<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 12, 1996
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
DIGEX, INCORPORATED
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
MARYLAND 4813 52-1672337
(STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
----------------
6800 VIRGINIA MANOR ROAD
BELTSVILLE, MARYLAND 20705
(301) 847-5000
(ADDRESS AND TELEPHONE NUMBER
OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE OF BUSINESS)
----------------
CHRISTOPHER R. MCCLEARY, PRESIDENT
6800 VIRGINIA MANOR ROAD
BELTSVILLE, MARYLAND 20705
(301) 847-5000
(NAME, ADDRESS, AND TELEPHONE NUMBER
OF AGENT FOR SERVICE)
----------------
Copies to:
JOHN D. WATSON, JR., ESQ. JOHN W. WHITE, ESQ.
LATHAM & WATKINS CRAVATH, SWAINE & MOORE
1001 PENNSYLVANIA AVENUE, N.W. WORLDWIDE PLAZA
SUITE 1300 825 EIGHTH AVENUE
WASHINGTON, D.C. 20004-2505 NEW YORK, NEW YORK 10019-7475
(202) 637-2200 (212) 474-1000
----------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION
STATEMENT.
----------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE PRICE(2) FEE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share........ * $ * $55,000,000.00 $18,965.52
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes shares issuable upon exercise of an option to be granted to the
Underwriters solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) promulgated under the Securities Act ("Rule
457(o)").
* Information omitted pursuant to Rule 457(o).
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
DIGEX, INCORPORATED
CROSS REFERENCE SHEET
Showing Location in Prospectus of Information
Required by Part I Items of Form SB-2
<TABLE>
<CAPTION>
LOCATION OR HEADING IN THE
PROSPECTUS OR REGISTRATION
FORM SB-2 ITEM NUMBER AND CAPTION STATEMENT
--------------------------------- ---------------------------------
<C> <S> <C>
1. Front of Registration Statement and
Outside Front Cover of Prospectus...... Outside Front Cover Page; Front
of Registration Statement
2. Inside Front and Outside Back Cover
Pages of Prospectus.................... Inside Front and Outside Back
Cover Page
3. Summary Information and Risk Factors... Prospectus Summary; The Company;
Risk Factors
4. Use of Proceeds........................ Prospectus Summary; Use of
Proceeds; Management's Discussion
and Analysis of Financial
Condition and Results of
Operations
5. Determination of Offering Price........ Outside Front Cover Page;
Underwriting
6. Dilution............................... Risk Factors; Dilution
7. Selling Security-Holders............... *
8. Plan of Distribution................... Outside Front Cover Page;
Underwriting
9. Legal Proceedings...................... Business--Legal Proceedings
10. Directors, Executive Officers,
Promoters and Control Persons.......... Management
11. Security Ownership of Certain
Beneficial Owners and Management....... Principal Stockholders
12. Description of Securities.............. Capital Stock of the Company
13. Interests of Named Experts and Counsel. *
14. Disclosure of Commission Position on
Indemnification for Securities Act Capital Stock of the Company--
Liabilities............................ Limitation on Directors' and
Officers' Liability
15. Organization Within Last Five Years.... Certain Transactions
16. Description of Business................ Prospectus Summary; Risk Factors;
Management's Discussion and
Analysis of Financial Condition
and Results of Operations;
Business
17. Management's Discussion and Analysis or
Plan of Operation...................... Management's Discussion and
Analysis of Financial Condition
and Results of Operations
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LOCATION OR HEADING IN THE
PROSPECTUS OR REGISTRATION
FORM SB-2 ITEM NUMBER AND CAPTION STATEMENT
--------------------------------- ---------------------------------
<C> <S> <C>
18. Description of Property................ Business--Properties
19. Certain Relationships and Related Certain Transactions; Principal
Transactions........................... Stockholders
20. Market for Common Equity and Related
Stockholder Matters.................... Risk Factors--No Prior Market for
Common Stock; Dividend Policy;
Capital Stock of the Company;
Shares Eligible for Future Sale
21. Executive Compensation................. Management
22. Financial Statements................... Financial Statements
23. Changes in and Disagreements with
Accountants on Accounting and Financial *
Disclosure.............................
</TABLE>
- --------
* Inapplicable
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
JUNE 12, 1996
PROSPECTUS
SHARES [DIGEX BUSINESS INTERNET LOGO APPEARS HERE]
DIGEX, INCORPORATED
COMMON STOCK
($.01 PAR VALUE)
All of the shares of Common Stock, $.01 par value per share (the "Common
Stock"), offered hereby (the "Shares") are being sold by DIGEX, Incorporated
("DIGEX" or the "Company"). Prior to this offering (the "Offering"), there has
been no public market for the Common Stock. It is currently anticipated that
the initial public offering price will be between $ and $ per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
The Company has applied to have the Common Stock approved for quotation on the
Nasdaq National Market under the symbol "DIGX."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT COMPANY (1)
<S> <C> <C> <C>
Per Share..................................... $ $ $
Total (2)..................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
(1) Before deducting expenses payable by the Company estimated at $ .
(2) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of additional shares of Common Stock at the Price to
Public, less the Underwriting Discount, solely to cover over-allotments, if
any. If the Underwriters exercise such option in full, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $ , $ ,
and $ , respectively. See "Underwriting."
The Shares are offered subject to receipt and acceptance by the Underwriters,
to prior sale and to the Underwriters' right to reject any order in whole or in
part and to withdraw, cancel or modify the offer without notice. It is expected
that delivery of the Shares will be made at the office of Salomon Brothers Inc,
Seven World Trade Center, New York, New York, or through the facilities of The
Depository Trust Company, on or about , 1996.
SALOMON BROTHERS INC MONTGOMERY SECURITIES
The date of this Prospectus is July , 1996.
<PAGE>
[ARTWORK]
[TO COME]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET
(INCLUDING THE NASDAQ NATIONAL MARKET) OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act
with respect to the Common Stock offered hereby (the "Registration
Statement"). This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the shares of Common Stock offered
hereby, reference is hereby made to the Registration Statement, including the
exhibits, financial statements and schedules thereto. Statements contained in
this Prospectus regarding the contents of any contract or other document are
not necessarily complete; with respect to each such contract or document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference.
As a result of this Offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, will file reports and
other information with the Commission. A copy of the Registration Statement,
including the exhibits, financial statements and schedules thereto, may be
inspected without charge at the principal office of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and
at its regional offices located at Seven World Trade Center, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Chicago, Illinois
60661, and copies of such material may be obtained from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549 upon payment of the fees prescribed by the
Commission. The Commission also maintains a Web site that contains reports,
proxy and information statements and other materials that are filed through
the Commission's Electronic Data Gathering, Analysis, and Retrieval system.
This Web site can be accessed at http://www.sec.gov.
