shareholders Agreement and the transactions contemplated herein and therein will
not result in (a) any such violation and will not be in conflict with or
constitute a material default under any of the foregoing, (b) the creation of
any mortgage, pledge, lien, encumbrance or charge upon any of the properties or
assets of the Company pursuant to any of the foregoing, or (c) the suspension,
revocation,
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impairment, forfeiture or nonrenewal of any permit, license, authorization or
approval applicable to the Company, its business, properties, financial
condition or results of operations.
3.10 Employees and Consultants. To the Company's knowledge, no
employee or consultant of the Company is in violation of any term of any
employment contract, patent disclosure agreement or any other contract or
agreement relating to the right of any such employee to be employed by the
Company or to serve as a consultant because of the nature of the business
conducted or to be conducted by the Company or for any other reason, and the
continued employment or use by the Company of its present employees and
consultants will not result in any such violations. The Company has no deferred
compensation, pension, profit sharing, bonus, insurance, severance or any other
similar employee benefit plan or obligation or any employment or severance
agreement covering any of its officers or employees. There are no asserted
controversies or labor disputes or union organization activities pending or, to
the knowledge of the Company, threatened, between it and its employees. Each
former and current employee and consultant of the Company has executed an
employee inventions and proprietary rights assignment and confidentiality
agreement with the Company, a copy of which has been made available to the
Purchasers or their special counsel. To the Company's knowledge, no employee or
consultant is in violation of any such agreement. The Company has complied in
all material respects with all applicable state and federal equal employment
opportunity and other laws related to employment.
3.11 Litigation, etc. There is no action, suit, proceeding or
investigation pending or threatened in writing and delivered to the Company,
against the Company, which, either in any single case or in the aggregate, would
result in any material adverse change in the business, properties, financial
condition, results of operations or prospects of the Company, or in any material
impairment of the right or ability of the Company to carry on its business as
now conducted or as proposed to be conducted, or in any material liability on
the part of the Company, and none which questions the validity of this
Agreement, the Investors Rights Agreement or the Shareholders Agreement, or any
action taken or to be taken in connection herewith or therewith, nor, to the
Company's knowledge, any basis therefor. The Company is not a party or subject
to any writ, order, decree or judgment, and there is no action, suit, proceeding
or investigation by the Company currently pending or which the Company intends
to initiate.
3.12 Registration Rights. Except as set forth in the Investors
Rights Agreement, the Company is not under any obligation to register any
presently outstanding securities, or any securities which may hereafter be
issued, under the Securities Act of 1933, as amended (the "Securities Act").
3.13 Governmental Consent, etc. No consent, approval,
qualification, order or authorization of, or designation, declaration or filing
with, any governmental authority on the part of the Company is required in
connection with the valid execution and delivery of this Agreement, the
Investors Rights Agreement or the Shareholders Agreement, the offer, sale or
issuance of the Series A Preferred Shares or the Conversion Shares, or the
consummation of any other transaction contemplated herein or therein, except the
filing of the Restated Articles with the California Secretary of State and,
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if required, qualifications or filings under the Securities Act, the California
Corporate Securities Law of 1968, as amended (the "California Law"), and other
applicable state securities laws, which qualifications or filings, if required,
will be obtained or made and will be effective within the time periods required
by law.
3.14 Disclosure. No statement by the Company contained in (i) this
Agreement, including the exhibits and schedules attached hereto, (ii) the
Investors Rights Agreement, (iii) the Shareholders Agreement and (iv) the
projections of the Company dated June 2, 1999 previously delivered to the
Purchasers, contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained herein or
therein not misleading in light of the circumstances under which they were made.
3.15 Taxes. The amount shown on the Balance Sheet (as defined in
Section 3.17 hereof) as provision for taxes is sufficient in all material
respects for payment of all accrued and unpaid Federal, state, county, local and
foreign taxes for the period then ended and all prior periods. The Company has
filed or has obtained presently effective extensions with respect to all
Federal, state, county, local and foreign tax returns which are required to be
filed by it, such returns are true and correct in all material respects and all
taxes shown thereon to be due have been timely paid with exceptions not material
to the Company. Federal income tax returns of the Company have not been audited
by the Internal Revenue Service, and no controversy with respect to taxes of any
type is pending or, to the Company's knowledge, threatened. Neither the Company
nor, to the Company's knowledge, any of its shareholders has ever filed (a) an
election pursuant to Section 1362 of the Internal Revenue Code of 1986, as
amended (the "Code"), that the Company be taxed as an S Corporation or (b)
consent pursuant to Section 341(f) of the Code relating to collapsible
corporations. Since the Balance Sheet Date (as defined in Section 3.17), the
Company has made adequate provisions on its books and accounts for all taxes,
assessments and governmental charges with respect to its business and operation
for such subsequent period. The Company has withheld or collected from each
payment made to its employees all taxes required to be withheld or collected
therefrom, and has paid the same to the proper tax receiving officers or
authorized depositories.
3.16 Transactions with Principals. No employee, shareholder,
officer or director of the Company or any 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 other than (a) for payment
of salary for services rendered, (b) reimbursement for reasonable expenses
incurred on behalf of the Company, and (c) for other standard employee benefits
made generally available to all employees (including stock option agreements
outstanding under the Stock Option Plan and approved by the Board of Directors).
No officer or director, and, to the Company's knowledge, no other person is,
directly or indirectly, interested in any contract with the Company. No officer
or director, or, to the Company's knowledge, no employee or shareholder of the
Company or any member of any officer's, director's, employee's or stockholder's
immediate family, 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
material business relationship, or any firm or corporation that competes with
the Company, except that
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employees, shareholders, officers and directors of the Company may own stock in
publicly traded companies that compete with the Company.
3.17 Financial Statements. The Company has furnished to each of
the Purchasers a complete and correct copy of (i) the unaudited consolidated
balance sheet and statements of income, retained earnings and cash flows of the
Company for the fiscal year ended December 31, 1998 (the "Year End Financials")
and (ii) the unaudited balance sheet of the Company (the "Balance Sheet") at May
31, 1999 (the "Balance Sheet Date") and the related statements of operations and
cash flow for the five months ended May 31, 1999 (the "Interim Financial
Statements" and together with the Year End Financials, the "Financial
Statements"). The Financial Statements are complete and correct in all material
respects and have been prepared in accordance with generally accepted accounting
principles consistently applied, except that notes do not accompany unaudited
Financial Statements. The Financial Statements present fairly and accurately in
all material respects the financial condition and results of operations of the
Company, as at the dates and for the periods indicated, subject in the case of
the Interim Financial Statements, to normal year-end adjustments and except that
the Interim Financial Statements may not contain footnotes. Since December 31,
1998, there has been no change in any accounting policies, principles, methods
or practices. Except as set forth in the Financial Statements, the Company has
no liabilities, contingent or otherwise, other than liabilities, and obligations
under contracts and commitments, incurred in the ordinary course of business
that are not required under generally accepted accounting principles to be
reflected in the Financial Statements and which, in the aggregate, are not
material to the financial condition or operating results of the Company. The
Company maintains and will continue to maintain a standard system of accounting
established and administered in accordance with generally accepted accounting
principles. All of the assets of the Company included on the Balance Sheet are
productively used in the conduct of the Company's business. The Company has not
capitalized any of its research and development expenses.
3.18 Permits. The Company has all franchises, permits, licenses
and any similar authority necessary for the conduct of its business as now being
conducted by it, and, to the knowledge of the Company, the Company can obtain,
without undue burden or expense, any similar authority for the conduct of its
business as planned to be conducted. The Company is not in default under any of
such franchises, permits, licenses or similar authority held by the Company.
3.19 Offering. Assuming the accuracy of the representations and
warranties of the Purchasers contained in Section 4 hereof, the offer, sale and
issuance of the Series A Preferred Shares and the Conversion Shares will be
exempt from the registration requirements of Section 5 of the Securities Act and
will have been registered or qualified (or are exempt from registration and
qualification) under the registration, permit or qualification requirements of
all applicable state securities laws.
3.20 Minute Books. The minute books of the Company have been made
available for inspection to counsel for the Purchasers and contain a summary of
all meetings of directors and stockholders since the time of incorporation and
reflect all transactions referred to in such minutes
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accurately in all material respects.
3.21 Real Property Holding Corporation. The Company is not a real
property holding corporation within the meaning of Internal Revenue Code Section
897(c)(2) and any regulations promulgated thereunder.
3.22 Investment Company Act. The Company is not an "investment
company", or a company "controlled" by an "investment company", within the
meaning of the Investment Company Act of 1940, as amended.
3.23 Environmental and Safety Laws. To the Company's knowledge, it
is not in violation of any applicable statute, law or regulation relating to the
environment or occupational health and safety, and no material expenditures are
or will be required in order to comply with any such existing statute, law or
regulation.
3.24 Guarantees. The Company is not a guarantor or indemnitor of
any indebtedness of any other person.
3.25 Changes. Since the Balance Sheet Date, 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 for changes in the ordinary course of business
which have not been, in the aggregate, materially adverse to the Company;
(b) any damage, destruction, or loss of tangible assets,
whether or not covered by insurance, that materially and adversely affects the
assets, properties, financial condition, operating results, prospects, or
business of the Company as currently conducted;
(c) 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;
(d) any waiver by the Company of a valuable right or of a
material debt owed to it;
(e) any change or amendment to a material contract or
arrangement by which the Company or any of its assets or properties is bound or
subject, except for changes in the ordinary course of business which have not
been materially adverse to the Company;
(f) any change in any compensation arrangement or agreement
with any employee of the Company;
(g) any transfer of any patent, trademark, copyright, trade
secret or other
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intangible asset of the Company except in the ordinary course of business;
(h) any resignation or termination of employment of any key
officer of the Company;
(i) receipt by the Company of written notice that there has
been a loss of, or order cancellation by, any major customer of the Company;
(j) any encumbrance of any material asset of the Company
except liens for taxes not yet due or payable;
(k) any loan or guarantee made by the Company to or for the
benefit of an employee, officer, director, or member of the family of an
employee, officer, or director, other than travel or other advances made in the
ordinary course of business;
(l) any declaration, setting aside, or distribution in
respect of any of the Company's capital stock, or any direct or indirect
redemption, purchase, or other acquisition of any of such stock by the Company;
(m) any other event or condition directly and specifically
affecting the Company of any character that the Company believes could adversely
affect the assets, properties, financial condition, operating results, business
or prospects of the Company (as such business is presently conducted and as it
is proposed to be conducted); or
(n) any agreement or commitment by the Company or to do any
of the things described in this Section 3.26.
3.27 No Other Agreements Relating to Voting or Transfer. Except as
contemplated by the Restated Articles, the Founder's Stock Agreement, the
Shareholders Agreement and in the Stock Plan, there are no agreements or
understandings involving the Company, any of its directors, or to the Company's
knowledge any shareholder of the Company, that (a) concerns voting the
securities of the Company or (b) restricts the transfer of securities of the
Company (except for restrictions intended to comply with applicable securities
laws).
3.28 List of Shareholders and Optionees. Attached hereto as
Exhibit F is a true and complete list of all owners, of record and to the
Company's knowledge beneficially, of the Company's securities and holders of
rights to acquire the Company's securities (including capital stock options to
purchase capital stock of the Company and warrants to purchase capital stock of
the Company) indicating the name of each holder, the number, class, and type and
series of securities held by each holder and any rights the Company has to
repurchase such securities.
3.29 Section 83(b) Elections. All elections notices permitted by
Section 83(b) of the Internal Revenue Code have been timely filed by all
employees who have purchased shares of
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the Company's Common Stock under agreements that provide for the vesting of such
shares.
3.30 Qualified Small Business Stock. As of the Closing: (i) the
Company will be an eligible corporation as defined in Section 1202(e)(4) of the
Code, (ii) the Company will not have made any purchases of its own stock during
the one-year period preceding the Closing having an aggregate value exceeding 5%
of the aggregate value of all its stock as of the beginning of such period and
(iii) the Company's aggregate gross assets, as defined by Code Section
1202(d)(2), at no time between the date the Company was incorporated and through
the Closing have exceeded or will exceed $50 million, taking into account the
assets of any corporations required to be aggregated with the Company in
accordance with Code Section 1202(d)(3).
4. Representations and Warranties of Purchasers and Restrictions on
Transfer Imposed by the Securities Act and California Law.
4.1 Representations and Warranties by Each Purchaser. Each
Purchaser, severally and not jointly, hereby represents and warrants to the
Company as follows:
(a) The Series A Preferred Shares and the Conversion Shares
issuable upon conversion thereof are being acquired for the Purchaser's own
account, for investment and not with a view to, or for resale in connection
with, any distribution or public offering thereof within the meaning of the
Securities Act or the California Law.
(b) The Purchaser understands that the Series A Preferred
Shares and the Conversion Shares have not been registered under the Securities
Act by reason of their issuance in a transaction exempt from the registration
and prospectus delivery requirements of the Securities Act pursuant to Section
4(2) thereof, that the Company has no present intention of registering the
Series A Preferred Shares or the Conversion Shares, that the Series A Preferred
Shares and the Conversion Shares must be held by the Purchaser indefinitely, and
that the Purchaser must therefore bear the economic risk of such investment
indefinitely, unless a subsequent disposition thereof is registered under the
Securities Act or is exempt from registration. The Purchaser further understands
that the Series A Preferred Shares and the Conversion Shares have not been
qualified under the California Law by reason of their issuance in a transaction
exempt from the qualification requirements of the California Law pursuant to
Section 25102(f) thereof, which exemption depends upon, among other things, the
bona fide nature of the Purchaser's investment intent expressed above.
(c) During the negotiation of the transactions contemplated
herein, the Purchaser and its representatives and legal counsel have been
afforded full and free access to corporate books, financial statements, records,
contracts, documents, and other information concerning the Company and to its
offices and facilities, have been afforded an opportunity to ask such questions
of the Company's officers, employees, agents, accountants and representatives
concerning the Company's business, operations, financial condition, assets,
liabilities and other relevant matters as they have deemed necessary or
desirable, and have been given all such information as has been requested, in
order
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to evaluate the merits and risks of the prospective investments contemplated
herein. The foregoing does not limit or modify the representations or warranties
of the Company in Section 3 hereof or the rights of the Purchaser to rely
thereon.
(d) The Purchaser and its representatives have been solely
responsible for the Purchaser's own "due diligence" investigation of the Company
and the Company's management and business, for its own analysis of the merits
and risks of this investment, and for its own analysis of the fairness and
desirability of the terms of the investment. In taking any action or performing
any role relative to the arranging of the proposed investment, the Purchaser has
acted solely in its own interest, and none of the Purchasers (or any of their
agents or employees) has acted as an agent of the Company or any other
Purchaser. The Purchaser has such knowledge and experience in financial and
business matters that the Purchaser is capable of evaluating the merits and
risks of the purchase of the Series A Preferred Shares pursuant to the terms of
this Agreement and of protecting Purchaser's interests in connection therewith.
(e) The Purchaser has the full right, power and authority
to enter into and perform the Purchaser's obligations under this Agreement, the
Investors Rights Agreement and the Shareholders Agreement, and this Agreement,
Investors Rights Agreement and the Shareholders Agreement constitute valid and
binding obligations of the Purchaser enforceable in accordance with their terms
except (A) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium, and other laws of general application affecting enforcement of
creditors' rights generally, and (B) as limited by laws relating to the
availability of specific performance, injunctive relief, or other equitable
remedies.
(f) No consent, approval or authorization of, or
designation, declaration or filing with, any governmental authority on the part
of the Purchaser is required in connection with the valid execution and delivery
of this Agreement, the Investors Rights Agreement or the Shareholders Agreement.
(g) Purchaser is an "accredited investor" as defined in
Rule 501 pursuant to the Securities Act.
4.2 Legend. Each certificate representing the Series A Preferred
Shares or the Conversion Shares may be endorsed with the following legends:
(a) THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY
NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH
SECURITIES, THE TRANSFER IS MADE IN COMPLIANCE WITH RULE 144 PROMULGATED
UNDER SUCH ACT OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE
HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY,
STATING THAT SUCH SALE, TRANSFER,
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ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
The Company need not register a transfer of any Series A Preferred Shares or
Conversion Shares, and may also instruct its transfer agent not to register the
transfer of the Series A Preferred Shares or Conversion Shares, unless the
conditions specified in the foregoing legends are satisfied.
4.3 Removal of Legend and Transfer Restrictions. Any legend endorsed on
a certificate pursuant to Section 4.2(a) and the stop transfer instructions with
respect to such Series A Preferred Shares or Conversion Shares shall be removed,
and the Company shall issue a certificate without such legend to the holder
thereof if (i) such Series A Preferred Shares or Conversion Shares are
registered under the Securities Act and a prospectus meeting the requirements of
Section 10 of the Securities Act is available, (ii) such legend may be properly
removed under the terms of Rule 144 promulgated under the Securities Act or
(iii) such holder provides the Company with an opinion of counsel for such
holder, reasonably satisfactory to legal counsel for the Company, to the effect
that a sale, transfer or assignment of such Series A Preferred Shares or
Conversion Shares may be made without registration. Notwithstanding the
foregoing, no such registration statement or opinion of counsel shall be
necessary for a transfer by a Purchaser to an affiliate or to the Purchaser's
family members or trust for the benefit of an individual Purchaser and his or
her family members; provided, however, that in any such instance the transferee
will be subject to the terms of this Agreement to the same extent as if he, she
or it were an original Purchaser hereunder. For the purposes of this Section 2,
an "affiliate" shall mean any officer, director, partner (including the
principals of any general partner) or shareholder of a Purchaser or any person
or entity that directly or indirectly through one or more intermediaries
controls or is controlled by or is under common control with a Purchaser.
4.4 Tax Consequences. Purchaser has reviewed with its own tax advisors
the federal, state, local and foreign tax consequences of this investment and
the transactions contemplated by this Agreement. Purchaser understands that
Purchaser (and not the Company) shall be responsible for Purchaser's own tax
liability that may arise as a result of this investment or the transactions
contemplated by this Agreement.
5. Conditions to Closing.
5.1 Conditions to Obligations of the Purchasers. The obligation of
each Purchaser to purchase Series A Preferred Shares at the Closing is subject
to the fulfillment on or prior to the Closing Date of the following conditions,
any of which may be waived by the Purchasers participating in that Closing
pursuant to the terms of subsection 6.1 hereof:
(a) Accuracy of Representations and Warranties; Performance
of Obligations. The representations and warranties made by the Company in
Section 3 above shall be true and correct when made, and shall be true and
correct in all material respects on the Closing Date with the same force
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and effect as if they had been made on and as of said date; the Company's
business and assets shall not have been adversely affected in any material way
prior to the Closing Date; and the Company shall have performed all obligations
and conditions herein required to be performed or observed by it on or prior to
the Closing Date.
(b) Consents and Waivers. The Company shall have obtained
any and all consents (including all governmental or regulatory consents,
approvals or authorizations required in connection with the valid execution and
delivery of this Agreement, the Investors Rights Agreement and the Shareholders
Agreement), permits and waivers necessary or appropriate for consummation of the
transactions contemplated in this Agreement, the Investors Rights Agreement and
the Shareholders Agreement.
(c) Legal Investment. At the time of the Closing, the
purchase of the Series A Preferred Shares by the Purchasers hereunder shall be
legally permitted by all laws and regulations to which the Purchasers and the
Company are subject.
(d) Opinion of Company's Counsel. The Purchasers shall have
received from Freshman, Marantz, Orlanski, Cooper & Klein and Paul Kosacz,
counsel for the Company, an opinion, dated the Closing Date, in form and content
reasonably satisfactory to Purchasers and their special counsel.
(e) Restated Articles. The Restated Articles shall have
been filed with the California Secretary of State.
(f) Shareholders Agreement. The Company, the Founder (as
defined in this Agreement) and each Purchaser shall have executed and delivered
the Shareholders Agreement in the form attached hereto as Exhibit D (the
"Shareholders Agreement").
(g) Investors Rights Agreement. The Company and each
Purchaser shall have executed and delivered the Investors Rights Agreement in
the form attached hereto as Exhibit E.
(h) Restricted Stock Purchase Agreement. The Company and
the Founder shall have executed and delivered the Restricted Stock Purchase
Agreement in the form attached hereto as Exhibit F.
(i) Board of Directors. Effective as of the Closing Date,
the authorized number of directors shall be five and the Board of Directors
shall consist of Lester Young, Cliff Young, Steve Foster, Matt Mochary and the
Chief Executive Officer to be subsequently hired by the Company.
(j) Compliance Certificate. The Company shall have
delivered to the Purchasers a certificate, executed by the President of the
Company, dated as of the Closing Date, certifying to the fulfillment of the
conditions specified in subsections (a) of this subsection 5.1.
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5.2 Conditions to Obligations of the Company. The Company's
obligation to sell and issue the Series A Preferred Shares at the Closing is
subject to the fulfillment on or prior to the Closing Date of the following
conditions, any of which may be waived by the Company:
(a) Accuracy of Representations and Warranties. The
representations and warranties made by each Purchaser in Section 4 hereof shall
be true and correct in all material respects when made, and shall be true and
correct on the Closing Date with the same force and effect as if they had been
made on and as of said date.
(b) Incorporation of Conditions. The conditions set forth
in subsections (b), (c) and (e) of subsection 5.1 above shall have been
fulfilled.
6. Miscellaneous.
6.1 Indemnification. The Company will indemnify and defend each
Purchaser and each of its officers, directors and partners, and each person
controlling such Purchaser, against all claims, losses, expenses, damages and
liabilities (or actions in respect thereto) arising out of any breach by the
Company of this Agreement, the Investors Rights Agreement or the Shareholders
Agreement; provided, however, that the indemnity agreement contained in this
subsection 6.1 shall not apply to amounts paid in settlement of any such claim,
loss, damage, liability, or action if such settlement is effected without the
consent of the Company (which consent shall not be unreasonably withheld).
6.2 Waivers and Amendments. With the written consent of the
Company and the record or beneficial holders of at least sixty percent (60%) of
the Series A Preferred Shares issued pursuant to this Agreement (including any
Conversion Shares), shares issued in exchange for the Series A Preferred Shares
or Conversion Shares and as adjusted for stock dividends, stock splits,
recapitalization and the like), the obligations of the Company and the rights of
the holders of the Series A Preferred Shares under this Agreement may be waived
(either generally or in a particular instance, either retroactively or
prospectively and, either for a specified period of time or indefinitely), and
with the same consent the Company, when authorized by resolution of the Board of
Directors, may enter into a supplementary agreement for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of this Agreement; provided, however, that no such waiver or supplemental
agreement shall reduce the aforesaid percentage of Series A Preferred Shares,
the holders of which are required to consent to any waiver or supplemental
agreement without the consent of the record or beneficial holders of all of the
Series A Preferred Shares; and provided further, however, that if such
supplementary agreement increases the rights of the Series A Preferred Shares,
the consent of the Company shall mean the approval of the Company's Board of
Directors including Cliff Young. Upon the effectuation of each such waiver,
consent or agreement of amendment or modification, the Company shall promptly
give written notice thereof to the record holders of the Series A Preferred
Shares who have not previously consented thereto in writing. Neither this
Agreement nor any provision
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hereof may be changed, waived, discharged or terminated orally, but only by a
statement in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought, except to the extent
provided in this subsection 6.2.
6.3 Governing Law. This Agreement shall be governed in all
respects by the laws of the State of California as such laws are applied to
agreements between California residents entered into and to be performed
entirely within California.
6.4 California Corporate Securities Law. THE SALE OF THE
SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH
THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF
SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION
THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS AN EXEMPTION FROM SUCH
QUALIFICATION IS AVAILABLE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE
EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, OR SUCH EXEMPTION
BEING AVAILABLE.
6.5 Survival. The representations, warranties, covenants and
agreements made herein shall survive the execution of this Agreement and the
Closing of the transactions contemplated herein for a period of three (3) years.
6.6 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto. The Company may not assign this Agreement.
6.7 Entire Agreement. This Agreement, the exhibits to this
Agreement, the Investors Rights Agreement and the Shareholders Agreement
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and thereof.
6.8 Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be sent via facsimile,
overnight courier service or mailed by certified or registered mail, postage
prepaid, return receipt requested, addressed or sent (a) if to a Purchaser, at
the address or facsimile number of the Purchaser set forth below such party's
name on Exhibit A hereto, or at such other address or number as the Purchaser
shall have furnished to the Company in writing, or (b) if to the Company, at
3250 Wilshire Blvd., Suite 2008, Los Angeles, CA 90010, facsimile: (213)
385-6182, or at such other address or number as the Company shall have furnished
to the Purchasers in writing. All notices shall be effective upon (i) delivery
if sent by facsimile (with a confirming receipt); (ii) delivery if delivered in
person or sent by overnight courier service or (iii) three (3) days after
deposit in the U.S. mail, registered or certified, with postage prepaid and
properly addressed according to this Section 6.8.
6.9 Separability. In case any provision of this Agreement shall be
declared invalid,
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illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
6.10 Finder's Fees.
(a) The Company (i) represents and warrants that it has
retained no finder or broker in connection with the transactions contemplated by
this Agreement and (ii) hereby agrees to indemnify and to hold the Purchasers
harmless of and from any liability for any commission or compensation in the
nature of a finder's fee to any broker or other person or firm (and the costs
and expenses of defending against such liability or asserted liability) for
which the Company, or any of its employees or representatives, are responsible.
(b) Each Purchaser (i) represents and warrants that it has
retained no finder or broker in connection with the transactions contemplated by
this Agreement and (ii) hereby agrees to indemnify and to hold the Company and
the other Purchasers harmless of and from any liability for any commission or
compensation in the nature of a finder's fee to any broker or other person or
firm (and the costs and expenses of defending against such liability or asserted
liability) for which it, or any of its employees or representatives, are
responsible.
6.11 Expenses. The Company and each Purchaser shall each bear its
respective expenses and legal fees incurred with respect to this Agreement and
the transactions contemplated herein; provided, however, that the Company will
pay the legal fees and expenses of one special counsel for the Purchasers and
other third party expenses up to a maximum of $30,000.
6.12 Titles and Subtitles. The titles of the paragraphs and
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
6.13 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
6.14 Delays or Omissions. No delay or omission to exercise any
right, power or remedy accruing to any Purchaser, upon any breach or default of
the Company under this Agreement, shall impair any such right, power or remedy,
nor shall it be construed to be a waiver of any such breach or default, or any
acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. It is
further agreed that any waiver, permit, consent or approval of any kind or
character on a Purchaser's part of any breach or default under this Agreement,
or any waiver on a Purchaser's part of any provisions or conditions of this
Agreement must be in writing and shall be effective only to the extent
specifically set forth in such writing and that all remedies, either under this
Agreement, or by law or otherwise afforded to a Purchaser, shall be cumulative
and not alternative.
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IN WITNESS WHEREOF, the parties have executed this Series A Preferred
Stock Purchase Agreement as of the day and year first above written.
"COMPANY"
ICNT, INC.,
a California corporation
By: /s/ CLIFF YOUNG
------------------------------------
Cliff Young, President
<PAGE> 19
PURCHASER'S COUNTERPART SIGNATURE PAGE
ICNT, INC.
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
Crosspoint Venture Partners 1999
By /s/ ROBERT HOFF
-----------------------------------
Robert Hoff, General Partner
Spectrum Equity Investors III, L.P.
By: Spectrum Equity Associates III, L.P.
Its General Partner
By: /s/ MATTHEW N. MOCHARY
-----------------------------------
Matthew N. Mochary
Its Duly Authorized Signatory
SEI II Entrepreneurs' Fund, L.P.
By: SEI III Entrepreneurs' LLC
Its General Partner
By: /s/ MATTHEW N. MOCHARY
-----------------------------------
Matthew N. Mochary
Its Duly Authorized Signatory
Spectrum III Investment Managers' Fund, L.P.
By: /s/ MATTHEW N. MOCHARY
-----------------------------------
Matthew N. Mochary
Its Duly Authorized Signatory
2
<PAGE> 20
PURCHASER'S COUNTERPART SIGNATURE PAGE
ICNT, INC.
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
/s/ DAVID CHUNG
- -------------------------------------
David Chung
/s/ NOEL RAHN
- --------------------------------------
Noel Rahn
3
<PAGE> 21
EXHIBIT A
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
Number of
Series A Aggregate
Name and Address of Purchaser Preferred Shares Purchase Price
----------------------------------- ---------------- --------------
<S> <C> <C>
CROSSPOINT VENTURE PARTNERS 1999 6,666,667 $ 5,000,000.25
2925 Woodside Road
Woodside, CA 94062
SPECTRUM EQUITY INVESTORS III, L.P. 6,208,000 $ 4,656,000.00
245 Lytton Avenue, Suite 175
Palo Alto, CA 94301
SEI II ENTREPRENEURS' FUND, L.P. 194,000 $ 145,500.00
245 Lytton Avenue, Suite 175
Palo Alto, CA 94301
SPECTRUM III INVESTMENT MANAGERS' 64,667 $ 48,500.25
FUND, L.P.
245 Lytton Avenue, Suite 175
Palo Alto, CA 94301
DAVID CHUNG 75,000 $ 56,250.00
NOEL RAHN 100,000 $ 75,000.00
3355 US Bank Place
601 Second Avenue South
Minneapolis, MN 55402
Patrick Healy 25,000 $ 18,750.00
Hellman & Freedman
1 Maritime Plaza, 12th Floor
San Francisco, CA 94111
13,333,334 $10,000,000.50
------------- ==============
</TABLE>
4
<PAGE> 22
EXHIBIT B
ICNT, INC.
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
FORM OF AMENDED AND RESTATED ARTICLES OF INCORPORATION
<PAGE> 23
EXHIBIT C
ICNT, INC.
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
SCHEDULE OF EXCEPTIONS
<PAGE> 24
EXHIBIT D
ICNT, INC.
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
FORM OF SHAREHOLDERS AGREEMENT
<PAGE> 25
EXHIBIT E
ICNT, INC.
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
FORM OF INVESTORS RIGHTS AGREEMENT
<PAGE> 26
EXHIBIT F
ICNT, INC.
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
FORM OF RESTRICTED STOCK PURCHASE AGREEMENT
<PAGE> 1
EXHIBIT 10.5
ICNT, INC.
FOUNDER'S STOCK AGREEMENT
THIS AGREEMENT is made as of July 16, 1999, by and between ICNT, Inc., a
California corporation (the "COMPANY"), and Cliff Young (the "FOUNDER").
WHEREAS, Founder is the record and beneficial owner of Seven Million
Seven Hundred Eighty-Six Thousand Six Hundred Twenty-Five (7,786,625) shares of
the Common Stock of the Company (the "Shares");
WHEREAS, the Company has entered into an agreement to issue and sell up
to 13,333,334 shares of the Company's Series A Preferred Stock pursuant to that
Series A Preferred Stock Purchase Agreement (the "Purchase Agreement") among the
Company and the investors set forth on Schedule A thereto (the "Investors");
WHEREAS, in order to induce the Investors to purchase the Series A
Preferred Stock, the Company and the Founder wish to enter into this Agreement
granting the Company certain rights of repurchase with respect to the Shares.
