<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 2000
--------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to __________
Commission file number: 025582
GRACE DEVELOPMENT, INC.
(Exact Name of Registrant as Specified in its Charter)
Colorado 84-1110469
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1690 Chantilly Drive (678) 222-3030
Atlanta, Georgia 30324 (Registrant's Telephone Number
(address of Principal Executive Offices) Including Area Code)
(Zip Code)
Not Applicable
(Former Name, Former Address and Former
Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No ___
---
As of April 30, 2000, there were 87,283,457 shares of the registrant's
common stock, no par value, outstanding.
<PAGE>
GRACE DEVELOPMENT, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I.............................................................................................. 2
ITEM 1. FINANCIAL STATEMENTS................................................................... 2
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.. 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................. 26
PART II............................................................................................. 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................................... 27
SIGNATURES.......................................................................................... 28
EXHIBIT INDEX....................................................................................... E-1
</TABLE>
1
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
During the first quarter of 2000, the Company completed the following
significant acquisitions: (i) the acquisition of WebWizard, Inc. on January 31,
2000; (ii) the acquisition of PVTel, Inc. on February 24, 2000; and (iii)
the acquisition of Alpha Computer Services, Inc. on March 31, 2000. The
financial position and results of operations of each of these entities is
required to be incorported into the Company's consolidated financial statements
for the first quarter of 2000. This consolidation proved to be exceptionally
problematic and time consuming due to the fact that none of these entities had
been subject to an audit by independent auditors prior to their acquisition by
the Company and the fact that each of these entities uses a different automated
accounting system. For these reasons, prior to the deadline for filing this Form
10-Q, the Company's independent public accountant was unable to complete its
review of Consolidated Financial Statements included herein, as required by rule
10-01(d) of Regulation S-X promulgated under the Securities Exchange Act of
1934, as amended. The Company will file an amendment to this Form 10-Q as soon
as practicable after its independent public accountant has completed the
required review.
GRACE DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------- -------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 100,063 $ 102,481
Restricted cash 50,000 -
Investment in certificates of deposit 3,700,000 3,700,000
Accounts receivable, net of allowance for doubtful accounts of $88,756 at 698,609 56,458
March 31, 2000, and $10,500 at December 31, 1999
Inventory 68,126 -
Prepaid expenses and other assets 136,711 156,599
Officer advances 98,633 25,012
------------- -------------
Total current assets 4,852,142 4,040,550
Property and equipment
Leasehold improvements 116,389 45,468
Furniture and fixtures 127,672 84,949
Equipment and software 7,686,338 2,530,895
------------- -------------
7,930,399 2,661,312
Less: Accumulated depreciation and amortization (543,178) (263,423)
------------- -------------
7,387,221 2,397,889
Other assets:
Goodwill and other intangibles, net of amortization of $169,326 at 5,786,046 600,547
March 31, 2000, and $75,931 at December 31, 1999
Notes receivable - related party 450,000 434,500
Advances to acquisition candidates - 50,000
Loan origination fees 100,820 -
Other non-current assets 148,722 75,329
------------- -------------
Total assets $18,724,952 $ 7,598,815
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable $ 2,648,729 $ 360,532
Deferred revenues 183,339 141,930
Accrued compensation - officers and directors 448,580 676,666
Accrued liabilities 816,874 218,182
Lines of credit 4,382,172 3,074,339
Senior note payable 630,000 -
Current portion of obligations under capital lease 1,631,941 735,170
Current portion of long-term debt 214,319 -
------------- -------------
Total current liabilities 10,955,955 5,206,819
Obligations under capital leases, net of current portion 4,418,779 1,237,634
Long term debt, net of current portion 250,015 -
------------- -------------
15,624,749 6,444,453
------------- -------------
Stockholders' equity
Grace Common Stock, no par value; 800,000,000 8,970,517 4,270,195
shares authorized; 84,133,457 shares issued and outstanding
at March 31, 2000; 73,871,895 shares issued and outstanding
at December 31, 1999.
Accumulated deficit (5,870,315) (3,115,833)
------------- -------------
Total stockholders' equity 3,100,202 1,154,362
------------- -------------
Total liabilities and stockholders' equity $18,724,952 $ 7,598,815
============= =============
</TABLE>
See Notes to the Consolidated Financial Statements
2
<PAGE>
GRACE DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Predecessor
company
Three months ended Three months ended
March 31, March 31,
2000 1999
------------------- ------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $ 626,061 $ 6,965
Operating expenses
Cost of services 516,119 -
Sales and marketing expenses 489,258 -
General and administrative expenses 1,821,745 27,852
Depreciation and amortization expenses 372,859 1,093
------------------- ------------------
Total operating expenses 3,199,981 28,945
------------------- ------------------
Loss from operations (2,573,921) (21,980)
------------------- ------------------
Other income (expense)
Interest income 42,540 -
Interest expense (223,101) -
------------------- ------------------
Total other income (expense) (180,561) -
------------------- ------------------
Loss before income taxes (2,754,482) (21,980)
Income tax expense - -
------------------ ------------------
Net loss $ (2,754,482) $ (21,980)
================== ==================
Basic and diluted net loss per common share $ (0.05) $ (0.01)
================== ==================
Weighted average common shares outstanding $ 59,460,562 $2,154,792
================== ==================
</TABLE>
See Notes to the Consolidated Financial Statements
3
<PAGE>
GRACE DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Predecessor
company
Three months ended Three months ended
March 31, March 31,
2000 1999
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities
Net loss $(2,754,482) $ (21,980)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation 279,755 1,093
Amortization 93,104 -
Non-cash stock compensation 672,500 -
Amortization of loan origination fees 76,273 -
Changes in assets and liabilities from operations
Accounts receivable 162,833 -
Prepaid expenses and other assets 35,676 -
Officer advances (73,621) 12,912
Other non-current assets 179,999 -
Accounts payable (66,817) 4,976
Deferred revenue (39,272) -
Accrued compensation - officers and directors (288,086) -
Accrued liabilities 165,675 -
------------------ --------------
Net cash used in operating activities (1,882,129) (2,999)
------------------ --------------
Cash flows from investing activities
Acquisition of property and equipment (203,573) -
Issuance of notes receivable (15,500) -
Acquisition of business units (see below) (284,438) -
------------------ --------------
Net cash used in investing activities (503,511) -
------------------ --------------
Cash flows from financing activities
Net proceeds from lines of credit 1,307,833 -
Proceeds from senior note payable 1,400,000 -
Loan origination fees (68,813) -
Repayment on obligations under capital leases (243,297) -
------------------ --------------
Net cash provided by financing activities 2,383,223 -
------------------ --------------
Decrease in cash and cash equivalents (2,418) (2,999)
Cash and cash equivalents at beginning of period 102,481 3,719
------------------ --------------
Cash and cash equivalents at end of period $ 100,063 $ 720
================== ==============
Supplemental disclosure of cash flow information
Cash paid for interest $ 223,101 -
================== ==============
</TABLE>
Supplemental activities of non-cash transactions:
During the three months ended March 31, 2000, the Company:
(i) acquired equipment under several capital lease obligations
totaling $3,566,439; and
(ii) issued stock as compensation for services rendered with a
fair market value on the date issued of
$660,000.
<TABLE>
<CAPTION>
Alpha Computer
Acquisition of business units: WebWizard, Inc. P.V.Tel., Inc. Services, Inc. Total
- --------------------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Goodwill $ 523,567 $ 2,228,497 $ 2,275,663 $ 5,027,727
Assets acquired 589,997 1,080,155 645,546 2,315,698
Liabilities assumed (408,542) (2,307,590) 1,371,209 4,087,341
Stock issued (705,022) (967,500) (1,550,000) 3,222,522
----------------- ---------------- ----------------- -----------------
Net cash $ 0 $ (33,562) $ 0 $ (33,562)
================= ================ ================= =================
</TABLE>
See Notes to the Consolidated Financial Statements
4
<PAGE>
GRACE DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999
AND THE THREE MONTHS ENDING MARCH 31, 2000
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Accumulated
----------------------------
Shares Amount Capital Deficit Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Issuance of New Millennium common stock - $ - $ 32,500 $ - $ 32,500
Net loss for the period ended
December 31, 1998 (20,741) (20,741)
------------------------------------------------------------------------
Predecessor balance at December 31, 1998 - $ - $ 32,500 $ (20,741) $ 11,759
------------------------------------------------------------------------
Shares issued in repayment of
shareholder debt - $ - $ 31,000 $ - $ 31,000
Shares issued as compensation
to New Millennium shareholders - - 174,375 - 174,375
Shares issued for Avana acquisition - - 44,021 - 44,021
Private placement of New
Millennium shares - - 777,600 - 777,600
Private placement of New
Millennium shares - - 3,459,319 - 3,459,319
Warrants exercised - - 147,000 - 147,000
Warrant cancellation fees - - (395,620) - (395,620)
Assumed purchase of net assets of
Grace at Predecessor's cost 66,246,933 4,270,195 (4,270,195) - -
Reverse acquisition of Grace
by New Millennium 7,599,962 (10,000) - - (10,000)
Shares issued for NWGA acquisition 25,000 10,000 - - 10,000
Net loss for the twelve months ended
December 31, 1999 - - - (3,095,092) (3,095,092)
------------------------------------------------------------------------
Balance at December 31, 1999 73,871,895 $4,270,195 $ - $(3,115,833) $ 1,154,362
------------------------------------------------------------------------
Shares canceled (500,992) - - - -
Shares issued for WebWizard acquisition 1,762,554 705,022 - - 705,022
Shares issued as compensation 1,650,000 660,000 - - 660,000
Shares issued for PVTel acquisition 2,150,000 967,500 - - 967,500
Shares issued in the Third Private Placement 2,100,000 817,800 - - 817,800
Shares issued for Alpha Computer acquisition 3,100,000 1,550,000 - - 1,550,000
Net loss for the three months ended - - - (2,754,482) (2,754,482)
March 31, 2000
------------------------------------------------------------------------
Balance at March 31, 2000 84,133,457 $ 8,970,517 $ - $(5,870,315) $ 3,100,202
========================================================================
</TABLE>
See Notes to the Consolidated Financial Statements
5
<PAGE>
GRACE DEVELOPMENT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of the Company and Basis of Presentation:
Grace Development, Inc., a Colorado corporation doing business as Avana
Communications ("Grace" or the "Company"), is an integrated communications
provider ("ICP") operating as a telecommunications services provider and an
Internet services provider ("ISP") to business and residential customers located
primarily in the Southeastern United States. Telecommunication services
currently offered are local and long distance, frame relay, ATM (Asynchronous
Transfer Mode), data private lines and calling cards.
The ISP operation focuses on serving individuals and small businesses. The
Company's service offerings include dial-up Internet access and business
services which are offered in various price and usage plans designed to meet the
needs of our subscribers. Business services include web hosting, which entails
maintaining a customer's web site; high speed, dedicated Internet access; web
page design; domain name registration and customer web server co-location.
Principles of consolidation and basis of financial reporting:
The consolidated financial statements include the accounts of Grace and
its wholly owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated. The financial statements of the predecessor
are the accounts of New Millennium Multimedia, Inc., a Georgia corporation ("New
Millennium"). New Millennium was formed on October 6, 1998, and merged with and
into a subsidiary of Grace on September 28, 1999 (the "Grace Merger"). Although,
as a result of the Grace Merger, New Millennium became a wholly owned subsidiary
of the Company, the Grace Merger was accounted for as an acquisition of Grace by
New Millennium because, following the transaction, the former shareholders of
New Millennium owned a substantial majority of the outstanding common stock, no
par value, of the Company ("Common Stock"). Accordingly, the historical
Consolidated Financial Statements of the Company are the financial statements of
New Millennium adjusted for the assumed acquisition of the net assets of Grace
in exchange for the issuance of the Company's Common Stock. The Grace Merger was
accounted for as a purchase and, accordingly, the net assets of New Millennium
were accounted for at their historical cost, and the net assets of Grace were
accounted for at their fair value as of September 28, 1999. No goodwill was
recorded as a result of the Grace Merger.
The predecessor acquired Avana Communications Corporation, a Georgia
corporation ("Avana"), on May 5, 1999. The Company acquired WebWizard, Inc., a
Delaware corporation ("WebWizard"), on January 31, 2000; P.V. Tel., Inc., a
South Carolina corporation ("PVTel"), on February 24, 2000; and Alpha Computer
Services, Inc., a Florida corporation ("Alpha Computer"), on March 31, 2000.
Each of these acquisitions was accounted for as a purchase,
6
<PAGE>
and the results of operations of each acquired entity has been included in the
Company's consolidated statements of operations from the date of their
respective acquisitions.
The accompanying unaudited consolidated financial statements reflect, in the
opinion of management, all the adjustments necessary to achieve a fair
presentation of the Company's financial position and results for the interim
periods presented. These consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999, as
amended.
Cash and Cash Equivalents:
Cash and cash equivalents consist of cash and other highly liquid debt
instruments with an original maturity of three months or less.
Inventory:
Inventory is carried at the lower of cost or fair market value. Inventory is
charged to operations as products are sold on a first-in, first-out (FIFO)
method.
Property and Equipment:
Property and equipment is carried at cost. Depreciation is computed using the
straight-line method based on estimated useful lives of the assets, generally
two to ten years. Asset classifications and estimated useful lives are as
follows:
Leasehold Improvements Life of lease
Furniture & Fixtures 5 - 10 years
Vehicles 2 - 3 years
Equipment & Software 2 - 7 years
Goodwill:
The Company amortizes goodwill on a straight-line basis over a period of five
years.
Revenue Recognition:
Internet Services. The Company recognizes revenues for Internet services as they
are earned. Some customers pay an annual fee for Internet services and the
revenues are recognized on a straight-line basis over the service period.
Deferred revenue represents the portion of unearned Internet service fees.
Telecommunications Services. The Company recognizes revenue for
telecommunications services based upon minutes of traffic processed and
contracted fees.
7
<PAGE>
Software Products. The Company recognizes revenues from software products in
accordance with the American Institute of Certified Public Accountants' (AICPA)
Statement of Position 97-2, "Software Revenue Recognition," as follows:
License revenue Revenue from the licensing of software is
recognized after shipment of the product
and fulfillment of acceptance terms,
provided no significant obligations remain
and collection of the resulting receivable
is deemed probable.
Installation, hosting and education When services are provided.
Support contract Ratably over the life of the contract from
the effective date.
Software Development Costs:
The Company expenses research and development costs as incurred. Statement of
Financial Accounting Standards No. 86 "Accounting for the costs of computer
software to be sold, leased or otherwise marketed" does not materially affect
the Company.
Income Taxes:
Income taxes are based on the loss for financial reporting purposes and reflect
a current asset for the estimated taxes recoverable in the current year tax
return and changes in deferred taxes. Deferred tax liabilities and assets are
recognized for the estimated tax effects of temporary differences between
financial reporting and taxable income (loss) for the loss carry-forwards based
on currently enacted tax laws and rates. A valuation allowance is used to reduce
deferred tax assets to the amount that is more likely than not to be realized.
Use of Estimates:
The preparation of financial statements in conformity with Generally Accepted
Accounting Principles ("GAAP") requires management to make estimates and
assumptions that affect the reported amounts of certain assets, liabilities, and
disclosures, including the allowance for doubtful accounts, useful lives and
recoverability of long-term assets. Actual amounts could differ from those
estimates. Any adjustments applied to estimates are recognized in the year in
which such adjustments are determined.
2. ACQUISITIONS:
Web Wizard Acquisition:
On January 31, 2000, a wholly owned subsidiary of Grace completed its
acquisition of WebWizard. The acquisition was accounted for as a purchase
pursuant to Accounting Principles
8
<PAGE>
Board Statement No. 16, "Business Combinations" ("APB 16"), and the results of
WebWizard's operations have been included in the Company's 2000 consolidated
statement of operations from the date of acquisition. Total consideration for
the acquisition was the issuance of 1,287,554 shares of Grace Common Stock.
257,510 of these shares will be held in escrow until June 30, 2001, to benefit
Grace in the event of any indemnifiable claims arising out of the acquisition of
WebWizard.
As a result of the acquisition of WebWizard, the Company recorded goodwill of
approximately $524,000. Goodwill is amortized on a straight-line basis over five
years.
Additionally, Grace issued 475,000 shares to former shareholders of WebWizard to
extinguish certain pre-acquisition debt owed by WebWizard to such shareholders.
PVTel Acquisition:
On February 24, 2000, a wholly owned subsidiary of Grace completed its
acquisition of PVTel. The acquisition was accounted for as a purchase pursuant
to APB 16, and PVTel's results of operations have been included in the Company's
2000 consolidated statement of operations from the date of acquisition. Total
consideration for the acquisition was the issuance of 2,150,000 shares of Grace
Common Stock. 750,000 of these shares will be held in escrow until July 31,
2001, to benefit Grace in the event of any indemnifiable claims arising out of
the acquisition of PVTel.
Prior to the consummation of the PVTel acquisition, the Company advanced to
PVTel approximately $434,500 for working capital purposes (the "Working Capital
Advances"), which advances were evidenced by a promissory note made by PVTel to
the Company. At the closing of the PVTel acquisition, the promissory note
evidencing the Working Capital Advances was canceled and two shareholders of
PVTel delivered to the Company promissory notes, including accrued interest,
totaling $450,000, in substitution thereof. The notes bear interest at the rate
of 9% per annum payable on or before February 24, 2001. The indebtedness
represented by these substituted promissory notes is secured by 150,000 shares
of Grace Common Stock owned by the two former shareholders of PVTel.
Repayment of the notes is contingent upon the noteholders being afforded the
right to register the shares of Common Stock they received in the PVTel
acquisition in a subsequent registration by the Company during the term of the
notes pursuant to a registration rights agreement executed at the closing of the
PVTel acquisition. In the event that the noteholders are not afforded the
opportunity to register their stock within the prescribed period, the notes and
all obligations under the notes will be canceled and all security interests in
the Common Stock held by the noteholders will be released.
The Company recorded goodwill of approximately $2,228,000 as a result of this
transaction. Goodwill is amortized on a straight-line basis over five years.
9
<PAGE>
Alpha Computer Acquisition:
On March 31, 2000, an indirect wholly owned subsidiary of the Company merged
with and into Alpha Computer (the "Alpha Computer Acquisition"). The Alpha
Computer Acquisition was accounted for as a purchase pursuant to APB 16 and, as
a result, Alpha Computer's assets have been included in the Company's 2000
consolidated statements as of the date of acquisition. Total consideration for
the acquisition was the issuance of 3,100,000 shares of Grace Common Stock.
620,000 of these shares will be held in escrow until March 30, 2001, to benefit
Grace in the event of any indemnifiable claims arising out of the Alpha Computer
Acquisition.
The Company recorded goodwill of approximately $2,276,000 as a result of this
transaction. Goodwill is amortized on a straight-line basis over five years.
Pro forma Financial Statements (unaudited):
The following unaudited pro-forma statement of operations of Grace gives
retroactive effect to the acquisitions of Web Wizard, PVTel and Alpha Computer,
as if such acquisitions had occurred on January 1, 2000 and 1999. This statement
was prepared by management based on historical financial information and may not
be indicative of actual results of operations that would have been achieved had
the transactions taken place at the date indicated.
As Reported Adjustments Pro Forma
----------- ----------- ------------
For the quarter ended March 31, 2000:
Revenues $ 626,061 $ 1,333,261 $ 1,959,322
Net Loss $(2,754,482) $ (76,939) $(2,831,421)
Earnings per share $ (0.05) $ (0.05)
For the quarter ended March 31, 2000:
Revenues $ 6,965 $ 1,633,931 $ 1,640,896
Net Loss $ (21,980) $ (303,747) $ (325,727)
Earnings per share $ (0.01) $ (0.15)
3. INVESTMENTS IN CERTIFICATES OF DEPOSIT:
The Company accounts for its investments under Financial Accounting Standards
Board ("FASB") No. 115 "Accounting for Certain Investments in Debt and Equity
Securities." As of March 31, 2000, the Company's investments consisted of the
following:
<TABLE>
<CAPTION>
Maturity Date Interest Rate Amount
-------------------------- ----------------- --------------------
<S> <C> <C> <C>
Certificate of Deposit September 24, 2000 4.689 % $ 2,000,000
Certificate of Deposit June 15, 2000 4.689 % 1,000,000
Certificate of Deposit July 29, 2000 5.250 % 700,000
---------------
$ 3,700,000
===============
</TABLE>
These certificates of deposit are pledged against lines of credit (see Note 7).
4. ACCOUNTS RECEIVABLE:
The Company does not have a secured interest in its accounts receivable, however
it does have legal recourse for defaulted amounts. The maximum accounting loss
from the credit risk associated with accounts receivable is the face amount of
the receivable recorded, less any allowance for doubtful accounts.
ACCOUNTS RECEIVABLE SOLD WITH RECOURSE:
In the normal course of business, the Company discounts or sells accounts
receivable with recourse to a factor. As of March 31, 2000 there were
approximately $165,000 of such receivables. The factor reserves an amount equal
to 35% of each receivable account sold. As each account is paid in full, the
reserve associated with the paid account will be returned to the Company. The
fee for factoring the receivable is 3% of the face amount of each invoice
factored. After 90 days, if the receivable is not collected, the factor at its
discretion may require the Company to repurchase the receivable for 68% of the
net sale of the invoice.
5. NOTES RECEIVABLE-RELATED PARTY:
At the closing of the PVTel acquisition (see Note 2), two shareholders of PVTel
delivered to the Company promissory notes totaling $450,000, in substitution of
the Working Capital Advances together with accrued interest. The notes bear
interest at the rate of 9% per annum payable on or before February 24, 2001.
10
<PAGE>
The indebtedness represented by these substituted promissory notes is secured by
150,000 shares of Grace Common Stock owned by the two former shareholders of
PVTel. Repayment of the notes is contingent upon the noteholders being afforded
the right to register the shares of Common Stock they received in the PVTel
acquisition in a subsequent registration by the Company during the term of the
notes pursuant to a registration rights agreement executed at the closing of the
PVTel acquisition. In the event that the noteholders are not afforded the
opportunity to register their stock within the prescribed period, the notes and
all obligations under the notes will be canceled and all security interests in
the shares of Common Stock held by the noteholders will be released.
6. COMMITMENTS AND CONTINGENCIES:
Concentrations of Credit Risk:
The Company maintains the majority of its cash deposits and investments at five
financial depository institutions. The amount of the accounting loss due to
credit risk the Company would incur if the financial depository institutions
failed would be the cash deposits in excess of the $100,000 amount per depositor
that is federally insured. The amount at risk totaled $3,500,000 at March 31,
2000.
Operating Leases:
The Company leases office space and equipment under several operating lease
agreements. Rent expense for the office space and equipment totaled $79,650 and
$ 0, for the quarters ended March 31, 2000 and 1999, respectively. At March 31,
2000, future minimum lease payments under non-cancelable leases having remaining
terms in excess of one year were as follows:
2001 $ 295,394
2002 $ 276,494
2003 $ 267,288
2004 $ 246,458
2005 $ 81,488
--------------
Total $ 1,167,122
==============
Obligations Under Capital Leases:
The Company leases equipment under various capital lease obligations. As of
March 31, 2000, $6,455,172 of equipment is included in the property and
equipment section of the balance sheet. The capitalized cost and accumulated
amortization at March 31, 2000, were as follows:
11
<PAGE>
-----------------
Total equipment placed in service $ 6,455,172
Accumulated amortization (402,892)
-----------------
Book value $ 6,052,280
=================
The future minimum lease payments under the capital leases at March 31, 2000,
were as follows:
2001 $ 2,307,695
2002 3,144,030
2003 1,956,140
2004 115,809
-----------------
7,523,674
Less amount representing interest (1,472,954)
-----------------
6,050,720
Less current portion (1,631,941)
-----------------
$ 4,418,779
=================
7. LINES OF CREDIT:
The Company has a line of credit with BankTennessee to provide working capital
of up to $650,000. The interest rate is 7.250% per annum payable monthly. The
balance on the line of credit was $649,900 on March 31, 2000. The line of credit
is secured by a Certificate of Deposit in the amount of $700,000, and matures on
July 29, 2000.
The Company has a line of credit with Regions Bank to provide working capital of
up to $2,000,000. The interest rate is 5.998% per annum payable monthly. The
balance on the line of credit was $1,990,000 on March 31, 2000. The line of
credit is secured by a Certificate of Deposit in the amount of $2,000,000, and
matures on September 24, 2000.
The Company has a second line of credit with Regions Bank to provide working
capital of up to $1,000,000. The interest rate is 6.198% per annum payable
monthly. The balance on the line of credit was $768,000 on March 31, 2000. The
line of credit is secured by a Certificate of Deposit in the amount of
$1,000,000, and matures on June 15, 2000.
12
<PAGE>
On January 21, 2000, the Company obtained an additional $1,000,000 line of
credit from Regions Bank. The line of credit bears interest at a variable rate
(initially 9.0% per annum), payable monthly. The balance on the line of credit
was $974,000 on March 31, 2000. The line of credit matures on March 24, 2001,
and is secured by 500,000 shares of the Company's Common Stock that are owned by
Signal Compression, Inc. ("Signal"). The line of credit is personally guaranteed
by Richard S. Granville, III, a holder of more than 10% of the outstanding
Common Stock and a former Chief Executive Officer and director of the Company.
As of May 22, 2000, pursuant to an agreement with Mr. Granville to maintain his
guarantee supporting the line of credit, the line of credit had been paid down
to $10,000. Draws under the line of credit are limited to 30% of the value of
the Common Stock pledged by Signal to secure the line of credit (based on the
"bid price" of the Common Stock). As of May 19, 2000, draws on the line of
credit were therefore limited to $450,000. Additionally, draws under the line
are subject to the financial condition of the guarantor. The draw amount could
be reinstated in full if additional collateral, satisfactory to Regions Bank, is
pledged by the Company to secure the repayment of the credit line.
8. LONG TERM DEBT:
The Company has installment notes with financial institutions and corporations
with monthly payments of principle and interest ranging from $336 to $14,286.
The notes bear interest ranging from 3.9% to 12% and mature between April 2001
and January 2004. The notes are secured by property and equipment, inventory,
accounts receivable, and maintenance contracts. The balance of the notes at
March 31, 2000 was $464,334.
Maturities of long-term debt for the next five years are as follows:
March 31, 2001 $ 214,319
2002 193,273
2003 48,852
2004 7,890
-----------
464,334
Less Current Portion (214,319)
-----------
$ 250,015
===========
9. SENIOR NOTE PAYABLE:
The Company had a senior note payable with a face value of $1,400,000 that was
issued with the Third Private Placement (see Note 12). The note was recorded at
a discount and the balance as of March 31, 2000 was $630,000. The note bore
interest at a rate of 12% per annum, payable quarterly. On April 14, 2000,
$1,420,000 of the proceeds from the Fourth Private Placement (see Note 16) was
used to repay all of the outstanding principle and interest on this note. As a
result of the early payoff, the Company will incur a charge to operations of
$770,000 in the second quarter of 2000 representing the difference between the
face value of the note and the discount recorded in the financial statements.
10. PREFERRED STOCK:
13
<PAGE>
The Company is authorized to issue 10,000,000 shares of preferred stock with no
par value. The preferred stock may be issued, by the Board of Directors, in one
or more series. The Board of Directors may determine the terms of each series
including preferences, rights and restrictions, by resolution upon the
establishment of such series. No shares of preferred stock have been issued.