REPORTS TO STOCKHOLDERS
The Company intends to furnish to its stockholders annual reports containing
consolidated financial statements audited by its independent certified public
accountants and quarterly reports containing unaudited summary financial
information for the first three quarters of each fiscal year.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Investors should carefully consider the
information set forth under "Risk Factors." Unless otherwise indicated, all
information in this Prospectus assumes (i) no exercise of the Underwriters'
over-allotment option, (ii) the issuance of 6,700,839 shares of common stock,
$.01 par value (the "Common Stock"), upon the conversion (the "Preferred Stock
Conversion") of all outstanding shares of the Company's Series A and Series B
convertible preferred stock, $1.00 par value (collectively, the "Preferred
Stock"), upon consummation of the offering of Common Stock made hereby (the
"Offering"), (iii) the exercise of warrants to purchase 4,671,020 shares of
Common Stock at an aggregate exercise price of approximately $685,000
concurrently with the Preferred Stock Conversion (the "Warrant Exercise"), (iv)
reincorporation of the Company as a Delaware corporation and (v) the
establishment of the Company's nationwide network backbone, which the Company
expects to occur prior to June 30, 1996. All share totals stated herein reflect
the Company's 505.26:1 stock split of March 1995 and the 10:1 stock split of
August 1995. See "Glossary" for the definitions of certain terms and acronyms
used herein.
THE COMPANY
DIGEX, Incorporated ("DIGEX" or the "Company") is a leading independent
national Internet service provider ("ISP") that focuses exclusively on
businesses, government agencies and other institutional customers ("business
customers"). The Company offers a comprehensive range of INDUSTRIAL STRENGTH
Internet solutions, including business connectivity, Web server hosting,
consulting and education services and security and other network products.
After receiving its first major infusion of institutional equity capital in
March 1995, the Company reoriented its strategy to focus exclusively on
business customers, who generally require high bandwidth connectivity, and also
began to develop its Web server hosting business. Additionally, the Company
brought in an experienced management team in the first quarter of 1996. As a
result, the Company's leased line and server customers have grown from
approximately 65 accounts at April 30, 1995 to approximately 750 accounts at
May 31, 1996.
The Company believes that Internet solutions are increasingly achieving
"mission critical" status for business customers as the role of the Internet
and corporate intranets grows. International Data Corporation ("IDC") has
estimated that the number of Internet users was approximately 56 million in
1995, approximately 71% of which (or 40 million) were business users, and that
the aggregate number of users will grow to approximately 200 million by 1999.
In addition, according to Netcraft, Ltd., the number of corporate Internet
sites, defined as domain names ending in ".com," has increased from 4,912 in
August 1995 to 171,738 in June 1996.
DIGEX's nationwide network infrastructure enables Internet connectivity to
business customers in 24 U.S. cities through 30 points of presence ("POPs").
Leveraging off a strong and well-established presence in the eastern United
States, the Company has embarked on a major expansion program which will result
in a total of 61 POPs (serving 55 U.S. cities) by the end of 1996. The
Company's network infrastructure is designed to provide business customers with
a high degree of reliability, enhanced performance and scalable bandwidth. It
uses Cisco Systems 7513 routers and a redundant clear channel DS-3 loop
architecture which provides 90 Mbps of coast-to-coast capacity, monitored by a
24x7x365 network operations center ("NOC"). Unlike the network infrastructure
of regional ISPs, which typically connect at only one peering point, the
Company's network connects with the networks of other national ISPs at the
three major peering points across the U.S.
4
<PAGE>
The Company's objective is to be a single-source provider of reliable high-
performance INDUSTRIAL STRENGTH Internet solutions that serve the needs of
business customers. To achieve this objective, the Company will focus
exclusively on business customers, expand and optimize its nationwide network,
provide a comprehensive range of Internet solutions, implement multiple
distribution channels for its solutions and focus on customer acquisition and
retention.
As part of its distribution strategy, the Company is targeting
telecommunications service providers who wish to provide private label Internet
services to their customers without building their own facilities. The Company
recently entered into its first such multi-year private network agreements with
LCI International, Inc. and WinStar Communications, Inc. ("WinStar"). The
Company expects that its ability to attract additional private network
customers will be significantly enhanced by the announcement of these two
agreements.
The Company was founded in 1990 by a group of Internet pioneers as a Maryland
corporation under the name "Digital Express Group, Inc." The Company, which is
now named "DIGEX, Incorporated," is reincorporating as a Delaware corporation
in connection with the Offering. The Company's principal executive offices are
located at 6800 Virginia Manor Road, Beltsville, Maryland 20705, and the
Company's telephone number is (301) 847-5000. The Company's Web site is located
at http://www.digex.net.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered......................... shares (1)
Common Stock Outstanding after the Offering.. shares (1)(2)
Use of Proceeds.............................. The Company intends to use the net
proceeds of the Offering to fund the
expansion of its network infrastructure,
to acquire business-focused regional
ISPs or to purchase their subscriber
bases, to fund anticipated operating
losses and for general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market Symbol....... DIGX
</TABLE>
- --------
(1) Excludes shares of Common Stock subject to the Underwriters' over-allotment
option granted by the Company.
(2) Based on the number of shares outstanding as of June 1, 1996 (assuming the
Preferred Stock Conversion and the Warrant Exercise, both of which will
occur upon consummation of the Offering). Does not include 4,315,950 shares
issuable upon the exercise of options presently outstanding under the
Company's Incentive Stock Option Plan (the "Stock Option Plan"), as well as
14,039 shares issuable upon the exercise of options authorized but not
granted under the Stock Option Plan. See "Management--Incentive Stock
Option Plan." Also does not include warrants to purchase 600,000 shares of
Common Stock at an exercise price of $1.50 per share granted to WinStar in
connection with the Company's private network agreement with WinStar.
The Company has applied for federal registration of the following
servicemarks and trademarks: INDUSTRIAL STRENGTH Internet SM, WEBenefit
Series(TM), IntroWeb(TM), WEBenefit(TM), WebPlus(TM), WebPreferred(TM) and
WebPremier(TM). This Prospectus also includes product names and other trade
names of the Company and of other organizations.