NOW, THEREFORE, in consideration of the mutual covenants and
representations herein set forth, the Company and the Founder agree as follows:
1. Repurchase Option.
(a) In the event of any voluntary or involuntary termination of
the Founder's employment by or services to the Company for any or no reason,
including death or disability, (a "TERMINATION") before all of the Shares are
released from the Company's repurchase option (see Section 2 below), the Company
shall, upon the date of a Termination (as reasonably fixed and determined by the
Company) have an irrevocable, exclusive option (the "REPURCHASE OPTION") for a
period of 90 days from such date to repurchase all (but not less than all) of
the Shares that shall constitute the Unreleased Shares (as defined in Section 2)
at such time, at the price of $.01 per share (the "REPURCHASE PRICE");
(b) The Repurchase Option shall be exercised by the Company by
written notice to the Founder or the Founder's executor (with a copy to the
Escrow Agent) and, at the Company's option, (i) by delivery to the Founder or
the Founder's executor with such notice of a check in the amount of the purchase
price for the Shares being repurchased, (ii) by cancellation by the Company of
an amount of the Founder's indebtedness to the Company equal to the purchase
price for the Shares being repurchased, or (iii) by a combination of (i) and
(ii) so that the combined payment and cancellation of indebtedness equals the
aggregate Repurchase Price. Upon delivery of such notice and the payment of the
purchase price in any of the ways described above, the Company shall become the
legal and beneficial owner of the Shares being repurchased and all rights and
interests therein or relating thereto, and the Company
1
<PAGE> 2
shall have the right to retain and transfer to its own name the number of Shares
being repurchased by the Company.
(c) Whenever the Company shall have the right to repurchase
Shares hereunder, the Company may designate and assign one or more employees,
officers, directors, or shareholders of the Company or other persons or
organizations to exercise all or a part of the Company's purchase rights under
this Agreement and purchase all or a part of such Shares. If the fair market
value of the Shares to be repurchased on the date of such designation or
assignment (the "REPURCHASE FMV") exceeds the aggregate Repurchase Price of such
Shares, then each such designee or assignee shall pay the Company cash equal to
the difference between the Repurchase FMV and the aggregate Repurchase Price of
such Shares.
2. Release of Shares From Repurchase Option.
(a) Fifty Percent (50%) of the Shares shall be released from the
Company's Repurchase Option on the date of this Agreement and one thirty-sixth
(1/36) of the remaining Shares shall be released from the Company's Repurchase
Option on the first day of each calendar month thereafter until all of the
Shares have been released; provided in each case that the Founder has not ceased
to be an employee or a director of or a consultant to the Company prior to the
date of any such release, but in which case the Founder shall get vesting credit
for the number of days in the final month that the Founder is an employee or a
director of or a consultant to the Company.
(b) Notwithstanding anything set forth in Section 2(a) above,
(i) In the event the Founder's employment terminates
other than for Cause within 12 months after a Change of Control, one hundred
percent (100%) of the Unreleased Shares (as defined below) shall be released
from the Company's Repurchase Option upon the date of such termination. For
purposes of the foregoing, a "CHANGE OF CONTROL" shall occur upon the closing of
a merger or consolidation of the Company with or into any other corporation or
other entity, or sale of all or substantially all of the assets of the Company,
unless the shareholders of the Company immediately prior to such transaction
hold at least 50% of the outstanding equity securities of the entity surviving
such merger or consolidation or the entity purchasing such assets.
(ii) In the event the Founder's employment terminates
other than by the Company for Cause, the Founder (or the Founder's executor in
the case of death or disability) and the Company shall negotiate in good faith
and enter into a settlement and release agreement on terms and conditions
acceptable to the Company and the Founder (or the Founder's executor in the case
of death or disability), which shall provide, among other things, that one
hundred percent (100%) of the Unreleased Shares shall be released from the
Company's Repurchase Option on the date of such termination and that Founder
shall be provided with Founder's then current salary and benefits from the date
of such termination until the date that is three years from the date of this
Agreement in accordance with the Company's standard payroll practices. The
Unreleased Shares shall be released from the Company's Repurchase Option only
upon the execution of the settlement and release agreement by the Founder (or
the Founder's executor in the case of death or disability) and the Company and
on the terms and conditions set forth therein.
2
<PAGE> 3
(c) For the purposes of this Section 2, the following terms
referred to in this Agreement shall have the following meanings:
"Cause" shall mean (i) a material act of dishonesty in
connection with the Founder's responsibilities as an employee, (ii) the
Founder's conviction of, or plea of nolo contendere to, a felony, (iii) the
Founder's gross misconduct, which has a material adverse effect on the Company,
or (iv) the Founder's consistent and willful failure to perform his employment
duties (if such failure is not remedied within ninety (90) days following
receipt by the Founder of a written notice from the Company specifying the facts
relating to the failure); provided, however, that the foregoing subsection (iv)
shall not apply if there is a significant reduction by the Company of Founder's
duties or responsibilities relative to the duties or responsibilities of other
members of the Company's executive management or relative to such other duties
as have been mutually agreed upon between the Founder and the Company.
(d) Any of the Shares which have not yet been released from the
Repurchase Option are referred to herein as "UNRELEASED SHARES".
3. Restriction on Transfer. The Founder shall not sell, transfer,
pledge, or otherwise dispose of any Shares that remain subject to the Repurchase
Option other than a pledge in connection with indebtedness owed to the Company
or than by will or the laws of descent and distribution. The Founder agrees
that, in order to ensure compliance with the restrictions referred to herein,
the Company may issue appropriate "stop transfer" instructions to its transfer
agent, if any, and that, if the Company transfers its own securities, it may
make appropriate notations to the same effect in its own records. The Company
shall not be required (i) to transfer on its books any Shares that have been
sold or otherwise transferred in violation of any of the provisions of this
Agreement or (ii) to treat as owner of such Shares or to accord the right to
vote or pay dividends to any purchaser or other transferee to whom such Shares
shall have been so transferred.
4. Escrow of Shares. The Unreleased Shares issued under this Agreement
shall be held by the Escrow Agent, along with a stock assignment executed by the
Founder in blank in the form attached hereto as Exhibit A, pursuant to the terms
of the Joint Escrow Instructions attached hereto as Exhibit B. This Agreement
shall not affect in any way the ownership, voting rights or other rights or
duties of Founder, except as specifically provided herein.
5. Company's Right of First Refusal. Before any Shares held by the
Founder or any transferee (either being sometimes referred to herein as the
"HOLDER") may be sold or otherwise transferred (including transfer by gift or
operation of law), the Company or its assignee(s) shall have a right of first
refusal to purchase the Shares on the terms and conditions set forth in this
Section 5 (the "RIGHT OF FIRST REFUSAL").
(a) Notice of Proposed Transfer. The Holder of the Shares shall
deliver to the Company a written notice (the "NOTICE") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee (each a "PROPOSED TRANSFEREE");
(iii) the number of Shares to be transferred to each Proposed Transferee; and
(iv) the bona
3
<PAGE> 4
fide cash price or other consideration for which the Holder proposes to transfer
the Shares (the "OFFERED PRICE"), and the Holder shall offer the Shares at the
Offered Price to the Company or its assignee(s).
(b) Exercise of Right of First Refusal. At any time within 30
days after receipt of the Notice, the Company and/or its assignee(s) may, by
giving written notice to the Holder, elect to purchase all or any part of the
Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the Offered Price.
(c) Payment. In the event the Company elects to exercise its
Right of First Refusal, payment shall be made, at the option of the Company or
its assignee(s), in cash, by check, by cancellation of all or a portion of any
outstanding indebtedness of the Holder to the Company (or, in the case of
repurchase by an assignee, to the assignee), or by any combination thereof
within thirty (30) days after receipt of the Notice or in the manner and at the
times set forth in the Notice.
(d) Holder's Right to Transfer. If all of the Shares proposed in
the Notice to be transferred to a given Proposed Transferee are not purchased by
the Company and/or its assignee(s) as provided in this Section 5, then subject
to any rights the Purchasers may have to purchase the Shares pursuant to that
Shareholder Agreement by and among the Company, the Founder, certain members of
the Company's management and the Purchasers, the Holder may sell or otherwise
transfer such Shares to that Proposed Transferee at the Offered Price or at a
higher price, provided that such sale or other transfer is consummated in
accordance with any applicable securities laws and the Proposed Transferee
agrees in writing that the provisions of this Section 5 and Section 7 shall
continue to apply to the Shares in the hands of such Proposed Transferee. If the
Shares described in the Notice are not transferred to the Proposed Transferee
within such period, a new Notice shall be given to the Company, and the Company
and/or its assignees shall again be offered the Right of First Refusal in
accordance with this Section 5 before any Shares held by the Holder may be sold
or otherwise transferred.
(e) Exception for Certain Family Transfers. Anything to the
contrary contained in this Section 5 notwithstanding, the transfer of any or all
of the Shares during the Founder's lifetime or on the Founder's death by will or
intestacy to the Founder's immediate family or a trust for the benefit of the
Founder's immediate family shall be exempt from the provisions of this Section.
"IMMEDIATE FAMILY" as used herein shall mean spouse, lineal descendant or
antecedent, father, mother, brother or sister. In such case, the transferee or
other recipient shall receive and agree in writing to hold the Shares so
transferred subject to the provisions of this Section 5 and Section 7, and there
shall be no further transfer of such Shares except in accordance with the terms
of this Section 5 and Section 7.
(f) Termination of Right of First Refusal. The Right of First
Refusal shall terminate on (i) the effective date of a registration statement
filed by the Company under the Securities Act of 1933, as amended (the
"SECURITIES ACT"), with respect to an underwritten public offering of Common
Stock of the Company or (ii) the closing date of a sale of assets or merger of
the Company or other acquisition transaction, unless the shareholders of the
Company immediately prior to such transaction hold at least 50% of the
outstanding equity securities of the entity surviving such merger or
consolidation or the entity purchasing such assets.
4
<PAGE> 5
6. Stock Certificate Legends. The share certificate evidencing the
Shares shall be endorsed with the following legends:
(a) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
THESE SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION
OR AN EXEMPTION THEREFROM UNDER SAID ACT. COPIES OF THE AGREEMENT COVERING THE
PURCHASE OF THESE SHARES AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO
COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE
SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE
CORPORATION.
(b) THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED
ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE
SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.
(c) Any legend required by any applicable state securities laws.
7. Standoff Agreement. The Founder hereby agrees that during the
period of duration (not to exceed one hundred eighty (180) days) following the
effective date of a registration statement with respect to the Company's initial
public offering of securities of the Company filed under the Securities Act, it
shall not, to the extent requested by the Company and such underwriter, directly
or indirectly sell, offer to sell, contract to sell (including, without
limitation, any short sale), grant any option to purchase, pledge 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. The Founder further agrees to enter
into any agreement reasonably required by the underwriters to implement the
foregoing.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Shares of the Founder until the
end of such period.
8. Adjustment for Stock Split. All references to the number of
Shares and the purchase price of the Shares in this Agreement shall be
appropriately adjusted to reflect any stock split or stock dividend with respect
to the Shares which may be made by the Company after the date of this Agreement.
9. General Provisions.
(a) This Agreement shall be governed by the laws of the State of
California as they apply to contracts entered into and wholly to be performed in
such state. This Agreement represents the entire agreement between the parties
with respect to the purchase of Common Stock by the Founder and may only be
modified or amended in writing signed by both parties.
5
<PAGE> 6
(b) Any dispute, claim or controversy of any kind (including but
not limited to tort, contract and statute) arising under, in connection with, or
relating to this Agreement, including but not limited to any determination of
"for Cause" hereunder, shall at the request of either party be resolved
exclusively by binding arbitration in Los Angeles County, California, or any
other location mutually agreeable to the parties, in accordance with the
commercial rules of the American Arbitration Association then in effect. The
Founder and the Company agree to waive any objection to personal jurisdiction or
venue in any forum located in Los Angeles County, California, or any other
location mutually agreeable to the parties. Judgment may be entered on the
arbitrator's award in any court having jurisdiction.
(c) Any notice, demand or request required or permitted to be
given by either the Company or the Founder pursuant to the terms of this
Agreement shall be in writing and shall be deemed given when delivered
personally or deposited in the U.S. mail, first class with postage prepaid, and
addressed to the parties at the addresses of the parties set forth at the end of
this Agreement or such other address as a party may request by notifying the
other in writing.
(d) The rights and benefits of the Company under this Agreement
shall be transferable to any one or more persons or entities, and all covenants
and agreements hereunder shall inure to the benefit of, and be enforceable by
the Company's successors and assigns. The rights and obligations of the Founder
under this Agreement may only be assigned with the prior written consent of the
Company.
(e) Either party's failure to enforce any provision or provisions
of this Agreement shall not in any way be construed as a waiver of any such
provision or provisions, nor prevent that party thereafter from enforcing each
and every other provision of this Agreement. The rights granted both parties
herein are cumulative and shall not constitute a waiver of either party's right
to assert all other legal remedies available to it under the circumstances.
(f) The Founder agrees upon request to execute any further
documents or instruments necessary or desirable to carry out the purposes or
intent of this Agreement.
(g) FOUNDER ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES
PURSUANT TO SECTION 2 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN EMPLOYEE
OR CONSULTANT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED AT
THIS DATE). FOUNDER FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS AN
EMPLOYEE OR CONSULTANT FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND
SHALL NOT INTERFERE WITH THE FOUNDER'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE
FOUNDER'S EMPLOYMENT OR CONSULTING RELATIONSHIP AT ANY TIME, WITH OR WITHOUT
CAUSE.
(h) This Founder's Stock Agreement constitutes the full and
entire understanding and agreement between the parties with regard to the
subject matter hereof and this Founder's Stock
6
<PAGE> 7
Agreement shall supersede and cancel those relevant provisions of paragraphs
four and five of that certain employment letter dated June 14, 1999 by and
between the Company and the Founder.
(i) This Founder's Stock Agreement constitutes the full and
entire understanding and agreement between the parties with regard to the
subject matter hereof and this Agreement shall supersede and cancel those
relevant provisions or paragraphs of that employment letter dated June 14, 1999
by and between the Company and the Founder.
(i) Founder has reviewed this Agreement in its entirety, has had
an opportunity to obtain the advice of counsel prior to executing this Agreement
and fully understands all provisions of this Agreement.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first set forth above.
ICNT, INC. FOUNDER:
a California corporation
By: /s/ CLIFF YOUNG /s/ CLIFF YOUNG
------------------------------ -------------------------
Cliff Young
7
<PAGE> 8
CONSENT OF SPOUSE
I, _____________________, spouse of Cliff Young, have read and approve
the foregoing Founder's Stock Agreement (the "AGREEMENT"). I hereby appoint my
spouse as my attorney-in-fact in respect to the exercise of any rights under the
Agreement and agree to be bound by the provisions of the Agreement insofar as I
may have any rights in said Agreement or any shares issued pursuant thereto
under the community property laws of the State of California or similar laws
relating to marital property in effect in the state of our residence as of the
date of the signing of the foregoing Agreement.
Dated: ________________________________
Signed: _________________________________
8
<PAGE> 9
EXHIBIT A
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, Cliff Young, hereby sell, assign and transfer
unto___________________________, ______________________ (__________) shares of
the Common Stock of ICNT, Inc. standing in my name of the books of said
corporation represented by Certificate No. _____ herewith and do hereby
irrevocably constitute and appoint __________________________________________,
attorney, to transfer the said stock on the books of the within named
corporation with full power of substitution in the premises.
This Assignment Separate from Certificate was executed in conjunction
with the terms of a Founder's Stock Purchase Agreement between ICNT, Inc. and
the undersigned dated as of
_________________.
Dated: _______________
___________________________________
(to be signed exactly as name is to
appear on stock certificate)
INSTRUCTIONS: Please do not fill in the blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise its
"repurchase option," as set forth in the Agreement, without requiring additional
signatures on the part of the Founder.
<PAGE> 10
EXHIBIT B
JOINT ESCROW INSTRUCTIONS
July 16, 1999
Freshman, Marantz, Orlanski,
Cooper & Klein
9100 Wilshire Boulevard
Beverly Hills, California 90212-3480
Attention: Tom Poletti
Dear Mr. Poletti:
As Escrow Agent for both ICNT, Inc., a California corporation (the
"COMPANY"), and the undersigned purchaser of stock of the Company (the
"FOUNDER"), you are hereby authorized and directed to hold the documents
delivered to you pursuant to the terms of the Founder's Stock Purchase Agreement
(the "AGREEMENT") between the Company and the undersigned, in accordance with
the following instructions:
1. In the event the Company and/or any assignee of the Company (referred
to collectively for convenience herein as the "COMPANY") exercises the Company's
repurchase option set forth in the Agreement, the Company shall give to the
Founder and you a written notice specifying the number of shares of stock to be
purchased, the purchase price and the time for a closing hereunder at the
principal office of the Company. The Founder and the Company hereby irrevocably
authorize and direct you to close the transaction contemplated by such notice in
accordance with the terms of said notice.
2. At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver the same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, cancellation of indebtedness or some combination thereof) for the
number of shares of stock being purchased pursuant to the exercise of the
Company's repurchase option.
3. The Founder irrevocably authorizes the Company to deposit with you
any certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement. The
Founder does hereby irrevocably constitute and appoint you as the Founder's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities. Subject to
<PAGE> 11
the provisions of this paragraph 3, the Founder shall exercise all rights and
privileges of a shareholder of the Company while the stock is held by you.
4. Upon written request of the Founder, but no more than once per
calendar quarter, unless the Company's repurchase option has been exercised, you
will deliver to the Founder a certificate or certificates representing so many
shares of stock as are not then subject to the Company's repurchase option,
provided that such shares do not secure an unpaid promissory note or shares not
fully paid for. Within 90 days after cessation of the Founder's continuous
employment by the Company or any parent or subsidiary of the Company, you will
deliver to the Founder a certificate or certificates representing the aggregate
number of shares held or issued pursuant to the Agreement and not purchased by
the Company or its assignees pursuant to exercise of the Company's repurchase
option.
5. If at the time of termination of this escrow you should have in your
possession any documents, securities or other property belonging to the Founder,
you shall deliver all of the same to the Founder and shall be discharged of all
further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties. You
shall not be personally liable for any act you may do or omit to do hereunder as
Escrow Agent or as attorney-in-fact for the Founder while acting in good faith,
and any act done or omitted by you pursuant to the advice of your own attorneys
shall be conclusive evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court. In
case you obey or comply with any such order, judgment or decree, you shall not
be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under the
Statute of Limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.
<PAGE> 12
12. Your responsibilities as Escrow Agent hereunder shall terminate if
you shall cease to be an officer or agent of the Company or if you shall resign
by written notice to each party. In the event of any such termination, the
Company shall appoint a successor Escrow Agent.
13. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with
respect to the delivery and/or ownership or right of possession of the
securities held by you hereunder, you are authorized and directed to retain in
your possession without liability to anyone all or any part of said securities
until such disputes shall have been settled either by mutual written agreement
of the parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
15. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties hereto.
COMPANY: ICNT, Inc.
3250 Wilshire Blvd., Suite 2008,
Los Angeles, California 90010
Attention: President
FOUNDER: Cliff Young
3250 Wilshire Blvd., Suite 2008,
Los Angeles, California 90010
ESCROW AGENT: Freshman, Marantz, Orlanski
Cooper & Klein
9100 Wilshire Boulevard
Beverly Hills, CA 90212-3480
16. By signing these Joint Escrow Instructions, you become a party
hereto only for the purpose of said Joint Escrow Instructions; you do not become
a party to the Agreement.
17. This instrument shall be binding upon and inure to the benefit of
the parties hereto, and their respective successors and permitted assigns.
<PAGE> 13
18. These Joint Escrow Instructions shall be governed by, and construed
and enforced in accordance with, the laws of the State of California.
Very truly yours,
ICNT, INC.
By:
----------------------------------------
FOUNDER
-------------------------------------------
Cliff Young
ESCROW AGENT:
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<PAGE> 1
EXHIBIT 10.6
ICNT, INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES B PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement") is
entered into as of December 21, 1999, by and among ICNT, Inc., a California
corporation (the "Company"), and each of the undersigned purchasers of Series B
Preferred Stock of the Company (each, a "Purchaser," and collectively, the
"Purchasers") listed on the Schedule of Purchasers attached hereto as Exhibit A.
In consideration for and of the mutual promises, covenants and
conditions hereinafter set forth and other good and valuable consideration the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. Authorization and Sale of the Shares.
1.1 Authorization; Amended and Restated Articles of
Incorporation. The Company has authorized the issuance and sale pursuant to the
terms and conditions hereof of up to Ten Million One Hundred Fifty Thousand Four
Hundred Ninety (10,150,490) shares of its Series B Preferred Stock (the "Series
B Preferred Shares"), having the rights, preferences, privileges and
restrictions as set forth in the form of Amended and Restated Articles of
Incorporation of the Company (the "Restated Articles") attached hereto as
Exhibit B.
1.2 Issuance and Sale. Subject to the terms and conditions set
forth in this Agreement, each Purchaser agrees, severally and not jointly, to
purchase from the Company, and the Company agrees to sell and issue to each
Purchaser, severally and not jointly, at the Closing the respective number of
Series B Preferred Shares set forth opposite each Purchaser's name on Exhibit A
hereto at a purchase price of $0.9852 per share. The Series B Preferred Shares
will have the rights, preferences, privileges and restrictions set forth in the
Restated Articles.
2. Closing; Delivery.
2.1 Closing. The closing of the purchase and sale of the Series B
Preferred Shares hereunder (the "Closing") shall take place at the offices of
Freshman, Marantz, Orlanski, Cooper & Klein, A Law Corporation, counsel to the
Company ("FMOCK"), 9100 Wilshire Boulevard, Beverly Hills, California 90212, at
3:00 p.m. on December 21, 1999 or at such other date, time and place as the
Company and the Purchasers participating in such closing mutually agree upon,
orally or in writing. The date of the closing of the transactions contemplated
in this Agreement is sometimes also referred to herein as the "Closing Date."
2.2 Delivery. Subject to the terms and conditions set forth in
this Agreement, at the Closing the Company will deliver to each Purchaser a
stock certificate representing the number of Series B Preferred Shares set forth
beside such Purchaser's name on Exhibit A hereto, against delivery by each
Purchaser of payment of the purchase price therefor by check or wire transfer
payable to the Company, by cancellation of outstanding indebtedness of the
Company to such Purchaser, or a combination thereof in the amount specified
opposite such Purchaser's name on Exhibit A hereto. In the event that payment by
a Purchaser is made, in whole or in part, by cancellation of indebtedness, then
such Purchaser shall surrender to the Company for cancellation
<PAGE> 2
at the Closing any evidence of such indebtedness or shall execute an instrument
of cancellation in form and substance acceptable to the Company. In addition,
the Company at the Closing shall deliver to any Purchaser choosing to pay any
part of the purchase price of the Series B Preferred Shares by cancellation of
indebtedness, a check in the amount of any interest accrued on such indebtedness
through the Closing Date.
3. Representations and Warranties of the Company. Except as set forth on
Exhibit C attached hereto and incorporated herein by reference, the Company
hereby represents and warrants to each Purchaser as follows:
3.1 Organization; Good Standing; Qualification. The Company is a
corporation duly organized and validly existing under, and by virtue of, the
laws of the State of California and is in good standing under such laws. The
Company has the requisite corporate power to own and operate its properties and
assets, and to carry on its business as presently conducted and as proposed to
be conducted. The Company is in good standing and qualified to do business as a
foreign corporation in California and in every other jurisdiction where the
failure to so qualify would have a material adverse impact on the Company's
business, properties, financial condition or results of operations. The Company
has furnished to special counsel to the Purchasers true and complete copies of
its Amended and Restated Articles of Incorporation (the "Restated Articles") and
Bylaws, each as amended to date and presently in effect.
3.2 Corporate Power. The Company has all requisite legal and
corporate power and authority to enter into this Agreement, the First Restated
Investors Rights Agreement and the First Restated Shareholders Agreement, and to
sell the Series B Preferred Shares hereunder and to carry out and perform its
obligations under the terms of this Agreement, the First Restated Investors
Rights Agreement and the First Restated Shareholders Agreement.
3.3 Subsidiaries. The Company does not control, directly or
indirectly, or have an interest in, any other corporation, association or
business entity.
3.4 Capitalization.
(a) Common Stock and Preferred Stock. The authorized
capital stock of the Company consists, or will consist immediately prior to the
Closing of 50,000,000 shares of Common Stock and 33,608,167 shares of Preferred
Stock of which 13,333,334 shares have been designated Series A Preferred Stock
("Series A Stock") and 10,150,490 shares have been designated Series B Preferred
Stock. The Series B Preferred Stock have the rights, preferences, privileges and
restrictions set forth in the Restated Articles. Immediately prior to the
Closing, there are 12,782,307 shares of Common Stock issued and outstanding;
13,333,334 shares of Series A Preferred Stock, and no Series B Preferred Stock
issued and outstanding. All such issued and outstanding shares have been duly
authorized and validly issued, are fully paid and nonassessable and were issued
in compliance with all applicable state and federal laws concerning the issuance
of securities.
(b) Options, Warrants, Reserved Shares, Etc. Except
as set forth in this Agreement, the First Restated Investors Rights Agreement or
the First Restated Shareholders Agreement, there are no outstanding preemptive
or other rights, plans, options, warrants, conversion rights or agreements for
the purchase or acquisition from the Company of any shares of its capital
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<PAGE> 3
stock, except that a sufficient number of shares of Common Stock have been duly
and validly reserved for issuance upon conversion of the Series B Preferred
Shares (the "Conversion Shares").
3.5 Authorization.
(a) All corporate actions on the part of the Company,
its officers, directors and shareholders necessary for (i) the authorization,
sale and issuance of the Series B Preferred Shares pursuant hereto, (ii) the
authorization and issuance of the Conversion Shares, and (iii) the
authorization, execution, delivery and performance by the Company of this
Agreement, the First Restated Investors Rights Agreement and the First Restated
Shareholders Agreement, have been taken or will be taken prior to the Closing
hereunder. This Agreement, the First Restated Investors Rights Agreement and the
First Restated Shareholders Agreement, when executed and delivered, will
constitute valid and binding obligations of the Company enforceable against it
in accordance with their terms except (A) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, and other laws of general application
affecting enforcement of creditors' rights generally, and (B) as limited by laws
relating to the availability of specific performance, injunctive relief, or
other equitable remedies.
(b) The Series B Preferred Shares and the Conversion
Shares, when issued in compliance with the provisions of this Agreement and the
Restated Articles, will be duly and validly issued, fully paid and
nonassessable, and will be free of any liens or encumbrances; provided, however,
that the Series B Preferred Shares and the Conversion Shares may be subject to
restrictions on transfer under state and/or federal securities laws, as set
forth herein or in the First Restated Investors Rights Agreement or First
Restated Shareholders Agreement or otherwise required by such laws at the time a
transfer is proposed.
3.6 Title to Properties and Assets; Liens, etc. The Company has
good and marketable title to all its properties and assets and good title to all
its leasehold estates, in each case subject to no mortgage, pledge, lien,
encumbrance or charge, other than or resulting from taxes which have not yet
become delinquent and liens and encumbrances which do not in any case materially
detract from the value of the property subject thereto or materially impair the
operations of the Company, and which have not arisen otherwise than in the
ordinary course of business. The Company is not in default of any provision of
any leases pursuant to which it holds its leasehold estates. Except as set forth
in this Agreement, the Company does not use any properties or assets in the
conduct of its business that it does not own or lease.
3.7 Material Contracts. All material agreements and contracts are
valid, binding and in full force and effect with respect to the Company. The
Company is not in breach or default of any provision or term of any such
agreement or commitment and, to the Company's knowledge, no other party to any
such agreements or commitments is in breach or default thereof. The Company is
not bound by any agreement or commitment that places any restriction on the
ability of the Company to conduct its business as presently conducted or as
proposed to be conducted.
3.8 Patents, Trademarks, etc. The Company owns, or has the right
to use, all patents, trademarks, service marks, trade names, copyrights,
licenses, trade secrets or other proprietary rights necessary to its business as
now conducted without conflicting with or infringing upon the right or claimed
right of any person under or with respect to any of the foregoing. There are no
outstanding options, licenses or agreements of any kind relating to the
Company's intellectual
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<PAGE> 4
property rights, nor is the Company bound by or a party to any options, licenses
or agreements of any kind with respect to the patents, trademarks, service
marks, trade names, copyrights, licenses, trade secrets or other proprietary
rights of any other person or entity. The Company has not received any
communications alleging that the Company has violated or, by conducting its
business as presently conducted or proposed to be conducted, would violate, any
of the patents, trademarks, service marks, trade names, copyrights or trade
secrets or other proprietary rights of any other person or entity. The Company
is not aware of any violation by a third party of any of the Company's patents,
trademarks, service marks, trade names, copyrights, trade secrets or other
proprietary rights. 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 such employee's
duties to the Company or that would conflict with the Company's business as now
conducted or as proposed to be conducted. Neither the execution nor delivery of
this Agreement, nor the carrying on of the Company's business by the employees
of the Company, nor the conduct of the Company's business, will, to the
Company's knowledge, conflict with or result in a material breach of the terms,
conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any employee is now obligated. The Company is
not utilizing and it will not be necessary for the Company to utilize any
inventions of any of its employees made prior to their employment by the
Company, except for inventions that have been assigned to the Company.
3.9 Compliance with Other Instruments. The Company is not in
violation or default in any respect of any term of the Restated Articles or its
bylaws, as amended, or any judgment, decree or order by which the Company is
bound or to which its properties are subject or, to its knowledge, any statute,
rule, or regulation applicable to the Company which would materially and
adversely affect the business, properties, financial condition and results of
operations of the Company. The execution, delivery and performance of and
compliance with this Agreement, the First Restated Investors Rights Agreement
and the First Restated Shareholders Agreement and the transactions contemplated
herein and therein will not result in (a) any such violation and will not be in
conflict with or constitute a material default under any of the foregoing, (b)
the creation of any mortgage, pledge, lien, encumbrance or charge upon any of
the properties or assets of the Company pursuant to any of the foregoing, or (c)
the suspension, revocation, impairment, forfeiture or nonrenewal of any permit,
license, authorization or approval applicable to the Company, its business,
properties, financial condition or results of operations.
3.10 Employees and Consultants. To the Company's knowledge, no
employee or consultant of the Company is in violation of any term of any
employment contract, patent disclosure agreement or any other contract or
agreement relating to the right of any such employee to be employed by the
Company or to serve as a consultant because of the nature of the business
conducted or to be conducted by the Company or for any other reason, and the
continued employment or use by the Company of its present employees and
consultants will not result in any such violations. The Company has no deferred
compensation, pension, profit sharing, bonus, insurance, severance or any other
similar employee benefit plan or obligation or any employment or severance
agreement covering any of its officers or employees. There are no asserted
controversies or labor disputes or union organization activities pending or, to
the knowledge of the Company, threatened, between it and its employees. Each
former and current employee and consultant of the Company has executed an
employee inventions and proprietary rights assignment and confidentiality
agreement with the Company, a copy of which has been made available to the
Purchasers or their special counsel. To the Company's knowledge, no employee or
consultant is in
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<PAGE> 5
violation of any such agreement. The Company has complied in all material
respects with all applicable state and federal equal employment opportunity and
other laws related to employment.
3.11 Litigation, etc. There is no action, suit, proceeding or
investigation pending or threatened in writing and delivered to the Company,
against the Company, which, either in any single case or in the aggregate, would
result in any material adverse change in the business, properties, financial
condition, results of operations or prospects of the Company, or in any material
impairment of the right or ability of the Company to carry on its business as
now conducted or as proposed to be conducted, or in any material liability on
the part of the Company, and none which questions the validity of this
Agreement, the First Restated Investors Rights Agreement or the First Restated
Shareholders Agreement, or any action taken or to be taken in connection
herewith or therewith, nor, to the Company's knowledge, any basis therefor. The
Company is not a party or subject to any writ, order, decree or judgment, and
there is no action, suit, proceeding or investigation by the Company currently
pending or which the Company intends to initiate.
3.12 Registration Rights. Except as set forth in the First
Restated Investors Rights Agreement, the Company is not under any obligation to
register any presently outstanding securities, or any securities which may
hereafter be issued, under the Securities Act of 1933, as amended (the
"Securities Act").