11. SEGMENT REPORTING:
The Company operates two business segments: Telecommunications sales and
services and Internet services including dial-up accounts, web hosting and web
design services.
Three Months Ended
------------------------------------
March 31, 2000 March 31, 1999
--------------- --------------
Revenues:
Telecommunications $ 379,022 $ 6,956
Internet services 247,039 -
------------- -------------
$ 626,061 $ 6.956
Profit (Loss)
Telecommunications $ (2,319,465) $ (21,980)
Internet services $ (435,017) -
------------- -------------
$ (2,754,482) $ (21,980)
Depreciation and Amortization:
Telecommunications $ 204,402 $ 1,093
Internet Services $ 168,457 $ -
------------ -------------
$ 372,859 $ 1,093
Identifiable Net Assets:
Telecommunications $ 4,323,659 $ 11,518
Internet Services $ 3,063,562 -
------------ -------------
$ 7,387,221 $ 11,518
14
<PAGE>
12. PRIVATE PLACEMENTS:
Third Private Placement
On March 1, 2000, the Company entered into a private placement agreement with
C&S Private Equity Fund, LP ("C&S)" (the "Third Private Placement"), pursuant to
which the Company issued to C&S 14 units ("C&S Units") for $100,000 per C&S
Unit. Each C&S Unit consisted of (i) a $100,000 convertible senior secured note
of the Company and (ii) 150,000 shares of the Company's Common Stock. An
aggregate of 2,100,000 shares of the Company's Common Stock were issued along
with a convertible senior secured note payable to C&S in the principal amount of
$1,400,000. The net proceeds of $1,363,000 were used for the purchase and
working capital requirements of WebWizard and PVTel. The note was due March 2,
2001, and bore interest at a rate of 12% per year, payable quarterly. On April
14, 2000, $1,420,000 of the net proceeds from the Fourth Private Placement (as
described in Note 16) were used to repay all of the outstanding principal and
interest on the note issued in the Third Private Placement.
Additionally, the private placement agreement governing the Third Private
Placement provided that, if the Company acquired Alpha Computer, C&S would have
the option to purchase, and the Company would have the option to sell, within 14
days after the Company's acquisition of Alpha Computer, up to seven additional
C&S Units. On March 30, 2000, the Company acquired Alpha Computer. Neither the
Company nor C&S exercised its option with respect to the additional seven C&S
Units.
The 2,100,000 shares of the Company's Common Stock issued in the Third Private
Placement are "restricted securities" under Rule 144 promulgated under the
Securities Act. Such securities may not be sold in the absence of registration
under the Securities Act unless an exemption from registration is available,
including the exemptions contained in Rule 144.
13. STOCK COMPENSATION:
On February 16, 2000, pursuant to a separation agreement, the Company awarded
Louis Friedman 650,000 shares of the Company's Common Stock for prior services
rendered during 1999. The shares were valued at $260,000 and a non-cash expense
was recorded in the statement of operations for the year ended December 31,
1999. Additionally, the Company agreed to pay up to $150,000 to cover Mr.
Friedman's income tax liability associated with the stock grant.
On February 16, 2000, pursuant to an amended and restated employment agreement,
the Company awarded the President of the Company 1,000,000 shares of the
Company's Common Stock for prior services rendered during 1999 and 2000. The
shares were valued at $400,000 and a non-cash expense was recorded in the
statement of operations for the year ended December 31, 1999 of $266,666 and in
the statement of operations for the quarter ended March 31, 2000 of $133,334.
Additionally, the Company agreed to accept a promissory note in the amount of
$141,800 from the President of the Company to cover the income taxes associated
with the stock grant. If the President of the Company has not been terminated
for cause or voluntarily resigned without good cause as of December 31, 2001
then the Company will forgive 50% of the principle and accrued interest then
payable under such note.
14. RELATED PARTY TRANSACTIONS:
Richard S. Granville (a holder of more than 10% of the outstanding Common
Stock and a former Chief Executive Officer and director of the Company) has
personally guaranteed one of the Company's $1,000,000 lines of credit with
Regions Bank (see Note 7). On April 19, 2000, the Company paid $150,000 in
promotional fees to Team Warlock Racing, an affiliate of Mr. Granville.
15
<PAGE>
15. STOCK OPTIONS:
The Company has not yet adopted a stock option plan but has awarded stock
options to certain directors, officers, and employees. The options vest in
varying percentages, over varying time frames ranging from "date of grant" up to
4 years. The options, after vesting, will expire in varying periods ranging from
120 days up to 10 years. At March 31, 2000, 1,638,500 options were vested, with
none being exercised or expired.
Number of Options Weighted Average
Outstanding Exercise Price Outstanding
December 31, 1998 0 n/a
Awarded 1,592,540 $ 1.00
Exercised 0
---------
December 31, 1999 1,592,540 $ 1.00
---------
Awarded 7,987,480 $ .68
Exercised 0
---------
March 31, 2000 9,580,020 $ .73
========= ======
The Company follows Accounting Principles Board Opinion 25, "Accounting for
Stock Issued to Employees," to account for stock options and employee stock
purchase plans. Accordingly, employee stock options are valued at the difference
between the exercise price and the estimated fair market value of the underlying
shares on the date of grant, and recorded as deferred compensation, which is
then amortized over the life of the options.
An alternative method of accounting for stock options is SFAS 123, "Accounting
for Stock-Based Compensation." Under SFAS 123, employee stock options are valued
at the grant date using the Black-Scholes valuation model, and compensation cost
is recognized ratably over the vesting period. Had compensation cost for the
Company's stock options and employee stock purchase plans been determined based
on the Black-Scholes model at the various grant dates, pro forma statements of
operations for the quarter ended March 31, 2000, would have been as follows:
As reported Adjustments Pro Forma
----------- ----------- ---------
Net Loss $ (2,754,482) $ (273,356) $(3,027,838)
Earnings per share (.05) - (.05)
The fair value of cash options on each date of grant is determined based on the
following assumptions:
16
<PAGE>
Risk free interest rate: 6.25%
Life: 4 - 10 years
Dividends: none
Volatility: 100% - 124%
Weighted average grant debt fair value: $0.40
16. SUBSEQUENT EVENTS:
Fourth Private Placement
On April 14, 2000, the Company entered into a Securities Purchase
Agreement (the "Fourth Private Placement") with Greenlight Capital, L.P. and
certain affiliates of Greenlight (the "Purchasers") pursuant to which the
Company agreed to issue for an aggregate purchase price of $6.5 million, (a)
3,000,000 shares of Common Stock, (b) the Company's 12% senior secured
convertible promissory notes with an original principal amount of $6,500,000
(the "Greenlight Notes") convertible into shares of Common Stock at a conversion
price of $1.00 per share, (c) stock purchase warrants (the "Greenlight
Warrants") to purchase 6,500,000 shares of Common Stock at an exercise price of
$1.00 per share, and (d)(1) options, exercisable on August 14, 2000, and
December 14, 2000, to purchase for an aggregate purchase price of $4.5 million
on each date, (A) 1,575,000 shares of Common Stock, (B) Notes with an original
principal amount of $2,925,000 convertible into shares of Common Stock at a
conversion price of $1.00 per share, and (C) Warrants to purchase 2,925,000
shares of Common Stock at an exercise price of $1.00 per share, and (2) an
option, exercisable on April 14, 2001, to purchase for an aggregate purchase
price of $4.5 million, (A) 1,050,000 shares of Common Stock, (B) Notes with an
original principal amount of $2,925,000 convertible into shares of Common Stock
at a conversion price of $1.50 per share, and (C) Warrants to purchase 1,950,000
shares of Common Stock at an exercise price of $1.50 per share (the "Greenlight
Options"). The Greenlight Note is guaranteed by all of the subsidiaries of the
Company and is secured by all of the issued and outstanding capital stock of all
of the Company's subsidiaries. $1,420,000 of the net proceeds of the Fourth
Private Placement were used to repay all of the outstanding principal and
interest on the note issued in the Third Private Placement, and the remainder of
the net proceeds will be used for the Company's working capital requirements.
All of the shares of Common Stock issued pursuant to the Fourth Private
Placement, including any shares issued pursuant to the Greenlight Note, the
Greenlight Warrant and the Greenlight Options, are "restricted securities" under
Rule 144 promulgated under the Securities Act. Such securities may not be sold
in the absence of registration under the Securities Act unless an exemption from
registration is available, including the exemptions contained in Rule 144.
Pursuant to a registration rights agreement executed at the closing of the
Fourth Private Placement, all of the shares of Common Stock issued pursuant to
the Fourth Private Placement, including any shares issued pursuant to the
Greenlight Note, the Greenlight Warrant and the Greenlight Options, were granted
"demand" and "piggyback" registration rights. Subject to certain conditions set
forth in the registration rights agreement, the demand registration rights
require that, 30 days following the date on which the Company becomes eligible
to use Form S-3, the Company use its reasonable best efforts to register the
applicable shares as soon as
17
<PAGE>
practicable. Subject to certain conditions set forth in the registration rights
agreement, the piggyback registration rights permit the holders of the covered
shares to include such shares in a registration by the Company when and if the
Company proposes to register any Common Stock under the Securities Act for sale
to the public on a form that would also permit the registration of the covered
shares (other than registrations on Forms S-8 or S-4).
Compensation Agreement:
On April 14, 2000, the Company amended and restated an employment agreement
with the President of the Company. The original agreement was ratified by the
board of directors on February 16, 2000. The amended agreement awarded a stock
grant of 1,000,000 shares of the Company's Common Stock as compensation for
prior services rendered, and 1,000,000 shares of restricted stock, which vests
on December 1, 2000, for future services to be rendered. Additionally, the
Company agreed to accept a promissory note in the amount of $141,800 from the
President of the Company to cover the income tax withholding liability
associated with the stock grant. If the President of the Company has not been
terminated for cause or voluntarily resigned without good cause as of
December 31, 2001 then the Company will forgive 50% of the principle and accrued
interest then payable under such note.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview: The predecessor to the Company, New Millennium, was formed on
October 6, 1998, and merged with and into a subsidiary of Grace on September 28,
1999 (the "Grace Merger"). Although, as a result of the Grace Merger, New
Millennium became a wholly owned subsidiary of the Company, the Grace Merger was
accounted for as an acquisition of Grace by New Millennium because, following
the transaction, the former shareholders of New Millennium owned a substantial
majority of the Company's outstanding Common Stock. Accordingly, the historical
Consolidated Financial Statements of the Company are the financial statements of
New Millennium adjusted for the assumed acquisition of the net assets of Grace
in exchange for the issuance of the Company's Common Stock. In accordance with
purchase accounting principles, the net assets of New Millennium have been
accounted for at their historical cost, and the net assets of Grace have been
accounted for at their fair value as of September 28, 1999. No goodwill was
recorded as a result of the Grace Merger.
The predecessor acquired Avana Communications Corporation on May 5,
1999. The Company acquired WebWizard on January 31, 2000; PVTel on February 24,
2000; and Alpha Computer on March 31, 2000. Each of these acquisitions was
accounted for as a purchase, and the results of operations of each acquired
entity has been included in the Company's consolidated statements of operations
from the date of the respective acquisition.
This section does not contain a quarter-to-quarter comparison of the
Company's first quarter 2000 and first quarter 1999 financial information
because the Company did not have any significant operations in the first quarter
of 1999.
RESULTS OF OPERATIONS
Revenues: Revenues for the quarter ended March 31, 2000, were derived
from telecommunications sales and commissions, and from providing Internet and
Web hosting
18
<PAGE>
services. Telecommunications revenues were $379,022 while Internet
and Web hosting revenues were $247,039. Revenues for the quarter ended March 31,
2000, totaled $626,061.
Cost of Services: Cost of services for providing Internet services includes
salaries and wages of those employed in customer service and sales and in the
technical support areas needed to maintain and upgrade the Company's systems.
Cost of services for the quarter ended March 31, 2000, were $516,119.
Sales and Marketing Expenses: Sales and marketing expenses include the
salaries and wages of sales and marketing personnel, advertising costs for the
Internet operations and development of the promotional campaign for both
telecommunications sales and corporate branding. For the quarter ended March 31,
2000, sales and marketing expenses were $489,258. These expenses are expected to
increase as the Company pursues an aggressive sales effort.
General and Administrative Expenses: Included in General and Administrative
expenses are salaries and wages senior management and corporate headquarters
personnel, professional fees, travel expenses, office supplies and other general
expenses. Expenses in these categories increased due to growth in the number of
employees, the closing of several acquisitions and financings, and increased
costs related to pursuing potential acquisitions and related financing
activities. For the quarter ended March 31, 2000, General and Administrative
expenses were $1,821,745.
Depreciation and Amortization: Depreciation expenses are computed using the
straight-line method based upon the estimated useful lives of assets, generally
three to ten years. Goodwill and other intangible costs are amortized over a
five-year period. For the quarter ended March 31, 2000, depreciation expense and
amortization expense were $279,755 and $93,104, respectively.
Interest Expense: The Company currently incurs interest expense on its
lines of credit and under capitalized leases. For the quarter ended March 31,
2000, interest expense was $223,101.
Interest Income: The Company currently earns interest income on cash and
cash equivalents and investments. For the quarter ended March 31, 2000, interest
income was $42,540.
Accounts receivable, net of the allowance for doubtful accounts, increased
from $56,000 at the end of 1999, to $642,151 as of March 31, 2000, due primarily
to the acquisition of WebWizard, PVTel and Alpha Computer, and increased
billings from sales of telecommunications services.
Equipment and software increased from $2,530,895 at the end of 1999, to
$7,686,338 as of March 31, 2000, due primarily to the acquisition of WebWizard,
PVTel and Alpha Computer, and to the purchase of approximately $3,500,000 in new
equipment from Lucent Technologies.
19
<PAGE>
Goodwill, net of amortization, increased from $600,547 at the end of 1999,
to $5,786,046 as of March 31, 2000, due primarily to the acquisition of
WebWizard, PVTel and Alpha Computer.
Accounts payable increased from $360,532 at the end of 1999, to $2,648,729
as of March 31, 2000, due primarily to the acquisition of WebWizard, PVTel and
Alpha Computer, and to the increased purchasing activity related to internally
generated revenues.
Accrued liabilities increased from $218,182 at the end of 1999, to $876,874
as of March 31, 2000, due primarily to the acquisition of WebWizard, PVTel and
Alpha Computer.
Lines of credit increased from $3,074,339 at the end of 1999, to $4,382,172
as of March 31, 2000, due primarily to an additional $1,000,000 line of credit
with Regions Bank obtained on January 21, 2000, which had a balance of $974,000
as of March 31, 2000. As of May 22, 2000, this line of credit had been paid down
to $10,000, with a portion of the proceeds from the Fourth Private Placement,
and draws were limited to $450,000 (see Note 7 of the Notes to Consolidated
Financial Statements).
20
<PAGE>
Obligations under capital leases, net of current portion, increased from
$1,237,634 at the end of 1999, to $4,418,779 as of March 31, 2000, due primarily
to the acquisition of WebWizard, PVTel and Alpha Computer, and the purchase of
approximately $3,500,000 in new equipment from Lucent Technologies. The current
portion of obligations under capital lease increased from $735,170 at the end of
1999, to $1,631,941 as of March 31, 2000, due primarily to the acquisition of
WebWizard, PVTel and Alpha Computer.
Stockholders' equity represented by Common Stock outstanding increased from
$4,270,195 at the end of 1999, to $8,970,517 as of March 31, 2000, due
primarily to the acquisition of WebWizard, PVTel and Alpha Computer, the Third
Private Placement, and the issuance of shares as compensation as discussed in
Note 13 to the financial statements.
The accumulated stockholders' equity deficit increased from $3,115,833 at
the end of 1999, to $5,930,315 as of March 31, 2000, due primarily to a net loss
for the three months ended March 31, 2000, of $2,814,482.
LIQUIDITY AND CAPITAL RESOURCES
For the quarter ended March 31, 2000, the Company's operating activities
required net cash of $1,728,571. Working capital decreased by $4,937,544 in the
quarter ended March 31, 2000. Working capital was provided by proceeds from the
Third Private Placement which was offset in part by the current portion of
leases capitalized during the quarter and draws against the lines of credit used
for the same period. Changes in net cash from operations resulted primarily from
the loss for the period offset in part by non-cash items of depreciation,
amortization and compensation paid in the form of stock. The changes in net cash
were also
21
<PAGE>
affected by an increase in accounts receivable, prepaid expenses, other assets,
advances to officers and deferred revenue, partially offset by an increase in
accounts payable and accrued liabilities.
Cash used for investing activities was $647,689 for the quarter ended March
31, 2000. Expenditures of cash for property and equipment were made totaling
$247,163 for the quarter ended March 31, 2000.
The Company's financing activities occurring in the first quarter of 2000
consisted of the Third Private Placement and four lines of credit. Note 12,
describing the Third Private Placement, and Note 7, describing the four lines of
credit, to the Consolidated Financial Statements of the Company included in Item
1 of Part I of this Form 10-Q are incorporated herein by reference.
Subsequent to the end of the first quarter 2000, on April 14, 2000, the
Company completed the Fourth Private Placement. Note 16, describing the Fourth
Private Placement, to the Consolidated Financial Statements of the Company
included in Item 1 of Part I of this Form 10-Q is incorporated herein by
reference.
22
<PAGE>
23
<PAGE>
Cash provided by financing activities was $2,373,842 for the quarter
ended March 31, 2000. Cash provided consisted primarily of proceeds from private
placements of $1,400,000 and proceeds from line of credit borrowings of
$1,307,833. These amounts were partially offset by repayment on obligations
under capital leases of $252,678, and deferred debt transaction costs of
$68,813.
As of March 31, 2000, the Company had cash and cash equivalents of
$100,063. The Company also had $3,700,000 in certificates of deposit less
offsetting related liabilities in the form of lines of credit of $3,408,341. The
net proceeds available from certificates of deposit less the corresponding
liability totaled $291,659. With $100,063 of cash and cash equivalents and
$291,659 of net proceeds available from certificates of deposit, the Company had
$391,722 with which to meet its current obligations and fund its operations.
Management believes this amount, together with the proceeds of the Fourth
Private Placement, will be sufficient to enable the Company to expand its
business as currently planned.
If the Company's plans or assumptions change (including those with
respect to the development of the network, the level of its operations and its
operating cash flow), if its assumptions prove inaccurate, if it consummates
additional investments or acquisitions, if it experiences unexpected costs or
competitive pressures, or if existing cash and any other borrowings otherwise
prove to be
24
<PAGE>
insufficient, the Company may be required to seek additional capital sooner than
expected. In the event that the Company is unable to obtain such additional
capital or is unable to obtain such additional capital on acceptable terms, it
may be required to reduce the scope of its expansion, which could adversely
affect its business prospects and its ability to compete. There can be no
assurances that the Company will be able to raise equity capital, obtain capital
leases or bank financing or incur other borrowings on commercially reasonable
terms, if at all, to fund any such expansion.
To accelerate its growth rate and to finance the launch or build-out of
additional markets, the Company will consider obtaining financing from various
sources, including additional vendor financing provided by equipment suppliers,
project financing from commercial banks, bank lines of credit and the sale of
equity and debt securities. To the extent that the Company or any of its
subsidiaries issues debt, its leverage and debt service obligations will
increase.
As part of its business strategy, the Company intends to continue to
evaluate potential acquisitions, joint ventures and strategic alliances in
companies that own existing networks or companies that provide services that
complement the Company's existing businesses. The Company continues to consider
potential acquisitions from time to time. New sources of capital such as credit
facilities and other borrowings, and/or additional debt and equity investments
in the Company may be necessary to fund any material acquisitions and similar
strategic investments.
YEAR 2000 COMPLIANCE
The Company dedicated resources to address the potential hardware,
software, and other computer and technology issues and related concerns
associated with the transition to the Year 2000 and to confirm that its service
providers took similar measures. As a result of these efforts, the Company has
not experienced any material disruptions in its operations in connection with,
or following, the transition to the Year 2000. Given that the majority of the
Company's telecommunications network infrastructure and critical back office
systems were acquired after 1997, Year 2000 compliance was substantially ensured
at the time of acquisition. The total cost to complete the Company's Year 2000
compliance efforts was negligible. While the Company tested its own mission-
critical systems for Year 2000 compliance, the Company does not control the
systems of its suppliers, strategic partners and customers. The Company received
assurances prior to December 31, 1999, from its suppliers and strategic partners
regarding the Year 2000 readiness of their systems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not invested in financial instruments that subject the
Company to material market risk. Financial instruments which the Company holds
are disclosed in Note 3 to the Company's Consolidated Financial Statements on
page 9 herein.
25
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The exhibits that are required to be filed or incorporated by
reference herein are listed in the Exhibit Index.
(b) Reports on Form 8-K.
1. Current Report on Form 8-K, dated December 28, 1999, filed January
21, 2000, disclosing the resignation of a director from the Board
of Directors.
2. Current Report on Form 8-K, dated January 31, 2000, filed February
15, 2000, disclosing the acquisition of WebWizard, Inc.
3. Current Report on Form 8-K, dated February 24, 2000, filed March 9,
2000, disclosing the acquisition of P.V. Tel., Inc.
4. Current Report on Form 8-K, dated March 17, 2000, filed March 17,
2000, disclosing certain explanations and clarifications with
respect to information reported in prior filings.
5. Current Report on Form 8-K, dated March 30, 2000, filed April 14,
2000, disclosing the acquisition of Alpha Computer Services, Inc.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GRACE DEVELOPMENT, INC.
(Registrant)
Date: May 22, 2000 By: /s/ James M. Blanchard
----------------------
James M. Blanchard
President
By: /s/ James C. Foregger
---------------------
James C. Foregger
Director of Finance
(principal financial officer)
By: /s/ Wendy L. Squires
--------------------
Wendy L. Squires
Controller
(principal accounting officer)
27
<PAGE>
EXHIBIT INDEX
Exhibit
- -------
Number Exhibit Title
- ------ -------------
2.1 Agreement and Plan of Merger, dated January 20, 2000, by and among
Avana Acquisition Sub, Inc., Grace Development, Inc., Web Wizard,
Inc., O.E. "Randy" Ray and John Cavenaugh (filed as exhibit 2.2 to the
Registrant's Current Report on Form 8-K dated January 31, 2000, and
incorporated herein by reference).
2.2 Stock Exchange Agreement, dated as of February 15, 2000, by and among
Grace Development, Inc., Avana Telecommunications Group, Inc., P.V.
Tel. Inc. and the Shareholders of P.V. Tel. Inc. (filed as exhibit 2.2
to the Registrant's Current Report on Form 8-K dated February 24,
2000, and incorporated herein by reference).
2.3 Agreement and Plan of Merger, dated March 28, 2000, by and between
Avana Acquisition Sub II, Inc., Grace Development, Inc., Alpha
Computer Services, Inc. O.E. "Randy" Ray, Wendy Lewis and Richard
Warren (filed as exhibit 2.3 to the Registrant's Current Report on
Form 8-K dated March 30, 2000).
4.1 Securities Purchase Agreement, dated as of April 14, 2000, by and
among Grace Development, Inc., Greenlight Capital, L.P. and certain
affiliates of Greenlight Capital L.P. executed in the Fourth Private
Placement.
4.2 Form of 12% Senior Secured Convertible Promissory Note issued in the
Fourth Private Placement.
4.3 Form of Stock Purchase Warrant issued in the Fourth Private Placement.
4.4 Registration Rights Agreement, dated as of April 14, 2000, by and
among Grace Development, Inc., Greenlight Capital, L.P. and certain
affiliates of Greenlight Capital L.P. executed in the Fourth Private
Placement.
27.1 Financial Data Schedule.
E-1
<PAGE>
Exhibit 4.1
SECURITIES PURCHASE AGREEMENT
-----------------------------
SECURITIES PURCHASE AGREEMENT (the "Agreement"), dated as of April 14,
---------
2000, by and among Grace Development Inc. d/b/a Avana Communications, Inc., a
Colorado corporation (the "Company"), and the purchasers set forth on the
-------
signature pages hereto (the "Purchasers").
----------
PRELIMINARY STATEMENT
---------------------
The Company desires to obtain funds by issuing to the Purchasers the
following securities: (i) 12% Senior Secured Convertible Promissory Notes in the
principal amount of up to $15,275,000 (ii) up to 7,200,000 shares of Common
Stock of the Company (the "Sale Shares") and (iii) Warrants to purchase an
-----------
aggregate of up to 14,300,000 shares (subject to adjustment as provided in the
Warrants) of Common Stock of the Company at an exercise price of either $1.00
per share or $1.50 per share as described more fully in this Agreement (the
Convertible Notes, the Sale Shares and the Warrants are collectively referred to
herein as the "Securities"), and the Purchasers desire to purchase or have the
----------
option to purchase such Securities, subject to the terms and conditions set
forth in this Agreement.
ACCORDINGLY, in consideration of the preceding preliminary statement and
the mutual agreements, covenants, representations and warranties contained in
this Agreement, the parties hereto, intending to be legally bound, now agree as
follows:
STATEMENT OF AGREEMENT
----------------------
ARTICLE 1. CERTAIN DEFINITIONS.
-------------------
"Affiliate" of any specified Person means any other Person which directly
---------
or indirectly through one or more intermediaries controls, or is controlled by,
or is under common control with, such specified Person. For the purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlling," "controlled by," and "under common control with"), as used with
respect to any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by agreement or
otherwise.
"Agreement" means this Securities Purchase Agreement, by and among the
---------
Company and the Purchasers, as such may be amended, supplemented, restated or
otherwise modified from time to time.
"Bankruptcy Law" means Title 11, United States Code or any similar federal
--------------
or state law for the relief of debtors.
"Business Day" means any day that is not a Saturday or Sunday or, as the
------------
context requires, (i) a day on which the applicable stock exchange or market is
required or permitted to
<PAGE>
be closed, or (ii) a day on which banks are required or permitted to be closed
in New York, New York.
"Closing" and "Closing Date" have the meanings given to such terms in
------- ------------
Section 2.1 of this Agreement.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
----
"Collateral" shall have the meaning given to such term in Section 2 of the
----------
Pledge Agreement.
"Common Stock" means the common stock, no par value per share, of the
------------
Company.
"Company" has the meaning given to such term in the preamble of this
-------
Agreement.
"Conversion Price" means $1.00 per share of Common Stock in the case of
----------------
Notes issued at the First, Second or Third Closings and $1.50 per share of
Common Stock for Notes issued at the Fourth Closing, as adjusted if and as
appropriate pursuant to the provisions of Article 9.
"Distribution Event" means any insolvency, bankruptcy, receivership,
------------------
liquidation, reorganization or similar proceeding (whether voluntary or
involuntary) relating to the Company or its property, or any proceeding for
voluntary liquidation, dissolution or other winding up of the Company, whether
or not involving insolvency or bankruptcy.
"Documents" means this Agreement, the Notes, the Warrants, the
---------
Registration Rights Agreement, the Guarantee Agreement, the Pledge Agreement and
the Finders Agreement, together with all amendments and supplements thereto, all
substitutions and replacements therefor, and all renewals, extensions,
increases, restatements, modifications, rearrangements and waivers thereof from
time to time.
"Equity Interests" means, with respect to any Person, any and all
----------------
shares or other equivalents (however designated) of capital stock, partnership
interests or any other participation, right or other interests in the nature of
an equity interest in such Person or any option, warrant or other security
convertible into or exchangeable for any of the foregoing.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time.