6
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------- ----------------------
1993 1994 1995 1995 1996
-------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $431,098 $1,577,609 $ 5,075,316 $ 739,671 $ 2,232,462
Costs and expenses:
Cost of revenue........ 216,656 1,002,503 4,471,500 478,646 1,959,821
Sales and marketing.... 18,326 263,075 1,710,234 116,342 673,800
General and administra-
tive.................. 135,238 366,392 2,715,752 278,852 903,887
-------- ---------- ----------- --------- -----------
Total expenses.......... 370,220 1,631,970 8,897,486 873,840 3,537,508
-------- ---------- ----------- --------- -----------
Income (loss) from oper-
ations................. 60,878 (54,361) (3,822,170) (134,169) (1,305,046)
Other income (expense):
Interest and other in-
come.................. -- -- 72,002 -- 14,933
Interest expense....... -- (23,693) (226,745) (688) (540,927)
-------- ---------- ----------- --------- -----------
-- (23,693) (154,743) (688) (525,994)
-------- ---------- ----------- --------- -----------
Income (loss) before in-
come taxes............. 60,878 (78,054) (3,976,913) (134,857) (1,831,040)
Income taxes............ (25,540) (3,470) -- -- --
-------- ---------- ----------- --------- -----------
Net income (loss)....... 35,338 (81,524) (3,976,913) (134,857) (1,831,040)
Accretion of Preferred
Stock to redemption
value.................. -- -- (338,698) -- (123,306)
-------- ---------- ----------- --------- -----------
Net income (loss) at-
tributable to common
shareholders........... $ 35,338 $ (81,524) $(4,315,611) $(134,857) $(1,954,346)
======== ========== =========== ========= ===========
Pro forma net income
(loss) per common
share(1)............... $ (0.20) $ (0.07)
=========== ===========
Pro forma average common
and common equivalent
shares outstanding(1).. 19,245,015 20,334,716
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
PRO FORMA
AS
ACTUAL ADJUSTED(2)
----------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 727,750
Working capital (deficit).............................. (4,190,967)
Total assets........................................... 6,325,475
Total indebtedness, less current portion............... 915,864
Mandatorily redeemable preferred stock................. 2,262,195
Total stockholders' equity (deficit)................... (2,999,226)
</TABLE>
- --------
(1) Pro forma net loss per common share adjusts historical earnings per share
for the assumed conversion of convertible securities which are not included
in the historical computations. These convertible securities will
automatically convert into shares of Common Stock upon the consummation of
the Offering. Historical net loss was reduced by $450,871 for the year
ended December 31, 1995 and $623,074 for the three months ended March 31,
1996 to adjust for interest expense and preferred stock accretion related
to the convertible securities. See Note 2 to Financial Statements.
(2) The pro forma as adjusted data give effect to (i) the 1996 Venture
Financing (as defined); (ii) the Preferred Stock Conversion and the Warrant
Exercise, both of which will occur upon consummation of the Offering; and
(iii) the issuance and sale by the Company of the shares of Common Stock
offered hereby (at an assumed offering price of $ per share, after
deducting estimated underwriting discount and expenses of the Offering
payable by the Company) and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."
7
<PAGE>
RISK FACTORS
Investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors should carefully consider the factors set forth
below together with the other information contained in this Prospectus before
making a decision to purchase the Common Stock offered hereby.
INTENSE COMPETITION
The market for Internet connectivity services is extremely competitive.
There are no substantial barriers to entry, and the Company expects that
competition will intensify in the future.
Currently, the Company's primary competitors are other ISPs focused on
business customers, including UUNET Technologies, Inc. ("UUNET"), BBN
Corporation ("BBN") and PSINet Inc. ("PSI"). UUNET, BBN and PSI, in
particular, all have significantly greater market presence and financial,
technological and personnel resources than the Company and have more extensive
network infrastructures than the Company. To a lesser extent, the Company
competes with other national and regional ISPs, of which there are currently
more than 1500, including NETCOM On-Line Communications Services, Inc.
("NETCOM"). The Company also currently competes with AT&T Corp. ("AT&T"), MCI
Communications Corporation ("MCI") and Sprint Corporation ("Sprint"). The
Telecommunications Act of 1996 is removing a number of regulatory obstacles to
the entry of other telecommunications companies into the Internet connectivity
market. Accordingly, the Company expects all of the other major
telecommunications service providers, including the Regional Bell Operating
Companies (the "RBOCs") to compete fully in the Internet connectivity market.
Deregulation of the telecommunications industry has already led to significant
horizontal integration through acquisitions and joint ventures, and the
Company expects these trends to continue.
The telecommunications companies with which the Company competes have access
to significantly greater financial, technological and personnel resources than
the Company and also have large existing business customer bases. In addition,
interexchange carriers ("IXCs"), including AT&T, MCI and Sprint, possess
existing nationwide telecommunications networks and generally face lower
infrastructure costs in providing Internet connectivity than the Company.
Although its WorldNet offering targets the consumer market, AT&T is party to
an agreement with BBN pursuant to which it can market BBN's business
connectivity services to AT&T's business customer base or, in the alternative,
provide its own Internet connectivity. In addition, MCI and British
Telecommunications P.L.C. have announced that they intend to merge their
international high-speed data networks and their Internet backbones thus
offering their customers international Internet connectivity services.
Although local exchange carriers ("LECs"), such as the RBOCs, and
competitive access providers ("CAPs"), such as MFS Communications Company,
Inc. ("MFS"), do not currently possess nationwide networks, they generally
have lower communications costs than the Company in providing leased lines to
businesses in the areas in which they operate. Moreover, significant
consolidation among RBOCs, including SBC Communications Inc.'s recently-
announced proposal to acquire Pacific Telesis Group ("PacTel") and the
proposed merger of NYNEX Corp. and Bell Atlantic Corporation ("Bell
Atlantic"), could result in the expansion of networks which can compete for
Internet connectivity customers. In addition, MFS has announced that it has
agreed to acquire UUNET to offer its customers expanded Internet connectivity,
and PacTel has already announced an offering of consumer connectivity to
customers in California.
Certain companies are also exploring the possibility of providing high-speed
data services using alternative delivery methods. For example, @Home, a joint
venture between Tele-Communications, Inc. and Kleiner Perkins Caulfield &
Byers, has stated its intent to provide high-speed data services over cable
television plant, and Hughes Network Systems, Inc. has launched DirecPC, which
will deliver high-speed data through direct broadcast satellite technology.
The Company has announced a high-speed connectivity product for telecommuters
using DirecPC. If these technologies gain commercial acceptance, operators of
cable television and direct broadcast satellite systems could become
competitors of the Company. CAI Wireless Systems, Inc., a wireless cable
television service,
8
<PAGE>
also has announced that it has begun testing the first Internet connectivity
product delivered by wireless cable.
The Company also competes, to a lesser extent, with certain on-line service
providers which offer Internet connectivity in conjunction with their primary
products or services. For example, Microsoft Corporation ("Microsoft")
provides Internet connectivity through its Microsoft Network, which was built
by UUNET (in which Microsoft holds a significant minority stake) and which is
a standard integrated feature of its Windows 95 operating system, and
International Business Machines Corporation ("IBM") offers its OS/2 WARP
operating system preconfigured to provide Internet connectivity through the
Advantis network, which is controlled by IBM. In addition, America Online,
Inc. ("AOL"), CompuServe, Inc. ("CompuServe") and Prodigy Services Company
("Prodigy"), currently provide Internet connectivity and have announced plans
to offer expanded Internet connectivity capabilities.
The market for Web server hosting services is highly fragmented and
extremely competitive. There are no substantial barriers to entry and the
Company expects that competition will intensify in the future. Currently the
Company's primary competitors are other ISPs, including BBN, UUNET and PSINet,
and companies whose primary business is developing and operating "Server
Farms," such as Internet Direct, Inc. ("Internet Direct"). In addition, many
organizations currently host Web servers at their own facilities.