3.13 Governmental Consent, etc. No consent, approval,
qualification, order or authorization of, or designation, declaration or filing
with, any governmental authority on the part of the Company is required in
connection with the valid execution and delivery of this Agreement, the First
Restated Investors Rights Agreement or the First Restated Shareholders
Agreement, the offer, sale or issuance of the Series B Preferred Shares or the
Conversion Shares, or the consummation of any other transaction contemplated
herein or therein, except the filing of the Restated Articles with the
California Secretary of State and, if required, qualifications or filings under
the Securities Act, the California Corporate Securities Law of 1968, as amended
(the "California Law"), and other applicable state securities laws, which
qualifications or filings, if required, will be obtained or made and will be
effective within the time periods required by law.
3.14 Disclosure. No statement by the Company contained in (i)
this Agreement, including the exhibits and schedules attached hereto, (ii) the
First Restated Investors Rights Agreement, and (iii) the First Restated
Shareholders Agreement, contains any untrue statement of a material fact or
omits to state a material fact necessary in order to make the statements
contained herein or therein not misleading in light of the circumstances under
which they were made.
3.15 Taxes. The amount shown on the Balance Sheet (as defined in
Section 3.17 hereof) as provision for taxes is sufficient in all material
respects for payment of all accrued and unpaid Federal, state, county, local and
foreign taxes for the period then ended and all prior periods. The Company has
filed or has obtained presently effective extensions with respect to all
Federal, state, county, local and foreign tax returns which are required to be
filed by it, such returns are true and correct in all material respects and all
taxes shown thereon to be due have been timely paid with exceptions not material
to the Company. Federal income tax returns of the Company have not been
audited by the Internal Revenue Service, and no controversy with respect to
taxes of any type is pending or, to the Company's knowledge, threatened. Neither
the Company nor, to the Company's knowledge, any of its shareholders has ever
filed (a) an election pursuant to Section 1362 of the Internal Revenue Code of
1986, as amended (the "Code"), that the Company be taxed as an S
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<PAGE> 6
Corporation or (b) consent pursuant to Section 341(f) of the Code relating to
collapsible corporations. Since the Balance Sheet Date (as defined in Section
3.17), the Company has made adequate provisions on its books and accounts for
all taxes, assessments and governmental charges with respect to its business and
operation for such subsequent period. The Company has withheld or collected from
each payment made to its employees all taxes required to be withheld or
collected therefrom, and has paid the same to the proper tax receiving officers
or authorized depositories.
3.16 Transactions with Principals. No employee, shareholder,
officer or director of the Company or any 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 other than (a) for payment
of salary for services rendered, (b) reimbursement for reasonable expenses
incurred on behalf of the Company, and (c) for other standard employee benefits
made generally available to all employees (including stock option agreements
outstanding under the Stock Option Plan and approved by the Board of Directors).
No officer or director, and, to the Company's knowledge, no other person is,
directly or indirectly, interested in any contract with the Company. No officer
or director, or, to the Company's knowledge, no employee or shareholder of the
Company or any member of any officer's, director's, employee's or stockholder's
immediate family, 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
material business relationship, or any firm or corporation that competes with
the Company, except that employees, shareholders, officers and directors of the
Company may own stock in publicly traded companies that compete with the
Company.
3.17 Financial Statements. The Company has furnished to each of
the Purchasers a complete and correct copy of (i) the unaudited consolidated
balance sheet and statements of income, retained earnings and cash flows of the
Company for the fiscal year ended December 31, 1998 (the "Year End Financials")
and (ii) the unaudited balance sheet of the Company (the "Balance Sheet") at
September 30, 1999 (the "Balance Sheet Date") and the related statements of
operations and cash flow for the nine months ended September 30, 1999 (the
"Interim Financial Statements" and together with the Year End Financials, the
"Financial Statements"). The Financial Statements are complete and correct in
all material respects and have been prepared in accordance with generally
accepted accounting principles consistently applied, except that notes do not
accompany unaudited Financial Statements. The Financial Statements present
fairly and accurately in all material respects the financial condition and
results of operations of the Company, as at the dates and for the periods
indicated, subject in the case of the Interim Financial Statements, to normal
year-end adjustments and except that the Interim Financial Statements may not
contain footnotes. Since December 31, 1998, there has been no change in any
accounting policies, principles, methods or practices. Except as set forth in
the Financial Statements, the Company has no liabilities, contingent or
otherwise, other than liabilities, and obligations under contracts and
commitments, incurred in the ordinary course of business that are not required
under generally accepted accounting principles to be reflected in the Financial
Statements and which, in the aggregate, are not material to the financial
condition or operating results of the Company. The Company maintains and will
continue to maintain a standard system of accounting established and
administered in accordance with generally accepted accounting principles. All of
the assets of the Company included on the Balance Sheet are productively used in
the conduct of the Company's business. The Company has not capitalized any of
its research and development expenses.
3.18 Permits. The Company has all franchises, permits, licenses
and any similar authority necessary for the conduct of its business as now being
conducted by it, and, to the
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knowledge of the Company, the Company can obtain, without undue burden or
expense, any similar authority for the conduct of its business as planned to be
conducted. The Company is not in default under any of such franchises, permits,
licenses or similar authority held by the Company.
3.19 Offering. Assuming the accuracy of the representations and
warranties of the Purchasers contained in Section 4 hereof, the offer, sale and
issuance of the Series B Preferred Shares and the Conversion Shares will be
exempt from the registration requirements of Section 5 of the Securities Act and
will have been registered or qualified (or are exempt from registration and
qualification) under the registration, permit or qualification requirements of
all applicable state securities laws.
3.20 Minute Books. The minute books of the Company have been made
available for inspection to counsel for the Purchasers and contain a summary of
all meetings of directors and stockholders since the time of incorporation and
reflect all transactions referred to in such minutes accurately in all material
respects.
3.21 Real Property Holding Corporation. The Company is not a
real property holding corporation within the meaning of Internal Revenue Code
Section 897(c)(2) and any regulations promulgated thereunder.
3.22 Investment Company Act. The Company is not an "investment
company", or a company "controlled" by an "investment company", within the
meaning of the Investment Company Act of 1940, as amended.
3.23 Environmental and Safety Laws. To the Company's knowledge,
it is not in violation of any applicable statute, law or regulation relating to
the environment or occupational health and safety, and no material expenditures
are or will be required in order to comply with any such existing statute, law
or regulation.
3.24 Guarantees. The Company is not a guarantor or indemnitor
of any indebtedness of any other person.
3.25 Changes. Since the Balance Sheet Date, 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 for changes in the ordinary course of business
which have not been, in the aggregate, materially adverse to the Company;
(b) any damage, destruction, or loss of tangible assets,
whether or not covered by insurance, that materially and adversely affects the
assets, properties, financial condition, operating results, prospects, or
business of the Company as currently conducted;
(c) 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;
(d) any waiver by the Company of a valuable right or of a
material debt owed to it;
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<PAGE> 8
(e) any change or amendment to a material contract or
arrangement by which the Company or any of its assets or properties is bound or
subject, except for changes in the ordinary course of business which have not
been materially adverse to the Company;
(f) any change in any compensation arrangement or
agreement with any employee of the Company;
(g) any transfer of any patent, trademark, copyright,
trade secret or other intangible asset of the Company except in the ordinary
course of business;
(h) any resignation or termination of employment of any
key officer of the Company;
(i) receipt by the Company of written notice that there
has been a loss of, or order cancellation by, any major customer of the Company;
(j) any encumbrance of any material asset of the Company
except liens for taxes not yet due or payable;
(k) any loan or guarantee made by the Company to or for
the benefit of an employee, officer, director, or member of the family of an
employee, officer, or director, other than travel or other advances made in the
ordinary course of business;
(l) any declaration, setting aside, or distribution in
respect of any of the Company's capital stock, or any direct or indirect
redemption, purchase, or other acquisition of any of such stock by the Company;
(m) any other event or condition directly and specifically
affecting the Company of any character that the Company believes could adversely
affect the assets, properties, financial condition, operating results, business
or prospects of the Company (as such business is presently conducted and as it
is proposed to be conducted); or
(n) any agreement or commitment by the Company or to do
any of the things described in this Section 3.26.
3.27 No Other Agreements Relating to Voting or Transfer. Except
as contemplated by the Restated Articles, the Founder's Stock Agreement dated
July 16, 1999 between the Company and Cliff Young, the First Restated
Shareholders Agreement and in the Stock Plan, there are no agreements or
understandings involving the Company, any of its directors, or to the Company's
knowledge, any shareholder of the Company, that (a) concerns voting the
securities of the Company or (b) restricts the transfer of securities of the
Company (except for restrictions intended to comply with applicable securities
laws).
3.28 List of Shareholders and Optionees. Attached hereto as
Exhibit D is a true and complete list of all owners, of record and to the
Company's knowledge beneficially, of the Company's securities and holders of
rights to acquire the Company's securities (including capital stock options to
purchase capital stock of the
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<PAGE> 9
Company and warrants to purchase capital stock of the Company) indicating the
name of each holder, the number, class, and type and series of securities held
by each holder and any rights the Company has to repurchase such securities.
3.29 Section 83(b) Elections. All elections notices permitted by
Section 83(b) of the Internal Revenue Code have been timely filed by all
employees who have purchased shares of the Company's Common Stock under
agreements that provide for the vesting of such shares.
3.30 Qualified Small Business Stock. As of the Closing: (i) the
Company will be an eligible corporation as defined in Section 1202(e)(4) of the
Code, (ii) the Company will not have made any purchases of its own stock during
the one-year period preceding the Closing having an aggregate value exceeding 5%
of the aggregate value of all its stock as of the beginning of such period and
(iii) the Company's aggregate gross assets, as defined by Code Section
1202(d)(2), at no time between the date the Company was incorporated and through
the Closing have exceeded or will exceed $50 million, taking into account the
assets of any corporations required to be aggregated with the Company in
accordance with Code Section 1202(d)(3).
4. Representations and Warranties of Purchasers and Restrictions on
Transfer Imposed by the Securities Act and California Law.
4.1 Representations and Warranties by Each Purchaser. Each
Purchaser, severally and not jointly, hereby represents and warrants to the
Company as follows:
(a) The Series B Preferred Shares and the Conversion
Shares issuable upon conversion thereof are being acquired for the Purchaser's
own account, for investment and not with a view to, or for resale in connection
with, any distribution or public offering thereof within the meaning of the
Securities Act or the California Law.
(b) The Purchaser understands that the Series B
Preferred Shares and the Conversion Shares have not been registered under the
Securities Act by reason of their issuance in a transaction exempt from the
registration and prospectus delivery requirements of the Securities Act pursuant
to Section 4(2) thereof, that the Company has no present intention of
registering the Series B Preferred Shares or the Conversion Shares, that the
Series B Preferred Shares and the Conversion Shares must be held by the
Purchaser indefinitely, and that the Purchaser must therefore bear the economic
risk of such investment indefinitely, unless a subsequent disposition thereof is
registered under the Securities Act or is exempt from registration. The
Purchaser further understands that the Series B Preferred Shares and the
Conversion Shares have not been qualified under the California Law by reason of
their issuance in a transaction exempt from the qualification requirements of
the California Law pursuant to Section 25102(f) thereof, which exemption depends
upon, among other things, the bona fide nature of the Purchaser's investment
intent expressed above.
(c) During the negotiation of the transactions
contemplated herein, the Purchaser and its representatives and legal counsel
have been afforded full and free access to corporate books, financial
statements, records, contracts, documents, and other information concerning the
Company and to its offices and facilities, have been afforded an opportunity to
ask such questions of the Company's officers, employees, agents, accountants and
representatives concerning the Company's business, operations, financial
condition, assets, liabilities and other relevant matters as they have deemed
necessary or desirable, and have been given all such information as has been
requested, in order to evaluate the merits and risks of the prospective
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investments contemplated herein. The foregoing does not limit or modify the
representations or warranties of the Company in Section 3 hereof or the rights
of the Purchaser to rely thereon.
(d) The Purchaser and its representatives have been
solely responsible for the Purchaser's own "due diligence" investigation of the
Company and the Company's management and business, for its own analysis of the
merits and risks of this investment, and for its own analysis of the fairness
and desirability of the terms of the investment. In taking any action or
performing any role relative to the arranging of the proposed investment, the
Purchaser has acted solely in its own interest, and none of the Purchasers (or
any of their agents or employees) has acted as an agent of the Company or any
other Purchaser. The Purchaser has such knowledge and experience in financial
and business matters that the Purchaser is capable of evaluating the merits and
risks of the purchase of the Series B Preferred Shares pursuant to the terms of
this Agreement and of protecting Purchaser's interests in connection therewith.
(e) The Purchaser has the full right, power and
authority to enter into and perform the Purchaser's obligations under this
Agreement, the First Restated Investors Rights Agreement and the First Restated
Shareholders Agreement, and this Agreement, the First Restated Investors Rights
Agreement and the First Restated Shareholders Agreement constitute valid and
binding obligations of the Purchaser enforceable in accordance with their terms
except (A) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium, and other laws of general application affecting enforcement of
creditors' rights generally, and (B) as limited by laws relating to the
availability of specific performance, injunctive relief, or other equitable
remedies.
(f) No consent, approval or authorization of, or
designation, declaration or filing with, any governmental authority on the part
of the Purchaser is required in connection with the valid execution and delivery
of this Agreement, the First Restated Investors Rights Agreement or the First
Restated Shareholders Agreement.
(g) Purchaser is an "accredited investor" as defined
in Rule 501 pursuant to the Securities Act.
4.2 Legend. Each certificate representing the Series B Preferred
Shares or the Conversion Shares may be endorsed with the following legends:
(a) THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE TRANSFER IS
MADE IN COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT OR THE COMPANY
RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY
SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR
HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF SUCH ACT.
The Company need not register a transfer of any Series B Preferred Shares or
Conversion Shares, and may also instruct its transfer agent not to register the
transfer of the Series B Preferred Shares or Conversion Shares, unless the
conditions specified in the foregoing legends are satisfied.
-10-
<PAGE> 11
4.3 Removal of Legend and Transfer Restrictions. Any legend
endorsed on a certificate pursuant to Section 4.2(a) and the stop transfer
instructions with respect to such Series B Preferred Shares or Conversion Shares
shall be removed, and the Company shall issue a certificate without such legend
to the holder thereof if (i) such Series B Preferred Shares or Conversion Shares
are registered under the Securities Act and a prospectus meeting the
requirements of Section 10 of the Securities Act is available, (ii) such legend
may be properly removed under the terms of Rule 144 promulgated under the
Securities Act or (iii) such holder provides the Company with an opinion of
counsel for such holder, reasonably satisfactory to legal counsel for the
Company, to the effect that a sale, transfer or assignment of such Series B
Preferred Shares or Conversion Shares may be made without registration.
Notwithstanding the foregoing, no such registration statement or opinion of
counsel shall be necessary for a transfer by a Purchaser to an affiliate or to
the Purchaser's family members or trust for the benefit of an individual
Purchaser and his or her family members; provided, however, that in any such
instance the transferee will be subject to the terms of this Agreement to the
same extent as if he, she or it were an original Purchaser hereunder. For the
purposes of this Section 2, an "affiliate" shall mean any officer, director,
partner (including the principals of any general partner) or shareholder of a
Purchaser or any person or entity that directly or indirectly through one or
more intermediaries controls or is controlled by or is under common control with
a Purchaser.
4.4 Tax Consequences. Purchaser has reviewed with its own tax
advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement. Purchaser
understands that Purchaser (and not the Company) shall be responsible for
Purchaser's own tax liability that may arise as a result of this investment or
the transactions contemplated by this Agreement.
5. Conditions to Closing.
5.1 Conditions to Obligations of the Purchasers. The obligation
of each Purchaser to purchase Series B Preferred Shares at the Closing is
subject to the fulfillment on or prior to the Closing Date of the following
conditions, any of which may be waived by the Purchasers participating in that
Closing pursuant to the terms of subsection 6.2 hereof:
(a) Accuracy of Representations and Warranties;
Performance of Obligations. The representations and warranties made by the
Company in Section 3 above shall be true and correct when made, and shall be
true and correct in all material respects on the Closing Date with the same
force and effect as if they had been made on and as of said date; the Company's
business and assets shall not have been adversely affected in any material way
prior to the Closing Date; and the Company shall have performed all obligations
and conditions herein required to be performed or observed by it on or prior to
the Closing Date.
(b) Consents and Waivers. The Company shall have
obtained any and all consents (including all governmental or regulatory
consents, approvals or authorizations required in connection with the valid
execution and delivery of this Agreement, the First Restated Investors Rights
Agreement and the First Restated Shareholders Agreement), permits and waivers
necessary or appropriate for consummation of the transactions contemplated in
this Agreement, the First Restated Investors Rights Agreement and the First
Restated Shareholders Agreement.
-11-
<PAGE> 12
(c) Legal Investment. At the time of the Closing, the
purchase of the Series B Preferred Shares by the Purchasers hereunder shall be
legally permitted by all laws and regulations to which the Purchasers and the
Company are subject.
(d) Opinion of Company's Counsel. The Purchasers
shall have received from Freshman, Marantz, Orlanski, Cooper & Klein and Howard
M. Loeb, Professional Corporation, counsel for the Company, an opinion, dated
the Closing Date, in form and content reasonably satisfactory to Purchasers and
their special counsel.
(e) Restated Articles. The Restated Articles shall
have been filed with the California Secretary of State.
(f) First Restated Shareholders Agreement. The
Company, the Founder (as defined in this Agreement), the holders of shares of
Series A Preferred Stock and each Purchaser shall have executed and delivered
the First Restated Shareholders Agreement in the form attached hereto as Exhibit
E (the "First Restated Shareholders Agreement").
(g) First Restated Investors Rights Agreement. The
Company, the holders of Series A Preferred Stock and each Purchaser shall have
executed and delivered the First Restated Investors Rights Agreement in the form
attached hereto as Exhibit F (the "First Restated Investors Rights Agreement.")
(h) Compliance Certificate. The Company shall have
delivered to the Purchasers a certificate, executed by the President of the
Company, dated as of the Closing Date, certifying to the fulfillment of the
conditions specified in subsections (a) of this subsection 5.1.
5.2 Conditions to Obligations of the Company. The Company's
obligation to sell and issue the Series B Preferred Shares at the Closing is
subject to the fulfillment on or prior to the Closing Date of the following
conditions, any of which may be waived by the Company:
(a) Accuracy of Representations and Warranties. The
representations and warranties made by each Purchaser in Section 4 hereof shall
be true and correct in all material respects when made, and shall be true and
correct on the Closing Date with the same force and effect as if they had been
made on and as of said date.
(b) Incorporation of Conditions. The conditions set
forth in subsections (b), (c) and (e) of subsection 5.1 above shall have been
fulfilled.
6. Miscellaneous.
6.1 Indemnification. The Company will indemnify and defend each
Purchaser and each of its officers, directors and partners, and each person
controlling such Purchaser, against all claims, losses, expenses, damages and
liabilities (or actions in respect thereto) arising out of any breach by the
Company of this Agreement, the First Restated Investors Rights Agreement or the
First Restated Shareholders Agreement; provided, however, that the indemnity
agreement contained in this subsection 6.1 shall not apply to amounts paid in
settlement of any such claim, loss, damage, liability, or action if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld).
-12-
<PAGE> 13
6.2 Waivers and Amendments. With the written consent of the
Company and the record or beneficial holders of at least sixty percent (60%) of
the Series B Preferred Shares issued pursuant to this Agreement (including any
Conversion Shares, shares issued in exchange for the Series B Preferred Shares
or Conversion Shares and as adjusted for stock dividends, stock splits,
recapitalization and the like), the obligations of the Company and the rights of
the holders of the Series B Preferred Shares under this Agreement may be waived
(either generally or in a particular instance, either retroactively or
prospectively and, either for a specified period of time or indefinitely), and
with the same consent the Company, when authorized by resolution of the Board of
Directors, may enter into a supplementary agreement for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of this Agreement; provided, however, that no such waiver or supplemental
agreement shall reduce the aforesaid percentage of Series B Preferred Shares,
the holders of which are required to consent to any waiver or supplemental
agreement without the consent of the record or beneficial holders of all of the
Series B Preferred Shares; and provided further, however, that if such
supplementary agreement increases the rights of the Series B Preferred Shares,
the consent of the Company shall mean the approval of the Company's Board of
Directors including Cliff Young. Upon the effectuation of each such waiver,
consent or agreement of amendment or modification, the Company shall promptly
give written notice thereof to the record holders of the Series B Preferred
Shares who have not previously consented thereto in writing. Neither this
Agreement nor any provision hereof may be changed, waived, discharged or
terminated orally, but only by a statement in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought, except to the extent provided in this subsection 6.2.
6.3 Governing Law. This Agreement shall be governed in all
respects by the laws of the State of California as such laws are applied to
agreements between California residents entered into and to be performed
entirely within California.
6.4 California Corporate Securities Law. THE SALE OF THE
SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH
THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF
SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION
THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS AN EXEMPTION FROM SUCH
QUALIFICATION IS AVAILABLE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE
EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, OR SUCH EXEMPTION
BEING AVAILABLE.
6.5 Survival. The representations, warranties, covenants and
agreements made herein shall survive the execution of this Agreement and the
Closing of the transactions contemplated herein for a period of three (3) years.
6.6 Successors and Assigns. Except as otherwise expressly
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors and administrators of
the parties hereto. The Company may not assign this Agreement.
6.7 Entire Agreement. This Agreement, the exhibits to this
Agreement, the First Restated Investors Rights Agreement and the First Restated
Shareholders Agreement constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof.
-13-
<PAGE> 14
6.8 Notices, etc. All notices and other communications required
or permitted hereunder shall be in writing and shall be sent via facsimile,
overnight courier service or mailed by certified or registered mail, postage
prepaid, return receipt requested, addressed or sent (a) if to a Purchaser, at
the address or facsimile number of the Purchaser set forth below such party's
name on Exhibit A hereto, or at such other address or number as the Purchaser
shall have furnished to the Company in writing, or (b) if to the Company, at
4499 Glencoe Avenue, Marina del Rey, California 90292, facsimile: (310)
881-6223, or at such other address or number as the Company shall have furnished
to the Purchasers in writing. All notices shall be effective upon (i) delivery
if sent by facsimile (with a confirming receipt); (ii) delivery if delivered in
person or sent by overnight courier service or (iii) three (3) days after
deposit in the U.S. mail, registered or certified, with postage prepaid and
properly addressed according to this Section 6.8.
6.9 Separability. In case any provision of this Agreement shall
be declared invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
6.10 Finder's Fees.
(a) The Company (i) represents and warrants that it
has retained no finder or broker in connection with the transactions
contemplated by this Agreement and (ii) hereby agrees to indemnify and to hold
the Purchasers harmless of and from any liability for any commission or
compensation in the nature of a finder's fee to any broker or other person or
firm (and the costs and expenses of defending against such liability or asserted
liability) for which the Company, or any of its employees or representatives,
are responsible.
(b) Each Purchaser (i) represents and warrants that it
has retained no finder or broker in connection with the transactions
contemplated by this Agreement and (ii) hereby agrees to indemnify and to hold
the Company and the other Purchasers harmless of and from any liability for any
commission or compensation in the nature of a finder's fee to any broker or
other person or firm (and the costs and expenses of defending against such
liability or asserted liability) for which it, or any of its employees or
representatives, are responsible.
6.11 Expenses. The Company and each Purchaser shall each bear its
respective expenses and legal fees incurred with respect to this Agreement and
the transactions contemplated herein; provided, however, that the Company will
pay the legal fees and expenses of one special counsel for the Purchasers and
other third party expenses up to a maximum of $30,000.
6.12 Titles and Subtitles. The titles of the paragraphs and
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
6.13 Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
6.14 Delays or Omissions. No delay or omission to exercise any
right, power or remedy accruing to any Purchaser, upon any breach or default of
the Company under this Agreement, shall impair any such right, power or remedy,
nor shall it be construed to be a waiver
-14-
<PAGE> 15
of any such breach or default, or any acquiescence therein, or of or in any
similar breach or default thereafter occurring; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
theretofore or thereafter occurring. It is further agreed that any waiver,
permit, consent or approval of any kind or character on a Purchaser's part of
any breach or default under this Agreement, or any waiver on a Purchaser's part
of any provisions or conditions of this Agreement must be in writing and shall
be effective only to the extent specifically set forth in such writing and that
all remedies, either under this Agreement, or by law or otherwise afforded to a
Purchaser, shall be cumulative and not alternative.
[Remainder of this page intentionally left blank]
-15-
<PAGE> 16
IN WITNESS WHEREOF, the parties have executed this Series B Preferred
Stock Purchase Agreement as of the day and year first above written.
"COMPANY"
ICNT, INC.,
a California corporation
By: /s/ JOHN COMBS
-------------------------------------
John Combs, Chief Executive Officer
By: /s/ CLIFF YOUNG
-------------------------------------
Cliff Young, President
-16-
<PAGE> 17
PURCHASERS COUNTERPART SIGNATURE PAGE
ICNT, INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
Crosspoint Venture Partners 1999
By /s/ ROBERT HOFF
----------------------------
Robert Hoff, General Partner
Spectrum Equity Investors III, L.P.
By: Spectrum Equity Associates III, L.P.
Its General Partner
By: /s/ MATTHEW N. MOCHARY
------------------------------
Matthew N. Mochary
Its Duly Authorized Signatory
SEI II Entrepreneurs' Fund, L.P.
By: SEI III Entrepreneurs' LLC
Its General Partner
By: /s/ MATTHEW N. MOCHARY
------------------------------
Matthew N. Mochary
Its Duly Authorized Signatory
Spectrum III Investment Managers' Fund, L.P.
By: /s/ MATTHEW N. MOCHARY
------------------------------
Matthew N. Mochary
Its Duly Authorized Signatory
-17-
<PAGE> 18
PURCHASERS COUNTERPART SIGNATURE PAGE
ICNT, INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
/s/ DAVID CHUNG
- -------------------------------------
David Chung
/s/ NOEL RAHN
- -------------------------------------
Noel Rahn
/s/ PATRICK HEALY
- ------------------------------------
Patrick Healy
-18-
<PAGE> 19
EXHIBIT A
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
NUMBER OF
SERIES B AGGREGATE
NAME AND ADDRESS OF PURCHASER PREFERRED SHARES PURCHASE PRICE
- ----------------------------------------- ----------------------------- -----------------------
<S> <C> <C>
CROSSPOINT VENTURE PARTNERS 1999 5,075,245 $ 5,000,000.25
2925 Woodside Road
Woodside, CA 94062
SPECTRUM EQUITY INVESTORS III, L.P. 4,726,068 $ 4,656,000.00
245 Lytton Avenue, Suite 175
Palo Alto, CA 94301
SEI II ENTREPRENEURS' FUND, L.P. 147,690 $ 145,500.00
245 Lytton Avenue, Suite 175
Palo Alto, CA 94301
SPECTRUM III INVESTMENT 49,230 $ 48,500.25
Managers' Fund, L.P.
245 Lytton Avenue, Suite 175
Palo Alto, CA 94301
DAVID CHUNG 57,097 $ 56,250.00
KKR
2800 Sand Hill Road
Suite 200
Menlo Park, CA 94025
NOEL RAHN 76,128 $ 75,000.00
3355 US Bank Place
601 Second Avenue South
Minneapolis, MN 55402
PATRICK HEALY 19,032 $ 18,750.00
Hellman & Freedman
1 Maritime Plaza, 12th Floor
San Francisco, CA 94111
10,150,490 $ 10,000,000.50
---------- =================
</TABLE>
-19-
<PAGE> 20
EXHIBIT B
ICNT, INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
FORM OF AMENDED AND RESTATED ARTICLES OF INCORPORATION
-20-
<PAGE> 21
EXHIBIT C
ICNT, INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
SCHEDULE OF EXCEPTIONS
-21-
<PAGE> 22
EXHIBIT D
ICNT, INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
LIST OF SHAREHOLDERS AND OPTIONEES
-22-
<PAGE> 23
EXHIBIT E
ICNT, INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
FORM OF FIRST RESTATED SHAREHOLDERS AGREEMENT
-23-
<PAGE> 24
EXHIBIT F
ICNT, INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
FORM OF FIRST RESTATED INVESTORS RIGHTS AGREEMENT
-24-
<PAGE> 1
EXHIBIT 10.7
ICNT, INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES C PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement") is
entered into as of March 28, 2000, by and among ICNT, Inc., a California
corporation (the "Company"), and Cabletron Systems, Inc. ("Purchaser").
In consideration for and of the mutual promises, covenants and conditions
hereinafter set forth and other good and valuable consideration the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Authorization and Sale of the Shares.
1.1 Authorization; Amended and Restated Articles of Incorporation.
The Company has authorized the issuance and sale pursuant to the terms and
conditions hereof of up to Two Million Seven Hundred Sixty One Thousand Two
Hundred Ten (2,761,210) shares of its Series C Preferred Stock (the "Series C
Preferred Shares"), having the rights, preferences, privileges and restrictions
as set forth in the form of Amended and Restated Articles of Incorporation of
the Company (the "Restated Articles") attached hereto as Exhibit A.
1.2 Issuance and Sale. Subject to the terms and conditions set
forth in this Agreement, Purchaser agrees to purchase from the Company, and the
Company agrees to sell and issue to Purchaser, at the Closing, 2,761,210 shares
of Series C Preferred Shares at a purchase price of $2.7162 per share. The
Series C Preferred Shares will have the rights, preferences, privileges and
restrictions set forth in the Restated Articles.
2. Closing; Delivery.
2.1 Closing. The closing of the purchase and sale of the Series C
Preferred Shares hereunder (the "Closing") shall take place at the offices of
Kirkpatrick & Lockhart LLP, counsel to the Company ("KL"), 9100 Wilshire
Boulevard, Beverly Hills, California 90212, at 3:00 p.m. on March 28, 2000 or at
such other date, time and place as the Company and Purchaser participating in
such closing mutually agree upon, orally or in writing. The date of the closing
of the transactions contemplated in this Agreement is sometimes also referred to
herein as the "Closing Date."
2.2 Delivery. Subject to the terms and conditions set forth in
this Agreement, at the Closing the Company will deliver to Purchaser a stock
certificate representing the number of Series C Preferred Shares, being
purchased against delivery by Purchaser of payment of the purchase price
therefore by cancellation/conversion of outstanding indebtedness of the Company
to Purchaser under that certain Convertible Promissory Note dated November 30,
1999 in the aggregate amount of Seven Million Five Hundred Thousand Dollars
($7,500,000) (the "Note"). Purchaser shall surrender to the Company for
cancellation at the Closing the Note or shall execute an instrument of
cancellation in form and substance acceptable to the Company. In addition, the
Company at the Closing shall deliver to Purchaser choosing to pay any part of
the purchase price of the Series C Preferred Shares by cancellation of
indebtedness, a check in the amount of any interest accrued on such indebtedness
through the Closing Date.
<PAGE> 2
3. Representations and Warranties of the Company. Except as set forth
on Exhibit B attached hereto and incorporated herein by reference, the Company
hereby represents and warrants to Purchaser as follows:
3.1 Organization; Good Standing; Qualification. The Company is a
corporation duly organized and validly existing under, and by virtue of, the
laws of the State of California and is in good standing under such laws. The
Company has the requisite corporate power to own and operate its properties and
assets, and to carry on its business as presently conducted and as proposed to
be conducted. The Company is in good standing and qualified to do business as a
foreign corporation in California and in every other jurisdiction where the
failure to so qualify would have a material adverse impact on the Company's
business, properties, financial condition or results of operations. The Company
has furnished to special counsel to Purchaser true and complete copies of its
Amended and Restated Articles of Incorporation (the "Restated Articles") and
Bylaws, each as amended to date and presently in effect.