"Event of Default" has the meaning given to such term in Section 8.1 of
----------------
this Agreement.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
------------
any similar federal statute, and the rules and regulations of the SEC
thereunder, all as the same shall be in effect from time to time.
"Holder" and "Holders" both mean, as the context requires, the holder or
------ -------
holders of the Notes from time to time under the terms of this Agreement and the
other Documents. As of the Closing Date, the Purchasers are the only Holders.
2
<PAGE>
"Indebtedness" means (i) all indebtedness for money borrowed or
------------
evidenced by notes, bonds, debentures or similar evidences of indebtedness, (ii)
all indebtedness under leases that are or should be capitalized under generally
accepted accounting principles, (iii) all contingent obligations including
guarantees of indebtedness of others, and (iv) indebtedness representing the
deferred and unpaid purchase price of goods or services.
"Lien" shall mean any mortgage, pledge, security interest, encumbrance,
----
lien or charge of any kind, including, without limitation, any conditional sale
or other title retention agreement, any lease in the nature thereof and the
filing of or agreement to give any financing statement under the Uniform
Commercial Code of any jurisdiction and including any lien or charge arising by
statute or other law.
"Majority Holders" means the Holder(s) of a majority in aggregate principal
----------------
amount of Notes then outstanding.
"Material Adverse Effect" shall mean any material and adverse effect on:
-----------------------
(a) the business, condition (financial or otherwise), results of operations,
assets, liabilities or prospects of the Company and the Subsidiaries on a
consolidated basis and (b) the ability of the Company and the Subsidiaries to
perform their respective obligations under each of the Documents to which they
are parties.
"NASD" means the National Association of Securities Dealers, Inc., or any
----
successor thereto.
"Note" means the 12% Senior Secured Convertible Promissory Notes to be made
----
by the Company payable to the Purchasers in the form attached hereto as Exhibit
-------
A, such Notes being in the aggregate original principal amount of up to
- -
$15,275,000, together with all amendments and supplements thereto, all
substitutions and replacements therefor, and all renewals, extensions,
increases, restatements, modifications, rearrangements and waivers thereof from
time to time.
"Permitted Liens" means, without duplication, (i) Liens in favor of
---------------
the Holders, (ii) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently conducted, provided,
--------
however, that any reserve or other appropriate provision as shall be required in
- -------
conformity with GAAP shall have been made therefor, (iii) landlords', carriers',
warehousemen's, mechanics', materialmen's, repairmen's or other like Liens
arising in the ordinary course of business (whether contractual, statutory or
constitutional in nature) and with respect to amounts which are not yet
delinquent or are being contested in good faith by appropriate proceedings with
appropriate reserves, (iv) pledges or deposits made in the ordinary course of
business in connection with (a) leases, performance bonds and similar
obligations, (b) workers' compensation, unemployment insurance and other social
security legislation, or (c) securing the performance of surety bonds and appeal
bonds required (1) in the ordinary course of business or in connection with the
enforcement of rights or claims of the Company or a Subsidiary thereof or (2) in
connection with judgments that do not give rise to an Event of Default, (iv)
easements, rights-of-way, restrictions, minor defects or irregularities
3
<PAGE>
in title and other similar encumbrances which, in the aggregate, do not
materially detract from the value of the property subject thereto or materially
interfere with the ordinary conduct of the business of the Company or any
Subsidiary in connection therewith, (v) Liens securing capital lease obligations
permitted to be incurred under this Agreement, provided, however, that such Lien
-------- -------
does not extend to any property other than that subject to the underlying lease,
(vi) Liens pursuant to leases and subleases of real property which do not
interfere with the ordinary conduct of the business of the Company or any of its
Subsidiaries and which are made on customary and usual terms applicable to
similar properties and do not extend to any property of the Company or a
Subsidiary other than the personal property located on such real property, (vii)
Liens resulting from the deposit of funds or government securities in trust for
the purpose of decreasing or defeasing Indebtedness of the Company and its
Subsidiaries as may be permitted hereunder, (viii) setoff, chargeback and other
rights of depository and collecting banks and other regulated financial
institutions with respect to money or instruments of the Company or its
Subsidiaries on deposit with or in the possession of such institutions, and (ix)
judgment or attachment Liens not giving rise to an Event of Default.
"Person" means any individual, corporation, partnership, joint venture,
------
association, limited liability company, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Purchase Price" means the amounts set forth on Schedule 2.1.
-------------- ------------
"Purchasers" has the meaning given to such term in the preamble of this
----------
Agreement.
"Registration Rights Agreement" means a registration rights agreement by
-----------------------------
and among the Company and the Purchasers in the form attached hereto as
Exhibit C, as amended, supplemented, restated or otherwise modified from time to
- ---------
time.
"Sale and Lease-Back Transaction" means any arrangement with any Person
-------------------------------
providing for the leasing by the Company or any Subsidiary of the Company of any
real or tangible personal property, which property has been or is to be sold,
conveyed or transferred by the Company or such Subsidiary to such Person in
contemplation of such leasing.
"SEC" means the Securities and Exchange Commission of the United States of
---
America or any successor to the rights and duties thereof.
"Securities" means the Notes, the Sale Shares and the Warrants.
----------
"Securities Act" means the Securities Act of 1933, as amended, or any
--------------
successor U.S. Federal statute, and all rules and regulations thereunder.
"Subsidiaries" means all entities at least 50% of the outstanding Equity
------------
Interests of which are held by the Company or another direct or indirect
Subsidiary of the Company.
"Subsidiary Guarantors" means the Subsidiaries of the Company parties to
---------------------
the Guarantee Agreement attached hereto as Exhibit D.
---------
4
<PAGE>
"TIA" means the Trust Indenture Act of 1939, as amended, or any successor
---
U.S. Federal statute, and all rules and regulations thereunder.
"Warrant" and "Warrants" both mean, as the context requires, the stock
------- --------
purchase warrants to be issued by the Company to the Purchasers in the form
attached hereto as Exhibit B, together with all amendments and supplements
---------
thereto, all substitutions and replacements therefor, and all renewals,
extensions, increases, restatements, modifications, rearrangements and waivers
thereof from time to time.
ARTICLE 2. ISSUANCE OF SECURITIES.
----------------------
Section 2.1 Sale and Purchase of Securities. Upon the terms and
-------------------------------
subject to the conditions herein contained, and in reliance on the covenants and
agreements of the Company contained herein, the Purchasers are purchasing from
the Company at the First Closing, and the Company is selling to the Purchasers,
Notes in the form of Exhibit A and Warrants in the form of Exhibit B in exchange
--------- ---------
for payment by wire transfer by the Purchasers of the amounts set forth beside
each Purchaser's name on Schedule 2.1, and the Sale Shares in exchange for
-------------
payment, by wire transfer by the Purchaser in the amounts set forth beside each
Purchaser's name on Schedule 2.1. Acquisition of the Securities at the Second,
------------
Third or Fourth Closing shall occur only at the election of the Purchasers to
consummate such Closing by written notice to the Company at least five days
prior to the date of such closing and the Purchasers may acquire such Securities
in such proportions as they may agree. In the event the Company prepays any of
the Notes, the Purchasers may reallocate the principal amount of Notes and
number of shares of Common Stock acquired at a subsequent Closing in their sole
discretion, subject to the limitations that in no event shall the aggregate
principal amount of outstanding Notes represent in excess of 100% of the
purchase price of outstanding Securities prior to consummation of the Second
Closing, 85.7% of the purchase price of outstanding Securities prior to
consummation of the Third Closing, 79.7% of the purchase price of outstanding
Securities prior to consummation of the Fourth Closing and 76.4% of the purchase
price of outstanding Securities after consummation of the Fourth Closing. The
number of shares of Common Stock issuable at any Closing or upon conversion of
the Notes or exercise of the Warrants and the conversion or exercise price
thereof shall be appropriately adjusted for stock splits, stock dividends and
other recapitalizations after the date of this Agreement as described herein and
in the Warrants.
Section 2.2 Collateral and Ranking. As security for the repayment of
----------------------
Notes, the Company shall grant to the Purchasers liens and security interests
on, in and to the collateral (the "Collateral") as set forth in the Notes. The
Notes shall be senior to any future Subordinated Indebtedness of the Company.
Section 2.3 Closings.
--------
(a) The first closing contemplated by this Agreement (the "First
-----
Closing") shall take place at the New York offices of Akin, Gump, Strauss, Hauer
- -------
& Feld, L.L.P., at noon New York time on April 14, 2000 or on such other date or
at such other time or place as the issuance of the Securities and the payment of
the Purchase Price therefor shall actually occur (the "First Closing Date"). At
------------------
the First Closing, the Company will deliver to the Purchasers the Sale
5
<PAGE>
Shares, the Notes and the Warrants subscribed for by the Purchasers, each
registered in the name of the Purchasers, against payment of the Purchase Price
therefor. At the First Closing, the Purchase Price shall be paid by wire
transfer.
(b) The second, third and fourth closings (respectively, the
"Second Closing," "Third Closing," and "Fourth Closing" and, collectively with
-------------- ------------- --------------
the First Closing, the "Closings" and each a "Closing"), shall, at the election
-------- -------
of the Purchasers, occur at noon New York time, on the four month, eight month
and one year anniversaries of the First Closing Date, respectively (or if any
such date is not a Business Day, the first Business Day occurring after such
date) at the New York offices of Akin, Gump, Strauss, Hauer & Feld, L.L.P. or on
such other date or at such other time or place as the parties shall mutually
agree (each, a "Closing Date" and, collectively, the "Closing Dates"). The
------------ -------------
election of the Purchasers not to consummate a Closing after the First Closing
shall not in any way alter the rights of the Purchasers to elect to consummate
any subsequent Closing. At each Closing that occurs in accordance with the terms
of this Agreement, the Company will deliver to the Purchasers the Sale Shares,
the Notes and the Warrants subscribed for by the Purchasers, each registered in
the name of the Purchasers, against payment of the Purchase Price therefor.
Section 2.4 Placement Fee. The Company shall pay to One Up
-------------
Ventures a placement fee equal to 7.7% of the purchase price of the Securities
issued by the Company pursuant to this Agreement. Such payment shall be made in
the form of shares of Common Stock pursuant to the provisions of the Finders
Agreement attached hereto as Exhibit G (the "Finders Agreement") and shall be
--------- -------------------
subject to the terms of the Finders Agreement. The Company hereby indemnifies
the Purchasers against such fees and all other fees payable to any broker,
agent, finder or investment banker.
Section 2.5 Transaction Fee. At the First Closing, the Company shall
---------------
issue to the Purchasers an aggregate of 3,000,000 shares of Common Stock as a
transaction fee in the proportions set forth in Schedule 2.1.
------------
ARTICLE 3. PURCHASERS' REPRESENTATIONS AND WARRANTIES.
------------------------------------------
The Purchasers hereby represent and warrant to the Company as follows as of
the date hereof and as of each Closing Date:
Section 3.1 Organization and Powers. Each Purchaser is, if a
-----------------------
partnership or corporation, (i) duly organized, validly existing and in good
standing under the laws of the State of its formation, and (ii) has the power
and authority to execute, deliver and perform the Documents to which it is a
party.
Section 3.2 Authorization. The execution, delivery and performance by
-------------
the Purchaser of the Documents to which it is a party (i) have been duly
authorized by the Purchaser by all requisite action necessary to be taken by it,
(ii) will not violate and has not violated in such a way as to have a Material
Adverse Effect (A) any provision of law, statute, rule or regulation, (B) any
applicable judgment, writ, injunction, decree or other order of any governmental
authority, or (C) the articles of incorporation or bylaws of the Purchaser, or
any material
6
<PAGE>
agreement to which the Purchaser is a party, and (iii) will not be or result in,
and has not caused, a conflict with, a breach of or (with notice or lapse of
time or both) a default under any material agreement to which the Purchaser is a
party.
Section 3.3 Validity and Binding Nature. The Documents to which each
---------------------------
Purchaser is a party have been duly executed and delivered by such Purchaser and
each is a legal, valid and binding obligation of such Purchaser, enforceable
against such Purchaser in accordance with its terms (except as enforcement
thereof may be limited by bankruptcy, reorganization, insolvency, moratorium or
other laws or equitable principles affecting the enforcement of creditors'
rights generally).
Section 3.4 Acquisition for Investment. Each Purchaser is acquiring
--------------------------
the Securities (and all securities into which the Securities are convertible or
exercisable) solely for its own account for the purpose of investment and not
with a view to or for sale in connection with any distribution thereof, and such
Purchaser does not have a present intention or plan to effect any distribution
of the Securities (or such other securities). Notwithstanding anything in this
Section to the contrary, the disposition of each Purchaser's property shall be
at all times within the control of such Purchaser and subject to the rights of
such Purchaser to dispose of all or any of the Securities (or such other
securities) pursuant to an effective registration statement under the Securities
Act or an exception available under the Securities Act.
Section 3.5 Accredited Investor; Sophistication. Each Purchaser is an
-----------------------------------
"accredited investor" within the meaning of Rule 501 under the Securities Act
and is able to bear the economic risk of this investment in the Securities, at
the present time, is able to afford a complete loss of such investment and has
no present need for liquidity with respect to such investment. Each Purchaser
has such knowledge, sophistication and experience in business and financial
matters that it is capable of evaluating the merits and risks of the prospective
investment in the Securities.
Section 3.6 No General Solicitation. To each Purchaser's knowledge,
-----------------------
the Securities were not offered to such Purchaser by means of general
solicitations, publicly disseminated advertisements or sales literature.
Section 3.7 Address. The true and correct address of the Purchasers'
-------
principal place of business is as set forth on Schedule 2.1. If applicable, each
------------
Purchaser has supplied its federal tax identification number to the Company.
Each Purchaser has no present intention of moving its principal place of
business to any other state or jurisdiction.
Section 3.8 No Brokers. The Purchasers have not employed any broker,
----------
agent, finder or investment banker in connection with any transaction
contemplated by the Documents.
Section 3.9 Economic Risk. Each Purchaser is aware that the business
-------------
of the Company involves significant and material economic variables and risks
that could adversely affect its investment in the Securities.
7
<PAGE>
Section 3.10 No Prospectus or Offering Circular. Each Purchaser
----------------------------------
understands that no prospectus, offering circular or other offering statement
containing information with respect to the Company and the Securities or with
respect to the Company's business is being issued and each Purchaser has made
its own inquiry and analysis with respect to the Company, the Securities, the
Company's business and other material factors affecting the investment in the
Securities.
Section 3.11 Access to Information; Independent Investigation. Each
------------------------------------------------
Purchaser acknowledges that it has either been supplied with or has had access
to information to which a reasonable investor would attach significance in
making investment decisions and each Purchaser has had the opportunity to ask
questions of, and receive answers from, knowledgeable individuals concerning the
Company, its business and the Securities so that as a reasonable investor, each
Purchaser has been able to make an informed decision to purchase the Securities.
In determining to proceed with this investment, each Purchaser has relied solely
upon the results of its own independent investigation with respect to the
Securities, the Company and its business and upon the representations and
statements of the Company set forth in the Documents. Such representations and
statements by the Company constitute the sole and exclusive representations,
warranties, covenants and statements of the Company and its officers, directors,
shareholders and other affiliates to each Purchaser in connection with this
investment, and each Purchaser understands, acknowledges and agrees that all
other representations, warranties, covenants and statements of any kind or
nature, whether oral or contained in any writing other than this Agreement are
specifically disclaimed by the Company.
Section 3.12 Private Placement of Unregistered Securities. Each
--------------------------------------------
Purchaser understands that the Securities (a) are not being registered (or, with
respect to state securities or "Blue Sky" laws, otherwise qualified for sale)
under the Securities Act or under the securities or "Blue Sky" laws and
regulations of any state including, without limitation, Section 10-5-5 of the
Georgia Securities Act of 1973, in reliance upon exemptions from registration,
(b) will not be traded in any securities market, (c) will not be readily
marketable and (d) cannot be sold, transferred or otherwise disposed of unless
subsequently registered under the Securities Act and applicable state securities
or "Blue Sky" laws or pursuant to an exemption from such registration which is
available at the time of desired sale, and will bear a legend to that effect.
Section 3.13 Restrictions on Transfer of Securities. Each Purchaser
--------------------------------------
acknowledges and agrees that it may not, directly or indirectly, sell, assign,
pledge, give, subject to lien or security interest or otherwise dispose of or
encumber any of the Securities except in compliance with applicable securities
laws and the terms of the Securities.
Section 3.14 Risk Factors. Each Purchaser has considered the
------------
following risks, among others, in making this investment:
(a) There are a number of companies that currently compete with the
Company. Many of these companies have far greater capital, marketing and other
resources than the Company. Furthermore, there can be no assurance that these
or other companies or firms will
8
<PAGE>
not develop new or enhanced products that are more effective than any that have
been or may be developed by the Company.
(b) The markets for telecommunications equipment and services are
subject to rapid technological change. As more technologically advanced
platforms for such products emerge, the Company may be required to alter the
design, production and delivery of is products and services in a way in which it
is incapable of doing.
(c) The Company's targeted customers may not accept the Company as an
alternative provider of local telecommunications products and related services.
On the other hand, general acceptance of such a system may encourage competition
by companies or firms with greater resources to develop, sell and service their
products and service offerings.
ARTICLE 4. COMPANY'S REPRESENTATIONS AND WARRANTIES.
----------------------------------------
The Company hereby represents and warrants to the Purchasers as follows as
of the date hereof and as of each Closing Date:
Section 4.1 Organization and Powers. Each of the Company and its
-----------------------
subsidiaries (i) is a corporation duly organized, validly existing and in good
standing under the laws of its state of organization, (ii) has all requisite
corporate power and authority to own its property and assets and to carry on its
business as now conducted and as proposed to be conducted, (iii) is duly
qualified to conduct business in each jurisdiction where such qualification is
necessary, except where the failure to be so qualified would not have a Material
Adverse Effect and (iv) has the power and authority to execute, deliver and
perform the Documents to which it is a party.
Section 4.2 Authorization. The execution, delivery and performance by
-------------
the Company of the Documents to which it is a party (i) have been duly
authorized by the Company by all requisite action necessary to be taken by it,
(ii) will not violate and has not violated in such a way as to have a Material
Adverse Effect (A) any provision of law, statute, rule or regulation, (B) any
applicable judgment, writ, injunction, decree or other order of any governmental
authority, or (C) the articles of incorporation or bylaws of the Company, or any
material agreement to which the Company is a party, and (iii) will not be or
result in, and has not caused, a conflict with, a breach of or (with notice or
lapse of time or both) a default under any material agreement to which the
Company is a party.
Section 4.3 Validity and Binding Nature. This Agreement has been duly
---------------------------
executed and delivered by the Company and is, and each of the other Documents,
when executed and delivered by the Company will be, a legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms (except as enforcement thereof may be limited by bankruptcy,
reorganization, insolvency, moratorium or other laws or equitable principles
affecting the enforcement of creditors' rights generally).
Section 4.4 Consents, Licenses, Filings, Etc. Except as required
---------------------------------
under the Securities Act and applicable state securities laws, no action,
consent or approval of, license or
9
<PAGE>
permit from, or registration or filing with, or any other action by any
governmental authority or any other Person was or is required in connection with
the execution, delivery and performance by the Company of the Documents.
Section 4.5 No Brokers. Other than One Up Ventures (whose fee shall
----------
be paid by the Company in accordance with the terms of the Finders Agreement),
the Company has not employed any broker, agent, finder or investment banker in
connection with any transaction contemplated by the Documents.
Section 4.6 Capitalization. The capitalization of the Company as of
--------------
the date of this Agreement, including the authorized capital stock, the number
of shares issued and outstanding, the number of shares reserved for issuance
pursuant to the Company's stock option plans, the number of shares reserved for
issuance pursuant to securities (other than the Note and the Warrant)
exercisable for, or convertible into or exchangeable for any shares of Common
Stock and the number of shares to be initially reserved for issuance upon
exercise of the Note and the Warrant ("Note Shares" and "Warrant Shares",
----------- --------------
respectively) is set forth on Schedule 4.6 attached hereto. All of such
------------
outstanding shares of capital stock have been, or upon issuance will be, validly
issued, fully paid and non-assessable. Except as disclosed in Schedule 4.6, no
------------
shares of capital stock of the Company (including the Note Shares and the
Warrant Shares) are subject to preemptive rights or any other similar rights of
the stockholders of the Company. Except as disclosed in Schedule 4.6 or in the
------------
SEC Documents (as defined herein), as of the date of this Agreement, there are
no outstanding options, warrants, scrip, rights to subscribe for, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exercisable or exchangeable for, any shares of capital stock
of the Company or any of its subsidiaries, or contracts, commitments,
understandings or arrangements by which the Company or any of its subsidiaries
is or may become bound to issue additional shares of capital stock of the
Company or any of its subsidiaries. The Company has furnished to the undersigned
true and correct copies of the Company's Articles of Incorporation as currently
in effect ("Articles of Incorporation"), and the Company's Bylaws as currently
in effect (the "Bylaws"). The Company has set forth on Schedule 4.6 or as a part
------------
of the SEC Documents all instruments and agreements (other than the Articles of
Incorporation and Bylaws) governing securities convertible into or exercisable
or exchangeable for Common Stock (and the Company shall provide to the
undersigned copies thereof upon the request of the undersigned). Except as
disclosed in Schedule 4.6, the SEC Documents or this Agreement, (x) the Company
------------
has no indebtedness for borrowed money and no agreement providing for
indebtedness for borrowed money, (y) the Company has no share purchase
agreements, rights plans or agreements containing similar provisions and no
agreements containing anti-dilution provisions, and (z) no anti-dilution
provisions which have, individually or in the aggregate, any dilutive effect on
the undersigned's investment are triggered as a result of any of the
transactions contemplated hereby, including conversion of the Note or exercise
of the Warrant. The Company has no Subsidiaries, except as provided on Schedule
--------
4.6. All such Subsidiaries included on Schedule 4.6 are 100% owned by the
- --- ------------
Company. Except as provided on Schedule 4.6, the Company has no investments,
------------
either debt or equity, in any other entity.
10
<PAGE>
Section 4.7 Issuance of Shares. The Sale Shares and the Common Stock
------------------
issuable upon conversion of the Notes or exercise of the Warrants have been duly
authorized and when issued in accordance with the terms of the Documents shall
be validly issued, fully paid and non-assessable.
Section 4.8 SEC Documents; Financial Statements. The Company's common
-----------------------------------
stock is registered under Section 12 of the Exchange Act and has been so
registered since September 28, 1999. Except as disclosed on Schedule 4.8A, since
-------------
September 28, 1999, the Company has timely filed all reports, schedules, forms,
statements and other documents required to be filed by it with the SEC pursuant
to the reporting requirements of the Exchange Act (all of the foregoing filed
after such date prior to the date hereof and all exhibits included therein and
financial statements and schedules thereto and documents (other than exhibits)
incorporated by reference therein, together with the draft Form 10-K for the
fiscal year ended December 31, 1999 attached hereto as Schedule 4.8B (the "Draft
------------- -----
10-K") being hereinafter referred to herein as the "SEC Documents"). The Company
- ---- -------------
has delivered to the Purchaser true and complete copies of the SEC Documents,
except for such exhibits, schedules and incorporated documents. As of their
respective dates, the SEC Documents complied in all material respects with the
requirements of the Exchange Act and the rules and regulations of the SEC
promulgated thereunder applicable to such SEC Documents, and none of the SEC
Documents, at the time they were filed with the SEC, or the Draft 10-K contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. As of their respective dates, the financial statements of the
Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto. Such financial statements have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the periods involved (except (i) as may be otherwise
indicated in such financial statements or the notes thereto or (ii) in the case
of unaudited statements to the extent they may not include footnotes or may be
condensed or summary statements) and fairly present in all material respects the
consolidated financial position of the Company and its consolidated subsidiaries
as of the dates thereof and the consolidated results of their operations and
cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments).
Section 4.9 Compliance with Laws. The business and operations of the
--------------------
Company and the Subsidiaries have been and are being conducted in compliance
with all applicable state and local laws, ordinances, rules, regulations and
orders except those laws, ordinances, rules, regulations and orders the failure
with which to comply would not, in the aggregate, have a Material Adverse
Effect.
Section 4.10 Absence of Certain Changes or Events. Except as
------------------------------------
contemplated by this Agreement or as set forth on Schedule 4.10 or in the SEC
-------------
Documents, since December 31, 1999 to the date hereof, there has not been (a)
any change having a Material Adverse Effect; (b) any damage, destruction or
loss, whether covered by insurance or not, having a Material Adverse Effect; (c)
any entry by the Company or any of the Subsidiaries into any commitment or
transaction material to the Company or any of the Subsidiaries which is not in
the ordinary
11
<PAGE>
course of business; (d) any change by the Company or any of the Subsidiaries in
accounting principles or methods except insofar as may be required by a change
in generally accepted accounting principles; or (e) any declarations, payment or
setting aside for payment of any dividends.
Section 4.11 Certain Liabilities. Except as reflected in the
-------------------
Company's financial statements included in filings with the Securities and
Exchange Commission (the "Commission") and as set forth on Schedule 4.11, the
---------- -------------
Company and the Subsidiaries have no material liabilities, absolute, accrued,
contingent or otherwise and whether due or to become due, and whether known or
unknown. Since December 31, 1999 to the date hereof, the Company and the
Subsidiaries have not incurred any such material liabilities (whether or not
required by generally accepted accounting principles to be disclosed on a
corporate balance sheet or the notes thereto and whether known or unknown)
except liabilities incurred in the ordinary course of business, liabilities
which are fully covered by insurance and liabilities which are not reasonably
likely to have a Material Adverse Effect.
Section 4.12 Contracts. Listed in the exhibits to SEC Documents and
---------
on Schedule 4.12 or Schedule 4.6 are all material contracts of the Company and
------------- ------------
the Subsidiaries. Neither the Company nor any of the Subsidiaries is in default
under any such contract, understanding, commitment and agreement which default
would have a Material Adverse Effect. Neither the Company nor any of the
Subsidiaries has waived any right under any such contract, understanding,
commitment and agreement so as to cause a Material Adverse Effect. All such
contracts, understandings, commitments and agreements are valid and enforceable
by the Company and the Subsidiaries subject to any restrictions under applicable
bankruptcy, insolvency, reorganization or other laws and judicial decisions of
general application relating to or affecting the enforcement of creditors'
rights generally or by general equitable principles. Neither the Company nor
any of the Subsidiaries is a party to or otherwise bound by the provisions of a
collective bargaining agreement.
Section 4.13 Litigation. Except as set forth on Schedule 4.13, there
---------- -------------
are no actions, suits, government investigations, or legal, administrative,
arbitration or other proceedings pending or, to the best knowledge of the
Company, threatened against the Company or any of the Subsidiaries, nor is the
Company or any of the Subsidiaries or their respective properties subject to any
order, judgment, injunction or decree, except for (i) matters that involve
claims fully covered by insurance or for which the Company has provided adequate
reserves on its balance sheet as of December 31, 1999, or (ii) matters that, in
the aggregate, would not have any Material Adverse Effect.