As a result of an increase in the number of competitors, and vertical and
horizontal integration in the industry, the Company currently encounters and
expects to encounter significant pricing pressure and other competition in the
future. Advances in technology as well as changes in the marketplace and the
regulatory environment are constantly occurring, and the Company cannot
predict the effect that ongoing or future developments may have on the
Internet connectivity and Web server hosting markets generally or on the
Company specifically. See "Risk Factors--Dependence Upon Product Development;
Risks of Changing Technology and Industry Standards" and "--Potential
Liability for Information Disseminated Over Network; Regulation."
DIFFICULTIES IN MANAGING GROWTH; NEW MANAGEMENT; NEED TO HIRE ADDITIONAL
PERSONNEL
The rapid growth of the Company's business and its product and service
offerings has placed, and is expected to continue to place, a significant
strain on the Company's managerial, operational and accounting resources.
Demands on the Company's operational and accounting information systems and
controls, including its billing, accounts receivable and payable tracking and
other accounting systems, have grown rapidly with the Company's expanding
customer base and its new focus on business customers. In the past, the
Company has experienced difficulties in billing its customers, pursuing
delinquent accounts receivable balances, recording payables in the proper
period, performing timely reconciliations of financial statement data on a
monthly basis and maintaining adequate accounting controls. These difficulties
were considered by the Company's independent auditors to be evidence of
material weaknesses in the internal control structure, as communicated to
management and the Board of Directors at the completion of the audit of the
Company's financial statements for the year ended December 31, 1995. Although
the Company has taken actions to upgrade and improve its accounting systems
and controls and to increase the number of qualified accounting personnel,
additional actions may be required, particularly if the Company should
experience significant additional growth.
Increasing demands for the Company's Internet solutions and related customer
support services have also created additional demands on the Company's network
infrastructure and technical support and customer services personnel. The
Company has in the past experienced difficulties making installations on a
timely basis and providing adequate customer support. Although the Company has
hired additional support and customer service personnel and has established a
24x7x365 NOC, it is possible that such difficulties will continue in the
future.
9
<PAGE>
The Company has a new management team and a substantial number of new
employees. At December 31, 1994, the Company had 32 employees, and at May 31,
1996, the Company had 143 employees. In addition, key members of the Company's
current management team, including Christopher R. McCleary, the Company's
Chairman, President and Chief Executive Officer; Thomas M. Brandt, Jr., the
Company's Senior Vice President, Finance and Administration, and Chief
Financial Officer; Brian M. Deobald, the Company's Vice President, Telecommute
Products Group; Earl P. Galleher, the Company's Vice President, Internet
Server Products Group; and Nicholas J. Magliato, the Company's Vice President,
Private Networks Group, have joined the Company since February 1996.
To manage its growth, the Company must continue to improve its operational
and accounting information systems and controls and must attract and retain
additional highly qualified management, financial, technical, sales and
marketing and customer service personnel. Any failure of the Company to manage
its growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.
ACCUMULATED DEFICIT; NET LOSSES; LIMITED OPERATING HISTORY
At March 31, 1996, the Company had an accumulated deficit of approximately
$6.4 million. The Company experienced net losses of approximately $4.0 million
and $1.8 million in the year ended December 31, 1995 and in the three months
ended March 31, 1996, respectively. The Company is currently making
significant capital expenditures intended to expand the Company's network and
organizational infrastructure, expects to incur operating and net losses in
1996 and may continue to incur operating and net losses thereafter. There can
be no assurance that the Company will achieve or sustain profitability in the
future.
Although the Company has been in existence since 1990, it reoriented its
strategy in March 1995 to focus exclusively on business customers. As a
result, prospective investors have limited relevant operating and financial
data upon which to base an evaluation of the Company and an investment in the
Common Stock offered hereby.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING; RISKS ASSOCIATED
WITH CURRENT FINANCING ARRANGEMENTS
The Company currently anticipates that funds which WinStar has agreed to
advance under the terms of its private network agreement and the net proceeds
of the 1996 Venture Financing (as defined) and the Offering, together with
existing financing arrangements and funds from operations, will be sufficient
to meet the Company's presently anticipated working capital and capital
expenditure requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." However, the Company may need to raise additional funds through
public or private debt or equity financing in the event that the Company's
estimates of operating losses and capital requirements change or prove
inaccurate or in order for the Company to respond to unanticipated competitive
pressures or to take advantage of unanticipated opportunities. Such
opportunities could include the acquisition of business-focused regional ISPs
or the purchase of their subscriber bases, international expansion,
acquisitions of complementary businesses or technologies and the development
of new products. There can be no assurance that additional financing will be
available on terms favorable to the Company, or at all. If adequate funds are
not available or are not available on acceptable terms, the Company may not be
able to continue its network expansion, to take advantage of market
opportunities, to develop new products or otherwise to respond to competitive
pressures. Such inability could have a material adverse effect on the
Company's business, financial condition and results of operations.
In addition, the Company's financing arrangements are secured by
substantially all of the Company's assets, require the Company to satisfy
certain financial covenants and restrict the payment of dividends. Such
collateral security arrangements entitle the Company's secured lenders to
foreclose
10
<PAGE>
upon the Company's assets in the event of a default under the Company's
financing arrangements and may adversely affect the Company's ability to
obtain additional financing.
DEPENDENCE ON NETWORK INFRASTRUCTURE; MAINTENANCE OF PEERING RELATIONSHIPS
The Company's success will depend upon the geographic reach, capacity,
reliability and security of its network infrastructure. The Internet is
comprised of many ISPs who operate their own networks and interconnect with
other ISPs at various peering points. The establishment and maintenance of
peering relationships with other ISPs is necessary in order to exchange
traffic with other ISPs without having to pay retail rates. The Company
expects the industry's current practice regarding peering to evolve by the end
of 1996 to require an ISP to have (i) a coast-to-coast DS-3 backbone, (ii) 45
Mbps connections to three U.S. peering points and (iii) a 24x7x365 NOC in
order to qualify for peering with the major national ISPs. Although the
Company currently meets these requirements, there is no assurance that other
national ISPs will maintain peering relationships with the Company. In
addition, there may develop increasing requirements associated with
maintaining peering with the major national ISPs with which the Company may
have to comply. The Company also expects to be required to expand and adapt
its network infrastructure in order to respond to its growing number of
customers, demands to transmit increasing amounts of data and changes to its
customers' product and service requirements. The expansion and adaptation of
the Company's network infrastructure will require substantial financial,
operational and managerial resources. There can be no assurance that the
Company will be able to expand or adapt its network infrastructure to meet the
industry's evolving standards or its customers' growing demand and changing
requirements on a timely basis, at a commercially reasonable cost, or at all,
or that the Company will be able to deploy successfully any expanded and
adapted network infrastructure.