3.2 Corporate Power. The Company has all requisite legal and
corporate power and authority to enter into this Agreement, the Second Restated
Investors Rights and the Second Restated Shareholders Agreement, and to sell the
Series C Preferred Shares hereunder and to carry out and perform its obligations
under the terms of this Agreement, the Second Restated Investors Rights
Agreement and the Second Restated Shareholders Agreement.
3.3 Subsidiaries. The Company does not control, directly or
indirectly, or have an interest in, any other corporation, association or
business entity.
3.4 Capitalization.
(a) Common Stock and Preferred Stock. The authorized capital
stock of the Company consists, or will consist immediately prior to the Closing
of 60,000,000 shares of Common Stock and 26,245,034 shares of Preferred Stock of
which 13,333,334 shares have been designated Series A Preferred Stock ("Series A
Stock"), 10,150,490 shares have been designated Series B Preferred Stock
("Series B Stock") and 2,761,210 shares have been designated Series C Preferred
Stock ("Series C Stock"). The Series C Stock have the rights, preferences,
privileges and restrictions set forth in the Restated Articles. Immediately
prior to the Closing, there are 12,856,726 shares of Common Stock issued and
outstanding; 13,333,334 shares of Series A Stock, 10,150,490 shares of Series B
Stock and no shares of Series C Stock issued and outstanding. All such issued
and outstanding shares have been duly authorized and validly issued, are fully
paid and nonassessable and were issued in compliance with all applicable state
and federal laws concerning the issuance of securities.
(b) Options, Warrants, Reserved Shares, Etc. Except as set
forth in this Agreement, the Second Restated Investors Rights Agreement or the
Second Restated Shareholders Agreement, there are no outstanding preemptive or
other rights, plans, options, warrants, conversion rights or agreements for the
purchase or acquisition from the Company of any shares of its capital stock,
except that a sufficient number of shares of Common Stock have been duly and
validly reserved for issuance upon conversion of the Series C Preferred Shares
(the "Conversion Shares").
2
<PAGE> 3
3.5 Authorization.
(a) All corporate actions on the part of the Company, its
officers, directors and shareholders necessary for (i) the authorization, sale
and issuance of the Series C Preferred Shares pursuant hereto, (ii) the
authorization and issuance of the Conversion Shares, and (iii) the
authorization, execution, delivery and performance by the Company of this
Agreement, the Second Restated Investors Rights Agreement and the Second
Restated Shareholders Agreement, have been taken or will be taken prior to the
Closing hereunder. This Agreement, the Second Restated Investors Rights
Agreement and the Second Restated Shareholders Agreement, when executed and
delivered, will constitute valid and binding obligations of the Company
enforceable against it in accordance with their terms except (A) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of
general application affecting enforcement of creditors' rights generally, and
(B) as limited by laws relating to the availability of specific performance,
injunctive relief, or other equitable remedies.
(b) The Series C Preferred Shares and the Conversion Shares,
when issued in compliance with the provisions of this Agreement and the Restated
Articles, will be duly and validly issued, fully paid and nonassessable, and
will be free of any liens or encumbrances; provided, however, that the Series C
Preferred Shares and the Conversion Shares may be subject to restrictions on
transfer under state and/or federal securities laws, as set forth herein or in
the Second Restated Investors Rights Agreement or Second Restated Shareholders
Agreement or otherwise required by such laws at the time a transfer is proposed.
3.6 Title to Properties and Assets; Liens, etc. The Company has
good and marketable title to all its properties and assets and good title to all
its leasehold estates, in each case subject to no mortgage, pledge, lien,
encumbrance or charge, other than or resulting from taxes which have not yet
become delinquent and liens and encumbrances which do not in any case materially
detract from the value of the property subject thereto or materially impair the
operations of the Company, and which have not arisen otherwise than in the
ordinary course of business. The Company is not in default of any provision of
any leases pursuant to which it holds its leasehold estates. Except as set forth
in this Agreement, the Company does not use any properties or assets in the
conduct of its business that it does not own or lease.
3.7 Material Contracts. All material agreements and contracts are
valid, binding and in full force and effect with respect to the Company. The
Company is not in breach or default of any provision or term of any such
agreement or commitment and, to the Company's knowledge, no other party to any
such agreements or commitments is in breach or default thereof. The Company is
not bound by any agreement or commitment that places any restriction on the
ability of the Company to conduct its business as presently conducted or as
proposed to be conducted.
3.8 Patents, Trademarks, etc. The Company owns, or has the right
to use, all patents, trademarks, service marks, trade names, copyrights,
licenses, trade secrets or other proprietary rights necessary to its business as
now conducted without conflicting with or infringing upon the right or claimed
right of any person under or with respect to any of the foregoing. There are no
outstanding options, licenses or agreements of any kind relating to the
Company's intellectual property rights, nor is the Company bound by or a party
to any options,
3
<PAGE> 4
licenses or agreements of any kind with respect to the patents, trademarks,
service marks, trade names, copyrights, licenses, trade secrets or other
proprietary rights of any other person or entity. The Company has not received
any communications alleging that the Company has violated or, by conducting its
business as presently conducted or proposed to be conducted, would violate, any
of the patents, trademarks, service marks, trade names, copyrights or trade
secrets or other proprietary rights of any other person or entity. The Company
is not aware of any violation by a third party of any of the Company's patents,
trademarks, service marks, trade names, copyrights, trade secrets or other
proprietary rights. 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 such employee's
duties to the Company or that would conflict with the Company's business as now
conducted or as proposed to be conducted. Neither the execution nor delivery of
this Agreement, nor the carrying on of the Company's business by the employees
of the Company, nor the conduct of the Company's business, will, to the
Company's knowledge, conflict with or result in a material breach of the terms,
conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any employee is now obligated. The Company is
not utilizing and it will not be necessary for the Company to utilize any
inventions of any of its employees made prior to their employment by the
Company, except for inventions that have been assigned to the Company.
3.9 Compliance with Other Instruments. The Company is not in
violation or default in any respect of any term of the Restated Articles or its
bylaws, as amended, or any judgment, decree or order by which the Company is
bound or to which its properties are subject or, to its knowledge, any statute,
rule, or regulation applicable to the Company which would materially and
adversely affect the business, properties, financial condition and results of
operations of the Company. The execution, delivery and performance of and
compliance with this Agreement, the Second Restated Investors Rights Agreement
and the Second Restated Shareholders Agreement and the transactions contemplated
herein and therein will not result in (a) any such violation and will not be in
conflict with or constitute a material default under any of the foregoing, (b)
the creation of any mortgage, pledge, lien, encumbrance or charge upon any of
the properties or assets of the Company pursuant to any of the foregoing, or (c)
the suspension, revocation, impairment, forfeiture or nonrenewal of any permit,
license, authorization or approval applicable to the Company, its business,
properties, financial condition or results of operations.
3.10 Employees and Consultants. To the Company's knowledge, no
employee or consultant of the Company is in violation of any term of any
employment contract, patent disclosure agreement or any other contract or
agreement relating to the right of any such employee to be employed by the
Company or to serve as a consultant because of the nature of the business
conducted or to be conducted by the Company or for any other reason, and the
continued employment or use by the Company of its present employees and
consultants will not result in any such violations. The Company has no deferred
compensation, pension, profit sharing, bonus, insurance, severance or any other
similar employee benefit plan or obligation or any employment or severance
agreement covering any of its officers or employees. There are no asserted
controversies or labor disputes or union organization activities pending or, to
the knowledge of the Company, threatened, between it and its employees. Each
former and current employee and consultant of the Company has executed an
employee inventions and proprietary rights assignment and confidentiality
agreement with the Company. To the Company's
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knowledge, no employee or consultant is in violation of any such agreement. The
Company has complied in all material respects with all applicable state and
federal equal employment opportunity and other laws related to employment.
3.11 Litigation, etc. There is no action, suit, proceeding or
investigation pending or threatened in writing and delivered to the Company,
against the Company, which, either in any single case or in the aggregate, would
result in any material adverse change in the business, properties, financial
condition, results of operations or prospects of the Company, or in any material
impairment of the right or ability of the Company to carry on its business as
now conducted or as proposed to be conducted, or in any material liability on
the part of the Company, and none which questions the validity of this
Agreement, the Second Restated Investors Rights Agreement or the Second Restated
Shareholders Agreement, or any action taken or to be taken in connection
herewith or therewith, nor, to the Company's knowledge, any basis therefor. The
Company is not a party or subject to any writ, order, decree or judgment, and
there is no action, suit, proceeding or investigation by the Company currently
pending or which the Company intends to initiate.
3.12 Registration Rights. Except as set forth in the Second
Restated Investors Rights Agreement, the Company is not under any obligation to
register any presently outstanding securities, or any securities which may
hereafter be issued, under the Securities Act of 1933, as amended (the
"Securities Act").
3.13 Governmental Consent, etc. No consent, approval,
qualification, order or authorization of, or designation, declaration or filing
with, any governmental authority on the part of the Company is required in
connection with the valid execution and delivery of this Agreement, the Second
Restated Investors Rights Agreement or the Second Restated Shareholders
Agreement, the offer, sale or issuance of the Series C Preferred Shares or the
Conversion Shares, or the consummation of any other transaction contemplated
herein or therein, except the filing of the Restated Articles with the
California Secretary of State and, if required, qualifications or filings under
the Securities Act, the California Corporate Securities Law of 1968, as amended
(the "California Law"), and other applicable state securities laws, which
qualifications or filings, if required, will be obtained or made and will be
effective within the time periods required by law.
3.14 Disclosure. No statement by the Company contained in (i) this
Agreement, including the exhibits and schedules attached hereto, (ii) the Second
Restated Investors Rights Agreement and (iii) the Second Restated Shareholders
Agreement, contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained herein or
therein not misleading in light of the circumstances under which they were made.
3.15 Taxes. The amount shown on the Balance Sheet (as defined in
Section 3.17 hereof) as provision for taxes is sufficient in all material
respects for payment of all accrued and unpaid Federal, state, county, local and
foreign taxes for the period then ended and all prior periods. The Company has
filed or has obtained presently effective extensions with respect to all
Federal, state, county, local and foreign tax returns which are required to be
filed by it, such returns are true and correct in all material respects and all
taxes shown thereon to be due have been timely paid with exceptions not material
to the Company. Federal income tax returns
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of the Company have not been audited by the Internal Revenue Service, and no
controversy with respect to taxes of any type is pending or, to the Company's
knowledge, threatened. Neither the Company nor, to the Company's knowledge, any
of its shareholders has ever filed (a) an election pursuant to Section 1362 of
the Internal Revenue Code of 1986, as amended (the "Code"), that the Company be
taxed as an S Corporation or (b) consent pursuant to Section 341(f) of the Code
relating to collapsible corporations. Since the Balance Sheet Date (as defined
in Section 3.17), the Company has made adequate provisions on its books and
accounts for all taxes, assessments and governmental charges with respect to its
business and operation for such subsequent period. The Company has withheld or
collected from each payment made to its employees all taxes required to be
withheld or collected therefrom, and has paid the same to the proper tax
receiving officers or authorized depositories.
3.16 Transactions with Principals. No employee, shareholder,
officer or director of the Company or any 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 other than (a) for payment
of salary for services rendered, (b) reimbursement for reasonable expenses
incurred on behalf of the Company, and (c) for other standard employee benefits
made generally available to all employees (including stock option agreements
outstanding under the Stock Option Plan and approved by the Board of Directors).
No officer or director, and, to the Company's knowledge, no other person is,
directly or indirectly, interested in any contract with the Company. No officer
or director, or, to the Company's knowledge, no employee or shareholder of the
Company or any member of any officer's, director's, employee's or stockholder's
immediate family, 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
material business relationship, or any firm or corporation that competes with
the Company, except that employees, shareholders, officers and directors of the
Company may own stock in publicly traded companies that compete with the
Company.
3.17 Financial Statements. The Company has furnished to Purchaser a
complete and correct copy of the unaudited consolidated balance sheet (the
"Balance Sheet") and statements of income, retained earnings and cash flows of
the Company for the fiscal year ended December 31, 1999 (the "Financial
Statements"). The Financial Statements are complete and correct in all material
respects and have been prepared in accordance with generally accepted accounting
principles consistently applied, except that notes do not accompany unaudited
Financial Statements. The Financial Statements present fairly and accurately in
all material respects the financial condition and results of operations of the
Company, as at the dates and for the periods indicated. Since December 31, 1999,
there has been no change in any accounting policies, principles, methods or
practices. Except as set forth in the Financial Statements, the Company has no
liabilities, contingent or otherwise, other than liabilities, and obligations
under contracts and commitments, incurred in the ordinary course of business
that are not required under generally accepted accounting principles to be
reflected in the Financial Statements and which, in the aggregate, are not
material to the financial condition or operating results of the Company. The
Company maintains and will continue to maintain a standard system of accounting
established and administered in accordance with generally accepted accounting
principles. All of the assets of the Company included on the Balance Sheet are
productively used in the conduct of the Company's business. The Company has not
capitalized any of its research and development expenses.
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3.18 Permits. The Company has all franchises, permits, licenses and
any similar authority necessary for the conduct of its business as now being
conducted by it, and, to the knowledge of the Company, the Company can obtain,
without undue burden or expense, any similar authority for the conduct of its
business as planned to be conducted. The Company is not in default under any of
such franchises, permits, licenses or similar authority held by the Company.
3.19 Offering. Assuming the accuracy of the representations and
warranties of the Purchaser contained in Section 4 hereof, the offer, sale and
issuance of the Series C Preferred Shares and the Conversion Shares will be
exempt from the registration requirements of Section 5 of the Securities Act and
will have been registered or qualified (or are exempt from registration and
qualification) under the registration, permit or qualification requirements of
all applicable state securities laws.
3.20 Minute Books. The minute books of the Company have been made
available for inspection to counsel for the Purchaser and contain a summary of
all meetings of directors and stockholders since the time of incorporation and
reflect all transactions referred to in such minutes accurately in all material
respects.
3.21 Real Property Holding Corporation. The Company is not a real
property holding corporation within the meaning of Internal Revenue Code Section
897(c)(2) and any regulations promulgated thereunder.
3.22 Investment Company Act. The Company is not an "investment
company", or a company "controlled" by an "investment company", within the
meaning of the Investment Company Act of 1940, as amended.
3.23 Environmental and Safety Laws. To the Company's knowledge,
it is not in violation of any applicable statute, law or regulation relating to
the environment or occupational health and safety, and no material expenditures
are or will be required in order to comply with any such existing statute, law
or regulation.
3.24 Guarantees. The Company is not a guarantor or indemnitor of
any indebtedness of any other person.
3.25 Changes. Since the Balance Sheet Date, 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 for changes in the ordinary course of business
which have not been, in the aggregate, materially adverse to the Company;
(b) any damage, destruction, or loss of tangible assets,
whether or not covered by insurance, that materially and adversely affects the
assets, properties, financial condition, operating results, prospects, or
business of the Company as currently conducted;
(c) 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;
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(d) any waiver by the Company of a valuable right or of a
material debt owed to it;
(e) any change or amendment to a material contract or
arrangement by which the Company or any of its assets or properties is bound or
subject, except for changes in the ordinary course of business which have not
been materially adverse to the Company;
(f) any change in any compensation arrangement or agreement
with any employee of the Company;
(g) any transfer of any patent, trademark, copyright, trade
secret or other intangible asset of the Company except in the ordinary course of
business;
(h) any resignation or termination of employment of any key
officer of the Company;
(i) receipt by the Company of written notice that there has
been a loss of, or order cancellation by, any major customer of the Company;
(j) any encumbrance of any material asset of the Company
except liens for taxes not yet due or payable;
(k) any loan or guarantee made by the Company to or for the
benefit of an employee, officer, director, or member of the family of an
employee, officer, or director, other than travel or other advances made in the
ordinary course of business;
(l) any declaration, setting aside, or distribution in
respect of any of the Company's capital stock, or any direct or indirect
redemption, purchase, or other acquisition of any of such stock by the Company;
(m) any other event or condition directly and specifically
affecting the Company of any character that the Company believes could adversely
affect the assets, properties, financial condition, operating results, business
or prospects of the Company (as such business is presently conducted and as it
is proposed to be conducted); or
(n) any agreement or commitment by the Company or to do any
of the things described in this Section 3.25.
3.26 No Other Agreements Relating to Voting or Transfer. Except as
contemplated by the Restated Articles, the Founder's Stock Agreement dated July
16, 1999 between the Company and Cliff Young, the Second Restated Shareholders
Agreement and in the Stock Plan, there are no agreements or understandings
involving the Company, any of its directors, or to the Company's knowledge, any
shareholder of the Company, that (a) concerns voting the securities of the
Company or (b) restricts the transfer of securities of the Company (except for
restrictions intended to comply with applicable securities laws).
3.27 List of Shareholders and Optionees. Attached hereto as Exhibit
C is a true
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and complete list of all owners, of record and to the Company's knowledge
beneficially, of the Company's securities and holders of rights to acquire the
Company's securities (including capital stock options to purchase capital stock
of the Company and warrants to purchase capital stock of the Company) indicating
the name of each holder, the number, class, and type and series of securities
held by each holder and any rights the Company has to repurchase such
securities.
3.28 Section 83(b) Elections. All elections notices permitted by
Section 83(b) of the Internal Revenue Code have been timely filed by all
employees who have purchased shares of the Company's Common Stock under
agreements that provide for the vesting of such shares.
3.29 Qualified Small Business Stock. As of the Closing: (i) the
Company will be an eligible corporation as defined in Section 1202(e)(4) of the
Code, (ii) the Company will not have made any purchases of its own stock during
the one-year period preceding the Closing having an aggregate value exceeding 5%
of the aggregate value of all its stock as of the beginning of such period and
(iii) the Company's aggregate gross assets, as defined by Code Section
1202(d)(2), at no time between the date the Company was incorporated and through
the Closing have exceeded or will exceed $50 million, taking into account the
assets of any corporations required to be aggregated with the Company in
accordance with Code Section 1202(d)(3).
4. Representations and Warranties of Purchaser and Restrictions on
Transfer Imposed by the Securities Act and California Law.
4.1 Representations and Warranties by Purchaser. Purchaser hereby
represents and warrants to the Company as follows:
(a) The Series C Preferred Shares and the Conversion Shares
issuable upon conversion thereof are being acquired for the Purchaser's own
account, for investment and not with a view to, or for resale in connection
with, any distribution or public offering thereof within the meaning of the
Securities Act or the California Law.
(b) The Purchaser understands that the Series C Preferred
Shares and the Conversion Shares have not been registered under the Securities
Act by reason of their issuance in a transaction exempt from the registration
and prospectus delivery requirements of the Securities Act pursuant to Section
4(2) thereof, that the Company has no present intention of registering the
Series C Preferred Shares or the Conversion Shares, that the Series C Preferred
Shares and the Conversion Shares must be held by the Purchaser indefinitely, and
that the Purchaser must therefore bear the economic risk of such investment
indefinitely, unless a subsequent disposition thereof is registered under the
Securities Act or is exempt from registration. The Purchaser further understands
that the Series C Preferred Shares and the Conversion Shares have not been
qualified under the California Law by reason of their issuance in a transaction
exempt from the qualification requirements of the California Law pursuant to
Section 25102(f) thereof, which exemption depends upon, among other things, the
bona fide nature of the Purchaser's investment intent expressed above.
(c) During the negotiation of the transactions contemplated
herein, the Purchaser and its representatives and legal counsel have been
afforded full and free access to
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corporate books, financial statements, records, contracts, documents, and other
information concerning the Company and to its offices and facilities, have been
afforded an opportunity to ask such questions of the Company's officers,
employees, agents, accountants and representatives concerning the Company's
business, operations, financial condition, assets, liabilities and other
relevant matters as they have deemed necessary or desirable, and have been given
all such information as has been requested, in order to evaluate the merits and
risks of the prospective investments contemplated herein. The foregoing does not
limit or modify the representations or warranties of the Company in Section 3
hereof or the rights of the Purchaser to rely thereon.
(d) The Purchaser and its representatives have been solely
responsible for the Purchaser's own "due diligence" investigation of the Company
and the Company's management and business, for its own analysis of the merits
and risks of this investment, and for its own analysis of the fairness and
desirability of the terms of the investment. In taking any action or performing
any role relative to the arranging of the proposed investment, the Purchaser has
acted solely in its own interest, and none of the Purchaser (or any of their
agents or employees) has acted as an agent of the Company or any other
Purchaser. The Purchaser has such knowledge and experience in financial and
business matters that the Purchaser is capable of evaluating the merits and
risks of the purchase of the Series C Preferred Shares pursuant to the terms of
this Agreement and of protecting Purchaser's interests in connection therewith.
(e) The Purchaser has the full right, power and authority to
enter into and perform the Purchaser's obligations under this Agreement, the
Second Restated Investors Rights Agreement and the Second Restated Shareholders
Agreement, and this Agreement, the Second Restated Investors Rights and the
Second Restated Shareholders Agreement constitute valid and binding obligations
of the Purchaser enforceable in accordance with their terms except (A) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium, and
other laws of general application affecting enforcement of creditors' rights
generally, and (B) as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies.
(f) No consent, approval or authorization of, or
designation, declaration or filing with, any governmental authority on the part
of the Purchaser is required in connection with the valid execution and delivery
of this Agreement, the Second Restated Investors Rights Agreement and the Second
Restated Shareholders Agreement.
(g) Purchaser is an "accredited investor" as defined in Rule
501 pursuant to the Securities Act.
4.2 Legend. Each certificate representing the Series C Preferred
Shares or the Conversion Shares may be endorsed with the following legends:
(a) THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE TRANSFER IS
MADE IN COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT OR THE
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COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES
REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER,
ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS
DELIVERY REQUIREMENTS OF SUCH ACT.
The Company need not register a transfer of any Series C Preferred Shares or
Conversion Shares, and may also instruct its transfer agent not to register the
transfer of the Series C Preferred Shares or Conversion Shares, unless the
conditions specified in the foregoing legends are satisfied.
4.3 Removal of Legend and Transfer Restrictions. Any legend
endorsed on a certificate pursuant to Section 4.2(a) and the stop transfer
instructions with respect to such Series C Preferred Shares or Conversion Shares
shall be removed, and the Company shall issue a certificate without such legend
to the holder thereof if (i) such Series C Preferred Shares or Conversion Shares
are registered under the Securities Act and a prospectus meeting the
requirements of Section 10 of the Securities Act is available, (ii) such legend
may be properly removed under the terms of Rule 144 promulgated under the
Securities Act or (iii) such holder provides the Company with an opinion of
counsel for such holder, reasonably satisfactory to legal counsel for the
Company, to the effect that a sale, transfer or assignment of such Series C
Preferred Shares or Conversion Shares may be made without registration.
Notwithstanding the foregoing, no such registration statement or opinion of
counsel shall be necessary for a transfer by a Purchaser to an affiliate or to
the Purchaser's family members or trust for the benefit of an individual
Purchaser and his or her family members; provided, however, that in any such
instance the transferee will be subject to the terms of this Agreement to the
same extent as if he, she or it were an original Purchaser hereunder. For the
purposes of this Section 2, an "affiliate" shall mean any officer, director,
partner (including the principals of any general partner) or shareholder of a
Purchaser or any person or entity that directly or indirectly through one or
more intermediaries controls or is controlled by or is under common control with
a Purchaser.
4.4 Tax Consequences. Purchaser has reviewed with its own tax
advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement. Purchaser
understands that Purchaser (and not the Company) shall be responsible for
Purchaser's own tax liability that may arise as a result of this investment or
the transactions contemplated by this Agreement.
5. Conditions to Closing.
5.1 Conditions to Obligations of the Purchaser. The obligation of
Purchaser to purchase Series C Preferred Shares at the Closing is subject to the
fulfillment on or prior to the Closing Date of the following conditions, any of
which may be waived by the Purchaser:
(a) Accuracy of Representations and Warranties; Performance
of Obligations. The representations and warranties made by the Company in
Section 3 above shall be true and correct when made, and shall be true and
correct in all material respects on the Closing Date with the same force and
effect as if they had been made on and as of said date; the Company's business
and assets shall not have been adversely affected in any material way prior to
the Closing Date; and the Company shall have performed all obligations and
conditions herein required to be performed or observed by it on or prior to the
Closing Date.
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(b) Consents and Waivers. The Company shall have obtained
any and all consents (including all governmental or regulatory consents,
approvals or authorizations required in connection with the valid execution and
delivery of this Agreement, the Second Restated Investors Rights Agreement and
the Second Restated Shareholders Agreement), permits and waivers necessary or
appropriate for consummation of the transactions contemplated in this Agreement,
the Second Restated Investors Rights Agreement and the Second Restated
Shareholders Agreement.
(c) Legal Investment. At the time of the Closing, the
purchase of the Series C Preferred Shares by the Purchaser hereunder shall be
legally permitted by all laws and regulations to which the Purchaser and the
Company are subject.
(d) Restated Articles. The Restated Articles shall have been
filed with the California Secretary of State.
(e) Second Restated Investors Rights Agreement. The Company,
the holders of Series A Preferred Stock and Series B Preferred Stock and
Purchaser shall have executed and delivered the Second Restated Investors Rights
Agreement in the form attached hereto as Exhibit D (the "Second Restated
Investors Rights Agreement.")
(f) Second Restated Shareholders Agreement. The Company, the
holders of Series A Preferred Stock and Series B Preferred Stock and Purchaser
shall have executed and delivered the Second Restated Shareholders Agreement in
the form attached hereto as Exhibit E (the "Second Restated Shareholders
Agreement.")
5.2 Conditions to Obligations of the Company. The Company's
obligation to sell and issue the Series C Preferred Shares at the Closing is
subject to the fulfillment on or prior to the Closing Date of the following
conditions, any of which may be waived by the Company:
(a) Accuracy of Representations and Warranties. The
representations and warranties made by Purchaser in Section 4 hereof shall be
true and correct in all material respects when made, and shall be true and
correct on the Closing Date with the same force and effect as if they had been
made on and as of said date.
(b) Incorporation of Conditions. The conditions set forth in
subsections (b), (c) and (d) of subsection 5.1 above shall have been fulfilled.
6. Miscellaneous.
6.1 Indemnification. The Company will indemnify and defend
Purchaser and each of its officers, directors and partners, and each person
controlling Purchaser, against all claims, losses, expenses, damages and
liabilities (or actions in respect thereto) arising out of any breach by the
Company of this Agreement or the Second Restated Investors Rights Agreement
Second Restated Shareholders Agreement; provided, however, that the indemnity
agreement contained in this subsection 6.1 shall not apply to amounts paid in
settlement of any such claim, loss, damage, liability, or action if such
settlement is effected without the consent of the
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Company (which consent shall not be unreasonably withheld).
6.2 Waivers and Amendments. With the written consent of the
Company and the record or beneficial holders of at least sixty percent (60%) of
the Series C Preferred Shares issued pursuant to this Agreement (including any
Conversion Shares, shares issued in exchange for the Series C Preferred Shares
or Conversion Shares and as adjusted for stock dividends, stock splits,
recapitalization and the like), the obligations of the Company and the rights of
the holders of the Series C Preferred Shares under this Agreement may be waived
(either generally or in a particular instance, either retroactively or
prospectively and, either for a specified period of time or indefinitely), and
with the same consent the Company, when authorized by resolution of the Board of
Directors, may enter into a supplementary agreement for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of this Agreement; provided, however, that no such waiver or supplemental
agreement shall reduce the aforesaid percentage of Series C Preferred Shares,
the holders of which are required to consent to any waiver or supplemental
agreement without the consent of the record or beneficial holders of all of the
Series C Preferred Shares; and provided further, however, that if such
supplementary agreement increases the rights of the Series B Preferred Shares,
the consent of the Company shall mean the approval of the Company's Board of
Directors including Cliff Young. Upon the effectuation of each such waiver,
consent or agreement of amendment or modification, the Company shall promptly
give written notice thereof to the record holders of the Series C Preferred
Shares who have not previously consented thereto in writing. Neither this
Agreement nor any provision hereof may be changed, waived, discharged or
terminated orally, but only by a statement in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought, except to the extent provided in this subsection 6.2.
6.3 Governing Law. This Agreement shall be governed in all
respects by the laws of the State of California as such laws are applied to
agreements between California residents entered into and to be performed
entirely within California.
6.4 California Corporate Securities Law. THE SALE OF THE
SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH
THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF
SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION
THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS AN EXEMPTION FROM SUCH
QUALIFICATION IS AVAILABLE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE
EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, OR SUCH EXEMPTION
BEING AVAILABLE.
6.5 Survival. The representations, warranties, covenants and
agreements made herein shall survive the execution of this Agreement and the
Closing of the transactions contemplated herein for a period of three (3) years.
6.6 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto. The Company may not assign this Agreement.
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6.7 Entire Agreement. This Agreement, the exhibits to this
Agreement, the Second Restated Investors Rights Agreement and the Second
Restated Shareholders Agreement constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof.
6.8 Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be sent via facsimile,
overnight courier service or mailed by certified or registered mail, postage
prepaid, return receipt requested, addressed or sent (a) if to
____________________, 35 Industrial Way, Rochester, New Hampshire 03867,
facsimile (603) 337-1518, or at such other address or number as the Purchaser
shall have furnished to the Company in writing, or (b) if to the Company, at
4499 Glencoe Avenue, Marina del Rey, California 90292, facsimile: (310)
881-6223, or at such other address or number as the Company shall have furnished
to the Purchaser in writing. All notices shall be effective upon (i) delivery if
sent by facsimile (with a confirming receipt); (ii) delivery if delivered in
person or sent by overnight courier service or (iii) three (3) days after
deposit in the U.S. mail, registered or certified, with postage prepaid and
properly addressed according to this Section 6.8.
6.9 Severability. In case any provision of this Agreement shall be
declared invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
6.10 Finder's Fees.
(a) The Company (i) represents and warrants that it has
retained no finder or broker in connection with the transactions contemplated by
this Agreement and (ii) hereby agrees to indemnify and to hold the Purchaser
harmless of and from any liability for any commission or compensation in the
nature of a finder's fee to any broker or other person or firm (and the costs
and expenses of defending against such liability or asserted liability) for
which the Company, or any of its employees or representatives, are responsible.
(b) Purchaser (i) represents and warrants that it has
retained no finder or broker in connection with the transactions contemplated by
this Agreement and (ii) hereby agrees to indemnify and to hold the Company
harmless of and from any liability for any commission or compensation in the
nature of a finder's fee to any broker or other person or firm (and the costs
and expenses of defending against such liability or asserted liability) for
which it, or any of its employees or representatives, are responsible.
6.11 Expenses. The Company and Purchaser shall each bear its
respective expenses and legal fees incurred with respect to this Agreement and
the transactions contemplated herein.
6.12 Titles and Subtitles. The titles of the paragraphs and
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
6.13 Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.
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6.14 Delays or Omissions. No delay or omission to exercise
any right, power or remedy accruing to Purchaser, upon any breach or default of
the Company under this Agreement, shall impair any such right, power or remedy,
nor shall it be construed to be a waiver of any such breach or default, or any
acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. It is
further agreed that any waiver, permit, consent or approval of any kind or
character on Purchaser's part of any breach or default under this Agreement, or
any waiver on Purchaser's part of any provisions or conditions of this Agreement
must be in writing and shall be effective only to the extent specifically set
forth in such writing and that all remedies, either under this Agreement, or by
law or otherwise afforded to a Purchaser, shall be cumulative and not
alternative.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
15
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IN WITNESS WHEREOF, the parties have executed this Series C Preferred
Stock Purchase Agreement as of the day and year first above written.
"COMPANY"
ICNT, INC.,
a California corporation
By: /s/ JOHN COMBS
----------------------------------------
John Combs, Chief Executive Officer
By: /s/ CLIFF YOUNG
----------------------------------------
Cliff Young, President
16
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PURCHASER COUNTERPART SIGNATURE PAGE
ICNT, INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
Cabletron Systems, Inc.