Section 4.14 Title to Property. The Company and the Subsidiaries
-----------------
have good and, in the case of real property, marketable title to all of their
respective material properties (except for property sold or otherwise disposed
of in the ordinary course of business) free of any Liens, except for (i) Liens
disclosed in the Company's financial statements included in filings with the
Commission, (ii) statutory liens not yet delinquent, (iii) Permitted Liens and
(iv) Liens that do not have a Material Adverse Effect.
12
<PAGE>
Section 4.15 Tax Returns and Audits. The Company and the Subsidiaries
----------------------
have duly filed all income, franchise and other federal, state and local tax
returns, notices and reports which they individually or collectively have been
or are required to file except where the failure to file such returns would not
have a Material Adverse Effect. The provisions for federal, state and local
taxes reflected in the financial statements included in the SEC Documents, as
they relate to the Company, are adequate to cover the liabilities of the Company
for such taxes with respect to the periods then ended and for all prior periods.
Section 4.16 Employee Benefit Plans.
----------------------
(a) "Employee Plans" shall be defined to include all employee welfare
benefit plans (as defined in Section 3(1) of ERISA), employee pension benefit
plans (as defined in Section 3(2) of ERISA) and all bonus, stock option, stock
purchase, benefit, profit sharing, savings, vacation, retirement, disability,
insurance, incentive, deferred compensation and other similar fringe or employee
benefit plans, programs or arrangements for the benefit of, or relating to, any
employee of the Company or the Subsidiaries which the Company or the
Subsidiaries contribute to or maintain.
(b) All Employee Plans and their related trusts have been and are
maintained in material compliance with applicable requirements of ERISA, the
Code and all other federal and state statutes and regulations relating to
employee benefit plans.
(c) Neither the Company, nor any Subsidiary, nor the administrator of
any Employee Plan has engaged in a "prohibited transaction" (as such term is
defined in Section 406 of ERISA or Section 4975 of the Code) with respect to an
Employee Plan which could subject the Company or the administrator of any
Employee Plan to the tax on, or any other penalty or sanction with respect to,
prohibited transactions imposed by Section 502 of ERISA or Section 4975 of the
Code except for any such penalty or sanction that would not have a Material
Adverse Effect.
(d) No Employee Plan which is subject to Section 412 of the Code has
had a material "accumulated funding deficiency" (as such term is defined in
Section 412 of the Code), whether or not waived, as of the last day of the most
recent plan year, and no material unsatisfied liability (other than for
premiums) to the Pension Benefit Guaranty Corporation ("PBGC") has been incurred
with respect to any Employee Plan by the Company or the Subsidiaries. No
Employee Plan to which this Subsection 4.16(d) applies would have a material
accumulated funding deficiency or would subject the Company or the Subsidiaries
to any liability to the PBGC if such Employee Plan were to be terminated as of
the Closing Date.
(e) Except as a result of the transactions contemplated herein,
neither the Company nor any of the Subsidiaries knows or has any reasonable
grounds to know of any event threatened or about to occur which would constitute
a "reportable event" (as that term is defined in Section 4043(b) of ERISA) with
respect to any Employee Plan, but excluding any event for which reporting has
been waived by regulation, and, except as provided on Schedule 4.16, to the
-------------
knowledge of the Company, no notice of termination has been filed by the plan
administrator of
13
<PAGE>
any Employee Plan pursuant to Section 4041 of ERISA or has been issued by the
PBGC pursuant to Section 4042 of ERISA with respect to any Employee Plan.
(f) Except as provided on Schedule 4.16, each Employee Plan intended
-------------
to be "qualified" within the meaning of Section 401(a) of the Code has been
determined to be so qualified by the appropriate District Director of the
Internal Revenue Service. No such Employee Plan has lost its qualified status
and, to the best knowledge of the Company and the Subsidiaries, there are no
facts which would adversely affect the qualified status of any Employee Plan.
(g) There is no pending or, to the knowledge of the Company,
threatened legal action, proceeding or investigation against or involving any
Employee Plan, and, to the knowledge of the Company and the Subsidiaries, there
is no basis for any such legal action, proceeding or investigation. Neither the
Company nor any of the Subsidiaries is in default in performing any of their
contractual obligations with respect to any Employee Plan.
(h) The Company does not maintain a "multiemployer plan" within the
meaning of Section 3(37) of ERISA.
(i) Except as provided on Schedule 4.16, neither the Company nor any
-------------
of the Subsidiaries has any material liability with respect to any "employee
benefit plan," as defined in Section 3(3) of ERISA, currently or formerly
maintained by the Company.
Section 4.17 Intellectual Property. Except as set forth on Schedule
--------------------- --------
4.17 (which schedule shall include correspondence involving the dispute on the
- ----
"WebWizard" name), each of the Company and its Subsidiaries owns or possesses
adequate and enforceable rights to use all patents, patent applications,
trademarks, trademark applications, trade names, service marks, copyrights,
copyright applications, licenses, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information, systems
or procedures) and other similar rights and proprietary knowledge (collectively,
"Intangibles") used or necessary for the conduct of its business as now being
conducted and as previously described in the SEC Documents except where the
failure to own or possess such rights would not have a Material Adverse Effect.
Neither the Company nor any Subsidiary of the Company infringes on or is in
conflict with any right of any other person with respect to any Intangibles nor
is there any claim of infringement made by a third party against or involving
the Company or any of its subsidiaries, which infringement, conflict or claim,
individually or in the aggregate, if the subject of an unfavorable decisions,
ruling or finding, would have a Material Adverse Effect.
Section 4.18 Registration Rights. Neither the Company nor any of the
-------------------
Subsidiaries has agreed to register under the Securities Act any of its
authorized or outstanding securities except pursuant to this Agreement or as set
forth in Schedule 4.18 or in the SEC Documents.
-------------
Section 4.19 Full Disclosure. No representation or warranty by the
---------------
Company and the Subsidiaries in the Documents and no information contained in
any of the Schedules and Exhibits hereto, contains any untrue statement of a
material fact or omits to state a material fact
14
<PAGE>
necessary to make the statements made and information contained herein or
therein, in light of the circumstances under which they were made, not
misleading.
ARTICLE 5. PURCHASERS' CONDITIONS TO CLOSING.
---------------------------------
Each Purchaser's obligation to purchase and pay for Securities at a Closing
is subject to the fulfillment to such Purchaser's satisfaction, on or before the
applicable Closing Date, of each of the following conditions:
Section 5.1 Expiration Date. The First Closing Date shall have
---------------
occurred on or before April 14, 2000.
Section 5.2 Securities. Each Purchaser shall have received the
----------
Securities required to be delivered by the Company to such Purchaser on such
Closing Date pursuant to Article 2 of this Agreement, each duly executed and
delivered by the Company.
Section 5.3 Registration Rights Agreement. Each Purchaser shall have
-----------------------------
received the Registration Rights Agreement, duly executed and delivered by the
Company.
Section 5.4 Subsidiary Guarantee. Each Purchaser shall have received
--------------------
the Guarantee Agreement, a form of which is attached hereto as Exhibit D, duly
---------
executed and delivered by the Subsidiary Guarantors.
Section 5.5 Representations and Warranties; Covenants; Events of
----------------------------------------------------
Default. (i) The representations and warranties of the Company contained in this
- -------
Agreement and the other Documents shall be true and correct in all material
respects on and as of the Closing Date with the same effect as though such
representations and warranties had been made on the Closing Date, except to the
extent of any changes caused by the transactions herein contemplated or
disclosed in documents filed with the SEC at least six days prior to such
Closing Date or otherwise disclosed in writing to Purchasers, (ii) the Company
shall not be in material breach of any covenant contained in the Documents,
(iii) no Event of Default shall have occurred and be continuing, and (iv) the
Company shall have delivered to each Purchaser an officer's certificate to the
effect of clauses (i), (ii) and (iii) and to the effect that all of the
conditions to such Purchaser's obligation to purchase Securities at such Closing
have been fulfilled as of such Closing Date.
Section 5.6 Transactions Permitted by Applicable Laws. The Closing
-----------------------------------------
and the other transactions contemplated by this Agreement shall not violate any
applicable law or governmental regulation or result in a violation of any order
of any court or governmental body applicable to the Purchasers or the Company or
the Subsidiaries and shall not subject the Purchasers or the Company to any tax,
penalty or liability.
Section 5.7 No Adverse Action or Decision. There shall be no action,
-----------------------------
suit, investigation or proceeding pending, or, to the best of the Purchasers'
knowledge, threatened against or affecting the Purchasers or the Company or any
of their respective properties that (i) seeks to restrain, enjoin, prevent the
consummation of or otherwise affect the Closing or the
15
<PAGE>
other transactions contemplated by this Agreement, or (ii) questions the
validity or legality of any such transactions or seeks to recover damages or to
obtain other relief in connection with any such transactions.
Section 5.8 Approvals and Consents. The Company shall have duly
----------------------
received all authorizations, consents, approvals, licenses, franchises, permits
and certificates by or of, and shall have made all filings and effected all
registrations and qualifications with, all federal, state and local governmental
authorities and other Persons (including, to the extent applicable, the
Company's shareholders) necessary for the consummation of such Closing and the
other transactions contemplated by this Agreement, and all such matters shall be
in full force and effect as of such Closing Date and in a form reasonably
satisfactory to Purchasers. The Company shall have received waivers in a form
reasonably acceptable to Purchasers under any contracts that require payments
to third parties as a result of the consummation of the transactions
contemplated hereby.
Section 5.9 Proceedings. All corporate and other proceedings to be
-----------
taken by the Company and the Subsidiaries in connection with the transactions
contemplated hereby and all documents incident thereto shall be reasonably
satisfactory in substance and form to the Purchaser.
Section 5.10 Legal Opinion. The Purchasers shall have received on the
-------------
Closing Date an opinion, dated the Closing Date, in form and substance
satisfactory to the Purchasers and counsel for the Purchasers, of Hunton &
Williams, counsel for the Company and the Subsidiaries, substantially in the
form of Exhibit E.
---------
Section 5.11 Lien Documents. At Closing and thereafter as the
--------------
Purchasers deem necessary in their sole discretion, the Company shall execute
and deliver, or have executed and delivered, to the Purchasers (all in form and
substance satisfactory to the Purchasers in their sole discretion):
(a) Pledge Agreement substantially in the form of Exhibit F;
---------
(b) Guarantee Agreement substantially in the form of Exhibit D;
---------
(c) UCC-1 financing statements pursuant to the Uniform Commercial Code
in effect in the jurisdiction(s) in which the Company operates, which the
Purchasers may file in any jurisdiction where any Collateral is or may be
located and in any other jurisdiction that the Purchasers deem appropriate;
provided that a carbon, photographic, or other reproduction or other copy of the
- --------
Securities Purchase Agreement or of a financing statement is sufficient as and
may be filed in lieu of a financing statement; and
(d) any other agreements, documents, instruments, and writings
reasonably deemed necessary by the Purchasers or as any Purchaser may otherwise
request from time to time in its reasonable discretion to evidence, perfect, or
protect the Purchasers' lien on and security interest in the Collateral required
pursuant to the Note and this Agreement.
16
<PAGE>
Section 5.12 Second, Third and Fourth Closings. In the case of the
---------------------------------
Second, Third and Fourth Closings, the Purchasers shall have delivered notice to
the Company of the Purchasers' intent to consummate such Closing pursuant to
Section 2.1.
- -----------
ARTICLE 6. COMPANY'S CONDITIONS TO CLOSING.
-------------------------------
The obligation of the Company to issue and sell Securities to the
Purchasers is subject to the fulfillment to the satisfaction of the Company, on
or before each Closing Date, of each of the following conditions:
Section 6.1 Purchase Price. The Company shall have received payment
--------------
in full of the Purchase Price for the Securities acquired on such Closing Date.
Section 6.2 Representations and Warranties; Covenants. (i) The
-----------------------------------------
representations and warranties of the Purchasers contained in this Agreement
shall be true and correct in all material respects on and as of such Closing
Date with the same effect as though such representations and warranties had been
made on such Closing Date, except to the extent of any changes caused by the
transactions herein contemplated, and (ii) the Purchasers shall not be in
material breach of any covenant contained in the Documents.
Section 6.3 No Adverse Action or Decision. There shall be no action,
-----------------------------
suit, investigation or proceeding pending, or, to the best of the Company's
knowledge, threatened against or affecting the Purchasers or the Company or any
of their respective properties before any court, arbitrator or administrative or
governmental body that (i) seeks to restrain, enjoin, prevent the consummation
of or otherwise affect the Closing or the other transactions contemplated by
this Agreement, or (ii) questions the validity or legality of any such
transactions or seeks to recover damages or to obtain other relief in connection
with any such transactions.
ARTICLE 7. COVENANTS.
---------
The Company hereby covenants and agrees with the Purchasers and the
Majority Holders that, so long as the principal of or interest on any Note shall
be unpaid:
Section 7.1 Certain Restrictions. While any Notes remain
--------------------
outstanding, without the prior written consent of the Majority Holders, the
Company will not, and will not permit any of its Subsidiaries to, directly or
indirectly:
(a) Indebtedness. Create or suffer to exist any direct, indirect,
------------
fixed, or that of contingent liability for, or incur, any Indebtedness with an
effective cash interest rate higher than the Notes or with a maturity date on or
before that of the Notes other than the maturity date of existing Indebtedness
as of the date of this Agreement and other than (i) operating leases for
equipment other than telecommunications equipment not in excess of $100,000 at
any one time outstanding, (ii) operating leases for telecommunications equipment
or other capital leases entered into in the ordinary course of business with
unaffiliated third parties, (iii) Indebtedness of entities acquired by the
Company existing at the time of acquisition and (iv) current liabilities
incurred in the ordinary course of business.
17
<PAGE>
(b) Liens. In any way pledge, hypothecate, or grant a Lien on any
-----
of the assets of the Subsidiary Guarantors to any Person, except the Permitted
Liens or transfer any of the assets of the Subsidiary Guarantors to any other
Subsidiary of the Company except in the ordinary course of business.
(c) Sale of Assets. Sell, lease, or otherwise dispose of all or any
--------------
material part of its assets except sales of inventory or other sales in the
ordinary course of business.
(d) Liquidation, Merger and Consolidation. (i) Alter its corporate,
-------------------------------------
capital or legal structure in a manner in any way adverse to the Purchasers or
dissolve or liquidate, or merge or consolidate with any Person other than (a) a
merger of the Company and a Person that is organized in a jurisdiction within
the United States in which the Company is the surviving corporation and such
merger will not result in an Event of Default or otherwise adversely affect the
Purchasers or (b) in connection with a reincorporation of the Company that does
not in any way adversely affect the Purchasers, or (ii) acquire all or any
substantial portion of the property, assets, or stock of, or interest in, any
Person (an "Acquisition") unless the stock of such Person is pledged to
Purchasers hereunder and such Person guarantees the obligations of the Company
under the Notes.
(e) Dividends, Etc. Declare or pay any dividend on any class of the
--------------
capital stock of the Company now or hereafter outstanding, make any distribution
of cash or property to holders of any shares of such stock, or redeem, retire,
purchase or otherwise acquire, directly or indirectly, any shares of any class
of capital stock of the Company now or hereafter outstanding.
(f) Sale and Issuance of Subsidiary Interests. Issue, transfer,
-----------------------------------------
convey, sell, lease or otherwise dispose of any Equity Interests of any
Subsidiary to any Person other than another Subsidiary that is a party to the
Guarantee Agreement.
(g) Sale and Lease-Back Transactions. Enter into any Sale and
--------------------------------
Lease-Back transaction unless the consideration received in such Sale and
Lease-Back transaction is at least equal to the fair market value of the
property sold as determined in good faith by the Company's Board of Directors.
(h) No Restrictions on Subsidiary Distributions to Company or Other
---------------------------------------------------------------
Subsidiaries. Permit any of its Subsidiaries to create or otherwise cause or
- ------------
suffer to exist or become effective any consensual encumbrance or restriction of
any kind on the ability of any such Subsidiary to (i) pay dividends or make any
other distributions on any of such Subsidiary's capital stock owned by the
Company or any other Subsidiary of the Company, (ii) repay or prepay any
Indebtedness owed by such Subsidiary to the Company or any other Subsidiary of
Company, (iii) make loans or advances to the Company or any other Subsidiary or
(iv) transfer any of its property or assets to the Company or any other
Subsidiary.
(i) Business. Engage, directly or through other Persons, in any
--------
business other than the business now carried on, and other businesses directly
related thereto.
18
<PAGE>
(j) Loans, Advances and Investments. Make any loans or advances to,
-------------------------------
make investments in, or purchase stock or other securities or evidences of
Indebtedness of, or interests in, any Person, except (i) direct obligations of
the United States or any agency thereof, (ii) commercial paper issued by
corporations rated not less than A-1 or P-1 by a nationally recognized rating
agency, (iii) certificates of deposit issued by, and demand deposit accounts
with, any United States commercial bank that are fully insured by the Federal
Deposit Insurance Corporation, (iv) loans made in the ordinary course of
business and (v) in connection with an Acquisition.
(k) Certain Transactions. Enter into, or be a party to, any
--------------------
transaction with, or pay any management fee or other fees or compensation to,
any Affiliate or stockholder of the Company, except (i) any tax sharing
agreement with any Subsidiary and (ii) in the ordinary course of and pursuant to
the reasonable requirements of the Company's business and upon fair and
reasonable terms which are fully disclosed to the Purchasers and are no less
favorable to the Company than it would obtain in a comparable arm's length
transaction with a Person not an Affiliate or stockholder of the Company.
(l) Utilize Equity Line. Utilize its equity line pursuant to which
-------------------
it issues additional capital stock or any similar financing facility unless
Purchasers elect not to consummate a Closing hereunder.
(m) Further Assurances. Promptly (and in any event within 10 days
------------------
after the First Closing) provide such additional information and execute such
additional instruments and documents as the Purchasers may reasonably request in
connection with the transactions contemplated hereby, including without
limitation documents and instruments perfecting the security interest of the
Purchasers in the Collateral. In addition, the Company shall use its best
efforts to cause Hunton & Williams to deliver any opinions set forth in Exhibit
E which Hunton & Williams does not deliver on the First Closing Date.
Section 7.2 Compliance with Law; Maintenance of Properties. The
----------------------------------------------
Company will do or cause to be done all things necessary (i) to preserve and
keep in full force and effect at all times the Company's and the Subsidiaries'
existence, and all rights, licenses and franchises that are material to its
business, except that the Company may merge or consolidate any wholly owned
Subsidiaries with another wholly owned Subsidiary that is a party to the
Guarantee Agreement, (ii) to comply with and cause the Subsidiaries to comply
with all applicable laws, and all applicable rules, regulations and orders
issued by any governmental authority, noncompliance with which could have a
Material Adverse Effect, and (iii) to preserve all material property, in the
Board of Directors' good faith judgment, useful in the conduct of the Company's
and the Subsidiaries' business and keep the same in reasonably good repair,
working order and condition, normal wear and tear excepted, and from time to
time make, or cause to be made, all needful and proper repairs, renewals and
replacements, betterments and improvements thereto so that the business carried
on in connection therewith may be properly and advantageously conducted at all
times.
19
<PAGE>
Section 7.3 Performance of Liabilities. The Company will and will
--------------------------
cause the Subsidiaries to (i) duly pay and discharge all Indebtedness in such
manner as shall be necessary in order to prevent the occurrence of an Event of
Default under Section 8.1(d) hereof, and (ii) duly pay and discharge all taxes
before the same shall become in default unless such taxes are being contested by
the Company in good faith, and all lawful claims for labor, materials and
supplies that have become due and payable which taxes and other claims, if
unpaid, might become a Lien upon any of its properties if the loss of such
properties could have a Material Adverse Effect.
Section 7.4 Inspection. The Company will and will cause the
----------
Subsidiaries to permit, upon written request therefor, any duly authorized
representative of the Majority Holders to visit and inspect any of the
properties of the Company or any of its Subsidiaries, examine its books of
record and accounts and take copies and extracts therefrom, and conduct audits
of such books of record and accounts, all at such times and as often as the
Majority Holders may reasonably request upon 24 hours notice.
Section 7.5 Reporting Requirements. To the extent not publicly
----------------------
available, the Company shall furnish to the Holders the following:
(a) Defaults. As soon as possible and in any event within 3 days
--------
after obtaining knowledge of the occurrence of any Event of Default or a
condition or event that, after notice or lapse of time or both, would constitute
an Event of Default, a statement of an appropriate officer of the Company
setting forth details of such Event of Default and the action that the Company
has taken or proposes to take with respect thereto.
(b) Financial Statements. As soon as available, and in any event
--------------------
(i) within 90 days following the end of each fiscal year of the Company and the
Subsidiaries, a copy of the annual audit report for such fiscal year for the
Company and the Subsidiaries, including therein the balance sheet of the Company
and each Subsidiary, as of the end of such fiscal year and related statements of
income, shareholders' equity and cash flows for such fiscal year; (ii) within 45
days following the end of each quarter of the Company and the Subsidiaries, a
copy of the quarterly financial reports for such quarter for the Company and the
Subsidiaries; (iii) within 15 days following the end of each month, a monthly
financial report of the Company and the Subsidiaries, including a monthly
balance sheet and profit and loss statement with a comparison to budget; and
(iv) within 10 days of their becoming available, all reports or other publicly
available information that the Company shall make available to its
securityholders including, without limitation, all reports, financial statements
and proxy or information statements filed by the Company with the SEC or any
national securities exchange.
(c) Information Provided to Others. At the time provided to the
------------------------------
SEC, any shareholder or any other holder of Indebtedness, all balance sheets,
statements of income, shareholders' equity and cash flows and other financial
and operational reports and statements provided to such other holder of
Indebtedness.
(d) Litigation. Notification in writing, promptly upon the
----------
Company's learning thereof, but in no event later than 10 days after learning
thereof, of any litigation involving an
20
<PAGE>
amount in controversy exceeding $50,000 whether or not the claim is considered
by the Company to be covered by insurance.
(e) Budget. As soon as available and upon request, and in any event
------
within 30 days prior to the end of each fiscal year, the Company's budget for
the next succeeding fiscal year. The Company will also promptly provide the
Purchasers with any updates of such budget.
Section 7.6 First Refusal on Future Financing. Until such time as a
---------------------------------
registration statement has become effective covering at least 50% of the
Registrable Securities (as defined in the Registration Rights Agreement), the
Purchasers shall be given a reasonable right of first refusal on any future
financings of the Company other than underwritten offerings of Common Stock with
an anticipated public offering price in excess of $3.00 per share in the case of
public offerings on or before December 31, 2000 and $5.00 per share thereafter
(as such per share amounts are adjusted for stock splits, stock dividends and
other recapitalizations after the date of this Agreement). The Purchasers shall
use reasonable best efforts to respond to any such rights within 48 hours of
notice thereof by the Company, but in any event Purchasers shall respond within
four Business Days.
Section 7.7 Obtain NASDAQ Listing. The Company shall use its
---------------------
reasonable best efforts to list its Common Stock on NASDAQ and to maintain such
listing.
Section 7.8 Board Observer Rights. The Company shall give notice to
---------------------
the Purchasers of all meetings of the Board of Directors and Committees thereof
and permit a representative of the Purchasers to attend all such meetings until
the later to occur of (i) such time as no Notes remain outstanding and (ii) such
time as a registration statement has been declared effective with respect to all
of the Registrable Securities (as defined in the Registration Rights Agreement).
The Company shall have the right to exclude such representative from any portion
of a meeting that deals with issues related to the Purchasers or the Holders of
the Securities. The Company shall reimburse all reasonable out-of-pocket
expenses of such representative in attending any such meetings. The Purchasers
acknowledge and agree that certain information provided or made available to
them under this Agreement may constitute material non-public information that
may result in restrictions under federal securities laws on the ability of the
Purchasers to sell Securities of the Company.
Section 7.9 Public Announcement. As soon as practicable after the
-------------------
First Closing, the Company shall make the public announcement of the
consummation of the transactions contemplate hereby in a manner reasonably
acceptable to the Purchasers.
Section 7.10 Use of Proceeds. The Company shall use the proceeds
---------------
from the issuance of the Securities hereunder to repay approximately $1.4
million of existing Indebtedness owing by the Company to C&S Private Equity
Fund, L.P. and for working capital and other general corporate purposes.
Section 7.11 Registration Rights. As long as any Securities are
-------------------
outstanding, the Company will not in the future grant any registration rights
that are not subordinate to those of
21
<PAGE>
the Purchasers under the Registration Rights Agreement. In addition, the Company
will use its best efforts to modify the provisions of existing registration
rights to make them consistent.
ARTICLE 8. DEFAULT AND REMEDIES.
--------------------
Section 8.1 Events of Default. An "Event of Default" occurs if:
----------------- ----------------
(a) the Company defaults in the payment of principal of or interest
on the Notes when the same becomes due and payable and such default continues
for 5 days;
(b) the Company shall fail to observe or perform any other covenant
or agreement contained in any Document and such default continues for 30 days;
(c) any material representation or warranty made by the Company in
any Document shall prove to have been false or misleading in any material
respect when made and such false or misleading statement has a Material Adverse
Effect;
(d) the Company shall fail to make any payment of principal of or
interest on any Indebtedness other than the Notes when due after giving effect
to any applicable grace periods (whether due by acceleration or otherwise) and
the aggregate amount of all such past-due Indebtedness (including Indebtedness
accelerated pursuant to the terms thereof) shall be equal to or greater than
$250,000;
(e) the Company (i) shall commence a voluntary case concerning itself
under any Bankruptcy Law now or hereafter in effect, or any successor thereof;
(ii) is the object of an involuntary case under any Bankruptcy Law; or (iii)
commences any Distribution Event or is the object of an involuntary Distribution
Event; or
(f) James M. Blanchard ceases to spend substantially all of his
business time and attention in the employment of the Company as a senior
executive officer.
Section 8.2 Remedies.
--------
(a) If an Event of Default (other than an Event of Default under
Section 8.1(e) shall occur and be continuing, the Majority Holders may declare
by notice in writing given to the Company, the entire unpaid principal amount of
the Notes, together with accrued but unpaid interest thereon, to be immediately
due and payable, in which case the Notes shall become immediately due and
payable, both as to principal and interest, without presentment, demand,
default, notice of default, notice of intent to accelerate and notice of such
acceleration, protest or notice of any kind, all of which are hereby expressly
waived, anything herein or elsewhere to the contrary notwithstanding.
(b) If an Event of Default under Section 8.1(e) shall occur and be
continuing, the entire unpaid principal amount of the Notes, together with
accrued but unpaid interest thereon, shall automatically become immediately due
and payable, both as to principal and interest, without presentment, demand,
default, notice of default, notice of intent to accelerate
22
<PAGE>
and notice of such acceleration, protest or notice of any kind, all of which are
hereby expressly waived, anything herein or elsewhere to the contrary
notwithstanding.
(c) If any Event of Default shall have occurred and is continuing,
the Holders may, subject to the consent of the Majority Holders, proceed to
protect and enforce their rights either by suit in equity or by action at law,
or both.
ARTICLE 9. CONVERSION.
----------
Section 9.1 Right to Convert. Any Holder of Notes may exercise the
----------------
conversion rights set forth in this Section 9 (i) at any time after five days
following the issuance of such Note or (ii) if the Company exercises its rights
under the prepayment provisions of Section 2.2 of the Notes, within 10 Business
Days of the Company's notice to the holder of the Company's election to exercise
its prepayment rights. If a Holder of Notes chooses to exercise its conversion
rights pursuant to the preceding sentence (unless the Note is repaid within five
days after issuance), such Holder may convert all or any portion of the
principal amount thereof and any interest accrued thereon into the number of
shares of Common Stock, obtained by dividing the principal and accrued interest
to be so converted by the Conversion Price determined from time, to time
pursuant to Section 9.5.