RISKS TO PHYSICAL NETWORK; RISKS TO INTEGRITY OF DATA ON NETWORK
The Company's operations are dependent upon its ability to protect its
network infrastructure against damage from fire, earthquakes, severe flooding,
mudslides, power loss, telecommunications failures or similar events or to
construct networks which are not vulnerable to the effects of these events. A
significant portion of the Company's computer equipment, including components
critical to the operation of its Internet backbone, is located at the
Company's facilities in Beltsville, Maryland. The Company has in the past
experienced service interruptions due to severe flooding in the midwest United
States in 1994 and in Pennsylvania in 1996. The occurrence of a natural
disaster or other unanticipated problems at the Company's NOC, its hubs (sites
at which the Company has located routers, switches and other computer
equipment which make up the backbone of the Company's network infrastructure)
or at a number of the Company's POPs in the future could cause additional
major interruptions in the services provided by the Company.
In addition, some ISPs have in the past experienced interruptions in service
as a result of the accidental or intentional actions of Internet users,
current and former employees or others, and the Company has experienced
interruptions in service as a result of accidental or intentional actions of
Internet users. Further interruptions of service may occur in the future. In
the past, there have been break-ins to computers connected to the Internet at
General Electric Company, Sprint and IBM, as well as the computer systems of
NETCOM and the San Diego Supercomputer Center, and there have also been
incidents involving hackers bypassing firewalls and stealing sensitive
information. Unauthorized use of the Company's network could jeopardize the
security of confidential information stored in the computer systems of the
Company and its customers, which may result in liability of the Company to its
customers or deter potential subscribers. The Company's industry-standard
network security measures have been circumvented in the past, and there can be
no assurance that such measures will not be circumvented in the future.
11
<PAGE>
The failure of the Company to adequately manage service disruptions
resulting from physical damage to its network or breaches of its integrity,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE UPON SUPPLIERS; LIMITED SOURCES OF SUPPLY
The Company relies on other companies to supply certain key components of
its network infrastructure, including telecommunications services and
networking equipment which, in the quantities and quality demanded by the
Company, are available only from limited sources. MCI, which is a competitor
of the Company, and Cable & Wireless, Inc. ("Cable & Wireless") are the
Company's primary providers of data communications facilities and network
capacity and lease physical space to the Company for routers, modems and other
equipment. The Company is also dependent upon LECs and CAPs to provide
telecommunications services to the Company and its customers. The Company
expects these telecommunications companies to become competitors of the
Company as well. The Company has from time to time experienced delays in
receiving telecommunications services, and there can be no assurance that the
Company will be able to obtain such services on the scale and within the time
frames required by the Company at a commercially reasonable cost, or at all.
Certain of the Company's suppliers, including the RBOCs and certain other
LECs, are currently subject to tariff controls and other price constraints
which in the future could be changed. In addition, due to the passage of the
Telecommunications Act of 1996, regulatory proposals are pending that will
affect the prices charged to the Company by the RBOCs and certain other LECs.
Any such regulatory changes could result in increased prices of services and
products to the Company. See "--Potential Liability for Information
Disseminated Over Network; Regulation."
DEPENDENCE UPON KEY PERSONNEL
The Company's success will depend upon the continued service of its senior
management team and its technical, marketing and sales personnel. The
Company's employees, including members of its management team, may voluntarily
terminate their employment with the Company at any time, and competition for
qualified employees in the Internet industry is intense. Six senior executives
do, however, have employment agreements with the Company which run through
March or May 1997 (or, in the case of Christopher McCleary, the Company's
Chairman, President and Chief Executive Officer, through December 1999).
Although most of these employment agreements contain non-competition and non-
disclosure agreements, there can be no assurance that these provisions will be
enforceable in whole or in part. The loss of the services of key personnel
could have a material adverse effect upon the Company's business, financial
condition, and results of operations.
DEPENDENCE UPON CONTINUED DEVELOPMENT OF BUSINESS MARKET
A substantial portion of the Company's revenues to date have been, and
substantially all of the Company's revenues for the foreseeable future will
be, derived from the sale of its Internet solutions to business customers. The
Company's success will depend upon the continued development and expansion of
the business market for Internet solutions and the networks which comprise the
Internet, as well as the extent to which Internet connectivity becomes
critical to achievement of the objectives of the Company's business customers.
Certain key issues concerning the extensive use of the Internet by business
customers, including data security, network reliability, ease and cost of
access and quality of service remain unresolved and may impact the growth of
Internet use by business customers. In particular, numerous published reports
have indicated that a perceived lack of security of commercial data, such as
credit card numbers, has significantly impeded commercial exploitation of the
Internet to date, and there can be no assurance that encryption or other
technologies will be developed that
12
<PAGE>
satisfactorily addresses these security concerns. The failure of the market
for business-related Internet solutions to continue to develop would adversely
impact the Company's business, financial condition and results of operations.
DEPENDENCE UPON PRODUCT DEVELOPMENT; RISKS OF CHANGING TECHNOLOGY AND INDUSTRY
STANDARDS
The Company's success will depend upon its ability to respond to the rapidly
changing requirements of its business customers for Internet solutions. The
Internet industry is characterized by rapidly changing technology and evolving
industry standards, emerging competition and frequent new product and service
introductions. There can be no assurance that the Company can successfully
identify new product opportunities or develop and bring new products and
services to market in a timely manner. The Company is also at risk from
fundamental technological changes in the way Internet solutions are marketed
and delivered. Integrating technological advances may require substantial time
and expense, and there can be no assurance that the Company will succeed in
adapting its network infrastructure.
In addition, new technologies or industry standards have the potential to
replace or provide lower cost alternatives to the Company's existing products
and services. The adoption of such new technologies or industry standards
could render the Company's existing products and services obsolete and
unmarketable. For example, the Company's services rely on the continued
widespread commercial use of Transmission Control Protocol/Internet Protocol
("TCP/IP"). Alternative open and proprietary protocol standards that compete
with TCP/IP, including proprietary protocols developed by IBM and Novell,
Inc., have been or are being developed.
Failure of the Company to adapt to changes in technology and industry
standards would have a material adverse effect on the Company's business,
financial condition and results of operations.
POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED OVER NETWORK; REGULATION
The law relating to the liability of on-line service providers and ISPs for
information carried on or disseminated through the facilities of their
networks is currently unsettled. Several lawsuits seeking a judgment of such
liability are currently pending. In one case brought against an ISP, Religious
Technology Center v. Netcom On-Line Communication Services, Inc., the United
States District Court for the Northern District of California ruled in a
preliminary phase that under certain circumstances ISPs could be held liable
for copyright infringement. The case has not reached final judgment. The
Telecommunications Act of 1996 prohibits and imposes criminal penalties and
civil liability for using an interactive computer service for transmitting
certain types of information and content, such as indecent or obscene
communications. This provision has been stayed pending a determination of its
constitutionality. In addition, numerous states have adopted or are currently
considering similar types of legislation. The imposition upon ISPs or Web
server hosts of potential liability for materials carried on or disseminated
through their systems could require the Company to implement measures to
reduce its exposure to such liability, which may require the expenditure of
substantial resources or the discontinuation of certain product or service
offerings. The Company believes that it is currently unsettled whether the
Telecommunications Act of 1996 prohibits and imposes liability for any
services provided by the Company should the content of information transmitted
be subject to the statute.