By: /s/ DAN HARDING
--------------------------------------------
Name: Dan Harding
Title: Vice - President, Business Development
17
<PAGE> 18
EXHIBIT A
ICNT, INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
FORM OF AMENDED AND RESTATED ARTICLES OF INCORPORATION
18
<PAGE> 19
EXHIBIT B
ICNT, INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
SCHEDULE OF EXCEPTIONS
19
<PAGE> 20
EXHIBIT C
ICNT, INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
LIST OF SHAREHOLDERS AND OPTIONEES
20
<PAGE> 21
EXHIBIT D
ICNT, INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
FORM OF SECOND RESTATED INVESTORS RIGHT AGREEMENT
21
<PAGE> 22
EXHIBIT E
ICNT, INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
FORM OF SECOND RESTATED SHAREHOLDERS AGREEMENT
22
<PAGE> 1
EXHIBIT 10.8
ICNT, INC.
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES D PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement") is
entered into as of April 13, 2000, by and among ICNT, Inc., a California
corporation (the "Company"), and each of the undersigned purchasers of Series D
Preferred Stock of the Company (each, a "Purchaser," and collectively, the
"Purchasers") listed on the Schedule of Purchasers attached hereto as Exhibit A.
In consideration for and of the mutual promises, covenants and
conditions hereinafter set forth and other good and valuable consideration the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. Authorization and Sale of the Shares.
1.1. Authorization; Amended and Restated Articles of
Incorporation. The Company has authorized the issuance and sale pursuant to the
terms and conditions hereof of up to Six Million Two Hundred Sixty Thousand
Eight Hundred Twenty Three (6,260,823) shares of its Series D Preferred Stock
(the "Series D Preferred Shares"), having the rights, preferences, privileges
and restrictions as set forth in the form of Amended and Restated Articles of
Incorporation of the Company (the "Restated Articles") attached hereto as
Exhibit B.
1.2. Issuance and Sale. Subject to the terms and conditions set
forth in this Agreement, each Purchaser agrees, severally and not jointly, to
purchase from the Company, and the Company agrees to sell and issue to each
Purchaser, severally and not jointly, at the Closing the respective number of
Series D Preferred Shares set forth opposite each Purchaser's name on Exhibit A
hereto at a purchase price of $8.52124 per share. The Series D Preferred Shares
will have the rights, preferences, privileges and restrictions set forth in the
Restated Articles.
2. Closing; Delivery.
2.1. Closing. The closing of the purchase and sale of the Series
D Preferred Shares hereunder (the "Closing") shall take place at the offices of
Kirkpatrick & Lockhart LLP, counsel to the Company ("K&L"), 9100 Wilshire
Boulevard, Beverly Hills, California 90212, at 3:00 p.m. on April 13, 2000 or at
such other date, time and place as the Company and the Purchasers participating
in such closing mutually agree upon, orally or in writing. The date of the
closing of the transactions contemplated in this Agreement is sometimes also
referred to herein as the "Closing Date."
2.2. Delivery. Subject to the terms and conditions set forth in
this Agreement, at the Closing the Company will deliver to each Purchaser a
stock certificate representing the number of Series D Preferred Shares set forth
beside such Purchaser's name on Exhibit A hereto, against delivery by each
Purchaser of payment of the purchase price therefor by check or wire transfer
payable to the Company, by cancellation of outstanding indebtedness of the
Company to such Purchaser, or a combination thereof in the amount specified
opposite such Purchaser's name on Exhibit A hereto. In the event that payment by
a Purchaser is made, in whole or in part, by cancellation of indebtedness, then
such Purchaser shall surrender to the Company for cancellation at the Closing
any evidence of such indebtedness or shall execute an instrument of cancellation
in form and substance acceptable to the Company. In addition, the Company at the
Closing shall deliver to any Purchaser choosing to pay any part of the purchase
price of the
<PAGE> 2
Series D Preferred Shares by cancellation of indebtedness, a check in the amount
of any interest accrued on such indebtedness through the Closing Date.
3. Representations and Warranties of the Company. Except as set forth on
Exhibit C attached hereto and incorporated herein by reference, the Company
hereby represents and warrants to each Purchaser as follows:
3.1. Organization; Good Standing; Qualification. The Company is a
corporation duly organized and validly existing under, and by virtue of, the
laws of the State of California and is in good standing under such laws. The
Company has the requisite corporate power to own and operate its properties and
assets, and to carry on its business as presently conducted and as proposed to
be conducted. The Company is in good standing and qualified to do business as a
foreign corporation in California and in every other jurisdiction where the
failure to so qualify would have a material adverse impact on the Company's
business, properties, financial condition or results of operations. The Company
has furnished to special counsel to the Purchasers true and complete copies of
its Amended and Restated Articles of Incorporation (the "Restated Articles") and
Bylaws, each as amended to date and presently in effect.
3.2. Corporate Power. The Company has all requisite legal and
corporate power and authority to enter into this Agreement, the Third Restated
Investors Rights Agreement and the Third Restated Shareholders Agreement, and to
sell the Series D Preferred Shares hereunder and to carry out and perform its
obligations under the terms of this Agreement, the Third Restated Investors
Rights Agreement and the Third Restated Shareholders Agreement.
3.3. Subsidiaries. The Company does not control, directly or
indirectly, or have an interest in, any other corporation, association or
business entity.
3.4. Capitalization.
(a) Common Stock and Preferred Stock. The authorized
capital stock of the Company consists, or will consist immediately prior to the
Closing of 60,000,000 shares of Common Stock and 32,505,857 shares of Preferred
Stock of which 13,333,334 shares have been designated Series A Preferred Stock
("Series A Stock"), 10,150,490 shares have been designated Series B Preferred
Stock, 2,761,210 shares have been designated Series C Preferred Stock ("Series C
Stock") and 6,260,823 shares have been designated Series D Preferred Stock
("Series D Stock"). The Series D Preferred Stock have the rights, preferences,
privileges and restrictions set forth in the Restated Articles. Immediately
prior to the Closing, there are 12,905,086 shares of Common Stock issued and
outstanding; 13,333,334 shares of Series A Preferred Stock, 10,150,490 shares of
Series B Preferred Stock, 2,761,210 shares of Series C Preferred Stock and no
Series D Preferred Stock issued and outstanding. All such issued and outstanding
shares have been duly authorized and validly issued, are fully paid and
nonassessable and were issued in compliance with all applicable state and
federal laws concerning the issuance of securities.
(b) Options, Warrants, Reserved Shares, Etc. Except as set
forth in this Agreement, the Third Restated Investors Rights Agreement or the
Third Restated Shareholders Agreement, there are no outstanding preemptive or
other rights, plans, options, warrants, conversion rights or agreements for the
purchase or acquisition from the Company of any shares of its capital stock,
except that a sufficient number of shares of Common Stock have
2
<PAGE> 3
been duly and validly reserved for issuance upon conversion of the Series D
Preferred Shares (the "Conversion Shares").
3.5. Authorization.
(a) All corporate actions on the part of the Company, its
officers, directors and shareholders necessary for (i) the authorization, sale
and issuance of the Series D Preferred Shares pursuant hereto, (ii) the
authorization and issuance of the Conversion Shares, and (iii) the
authorization, execution, delivery and performance by the Company of this
Agreement, the Third Restated Investors Rights Agreement and the Third Restated
Shareholders Agreement, have been taken or will be taken prior to the Closing
hereunder. This Agreement, the Third Restated Investors Rights Agreement and the
Third Restated Shareholders Agreement, when executed and delivered, will
constitute valid and binding obligations of the Company enforceable against it
in accordance with their terms except (A) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, and other laws of general application
affecting enforcement of creditors' rights generally, and (B) as limited by laws
relating to the availability of specific performance, injunctive relief, or
other equitable remedies.
(b) The Series D Preferred Shares and the Conversion
Shares, when issued in compliance with the provisions of this Agreement and the
Restated Articles, will be duly and validly issued, fully paid and
nonassessable, and will be free of any liens or encumbrances; provided, however,
that the Series D Preferred Shares and the Conversion Shares may be subject to
restrictions on transfer under state and/or federal securities laws, as set
forth herein or in the Third Restated Investors Rights Agreement or Third
Restated Shareholders Agreement or otherwise required by such laws at the time a
transfer is proposed.
3.6. Title to Properties and Assets; Liens, etc. The Company has
good and marketable title to all its properties and assets and good title to all
its leasehold estates, in each case subject to no mortgage, pledge, lien,
encumbrance or charge, other than or resulting from taxes which have not yet
become delinquent and liens and encumbrances which do not in any case materially
detract from the value of the property subject thereto or materially impair the
operations of the Company, and which have not arisen otherwise than in the
ordinary course of business. The Company is not in default of any provision of
any leases pursuant to which it holds its leasehold estates. Except as set forth
in this Agreement, the Company does not use any properties or assets in the
conduct of its business that it does not own or lease.
3.7. Material Contracts. All material agreements and contracts
are valid, binding and in full force and effect with respect to the Company. The
Company is not in breach or default of any provision or term of any such
agreement or commitment and, to the Company's knowledge, no other party to any
such agreements or commitments is in breach or default thereof. The Company is
not bound by any agreement or commitment that places any restriction on the
ability of the Company to conduct its business as presently conducted or as
proposed to be conducted.
3.8. Patents, Trademarks, etc. The Company owns, or has the right
to use, all patents, trademarks, service marks, trade names, copyrights,
licenses, trade secrets or other proprietary rights necessary to its business as
now conducted without conflicting with or infringing upon the right or claimed
right of any person under or with respect to any of the foregoing. There are no
outstanding options, licenses or agreements of any kind relating to the
Company's intellectual property rights, nor is the Company bound by or a party
to any options,
3
<PAGE> 4
licenses or agreements of any kind with respect to the patents, trademarks,
service marks, trade names, copyrights, licenses, trade secrets or other
proprietary rights of any other person or entity. The Company has not received
any communications alleging that the Company has violated or, by conducting its
business as presently conducted or proposed to be conducted, would violate, any
of the patents, trademarks, service marks, trade names, copyrights or trade
secrets or other proprietary rights of any other person or entity. The Company
is not aware of any violation by a third party of any of the Company's patents,
trademarks, service marks, trade names, copyrights, trade secrets or other
proprietary rights. 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 such employee's
duties to the Company or that would conflict with the Company's business as now
conducted or as proposed to be conducted. Neither the execution nor delivery of
this Agreement, nor the carrying on of the Company's business by the employees
of the Company, nor the conduct of the Company's business, will, to the
Company's knowledge, conflict with or result in a material breach of the terms,
conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any employee is now obligated. The Company is
not utilizing and it will not be necessary for the Company to utilize any
inventions of any of its employees made prior to their employment by the
Company, except for inventions that have been assigned to the Company.
3.9. Compliance with Other Instruments. The Company is not in
violation or default in any respect of any term of the Restated Articles or its
bylaws, as amended, or any judgment, decree or order by which the Company is
bound or to which its properties are subject or, to its knowledge, any statute,
rule, or regulation applicable to the Company which would materially and
adversely affect the business, properties, financial condition and results of
operations of the Company. The execution, delivery and performance of and
compliance with this Agreement, the Third Restated Investors Rights Agreement
and the Third Restated Shareholders Agreement and the transactions contemplated
herein and therein will not result in (a) any such violation and will not be in
conflict with or constitute a material default under any of the foregoing, (b)
the creation of any mortgage, pledge, lien, encumbrance or charge upon any of
the properties or assets of the Company pursuant to any of the foregoing, or (c)
the suspension, revocation, impairment, forfeiture or nonrenewal of any permit,
license, authorization or approval applicable to the Company, its business,
properties, financial condition or results of operations.
3.10. Employees and Consultants. To the Company's knowledge, no
employee or consultant of the Company is in violation of any term of any
employment contract, patent disclosure agreement or any other contract or
agreement relating to the right of any such employee to be employed by the
Company or to serve as a consultant because of the nature of the business
conducted or to be conducted by the Company or for any other reason, and the
continued employment or use by the Company of its present employees and
consultants will not result in any such violations. The Company has no deferred
compensation, pension, profit sharing, bonus, insurance, severance or any other
similar employee benefit plan or obligation or any employment or severance
agreement covering any of its officers or employees. There are no asserted
controversies or labor disputes or union organization activities pending or, to
the knowledge of the Company, threatened, between it and its employees. Each
former and current employee and consultant of the Company has executed an
employee inventions and proprietary rights assignment and confidentiality
agreement with the Company. To the Company's
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<PAGE> 5
knowledge, no employee or consultant is in violation of any such agreement. The
Company has complied in all material respects with all applicable state and
federal equal employment opportunity and other laws related to employment.
3.11. Litigation, etc. There is no action, suit, proceeding or
investigation pending or threatened in writing and delivered to the Company,
against the Company, which, either in any single case or in the aggregate, would
result in any material adverse change in the business, properties, financial
condition, results of operations or prospects of the Company, or in any material
impairment of the right or ability of the Company to carry on its business as
now conducted or as proposed to be conducted, or in any material liability on
the part of the Company, and none which questions the validity of this
Agreement, the Third Restated Investors Rights Agreement or the Third Restated
Shareholders Agreement, or any action taken or to be taken in connection
herewith or therewith, nor, to the Company's knowledge, any basis therefor. The
Company is not a party or subject to any writ, order, decree or judgment, and
there is no action, suit, proceeding or investigation by the Company currently
pending or which the Company intends to initiate.
3.12. Registration Rights. Except as set forth in the Third
Restated Investors Rights Agreement, the Company is not under any obligation to
register any presently outstanding securities, or any securities which may
hereafter be issued, under the Securities Act of 1933, as amended (the
"Securities Act").
3.13. Governmental Consent, etc. No consent, approval,
qualification, order or authorization of, or designation, declaration or filing
with, any governmental authority on the part of the Company is required in
connection with the valid execution and delivery of this Agreement, the Third
Restated Investors Rights Agreement or the Third Restated Shareholders
Agreement, the offer, sale or issuance of the Series D Preferred Shares or the
Conversion Shares, or the consummation of any other transaction contemplated
herein or therein, except the filing of the Restated Articles with the
California Secretary of State and, if required, qualifications or filings under
the Securities Act, the California Corporate Securities Law of 1968, as amended
(the "California Law"), and other applicable state securities laws, which
qualifications or filings, if required, will be obtained or made and will be
effective within the time periods required by law.
3.14. Disclosure. No statement by the Company contained in (i)
this Agreement, including the exhibits and schedules attached hereto, (ii) the
Third Restated Investors Rights Agreement, and (iii) the Third Restated
Shareholders Agreement, contains any untrue statement of a material fact or
omits to state a material fact necessary in order to make the statements
contained herein or therein not misleading in light of the circumstances under
which they were made.
3.15. Taxes. The amount shown on the Balance Sheet (as defined in
Section 3.17 hereof) as provision for taxes is sufficient in all material
respects for payment of all accrued and unpaid Federal, state, county, local and
foreign taxes for the period then ended and all prior periods. The Company has
filed or has obtained presently effective extensions with respect to all
Federal, state, county, local and foreign tax returns which are required to be
filed by it, such returns are true and correct in all material respects and all
taxes shown thereon to be due have been timely paid with exceptions not material
to the Company. Federal income tax returns of the Company have not been audited
by the Internal Revenue Service, and no controversy with
5
<PAGE> 6
respect to taxes of any type is pending or, to the Company's knowledge,
threatened. Neither the Company nor, to the Company's knowledge, any of its
shareholders has ever filed (a) an election pursuant to Section 1362 of the
Internal Revenue Code of 1986, as amended (the "Code"), that the Company be
taxed as an S Corporation or (b) consent pursuant to Section 341(f) of the Code
relating to collapsible corporations. Since the Balance Sheet Date (as defined
in Section 3.17), the Company has made adequate provisions on its books and
accounts for all taxes, assessments and governmental charges with respect to its
business and operation for such subsequent period. The Company has withheld or
collected from each payment made to its employees all taxes required to be
withheld or collected therefrom, and has paid the same to the proper tax
receiving officers or authorized depositories.
3.16. Transactions with Principals. No employee, shareholder,
officer or director of the Company or any 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 other than (a) for payment
of salary for services rendered, (b) reimbursement for reasonable expenses
incurred on behalf of the Company, and (c) for other standard employee benefits
made generally available to all employees (including stock option agreements
outstanding under the Stock Option Plan and approved by the Board of Directors).
No officer or director, and, to the Company's knowledge, no other person is,
directly or indirectly, interested in any contract with the Company. No officer
or director, or, to the Company's knowledge, no employee or shareholder of the
Company or any member of any officer's, director's, employee's or stockholder's
immediate family, 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
material business relationship, or any firm or corporation that competes with
the Company, except that employees, shareholders, officers and directors of the
Company may own stock in publicly traded companies that compete with the
Company.
3.17. Financial Statements. The Company has furnished to each of
the Purchasers a complete and correct copy of the unaudited consolidated balance
sheet (the "Balance Sheet")and statements of income, retained earnings and cash
flows of the Company for the fiscal year ended December 31, 1999 (the "Balance
Sheet Date") (the "Financial Statements"). The Financial Statements are complete
and correct in all material respects and have been prepared in accordance with
generally accepted accounting principles consistently applied, except that notes
do not accompany unaudited Financial Statements. The Financial Statements
present fairly and accurately in all material respects the financial condition
and results of operations of the Company, as at the dates and for the periods
indicated. Since there has been no change in any accounting policies,
principles, methods or practices. Except as set forth in the Financial
Statements, the Company has no liabilities, contingent or otherwise, other than
liabilities, and obligations under contracts and commitments, incurred in the
ordinary course of business that are not required under generally accepted
accounting principles to be reflected in the Financial Statements and which, in
the aggregate, are not material to the financial condition or operating results
of the Company. The Company maintains and will continue to maintain a standard
system of accounting established and administered in accordance with generally
accepted accounting principles. All of the assets of the Company included on the
Balance Sheet are productively used in the conduct of the Company's business.
The Company has not capitalized any of its research and development expenses.
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<PAGE> 7
3.18. Permits. The Company has all franchises, permits, licenses
and any similar authority necessary for the conduct of its business as now being
conducted by it, and, to the knowledge of the Company, the Company can obtain,
without undue burden or expense, any similar authority for the conduct of its
business as planned to be conducted. The Company is not in default under any of
such franchises, permits, licenses or similar authority held by the Company.
3.19. Offering. Assuming the accuracy of the representations and
warranties of the Purchasers contained in Section 4 hereof, the offer, sale and
issuance of the Series D Preferred Shares and the Conversion Shares will be
exempt from the registration requirements of Section 5 of the Securities Act and
will have been registered or qualified (or are exempt from registration and
qualification) under the registration, permit or qualification requirements of
all applicable state securities laws.
3.20. Minute Books. The minute books of the Company have been
made available for inspection to counsel for the Purchasers and contain a
summary of all meetings of directors and stockholders since the time of
incorporation and reflect all transactions referred to in such minutes
accurately in all material respects.
3.21. Real Property Holding Corporation. The Company is not a
real property holding corporation within the meaning of Internal Revenue Code
Section 897(c)(2) and any regulations promulgated thereunder.
3.22. Investment Company Act. The Company is not an "investment
company", or a company "controlled" by an "investment company", within the
meaning of the Investment Company Act of 1940, as amended.
3.23. Environmental and Safety Laws. To the Company's knowledge,
it is not in violation of any applicable statute, law or regulation relating to
the environment or occupational health and safety, and no material expenditures
are or will be required in order to comply with any such existing statute, law
or regulation.
3.24. Guarantees. The Company is not a guarantor or indemnitor of
any indebtedness of any other person.
3.25. Changes. Since the Balance Sheet Date, 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 for changes in the ordinary course of business
which have not been, in the aggregate, materially adverse to the Company;
(b) any damage, destruction, or loss of tangible assets,
whether or not covered by insurance, that materially and adversely affects the
assets, properties, financial condition, operating results, prospects, or
business of the Company as currently conducted;
(c) 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;
(d) any waiver by the Company of a valuable right or of a
material debt owed to it;
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(e) any change or amendment to a material contract or
arrangement by which the Company or any of its assets or properties is bound or
subject, except for changes in the ordinary course of business which have not
been materially adverse to the Company;
(f) any change in any compensation arrangement or
agreement with any employee of the Company;
(g) any transfer of any patent, trademark, copyright,
trade secret or other intangible asset of the Company except in the ordinary
course of business;
(h) any resignation or termination of employment of any
key officer of the Company;
(i) receipt by the Company of written notice that there
has been a loss of, or order cancellation by, any major customer of the Company;
(j) any encumbrance of any material asset of the Company
except liens for taxes not yet due or payable;
(k) any loan or guarantee made by the Company to or for
the benefit of an employee, officer, director, or member of the family of an
employee, officer, or director, other than travel or other advances made in the
ordinary course of business;
(l) any declaration, setting aside, or distribution in
respect of any of the Company's capital stock, or any direct or indirect
redemption, purchase, or other acquisition of any of such stock by the Company;
(m) any other event or condition directly and specifically
affecting the Company of any character that the Company believes could adversely
affect the assets, properties, financial condition, operating results, business
or prospects of the Company (as such business is presently conducted and as it
is proposed to be conducted); or
(n) any agreement or commitment by the Company or to do
any of the things described in this Section 3.25.
3.26. No Other Agreements Relating to Voting or Transfer. Except
as contemplated by the Restated Articles, the Founder's Stock Agreement dated
July 16, 1999 between the Company and Cliff Young, the Third Restated
Shareholders Agreement and in the Stock Plan, there are no agreements or
understandings involving the Company, any of its directors, or to the Company's
knowledge, any shareholder of the Company, that (a) concerns voting the
securities of the Company or (b) restricts the transfer of securities of the
Company (except for restrictions intended to comply with applicable securities
laws).
3.27. List of Shareholders and Optionees. Attached hereto as
Exhibit D is a true and complete list of all owners, of record and to the
Company's knowledge beneficially, of the Company's securities and holders of
rights to acquire the Company's securities (including capital stock options to
purchase capital stock of the Company and warrants to purchase capital stock of
the Company) indicating the name of each holder, the number, class, and type and
series of securities held by each holder and any rights the Company has to
repurchase such securities.
3.28. Section 83(b) Elections. All elections notices permitted by
Section 83(b) of the Internal Revenue Code have been timely filed by all
employees who have purchased
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<PAGE> 9
shares of the Company's Common Stock under agreements that provide for the
vesting of such shares.
3.29. Qualified Small Business Stock. As of the Closing: (i) the
Company will be an eligible corporation as defined in Section 1202(e)(4) of the
Code, (ii) the Company will not have made any purchases of its own stock during
the one-year period preceding the Closing having an aggregate value exceeding 5%
of the aggregate value of all its stock as of the beginning of such period and
(iii) the Company's aggregate gross assets, as defined by Code Section
1202(d)(2), at no time between the date the Company was incorporated and through
the Closing have exceeded or will exceed $50 million, taking into account the
assets of any corporations required to be aggregated with the Company in
accordance with Code Section 1202(d)(3).
4. Representations and Warranties of Purchasers and Restrictions on
Transfer Imposed by the Securities Act and California Law.
4.1. Representations and Warranties by Each Purchaser. Each
Purchaser, severally and not jointly, hereby represents and warrants to the
Company as follows:
(a) The Series D Preferred Shares and the Conversion
Shares issuable upon conversion thereof are being acquired for the Purchaser's
own account, for investment and not with a view to, or for resale in connection
with, any distribution or public offering thereof within the meaning of the
Securities Act or the California Law.
(b) The Purchaser understands that the Series D Preferred
Shares and the Conversion Shares have not been registered under the Securities
Act by reason of their issuance in a transaction exempt from the registration
and prospectus delivery requirements of the Securities Act pursuant to Section
4(2) thereof, that the Company has no present intention of registering the
Series D Preferred Shares or the Conversion Shares, that the Series D Preferred
Shares and the Conversion Shares must be held by the Purchaser indefinitely, and
that the Purchaser must therefore bear the economic risk of such investment
indefinitely, unless a subsequent disposition thereof is registered under the
Securities Act or is exempt from registration. The Purchaser further understands
that the Series D Preferred Shares and the Conversion Shares have not been
qualified under the California Law by reason of their issuance in a transaction
exempt from the qualification requirements of the California Law pursuant to
Section 25102(f) thereof, which exemption depends upon, among other things, the
bona fide nature of the Purchaser's investment intent expressed above.
(c) During the negotiation of the transactions
contemplated herein, the Purchaser and its representatives and legal counsel
have been afforded full and free access to corporate books, financial
statements, records, contracts, documents, and other information concerning the
Company and to its offices and facilities, have been afforded an opportunity to
ask such questions of the Company's officers, employees, agents, accountants and
representatives concerning the Company's business, operations, financial
condition, assets, liabilities and other relevant matters as they have deemed
necessary or desirable, and have been given all such information as has been
requested, in order to evaluate the merits and risks of the prospective
investments contemplated herein. The foregoing does not limit or modify the
representations or warranties of the Company in Section 3 hereof or the rights
of the Purchaser to rely thereon.
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<PAGE> 10
(d) The Purchaser and its representatives have been solely
responsible for the Purchaser's own "due diligence" investigation of the Company
and the Company's management and business, for its own analysis of the merits
and risks of this investment, and for its own analysis of the fairness and
desirability of the terms of the investment. In taking any action or performing
any role relative to the arranging of the proposed investment, the Purchaser has
acted solely in its own interest, and none of the Purchasers (or any of their
agents or employees) has acted as an agent of the Company or any other
Purchaser. The Purchaser has such knowledge and experience in financial and
business matters that the Purchaser is capable of evaluating the merits and
risks of the purchase of the Series D Preferred Shares pursuant to the terms of
this Agreement and of protecting Purchaser's interests in connection therewith.
(e) The Purchaser has the full right, power and authority
to enter into and perform the Purchaser's obligations under this Agreement, the
Third Restated Investors Rights Agreement and the Third Restated Shareholders
Agreement, and this Agreement, the Third Restated Investors Rights Agreement and
the Third Restated Shareholders Agreement constitute valid and binding
obligations of the Purchaser enforceable in accordance with their terms except
(A) as limited by applicable bankruptcy, insolvency, reorganization, moratorium,
and other laws of general application affecting enforcement of creditors' rights
generally, and (B) as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies.
(f) No consent, approval or authorization of, or
designation, declaration or filing with, any governmental authority on the part
of the Purchaser is required in connection with the valid execution and delivery
of this Agreement, the Third Restated Investors Rights Agreement or the Third
Restated Shareholders Agreement.
(g) Purchaser is an "accredited investor" as defined in
Rule 501 pursuant to the Securities Act.
4.2. Legend. Each certificate representing the Series D Preferred
Shares or the Conversion Shares may be endorsed with the following legends:
(a) THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE TRANSFER IS
MADE IN COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT OR THE COMPANY
RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY
SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR
HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF SUCH ACT.
The Company need not register a transfer of any Series D Preferred Shares or
Conversion Shares, and may also instruct its transfer agent not to register the
transfer of the Series D Preferred Shares or Conversion Shares, unless the
conditions specified in the foregoing legends are satisfied.
4.3. Removal of Legend and Transfer Restrictions. Any legend
endorsed on a certificate pursuant to Subsection 4.2(a) and the stop transfer
instructions with respect to such
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<PAGE> 11
Series D Preferred Shares or Conversion Shares shall be removed, and the Company
shall issue a certificate without such legend to the holder thereof if (i) such
Series D Preferred Shares or Conversion Shares are registered under the
Securities Act and a prospectus meeting the requirements of Section 10 of the
Securities Act is available, (ii) such legend may be properly removed under the
terms of Rule 144 promulgated under the Securities Act or (iii) such holder
provides the Company with an opinion of counsel for such holder, reasonably
satisfactory to legal counsel for the Company, to the effect that a sale,
transfer or assignment of such Series D Preferred Shares or Conversion Shares
may be made without registration. Notwithstanding the foregoing, no such
registration statement or opinion of counsel shall be necessary for a transfer
by a Purchaser to an affiliate or to the Purchaser's family members or trust for
the benefit of an individual Purchaser and his or her family members; provided,
however, that in any such instance the transferee will be subject to the terms
of this Agreement to the same extent as if he, she or it were an original
Purchaser hereunder. For the purposes of this Subsection 4.3, an "affiliate"
shall mean any officer, director, partner (including the principals of any
general partner) or shareholder of a Purchaser or any person or entity that
directly or indirectly through one or more intermediaries controls or is
controlled by or is under common control with a Purchaser.
4.4. Tax Consequences. Purchaser has reviewed with its own tax
advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement. Purchaser
understands that Purchaser (and not the Company) shall be responsible for
Purchaser's own tax liability that may arise as a result of this investment or
the transactions contemplated by this Agreement.
5. Conditions to Closing.
5.1. Conditions to Obligations of the Purchasers. The obligation
of each Purchaser to purchase Series D Preferred Shares at the Closing is
subject to the fulfillment on or prior to the Closing Date of the following
conditions, any of which may be waived by the Purchasers participating in that
Closing pursuant to the terms of subsection 6.2 hereof:
(a) Accuracy of Representations and Warranties;
Performance of Obligations. The representations and warranties made by the
Company in Section 3 above shall be true and correct when made, and shall be
true and correct in all material respects on the Closing Date with the same
force and effect as if they had been made on and as of said date; the Company's
business and assets shall not have been adversely affected in any material way
prior to the Closing Date; and the Company shall have performed all obligations
and conditions herein required to be performed or observed by it on or prior to
the Closing Date.
(b) Consents and Waivers. The Company shall have obtained
any and all consents (including all governmental or regulatory consents,
approvals or authorizations required in connection with the valid execution and
delivery of this Agreement, the Third Restated Investors Rights Agreement and
the Third Restated Shareholders Agreement), permits and waivers necessary or
appropriate for consummation of the transactions contemplated in this Agreement,
the Third Restated Investors Rights Agreement and the Third Restated
Shareholders Agreement.
(c) Legal Investment. At the time of the Closing, the
purchase of the Series D Preferred Shares by the Purchasers hereunder shall be
legally permitted by all laws and regulations to which the Purchasers and the
Company are subject.
11
<PAGE> 12
(d) Opinion of Company's Counsel. The Purchasers shall
have received from Kirkpatrick & Lockhart LLP and Howard M. Loeb, a professional
corporation, counsel for the Company, an opinion, dated the Closing Date, in
form and content reasonably satisfactory to Purchasers and their special
counsel.
(e) Restated Articles. The Restated Articles shall have
been filed with the California Secretary of State.
(f) Third Restated Shareholders Agreement. The Company,
the Founder (as defined in this Agreement), the holders of shares of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock and each
Purchaser shall have executed and delivered the Third Restated Shareholders
Agreement in the form attached hereto as Exhibit E (the "Third Restated
Shareholders Agreement").
(g) Third Restated Investors Rights Agreement. The
Company, the holders of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock and each Purchaser shall have executed and delivered
the Third Restated Investors Rights Agreement in the form attached hereto as
Exhibit F (the "Third Restated Investors Rights Agreement.")
(h) Compliance Certificate. The Company shall have
delivered to the Purchasers a certificate, executed by the President of the
Company, dated as of the Closing Date, certifying to the fulfillment of the
conditions specified in subsections (a) of this subsection 5.1.
5.2. Conditions to Obligations of the Company. The Company's
obligation to sell and issue the Series D Preferred Shares at the Closing is
subject to the fulfillment on or prior to the Closing Date of the following
conditions, any of which may be waived by the Company:
(a) Accuracy of Representations and Warranties. The
representations and warranties made by each Purchaser in Section 4 hereof shall
be true and correct in all material respects when made, and shall be true and
correct on the Closing Date with the same force and effect as if they had been
made on and as of said date.