Section 9.2 Mechanics of Conversion. Before, a holder of any Note
-----------------------
converts any of the principal amount thereof or accrued interest thereon into
shares of Common Stock, such Holder shall surrender the Note, duly endorsed, at
the principal office of the Company and shall give written notice to the Company
at such office of its election to convert all or any portion of the principal
thereof or accrued interest thereon into shares of Common Stock. The notice
shall state the principal amount thereof and accrued interest thereon to be
converted and the name of the Holder or the name(s) of the nominee(s) of such
Holder in which any certificates for shares of Common Stock are to be issued.
The Company shall, as soon as practicable but in no event later than five
Business Days thereafter, issue and deliver at such office to such Holder or
such nominee(s), a certificate or certificates for the number of full shares of
Common Stock to which such holder or such nominee(s) is entitled. Any conversion
shall be deemed to occur immediately prior to the close of business on the date
of surrender of the Note, and the person or persons entitled to receive the
shares of Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock on such
date.
Section 9.3 No Fractional Shares. No fractional shares of Common
--------------------
Stock or scrip shall be issued upon conversion of this Note. Instead of issuing
any fractional shares of Common Stock that would otherwise be issuable upon
conversion of the Note (or any portion hereof), the Company shall round down to
the nearest whole number of shares of Common Stock and pay to such holder cash
in an amount equal to the amount of such fractional interest, multiplied by the
Conversion Price.
Section 9.4 Reservation of Shares. The Company covenants that it
---------------------
will at all times reserve and keep available, free from preemptive rights, out
of the aggregate of its authorized but unissued shares of Common Stock, for the
purpose of effecting the conversion of
23
<PAGE>
any Note, the full number of shares of Common Stock deliverable upon the
conversion of the Notes.
Section 9.5 Antidilution Provisions. During the conversion period or
-----------------------
until fully converted, the Conversion Price and the number of shares of Common
Stock issuable pursuant to this Note (the "Note Shares") shall be subject to
adjustment from time to time as provided in this Section 9. In the event that
any adjustment of the Conversion Price as required herein results in a fraction
of a cent, such Conversion Price shall be rounded up or down to the nearest
cent.
a. Adjustment of Conversion Price and Number of Shares Upon Issuance
-----------------------------------------------------------------
of Common Stock. Except as otherwise provided in Section 9.3 and 9.4 hereof, if
- ---------------
and whenever after the First Closing Date, the Company issues or sells, or in
accordance with Section 9.5(b) hereof is deemed to have issued or sold, any
shares of Common Stock for no consideration or for a consideration per share
less than the Market Price on the date of issuance (a "Dilutive Issuance"), then
effective immediately upon the Dilutive Issuance, the Conversion Price will be
adjusted in accordance with the following formula:
E' = (E) (O + P/M) / (CSDO)
where:
E' = the adjusted Conversion Price
E = the then current Conversion Price;
M = the then current Market Price; provided, however,
that in the case of stock issued in stock for stock
acquisitions with unaffiliated third parties, "M"
will be deemed to be the lesser of (i) (a)$0.70 per
share in the case of issuances after the First
Closing and (b) $1.00 per share in the case of
issuances on or after the Second Closing to the
extent the Second Closing occurs (as such per share
amounts are adjusted for stock splits, stock
dividends and other recapitalizations after the date
of this Agreement); and (ii) the then current Market
Price
O = the number of shares of Common Stock outstanding
immediately prior to the Dilutive Issuance;
P = the aggregate consideration, calculated as set forth
in Section 9.5(b) hereof, received by the Company
upon such Dilutive Issuance; and
CSDO = the total number of shares of Common Stock Deemed
Outstanding (as herein defined) immediately after the
Dilutive Issuance.
b. Effect on Conversion Price of Certain Events. For purposes of
--------------------------------------------
determining the adjusted Conversion Price under Section 9.5(a) hereof, the
following will be applicable:
1. Issuance of Rights or Options. If the Company in any manner
-----------------------------
issues or grants any warrants, rights or options, whether or not immediately
exercisable, to subscribe for or to purchase Common Stock or other securities
24
<PAGE>
exercisable, convertible into or exchangeable for Common Stock ("Convertible
Securities") (such warrants, rights and options to purchase Common Stock or
Convertible Securities are hereinafter referred to as "Options"), and the price
per share for which Common Stock is issuable upon the exercise of such Options
is less than the Market Price on the date of issuance ("Below Market Options"),
then the maximum total number of shares of Common Stock issuable upon the
exercise of all such Below Market Options (assuming full exercise, conversion or
exchange of Convertible Securities, if applicable) will, as of the date of the
issuance or grant of such Below Market Options, be deemed to be outstanding and
to have been issued and sold by the Company for such price per share. For
purposes of the preceding sentence, the price per share for which Common Stock
is issuable upon the exercise of such Below Market Options is determined by
dividing (i) the total amount, if any, received or receivable by the Company as
consideration for the issuance or granting of such Below Market Options, plus
the minimum aggregate amount of additional consideration, if any, payable to the
Company upon the exercise of all such Below Market Options, plus, in the case of
Convertible Securities issuable upon the exercise of such Below Market Options,
the minimum aggregate amount of additional consideration payable upon the
exercise, conversion or exchange thereof at the time such Convertible Securities
first become exercisable, convertible or exchangeable, by (ii) the maximum total
number of shares of Common Stock issuable, upon the exercise of all such Below
Market Options (assuming full conversion of Convertible Securities, if
applicable). No further adjustment to the Conversion Price will be made upon the
actual issuance of such Common Stock upon the exercise of such Below Market
Options or upon the exercise, conversion or exchange of Convertible Securities
issuable upon exercise of such Below Market Options.
2. Issuance of Convertible Securities.
----------------------------------
a. If the Company in any manner issues or sells any Convertible
Securities, whether or not immediately convertible (other than where the same
are issuable upon the exercise of Options) and the price per share for which
Common Stock is issuable upon such exercise, conversion or exchange (as
determined pursuant to Section 9.5(b)(2)(b) if applicable) is less than the
Market Price on the date of issuance, then the maximum total number of shares of
Common Stock issuable upon the exercise, conversion or exchange of all such
Convertible Securities will, as of the date of the issuance of such Convertible
Securities, be deemed to be outstanding and to have been issued and sold by the
Company for such price per share. For the purposes of the preceding sentence,
the price per share for which Common Stock is issuable upon such exercise,
conversion or exchange is determined by dividing (i) the total amount, if any,
received or receivable by the Company as consideration for the issuance or sale
of all such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the exercise,
conversion or exchange thereof at the time such Convertible Securities first
become exercisable, convertible or exchangeable, by (ii) the maximum total
number of shares of Common Stock issuable upon the exercise, conversion or
exchange of all such Convertible Securities. No further adjustment to the
Conversion Price will be made upon the actual issuances of such Common Stock
upon exercise, conversion or exchange of such Convertible Securities.
25
<PAGE>
b. If the Company in any manner issues or sells any Convertible
Securities with a fluctuating conversion or exercise price or exchange ratio,
then the price per share for which Common Stock is issuable upon such exercise,
conversion or exchange for purposes of the calculation contemplated by Section
9.5(b)(2)(a) shall be deemed to be the lowest price per share which would be
applicable assuming that all holding period and other conditions to any
discounts contained in such Convertible Security have been satisfied.
3. Change in Option Price or Conversion Rate. Except for the
-----------------------------------------
grant or exercise of any stock or options which may hereafter be granted or
exercised under any employee or director benefit plan of the Company now
existing or to be implemented in the future, so long as the issuance of such
stock or options is approved by a majority of the non-employee members of the
Board of Directors of the Company or a majority of the members of a committee of
non-employee directors established for such purpose, if there is a change at any
time in (i) the amount of additional consideration payable to the Company upon
the exercise of any Options; (ii) the amount of additional consideration, if
any, payable to the Company upon the exercise, conversion or exchange or any
Convertible Securities; or (iii) the rate at which any Convertible Securities
are convertible into or exchangeable for Common Stock (other than under or by
reason of provisions designed to protect against dilution), the Conversion Price
in effect at the time of such change will be readjusted to the Conversion Price
which would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed additional consideration
or changed conversion rate, as the case may be, at the time initially granted,
issued or sold,
4. Treatment of Expired Options and Unexercised Convertible
--------------------------------------------------------
Securities. If, in any case, the total number of shares of Common Stock issuable
- ----------
upon exercise of any Options or upon exercise, conversion or exchange of any
Convertible Securities is not, in fact, issued and the rights to exercise such
option or to exercise, convert or exchange such Convertible Securities shall
have expired or terminated, the Conversion Price then in effect will be
readjusted to the Conversion Price which would have been in effect at the time
of such expiration or termination had such Options or Convertible Securities, to
the extent outstanding immediately prior to such expiration or termination
(other than in respect of the actual number of shares of Common Stock issued
upon exercise or conversion thereof), never been issued.
5. Calculation of Consideration Received. If any Common Stock,
-------------------------------------
Options or Convertible Securities are issued, granted or sold for cash, the
consideration received therefor for purposes of the Notes will be the amount
received by the Company therefor, before deduction of reasonable commissions,
underwriting discounts or allowances or other reasonable expenses paid or
incurred by the Company in connection with such issuance, grant or sale. In case
any Common Stock, Options or Convertible Securities are issued or sold for a
consideration part or all of which shall be other than cash, the amount of the
consideration other than cash received by the Company will be the fair market
value of such consideration except where such consideration consists of freely-
tradable securities, in which case the amount of consideration received by the
Company will be the Market Price thereof as of the date of receipt. In case any
Common Stock, Options or
26
<PAGE>
Convertible Securities are issued in connection with any merger or consolidation
in which the Company is the surviving corporation, the amount of consideration
therefor will be deemed to be the fair market value of such portion of the net
assets and business of the non-surviving corporation as is attributable to such
Common Stock, Options or Convertible Securities, as the case may be. The fair
market value of any consideration other than cash or securities will be
determined in the good faith reasonable business judgment of the Board of
Directors.
6. Exceptions to Adjustment of Conversion Price. No adjustment
--------------------------------------------
to the Conversion Price will be made (i) upon the exercise of any warrants,
options or convertible securities issued and outstanding on the First Closing
Date in accordance with the terms of such securities as of such date; (ii) upon
the issuance of the Sale Shares, the Notes or the Warrants in accordance with
terms of this Agreement; or (iii) upon the exercise of the Warrants or
conversion of the Notes,
c. Subdivision or Combination of Common Stock. If the Company, at
------------------------------------------
any time after the First Closing Date, subdivides (by any stock split, stock
dividend, recapitalization, reorganization, reclassification or otherwise) its
shares of Common Stock into a greater number of shares, then, after the date of
record for effecting such subdivision, the Conversion Price in effect
immediately prior to such subdivision will be proportionately reduced. If the
Company, at any time after the First Closing Date, combines (by reverse stock
split recapitalization, reorganization, reclassification or otherwise) its
shares of Common Stock into a smaller number of shares, then, after the date of
record for effecting such combination, the Conversion Price in effect
immediately prior to such combination will be proportionately increased.
d. Major Transactions. If after the First Closing Date the Company
------------------
shall consolidate or merge with any other corporation or entity (other than a
merger in which the Company is the surviving or continuing entity) or there
shall occur any share exchange pursuant to which all of the outstanding shares
of Common Stock are converted into other securities or property or any
reclassification or change of the outstanding shares of Common Stock (each of
the foregoing being a "Major Transaction"), then each holder of a Note may
thereafter, at its option, be entitled, at its election, either to (i) in the
event that the Common Stock remains outstanding or holders of Common Stock
receive any common stock or substantially similar equity interest, in each of
the foregoing cases which is publicly traded, retain its Note and such Note
shall continue to apply to such Common Stock or shall apply, as nearly as
practicable, to such other common stock or equity interest as the case may be,
or (ii) regardless of whether clause (i) applies, receive consideration, in
exchange for such Note, equal to the number of shares of stock or securities or
property of the Company, or of the entity resulting from such Major Transaction
(the "Major Transaction Consideration"), to which a holder of the number of
shares of Common Stock delivered upon the conversion of such Note would have
been entitled upon such Major Transaction had such holder converted the Note
(without regard to any limitations on conversion or elsewhere contained) on the
trading date immediately preceding the consummation of such Major Transaction
and had such Common Stock been issued and outstanding and had such Holder been
the holder of record of such Common Stock at the time of the consummation of
such Major Transaction; and the Company
27
<PAGE>
shall make lawful provision for the foregoing as a part of such Major
Transaction and shall cause the issuer of any security in such transaction which
constitutes Registrable Securities under that the Registration Rights Agreement
to assume all of the Company's obligations under the Registration Rights
Agreement. No later than five Business Days prior to the consummation of the
Major Transaction, but not prior to the public announcement at of such Major
Transaction, the Company shall deliver written notice ("Notice of Major
Transaction") to each holder of a Note of such Notice of Major Transaction. Such
Notice of Major Transaction shall indicate the amount and type of the Major
Transaction Consideration which such holder of a Note would receive under this
Section.
e. Distribution of Assets. In case the Company shall declare or make
----------------------
any distribution of its assets (or rights to acquire its assets) to holders of
Common Stock as a partial liquidating dividend, by way of return of capital or
otherwise (including any dividend or distribution to the Company's shareholders
of cash or shares (or rights to acquire shares) of capital stock of a
subsidiary) (a "Distribution"), at any time after the First Closing Date, then
the Holder shall be entitled upon conversion of this Note for the purchase of
any or all of the shares of Common Stock subject hereto, to receive the amount
of such assets (or rights) which would have been payable to the Holder had such
Holder been the holder of such shares of Common Stock on the record date for the
determination of shareholders entitled to such Distribution.
f. Notices of Adjust. Upon the occurrence of any event which
-----------------
requires any adjustment of the Conversion Price, then, and in each such case,
the Company shall give notice thereof to the Holder, which notice shall state
the Conversion Price resulting from such adjustment and the increase or decrease
in the number of Shares purchasable at such price upon conversion, setting forth
in reasonable detail the method of calculation and the facts upon which such
calculation is based. Such calculation shall be certified by the chief financial
officer of the Company.
g. Minimum Adjustment of Conversion Price. No adjustment of the
--------------------------------------
Conversion Price shall be made in an amount of less than 1% of the Conversion
Price in effect at the time such adjustment is otherwise required to be made,
but any such lesser adjustment shall be carried forward and shall be made at the
time and together with the next subsequent adjustment which, together with any
adjustments so carried forward, shall amount to not less than 1% of such
Conversion Price.
h. No Fractional Shares. No fractional shares of Common Stock are to
--------------------
be issued upon the conversion of a Note, but the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise be issuable
in an amount equal to the same fraction of the Market Price of a share of Common
Stock; provided that in the event that sufficient funds are not legally
available for the payment of such cash adjustment any fractional shares of
Common Stock shall be rounded up to the next whole number.
i. Other Notices. In case at any time: (i) the Company shall declare
-------------
any dividend upon the Common Stock payable in shares of stock of any class or
make any other distribution to the holders of the Common Stock; (ii) the Company
shall offer for
28
<PAGE>
subscription pro rata to the holders of the Common Stock any additional shares
of stock of any class or other rights; (iii) there shall be any capital
reorganization of the Company, or reclassification of the Common Stock, or
consolidation or merger of the Company with or into, or sale of all or
substantially all of its assets to, another corporation or entity, or (iv) there
shall be a voluntary or involuntary dissolution, liquidation or winding-up of
the Company; then, in each such case, the Company shall give to the Holder (A)
notice of the date on which the books of the Company shall close or a record
shall be taken for determining the holders of Common Stock entitled to receive
any such dividend, distribution, or subscription rights or for determining the
holders of Common Stock entitled to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up and (B) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, notice of
the date (or, if not then known, a reasonable approximation thereof by the
Company) when the same shall take place. Such notice shall also specify the date
on which the holders of Common Stock shall be entitled to receive such dividend,
distribution, or subscription rights or to exchange their Common Stock for stock
or other securities or property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation, or
winding-up, as the case may be. Such notice, shall be given at least 30 days
prior to the record date or the date on which the Company's books are closed in
respect thereto, but in no event earlier than public announcement of such
proposed transaction or event. Failure to give any such notice or any defect
therein shall not affect the validity of the proceedings referred to in clauses
(i), (ii), (iii) and (iv) above.
j. Certain Definitions.
-------------------
1. "Common Stock Deemed Outstanding" means the number of shares
-------------------------------
of Common Stock actually outstanding (not including shares of Common Stock held
in the treasury of the Company), plus (x) in case of any adjustment required by
Section 9.5(a) resulting from the issuance of any Options, the maximum total
number of shares of Common Stock issuable upon the exercise of the Options for
which the adjustment is required (including any Common Stock issuable upon the
conversion of Convertible Securities issuable upon the exercise of such
Options), and (y) in the case of any adjustment required by Section 9.5(a)
resulting from the issuance of any Convertible Securities, the maximum total
number of shares of Common Stock issuable upon the exercise, conversion or
exchange of the Convertible Securities for which the adjustment is required, as
of the date of issuance of such Convertible Securities, if any.
2. "Market Price" means, as of any date, (i) the average of the
------------
Closing Prices for the shares of Common Stock as reported to The Nasdaq National
Market for the 15 trading days immediately preceding such date, or (ii) if The
Nasdaq National Market is not the principal trading market for the Common Stock,
the average of the last reported bid prices on the principal trading market for
the Common Stock during the same period, or, if there is no bid price for such
period, the last reported sales price for such period, or (iii) if market value
cannot be calculated as of such date on any of the foregoing bases, the Market
Price shall be the average fair market value as reasonably determined by an
investment banking firm selected by the Company and reasonably acceptable to the
Holders of a majority in interest of the
29
<PAGE>
Note, with the costs of the appraisal to be borne by the Company. The manner of
determining the Market Price of the Common Stock set forth in the foregoing
definition shall apply with respect to any other security in respect of which a
determination as to market value, must be made hereunder.
ARTICLE 10. MISCELLANEOUS.
-------------
Section 10.1 Payments. The Company agrees that, as long as the
--------
Purchasers shall hold the Notes, all payments to be made on or in connection
with the Notes shall be made to the Purchasers at the addresses set forth in
this Agreement or such other places as the Purchasers may designate in writing.
All payments referred to under this Agreement and the other Documents shall be
in immediately available funds in lawful money of the United States of America.
The Holders agree that prior to any delivery upon the sale or other disposition
of all or any part of the Notes, the Holders will promptly make or cause to be
made a notation on the Notes reflecting all payments thereon.
Section 10.2 Amendments. This Agreement and the other Documents may
----------
be amended, modified, superseded or canceled, and any of the terms, covenants,
representations, warranties or conditions hereof and thereof may be waived, only
by a written instrument executed by the Company and the Majority Holders at such
time. If any such proposed amendment, modification or other action would require
the consent of holders of more than a majority in aggregate principal amount of
securities then outstanding if such action were proposed with respect to
securities issued pursuant to an indenture qualified under the TIA (such
percentage required under the TIA for such action being referred to herein as
the "Applicable Supermajority Percentage"), then such proposed amendment,
-----------------------------------
modification or other action with respect to this Agreement and the other
Documents shall require the consent of the Holders of the Applicable
Supermajority Percentage of the Notes (or, if the Notes have been paid in full,
the Warrants). If any such proposed amendment, modification or other action
would require the consent of each affected holder if such action were proposed
with respect to securities issued pursuant to an indenture qualified under the
TIA, then such proposed amendment, modification or other action with respect to
this Agreement and the other Documents shall require the consent of each
affected Holder.
Section 10.3 No Waiver. The failure of any party at any time or times
---------
to require performance of any provisions hereof shall in no manner affect the
right at a later time to enforce the same. No waiver by any party of any
condition, or of any breach of any term, covenant, representation or warranty
contained in this Agreement, in any one or more instances, shall be deemed to be
or construed as a further or continuing waiver of any such condition or breach
or a waiver of any other condition or of any breach of any other term, covenant,
representation or warranty.
Section 10.4 Survival of Representations and Warranties. All claims
------------------------------------------
and causes of action with respect to the representations, warranties, covenants,
indemnities and agreements contained herein or made in writing by the Company in
connection herewith shall survive the
30
<PAGE>
execution and delivery of this Agreement, the sale and purchase of the
Securities and any disposition thereof.
Section 10.5 Successors and Assigns. All covenants and agreements in
----------------------
this Agreement made by or on behalf of any of the parties hereto shall bind and
inure to the benefit of the Company, each Purchaser and each Holder and their
respective successors and permitted assigns. The terms and provisions of this
Agreement are intended solely for the benefit of each party hereto and its
respective successors and permitted assigns, and it is not the intention of the
parties to confer third-party beneficiary rights upon any other Person. The
Holders may not sell, assign (by operation of law or otherwise), transfer,
pledge, grant a security interest in, or otherwise dispose of this Agreement or
any other Document or any portion hereof or thereof or any rights or obligations
hereunder or thereunder unless the Company shall have received a written opinion
of counsel reasonably acceptable to the Company, addressed to the Company, to
the effect that any such proposed transfer or other disposition complies with
all applicable Federal and state securities laws, or other comfort reasonably
acceptable to the Company to the same effect; provided, however, that any
Purchaser may transfer any Securities acquired hereunder to another Purchaser or
to an Affiliate controlled by any Purchaser without any such opinion or comfort.
Section 10.6 Notices. All communications provided for hereunder and
-------
under the Notes shall be sent by first class mail and (i) if to a Purchaser,
addressed to it at the address shown on Schedule 2.1 the signature pages hereof,
-------------
or to such other address as such Purchaser may have designated to the Company in
writing, (ii) if to any subsequent Holder, addressed to such Holder at the
address of such Holder in the record books of the Company, and (iii) if to the
Company, addressed to it at 1690 Chantilly Drive, Atlanta, Georgia 30324,
Attention: President, or to such other address as the Company may have
designated in writing to the Holder.
Section 10.7 Descriptive Headings. The descriptive headings of the
--------------------
articles, sections, subsections and paragraphs of the Documents are inserted for
convenience only and do not constitute a part of the Documents.
Section 10.8 Choice of Law. This Agreement and the validity and
-------------
enforceability hereof shall be governed by and construed and interpreted in
accordance with the laws of the State of New York without giving effect to
conflict of laws rules or choice of laws rules thereof except Section 5-1401 of
the New York General Obligations Law.
Section 10.9 Pro Rata Sharing. All payments (including, but not
----------------
limited to, payments by offset) made under this Agreement or the Notes shall be
made to the Holders pro rata in accordance with the principal amount of Notes
--- ----
that such Holder owns. If any Holder shall receive any payment in violation of
this Section, such Holder shall pay such excess funds over to other Holders or
purchase Notes or interests therein from other Holders in order to cause such
excess payment to be shared by the Holders on a pro rata basis.
--- ----
Section 10.10 Limitation on Interest. Notwithstanding any other
----------------------
provision of this Agreement or any other Document, interest on the indebtedness
contemplated by the Documents is expressly limited so that in no contingency or
event whatsoever, whether by acceleration of the
31
<PAGE>
maturity of such indebtedness or otherwise, shall the interest contracted for,
charged or received by any Purchaser or any Holder exceed the maximum amount
permissible under applicable law. If from any circumstances whatsoever
fulfillment of any provisions of this Agreement or of any other document
evidencing, securing or pertaining to the indebtedness contemplated hereby, at
the time performance of such provision shall be due, shall involve transcending
the limit of validity prescribed by law, then, ipso facto, the obligation to be
fulfilled shall be reduced to the limit of such validity, and if from any such
circumstances any Purchaser or any Holder shall ever receive anything of value
as interest or deemed interest by applicable law under this Agreement or any
other document evidencing, securing or pertaining to the indebtedness
contemplated hereby or otherwise an amount that would exceed the highest lawful
rate, such amount that would be excessive interest shall be applied to the
reduction of the principal amount owing under this Agreement or on account of
any other indebtedness of the Company to such Purchaser or such Holder, and not
to the payment of interest, or if such excessive interest exceeds the unpaid
balance of principal of the Notes and such other indebtedness, such excess shall
be refunded to the Company. In determining whether or not the interest paid or
payable with respect to any indebtedness of the Company to such Purchaser or
such Holder, under any specific contingency, exceeds the highest lawful rate,
the Company and such Purchaser or such Holder shall, to the maximum extent
permitted by applicable law, (a) characterize any non-principal payment as an
expense, fee or premium rather than as interest, (b) exclude voluntary
prepayments and the effects thereof, (c) amortize, prorate, allocate and spread
the total amount of interest throughout the term of such indebtedness so that
the actual rate of interest on account of such indebtedness does not exceed the
maximum amount permitted by applicable law, and/or (d) allocate interest between
portions of such indebtedness, to the end that no such portion shall bear
interest at a rate greater than that permitted by applicable law. The terms and
provisions of this paragraph shall control and supersede every other conflicting
provision of this Agreement and the other Documents.
Section 10.11 Entire Agreement. This Agreement and the other
----------------
Documents embody the entire agreement of the parties relating to the subject
matter hereof and supersede all prior proposals, negotiations, agreements and
understandings relating to such subject matter.
Section 10.12 Counterparts. This Agreement may be executed in two or
------------
more counterparts, each of which when so executed and delivered shall be deemed
to be an original and all of which when taken together shall constitute but one
and the same agreement.
Section 10.13 Expenses. The Company agrees, whether or not the
--------
transactions contemplated hereby are consummated, to pay, and hold the
Purchasers and Holders of the Securities harmless from liability for the payment
of,
(i) the reasonable fees and expenses of counsel to the Purchaser
(which fees and expenses shall be reasonably documented), arising in
connection with the negotiation and execution of this Agreement and the
Documents and consummation of the transactions contemplated hereby (which
fees and expenses shall not exceed $50,000 in the aggregate and shall be
paid by wire transfer to such counsel at the Closing),
32
<PAGE>
(ii) the fees and expenses incurred in connection with any requested
waiver of the right of any Holder of Securities or the consent of any
Holder of Securities to contemplated acts of the Company not otherwise
permissible by the terms of this Agreement or the Documents,
(iii) stamp and other taxes, including income taxes, which may be
payable with respect to the execution and delivery of this Agreement or the
issuance, delivery or acquisition of the Securities or upon the conversion
of the Securities except that the Company shall not be responsible for any
such taxes incurred as a result of issuing the Securities to a Person other
than the Purchasers, and
(iv) the fees and expenses incurred in respect of the enforcement of
the rights granted under this Agreement and the Documents.
Section 10.14 Specific Performance. The Purchasers shall have the
--------------------
rights to specific performance with respect to the Company's obligations
hereunder.
[Signature page follows.]
33
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto as of the day and year specified at the beginning hereof.
GRACE DEVELOPMENT INC.
By: /s/ James M. Blanchard
--------------------------------
Name: James M. Blanchard
Title: President
GREENLIGHT CAPITAL, L.P.
By: Greenlight Capital, L.L.C., its
general partner
By: /s/ Jeffrey A. Keswin
--------------------------
Name: Jeffrey A. Keswin
Title: Managing Member
GREENLIGHT CAPITAL QUALIFIED L.P.