Although the Company is not currently subject to direct regulation by the
Federal Communications Commission (the "FCC") or any other federal or state
agency, changes in the regulatory environment relating to the Internet
connectivity market, including regulatory changes which directly or indirectly
affect telecommunications costs or increase the likelihood or scope of
competition from the RBOCs or other telecommunications companies, could affect
the prices at which the Company may sell its services. For instance, proposed
regulations at the FCC would require discounted Internet connectivity
13
<PAGE>
rates for schools and libraries. The Company cannot predict the impact, if
any, that future regulation or regulatory changes may have on its business.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have in the past and may in the
future vary significantly depending upon a number of factors, such as the
pricing and mix of services and products sold by the Company, terminations of
service, new product introductions by the Company and its competitors, the
timing of the expansion of the Company's network infrastructure, market
acceptance of new and enhanced versions of the Company's products and
services, changes in pricing policies by its competitors, the Company's
ability to obtain sufficient supplies of limited source components and the
lengthening of the Company's sales cycle. Many of these factors are beyond the
Company's control. In addition, the timing of the installation of significant
orders by the Company's suppliers in the past has been, and in the future may
be, delayed by lags in the installations of lines and equipment by the
Company's telecommunications subcontractors. For example, the severe winter
weather which struck the eastern United States in January 1996 resulted in
significant installation delays for new customers and consequent delays in the
recognition of revenue from these new customers. In addition, in response to
competitive pressures, the Company could be forced to take certain pricing or
marketing actions that would have a material effect on the amount of revenues
in the short term. The Company's expense levels are relatively fixed in the
short term; as a result, variations in the timing and amounts of revenues
recognized could have a material adverse effect on the Company's quarterly
operating results.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of the Company's Common Stock could
adversely affect the market price of the Common Stock. Several of the
Company's principal stockholders hold a significant portion of the Company's
outstanding Common Stock, and a decision by one or more of these stockholders
to sell their shares could adversely affect the market price of the Common
Stock. The Shares offered hereby (plus any shares issued upon exercise of the
Underwriters' over-allotment option) will be freely tradeable without
restriction, except to the extent that such shares are purchased by
"affiliates" of the Company. The holders of Common Stock, and warrants to
purchase Common Stock, of the Company, including officers and directors of the
Company, have entered into contractual agreements with the Underwriters (the
"Lock-Up Agreements") providing that they will not offer, sell or contract to
sell, or otherwise dispose of, directly or indirectly, or announce an offering
of, any shares of Common Stock of the Company beneficially owned by them or
any securities convertible into, or exchangeable for, the Company's Common
Stock for a period of 180 days after the date of the Underwriting Agreement
without the prior written consent of the representatives of the Underwriters,
other than shares of stock disposed of as bona fide gifts. As a result,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144 and 144(k) under the Securities Act of 1933, as amended (the "Act"),
shares subject to the Lock-Up Agreements will not be saleable until the Lock-
Up Agreements expire or their terms are waived by the Underwriters'
representatives. Assuming the Underwriters' representatives do not release
stockholders from the Lock-Up Agreements, the following shares will be
eligible for sale in the public market at the following times: beginning on
the effective date of the Registration Statement (the "Effective Date"), only
the shares sold in the Offering to non-affiliates will be immediately
available for sale in the public market; and beginning 180 days after the date
of the Underwriting Agreement, 4,044,768 shares will be eligible for sale
pursuant to Rule 144, all of which are held by affiliates of the Company. An
additional 11,371,859 shares will become eligible for sale pursuant to Rule
144 at various times during the two-year period following the Effective Date
(although such shares will continue to be subject to the Lock-Up Agreements
until the expiration of the terms thereof). The holders of approximately
10,666,650 shares of the Common Stock are entitled to certain rights with
respect to the registration of such shares under the Act beginning six months
after the Effective Date. In addition, the Company may register certain shares
of Common Stock issuable under the Stock Option Plan, and such registration
shall be effective upon filing with the Commission.
14
<PAGE>
As of May 31, 1996, there were outstanding options under the Stock Option Plan
to purchase 4,315,950 shares, of which options for 598,081 shares were fully
vested and exercisable. No shares have been issued to date under the Stock
Option Plan. See "Shares Eligible for Future Sale."
CONTROL BY CERTAIN STOCKHOLDERS; ANTI-TAKEOVER MEASURES
Following the Offering, the Company's executive officers, directors and
principal stockholders will beneficially own or control approximately % of the
outstanding shares of Common Stock, assuming exercise of vested options, the
Preferred Stock Conversion and the Warrant Exercise. As a result, these
stockholders will have the ability to control the election of the Company's
Board of Directors and the outcome of corporate actions requiring stockholder
approval. See "Principal Stockholders."
Certain provisions of the Company's Restated Certificate of Incorporation and
Bylaws could make it more difficult for a third party to acquire, and could
discourage a third party from attempting to acquire, control of the Company.
Certain of these provisions allow the Company to issue Preferred Stock with
rights senior to those of the Common Stock without any further vote or action
by the stockholders, eliminate the right of stockholders to act by written
consent, provide for a classified board of directors and impose various
procedural and other requirements which could make it more difficult for
stockholders to effect certain corporate actions. Such charter provisions could
limit the price that certain investors might be willing to pay in the future
for shares of the Company's Common Stock and may have the effect of delaying or
preventing a change in control of the Company. The issuance of Preferred Stock
also could decrease the amount of earnings and assets available for
distribution to the holders of Common Stock or could adversely affect the
rights and powers, including voting rights, of the holders of the Common Stock.
See "Description of Capital Stock--Common Stock" "--Preferred Stock," and "--
Delaware Law and Certain Charter Provisions."
ABSENCE OF PUBLIC MARKET; DETERMINATION OF PUBLIC OFFERING PRICE; POSSIBLE
VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market will
develop or be sustained after the Offering. The initial public offering price
will be determined by negotiations among the Company and the representatives of
the Underwriters. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The stock market
has from time to time experienced significant price and volume fluctuations
which have particularly affected the market prices of the stocks of ISPs and
other technology companies and which may be unrelated to the operating
performance of particular companies. Factors such as quarterly variations in
actual or anticipated operating results, changes in earnings estimated by
analysts, market conditions in the industry, announcements by competitors,
regulatory actions and general economic conditions may have a significant
effect on the market price of the Common Stock.