(b) Incorporation of Conditions. The conditions set forth
in subsections (b), (c) and (e) of subsection 5.1 above shall have been
fulfilled.
6. Miscellaneous.
6.1. Indemnification. The Company will indemnify and defend each
Purchaser and each of its officers, directors and partners, and each person
controlling such Purchaser, against all claims, losses, expenses, damages and
liabilities (or actions in respect thereto) arising out of any breach by the
Company of this Agreement, the Third Restated Investors Rights Agreement or the
Third Restated Shareholders Agreement; provided, however, that the indemnity
agreement contained in this subsection 6.1 shall not apply to amounts paid in
settlement of any such claim, loss, damage, liability, or action if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld).
6.2. Waivers and Amendments. With the written consent of the
Company and the record or beneficial holders of at least sixty percent (60%) of
the Series D Preferred Shares issued pursuant to this Agreement (including any
Conversion Shares, shares issued in exchange for the Series D Preferred Shares
or Conversion Shares and as adjusted for stock dividends, stock splits,
recapitalization and the like), the obligations of the Company and the rights of
the holders of the Series D Preferred Shares under this Agreement may be waived
(either generally or in a
12
<PAGE> 13
particular instance, either retroactively or prospectively and, either for a
specified period of time or indefinitely), and with the same consent the
Company, when authorized by resolution of the Board of Directors, may enter into
a supplementary agreement for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Agreement;
provided, however, that no such waiver or supplemental agreement shall reduce
the aforesaid percentage of Series D Preferred Shares, the holders of which are
required to consent to any waiver or supplemental agreement without the consent
of the record or beneficial holders of all of the Series D Preferred Shares; and
provided further, however, that if such supplementary agreement increases the
rights of the Series D Preferred Shares, the consent of the Company shall mean
the approval of the Company's Board of Directors including Cliff Young. Upon the
effectuation of each such waiver, consent or agreement of amendment or
modification, the Company shall promptly give written notice thereof to the
record holders of the Series D Preferred Shares who have not previously
consented thereto in writing. Neither this Agreement nor any provision hereof
may be changed, waived, discharged or terminated orally, but only by a statement
in writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought, except to the extent provided in this
subsection 6.2.
6.3. Governing Law. This Agreement shall be governed in all
respects by the laws of the State of California as such laws are applied to
agreements between California residents entered into and to be performed
entirely within California.
6.4. California Corporate Securities Law. THE SALE OF THE
SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH
THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF
SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION
THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS AN EXEMPTION FROM SUCH
QUALIFICATION IS AVAILABLE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE
EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, OR SUCH EXEMPTION
BEING AVAILABLE.
6.5. Survival. The representations, warranties, covenants and
agreements made herein shall survive the execution of this Agreement and the
Closing of the transactions contemplated herein for a period of three (3) years.
6.6. Successors and Assigns. Except as otherwise expressly
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors and administrators of
the parties hereto. The Company may not assign this Agreement.
6.7. Entire Agreement. This Agreement, the exhibits to this
Agreement, the Third Restated Investors Rights Agreement and the Third Restated
Shareholders Agreement constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof.
6.8. Notices, etc. All notices and other communications required
or permitted hereunder shall be in writing and shall be sent via facsimile,
overnight courier service or mailed by certified or registered mail, postage
prepaid, return receipt requested, addressed or sent (a) if to a Purchaser, at
the address or facsimile number of the Purchaser set forth below such party's
name on Exhibit A hereto, or at such other address or number as the Purchaser
shall have
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<PAGE> 14
furnished to the Company in writing, or (b) if to the Company, at 4499 Glencoe
Avenue, Marina del Rey, California 90292, facsimile: (310) 881-6223, or at such
other address or number as the Company shall have furnished to the Purchasers in
writing. All notices shall be effective upon (i) delivery if sent by facsimile
(with a confirming receipt); (ii) delivery if delivered in person or sent by
overnight courier service or (iii) three (3) days after deposit in the U.S.
mail, registered or certified, with postage prepaid and properly addressed
according to this Subsection 6.8.
6.9. Severability. In case any provision of this Agreement shall
be declared invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
6.10. Finder's Fees.
(a) The Company (i) represents and warrants that it has
retained no finder or broker in connection with the transactions contemplated by
this Agreement and (ii) hereby agrees to indemnify and to hold the Purchasers
harmless of and from any liability for any commission or compensation in the
nature of a finder's fee to any broker or other person or firm (and the costs
and expenses of defending against such liability or asserted liability) for
which the Company, or any of its employees or representatives, are responsible.
(b) Each Purchaser (i) represents and warrants that it has
retained no finder or broker in connection with the transactions contemplated by
this Agreement and (ii) hereby agrees to indemnify and to hold the Company and
the other Purchasers harmless of and from any liability for any commission or
compensation in the nature of a finder's fee to any broker or other person or
firm (and the costs and expenses of defending against such liability or asserted
liability) for which it, or any of its employees or representatives, are
responsible.
6.11. Expenses. The Company and each Purchaser shall each bear
its respective expenses and legal fees incurred with respect to this Agreement
and the transactions contemplated herein.
6.12. Titles and Subtitles. The titles of the paragraphs and
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
6.13. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
6.14. Delays or Omissions. No delay or omission to exercise any
right, power or remedy accruing to any Purchaser, upon any breach or default of
the Company under this Agreement, shall impair any such right, power or remedy,
nor shall it be construed to be a waiver of any such breach or default, or any
acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. It is
further agreed that any waiver, permit, consent or approval of any kind or
character on a Purchaser's part of any breach or default under this Agreement,
or any waiver on a Purchaser's part of any provisions or conditions of this
Agreement must be in writing and shall be effective only to the extent
specifically set forth in such writing and that all remedies, either under this
Agreement, or by law or otherwise afforded to a Purchaser, shall be cumulative
and not alternative.
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[Remainder of this page intentionally left blank]
15
<PAGE> 16
IN WITNESS WHEREOF, the parties have executed this Series D Preferred
Stock Purchase Agreement as of the day and year first above written.
"COMPANY"
ICNT, INC.,
a California corporation
By: /s/ JOHN W. COMBS
--------------------------------------
John W. Combs, Chief Executive Officer
By: /s/ CLIFFORD H. YOUNG
--------------------------------------
Clifford H. Young, President
16
<PAGE> 17
PURCHASER'S COUNTERPART SIGNATURE PAGE
ICNT, INC.
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
Crosspoint Venture Partners 1999
By: /s/ ROBERT HOFF
--------------------------------------
Robert Hoff, General Partners
Spectrum Equity Investors III, L.P.
By: Spectrum Equity Associates III, L.P.
Its General Partner
By: /s/ BRION B. APPLEGATE
--------------------------------------
Brion B. Applegate, General Partner
SEI III Entrepreneurs' Fund, L.P.
By: SEI III Entrepreneurs' LLC
Its General Partner
By: /s/ BRION B. APPLEGATE
--------------------------------------
Brion B. Applegate, Managing Member
Spectrum III Investment Managers' Fund, L.P.
By: /s/ BRION B. APPLEGATE
--------------------------------------
Brion B. Applegate, General Partner
17
<PAGE> 18
PURCHASER'S COUNTERPART SIGNATURE PAGE
ICNT, INC.
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
Efficient Networks, Inc.
By: /s/ Kenneth M. Siegel
--------------------------------------
Title: Vice President
-----------------------------------
Polycom
By: /s/ Michael R. Kouhry
--------------------------------------
Title: Chief Financial Officer
-----------------------------------
Winstar Communications
By: /s/ Kenneth J. Zinghini
--------------------------------------
Title: Senior Vice President
-----------------------------------
idealab! Capital Partners II-A, LP
By its General Partner,
idealab! Capital Management II, LLC
By: /s/ William Elkus
--------------------------------------
Title: Managing Member
-----------------------------------
18
<PAGE> 19
PURCHASER'S COUNTERPART SIGNATURE PAGE
ICNT, INC.
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
idealab! Capital Partners II-B, LP
By its General Partner,
idealab! Capital Management II, LLC
By: /s/ William Elkus
--------------------------------------
William Elkus, Managing Member
idealab! Capital Principals Fund, LP
By its General Partner,
idealab! Capital Management II, LLC
By: /s/ William Elkus
--------------------------------------
William Elkus, Managing Member
Morgan Stanley Dean Witter Equity Funding, Inc.
By: /s/ Thomas Clayton
--------------------------------------
Title: Vice President
-----------------------------------
Big Basin Partners, L.P.
By: /s/ Frank J. Marshall
--------------------------------------
Frank J. Marshall, General Partner
19
<PAGE> 20
PURCHASER'S COUNTERPART SIGNATURE PAGE
ICNT, INC.
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
/s/ Bernard Puckett
- -------------------------------
Bernard Puckett
/s/ Matthew Mochary
- -------------------------------
Matthew Mochary
BS-METALS B2B Acquisition Corp.
By: /s/ Richard L. Metrick
--------------------------------------
Title: Chief Executive Officer
-----------------------------------
Cabletron Systems, Inc.
By: /s/ Eric Jaeger
--------------------------------------
Title: Vice President
-----------------------------------
20
<PAGE> 21
EXHIBIT A
SCHEDULE OF PURCHASERS
21
<PAGE> 22
EXHIBIT B
ICNT, INC.
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
FORM OF AMENDED AND RESTATED ARTICLES OF INCORPORATION
22
<PAGE> 23
EXHIBIT C
ICNT, INC.
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
SCHEDULE OF EXCEPTIONS
23
<PAGE> 24
EXHIBIT D
ICNT, INC.
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
LIST OF SHAREHOLDERS AND OPTIONEES
24
<PAGE> 25
EXHIBIT E
ICNT, INC.
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
FORM OF THIRD RESTATED SHAREHOLDERS AGREEMENT
25
<PAGE> 26
EXHIBIT F
ICNT, Inc.
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
FORM OF THIRD RESTATED INVESTORS RIGHTS AGREEMENT
26
<PAGE> 1
EXHIBIT 10.9
ICNT, INC.
THIRD RESTATED INVESTORS RIGHTS AGREEMENT
THIS THIRD RESTATED INVESTORS RIGHTS AGREEMENT (the "Rights Agreement")
is entered into as of April 13, 2000, by and among ICNT, Inc., a California
corporation (the "Company") and the persons and entities listed on the List of
Investors attached hereto as Exhibit A (each hereinafter individually referred
to as an "Investor" and collectively referred to as the "Investors"). This
Rights Agreement supersedes and restates in its entirety that certain Second
Restated Investors Rights Agreement made and entered into as of March 28, 2000
(the "Second Restated Rights Agreement") by and among the Company, the Series A
Investors, the Series B Investors and the Series C Investor (each as defined
below).
RECITALS:
A. The Company has previously sold shares of its Series A Preferred
Stock (the "Series A Preferred") to certain investors (the "Series A Investors")
pursuant to a Series A Preferred Stock Purchase Agreement, dated as of July 16,
1999, (the "Series A Stock Agreement"). In connection with such sale, the
Company granted the Series A Investors certain rights, as set forth in the
Second Restated Rights Agreement.
B. The Company has previously sold shares of its Series B Preferred
Stock (the "Series B Preferred") to certain investors (the "Series B Investors")
pursuant to a Series B Preferred Stock Purchase Agreement, dated as of December
21, 1999, (the "Series B Stock Agreement"). In connection with such sale, the
Company granted the Series B Investors certain rights, as set forth in the
Second Restated Rights Agreement.
C. The Company has previously sold shares of its Series C Preferred
Stock (the "Series C Preferred") to Cabletron Systems, Inc. (the "Series C
Investor") pursuant to a Series C Preferred Stock Purchase Agreement, dated as
of March 28, 2000, (the "Series C Stock Agreement"). In connection with such
sale, the Company granted the Series C Investor certain rights, as set forth in
the Second Restated Rights Agreement.
D. Concurrently herewith, certain investors (the "Series D Investors")
and the Company are entering into a certain Series D Preferred Stock Purchase
Agreement, dated of even date herewith, pursuant to which the Series D Investors
are purchasing from the Company up to 6,260,823 shares of the Company's Series D
Preferred Stock (the "Series D Preferred").
E. This Rights Agreement amends the Second Restated Rights Agreement to
afford the purchasers of the Series D Preferred the same rights granted to the
holders of the Company's Series A Preferred, the Series B Preferred and Series C
Preferred. By their execution of this Rights Agreement, the Series A Investors,
the Series B Investors and Series C Investors each (i) agree to the amendment of
the Second Restated Rights Agreement as provided herein, (ii) consent of the
registration rights provided to the Series D Investor, (iii) waive their right
of first
<PAGE> 2
offer as set forth in the Second Restated Rights Agreement upon the issuance and
sale of the Series D Preferred, and (iv) agree to be bound by this Rights
Agreement.
F. The Series A Investors, the Series B Investors, the Series C Investor
and the Series D Investors will hereinafter be referred to collectively as the
"Investors." The Series A Preferred, the Series B Preferred, the Series C
Preferred and the Series D Preferred shall hereinafter be referred to
collectively as the "Preferred Stock."
G. The obligations of each of the Series D Investors to purchase their
respective amounts of Series D Preferred are conditioned upon, among other
things, the execution and delivery of this Rights Agreement by each of the
Investors and the Company.
AGREEMENT:
NOW, THEREFORE, in consideration for and of the foregoing and of the
mutual promises, covenants and conditions set forth herein and other good and
valuable consideration the receipt and sufficiency of which is hereby
acknowledged, the parties hereby agree as follows:
1. Registration Rights.
1.1 Definitions. As used in this Rights Agreement, the following
terms shall have the following respective meanings:
(a) The terms "register," "registered" and "registration"
refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act of 1933, as amended (the
"Securities Act"), and the declaration or ordering of the effectiveness of such
registration statement.
(b) The term "Exchange Act" means the Securities Exchange
Act of 1934, as amended.
(c) The term "Registrable Securities" means (i) any and
all shares of common stock of the Company ("Common Stock") issued or issuable
upon conversion of the Preferred Stock (the "Conversion Shares"), (ii) any and
all shares of Common Stock or other securities issued or issuable in respect of
the Preferred Stock, and (iii) any and all shares of Common Stock or other
securities issued or issuable upon any conversion of the Preferred Stock upon
any stock split, stock dividend, recapitalization or similar event; provided,
however, that any and all shares described in clauses (i)-(iii) above which have
been resold to the public or are registered shall cease to be Registrable
Securities upon such resale and any shares as to which registration rights have
terminated pursuant to Section 1.13 below shall cease to be Registrable
Securities upon such termination.
(d) The terms "Holder" or "Holders" means any person or
persons to whom Registrable Securities were originally issued or qualifying
transferees under subsection 1.10 hereof who hold Registrable Securities.
2
<PAGE> 3
(e) The term "Initiating Holders" means any Holder or
Holders holding fifty percent (50%) or greater of the aggregate of the Preferred
Stock or Common Stock issued or issuable upon conversion thereof which are
Registrable Securities.
(f) The term "Securities Act" means the Securities Act of
1933, as amended.
(g) The term "SEC" means the Securities and Exchange
Commission.
(h) The term "Registration Expenses" shall mean all
expenses incurred by the Company in complying with subsections 1.2, 1.3 and 1.4
hereof, including, without limitation, all registration, qualification and
filing fees, printing expenses, escrow fees, fees and disbursements of counsel
for the Company, blue sky fees and expenses, and the expense of any special
audits incident to or required by any such registration (but excluding the
compensation of regular employees of the Company which shall be paid in any
event by the Company, Selling Expenses and fees and disbursements of legal
counsel for the Holders.)
(i) The term "Holder Affiliates" means any of the mother,
father, descendants, brother(s), sister(s), or spouse of any Holder or any
trustee or trustees for the benefit of any one or more of the foregoing
(including such mother, father, brother(s), sister(s) or spouse).
(j) The term "Selling Expenses" shall mean all
underwriting discounts, selling commissions and stock transfer taxes applicable
to the sale of Registrable Securities.
1.2 Demand Registration.
(a) Request for Registration. In case the Company shall
receive from Initiating Holders a written request that the Company effect a
registration with respect to Registrable Securities, the Company will:
(i) within ten (10) days give written notice of the
proposed registration to all other Holders; and
(ii) as soon as practicable, subject to the
limitations set below, use its best efforts to effect all such registrations
(including, without limitation, the execution of an undertaking to file
post-effective amendments, appropriate qualifications under the applicable blue
sky or other state securities laws and appropriate compliance with exemptive
regulations issued under the Securities Act and any other governmental
requirements or regulations) as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Initiating
Holder's Registrable Securities as are specified in such request, together with
all or such portion of the Registrable Securities of any Holder or Holders
joining in such request as are specified in a written request given within
thirty (30) days after receipt of such written notice
3
<PAGE> 4
from the Company; provided, however, that the Company shall not be obligated to
take any action to effect such registration pursuant to this subsection 1.2(a):
(A) at any time prior to the earlier to occur of
(i) with respect to the Series A Investors, July 15, 2004, (ii) with respect to
the Series B Investors, December 20, 2004, (iii) with respect to the Series C
Investor, March 27, 2005, (iv) with respect to the Series D Investors, April 9,
2005, or (v) 180 days following the effective date of the registration statement
under the Securities Act for the Company's initial registered underwritten
public offering of its securities to the general public (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) (the "IPO");
(B) in any particular jurisdiction in which the
Company would be required to execute a general consent to service of process in
effecting such registration unless the Company is already subject to service in
such jurisdiction and except as required by the Securities Act;
(C) at any time prior to one (1) year following
the effective date of a registration statement filed pursuant to this subsection
1.2(a);
(D) after the Company has effected three (3)
such registrations, pursuant to this subsection 1.2(a) and such registrations
have been declared or ordered effective;
(E) during the period starting within the date
sixty (60) days prior to the Company's good faith estimate of the date of filing
of, and ending on a date ninety (90) days after the effective date of, a
Company-initiated registration; provided that the Company is actively employing
in good faith all reasonable efforts to cause such registration statement to
become effective; or
(F) If the Initiating Holders propose to dispose
of shares of Registrable Securities which may be immediately registered on Form
S-3 pursuant to a request made under Section 1.4 hereof.
Subject to the foregoing clauses (A) through (F), the Company shall file
a registration statement covering the Registrable Securities so requested to be
registered as soon as practical, but in any event within ninety (90) days, after
receipt of the request or requests of the Initiating Holders; provided, however,
that if the Company shall furnish to such Holders a certificate signed by the
President or Chief Executive Officer of the Company stating that in the good
faith judgment of the Company's board of directors (the "Board of Directors"),
it would be detrimental to the Company and its shareholders for such
registration statement to be filed on or before the date filing would be
required and it is therefore essential to defer the filing of such registration
statement, the Company shall have the right to defer such filing for a period of
not more than one hundred twenty (120) days after the furnishing of such a
certificate of deferral; and provided further, however, that the Board of
Directors shall not exercise such right to defer a filing under this Section 1.2
(a) or under Section 1.4(d) more than once in any period of twelve (12)
consecutive months.
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(b) Underwriting. 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 part of their request made
pursuant to subsection 1.2(a) and the Company shall include such information in
the written notice referred to in subsection 1.2(a)(i). In such event, the
underwriter shall be selected by a majority in interest of the Initiating
Holders and shall be reasonably acceptable to the Company. The right of any
Holder to registration pursuant to subsection 1.2 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. The Company shall (together with all Holders proposing to
distribute their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or underwriters.
Notwithstanding any other provision of this subsection 1.2, if the underwriter
advises the Initiating Holders in writing that marketing factors require a
limitation of the number of shares to be underwritten, the Initiating Holders
shall so advise all Holders who have elected to participate in such offering,
and the number of shares of Registrable Securities that may be included in the
registration and underwriting shall be allocated among all such Holders thereof
in proportion, as nearly as practicable, to the respective amounts of
Registrable Securities held by such Holders; provided, however, that the number
of shares of Registrable Securities to be included in such underwriting shall
not be reduced unless all other securities are first entirely excluded from the
underwriting. If any Holder of Registrable Securities disapproves of the terms
of the underwriting, such Holder may elect to withdraw therefrom by written
notice to the Company, the underwriter and the Initiating Holders. Any
Registrable Securities which are excluded from the underwriting by reason of the
underwriter's marketing limitation or withdrawn from such underwriting shall be
withdrawn from such registration.
(c) Company Shares. If the managing underwriter has not
limited the number of Registrable Securities to be underwritten, the Company,
employees of the Company and other holders of the Company's Common Stock may
include securities for its (or their) own account in such registration if the
managing underwriter so agrees and if the number of Registrable Securities which
would otherwise have been included in such registration and underwriting will
not thereby be limited.
1.3 Company Registration.
(a) Registration. If at any time or from time to time, the
Company shall determine to register any of its securities, for its own account
or the account of any of its shareholders other than the Holders (other than a
registration relating solely to employee stock option or purchase plans, or a
registration relating solely to an SEC Rule 145 transaction, or a registration
on any other form or any successor to such form, which does not include
substantially the same information as would be required to be included in a
registration statement covering the sale of Registrable Securities), the Company
will:
(i) within thirty (30) days prior to the filing of
such registration statement give to each Holder written notice thereof; and
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(ii) include in such registration (and any related
qualification under blue sky laws or other compliance with applicable laws), and
in any underwriting involved therein, all the Registrable Securities specified
in a written request or requests, made within twenty (20) days after receipt of
such written notice from the Company, by any Holder or Holders, except as set
forth in subsection 1.3(b) below.
(b) Underwriting. If the registration of which the Company
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to subsection 1.3(a)(i). In such event the right of any Holder to
registration pursuant to subsection 1.3 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
(together with the Company and the other holders distributing their securities
through such underwriting) enter into an underwriting agreement in customary
form with the underwriter or underwriters selected for such underwriting by the
Company. Notwithstanding any other provision of this subsection 1.3, if the
underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten, and (i) if such registration is the IPO, the
underwriter may limit the number of Registrable Securities to be included in the
registration and underwriting, or may exclude Registrable Securities entirely
from such registration and underwriting, or (ii) if such registration is other
than the IPO, the underwriter may limit the amount of securities to be included
in the registration and underwriting by the Company's shareholders; provided,
however, the number of Registrable Securities to be included in such
registration and underwriting under this subsection 1.3(b)(ii) shall not be
reduced to less than thirty percent (30%) of the aggregate securities included
in such registration without the prior consent of the Holders of not less than a
majority of the Registrable Securities proposed to be included in such
registration and underwriting. In the event of a cutback by the underwriters of
the number of Registrable Securities to be included in the registration and
underwriting, the Company shall so advise all Holders of Registrable Securities
which would otherwise be registered and underwritten pursuant hereto, and the
number of shares of Registrable Securities that may be included in the
registration and underwriting shall be allocated among Holders requesting
registration in proportion, as nearly as practicable, to the respective amounts
of Registrable Securities held by each of such Holders as of the date of the
notice pursuant to subsection 1.3(a)(i) above; provided, however, that in no
instance shall shares of any other selling shareholder be included in such
registration and underwriting if such inclusion would reduce the number of
shares of Registrable Securities held by the Holders able to be included in such
registration and underwriting. If any Holder disapproves of the terms of any
such underwriting, he may elect to withdraw therefrom by written notice to the
Company and the underwriter. Any Registrable Securities excluded or withdrawn
from such underwriting shall be withdrawn from such registration.
1.4 Form S-3. In addition to the rights and obligations set forth
in subsection 1.2(a) above, if Holders holding thirty percent (30%) or more of
the Registrable Securities then outstanding request that the Company file a
registration statement on Form S-3 (or any successor to Form S-3) for the public
offering of shares of Registrable Securities, the reasonably anticipated
aggregate price to the public of which (net of underwriting discounts and
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commissions) would exceed One Million Dollars ($1,000,000) and the Company is
then a registrant entitled to use Form S-3 to register the shares for such an
offering, the Company shall use its best efforts to cause such shares to be
registered for the offering as soon as practicable on Form S-3 (or any successor
form to Form S-3); provided, however, the Company shall not be required to
effect a registration pursuant to this subsection 1.4:
(a) in any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;
(b) if the Company, within twenty (20) days of the receipt
of the request of the notice described in subsection 1.4, gives notice of its
bona fide intention to effect the filing of a registration statement with the
SEC within one hundred twenty (120) days of receipt of such request (other than
with respect to a registration statement relating to a Rule 145 transaction, an
offering solely to employees or any other registration which is not appropriate
for the registration of Registrable Securities), and does so file within said
one hundred twenty (120) day period and makes reasonable efforts to cause such
registration to become effective;
(c) during a period of one hundred eighty (180) days
following the effective date of a registration statement other than registration
statements filed pursuant to this subsection 1.4;
(d) if the Company shall furnish to the Holders requesting
registration under section 1.4(a) a certificate signed by the President or Chief
Executive Officer of the Company stating that in the good faith judgment of the
Board of Directors, it would be detrimental to the Company and its shareholders
for such registration statement to be filed on or before the date filing would
be required and it is therefore essential to defer the filing of such
registration statement, in which case the Company shall have the right to defer
such filing for a period of not more than one hundred (120) days after the
furnishing of such a certificate of deferral; provided, however, that the Board
of Directors shall not exercise such right to defer a filing more than once in
any period of twelve (12) consecutive months period; or
(e) if the Company has, within the twelve (12) month
period preceding the date of a request to register shares on Form S-3 already
effected two registrations on Form S-3 for the Holders pursuant to this
Subsection 1.4.
1.5 Expenses of Registration. All Registration Expenses incurred
in connection with any registration pursuant to this Section 1 shall be borne by
the Company except as follows:
(a) The Company shall not be required to pay for expenses
of any registration proceeding begun pursuant to subsection 1.2 or 1.4, the
request for which has been subsequently withdrawn by the Initiating Holders (in
which case, such expenses shall be borne by the Holders requesting such
withdrawal); provided, however, that in lieu of paying such
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expenses, a majority in interest of the Initiating Holders may elect to forfeit
their right to request one registration under Section 1.2.
(b) The Company shall be required to pay the Registration
Expenses of the first registration pursuant to subsection 1.2 and the second and
third registrations pursuant to subsection 1.2 unless such second and third
registrations are effected within the first 12 months after the closing of the
Company's initial public offering.
1.6 Registration Procedures. In the case of each registration,
qualification or compliance effected by the Company pursuant to this Rights
Agreement, the Company will keep each Holder participating therein advised in
writing as to the initiation of each registration, qualification and compliance
and as to the completion thereof. Except as otherwise provided in subsection
1.5, at its expense the Company will:
(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 up to ninety (90) days or, if a
shorter period, until securities included in the registration statement are
sold; provided, however, that (i) such 90-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 90-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 and
supplements 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 Securities Act with respect to the disposition of all
securities covered by such registration statement.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities 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 United States
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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.
(e) In the event of the IPO, enter into and perform its
obligations under an underwriting agreement, in usual and customary form, with
the managing underwriter of such offering. Each Holder participating in such
underwriting shall also enter into and perform its obligations under such an
agreement.
(f) Notify each Holder of Registrable Securities covered
by such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act or the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
(g) Cause all such Registrable Securities registered
pursuant hereunder to be listed on each securities exchange or market on which
similar securities issued by the Company are then listed or quoted.
(h) Furnish, at the request of any Holder requesting
registration of Registrable Securities pursuant to this Section 1, on the date
that such Registrable Securities are delivered to the underwriters for sale in
connection with a registration pursuant to this Section 1, if such securities
are being sold through underwriters, or, if such securities are not being sold
through underwriters, on the date that the registration statement with respect
to such securities becomes effective, (i) an opinion, dated such date, of the
counsel representing the Company for the purposes of such registration, in form
and substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities and (ii) a letter dated such date, from
the independent public accountants of the Company, in form and substance as is
customarily given by independent certified public accountants to underwriters in
an underwritten public offering, addressed to the underwriters, if any, and to
the Holders requesting registration of Registrable Securities.
(i) 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.
1.7 Indemnification.
(a) The Company will indemnify and defend each Holder of
Registrable Securities and each of its officers, directors and partners, and
each person controlling such Holder, with respect to which a registration,
qualification or compliance has been effected pursuant to this Rights Agreement,
and each underwriter, if any, and each person who controls any underwriter of
the Registrable Securities held by or issuable to such Holder, against all
claims, losses, expenses, damages and liabilities (or actions in respect
thereto) arising out of or
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based on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement or prospectus incident to such
registration, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statement
therein not misleading, or any violation or alleged violation by the Company of
the Securities Act, the Exchange Act or any state securities law applicable to
the Company or any rule or regulation promulgated under the Securities Act, the
Exchange Act or any such state law and relating to action or inaction required
of the Company in connection with any such registration, and will reimburse each
such Holder, each of its officers, directors and partners, and each person
controlling such Holder, each such underwriter and each person who controls any
such underwriter, for any reasonable legal and any other expenses incurred in
connection with investigating, defending or settling any such claim, loss,
damage, liability or action; provided, however, that the indemnity agreement
contained in this subsection 1.7(a) shall not apply to amounts paid in
settlement of any such claim, loss, damage, liability, or action if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld); and provided further, that the Company will not
be liable in any such case to the extent that any such claim, loss, damage or
liability arises out of or is based on any untrue statement or omission based
upon written information furnished to the Company by such Holder or underwriter
specifically for use therein; and provided further, that the agreement of the
Company to indemnify any underwriter and any person who controls such
underwriter contained herein with respect to any such preliminary prospectus
shall not inure to the benefit of an underwriter, from whom the person asserting
any such claim, loss, damage, liability or action purchased the stock which is
the subject thereof, if at or prior to the written confirmation of the sale of
such stock, a copy of the prospectus (or the prospectus as amended or
supplemented) was not sent to delivered to such person, excluding the documents
incorporated therein by reference, and the untrue statement or omission of a
material fact contained in such preliminary prospectus was corrected in the
prospectus (or the prospectus as amended or supplemented).
(b) Each Holder will, if Registrable Securities held by or
issuable to such Holder are included in the securities as to which such
registration, qualification or compliance is being effected, indemnify and
defend the Company, each of its directors and officers, each underwriter, if
any, of the Company's securities covered by such a registration statement, each
person who controls the Company within the meaning of the Securities Act, and
each other such Holder, each of its officers, directors and partners and each
person controlling such Holder, against all claims, losses, expenses, damages
and liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any registration statement or prospectus incident to such registration, or any
omission (or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will reimburse the Company, such Holders, such directors, officers, partners,
persons or underwriters for any reasonable legal or any other expenses incurred
in connection with investigating, defending or settling any such claim, loss,
damage, liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, offering circular, prospectus
or other document in reliance upon and in conformity with written information
furnished to the Company by the Holder in an instrument duly executed by such
Holder specifically for use therein; provided, however, that the indemnity
agreement contained in this subsection 1.7(b) shall not apply to amounts paid in
settlement of
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any such claim, loss, damage, liability or action if such settlement is effected
without the consent of the Holder (which consent shall not be unreasonably
withheld); and provided further, that the total amount for which any Holder
shall be liable under this subsection 1.7(b) shall not in any event exceed the
aggregate gross proceeds received by such Holder from the sale of Registrable
Securities held by such Holder in such registration not including underwriter's
commissions and discounts.
(c) Each party entitled to indemnification under this
subsection 1.7 (the "Indemnified Party") shall give notice to the party required
to provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom; provided, however, that
counsel for the Indemnifying Party, who shall conduct the defense of such claim
or litigation, shall be approved by the Indemnified Party (whose approval shall
not be unreasonably withheld), and the Indemnified Party may participate in such
defense at its own expense; and provided further, that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations hereunder, unless such failure resulted in
prejudice to the Indemnifying Party; and provided further, 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 a conflict of interests
between such Indemnified Party and any other party represented by such counsel
in such proceeding. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of the Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation. No Indemnified Party shall be entitled to indemnification hereunder
if such Indemnified Party consents to entry of any judgment or enters into any
settlement without the consent of the Indemnifying Party. Any Indemnified Party
shall cooperate with the Indemnifying Party in the defense of any claim or
litigation brought against such Indemnified Party.