By: Greenlight Capital, L.L.C., its
general partner
By: /s/ Jeffrey A. Keswin
---------------------------
Name: Jeffrey A. Keswin
Title: Managing Member
GREENLIGHT CAPITAL OFFSHORE, LTD.
By: /s/ Jeffrey A. Keswin
--------------------------
Name: Jeffrey A. Keswin
Title: Co-President Advisor
1
<PAGE>
EXHIBITS AND SCHEDULES
- ----------------------
Exhibit A Form of Note
Exhibit B Form of Warrant
Exhibit C Form of Registration Rights Agreement
Exhibit D Form of Guarantee Agreement
Exhibit E Form of Legal Opinion
Exhibit F Form of Pledge Agreement
Exhibit G Finders Agreement
Schedules
i
<PAGE>
SCHEDULE 2.1
------------
INITIAL PURCHASERS, AMOUNTS AND SECURITIES
------------------------------------------
<TABLE>
No. of Shares of
Common Stock issued
as a Transaction No. of Shares of Common Stock
Fee at the First issuable upon exercise of Warrant at
Closing and at exercise price of $1.00 per share in
$1.00 per share a the case of the First, Second and
Second and Third Third Closings and $1.50 per share
Closings and $1.50 in the case of the Fourth Closing
Principal per share at (subject to adjustment as described Total
First Closing Amount of Notes Fourth Closing in the Warrant) Consideration
- ------------- ---------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Greenlight Capital, L.P. $1,500,000 692,308 1,500,000 $1,500,000
420 Lexington Avenue
Suite 1740
New York, New York 10170
Greenlight Capital Qualified, 2,500,000 1,153,846 2,500,000 2,500,000
L.P.
420 Lexington Avenue
Suite 1740
New York, New York 10170
Greenlight Capital Offshore, 2,500,000 1,153,846 2,500,000 2,500,000
Ltd.
c/o CITCO BVI Limited
Citco Building
Wickhams Cay 1
P. O. Box 662
Road Town, Tortola
British Virgin Islands
------------ ---------- ---------- -----------
TOTAL $6,500,000 3,000,000 6,500,000 $6,500,000
shares shares
Second Closing* $2,925,000 1,575,000 2,925,000 $4,500,000
(in the aggregate) shares shares
Third Closing* $2,925,000 1,575,000 2,925,000 $4,500,000
(in the aggregate) shares shares
Fourth Closing* $2,925,000 1,050,000 1,950,000 $4,500,000
(in the aggregate) shares shares
</TABLE>
*Subject to reallocation as
described in Section 2.1.
i
<PAGE>
SCHEDULE 4.6
------------
CAPITALIZATION
--------------
ii
<PAGE>
Exhibit 4.2
This Promissory Note (this "Note") and any securities acquired upon the
conversion of this Note have not been registered under the Securities Act of
1933, as amended (the "Securities Act"), or the securities laws of any state.
None of this Note, such securities or any interest therein may be sold,
transferred, pledged or hypothecated except pursuant to an effective
registration statement under the Securities Act and such registration or
qualification as may be necessary under the securities laws of any jurisdiction
or pursuant to a written opinion of counsel (which counsel and opinion shall be
reasonably satisfactory to the Company) that such registration or qualification
is not required.
GRACE DEVELOPMENT INC.
----------------------
12% SENIOR SECURED CONVERTIBLE PROMISSORY NOTE
----------------------------------------------
[Date] Note No ____________
GRACE DEVELOPMENT INC., a Colorado corporation ("Issuer" or the "Company"),
------ -------
for value received, hereby promises to pay in accordance with the provisions
hereof to [Purchaser] (the "Holder") or its permitted assigns the principal
------
amount of _____ MILLION _____________ THOUSAND DOLLARS ($___________) on the
dates specified herein, with interest as specified herein.
This Note is subject to the following additional provisions, terms and
conditions:
ARTICLE 1. DEFINITIONS.
-----------
1.1 Certain Definitions.
-------------------
"Applicable Rate" means 12% per annum.
---------------
"Default Rate" means 16% per annum.
------------
"Guarantee Agreement" means that certain Guarantee Agreement, dated as of
-------------------
April __, 2000, by and among the Subsidiary Guarantors in favor of Greenlight
Capital, L.P., Greenlight Capital Qualified, L.P. and Greenlight Capital
Offshore, Ltd., as such may be amended, supplemented, restated or otherwise
modified from time to time.
"Holder" has the meaning given to such term in the first paragraph of this
------
Note.
"Interest Payment Date" means April 14, 2001 and April 14, 2002.
---------------------
"Maturity Date" means April 14, 2002.
-------------
"Maximum Rate" means the maximum nonusurious interest rate permitted under
------------
applicable law.
<PAGE>
"Note" and "Notes" means this Senior Secured Convertible Promissory Note
---- -----
made by the Company payable to the Holder, together with all amendments and
supplements hereto, all substitutions and replacements herefor, and all
renewals, extensions, increases, restatements, modifications, rearrangements and
waivers hereof from time to time.
"Pledge Agreement" means that certain Pledge Agreement, dated as of April
----------------
14, 2000, by and among the Company and Greenlight Capital, L.P., Greenlight
Capital Qualified, L.P., and Greenlight Capital Offshore, Ltd., as such may be
amended, supplemented, restated or otherwise modified from time to time.
"Securities Purchase Agreement" means that certain Securities Purchase
-----------------------------
Agreement, dated as of April 14, 2000, by and among the Company and Greenlight
Capital, L.P., Greenlight Capital Qualified, L.P., and Greenlight Capital
Offshore, Ltd., as such may be amended, supplemented, restated or otherwise
modified from time to time.
1.2 Incorporated Definitions. Capitalized terms used in this Note and not
------------------------
otherwise defined herein shall have the meanings set forth in the Securities
Purchase Agreement.
ARTICLE 2. BASIC TERMS.
-----------
2.1 Identification. This Note is one of the Convertible Notes referred to
--------------
in the Securities Purchase Agreement and is entitled to the benefits thereof,
including, but not limited to, Article 8 thereof, which sets forth certain
---------
Events of Default and remedies.
2.2 Principal.
---------
(a) Scheduled Repayment. The principal of this Note shall be due and
-------------------
payable on the Maturity Date.
(b) Right to Prepay. The Company shall have the right to prepay this
---------------
Note in full or in part without penalty subject to the Holder's right to convert
amounts payable hereunder to shares of Common Stock of the Company as described
in the Securities Purchase Agreement.
(c) Mechanics of Prepayment. The Company shall effect the prepayment
-----------------------
at Company's election under this Section 2.2 by giving prior written notice (the
"Option Prepayment Notice"), which notice may only be delivered on a Business
------------------------
Day, and at least 10 Business Days prior to the date on which such prepayment is
to become effective (the "Effective Time of Prepayment") to the holder of this
----------------------------
Note at the address and facsimile number of such holder appearing in the
Securities Purchase Agreement. The Option Prepayment Notice shall indicate the
prepayment amount and Effective Time of Prepayment.
(d) Restriction on Prepayment. The Company may not deliver an Optional
-------------------------
Prepayment Notice or effect a prepayment unless on or prior to the date of
delivery of such Optional Prepayment Notice, the Company shall have deposited
with an escrow agent reasonably satisfactory to Holder, as a trust fund, cash
sufficient in amount to pay all amounts to which holders are entitled upon such
prepayment pursuant to this Section 2.2, with irrevocable
<PAGE>
instructions and authority to such escrow agent to complete the prepayment
thereof in accordance with this Section 2.2.
(e) Officer Certification. Any optional Prepayment Notice delivered in
---------------------
accordance with this Section 2.2 shall be accompanied by a statement executed by
a duly authorized officer of its transfer agent or escrow agent, certifying the
amount of funds which have been deposited with such transfer agent or escrow
agent and that the transfer agent or escrow agent has been instructed and agrees
to act as prepayment agent hereunder.
2.3 Interest.
--------
(a) Interest will accrue on the Notes from the date hereof (the "Issue
-----
Date") and will be payable in either cash or additional Notes of like tenor, at
- ----
the election of the Company. The Company will deliver notice of its election to
the Holder at least five Business Days prior to each Interest Payment Date. The
Issuer agrees to pay interest in respect of the unpaid principal amount of this
Note at a rate per annum equal to the lesser of the Applicable Rate and the
Maximum Rate. Notwithstanding the preceding sentence, the Company agrees to pay
interest in respect of overdue principal, and, to the extent permitted by law,
overdue interest, at a rate per annum equal to the lesser of the Default Rate
and the Maximum Rate. The Company shall also pay interest at the lesser of the
Default Rate and the Maximum Rate if an Event of Default has occurred and is
continuing. No fractional shares of Common Stock shall be issued.
(b) Interest on the principal of this Note shall be due and payable
(i) on each Interest Payment Date and the Maturity Date, (ii) upon the optional
redemption or the payment or prepayment, in full, of the principal of this Note,
(iii) at the maturity of this Note (whether by acceleration or otherwise), and
(iv) after maturity (whether by acceleration or otherwise), on demand.
(c) All computations of interest, both before and after maturity,
shall be made on the basis of a year of 365 days (or 366 days, as applicable)
for the actual number of days (including the first day but excluding the last
day) occurring in the period for which such interest is payable.
(d) Additional Interest may accrue as described in Section 2.11 of
this Note.
2.4 Conversion. Subject to the provisions of Article 9 of the Securities
---------- ---------
Purchase Agreement, the Holder may, at the Holder's option, from time to time,
convert any or all of the principal of and/or accrued but unpaid interest on
this Note into Common Stock at the Conversion Price. Reference is made to
Article 9 of the Securities Purchase Agreement for a complete statement of the
- ---------
rights and obligations of the Company and the Holder with respect to conversion
of this Note into Common Stock.
2.5 Payments in General. Whenever any payment to be made under this Note
-------------------
shall be stated to be due on a day that is not a Business Day, the due date
thereof shall be extended to the next succeeding Business Day, and, with respect
to payments of principal, interest thereon shall
<PAGE>
be payable at the Applicable Rate during such extension. Each payment received
by the Holder shall be applied first to late charges and collection expenses, if
any, then to the payment of accrued but unpaid interest hereunder, and then to
the reduction of the unpaid principal balance hereof.
2.6 Surrender of Note on Redemption, Prepayment or Conversion. Upon any
---------------------------------------------------------
conversion of any or all of this Note to Common Stock or any prepayment or
redemption of this Note, this Note may, at the option of the Holder or if
requested by the Company, and shall, as a condition to transfer, be surrendered
to the Company in exchange for a new Note in a principal amount equal to the
principal amount remaining unpaid on the surrendered Note, or made available to
the Company for notation thereon of the portion of the principal and interest so
redeemed, prepaid or converted. In case the entire principal amount of this Note
is redeemed, prepaid or converted, this Note shall be surrendered to the Company
for cancellation and shall not be reissued.
2.7 Guarantees. Subject to the provisions of the Guarantee Agreement, the
----------
principal of and interest on the Notes will be guaranteed jointly and severally
by the Subsidiary Guarantors on a senior basis (the "Guarantees"). The
----------
Guarantees of the Notes issued by any Subsidiary Guarantor will be senior to all
existing and future Indebtedness of such Subsidiary Guarantors which is not
expressly subordinate or junior in right of payment to the Guarantees.
2.8 Security/Ranking. The Notes will be secured by the Collateral and will
----------------
be senior to any existing or future Indebtedness of the Company which is not
expressly subordinate or junior in right of payment to the Notes.
2.9 Use of Proceeds. The net proceeds from the Notes will be used to repay
---------------
existing debt owing by the Company to C&S Private Equity Fund, L.P. and
prepayment penalties, if any, and fund working capital and expansion
requirements and to pay related fees and expenses.
2.10 Certain Covenants. The Securities Purchase Agreement contains certain
-----------------
covenants as set forth therein and such covenants are herein incorporated by
reference.
2.11 Registration Rights. Shares of Common Stock issuable under the terms
-------------------
of this Note shall have registration rights as described in the Registration
Rights Agreement. Among other provisions, in the event of a default by the
Company in its obligations to register shares under the Registration Rights
Agreement or any other material default under the Registration Rights Agreement,
which material default is not cured within 10 days after the occurrence thereof
(a "Registration Default"), the Note will accrue additional interest
--------------------
("Additional Interest") as follows: the per annum interest rate on the Note will
- ---------------------
increase by an additional 500 basis points from the date of the Registration
Default and for 90 days thereafter, and then the per annum interest rate will
increase by an additional 25 basis points for each subsequent 90-day period
during which the Registration Default remains uncured. All Additional Interest
will be payable in cash monthly on the first of each month, commencing with the
first such date occurring after any such Additional Interest commences to
accrue, until such Registration Default is cured. After the date on which such
Registration Default is cured, the interest rate on the Note will revert to the
interest rate in effect prior to the Registration Default.
<PAGE>
2.12 Event of Default. Upon the occurrence of an Event of Default, the
----------------
unpaid balance of the principal amount of this Note, together with all accrued
and unpaid interest thereon, may become, or may be declared to be, due and
payable in the manner, upon the conditions and with the effect provided in
Section 8.2 of the Securities Purchase Agreement.
ARTICLE 3. COLLATERAL.
-----------
3.1 Generally.Section 3.1. Generally. As security for the payment of all
--------- ------------------------
liabilities of Issuer to Holder, including without limitation: (i) indebtedness
evidenced under the Notes, advances and other extensions of credit, all fees and
charges owing by Issuer, and all other liabilities and obligations of every kind
or nature whatsoever of Issuer to Holder, whether now existing or hereafter
incurred, joint or several, matured or unmatured, direct or indirect, primary or
secondary, related or unrelated, due or to become due, including but not limited
to any extensions, modifications, substitutions, increases and renewals thereof,
(ii) the payment of all amounts advanced by Holder to preserve, protect, defend,
and enforce its rights hereunder and in the following property in accordance
with the terms of the Notes and Securities Purchase Agreement, and (iii) the
payment of all expenses incurred by Holder in connection therewith
(collectively, the "Obligations"). Issuer hereby assigns and grants to Holder,
-----------
to the extent permitted by applicable law, a continuing first priority lien on
and security interest in, upon, and to the Collateral.
3.2 Lien Documents. At Closing and thereafter as Holder deems necessary in
--------------
its sole discretion, Issuer shall execute and
deliver to Holder, or have executed and delivered (all in form and substance
satisfactory to Holder in its sole discretion):
(a) the Pledge Agreement;
(b) the Guarantee Agreement;
(c) UCC-1 Financing statements pursuant to the Uniform Commercial Code
in effect in the jurisdiction(s) in which Issuer operates, which Holder may file
in any jurisdiction where any Collateral is or may be located and in any other
jurisdiction that Holder deems appropriate; provided that a carbon,
--------
photographic, or other reproduction or other copy of the Securities Purchase
Agreement or of a financing statement is sufficient as and may be filed in lieu
of a financing statement; and
(d) any other agreements, documents, instruments, and writings deemed
necessary by Holder or as Holder may otherwise request from time to time in its
reasonable discretion to evidence, perfect, or protect Holder's lien and
security interest in the Collateral required hereunder.
3.3 Other Actions. In addition to the foregoing, Issuer (i) shall do
--------------
anything further that may be lawfully required by Holder to secure Holder and
effectuate the intentions and objects of the Notes, Pledge Agreement, and the
Securities Purchase Agreement, including but not limited to the execution and
delivery of continuation statements, amendments to financing statements, and
any other documents required hereunder. At Holder's
<PAGE>
request, Issuer shall also immediately deliver to Holder all items for which
Holder must receive possession to obtain a perfected security interest. Issuer
shall, on Holder's demand, deliver to Holder all notes, certificates, and
documents of title, instruments, and any other similar instruments constituting
Collateral.
3.4 Power of Attorney. Upon the occurrence of an Event of Default and
------------------
while an Event of Default is continuing, each of the officers of Holder is
hereby irrevocably made, constituted and appointed the true and lawful attorney
for Issuer (without requiring any of them to act as such) with full power of
substitution to do the following: (i) execute in the name of Issuer any
financing statements, schedules, assignments, instruments, documents, and
statements that Issuer is obligated to give Holder hereunder; and (ii) do such
other and further acts and deeds in the name of Issuer that may be reasonably
necessary or desirable to enforce any Collateral or perfect Holder's security
interest or lien in any Collateral.
ARTICLE 4. MISCELLANEOUS.
-------------
4.1 Amendment. This Note may be amended, modified, superseded or canceled,
---------
and any of the terms, covenants, representations, warranties or conditions
hereof and thereof may be waived only by a written instrument that satisfies the
requirements of Section 10.2 of the Securities Purchase Agreement.
------------
4.2 Successors and Assigns.
----------------------
(a) The rights and obligations of the Company and the Holder under
this Note shall be binding upon, and inure to the benefit of, and be enforceable
by, the Company and the Holder, and their respective permitted successors and
assigns.
(b) The Holder may not sell, assign (by operation of law or
otherwise), transfer, pledge, grant a security interest in, or otherwise dispose
of this Note or any portion hereof or any rights or obligations hereunder except
in compliance with Section 10.5 of the Securities Purchase Agreement, which
------------
contains certain restrictions on the transferability hereof.
(c) The registered owner of this Note may be treated as the owner of
this Note for all purposes.
4.3 GOVERNING LAW. THIS NOTE AND THE VALIDITY AND ENFORCEABILITY HEREOF
-------------
SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO CONFLICT OF LAWS RULES OR
CHOICE OF LAWS RULES THEREOF.
4.4 Waivers. Except as may be otherwise provided herein, the makers,
-------
signers, sure-ties, guarantors and endorsers of this Note severally waive
demand, presentment, notice of dishonor, notice of intent to demand or
accelerate payment hereof, notice of acceleration, diligence in collecting,
grace, notice, and protest, and agree to one or more extensions for any
<PAGE>
period or periods of time and partial payments, before or after maturity,
without prejudice to the Holder.
4.5 No Waiver by Holder. No failure or delay on the part of the Holder in
-------------------
exercising any right, power or privilege hereunder and no course of dealing
between the Company and the Holder shall operate as a waiver thereof; nor shall
any single or partial exercise of any right, remedy, power or privilege
hereunder preclude any other or further exercise thereof or the exercise of any
other right, remedy, power or privilege.
4.6 Limitation on Interest. Notwithstanding any other provision of this
----------------------
Note, interest on the indebtedness evidenced by this Note is expressly limited
so that in no contingency or event whatsoever, whether by acceleration of the
maturity of this Note or otherwise, shall the interest contracted for, charged
or received by the Holder exceed the maximum amount permissible under applicable
law. If from any circumstances whatsoever fulfillment of any provisions of this
Note or of any other document evidencing, securing or pertaining to the
indebtedness evidenced hereby, at the time performance of such provision shall
be due, shall involve transcending the limit of validity prescribed by law,
then, ipso facto, the obligation to be fulfilled shall be reduced to the limit
of such validity, and if from any such circumstances the Holder shall ever
receive anything of value as interest or deemed interest by applicable law under
this Note or any other document evidencing, securing or pertaining to the
indebtedness evidenced hereby or otherwise an amount that would exceed the
highest lawful rate, such amount that would be excessive interest shall be
applied to the reduction of the principal amount owing under this Note or on
account of any other indebtedness of the Company to the Holder, and not to the
payment of interest, or if such excessive interest exceeds the unpaid balance of
principal of this Note and such other indebtedness, such excess shall be
refunded to the Company. In determining whether or not the interest paid or
payable with respect to any indebtedness of the Company to the Holder, under any
specific contingency, exceeds the highest lawful rate, the Company and the
Holder shall, to the maximum extent permitted by applicable law, (a)
characterize any non-principal payment as an expense, fee or premium rather than
as interest, (b) exclude voluntary prepayments and the effects thereof, (c)
amortize, prorate, allocate and spread the total amount of interest throughout
the term of such indebtedness so that the actual rate of interest on account of
such indebtedness does not exceed the maximum amount permitted by applicable
law, and/or (d) allocate interest between portions of such indebtedness, to the
end that no such portion shall bear interest at a rate greater than that
permitted by applicable law. The terms and provisions of this paragraph shall
control and supersede every other conflicting provision of this Note and all
other agreements between the Company and the Holder.
<PAGE>
EXECUTED as of the date first written above.
GRACE DEVELOPMENT INC.
By:_________________________________
Name:_______________________________
Title:______________________________
<PAGE>
Exhibit 4.3
This Stock Purchase Warrant (this "Warrant") and any securities acquired
upon the exercise of this Warrant have not been registered under the Securities
Act of 1933, as amended (the "Securities Act"), or the securities laws of any
state. None of this warrant, such securities or any interest therein may be
sold, transferred, pledged or hypothecated except pursuant to an effective
registration statement under the Securities Act and such registration or
qualification as may be necessary under the securities laws of any jurisdiction
or pursuant to a written opinion of counsel (which counsel and opinion shall be
reasonably satisfactory to the Company) that such registration or qualification
is not required.
GRACE DEVELOPMENT INC.
STOCK PURCHASE WARRANT
This certifies that, for good and valuable consideration, Grace Development
Inc., a Colorado corporation (the "Company"), grants to [Purchaser] (the
"Warrantholder"), the right to subscribe for and purchase from the Company
_____________________________ (___________) validly issued, fully paid and
nonassessable shares (the "Warrant Shares") of Common Stock, no par value per
share, of the Company (the "Common Stock"), at the purchase price per share of
$1.00 (the "Exercise Price"), at any time prior to 5:00 p.m., New York, New York
time, on the Expiration Date, all subject to the terms, conditions and
adjustments herein set forth.
1. Duration and Exercise of Warrant, Limitation on Exercise, Payment of
--------------------------------------------------------------------
Taxes.
- -----
1.1. Duration and Exercise of Warrant. Subject to the terms and
--------------------------------
conditions set forth herein, this Warrant may be exercised, in whole or in part,
by the Warrantholder by:
(a) the surrender of this Warrant to the Company, with a duly
executed Exercise Form specifying the number of Warrant Shares to be purchased,
during normal business hours on any Business Day prior to the Expiration Date;
and
(b) the delivery of payment to the Company, for the account of
the Company, by cash, wire transfer, certified or official bank check or any
other means approved by the Company, of the Exercise Price for the number of
Warrant Shares specified in the Exercise Form in lawful money of the United
States of America. In addition to and without limiting the rights of the
Warrantholder under the terms hereof, the Warrantholder shall have the right, in
exercising this Warrant in whole or in part at any time or from time to time in
accordance with its terms, to deliver to the Company, in lieu of a payment by
cash, wire transfer, certified or official bank check or any other means
approved by the Company, written notice that the Warrantholder elects to apply
the Exercise Price against the outstanding principal balance of the Note
executed by the Company payable to the Warrantholder. The credit of the Exercise
Price against the Note shall in all respects be deemed to constitute payment in
full of such Exercise Price.
<PAGE>
The Company agrees that such Warrant Shares shall be deemed to be issued to
the Warrantholder as the record holder of such Warrant Shares as of the close of
business on the date on which this Warrant shall have been surrendered and
payment made for the Warrant Shares as aforesaid. Notwithstanding the
foregoing, no such surrender shall be effective to constitute the Person
entitled to receive such shares as the record holder thereof while the transfer
books of the Company for the Common Stock are closed for any purpose (but not
for any period in excess of five Business Days); but any such surrender of this
Warrant for exercise during any period while such books are so closed shall
become effective for exercise immediately upon the reopening of such books, as
if the exercise had been made on the date this Warrant was surrendered and for
the number of shares of Common Stock and at the Exercise Price in effect at the
date of such surrender.
1.2. Cashless Exercise Right.
-----------------------
(a) Subject to Section 1.1(b), at any time or from time to time,
in lieu of the payment of the Exercise Price, the Warrantholder shall have the
right (but not the obligation), to require the Company to convert this Warrant,
in whole or in part, into Common Stock (a "Cashless Exercise Right") as provided
for in this Section 1.2. Upon exercise of the Cashless Exercise Right, the
Company shall deliver to the Warrantholder within five Business Days after
receipt of the Exercise Form by the Company (without payment by the
Warrantholder of any of the Exercise Price) in accordance with Section 1.1 that
number of shares of Common Stock equal to the quotient obtained by dividing (i)
the value of the Warrant at the time the Cashless Exercise Right is exercised
(determined by subtracting, the Aggregate Exercise Price of the Warrant Shares
in effect immediately prior to the exercise of the Cashless Exercise Right from
the aggregate Market Price (as defined below) of the Warrant Shares in effect
immediately prior to the exercise of the Cashless Exercise Right) by (ii) the
Market Price of one share of Common Stock immediately prior to the exercise of
the Cashless Exercise Right.
(b) The Cashless Exercise Right may be exercised by the
Warrantholder, at any time or from time to time, on any Business Day by
delivering this Warrant, with a duly executed Exercise Form with the conversion
section completed, to the Company, exercising the Cashless Exercise Right and
specifying the total number of shares of Common Stock that, the Warrantholder
will be issued pursuant to such conversion. No fractional shares arising out of
the formula in Section 1.2(a) for determining the number of shares issuable
under the Cashless Exercise Right shall be issued, and the Company shall in lieu
thereof make payment to the Warrantholder of cash in the amount of such fraction
multiplied by the Market Price of one Share of Common Stock on the date of
conversion, provided that in the event that sufficient funds are not legally
available for such cash payment any fractional shares of Common Stock shall be
rounded up to the next whole number. Notwithstanding anything to the contrary in
this Warrant, the Cashless Exercise Right shall become null and void, and of no
further force and effect, upon the registration of this Warrant or the Warrant
Shares pursuant to an effective registration statement under the Securities Act.
1.3. Warrant Shares Certificate. A stock certificate or certificates
--------------------------
for the Warrant Shares specified in the Exercise Form shall be delivered to the
Warrantholder within
2
<PAGE>
five Business Days after receipt of the Exercise Form by the Company and payment
of the purchase price; provided, however, that if a determination by the
Company's Board of Directors (the "Board") is necessary pursuant to Section 1.2,
such delivery shall be made promptly after such determination is made (such
determination shall be made with reasonable promptness but no more frequently
than on a quarterly basis). If this Warrant shall have been exercised only in
part, the Company shall, at the time of delivery of the stock certificate or
certificates, deliver to the Warrantholder a new Warrant evidencing the, rights
to purchase the remaining Warrant Shares, which new Warrant shall in all other
respects be identical with this Warrant.
1.4. Reservation of Warrant Shares. The Company covenants that it will
-----------------------------
at all times, keep available such number of authorized shares of its Common
Stock, free from all preemptive rights with respect thereto, which will be
sufficient to permit the exercise of this Warrant for the full number of Warrant
Shares specified herein, upon exercise of this Warrant. The Company further
covenants that such Warrant Shares, when issued pursuant to the exercise of this
Warrant, will be duly and validly issued, fully paid and non-assessable, and
free from all taxes, liens and charges with respect to the issuance thereof.
1.5. Payment of Taxes. The issuance of certificates for Warrant
----------------
Shares shall be made without charge to the Warrantholder for any stock transfer
or other issuance tax in respect thereto; provided, however, that the
Warrantholder shall be required to pay any and all taxes that may be payable in
respect of any transfer involved in the issuance and delivery of any certificate
in a name other than that of the then Warrantholder as reflected upon the books
of the Company.