DILUTION
Purchasers of the Common Stock offered hereby will suffer an immediate and
substantial dilution, in the amount of $ per share, in the pro forma net
tangible book value per share of the Common Stock as of March 31, 1996, from
the initial public offering price. See "Dilution."
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company of the Offering, at an assumed offering
price of $ per share, after deducting estimated underwriting discount and
expenses of the Offering payable by the Company, will be approximately $
million (approximately $ million if the Underwriters' over-allotment option
is exercised in full). Approximately $25.0 million of the net proceeds will be
used to fund a portion of the costs of the expansion of the Company's network
infrastructure. The Company will use the balance of the net proceeds to fund
anticipated operating losses, to acquire business-focused regional ISPs or
purchase their subscriber bases and for general corporate purposes. However,
the Company has no commitments or agreements with respect to any such
acquisitions. Pending such uses, the net proceeds to the Company will be
invested in U.S. government securities and other short term, investment grade,
interest-bearing securities.
DILUTION
The net tangible book value of the Company at March 31, 1996 (after giving
effect to the 1996 Venture Financing, the Warrant Exercise and the Preferred
Stock Conversion) was $7,436,337, or approximately $0.48 per share of Common
Stock. Net tangible book value per share is determined by dividing the
Company's tangible net worth (tangible assets less total liabilities) by the
number of shares of Common Stock outstanding. After giving effect to the sale
of shares of Common Stock offered hereby and the receipt of the estimated
net proceeds therefrom (at the assumed public offering price of $ per share
and after deducting estimated underwriting discount and expenses of the
Offering payable by the Company), the pro forma net tangible book value of the
Company at March 31, 1996 would have been $ million, or $ per share. This
represents an immediate dilution of $ per share to purchasers of Common
Stock in the Offering. Dilution is determined by subtracting the pro forma net
tangible book value per share after the Offering from the initial offering
price per share. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial offering price per share..................................... $
Pro forma net tangible book value per share before the Offering.... $0.48
Increase in net tangible book value per share attributable to new
investors ........................................................
-----
Pro forma net tangible book value per share after the Offering.......
---
Dilution per share to new investors.................................. $
===
</TABLE>
The following table summarizes, as of March 31, 1996, after giving effect to
the Offering, the number of shares of Common Stock purchased from the Company,
the total consideration paid to the Company and the average price per share
paid by the existing stockholders and by new investors purchasing Common Stock
in the Offering. In the Offering, based on an assumed initial public offering
price of $ per share before deducting estimated underwriting discount and
expenses of the Offering payable by the Company, the number of shares of
Common Stock purchased from the Company is , the total consideration paid to
the Company is $ , the average price per share paid by the existing
stockholders is $ and the price per share paid by new investors is $ .
<TABLE>
<CAPTION>
SHARED PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Existing stockholders... % $ % $
New investors...........
-------- -------- --------- ---------
Total................. 100% $ 100%
======== ======== ========= =========
</TABLE>
16
<PAGE>
CAPITALIZATION
The following table sets forth, as of March 31, 1996, (i) the Company's
actual capitalization, (ii) the pro forma capitalization after giving effect
to the 1996 Venture Financing and (iii) the pro forma capitalization, as
adjusted to give effect to the Preferred Stock Conversion, the Warrant
Exercise and the issuance and sale by the Company of the shares of Common
Stock offered hereby, after deducting estimated underwriting discount and
expenses of the Offering payable by the Company (at the assumed public
offering price of per share), and the application of the estimated net
proceeds thereof. This table should be read in conjunction with the Company's
financial statements and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
---------- ---------- ------------
<S> <C> <C> <C>
Current portion of capital lease obliga-
tions.................................... $ 929,279 $ 929,279 $ 929,279
10% convertible debentures, net of dis-
count.................................... 2,488,787 0 0
---------- ---------- ----------
Total current indebtedness............ 3,418,066 929,279 929,279
========== ========== ==========
Capital lease obligations, less current
portion.................................. 915,864 915,864 915,864
Series A mandatorily redeemable preferred
stock, $1.00 par value(1):
Authorized shares--200,000 actual;
70,000 pro forma and pro forma as ad-
justed
Issued and outstanding shares--45,455
actual and pro forma; none pro forma as
adjusted............................... 2,262,195 2,262,195 0
Series B mandatorily redeemable preferred
stock, $1.00 par value(1):
Authorized shares--none actual; 130,000
pro forma and pro forma as adjusted
Issued and outstanding shares--none ac-
tual; 81,297 pro forma; none pro forma
as adjusted............................ 0 7,488,787 0
Shareholders' equity (deficit):
Common stock, $.01 par value:
Authorized shares--49,800,000 actual,
pro forma and pro forma as adjusted
Issued and outstanding shares--
4,044,768 actual and pro forma; pro
forma as adjusted(2)................... 40,448 40,448
Additional paid-in capital.............. 3,319,034 3,319,034
Accumulated deficit..................... (6,358,708) (6,358,708) (6,358,708)
---------- ---------- ----------
Total shareholders' equity (deficit).. (2,999,226) (2,999,226)
---------- ---------- ----------
Total capitalization................ $ 178,833 $7,667,620 $
========== ========== ==========
</TABLE>
- --------
(1) Preferred Stock is not presented in this table as a part of shareholders'
equity of the Company because it is mandatorily redeemable at the option
of the holders thereof. Each outstanding share of the Company's Preferred
Stock will convert into shares of Common Stock upon the closing of this
Offering and will be cancelled, retired and returned to the shares which
the Company is authorized to issue. See "Description of Capital Stock" and
Notes 7 and 15 of Notes to Financial Statements.
(2) Excludes 4,367,239 shares of Common Stock reserved for issuance to
employees under the Stock Option Plan (of which options to purchase
4,315,950 shares are outstanding as of May 31, 1996). See "Management--
Incentive Stock Option Plan," "Shares Eligible for Future Sale" and Note
10 of Notes to the Company's Financial Statements. Also excludes 600,000
shares of Common Stock reserved for issuance to WinStar pursuant to
warrants granted to WinStar in connection with the Company's private
network agreement with WinStar.