(d) If the indemnification provided for in this Section
1.7 is held by a court of competent jurisdiction to be unavailable to an
Indemnified Party with respect to any losses, claims, damages or liabilities
referred to herein, the Indemnifying Party, in lieu of indemnifying such
Indemnified Party thereunder, shall, to the extent permitted by applicable law,
contribute to the amount paid or payable by such Indemnified Party as a result
of such loss, claim, damage or liability in such proportion as is appropriate to
reflect the relative fault of the Indemnifying Party on the one hand and of the
Indemnified Party on the other in connection with the violation(s) that resulted
in such loss, claim, damage or liability, as well as any other relevant
equitable considerations. The relative fault of the Indemnifying Party and of
the Indemnified Party shall be determined by a court of law by reference to,
among other things, whether the untrue (or alleged untrue) statement of a
material fact or the omission (or alleged omission) to state a material fact
relates to information supplied by the Indemnifying Party or by the Indemnified
Party and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission; provided, that in
no event shall any
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contribution by a Holder hereunder exceed the net proceeds from the offering
received by such Holder.
(e) The obligations of the Company and Holders under this
Section 1.7 shall survive completion of any offering of Registrable Securities
in a registration statement and the termination of this agreement. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation.
(f) The indemnification provided for in this Section 1.7
shall be superseded by indemnification provided for in an underwriting agreement
entered into by the Company and an underwriter of Registrable Securities with
respect to which a registration has been effected pursuant to this Rights
Agreement.
1.8 Information by Holder. Any Holder or Holders of Registrable
Securities included in any registration shall promptly furnish to the Company
such information regarding such Holder or Holders and the distribution proposed
by such Holder or Holders as the Company may request in writing and as shall be
required in connection with any registration, qualification or compliance
referred to herein.
1.9 Rule 144 Reporting. With a view to making available to
Holders the benefits of certain rules and regulations of the SEC which may
permit the sale of the Registrable Securities to the public without
registration, the Company agrees at all times after the effective date of the
first registration filed by the Company for the IPO to:
(a) make and keep public information available, as those
terms are understood and defined in SEC Rule 144;
(b) file with the SEC in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act; and
(c) so long as a Holder owns any Registrable Securities,
to furnish to such Holder forthwith upon written request a written statement by
the Company as to its compliance with the reporting requirements of said Rule
144 (at any time after ninety (90) days after the effective date of the first
registration statement filed by the Company for the IPO) and of the Securities
Act and the Exchange Act (at any time after it has become subject to such
reporting requirements), a copy of the most recent annual or quarterly reports
of the Company, and such other reports and documents so filed by the Company as
the Holder may reasonably request in availing itself of any rule or regulation
of the SEC allowing such Holder to sell any such securities without
registration.
1.10 Transfer of Registration Rights. Holders' rights to cause
the Company to register their securities and keep information available, granted
to them by the Company under subsections 1.2, 1.3, 1.4 and 1.9, may be assigned
(but only with all related obligations) to a
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transferee or assignee of at least one hundred thousand (100,000) shares (as
adjusted for stock splits, stock dividends, recapitalization and like events) of
a Holder's Registrable Securities not sold to the public; provided, however,
that the Company is given written notice by such Holder at the time of or within
a reasonable time after said transfer, stating the name and address of said
transferee or assignee and identifying the securities with respect to which such
registration rights are being assigned. The Company may prohibit the transfer of
any Holders' rights under this subsection 1.10 to any proposed transferee or
assignee who the Company reasonably believes is a competitor of the Company.
Notwithstanding anything else in this subsection 1.10, any Holder may transfer
rights to a transferee of fewer than one hundred thousand (100,000) shares (as
adjusted for stock splits, stock dividends, recapitalizations and like events)
of a Holder's Registrable Securities if such transferee is an officer, director,
partner (including the principals of any general partner) or shareholder of a
Holder or any person or entity that directly or indirectly through one or more
intermediaries controls or is controlled by or is under common control with such
Holder.
1.11 Subsequent Grant of Registration Rights. The Company shall
not grant rights to have securities other than the Registrable Securities
registered under the Security Act that are pari passu or superior to the
registration rights granted herein without the written consent of the Holders of
a majority of the Registrable Securities.
1.12 Market "Stand-Off" Agreement. Each Holder hereby agrees
that, for so long as such Holder holds Registrable Securities, during the period
of duration (not to exceed one hundred eighty (180) days) after the Company's
IPO as specified by the Company and an underwriter of common stock or other
securities of the Company following the effective date of a registration
statement of the Company filed under the Securities Act, it shall not, to the
extent requested by the Company and such underwriter, directly or indirectly
sell, offer to sell, contract to sell (including, without limitation, any short
sale), grant any option to purchase, pledge 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 agreement shall not be
required unless all officers and directors and holders of 5% or more of the
outstanding voting securities of the Company enter into similar agreements. Each
Holder further agrees to enter into any agreement reasonably required by the
underwriters to implement the foregoing.
In order to enforce the foregoing covenant, the Company may
impose stop-transfer instructions with respect to the Registrable Securities of
each Holder (and the shares of securities of every other person subject to the
foregoing restriction) until the end of such period.
1.13 Termination of Registration Rights. The obligations of the
Company pursuant to this Section 1 shall terminate (i) as to all Holders on the
fifth anniversary of the closing of the IPO and (ii) as to any Holder, at such
time after the Company's IPO as (a) such Holder is able to sell all such
Registrable Securities held by such Holder within a single three month period
under Rule 144 or such Holder is able to sell all Registrable Securities held by
it pursuant to Rule 144(k) promulgated under the Securities Act and (b) the
Common Stock of the Company is then listed on the New York or American Stock
Exchange or is quoted on The Nasdaq Stock Market, or (iii) once all Registrable
Securities are registered.
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2. Holders' Right of First Offer.
2.1 Right of First Offer. If, at any time prior to the
termination of this right of first offer pursuant to subsection 2.6, the Company
should desire to issue in a transaction not registered under the Securities Act
in reliance upon a claimed exemption thereunder, any New Securities (as defined
in Section 2.5 below), it shall give each Holder ("Rights Holder") the right to
purchase such Holder's pro rata share (or any part thereof) of all of such
privately offered New Securities on the same terms as the Company is willing to
sell such New Securities to any other person so that each Holder will be able to
maintain their initial percentage ownership of Common Stock. Each Holder's pro
rata share of the New Securities shall be equal to that percentage of the
outstanding Common Stock then held by such Rights Holder including (a)
outstanding shares of Common Stock, and (b) shares of Common Stock issued or
issuable upon exercise and/or conversion of any then outstanding Preferred
Stock.
2.2 Notice. Prior to any sale or issuance by the Company of any
New Securities, the Company shall notify each Holder in writing of its intention
to sell and issue such securities, setting forth the terms under which it
proposes to make such sale. Within twenty (20) days after receipt of such
notice, each Rights Holder shall notify the Company in writing whether such
Rights Holder desires to exercise the option to purchase such Rights Holder's
pro rata share (or any part thereof) of the New Securities so offered.
2.3 Issuance of New Securities. After termination of the twenty
(20) day period specified in subsection 2.2 above, the Company may, during a
period of ninety (90) days following the end of such twenty (20) day period,
sell and issue such New Securities as to which (a) the Rights Holders have no
right under this Section 2 to purchase, and (b) the Rights Holders do not
indicate a desire to purchase, to another person upon the same terms and
conditions as those set forth in the notice to the Rights Holders. In the event
the Company has not sold the New Securities, or has not entered into an
agreement to sell the New Securities, within said ninety (90) day period, the
Company shall not thereafter issue or sell any New Securities without first
offering such securities to the Rights Holders in the manner provided above.
2.4 Payment. If a Rights Holder gives the Company written notice
that such Rights Holder desires to purchase any of the New Securities offered by
the Company, payment for the New Securities shall be by check, or wire transfer,
against delivery of the New Securities at the executive offices of the Company
within ten (10) days after giving the Company such notice, or, if later, the
closing date for the sale of such New Securities. The Company shall take all
such actions as may be required by any regulatory authority in connection with
the exercise by a Rights Holder of the right to purchase New Securities as set
forth in this Section 2.
2.5 New Securities. For purposes of this Section 2, the term "New
Securities" shall mean shares of Common Stock, Preferred Stock or any other
class of capital stock of the Company, whether or not now authorized, securities
of any type that are convertible into shares of such capital stock, and options,
warrants or rights to acquire shares of such capital stock. Notwithstanding the
foregoing, the term "New Securities" will not include securities issued or
issuable (a) to employees, directors or officers of, or consultants to, the
Company pursuant to
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<PAGE> 15
stock grant, stock purchase and/or stock option plans or any other stock
incentive program, agreement or arrangement approved by the Board of Directors,
(b) to the law firm of Kirkpatrick & Lockhart LLP or its designee(s) pursuant to
the exercise of stock options to purchase up to 123,000 shares of the Company's
Common Stock outstanding as of the date hereof, (c) upon conversion of
convertible promissory notes outstanding as of the date hereof, (d) pursuant to
the acquisition by the Company of all or substantially all of the assets or
shares of another company or entity whether through a merger, exchange,
reorganization or the like, (e) to financial institutions or lessors in
connection with commercial credit arrangements or equipment financing or leasing
arrangements; (f) upon conversion of the Preferred Stock of the Company, (g)
pursuant to authorized but unissued Preferred Stock, provided that such
purchasers become parties to and bound by this Agreement, (g) in connection with
any stock split, stock dividend, recapitalization or similar event or (i) issued
in connection with the IPO; provided that, for the purposes of clauses (d) and
(e) of this Section 2.5, the entity or other person to whom the securities are
issued or issuable is not an Affiliate (as hereinafter defined) of any director,
officers or other natural person who is an Affiliate of the Company (a "Control
Person") other than in such Control Person's capacity as an officer, director or
shareholder of the Company and such Control Person does not have a material
interest in such entity other than as an officer, director or shareholder of the
Company and such issuances are made in a bona fide arm's length transaction as
determined by the Board of Directors of the Company. For purposes of this
Section 2.5, an "Affiliate" means any person or entity controlling, controlled
by or under common control with the Company.
2.6 Termination of Right of First Offer. The right of first offer
contained in this Section 2 shall terminate upon the earlier to occur of (a) the
conversion of all of the outstanding Preferred Stock into Common Stock, (b) the
closing of the IPO or (c) the closing of (i) a merger or consolidation of the
Company with or into any other corporation in which the Company's shareholders
shall own less than fifty percent (50%) of the voting securities of the
surviving corporation or (ii) a sale, transfer, or disposition of all or
substantially all of the assets of the Company, but only if the Company's
shareholders receive cash and/or publicly traded securities as consideration in
such merger, consolidation or sale, transfer or disposition of assets.
2.7 Assignment of Right. A Rights Holder's right to purchase any
New Securities pursuant to this Section 2 may, in connection with transfer of at
least 100,000 shares of Preferred Stock, be assigned by a Rights Holder to an
affiliate of a Rights Holder. For the purposes of this Section 2, an "affiliate"
shall mean any officer, director, partner (including the principals of any
general partner) or shareholder of a Rights Holder or any person or entity that
directly or indirectly through one or more intermediaries controls or is
controlled by or is under common control with such Rights Holder.
2.8 Aggregation. For purposes of this Section 2, all shares held
or acquired by affiliated entities or persons shall be aggregated together for
the purpose of determining a Rights Holder's pro rata share and such pro rata
share may be allocated among the affiliated entities in any manner such
affiliated entities may determine.
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<PAGE> 16
3. Information Rights.
3.1 Annual Financial Information. As soon as practicable after
the end of each fiscal year, and in any event within ninety (90) days
thereafter, the Company will furnish to each Holder of Preferred Stock, audited
financial statements, including consolidated balance sheets of the Company and
its subsidiaries, if any, as of the end of such fiscal year and consolidated
statements of income and surplus and consolidated statements of changes in
financial position of the Company and its subsidiaries, if any, for such year,
prepared in accordance with generally accepted accounting principles and setting
forth in each case in comparative form the figures for the previous fiscal year.
3.2 Quarterly Financial Information. As soon as available and in
any event within forty-five (45) days after the first three quarterly accounting
periods, the Company will provide to each Holder of Preferred Stock, unaudited
quarterly financial statements, including consolidated balance sheets of the
Company and its subsidiaries, if any, as of the end of such quarter and
consolidated statements of income and surplus and consolidated statements of
changes in financial position of the Company and its subsidiaries, if any, for
such quarter, prepared in accordance with generally accepted accounting
principles and setting forth in each case in comparative form the figures for
the previous fiscal quarter.
3.3 Monthly Financial Information. As soon as available and in
any event within forty-five (45) days after the end of each month, the Company
will provide to each Holder of 100,000 or more shares of Preferred Stock, the
Company's unaudited income statement, statement of cash flows and a balance
sheet for and as of the end of such month, together with a comparison of such
statements to the Company's annual operating plan then in effect and approved by
its Board of Directors.
3.4 Annual Budget. As soon as available and in any event within
forty-five (45) days prior to the end of the Company's fiscal year, the Company
will provide to each Holder of 100,000 or more shares of Preferred Stock an
annual budget and operating plan of the Company for the next fiscal year,
including (but not limited to) a cash flow projection and operating budget
(including assumptions with respect to revenues, new customers, DSL lines
provisioned and sold, operating costs, and capital expenditures), calculated
monthly, as contained in its annual operating plan approved by the Company's
Board of Directors.
3.5 Confidentiality of Information. Each Holder agrees that any
information obtained by it pursuant to subsections 3.1, 3.2, 3.3 and 3.4 is
confidential and for its use only in connection with evaluating its investment
in the Company, and further agrees that it will not disseminate such information
to any person other than its officers, directors, shareholders, partners,
general partners, accountants, investment advisors, investment managers or
attorneys and that such dissemination shall be only for purposes of evaluating
its investment. Each Holder's obligations under this subsection 3.5 shall not
apply to any information which:
(a) was in the public domain at the time it was
communicated to the Holder by the Company;
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<PAGE> 17
(b) entered the public domain subsequent to the time it
was communicated to the Holder through no fault of the Holder;
(c) was in the Holder's possession free of any obligation
of confidence at the time it was communicated to the Holder by the Company;
(d) was rightfully communicated to the Holder by a third
party free of any obligation of confidence subsequent to the time it was
communicated to the Holder by the Company; or
(e) was disclosed by the Holder in response to a valid
order by a court or other governmental body, was otherwise required by law, or
was necessary to establish the rights of either party under this Rights
Agreement.
3.6 Inspection. The Company shall permit Holders of Preferred
Stock 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 during business hours, as may be requested in writing by the
Holder; provided, however, that the Company shall not be obligated pursuant to
this Section 3.6 to provide access to any information which the Company
reasonably considers to be a trade secret or similar confidential information.
3.7 Termination of Covenants. The covenants set forth in
subsections 3.1 through 3.6 shall terminate and be of no further force and
effect upon the earlier to occur of (a) the closing of the IPO or (b) upon any
merger or consolidation of the Company with any other corporation in which the
shareholders of the Company immediately prior to such transaction shall own less
than fifty percent (50%) of the voting securities of the surviving corporation,
provided that the Company's shareholders receive cash and/or publicly traded
securities as consideration in such merger or consolidation.
4. Additional Agreements.
4.1 Expenses of Board Members. The Company shall promptly
reimburse in full each non-employee member of the Company's Board of Directors
(and up to one additional person accompanying such Board member) for all of his
reasonable travel and out-of-pocket expenses incurred in attending each meeting
of the Board of Directors of the Company.
4.2 Use of Proceeds. The proceeds of this offering shall be used
by the Company for capital expenditures, working capital and operating
expenditures in accordance with a board-approved budget.
4.3 Board Meetings. Regular meetings of the Board of Directors
shall be scheduled bi-monthly unless otherwise agreed to by the Board of
Directors.
17
<PAGE> 18
4.4 Purchase of Additional Preferred Stock.
(a) If on or before December 31, 2000, the Company has
purchased from the Series C Investor $7,500,000 worth of products, the Company
may require the Series C Investor to purchase up to an aggregate of an
additional $7,500,000 of the Company's preferred stock on the same terms and
conditions as the preferred stock issued to persons immediately preceding the
Series C Investor's receipt of the Put Notice (as defined below); provided,
however, that if the Company has executed a term sheet for the investment in
another series of preferred stock at the time the Series C Investor receives the
Put Notice, then the Series C Investor, if the Company so chooses, shall be
required to invest on terms consistent with such new term sheet for the
preferred stock (the "Put Right").
(b) If the Company desires to exercise the Put Right under
Section 4.4(a), then, the Company shall deliver to the Series C Investor on or
before December 31, 2000, written notice (a "Put Notice") stating the Company's
exercise of its Put Right hereunder, the number of shares of preferred stock the
Company desires to sell to the Series C Investor and the purchase price per
share calculated as set forth above.
(c) The Series C Investor and the Company shall, within
sixty (60) days following delivery of the Put Notice, enter into a Preferred
Stock Purchase Agreement to purchase the number of shares of the Company's
preferred stock specified in the Put Notice. The Company shall grant the Series
C Investor substantially the same rights with respect to the Preferred Stock
under the Second Restated Investors Rights Agreement and the Second Restated
Shareholders Agreement as the Series C Investor enjoys with respect to the
Series C Preferred Stock.
(d) Upon the issuance and sale of the additional shares of
preferred stock by the Company as set forth in this subsection 4.4, the
Investors hereby agree to waive their Right of First Offer as described in
Section 2 of this Rights Agreement.
(e) The Company's right to require the Series C Investor
to purchase additional shares of preferred stock under this subsection 4.4 shall
terminate on the earlier of December 31, 2000 or the effective date of the
Company's IPO.
4.5 Repurchase Right.
(a) At any time after December 31, 2000, upon providing
the Repurchase Notice (as described below), the Company shall have an
irrevocable, exclusive option (the "Repurchase Option") for a period of 90 days
from such date to repurchase from Investor shares of Series C Preferred or the
Conversion Shares as determined by dividing the product of $7,500,000 less the
dollar amount of products actually purchased by the Company on or before
December 31, 2000 by $2.7162 (the "Repurchase Price") up to a maximum of
$3,500,000 worth of Series C Preferred or the Conversion Shares.
(b) The Repurchase Option shall be exercised by the
Company by written notice to the Series C Investor and, at the Company's option,
(i) by delivery to the Series
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<PAGE> 19
C Investor with such notice of a check in the amount of the purchase price for
the Shares being repurchased, (ii) by cancellation by the Company of an amount
of the Series C Investor indebtedness to the Company equal to the purchase price
for the Shares being repurchased, or (iii) by a combination of (i) and (ii) so
that the combined payment and cancellation of indebtedness equals the aggregate
Repurchase Price. Upon delivery of such notice and the payment of the purchase
price in any of the ways described above, the Company shall become the legal and
beneficial owner of the Shares being repurchased and all rights and interests
therein or relating thereto, and the Company shall have the right to retain and
transfer to its own name the number of Shares being repurchased by the Company.
(c) Whenever the Company shall have the right to
repurchase Shares hereunder, the Company may designate and assign one or more
employees, officers, directors, or shareholders of the Company or other persons
or organizations to exercise all or a part of the Company's purchase rights
under this Agreement and purchase all or a part of such Shares. If the fair
market value of the Shares to be repurchased on the date of such designation or
assignment (the "Repurchase FMV") exceeds the aggregate Repurchase Price of such
Shares, then each such designee or assignee shall pay the Company cash equal to
the difference between the Repurchase FMV and the aggregate Repurchase Price of
such Shares.
5. General.
5.1 Waivers and Amendments. With the written consent of the
record or beneficial holders of sixty percent (60%) of the Registrable
Securities, the obligations of the Company and the rights of the Preferred Stock
under this agreement may be waived (either generally or in a particular
instance, either retroactively or prospectively, and either for a specified
period of time or indefinitely). With the written consent of the record or
beneficial holders of sixty percent (60%) of the Registrable Securities, the
Company, when authorized by resolution of its Board of Directors, may enter into
a supplementary agreement for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Rights
Agreement; provided, however, that no such modification or amendment shall
reduce the aforesaid majority of Registrable Securities consent requirement
without the consent of all of the Holders of the Registrable Securities and
provided further, however, that if such supplementary agreement increases the
rights of the Preferred Stock, the consent of the Company shall mean the
approval of the Company's Board of Directors including Cliff Young. Upon the
effectuation of each such waiver, consent, agreement of amendment or
modification, the Company shall promptly give written notice thereof to the
record holders of the Registrable Securities who have not previously consented
thereto in writing. Notwithstanding anything else set forth above, the written
consent or approval of the record or beneficial holders of sixty percent (60%)
of the shares of a particular series of Preferred Stock will be required if and
to the extent that any waiver, amendment, modification or supplementary
agreement to this Agreement would negatively affect the rights of the Holders of
such series under this Agreement.
5.2 Governing Law. This Rights Agreement shall be governed in all
respects by the laws of the State of California as such laws are applied to
agreements between California residents entered into and to be performed
entirely within California.
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<PAGE> 20
5.3 Successors and Assigns. Except as otherwise expressly
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors and administrators of
the parties hereto.
5.4 Entire Rights Agreement. Except as set forth below, this
Rights Agreement and the other documents delivered pursuant hereto constitute
the full and entire understanding and agreement between the parties with regard
to the subjects hereof and thereof, and this Rights Agreement shall supersede
and cancel all prior agreements between the parties hereto with regard to the
subject matter hereof, including the Second Restated Rights Agreement.
5.5 Notices, etc. All notices and other communications required
or permitted hereunder shall be in writing and shall be sent via facsimile,
overnight courier service or mailed by certified mail, postage prepaid, return
receipt requested, addressed or sent (i) if to a Purchaser, at the address or
facsimile number of the Purchaser set forth in the Company's records, or at such
other address or number as the Purchaser shall have furnished to the Company in
writing, or (ii) if to the Company, at 4499 Glencoe Avenue, Marina del Rey,
California, facsimile: (310) 887-6223, or at such other address or number as the
Company shall have furnished to the Purchasers in writing, and shall be
effective (i) upon delivery if sent by facsimile (with a confirming receipt);
(ii) one day after delivery to an overnight courier service; or (iii) three (3)
days after deposit with the United States Post Office if mailed postage prepaid
by regular mail or airmail.
5.6 Severability. In case any provision of this Rights Agreement
shall be invalid, illegal, or unenforceable, the validity, legality and
enforceability of the remaining provisions of this Rights Agreement or any
provision of the other Agreements shall not in any way be affected or impaired
thereby.
5.7 Titles and Subtitles. The titles of the sections and
subsections of this Rights Agreement are for convenience of reference only and
are not to be considered in construing this Rights Agreement.
5.8 Counterparts. This Rights Agreement may be executed in any
number of counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.
5.9 Aggregation of Stock. All shares 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.
[Remainder of this page intentionally left blank.]
20
<PAGE> 21
IN WITNESS WHEREOF, the parties hereby have executed this Third Restated
Investors Rights Agreement on the date first above written.
"COMPANY"
ICNT, INC.,
a California corporation
By /s/ John W. Combs
---------------------------------------
John W. Combs
Chief Executive Officer
By /s/ Clifford H. Young
---------------------------------------
Clifford H. Young
President
21
<PAGE> 22
SERIES A, B AND D PURCHASERS' COUNTERPART SIGNATURE PAGE
ICNT, INC.
THIRD RESTATED INVESTORS RIGHTS AGREEMENT
APRIL 13, 2000
Crosspoint Venture Partners 1999
By: /s/ Robert Hoff
--------------------------------------
Robert Hoff, General Partner
Spectrum Equity Investors III, L.P.
By: Spectrum Equity Associates III, L.P.
Its General Partner
By: /s/ Brion Applegate
--------------------------------------
Brion Applegate, General Partner
SEI II Entrepreneurs' Fund, L.P.
By: SEI III Entrepreneurs' LLC
Its General Partner
By: /s/ Brion Applegate
--------------------------------------
Brion Applegate, Managing Member
Spectrum III Investment Managers' Fund, L.P.
By: /s/ Brion Applegate
--------------------------------------
Brion Applegate, General Partner
22
<PAGE> 23
SERIES A AND B PURCHASERS' COUNTERPART SIGNATURE PAGE
ICNT, INC.
THIRD RESTATED INVESTORS RIGHTS AGREEMENT
APRIL 13, 2000
/s/ David Chung
- -------------------------------------
David Chung
/s/ Noel Rahn
- --------------------------------------
Noel Rahn
/s/ Patrick Healy
- --------------------------------------
Patrick Healy
23
<PAGE> 24
SERIES C PURCHASER'S COUNTERPART SIGNATURE PAGE
ICNT, INC.
THIRD RESTATED INVESTORS RIGHTS AGREEMENT
APRIL 13, 2000
Cabletron Systems, Inc.
By: /s/ DAN HARDING
--------------------------------------------
Name: Dan Harding
Title: Vice - President, Business Development
24
<PAGE> 25
SERIES D PURCHASER'S COUNTERPART SIGNATURE PAGE
ICNT, INC.
THIRD RESTATED INVESTORS RIGHTS AGREEMENT
APRIL 13, 2000
Efficient Networks, Inc.
By: /s/ Kenneth M. Siegel
--------------------------------------
Title: Vice President
-----------------------------------
Polycom
By: /s/ Michael R. Kouhry
--------------------------------------
Title: Chief Financial Officer
-----------------------------------
Winstar Communications
By: /s/ Kenneth J. Zinghini
--------------------------------------
Title: Senior Vice President
-----------------------------------
<PAGE> 26
SERIES D PURCHASER'S COUNTERPART SIGNATURE PAGE
ICNT, INC.
THIRD RESTATED INVESTORS RIGHTS AGREEMENT
APRIL 13, 2000
Morgan Stanley Dean Witter Equity Funding, Inc.
By: /s/ THOMAS CLAYTON
--------------------------------------
Title: Vice President
-----------------------------------
Big Basin Partners, L.P.
By: /s/ FRANK J. MARSHALL
--------------------------------------
Frank J. Marshall, General Partner
/s/ MATTHEW MOCHARY
- -------------------------------
Matthew Mochary
/s/ BERNARD PUCKETT
- -------------------------------
Bernard Puckett
BS-METALS B2B Acquisition Corp.
By: /s/ RICHARD L. METRICK
--------------------------------------
Title: Chief Executive Officer
-------------------------------
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<PAGE> 27
SERIES D PURCHASER'S COUNTERPART SIGNATURE PAGE
ICNT, INC.
THIRD RESTATED INVESTORS RIGHTS AGREEMENT
APRIL 13, 2000
idealab! Capital Partners II-A, LP
By its General Partner,
idealab! Capital Management II, LLC
By: /s/ William Elkus
--------------------------------------
William Elkus, Managing Member
idealab! Capital Partners II-B, LP
By its General Partner,
idealab! Capital Management II, LLC
By: /s/ William Elkus
--------------------------------------
William Elkus, Managing Member
idealab! Capital Principals Fund, LP
By its General Partner,
idealab! Capital Management II, LLC
By: /s/ William Elkus
--------------------------------------
William Elkus, Managing Member
27
<PAGE> 28
EXHIBIT A
LIST OF INVESTORS
Crosspoint Venture Partners 1999
Spectrum Equity Investors III, L.P.
SEI II Entrepreneurs' Fund, L.P.
Spectrum III Investment Managers' Fund, L.P.
David Chung
Noel Rahn
Patrick Healy
Cabletron Systems, Inc.
Winstar Communications
Efficient Networks, Inc.
idealab! Capital Partners II-A, LP
idealab! Capital Partners II-B, LP
idealab! Capital Principals Fund, LP
Polycom
Morgan Stanley Dean Witter Equity Funding
Big Basin Partners, LP
BS-METALS B2B Acquisition Corp.
Bernard Puckett
Matthew Mochary
28
<PAGE> 1
EXHIBIT 10.10
ICNT, INC.
THIRD RESTATED SHAREHOLDERS AGREEMENT
THIS THIRD RESTATED SHAREHOLDERS AGREEMENT (this "Agreement") is made as
of the 13 day of April, 2000 by and among Cliff Young (the "Founder"), ICNT,
Inc., a California corporation (the "Company"), the shareholders of the
Company's Series A Preferred Stock (the "Series A Holders"), the shareholders of
the Series B Preferred Stock (the "Series B Holders"), Cabletron Systems, Inc.
(the "Series C Holder"), and the shareholders of the Series D Preferred Stock
(the "Series D Holders"). This Agreement supersedes and restates in its entirety
that certain Second Restated Shareholders Agreement (the "Second Restated
Shareholders Agreement") made and entered into as of March 28, 2000 by and among
the Company and the Series A Holders, the Series B Holder, and the Series C
Holder.
RECITALS:
A. The Founder is presently the beneficial owner of Seven Million Seven
Hundred Eighty-Six Thousand Six Hundred Twenty-Five (7,786,625) shares of the
outstanding common stock of the Company. All Common Stock and any other shares
of capital stock of the Company subsequently owned by the Founder are herein
collectively referred to as the "Founder Shares."
B. Pursuant to the Series A Stock Purchase Agreement, made and entered
into as of July 16, 1999, the Company has previously sold to the Series A
Holders thirteen million three hundred thirty-three thousand three hundred
thirty-four (13,333,334) shares of the Company's Series A Preferred Stock (the
"Series A Preferred"). In connection with such sales, the Company granted the
Series A Holders certain rights, as set forth in the First Restated Shareholders
Agreement.
C. Pursuant to the Series B Stock Purchase Agreement, made and entered
into as of December 21, 1999, the Company has previously sold to the Series B
Holders Ten Million One Hundred Fifty Thousand Four Hundred Ninety (10,150,490)
shares of the Company's Series B Preferred Stock (the "Series B Preferred"). In
connection with such sales, the Company granted the Series B Holders certain
rights, as set forth in the First Restated Shareholders Agreement.
D. Pursuant to the Series C Stock Purchase Agreement, made and entered
into as of March 28, 2000, the Company has previously sold to the Series C
Holder Two Million Seven Hundred Sixty One Thousand Two Hundred Ten (2,761,210)
shares of the Company's Series C Preferred Stock (the "Series C Preferred"). In
connection with such sale, the Company granted the Series C Holder certain
rights, as set forth in the Second Restated Shareholders Agreement. Pursuant to
that certain Second Restated Investors Rights Agreement, dated March 28, 2000,
between the Company and the Series C Holder, on certain conditions, the Company
has the right to require the Series C Holder to purchase up to $7,500,000 of the
Company's preferred stock (the "Put Right").
E. The Series D Holders have purchased from the Company shares of its
Series D Preferred Stock (the "Series D Preferred") pursuant to that certain
Series D Preferred Stock Purchase Agreement, dated of even date herewith, by and
among the Company and the Series D Holder (the "Series D Stock Agreement").
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<PAGE> 2
F. This Agreement amends the Second Restated Shareholders Agreement to
afford the Series D Holders the same rights granted to the Series A Holders, the
Series B Holders and the Series C Holder. By their execution of this Agreement,
each of the Series A Holders, the Series B Holders and the Series C Holder agree
to the amendment of the Second Restated Shareholders Agreement as provided
herein and agree to be bound by this Agreement.
G. The Series A Holders, the Series B Holders, the Series C Holder and
the Series D Holders will hereinafter be referred to collectively as the
"Holders." The Series A Preferred, the Series B Preferred, the Series C
Preferred and the Series D Preferred will hereinafter be referred to
collectively as the "Preferred Stock."