2. Restrictions on Transfer; Restrictive Legends.
---------------------------------------------
2.1. Restrictions on Transfer. This Warrant may not be offered, sold,
------------------------
transferred, pledged or otherwise disposed of, in whole or in part, to any
Person other than an Affiliate of the Warrantholder without the prior written
consent of the Company, which shall not be unreasonably withheld.
2.2. Restrictive Legends. Except as otherwise permitted by this
-------------------
Section 2, each Warrant (and each Warrant issued in substitution for any
Warrant) shall be stamped or otherwise imprinted with a legend in substantially
the following form:
This Warrant and any securities acquired upon the exercise of this warrant
have not been registered under the Securities Act of 1933, as amended (the
"Securities Act"), or the securities laws of any state. None of this
warrant, such securities or any interest therein may be sold, transferred,
pledged or hypothecated except pursuant to an effective registration
statement under the Securities Act and such registration or qualification
as may be necessary under the securities laws of any jurisdiction or
pursuant to a written opinion of counsel (which counsel and opinion shall
be reasonably satisfactory to the Company) that such registration or
qualification is not required.
Except as otherwise permitted by this Section 2, each stock certificate for
Warrant Shares issued upon the exercise of any Warrant and each stock
certificate issued upon the direct or
3
<PAGE>
indirect transfer of any such Warrant Shares shall be stamped or otherwise
imprinted with a legend in substantially the following form:
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended (the "Securities Act"), or the
securities laws of any state. The securities may not be sold, transferred,
pledged or hypothecated except pursuant to an effective registration
statement under the Securities Act and such registration or qualification
as may be necessary under the securities laws of any jurisdiction or
pursuant to a written opinion of counsel (which counsel and opinion shall
be reasonably satisfactory to the Company) that such registration or
qualification is not required.
Notwithstanding the foregoing, the Warrantholder may require the Company to
issue a Warrant or a stock certificate for Warrant Shares, in each case without
a legend, if either (i) such Warrant or such Warrant Shares, as the case may be,
have been registered for resale under the Securities Act, (ii) the Warrantholder
has delivered to the Company an opinion of legal counsel (from a firm reasonably
satisfactory to the Company) which opinion shall be addressed to the Company and
be reasonably satisfactory in form and substance to the Company's counsel, to
the effect that such registration is not required with respect to such Warrant
or such Warrant Shares, as the case may be or (iii) such Warrant or Warrant
Shares may be, sold pursuant to Rule 144 (or any successor provision then in
effect) under the Securities Act.
3. Loss or Destruction of Warrant. Subject to the terms and conditions
------------------------------
hereof, upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Warrant and, in the case of
loss, theft or destruction, of such bond or indemnification as the Company may
reasonably require, and, in the case of such mutilation, upon surrender and
cancellation of this Warrant the Company will execute and deliver a new Warrant
of like tenor.
4. Ownership of Warrant. The Company may deem and treat the person in
--------------------
whose name this Warrant is registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by anyone
other than the Company) for all purposes and shall not be affected by any notice
to the Company, until presentation of this Warrant for registration of transfer.
5. Antidilution Provisions. During the exercise period or until fully
-----------------------
exercised, the Exercise Price and the number of Warrant Shares issuable pursuant
to this Warrant shall be subject to adjustment from time to time as provided in
this Section 5. In the event that any adjustment of the Exercise Price as
required herein results in a fraction of a cent, such Exercise Price shall be
rounded up or down to the nearest cent.
(a) Adjustment of Exercise Price and Number of Shares upon Issuance of
------------------------------------------------------------------
Common Stock. Except as otherwise provided in Section 5(c) and 5(d) hereof, if
- ------------
and whenever after the First Closing Date, the Company issues or sells, or in
accordance with Section 5(b) hereof is deemed to have issued or sold, any shares
of Common Stock for no consideration or for a consideration per share less than
the Market Price on the date of issuance (a "Dilutive
4
<PAGE>
Issuance"), then effective immediately upon the Dilutive Issuance, the Exercise
Price will be adjusted in accordance with the following formula:
E' = (E) (O + P/M) / (CSDO)
where:
E' = the adjusted Exercise Price;
E = the then current Exercise Price;
M = the then current Market Price; provided, however, that
in the case of stock issued in stock for stock
acquisitions with unaffiliated third parties, "M" will
be deemed to be the lesser of (i) (a) $0.70 per share
in the case of issuances after the First Closing and
(b) $1.00 per share in the case of issuances on or
after the Second Closing to the extent the Second
Closing occurs (as such per share amounts are adjusted
for stock splits, stock dividends and other
recapitalizations after the date of this Agreement);
and (ii) the then current Market Price;
O = the number of shares of Common Stock outstanding
immediately prior to the Dilutive Issuance;
P = the aggregate consideration, calculated as set forth in
Section 5(b) hereof, received by the Company upon such
Dilutive Issuance; and
CSDO = the total number of shares of Common Stock Deemed
Outstanding (as herein defined) immediately after the
Dilutive Issuance.
(b) Effect on Exercise Price of Certain Events. For purposes of
------------------------------------------
determining the adjusted Exercise Price under Section 5(a) hereof, the following
will be applicable:
(i) Issuance of Rights or Options. If the Company in any manner
-----------------------------
issues or grants any warrants, rights or options, whether or not immediately
exercisable, to subscribe for or to purchase Common Stock or other securities
exercisable, convertible into or exchangeable for Common Stock ("Convertible
Securities") (such warrants, rights and options to purchase Common Stock or
Convertible Securities are hereinafter referred to as "Options"), and the price
per share, for which Common Stock is issuable upon the exercise of such Options
is less than the Market Price on the date of issuance ("Below Market Options"),
then the maximum total number of shares of Common Stock issuable upon the
exercise of all such Below Market Options (assuming full exercise, conversion or
exchange of Convertible Securities, if applicable) will, as of the date of the
issuance or grant of such Below Market Options, be deemed to be outstanding and
to have been issued and sold by the Company for such price per share. For
purposes of the preceding sentence, the price per share for which Common Stock
is issuable upon the exercise of such Below Market Options is determined by
dividing (i) the total amount, if any, received or receivable by the Company as
consideration for the issuance or granting of
5
<PAGE>
such Below Market Options, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the exercise of all such
Below Market Options, plus, in the case of Convertible Securities issuable upon
the exercise of such Below Market Options, the minimum aggregate amount of
additional consideration payable upon the exercise, conversion or exchange
thereof at the time such Convertible Securities first become exercisable,
convertible or exchangeable, by (ii) the maximum total number of shares of
Common Stock issuable upon the exercise of all such Below Market Options
(assuming full conversion of Convertible Securities, if applicable). No further
adjustment to the Exercise Price will be made upon the actual issuance of such
Common Stock upon the exercise of such Below Market Options or upon the
exercise, conversion or exchange of Convertible Securities issuable upon
exercise of such Below Market Options.
(ii) Issuance of Convertible Securities.
----------------------------------
(A) If the Company in any manner issues or sells any
Convertible Securities, whether or not immediately convertible (other than where
the same are issuable upon the exercise of Options) and the price per share for
which Common Stock is issuable upon such exercise, conversion or exchange (as
determined pursuant to Section 5(b)(ii)(B) if applicable) is less than the
Market Price on the date of issuance, then the maximum total number of shares of
Common Stock issuable upon the exercise, conversion or exchange of all such
Convertible Securities will, as of the date of the issuance of such Convertible
Securities, be deemed to be outstanding and to have been issued and sold by the
Company for such price per share. For the purposes of the preceding sentence,
the price per share for which Common Stock is issuable upon such exercise,
conversion or exchange is determined by dividing (i) the total amount, if any,
received or receivable by the Company as consideration for the issuance or sale
of all such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the exercise,
conversion or exchange thereof at the time such Convertible Securities first
become exercisable, convertible or exchangeable, by (ii) the maximum total
number of shares of Common Stock issuable upon the exercise, conversion or
exchange of all such Convertible Securities. No further adjustment to the
Exercise Price will be made upon the actual issuances of such Common Stock upon
exercise, conversion or exchange of such Convertible Securities.
(B) If the Company in any manner issues or sells any
Convertible Securities with a fluctuating conversion or exercise price or
exchange ratio, then the price per share for which Common Stock is issuable upon
such exercise, conversion or exchange for purposes of the calculation
contemplated by Section 5(b)(ii)(A) shall be deemed to be the lowest price per
share which would be applicable assuming that all holding period and other
conditions to any discounts contained in such Convertible Security have been
satisfied.
(iii) Change in Option Price or Conversion Rate. If there is a
change at any time after the First Closing Date in (i) the amount of additional
consideration payable to the Company upon the exercise of any Options; (ii) the
amount of additional consideration, if any, payable to the Company upon the
exercise, conversion or exchange or any Convertible Securities; or (iii) the
rate at which any Convertible Securities are convertible into or
6
<PAGE>
exchangeable for Common Stock (other than under or by reason of provisions
designed to protect against dilution), the Exercise Price in effect at the time
of such change will be readjusted to the Exercise Price, which would have been
in effect at such time had such Options or Convertible Securities still
outstanding provided for such changed additional consideration or changed
conversion rate, as the case may be, at the time initially granted, issued or
sold.
(iv) Treatment of Expired Options and Unexercised Convertible
--------------------------------------------------------
Securities. If, in any case, the total number of shares of Common Stock
- ----------
issuable upon exercise of any Options or upon exercise, conversion or exchange
of any Convertible Securities is not, in fact, issued and the rights to exercise
such option or to exercise, convert or exchange such Convertible Securities
shall have expired or terminated, the Exercise Price then in effect will be
readjusted to the Exercise Price which would have been in effect at the time of
such expiration or termination had such Options or Convertible Securities, to
the extent outstanding immediately prior to such expiration or termination
(other than in respect of the actual number of shares of Common Stock issued
upon exercise or conversion thereof), never been issued.
(v) Calculation of Consideration Received. If any Common Stock,
-------------------------------------
Options or Convertible Securities are issued, granted or sold for cash, the
consideration received therefor for purposes of this Warrant will be the amount
received by the Company therefor, before deduction of reasonable commissions,
underwriting discounts or allowances or other reasonable expenses paid or
incurred by the Company in connection with such issuance, grant or sale. In case
any Common Stock, Options or Convertible Securities are issued or sold for a
consideration part or all of which shall be other than cash, the amount of the
consideration other than cash received by the Company will be the fair market
value of such consideration except where such consideration consists of freely-
tradeable securities, in which case the amount of consideration received by the
Company will be the Market Price thereof as of the date of receipt. In case any
Common Stock, Options or Convertible Securities are issued in connection with my
merger or consolidation in which the Company is the Surviving corporation, the
amount of consideration therefor will be deemed to be the fair market value of
such portion of the net assets and business of the non-surviving corporation as
is attributable to such Common Stock, Options or Convertible Securities, as the
case may be. The fair market value of any consideration other than cash or
securities will be determined in the good faith reasonable business judgment of
the Board of Directors.
(vi) Exceptions to Adjustment of Exercise Price. No adjustment
------------------------------------------
to the Exercise Price will be made (i) upon the exercise of any warrants,
options or convertible securities issued and outstanding on the date hereof in
accordance with the terms of such securities as of such date; (ii) upon the
issuance of the Sale Shares or the Notes (each as defined in the Securities
Purchase Agreement) or the Warrant in accordance with terms of the Securities
Purchase Agreement; or (iii) upon the exercise of the Warrant or conversion of
the Note.
(c) Subdivision or Combination of Common Stock. If the Company, at
------------------------------------------
any time after the First Closing Date, subdivides (by any stock split, stock
dividend, recapitalization, reorganization, reclassification or otherwise) its
shares of Common Stock into a greater number of shares, then, after the date of
record for effecting such subdivision, the Exercise Price in effect
7
<PAGE>
immediately prior to such subdivision will be proportionately reduced. If the
Company, at any time after the initial issuance of this Warrant, combines (by
reverse stock split, recapitalization, reorganization, reclassification or
otherwise) its shares of Common Stock into a smaller number of shares, then,
after the date of record for effecting such combination, the Exercise Price in
effect immediately prior to such combination will be proportionately increased.
(d) Major Transaction. If, after the First Closing Date, the Company
-----------------
shall consolidate or merge with any other corporation or entity (other than a
merger in which the Company is the surviving or continuing entity) or there
shall occur any share exchange pursuant to which all of the outstanding shares
of Common Stock are converted into other securities or property or any
reclassification or change of the outstanding shares of Common Stock (each of
the foregoing being a "Major Transaction"), then each holder of a Warrant may
thereafter, at its option, be entitled, at its election, either to (i) in the
event that the Common Stock remains outstanding or holders of Common Stock
receive any common stock or substantially similar equity interest in each of the
foregoing cases which is publicly traded, retain its Warrant and such Warrant
shall continue to apply to such Common Stock or shall apply, as nearly as
practicable, to such other common stock or equity interest, as the case may be,
or (ii) regardless of whether clause (i) applies, receive consideration, in
exchange for such Warrant, equal to the number of shares of stock or securities
or property of the Company, or of the entity resulting from such Major
Transaction (the "Major Transaction Consideration"), to which a holder of the
number of shares of Common Stock delivered upon the exercise of such Warrant
would have been entitled upon such Major Transaction had such holder exercised
the Warrant (without regard to any limitations on conversion or elsewhere
contained) on the trading date immediately preceding the consummation of such
Major Transaction and had such Common Stock been issued and outstanding and had
such Warrantholder been the holder of record of such Common Stock at the time of
the consummation of such Major Transaction; and the Company shall make lawful
provision for the foregoing as a part of such Major Transaction and shall cause
the issuer of any security in such transaction which constitutes Registrable
Securities under that certain Registration Rights Agreement dated as of the date
hereof among the Company and the signatories thereto (the "Registration Rights
Agreement") to assume all of the Company's obligations under the Registration
Rights Agreement. No later than five Business Days prior to the consummation of
the Major Transaction, but not prior to the public announcement of such Major
Transaction, the Company shall deliver written notice ("Notice of Major
Transaction") to each holder of a Warrant of such Notice of Major Transaction.
Such Notice of Major Transaction shall indicate the amount and type of the Major
Transaction consideration which such holder of a Warrant would receive under
this Section.
(e) Distribution of Assets. In case the Company shall declare or make
----------------------
any distribution of its assets (or rights to acquire its assets) to holders of
Common Stock as a partial liquidating dividend, by way of return of capital or
otherwise (including any dividend or distribution to the Company's shareholders
of cash or shares (or rights to acquire shares) of capital stock of a
subsidiary) (a "Distribution"), at any time after the First Closing Date, then
the Warrantholder shall be entitled upon exercise of this Warrant for the
purchase of any or all of the shares of Common Stock subject hereto, to receive
the amount of such assets (or rights) which would have been payable to the
Warrantholder had such Warrantholder been the holder of such
8
<PAGE>
shares of Common Stock on the record date for the determination of shareholders
entitled to such Distribution.
(f) Notices of Adjustment. Upon the occurrence of any event which
---------------------
requires any adjustment of the Exercise Price or in the number or kind of shares
purchasable upon exercise of the Warrant, then, and in each such case, the
Company shall give notice thereof to the Warrantholder, which notice shall state
the Exercise Price resulting from such adjustment and the increase or decrease
in the number of Warrant Shares (or other securities or property) purchasable,
as applicable, at such price upon exercise, setting forth in reasonable detail
the method of calculation and the facts upon which such calculation is based.
Such calculation shall be certified by the chief financial officer of the
Company.
(g) Minimum Adjustment of Exercise Price. No adjustment of the
------------------------------------
Exercise Price shall be made in an amount of less than 1% of the Exercise Price
in effect at the time such adjustment is otherwise required to be made, but any
such lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment which, together with any
adjustments so carried forward, shall amount to not less than 1% of such
Exercise Price.
(h) No Fractional Shares. No fractional shares of Common Stock are to
--------------------
be issued upon the exercise of this Warrant, but the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise be issuable
in an amount equal to the same fraction of the Market Price of a share of Common
Stock; provided that in the event that sufficient funds are not legally
available for the payment of such cash adjustment any fractional shares of
Common Stock shall be rounded up to the next whole number.
(i) Other Notices. In case at any time:
-------------
(i) the Company shall declare any dividend upon the Common Stock
payable in shares of stock of any class or make any other distribution to the
holders of the Common Stock;
(ii) the Company shall offer for subscription pro rata to the
holders of the Common Stock any additional shares of stock of any class or other
rights;
(iii) there shall be any capital reorganization of the Company, or
reclassification of the Common Stock or consolidation or merger of the Company
with or into, or sale of all or substantially all of its assets to, another
corporation or entity; or
(iv) there shall be a voluntary or involuntary dissolution
liquidation or winding-up of the Company;
then, in each such case, the Company shall give to the Warrantholder (A) notice
of the date on which the books of the Company shall close or a record shall be
taken for determining the holders of Common Stock entitled to receive any such
dividend, distribution, or subscription rights or for determining the holders of
Common Stock entitled to vote in respect of any such
9
<PAGE>
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, or winding-up and (B) in the case of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up, notice of the date (or, if not then known, a reasonable
approximation thereof by the Company) when the same shall take place. Such
notice shall also specify the date on which the holders of Common Stock shall be
entitled to receive such dividend, distribution, or subscription rights or to
exchange their Common Stock for stock or other securities or property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation, or winding-up, as the case may be. Such notice
shall be given at least 30 days prior to the record date or the date on which
the Company's books are closed in respect thereto, but in no event earlier than
public announcement of such proposed transaction or event. Failure to give any
such notice or any defect therein shall not affect the validity of the
proceedings referred to in clauses (i), (ii), (iii) and (iv) above.
6. Amendments. Any provision of this Warrant may be amended and the
----------
observance thereof waived only with the written consent of the Company and the
Warrantholder.
7. Definitions. As used herein, unless the context otherwise requires,
-----------
the following terms have the following respective meanings:
"Affiliate" means, with respect to any Person, any other Person who
---------
controls, is controlled by or is under common control with such Person.
"Aggregate Exercise Price" means the dollar amount equal to (i) the total
------------------------
number of Warrant Shares set forth in the notice of exercise delivered pursuant
to Section 1.2 multiplied by (ii) the Exercise Price in effect immediately prior
to such exercise.
"Below Market Options" has the meaning specified in Section 5(b)(i).
--------------------
"Board" has the meaning specified in Section 1.3.
-----
"Business Day" means any day other than a Saturday, Sunday or a day on
------------
which national banks are authorized by law to close in the State of New York.
"Cashless Exercise Right" has the meaning specified in Section 1.2(a).
-----------------------
"Common Stock" has the meaning specified on the cover of this Warrant.
------------
"Common Stock Deemed Outstanding" means the number of shares of Common
-------------------------------
Stock actually outstanding (not including shares of Common Stock held in the
treasury of the Company), plus (x) in case of any adjustment required by Section
5(a) resulting from the issuance of any Options, the maximum total number of
shares of Common Stock issuable upon the exercise of the Options for which the
adjustment is required (including any Common Stock issuable upon the conversion
of Convertible Securities issuable upon the exercise of such Options), and (y)
in the case of any adjustment required by Section 5(a) resulting from the
issuance of any Convertible Securities, the maximum total number of shares of
Common Stock
10
<PAGE>
issuable upon the exercise, conversion or exchange of the Convertible Securities
for which the adjustment is required, as of the date of issuance of such
Convertible Securities, if any.
"Company" has the meaning specified on the cover of this Warrant.
-------
"Convertible Securities" has the meaning specified in Section 5(b)(i).
----------------------
"Dilutive Issuance" has the meaning specified in Section 5(a).
-----------------
"Distribution" has the meaning specified in Section 5(e).
------------
"Exercise Form" means an Exercise Form in the form annexed hereto as
-------------
Exhibit A.
"Exercise Price" has the meaning specified on the cover of this Warrant.
--------------
"Expiration Date" means the fifth anniversary of the date of issuance of
---------------
this Warrant.
"First Closing Date" has the meaning specified in the Securities Purchase
------------------
Agreement.
"Major Transaction" has the meaning specified in Section 5(d).
-----------------
"Major Transaction Consideration" has the meaning specified in Section
-------------------------------
5(d).
"Market Price" means, as of any date, (i) the average of the Closing Bid
------------
Prices for the shares of Common Stock as reported to The Nasdaq National Market
for the 15 trading days immediately preceding such date, or (ii) if The Nasdaq
National Market is not the principal trading market for the Common Stock, the
average of the last reported bid prices on the principal trading market for the
Common Stock, during the same period, or, if there is no bid price for such
period, the last reported sales price for such period, or (iii) if market value
cannot be calculated as of such date on any of the foregoing bases, the Market
Price shall be the average fair market value as reasonably determined by an
investment banking firm selected by the Company and reasonably acceptable to the
holders of a majority in interest of the Warrant, with the costs of the
appraisal to be borne by the Company. The manner of determining the Market
Price of the Common Stock set forth in the foregoing definition shall apply with
respect to any other security in respect of which a determination as to market
value must be made hereunder.
"Notice of Major Transaction" has the meaning specified in Section 5(d).
---------------------------
"Options" has the meaning specified in Section 5(b)(i).
-------
"Person" means any individual, firm, corporation, partnership, limited
------
liability company, trust, incorporated or unincorporated association, joint
venture, joint stock company, or other entity of any kind, and shall include any
successor (by merger or otherwise) of such entity.
"Registration Rights Agreement" has the meaning specified in Section 5(d).
-----------------------------
11
<PAGE>
"Securities Act" has the meaning specified on the cover of this Warrant, or
--------------
any similar Federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time. Reference to a
particular section of the Securities Act, shall include a reference to the
comparable section, if any, of any such similar Federal statute.
"Securities Purchase Agreement" means the Securities Purchase Agreement
-----------------------------
dated April 14, 2000 among the Company and certain purchasers named therein.
"Subsidiary" means, as to any Person, a corporation, partnership, limited
----------
liability company or other entity of which 50% or more of the voting power of
the outstanding voting equity securities or 50% or more of the economic equity
interest is held, directly or indirectly, by such Person.
"Warrantholder" has the meaning specified on the cover of this Warrant.
-------------
"Warrant Shares" has the meaning specified on the cover of this Warrant.
--------------
8. Miscellaneous.
-------------
8.1. Section and Other Headings. The section and other headings
--------------------------
contained in this Warrant are for reference purposes only and shall not be
deemed to be a part of this Warrant or to affect the meaning or interpretation
of this Warrant.
8.2. Notices. All notices, demands and other communications
-------
provided for or permitted hereunder shall be made in writing and shall be by
registered or certified first-class mail, return receipt requested, telecopier,
courier service, overnight mail or personal delivery:
(a) if to the Warrantholder:
[Name of Warrantholder]
420 Lexington Avenue
Suite 1740
New York, New York 10170
Telecopy: (212) 973-9219
Attention: Jeff Keswin and David Einhorn
(b) if to the Company:
Grace Development Inc.
1690 Chantilly Drive
Atlanta, Georgia 30324-3035
Telecopy: (678) 222-3036
Attention: President
12
<PAGE>
All such notices and communications shall be deemed to have been duly given
when delivered by hand, if personally delivered, when delivered by courier or
overnight mail, if delivered by commercial courier service or overnight mail;
five Business Days after being deposited in the mail, postage prepaid, if
mailed; and return receipt is mechanically acknowledged, if telecopied. Any
party may by notice given in accordance with this Section 9.2 designate another
address or Person for receipt of notices hereunder.
8.3. Severability. Any term or provision of this Warrant which is
------------
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the terms and provisions of this Warrant or
affecting the validity or enforceability of any of the terms or provisions of
this Warrant in any other jurisdiction.
8.4. GOVERNING LAW. THIS WARRANT AND THE VALIDITY AND ENFORCEABILITY
-------------
HEREOF SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO CONFLICT OF LAWS RULES OR
CHOICE OF LAWS RULES THEREOF.
8.5. No Rights or Liabilities as Stockholder. Nothing contained in
---------------------------------------
this Warrant shall be determined as conferring upon the Warrantholder any rights
as a stockholder of the Company or as imposing any liabilities on the
Warrantholder to purchase any securities whether such liabilities are asserted
by the Company or by creditors or stockholders of the Company or otherwise.
[Signature Page Follows]
13
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer.
GRACE DEVELOPMENT INC.
By: _____________________________
Name:
Title:
Dated: April ____, 2000
14
<PAGE>
EXERCISE FORM
-------------
(To be executed upon exercise of this Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant, to purchase _________________ of the Warrant Shares
and [herewith tenders payment for such Warrant Shares to the order of Grace
Development Inc. [hereby elects to apply the Exercise Price (as defined in the
Warrant) against the outstanding principal balance of the Note executed by Grace
Development Inc. payable to the undersigned] in the amount of $__________]
[hereby exercises its Cashless Exercise Right] in accordance with the terms of
this Warrant. The undersigned requests that a certificate for [such Warrant
Shares] [that the number of Warrant Shares to which the undersigned is entitled
as calculated pursuant to Section 1.2 of the Warrant] be registered in the name
of the undersigned and that such certificates be delivered to the undersigned's
address below.
The undersigned represents that it is acquiring such Warrant Shares
for its own account for investment and not with a view to or for sale in
connection with any distribution thereof (subject, however, to any requirement
of law that the disposition thereof shall at all times be within its control).
Dated: ___________________
________________________________
Signature
________________________________
(Print Name)
________________________________
(Street Address)
________________________________
(City) (State) (Zip Code)
Signed in the presence of:
____________________________________
Name:
15
<PAGE>
Exhibit 4.4
REGISTRATION RIGHTS AGREEMENT
-----------------------------
REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated as of April 14,
---------
2000 by and among Grace Development Inc., a Colorado corporation (the
"Company"), and the purchasers named on the signature pages hereto (the
-------
"Purchasers").
----------
PRELIMINARY STATEMENT
---------------------
Pursuant to the Securities Purchase Agreement (as defined below), the
Purchasers have agreed to purchase the Notes, the Sale Shares and the Warrants
(as each is defined in the Securities Purchase Agreement) on the condition,
among others, that the Company grant the registration rights set forth in this
Agreement.
ACCORDINGLY, to induce the Purchasers to purchase the Notes, the Sale
Shares and the Warrants and in consideration of the mutual representations and
agreements set forth in this Agreement, the Company and the Purchasers,
intending to be legally bound, now agree as follows:
STATEMENT OF AGREEMENT
----------------------
SECTION 1. DEFINITIONS.
-----------
1.1 Certain Definitions. As used in this Agreement, the following
-------------------
terms shall have the following meanings:
"Affiliate" means any entity controlling, controlled by or under
---------
common control with a designated Person. For the purposes of this definition,
"control" shall have the meaning specified as of the date of this Agreement for
that word in Rule 405 promulgated by the Securities and Exchange Commission (the
"SEC") under the Securities Act.
"Equity Security" shall mean any stock or similar security, including
---------------
without limitation securities containing equity features and securities
containing profit participation features, or any security convertible or
exchangeable, with or without consideration, into or for any stock or similar
security, or any security carrying any warrant or right to subscribe to or
purchase any stock or similar security, or any such warrant or right.
"Registrable Securities" shall mean (i) the Sale Shares, (ii) the
----------------------
Common Stock issuable upon conversion of the Notes, (iii) the Common Stock
issuable upon exercise of the Warrants, and (iv) any Common Stock issued with
respect to the Common Stock described in (i), (ii) or (iii) above by way of a
stock dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization or in connection
with any anti-dilution provisions relating to the Notes or the Warrants, until
the earliest to occur of (a) the date on which such security has been
effectively registered under the Securities Act and disposed of in accordance
with a registration statement and (b) the date on which all of the Registrable
Securities may be sold pursuant to Rule 144 (without any volume limitations
thereunder) or may
<PAGE>
be sold without compliance with such rule. The Holder hereby acknowledges and
agrees that the Notes and the Warrants shall not be deemed to be Registrable
Securities.