H. The obligations of each of the Series D Holders to purchase shares
of Series D Preferred is conditioned upon, among other things, the execution and
delivery by each of the Company, the Founder and the Holders of this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration for and of the foregoing and the mutual
promises, covenants and conditions set forth herein and other good and valuable
condition the receipt and sufficiency of which is hereby acknowledged, the
parties hereby agree as follows:
1. Holders' Right of First Refusal.
1.1 In the event the Founder desires to accept a bona fide third
party offer for any or all of Founder Shares (the shares subject to such offer
to be hereinafter called, solely for the purposes of this Section 1 the "Target
Shares"), the Founder shall promptly deliver to the Holders and the Company
written notice (the "Disposition Notice") stating: (i) the Founder's bona fide
intention to sell or otherwise transfer the Target Shares; (ii) the name of each
proposed purchaser or other transferee (each a "Proposed Transferee"); (iii) the
number of Target Shares to be transferred to each Proposed Transferee; and (iv)
the bona fide cash price or other consideration for which the Founder proposes
to transfer the Target Shares (the "Offered Price"), and the Founder shall offer
the Target Shares at the Offered Price to the Company or its assignee(s).
1.2 Subject to the Company's right of first refusal with respect
to the Founder Shares as set forth in the Founder's Stock Agreement, dated July
16, 1999, between the Company and the Founder, each Holder shall, for a period
of thirty (30) days following delivery of the Disposition Notice as determined
in accordance with Section 7.2 below, (the "Exercise Period"), have the right to
purchase that number of the Target Shares specified in the Disposition Notice as
shall be equal to the aggregate number of such shares multiplied by a fraction,
the numerator of which is the aggregate number of shares of Preferred Stock (on
an as-converted into Common Stock basis) then owned by such Holder and the
denominator of which is the aggregate number of shares of Preferred Stock
outstanding and held by all the Holders who exercise their right to purchase
shares pursuant to this Section 1 ("Electing Holders") (on an as-converted into
Common Stock basis), upon substantially the same terms and conditions specified
therein. Such right shall be exercisable by written notice (the "Exercise
Notice") delivered to the Founder prior to the expiration of the Exercise
Period. If such right is exercised with respect to all or any part of the Target
Shares specified in the
-2-
<PAGE> 3
Disposition Notice, then the Founder and the Electing Holders shall effect the
purchase of all or any part of the Target Shares, including payment of the
purchase price therefor, not more than ten (10) business days after the Exercise
Period. At such time the Founder shall deliver to the Electing Holders the
certificates representing the Target Shares to be purchased, each certificate to
be properly endorsed for transfer.
Should the purchase price specified in the Disposition Notice be
payable in property other than cash or evidences of indebtedness, the Electing
Holders shall have the right to pay the purchase price in the form of cash equal
in amount to the value of such property. If the Founder and the Electing Holders
cannot agree on such cash value within ten (10) days after the Exercise Period,
the valuation shall be made by an appraiser of recognized standing selected by
the Founder and a majority in interest of the Electing Holders, or, if they
cannot agree on an appraiser within twenty (20) days after the Exercise Period,
each shall select an appraiser of recognized standing, and the two appraisers
shall designate a third appraiser of recognized standing, whose appraisal shall
be determinative of such value. The cost of such appraisal shall be shared
equally by the Founder and the Electing Holders. The closing shall then be held
on the date ten (10) business days after such cash valuation shall have been
made.
1.3 In the event the Exercise Notice is not given to the Founder
within thirty (30) days following the delivery of the Disposition Notice, the
Founder shall have a period of thirty (30) days thereafter, in which to sell or
otherwise dispose of the Target Shares (and any shares of the Holders pursuant
to Section 2 below) upon terms and conditions (including the purchase price) no
more favorable to the third-party purchaser than those specified in the
Disposition Notice. The third-party purchaser shall acquire the Target Shares
free and clear of all the terms and provisions of this Right of First Refusal.
In the event the Founder does not sell or otherwise dispose of the Target Shares
within the specified thirty (30) day period, the Right of First Refusal shall
continue to be applicable to any subsequent disposition of the Target Shares by
the holder of such Target Shares until such right lapses in accordance with
Section 4.4.
1.4 Subject to Section 2 below, the Founder shall have the right
to effect the sale of the Target Shares not purchased by the Electing Holders to
the third party purchaser pursuant to Section 1.3.
2. Co-Sale Right.
2.1 Should the Founder offer to sell, or receive one or more bona
fide offers (individually, a "Purchase Offer") to purchase, any of the Founder
Shares, and the Holders do not exercise their full right of first refusal as set
forth in Section 1 hereof or the Founder is otherwise entitled to sell the
Founder Shares owned by such Founder pursuant to Section 1.3 or 1.4, then the
Founder shall promptly notify each Holder and the Company of the failure of the
Holders to exercise their full right of first refusal, and of the terms and
conditions of such Purchase Offer ("Co-Sale Notice"). Should a Holder receive
one or more Purchase Offers with respect to any of his, her or its shares of
Series A Preferred, Series B Preferred, Series C Preferred or Series D
Preferred, as applicable, then the Holder shall promptly deliver to the Founder
and the Company the Co-Sale Notice.
-3-
<PAGE> 4
2.2 With respect to sales of Founder Shares by the Founder, each
Holder shall have the right, exercisable upon written notice to the Founder
within thirty (30) days after receipt of the Co-Sale Notice (the "Offer
Period"), to participate in the Founder's sale of Founder Shares pursuant to the
specified terms and conditions of such Purchase Offer as set forth in the
Co-Sale Notice. To the extent a Holder exercises such right of participation in
accordance with the terms and conditions set forth below, the number of Founder
Shares that the Founder may sell pursuant to such Purchase Offer shall be
correspondingly reduced.
(a) Each Holder may sell all or any part of that number of
shares of Common Stock of the Company owned by that Holder that is not in excess
of the product obtained by multiplying (i) the aggregate number of Shares
covered by the Purchase Offer remaining after the exercise of any rights of
first refusal set forth above by (ii) a fraction, the numerator of which is the
number of shares of Common Stock at the time owned by that Holder and the
denominator of which is the total number of shares of Common Stock of the
Company outstanding, excluding any shares issuable upon exercise of any
outstanding options, warrants or other rights to acquire shares of Common Stock
or securities convertible into or exercisable or exchangeable for shares of
Common Stock of the Company. For purposes of making this computation, each
Holder shall be deemed to own the number of shares of Common Stock into which
all his, her or its Series A Preferred, Series B Preferred, Series C Preferred
and/or Series D Preferred is at the time convertible, and the number of shares
of Common Stock issuable upon conversion of all then-outstanding shares of
Preferred Stock will be deemed to be outstanding for purposes of determining the
total number of shares of Common Stock of the Company then outstanding.
(b) Each Holder may effect its participation in the sale by
delivering to the Founder, within the thirty (30) day period under Section 2.2,
for transfer to the maker(s) of the Purchase Offer, one or more certificates,
properly endorsed for transfer, which shall be accompanied by a written election
to participate in the sale with respect to a specified number of shares of
Common Stock not in excess of the amount of Shares permitted to be sold under
Section 2.2(a) (the "Election Number") and shall represent:
(i) the Election Number of shares of Common Stock, or
(ii) that number of shares of Series A Preferred,
Series B Preferred, Series C Preferred or Series D Preferred, as applicable,
which is at such time convertible into at least the Election Number of shares of
Common Stock; provided, however, that if the maker(s) of the Purchase Offer
objects to the delivery of Series A Preferred, Series B Preferred, Series C
Preferred or Series D Preferred in lieu of Common Stock, the Holder may convert
and deliver Common Stock as provided in subparagraph (i) above. Any Holder not
delivering such certificate(s) and written election within the aforesaid thirty
(30) day time period will have waived irrevocably all rights under this
Agreement with respect to the Purchase Offer, but not with respect to any
subsequent Purchase Offer.
(c) The stock certificate or certificates that the Holder
delivers to the Founder pursuant to Section 2.2 shall be transferred by the
Founder to the maker(s) of the Purchase Offer in consummation of the sale of the
Common Stock pursuant to the terms and conditions specified in the Co-Sale
Notice to the Holder, and the Founder shall promptly thereafter
-4-
<PAGE> 5
remit to such Holder that portion of the sale proceeds to which such Holder is
entitled by reason of its participation in such sale.
(d) The exercise or non-exercise of the rights of the
Holders hereunder to participate in one or more sales of Common Stock made by
the Founder shall not adversely affect their rights to participate in subsequent
sales of Founder Shares by the Founder pursuant to Section 2.1 hereof.
2.3 With respect to sales of Shares by the Holders, the Founder
shall have the right, exercisable upon written notice to the selling Holder
within thirty (30) days after receipt of the Co-Sale Notice (the "Offer
Period"), to participate in the Holder's sale of Shares pursuant to the
specified terms and conditions of such Purchase Offer as set forth in the
Co-Sale Notice. To the extent the Founder exercises such right of participation
in accordance with the terms and conditions set forth below, the number of
Shares that the Holder may sell pursuant to such Purchase Offer shall be
correspondingly reduced.
(a) The Founder may sell all or any part of that number of
shares of Common Stock of the Company owned by the Founder that is not in excess
of the product obtained by multiplying (i) the aggregate number of Shares
covered by the Purchase Offer by (ii) a fraction, the numerator of which is the
number of shares of Common Stock at the time owned by the Founder and the
denominator of which is the total number of shares of Common Stock of the
Company outstanding, excluding any shares issuable upon exercise of any
outstanding options, warrants or other rights to acquire shares of Common Stock
or securities convertible into or exercisable or exchangeable for shares of
Common Stock of the Company.
(b) The Founder may effect his participation in the sale by
delivering to the Holder, within the thirty (30) day period under this Section
2.3, for transfer to the maker(s) of the Purchase Offer, one or more
certificates, properly endorsed for transfer, which shall be accompanied by a
written election to participate in the sale with respect to a specified number
of shares of Common Stock (the "Election Number") and shall represent at least
the Election Number of shares of Common Stock.
(c) The stock certificate or certificates that the Founder
delivers to the selling Holder pursuant to this Section 2.3 shall be transferred
by the Holder to the maker(s) of the Purchase Offer in consummation of the sale
of the Common Stock pursuant to the terms and conditions specified in the
Co-Sale Notice to the Founder, and the Holder shall promptly thereafter remit to
the Founder that portion of the sale proceeds to which the Founder is entitled
by reason of its participation in such sale.
(d) The exercise or non-exercise of the rights of the
Founder hereunder to participate in one or more sales of Series A Preferred,
Series B Preferred, Series C Preferred or Series D Preferred made by the Holders
shall not adversely affect their rights to participate in subsequent sales of
Preferred Stock by the Holders pursuant to this Section 2.3.
2.4 The rights of the Holders to participate in any sale or
transfer by the Founder (a) are subordinate to any right of first refusal in
favor of the Company covering the
-5-
<PAGE> 6
Founder Shares, and (b) shall pertain or apply only to shares as to which any
such right of first refusal is not exercised.
3. The rights of the Holders pursuant to Section 1 and 2 shall not
pertain or apply to (a) any transfer of Founder Shares to any of the mother,
father, descendants, brother(s), sister(s) or spouse of the Founder or to any
trustee or trustees for the benefit of any one or more of the foregoing
(including such mother, father, brother(s), sister(s) or spouses), (b) any bona
fide gift of Shares, (c) any pledge of up to 100,000 Founder Shares made
pursuant to a bona fide loan transaction that creates a mere security interest,
(d) any sales of the Company's Common Stock pursuant to an underwritten public
offering of shares of the Company, (e) any transfer of Founder Shares to the
Company, (f) any one-time transfer by Founder of up to 100,000 Founder Shares
(less any shares pledged pursuant to 3(c) above), or (g) any transfer or
transfers of Shares in any merger or acquisition in which shareholders of the
Company receive cash or securities of another issuer or other consideration in
exchange for their shares; provided, however, that in the case of clauses (a)
and (b) above, the transferee (the "Permitted Transferee") shall furnish the
Holders with a written agreement to be bound by and comply with all provisions
of this Agreement applicable to the Founder.
4. The rights of the Founder pursuant to Section 2 shall not pertain or
apply to (a) any transfer of Preferred Stock to any officer, director, partner
(including the principals of any general partner) or stockholder of a Holder or
any person or entity that directly or indirectly through one or more
intermediaries controls or is controlled by or is under common control with such
Holder, (b) any sales of the Company's Preferred Stock or Common Stock issuable
upon conversion of the Preferred Stock pursuant to an underwritten public
offering of shares of the Company, (e) any transfer of Preferred Stock to the
Company, or (c) any transfer or transfers of Preferred Stock or Common Stock in
any merger or acquisition in which shareholders of the Company receive cash or
securities of another issuer or other consideration in exchange for their
shares.
5. Prohibited Transfers. No Holder shall sell, transfer, assign or
otherwise hypothecate any shares of capital stock of the Company to any proposed
transferee or assignee who the Company reasonably believes is a competitor of
the Company. Any attempt to transfer shares of the Company in violation of the
foregoing sentence or of Section 1 or 2 hereof shall be void, and the Company
agrees it will not effect such a transfer nor will it treat any alleged
transferee as the holder of such shares without the written consent of the
Founder or the Holders having the right to amend this Agreement as provided
below.
6. Standoff Agreement. Until such time as the Company's Put Right is
exercised, the Series C Holder shall not purchase or acquire any additional
shares of capital stock of the Company, either from the Company or other
shareholders, without the prior written consent of the Founder, which consent
may be withheld in his sole discretion.
7. Voting Agreement Pursuant to Section 5(b) of Article III(B) of the
Company's Amended and Restated Articles of Incorporation, the holders of the
Company's Common Stock are entitled to elect two members of the Company's Board
of Directors (the "Common Members"), the holders of the Company's Series A
Preferred are entitled to elect two members of the Company's Board of Directors
(the "Series A Members"), and the holders of the Company's Common Stock and
Preferred Stock are entitled to elect one member of the Company's Board of
-6-
<PAGE> 7
Directors (the "At Large Member"). In any and all elections of the Board of
Directors of the Company (whether at a meeting or by written consent in lieu of
a meeting), the Founder and each Holder, to the extent such Founder or Holder is
entitled to vote thereon, shall vote or cause to be voted all shares of Common
Stock owned by it, or over which it has voting control, and otherwise use its
respective best efforts, so as to cause to be elected as the Common Members,
John Combs and Cliff Young. In any and all elections of the Board of Directors
of the Company (whether at a meeting or by written consent in lieu of a
meeting), the Founder and each Holder, to the extent such Founder or Holder is
entitled to vote thereon, shall vote or cause to be voted all shares of Common
Stock or Preferred Stock, as applicable, owned by it, or over which it has
voting control, and otherwise use its respective best efforts, so as to cause to
be elected as the At Large Member, an industry expert who is not an employee of
the Company, selected by the holders of a majority of the Common Stock and the
Preferred Stock. In any and all elections of the Board of Directors of the
Company (whether at a meeting or by written consent in lieu of a meeting), the
Founder and each Holder, to the extent such Founder or Holder is entitled to
vote thereon, shall vote or cause to be voted all shares of Series A Preferred
owned by it, or over which it has voting control, and otherwise use its
respective best efforts, so as to cause to be elected as the Series A Members
one nominee of Crosspoint Venture Partners and one nominee of Spectrum Equity
Investors.
8. Legended Certificates.
8.1 Each certificate representing shares of the Common Stock and
Preferred Stock of the Company now or hereafter owned by the (i) Founder, (ii)
any Permitted Transferee pursuant to Section 3, or (iii) the Holders shall be
endorsed with the following legend:
"THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN SHAREHOLDERS
AGREEMENT. COPIES OF SUCH AGREEMENT MAY BE OBTAINED WITHOUT CHARGE UPON
WRITTEN REQUEST TO THE SECRETARY OF THE CORPORATION."
8.2 The Section 8.1 legend shall be removed upon termination of
this Agreement in accordance with the provisions of Section 9.1.
9. Miscellaneous Provisions.
9.1 The rights of the Holders and the Founder under this Agreement
and the correlative obligations of the Founder with respect to the Holders and
the Holders with respect to the Founder shall terminate upon the occurrence of
the earliest of the following events:
(a) The effective date of a registration statement under the
Securities Act of 1933, as amended (the "Act), filed in connection with the
Company's first underwritten public offering of shares of the Company in which
the Preferred Stock is converted into Common Stock; or
(b) (i) a merger or consolidation of the Company with or
into any other corporation or corporations or other entity or entities or any
other corporation reorganization in which the shareholders of the Company shall
own less than fifty percent (50%) of the voting
-7-
<PAGE> 8
securities of the surviving corporation or other entity, but only if the
Company's shareholders receive cash and/or publicly traded securities as
consideration in such merger or consolidation, (ii) any transaction or series of
related transactions in which in excess of 50% of the Company's voting power is
transferred, except in transactions, the primary purpose of which is to raise
additional equity capital for the Company, or (iii) a sale, lease, transfer or
other disposition (but not including a transfer or disposition by pledge or
mortgage to a bona fide lender) of all or substantially all of the assets of the
Company but only if the Company's shareholders receive cash and/or publicly
traded securities as consideration in such sale, transfer or disposition of
assets.
9.2 All notices and other communications required or permitted
hereunder shall be in writing and shall be sent via facsimile, overnight courier
service or mailed by certified mail, postage prepaid, return receipt requested,
addressed or sent (i) if to a Holder, at the address or facsimile number of the
Holder set forth in the Company's records, or at such other address or number as
the Holder shall have furnished to the Company in writing, or (ii) if to the
Company, at 4499 Glencoe Avenue, Marina del Rey, California 90292, facsimile:
(310) 881-6223, or at such other address or number as the Company shall have
furnished to the Holders in writing, or (iii) if to the Founder, at 4499 Glencoe
Avenue, Marina del Rey, California 90292, facsimile: (310) 881-6223, or at such
other address or number as the Founder shall have furnished to the Company and
the Holders in writing and shall be effective (a) upon delivery if sent by
facsimile (with a confirming receipt); (b) one day after delivery to an
overnight courier service; or (c) three (3) days after deposit with the United
States Post Office if mailed postage prepaid by regular mail or airmail.
9.3 This Agreement and the rights and obligations of the parties
hereunder shall inure to the benefit of, and be binding upon, their respective
successors, assigns and legal representatives.
9.4 In the event one or more of the provisions of this Agreement
should, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provisions of this Agreement, and this Agreement shall be construed as if
such invalid, illegal or unenforceable provision had never been contained
herein.
9.5 Any amendment, modification or waiver of any provision of this
Agreement shall be effective if in writing and approved by (i) the Company; (ii)
the holders of sixty percent (60%) of the shares of the Preferred Stock; and
(iii) the Founder.
9.6 Each Holder acknowledges that by the operation of Section 9.5
hereof the holders of the number of shares of the Preferred Stock specified
therein will have the right and power to diminish or eliminate all rights of
such Holders under this Agreement.
9.7 This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
the conflicts of laws principles thereof.
9.8 The Company agrees to use reasonable efforts to enforce the
term of this Agreement, to inform the Holders of any breach hereof and to assist
the Holders in the exercise of their rights and performance of their obligations
hereunder; provided, however, that nothing herein will require the Company to
initiate or join in any suit, action or proceeding.
-8-
<PAGE> 9
9.9 This Agreement may be executed in any number of counterparts,
each of which when so executed and delivered shall be deemed an original, and
all such counterparts together shall constitute one and same instrument.
9.10 The Company, the Founder and the Holders agree that this
Agreement sets forth the sole and entire agreement among the Company, the
Founder and the Holders on the subject matter hereof.
9.11 All shares held or acquired by affiliated entities or persons
shall be aggregated together for the purposes of Sections 1.2 and 2.2 of this
Agreement and may be allocated among affiliated entities in any manner such
affiliated entities desire.
-9-
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Third
Restated Shareholders Agreement as of the date first set forth above.
"COMPANY"
ICNT, INC.,
a California corporation
By /s/ JOHN W. COMBS
-----------------------------------------
John W. Combs
Chief Executive Officer
By /s/ CLIFFORD H. YOUNG
----------------------------------------
Clifford H. Young
President
-10-
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have executed this Third
Restated Shareholders Agreement as of the date first set forth above.
"FOUNDER"
/s/ CLIFFORD H. YOUNG
-----------------------------------
Clifford H. Young
-11-
<PAGE> 12
HOLDER'S COUNTERPART SIGNATURE PAGE
ICNT, INC.
THIRD RESTATED SHAREHOLDERS AGREEMENT
APRIL 13, 2000
Crosspoint Venture Partners 1999
By /s/ ROBERT HOFF
----------------------------------------
Robert Hoff, General Partner
Spectrum Equity Investors III, L.P.
By: Spectrum Equity Associates III, L.P.
Its General Partner
By: /s/ BRION B. APPLEGATE
-------------------------------------
Brion B. Applegate, General Partner
SEI III Entrepreneurs' Fund, L.P.
By: SEI III Entrepreneurs' LLC
Its General Partner
By: /s/ BRION B. APPLEGATE
-------------------------------------
Brion B. Applegate, Managing Member
Spectrum III Investment Managers' Fund, L.P.
By: /s/ BRION B. APPLEGATE
-------------------------------------
Brion B. Applegate, General Partner
-12-
<PAGE> 13
HOLDER'S COUNTERPART SIGNATURE PAGE
ICNT,INC.
THIRD RESTATED SHAREHOLDERS AGREEMENT
APRIL 13, 2000
/s/ DAVID CHUNG
- ---------------------------------------------
David Chung
/s/ NOEL RAHN
- ---------------------------------------------
Noel Rahn
/s/ PATRICK HEALY
- ---------------------------------------------
Patrick Healy
Big Basin Partners, L.P.
By: /s/ FRANK J. MARSHALL
-----------------------------------------
Frank J. Marshall, General Partner
idealab! Capital Partners II-A, LP
By its General Partner,
idealab! Capital Management II, LLC
By: /s/ WILLIAM ELKUS
----------------------------------------
William Elkus, Managing Member
idealab! Capital Partners II-B, LP
By its General Partner,
idealab! Capital Management II, LLC
By: /s/ WILLIAM ELKUS
---------------------------------------
William Elkus, Managing Member
-13-
<PAGE> 14
HOLDER'S COUNTERPART SIGNATURE PAGE
ICNT,INC.
THIRD RESTATED SHAREHOLDERS AGREEMENT
APRIL 13, 2000
idealab! Capital Principals Fund, LP
By its General Partner,
idealab! Capital Management II, LLC
By: /s/ WILLIAM ELKUS
------------------------------------
William Elkus, Managing Member
Winstar Communications
By: /s/ KENNETH J. ZINGHINI
------------------------------------------
Name: Kenneth J. Zinghini
Title: Senior Vice President
Cabletron Systems, Inc.
By: /s/ ERIC JAEGER
------------------------------------------
Name: Eric Jaeger
Title: Vice President
Efficient Networks, Inc.
By: /s/ KENNETH M. SIEGEL
------------------------------------------
Name: Kenneth M. Siegel
Title: Vice President
-14-
<PAGE> 15
HOLDER'S COUNTERPART SIGNATURE PAGE
ICNT,INC.
THIRD RESTATED SHAREHOLDERS AGREEMENT
APRIL 13, 2000
Polycom
By: /s/ Michael R. Kouhry
---------------------------------------
Name: Michael R. Kouhry
Title: Chief Financial Officer
BS-METALS B2B Acquisition Corp.
By: /s/ Richard L. Metrick
---------------------------------------
Title: Chief Executive Officer
------------------------------------
Morgan Stanley Dean Witter Equity Funding, Inc.
By: /s/ Thomas Clayton
---------------------------------------
Title: Vice President
-------------------------------------
-15-
<PAGE> 16
HOLDER'S COUNTERPART SIGNATURE PAGE
ICNT,INC.
THIRD RESTATED SHAREHOLDERS AGREEMENT
APRIL 13, 2000
Morgan Stanley Dean Witter
By: /s/ THOMAS CLAYTON
--------------------------------------------
Name: Thomas Clayton
Title: Vice President
/s/ MATTHEW MOCHARY
- -----------------------------------------------
Matthew Mochary
/s/ BERNARD PUCKETT
- -----------------------------------------------
Bernard Puckett
-16-
<PAGE> 1
EXHIBIT 10.11
August 2, 1999
Dear John,
I am pleased to offer you a position with InternetConnect, Inc. ("the Company")
as its President and Chief Executive Officer, reporting to the Board of
Directors. You will have responsibility for the management and direction of the
Company. In addition, you will be appointed to the Company's Board of Directors.
During the term of your employment, you shall devote your full time, skill and
attention to your duties and responsibilities and shall perform them
faithfully, diligently and competently. In addition, you shall comply with and
be bound by the operating policies, procedures and practices of the Company in
effect from time to time during your employment. You agree that, during the
term of your employment with the Company, you will not engage in any other
employment, occupation, consulting in other business activity directly related
to the business in which the Company is now involved or becomes involved during
the term of your employment, nor will you engage in any other activities that
conflict with your obligations to the Company. However, nothing shall preclude
you from continuing your existing activities as member of the board of
directors of Hello Direct and Digital Microwave.
Your initial base salary will be $20,833.33 per month. In addition, you will be
eligible to participate in the Company's incentive bonus program. You will work
with the Board to develop the incentive bonus program, including the goals and
objectives to be defined in connection therewith. As a Company employee you are
also eligible to receive medical insurance and other employee benefits
generally available to employees of the Company.
Also, in connection with your employment, the Company will grant you an option
for 3,000,000 shares of Common Stock. Your option shall be issued at an
exercise price per share equal to the value of the Common Stock as determined
by the Board at its first meeting ($0.15/share), and pursuant to the terms and
conditions contained in a stock option agreement which includes the following
terms (i) a forty-eight month vesting period with a six month cliff and (ii)
upon a change of control, these options will vest 50% of the unvested remaining
portion. In addition, if you are involuntarily terminated through job
elimination within six months after a change of control the remainder of your
unvested options will vest.
You should be aware, and acknowledge and agree, that your employment with the
Company is for no specified period of time and constitutes at will employment.
As a result, you are free to resign at any time, for any reason, or for no
reason. Similarly, the Company is free to conclude its employment relationship
with you at any time, for any reason, or for no reason. However, if the Company
elects to terminate its employment relationship with you for any reason other
than breach of your fiduciary duty to the Company or acts of gross negligence
or willful misconduct, you and the Company agree that you will sign a standard
form of settlement and release agreement, and that in consideration therefore
the Company will provide you a settlement of (i) twelve months of additional
vesting and (ii) twelve months' salary and benefits plus a pro rata calculation
of any bonus paid as a lump sum.
<PAGE> 2
You and ICNT agree with each other that any claim arising out of or relating to
the interpretation of this letter shall be resolved by binding arbitration. You
and ICNT agree to select an arbitor from JAMS (Judicial & Arbitration Mediation
Services). The prevailing party agrees to pay all legal expenses.
As an employee you will have access to certain Company confidential information
and you may, during the course of your employment, develop certain information
or inventions which will be the property of the company. To protect the
interests of the Company, you will need to sign the Company's standard
Confidentiality Agreement as a condition of your employment.
Your start date shall be no later than Monday, September 20, 1999. To indicate
your acceptance of the Company's offer, please sign and date this letter in the
space provided below and return it to me. This letter agreement sets forth the
terms of your employment with the Company, and supersedes any prior
representations or agreements, whether written or oral. This letter agreement
may not be modified or amended except by a written agreement, signed by a duly
authorized officer of the Company and by you.
On Behalf of the Board of Directors,
/s/ [Signature Illegible] (for Bob Hoff)
- -----------------------------------------
Robert A. Hoff
Agreed: /s/ JOHN W. COMBS
---------------------------------
John W. Combs
<PAGE> 1
EXHIBIT 10.12
June 14, 1999
Dear Cliff,
I am pleased to offer you a position with InternetConnect, Inc. ("the Company")
initially as its acting President and Chief Executive Officer, reporting to the
Board of Directors. In addition, you will be appointed to the Company's Board of
Directors as its Chairman. Upon closing of the sale and issuance of the
Company's Series A Preferred (the "Series A Preferred Financing"), the Company
will begin a search for a permanent President and Chief Executive Officer
("CEO"). After the CEO is hired, you will retain your position as Chairman of
the Board with duties consistent with such position and continue as a member of
the Company's senior management team reporting to the CEO.
During the term of your employment, you shall devote your full time, skill and
attention to your duties and responsibilities and shall perform them faithfully,
diligently and competently. In addition, you shall comply with and be bound by
the operating policies, procedures and practices of the Company in effect from
time to time during your employment. You agree that, during the term of your
employment with the Company, you will not engage in any other employment,
occupation, consulting or other business activity directly related to the
business in which the Company is now involved or becomes involved during the
term of your employment, nor will you engage in any other activities that
conflict with your obligations to the Company.
Your initial base salary will be $12,500.00 per month. In addition, you will be
eligible to participate in the Company's incentive bonus program, if any. The
Board of Directors plans to develop the incentive bonus program jointly with
the new CEO, including the goals and objectives to be defined in connection
therewith. As a Company employee you are also eligible to receive medical
insurance and other employee benefits generally available to employees of the
Company. Should you continue to be employed 12 and 24 months after the closing
of the Series A Preferred Financing your base salary will be increased by
$2,083.33 per month at your 12 month anniversary and again by $2,083.33 per
month at your 24 month anniversary.
Also, in connection with your employment, 50% of your current common stock
holdings will be subject to repurchase in the event your employment with the
Company is terminated for any reason whatsoever, except as set forth below.
This right will expire 1/36 per month over thirty-six months commencing on the
closing of the Series A Preferred Financing. If you are involuntarily
terminated after a change of control then this repurchase right will be deemed
to have expired.
You should be aware that your employment with the Company is for no specified
period and constitutes at will employment. As a result, you are free to resign
at any time, for any reason, or for no reason. Similarly, the Company is free
to conclude its employment relationship with you at any time with or without
cause. However, if the Company elects to terminate its employment relationship
with you for any reason other than (i) a material act of dishonesty made by you
in connection with your responsibilities as an employee, (ii) your conviction
of, or plea of nolo
<PAGE> 2
contendere to, a felony, (iii) your gross misconduct, which has a material
adverse effect on the Company, or (iv) your [consistent and willful] failure to
perform your employment duties (if such failure is not remedied within ninety
(90) days following receipt by you of a written notice from the Company
specifying the facts relating to the failure, you and the Company agree that
you will sign a standard form of settlement and release agreement, and that in
consideration therefore the Company will provide you a settlement of (i) the
vesting of your current stockholdings and (ii) salary and benefits due from the
date hereof through that period which is three years from the date hereof, less
salary and benefits already paid through the date of termination.
As an employee you will have access to certain Company confidential information
and you may, during the course of your employment, develop certain information
or inventions which will be the property of the company. To protect the
interests of the Company, you will need to sign the Company's standard
Confidentiality and Non-Compete agreement as a condition of your employment.
To indicate your acceptance of the Company's offer, please sign and date this
letter in the space provided below and return it to me. This letter agreement
sets forth the terms of your employment with the Company, and supercedes any
prior representations or agreements, whether written or oral. This letter
agreement may not be modified or amended except by a written agreement, signed
by a duly authorized officer of the Company and by you.
On Behalf of the Board of Directors,
/s/ ROBERT A. HOFF
- ------------------------------------
Robert A. Hoff
Agreed: /s/ CLIFF YOUNG
-----------------------------
Cliff Young
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated April 14, 2000 except for the subsequent events described in
Note 12, as to which the date is April 26, 2000, relating to the financial
statements of InternetConnect, Inc., which appears in such Registration
Statement. We also consent to the references to us under the headings "Experts"
and "Selected Financial Data" in such Registration Statement.
PricewaterhouseCoopers LLP
Woodland Hills, California
April 26, 2000
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
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<RECEIVABLES> 455,000
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