"Rule 144" means Rule 144 promulgated by the SEC under the Exchange
--------
Act, as such rule may be amended from time to time, or any successor rule
thereto.
"Securities Purchase Agreement" shall mean the Securities Purchase
-----------------------------
Agreement dated as of April 14, 2000 among the Company and the Purchasers.
1.2 Incorporated Definitions. Capitalized terms used in this
------------------------
Agreement and not otherwise defined herein shall have the meanings set forth in
the Securities Purchase Agreement.
SECTION 2. REGISTRATION.
------------
2.1 Mandatory Registration. Within 30 days following the date on
----------------------
which the Company becomes eligible to use Form S-3 (or any similar successor
form that permits incorporation by reference of filings made by the Company
under the Exchange Act, the Company shall file with the SEC a registration
statement with respect to the offering and sale or other disposition of all of
the Registrable Securities. The Company agrees to use its reasonable best
efforts to cause such registration statement to become effective as soon as
practicable following its filing with the SEC. The Company shall file such
additional registration statements on Form S-3 (or any similar successor form)
as the Holders of Registrable Securities may reasonably request to effect the
registration of Registrable Securities.
2.2 Piggyback Registration.
----------------------
(a) Except as set forth in Section 2.2 (b), as, if and when the
Company proposes to register any Common Stock under the Securities Act
for sale to the public, whether for its own account or for the account
of other security holders or both on a form that would also permit the
registration of the Registrable Securities (other than registrations
on Form S-8, or any successor form, or Form S-4, or any successor
form) (an "Eligible Registration), each such time it will give written
notice to the holders of Registrable Securities (the "Holders") of its
intention so to do. Upon the written request of a Holder received by
the Company within 20 days after the giving of any such notice by the
Company, to register such number of shares of Registrable Securities
held by such Holder specified in such written request, the Company
will cause the Registrable Securities as to which registration shall
have been so requested to be included in the securities to be covered
by the registration statement proposed to be filed by the Company with
respect to such Eligible Registration, all to the extent requisite to
permit the sale or other disposition by such Holder (in accordance
with its written request) of such Registrable Securities so
registered. In the event that any Eligible Registration pursuant to
this Section 2.2 shall be, in whole or in part an underwritten
offering of Common Stock (an "Underwritten Offering"), the number of
---------------------
shares of Registrable Securities to be included in such an
underwriting may be reduced if and to the extent that the managing
underwriter shall be of the opinion that such inclusion would
materially adversely affect the marketing of the securities to be sold
by the Company therein. In the
2
<PAGE>
event such a reduction is necessary, the reduction shall be borne
first by holders of securities that are not Registrable Securities
pursuant to this Agreement, and if a further reduction is necessary in
the judgment of the managing underwriter, then holders proposing to
sell Registrable Securities in the Underwritten Offering shall bear
the reduction on a pro-rata basis, based on the aggregate number of
shares of Registrable Securities that each holder proposed to offer
for sale in the Underwritten Offering. Notwithstanding the foregoing
provisions, the Company may for any reason and without the consent of
the Holders in good faith withdraw any registration statement referred
to in this Section 2.2 without thereby incurring any liability to the
Holders.
(b) Notwithstanding the foregoing, in connection with the first
underwritten Offering for the account of the Company after the date of
this Agreement, the Company will not have any obligation to register
in excess of 50% of the Registrable Securities as long as the price
per share offered in the Offering is equal to or greater than $3.00
per share in the event of Offerings on or before December 31, 2000 and
$5.00 per share thereafter (as such per share amounts are
appropriately adjusted for stock splits, stock dividends and other
recapitalizations after the date of this Agreement).
2.3 Method of Distribution. The Purchasers shall determine the method
----------------------
of distribution of the Registrable Securities registered pursuant to Section
2.1.
2.4 Registration Statement Form. Registrations pursuant to Section
---------------------------
2.1 shall be on such appropriate registration form of the SEC (i) as shall be
selected by the Company and as shall be reasonably acceptable to the Purchasers,
and (ii) as shall permit the disposition of such Registrable Securities in
accordance with the method or methods of disposition selected pursuant to
Section 2.3 hereof.
2.5 Expenses. Except as otherwise provided in this Section 2.6, all
--------
expenses incurred in connection with the effective registration pursuant to this
Section 2.1 and each registration pursuant to Section 2.2 hereof (excluding in
each case underwriting discounts and commissions applicable to Registrable
Securities), including, without limitation, in each case, all registration,
filing and NASD fees; all fees and expenses of complying with securities or blue
sky laws; all word processing, duplicating and printing expenses, messenger,
delivery and shipping expenses; fees and disbursements of the accountants and
counsel for the Company including the expenses of any special audits or "cold
comfort" letters or opinions required by or incident to such registrations; fees
and disbursements of one firm of counsel selected by the Holders, and any fees
and disbursements of underwriters customarily paid by issuers or sellers of
securities, but excluding underwriting discounts and commissions, if any, shall
be borne by the Company. In all cases, the Purchasers shall pay the underwriting
discounts and commissions applicable to the securities sold by the Purchasers.
2.6 Effective Registration Statement. Registrations pursuant to this
--------------------------------
Section 2 shall not be deemed to have been effected (i) unless a registration
statement with respect thereto has become effective (unless a substantial cause
of the failure of such registration statement to become effective shall be
attributable to the Purchasers), (ii) if after it has become effective, such
3
<PAGE>
registration is interfered with by any stop order, injunction or other order or
requirement of the SEC or other governmental agency or court for any reason,
resulting in a failure to consummate the offering of Registrable Securities
offered thereby, (iii) if after a registration statement with respect thereto
has become effective, the offering of Registrable Securities offered thereby is
not consummated due to factors beyond the control of the Purchasers, other than
the fact that the underwriters have advised the Purchasers that the Registrable
Securities cannot be sold at a net price equal to or above the net price
anticipated at the time of filing of the preliminary prospectus, or (iv) if the
conditions to closing specified in the Securities Purchase Agreement or
underwriting agreement entered into in connection with such registration are not
satisfied (unless a substantial cause of such conditions to closing not being
satisfied shall be attributable to the Purchasers).
2.7 Selection of Underwriters. If a registration pursuant to Section
-------------------------
2.2 hereof involves an underwritten offering, the underwriter or underwriters
thereof shall be selected by the Company.
SECTION 3. REGISTRATION PROCEDURES.
-----------------------
3.1 Procedures. The Company will, subject to the limitations provided
----------
herein, as expeditiously as possible:
(a) prepare and file with the SEC the requisite registration
statement to effect such registration, and thereafter, use reasonable
efforts to cause such registration statement to become effective;
provided that before filing a registration statement or prospectus or
any amendments or supplements thereto, including documents
incorporated by reference, the Company will furnish to counsel to the
holders of the Registrable Securities covered by such registration
statement and the managing underwriter or underwriters, if any, draft
copies of all such documents proposed to be filed (other than
exhibits, unless so requested) a reasonable time prior thereto, which
documents will be subject to the reasonable review of such counsel and
such holders and underwriters, and will notify each holder of the
Registrable Securities of any stop order issued or threatened by the
SEC in connection therewith and take all reasonable actions required
to prevent the entry of such stop order or to remove it if entered;
(b) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the
Securities Act with respect to the disposition of all securities
covered by such registration statement until such time as all of such
securities have been disposed of in accordance with the intended
methods of disposition by the seller or sellers thereof set forth in
such registration statement; provided, however, that the Company shall
not in any event be required to keep (i) the registration statement
filed pursuant to Section 2.1 effective for a period of more than two
years after such registration statement becomes effective and (ii) a
registration statement filed pursuant to Section 2.2 effective for a
period of more than nine months after such registration statement
becomes effective; and
4
<PAGE>
provided further that the Company may, at any time, delay the filing
or suspend the effectiveness of any registration under this Agreement,
or without suspending such effectiveness, instruct the Purchasers not
to sell any Registrable Securities included in any such registration,
(i) if the Company shall have determined upon the advice of counsel
that the Company would be required to disclose any actions taken or
proposed to be taken by the Company in good faith and for valid
business reasons, including without limitation, the acquisition or
divestiture of assets, which disclosure would have a material adverse
effect on the Company or on such actions, or (ii) if required by law,
to update the prospectus relating to any such registration to include
updated financial statements (a "Suspension Period") by providing the
-----------------
Purchasers with written notice of such Suspension Period and the
reasons therefor; provided, however, that the Company will not be
-------- -------
required to disclose such reasons with particularity if an authorized
executive officer of the Company certifies that the Company believes
it is required by law to delay the filing or suspend the effectiveness
of any such registration. In addition, the Company shall not be
required to keep any registration effective, or may without suspending
such effectiveness, instruct the Purchasers if it has Registrable
Securities included in such registration not to sell such securities,
during any period which the Company is instructed, directed, ordered
or otherwise requested by any governmental agency or self-regulatory
organization to stop or suspend such trading or sales ("Supplemental
------------
Extension Period"). In the event of a Suspension Period or
----------------
Supplemental Extension Period, the period during which any
registration under this Agreement is to remain effective pursuant to
this Section 3.1(b) shall be tolled until the end of any such
Suspension Period or Supplemental Extension Period. The Company will
use reasonable efforts to restrict any Suspension Period or
Supplemental Extension Period to less than 30 days;
(c) furnish to the Purchasers such number of conformed copies of
such registration statement and of each such amendment and supplement
thereto (in each case including all exhibits), such number of copies
of the prospectus contained in such registration statement (including
each preliminary prospectus and any summary prospectus) and any other
prospectus filed under Rule 424 under the Securities Act, and such
other documents, as the Purchasers may reasonably request;
(d) use its reasonable efforts to register or qualify all
Registrable Securities and other securities covered by such
registration statement under such other securities or blue sky laws of
such jurisdictions as each seller thereof shall reasonably request and
to keep such registration or qualification in effect for so long as
such registration statement remains in effect, and take any other
action which may be reasonably necessary or advisable to enable such
seller to consummate the disposition in such jurisdictions of the
securities owned by such seller, except that the Company shall not for
any such purpose be required to qualify generally to do business as a
foreign corporation in any jurisdiction wherein it would not but for
the requirements of this Section 3.1(d) be obligated to be so
qualified or to consent to general service of process in any such
jurisdiction.
5
<PAGE>
(e) use its reasonable efforts to cause all Registrable
Securities covered by such registration statement to be registered
with or approved by such other United States Federal or state
governmental agencies or authorities as may be necessary to enable the
Purchasers to consummate the disposition of such Registrable
Securities;
(f) notify in writing the Purchasers, if Registrable Securities
are covered by such registration statement, at any time when a
prospectus relating thereto is required to be delivered under the
Securities Act, upon discovery that, or upon 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 any material fact
required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances under which
they were made, and at the request of the Purchasers prepare and
furnish to the Purchasers a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary
so that, as thereafter delivered to the purchasers of such securities,
such prospectus shall not include an untrue statement of a material
fact or omit 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 under which they were made.
(g) otherwise use reasonable efforts to comply with all
applicable rules and regulations of the SEC and make available to its
securityholders, as soon as reasonably practicable, an earnings
statement covering the period of at least twelve months beginning with
the first full calendar month after the effective date of such
registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act;
(h) provide and cause to be maintained a transfer agent for all
Registrable Securities covered by such registration statement from and
after a date not later than the effective date of such registration
statement; and
(i) use its reasonable efforts to list all Registrable
Securities covered by such registration statement on any securities
exchange on which any of the Company's Common Stock is then listed.
3.2 Information Requirements. It shall be a condition precedent to
------------------------
the obligations of the Company to take any action with respect to registering
the Purchasers' Registrable Securities pursuant to this Section 3 that the
Purchasers furnish the Company in writing such information regarding the
Purchasers, the Registrable Securities and other securities of the Company held
by the Purchasers, and the distribution of such securities as the Company may
from time to time reasonably request in writing. If a Purchaser refuses to
provide the Company with any of such information on the grounds that it is not
necessary to include such information in the registration statement, the Company
may exclude the Purchaser's Registrable Securities from the registration
statement unless such Purchaser provides the Company with an opinion of counsel,
which opinion and counsel shall be reasonably satisfactory to the Company and
its counsel, to the effect that such information need not be included in the
registration statement.
6
<PAGE>
The Purchasers agree by acquisition of such Registrable Securities
that upon receipt of any notice from the Company of the happening of any event
of the kind described in Section 3.1(f), the Purchasers will forthwith
discontinue the Purchasers' disposition of Registrable Securities pursuant to
the registration statement relating to such Registrable Securities until the
Purchasers' receipt of the copies of the supplemented or amended prospectus
contemplated by Section 3.1(f) and, if so directed by the Company, will deliver
to the Company copies, other than permanent file copies then in the Purchasers'
possession, of the current prospectus relating to such Registrable Securities at
the time of receipt of such notice.
SECTION 4. UNDERWRITTEN OFFERINGS.
----------------------
If requested by the underwriters for any underwritten offering of
Registrable Securities pursuant to a registration under Section 2 hereof, the
Company will enter into an underwriting agreement with such underwriters for
such offering, such agreement to be satisfactory in substance and form to the
Purchasers and the underwriters and to contain such representations and
warranties by the Company and such other terms as are generally prevailing in
agreements of this type, including, without limitation, indemnities to the
effect and to the extent provided in Section 6 hereof. The Purchasers will
cooperate with the Company in the negotiation of the underwriting agreement and
will give consideration to the reasonable requests of the Company regarding the
form thereof, provided that nothing herein contained shall diminish the
--------
foregoing obligations of the Company. If requested by the underwriters of any
underwritten offering pursuant to a registration under Section 2 hereof, the
Purchasers agree to enter into an agreement with such underwriters not to sell
their shares of stock in the Company for a period of time (not to exceed 180
days) after the effectiveness of a registration statement equal to the period of
time which the sellers of securities in such registration have agreed not to
sell their shares after the effectiveness of such registration statement. The
Purchasers shall be a party to such underwriting agreement. The Purchasers shall
not be required to make any representations, warranties or agreements with the
Company other than representations, warranties or agreements regarding the
Purchasers, Purchasers' Registrable Securities and other securities of the
Company, the Purchasers' intended method of distribution, and any
representations, warranties or agreements required by law.
SECTION 5. PREPARATION; REASONABLE INVESTIGATION.
-------------------------------------
In connection with the preparation and filing of each registration
statement under the Securities Act pursuant to this Agreement, the Company will
give the Purchasers and their respective agents and advisors and the
underwriters, if any, the reasonable opportunity to participate in the
preparation of such registration statement, each prospectus included therein or
filed with the SEC, and each amendment thereof or supplement thereto, and will
give each of them such access to its books and records and such opportunities to
discuss the business of the Company with its officers and the independent public
accountants who have certified its financial statements as shall be necessary,
in the option of the Purchasers' counsel, to conduct a reasonable investigation
within the meaning of the Securities Act. Subject to the rights and obligations
of the Company under the Securities Act and other applicable laws, the
Purchasers
7
<PAGE>
shall have the right to review and approve those portions of such registration
statement that directly pertain to the Purchasers.
SECTION 6. INDEMNIFICATION.
---------------
6.1 Indemnification by the Company. In the event any Registrable
------------------------------
Securities are included in a registration statement under this Agreement, to the
extent permitted by law, the Company will, and hereby does, indemnify and hold
harmless each Purchaser, its directors and officers, each other Person who
participates as an underwriter in the offering or sale of such securities and
each other Person, if any, who controls each Purchaser or any such underwriter
within the meaning of the Securities Act, against any losses, claims, damages or
liabilities, joint or several, to which each Purchaser or any such director or
officer or underwriter or controlling person may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings, whether commenced or threatened, in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any registration statement
under which such securities were registered under the Securities Act, any
preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, 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 the Company will
reimburse the Purchasers and each such director, officer, underwriter and
controlling person for any legal or any other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim,
liability, action or proceeding; provided that the Company shall not be liable
--------
in any such case to the extent that any such loss, claim, damage, liability (or
action or proceeding in respect thereof) or expense arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in such registration statement, any such preliminary prospectus,
final prospectus, summary prospectus, amendment or supplement in reliance upon
and in conformity with written information furnished to the Company by the
Purchasers, and provided further that the Company shall not be liable to any
-------- -------
Person who participates as an underwriter in the offering or sale of Registrable
Securities or any other Person, if any, who controls such underwriter within the
meaning of the Securities Act, in any such case to the extent that any such
loss, claim, damage, liability (or action or proceeding in respect thereof) or
expense arises out of such Person's failure to send or give a copy of the final
prospectus, as the same may be then supplemented or amended to the Person
asserting an untrue statement or alleged untrue statement or omission or alleged
omission at or prior to the written confirmation of the sale of Registrable
Securities to such Person if such statement or omission was corrected in such
final prospectus and such delivery would have mitigated liability. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of the Purchasers or any such director, officer,
underwriter or controlling person and shall survive the transfer of such
securities by such seller.
6.2 Indemnification by the Purchasers. In the event any Registrable
---------------------------------
Securities are included in a registration statement under this Agreement, to the
extent permitted by law, each Purchaser whose Registrable Securities are
registered pursuant to such registration statement will, and hereby does
indemnify and hold harmless (in the same manner and to the same extent
8
<PAGE>
as set forth in Section 6.1) each underwriter, each Person who controls such
underwriter within the meaning of the Securities Act, the Company, each director
of the Company, each officer of the Company and each other Person, if any, who
controls the Company within the meaning of the Securities Act, with respect to
any statement or alleged statement in or omission or alleged omission from such
registration statement, any preliminary prospectus, final prospectus or summary
prospectus contained therein, or any amendment or supplement thereto, if such
statement or alleged statement or omission or alleged omission was made in
reliance upon and in strict conformity with written information furnished to the
Company by the Purchasers expressly for use in the preparation of such
registration statement, preliminary prospectus, final prospectus, summary
prospectus, amendment or supplement; provided that the Purchasers shall not be
--------
liable to any Person who participates as an underwriter in the offering or sale
of Registrable Securities or any other Person, if any, who controls such
underwriter within the meaning of the Securities Act, in any such case to the
extent that any such loss, claim, damage, liability (or action or proceeding in
respect thereof) or expense arises out of such Person's failure to send or give
a copy of the final prospectus, as the same may be then supplemented or amended,
to the Person asserting an untrue statement or alleged untrue statement or
omission or alleged omission at or prior to the written confirmation of the sale
of Registrable Securities to such Person if such statement or omission was
corrected in such final prospectus. Such indemnity shall remain in full force
and effect regardless of any investigation made by or on behalf of any
underwriter, the Company or any such director, officer or controlling Person and
shall survive the transfer of such securities by such seller.
6.3 Notices of Claims, etc. Promptly after receipt by an indemnified
-----------------------
party of notice of the commencement of any action or proceeding involving a
claim referred to in Sections 6.1 and 6.2, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party, give
written notice to the latter of the commencement of such action; provided that
--------
the failure of any indemnified party to give notice as provided herein shall not
relieve the indemnifying party of its obligations under the preceding
subdivisions of this Section 6, except to the extent that the indemnifying party
is actually prejudiced by such failure to give notice. In case any such action
is brought against an indemnified party, unless in such indemnified party's
reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist in respect of such claim, the indemnifying party
shall be entitled to participate in and to assume the defense thereof, jointly
with any other indemnifying party similarly notified to the extent that it may
wish, with counsel reasonably satisfactory to such indemnified party, and after
notice from the indemnifying party to such indemnified party of its election so
to assume the defense thereof, the indemnifying party shall not be liable to
such indemnified party for any legal or other expenses subsequently incurred by
the latter in connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without 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 consent to
entry of any judgment or enter into any settlement without the consent of the
indemnifying party.
9
<PAGE>
6.4 Other Indemnification. Indemnification similar to that specified
---------------------
in the preceding subdivisions of this Section 6 (with appropriate modifications)
shall be given by the Company and the Purchasers with respect to any required
registration or other qualification of securities under any Federal or state law
or regulation of any governmental authority other than the Securities Act.
6.5 Indemnification Payments. The indemnification required by this
------------------------
Section 6 shall be made by periodic payments of the amount thereof during the
course of the investigation or defense, as and when bills are received or
expense, loss, damage or liability is incurred.
6.6 Contribution. If the indemnification provided for in this Section
------------
6 from the indemnifying party is unavailable to an indemnified party hereunder
in respect of any losses, claims, damages, liabilities or expenses referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such loss, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party and indemnified parties in connection with the actions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative fault of such indemnifying party
and indemnified parties shall be determined by reference to, among other things,
whether any action in question, including any untrue statement of material fact
or omission or alleged omission to state a material fact, has been made by, or
relates to information supplied by, such indemnifying party or indemnified
parties, and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such action. The amount paid or payable by a
party as a result of the losses, claims, damages, liabilities and expenses
referred to above shall be deemed to include, subject to the limitations set
forth in Section 6.3 hereof, any legal or other fees or expenses reasonably
incurred by such party in connection with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6.6 were determined by pro rata allocation
--- ----
or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 6.6 no underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Registrable Securities underwritten by it and distributed to
the public were offered to the public exceeds the amount of any damages which
such underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation.
If indemnification is available under this Section 6, the indemnifying
parties shall indemnify each indemnified party to the full extent provided in
Section 6.1 through Section 6.5 hereof without regard to the relative fault of
said indemnifying party or indemnified party or any other equitable
consideration provided for in this Section 6.6.
10
<PAGE>
SECTION 7. REPORTING REQUIREMENTS UNDER EXCHANGE ACT.
-----------------------------------------
The Company shall use its reasonable efforts to keep effective the
registration of its Common Stock under Section 12 of the Exchange Act and shall
timely file such information, documents and reports as the SEC may require or
prescribe under Section 13 of the Exchange Act. The Company shall timely file
such information, documents and reports which a corporation, partnership or
other entity subject to Section 13 or 15(d) (whichever is applicable) of the
Exchange Act is required to file.
So long as the Company is subject to the reporting requirements of
either Section 13 or 15(d) of the Exchange Act, the Company shall forthwith upon
request furnish the Purchasers (i) a written statement by the Company that it
has complied with such reporting requirements, (ii) a copy of the most recent
annual or quarterly report of the Company, and (iii) such other reports and
documents filed by the Company with the SEC as the Purchasers may reasonably
request in availing itself of an exemption for the sale of Registrable
Securities without registration under the Securities Act. The Company
acknowledges and agrees that the purpose of the requirements contained in this
Section 7 are to enable the Purchasers to comply with the current public
information requirement contained in Paragraph (c) of Rule 144 under the
Securities Act should the Purchasers ever wish to dispose of any of the
Securities of the Company acquired by it without registration under the
Securities Act in reliance upon Rule 144 (or any other similar exemptive
provision). In addition, the Company shall take such other measures and file
such other information, documents and reports, as shall hereafter be required by
the SEC as a condition to the availability of Rule 144 under the Securities Act
(or any similar exemptive provision hereafter in effect).
SECTION 8. SHAREHOLDER INFORMATION.
-----------------------
The Company may require the Purchasers to furnish the Company such
information in writing with respect to the Purchasers and the distribution of
its Registrable Securities as the Company may from time to time reasonably
request in writing and as shall be required by law or by the SEC in connection
therewith.
SECTION 9. FORMS.
-----
All references in this Agreement to particular forms of registration
statements are intended to include, and shall be deemed to include, references
to all successor forms which are intended to replace, or to apply to similar
transactions as, the forms herein referenced.
SECTION 10. TRANSFER OF REGISTRATION RIGHTS.
-------------------------------
The registration rights granted to the Purchasers under this Agreement
may not be transferred without the prior written consent of the Company, which
shall not be unreasonably withheld.
11
<PAGE>
SECTION 11. AMENDMENT.
---------
This Agreement may be amended only by a written agreement signed by
the Company and the Purchasers.
SECTION 12. NOTICES.
-------
All notices, requests, consents and other communications required or
permitted hereunder shall be in writing and shall be delivered, or mailed first-
class postage prepaid, registered or certified mail,
(a) If to a Purchaser at its respective address as shown on the
books of the Company, or at such other address as such Purchaser may
specify by written notice to the Company, or
(b) If to the Company at 1690 Chantilly Drive, Atlanta, Georgia
30324, Attention: President; or at such other address as the Company
may specify by written notice to the Purchaser,
and such notices and other communications shall for all purposes of this
Agreement be treated as being effective or having been given if delivered
personally, or, if sent by mail, when received.
SECTION 13. COUNTERPARTS.
------------
This Agreement may be executed concurrently in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
SECTION 14. CHOICE OF LAW.
-------------
THIS AGREEMENT AND THE VALIDITY AND ENFORCEABILITY HEREOF SHALL BE
GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK WITHOUT GIVING EFFECT TO CONFLICT OF LAWS RULES OR CHOICE OF
LAWS RULES THEREOF EXCEPT SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS
LAW.
SECTION 15. SEVERABILITY.
------------
Should any one or more of the provisions of this Agreement or any
agreement entered into pursuant to this Agreement be determined to be illegal or
unenforceable, all other provisions of this Agreement and of each other
agreement entered into pursuant to this Agreement, shall be given effect
separately from the provision or provisions determined to be illegal or
unenforceable and shall not be affected thereby.
12
<PAGE>
SECTION 16. WHOLE AGREEMENT.
---------------
This Agreement constitutes the complete agreement and understanding by
and among the parties hereto and shall supersede any prior understanding,
agreement or representation by or among the parties, whether written or oral,
related to the subject matter hereof.
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized representatives effective the day and year
first above written.
GRACE DEVELOPMENT INC.
By: ____________________________________________
Name: _____________________________________
Title: _____________________________________
<PAGE>
PURCHASERS:
GREENLIGHT CAPITAL, L.P.
By: Greenlight Capital, L.L.C., its
general partner
By:________________________________________
Name:______________________________________
Title:_____________________________________
GREENLIGHT CAPITAL QUALIFIED L.P.
By: Greenlight Capital, L.L.C., its
general partner
By:________________________________________
Name:______________________________________
Title:_____________________________________
GREENLIGHT CAPITAL OFFSHORE, LTD.
By:__________________________________________________
Name:________________________________________________
Title:_______________________________________________
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000846899
<NAME> GRACE DEVELOPMENT, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 100,063
<SECURITIES> 3,700,000
<RECEIVABLES> 787,365
<ALLOWANCES> (88,756)
<INVENTORY> 68,126
<CURRENT-ASSETS> 4,852,142
<PP&E> 7,930,399
<DEPRECIATION> (543,178)
<TOTAL-ASSETS> 18,724,952
<CURRENT-LIABILITIES> 10,955,955
<BONDS> 0
0
0
<COMMON> 8,970,517
<OTHER-SE> (5,870,315)
<TOTAL-LIABILITY-AND-EQUITY> 18,724,952
<SALES> 626,061
<TOTAL-REVENUES> 626,061
<CGS> 516,119
<TOTAL-COSTS> 3,199,981
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 223,101
<INCOME-PRETAX> (2,754,482)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,754,482)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,754,482)
<EPS-BASIC> (0.5)
<EPS-DILUTED> (0.5)
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