17
<PAGE>
DIVIDEND POLICY
The Company does not currently pay dividends on its Common Stock and does
not anticipate paying dividends in the foreseeable future. It is the present
policy of the Company's Board of Directors to retain earnings, if any, to
finance the expansion of the Company's business. The payment of dividends in
the future will depend on the results of operations, financial condition,
capital expenditure plans and other cash obligations of the Company and will
be at the sole discretion of the Board of Directors. In addition, certain
provisions of the Company's existing indebtedness prohibit or limit, and
provisions of future indebtedness of the Company may also prohibit or limit,
the Company's ability to pay dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
18
<PAGE>
SELECTED FINANCIAL AND PRO FORMA FINANCIAL DATA
The selected financial data for each of the three years in the period ended
December 31, 1995 and the three-month period ended March 31, 1996 have been
derived from the Company's financial statements which were audited and are
included elsewhere in this Prospectus. The selected financial data for the
three-month period ended March 31, 1995 have been derived from the Company's
unaudited financial statements. The selected financial data should be read in
conjunction with and is qualified in its entirety by reference to the
financial statements of the Company and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------- ------------------------
1993 1994 1995 1995 1996
-------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $431,098 $1,577,609 $ 5,075,316 $ 739,671 $ 2,232,462
Costs and expenses:
Cost of revenue....... 216,656 1,002,503 4,471,500 478,646 1,959,821
Sales and marketing... 18,326 263,075 1,710,234 116,342 673,800
General and adminis-
trative.............. 135,238 366,392 2,715,752 278,852 903,887
-------- ---------- ----------- ----------- -----------
Total expenses.......... 370,220 1,631,970 8,897,486 873,840 3,537,508
-------- ---------- ----------- ----------- -----------
Income (loss) from oper-
ations................. 60,878 (54,361) (3,822,170) (134,169) (1,305,046)
Other income (expense):
Interest and other in-
come................. -- -- 72,002 -- 14,933
Interest expense...... -- (23,693) (226,745) (688) (540,927)
-------- ---------- ----------- ----------- -----------
-- (23,693) (154,743) (688) (525,994)
-------- ---------- ----------- ----------- -----------
Income (loss) before
income taxes........... 60,878 (78,054) (3,976,913) (134,857) (1,831,040)
Income taxes............ (25,540) (3,470) -- -- --
-------- ---------- ----------- ----------- -----------
Net income (loss)....... 35,338 (81,524) (3,976,913) (134,857) (1,831,040)
Accretion of Preferred
Stock to redemption
value.................. -- -- (338,698) -- (123,306)
-------- ---------- ----------- ----------- -----------
Net income (loss)
attributable to common
shareholders........... $ 35,338 $ (81,524) $(4,315,611) $ (134,857) $(1,954,346)
======== ========== =========== =========== ===========
Pro forma net income
(loss) per common
share(1)............... $ (0.20) $ (0.07)
=========== ===========
Pro forma average common
and common equivalent
shares outstanding(1).. 19,245,014 20,334,716
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------------
DECEMBER 31, PRO FORMA
1995 ACTUAL AS ADJUSTED (2)
------------ ---------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 832,582 $ 727,750
Working capital (deficit)............. (1,820,464) (4,190,967)
Total assets.......................... 5,051,786 6,325,475
Total indebtedness, less current por-
tion................................. 821,709 915,864
Mandatorily redeemable preferred
stock................................ 2,138,889 2,262,195 --
Total stockholders' equity (deficit).. (1,527,742) (2,999,226)
</TABLE>
- --------
(1) Pro forma net loss per common share adjusts historical earnings per share
for the assumed conversion of convertible securities which are not
included in the historical computations. These convertible securities will
automatically convert into shares of Common Stock upon the consummation of
the Offering. Historical net loss was reduced by $450,871 for the year
ended December 31, 1995 and $623,074 for the three months ended March 31,
1996 to adjust for interest expense and preferred stock accretion related
to the convertible securities. See Note 2 to Financial Statements.
(2) The pro forma as adjusted data give effect to (i) the 1996 Venture
Financing; (ii) the Preferred Stock Conversion and the Warrant Exercise,
both of which will occur upon consummation of the Offering; and (iii) the
issuance and sale by the Company of the shares of Common Stock offered
hereby (at the assumed public offering price of $ per share, after
deducting estimated underwriting discount and expenses of the Offering
payable by the Company) and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
DIGEX is a leading national ISP that focuses exclusively on business
customers. The Company was founded in 1990 by a group of Internet pioneers as
a local provider of dial-up Internet connectivity. After receiving its first
major infusion of institutional equity capital in March 1995, the Company
reoriented its strategy to focus exclusively on business customers, who
generally require high bandwidth connectivity, and also began to develop its
Web server hosting business. The Company brought in an experienced management
team in the first quarter of 1996. In the second quarter of 1996, the Company
expanded its network to the west coast, enabling the Company to provide its
solutions to business customers nationwide.
The Company derives its revenue from providing a comprehensive range of
INDUSTRIAL STRENGTH Internet solutions, including business connectivity, Web
server hosting, consulting and education services and security and other
network products. Business connectivity and Web server hosting customers are
typically signed to contracts with minimum terms of one year. Revenues
generated from these customers are typically in the form of recurring monthly
fees, installation and start-up charges and sales of related equipment,
applications and services.
The Company has made significant investments in developing and expanding its
network infrastructure and its customer service and sales and marketing
efforts. The substantial costs incurred in connection with this expansion
contributed heavily to the Company's operating losses in 1995 and the three
months ended March 31, 1996. In anticipation of future growth, the Company
expects to continue to make significant investments in its network
infrastructure and its corporate operations throughout the remainder of 1996
and in 1997. The Company's leased line and server customers have expanded from
approximately 65 accounts at April 30, 1995 to approximately 750 accounts at
May 31, 1996.
The Company's quarterly operating results have fluctuated and will continue
to fluctuate from period to period depending upon factors such as the timing
and installation of significant orders, the pricing and mix of services and
products sold by the Company, terminations of service, new product
introductions by the Company and its competitors, market acceptance of new and
enhanced versions of the Company's products and services, changes in pricing
policies by its competitors, the Company's ability to obtain sufficient
supplies of limited source components, the lengthening of the Company's sales
cycle and the timing of the expansion of the Company's network infrastructure.
In view of the significant growth of the Company's operations, the Company
believes that period-to-period comparisons of its financial results should not
be relied upon as an indication of future performance and that the Company may
experience future period-to-period fluctuation in operating results. The
Company's short-term focus is on building and increasing its customer base,
which will require it to make significant investments in its network
infrastructure, personnel, marketing and the development of new products and
services, and may adversely impact short-term operating results. The Company
expects to incur operating and net losses in 1996 and may continue to incur
operating and net losses thereafter. There can be no assurance that the
Company will achieve or sustain profitability in the future.
RESULTS OF OPERATIONS
The following table sets forth the percentage of the Company's revenue and
total expenses represented by certain line items from the Company's statement
of operations.
20
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
----------------- ----------------
1993 1994 1995 1995 1996
---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
Revenue................................. 100% 100% 100% 100% 100%
Costs and expenses:
Cost of revenue....................... 50 63 88 65 88
Sales and marketing................... 4 17 34 16 30
General and administrative............ 32 23 53 37 40
--- --- --- ------ ------
Total expenses.......................... 86 103 175 118 158
--- --- --- ------ ------
Income (loss) from operations........... 14 (3) (75) (18) (58)
Interest expense........................ -- (2) (3) -- (24)
--- --- --- ------ ------
Income (loss) before income taxes....... 14 (5) (78) (18) (82)
Income taxes ........................... 6 0 -- -- --
--- --- --- ------ ------
Net income (loss)................... 8% (5)% (78)% (18)% (82)%
=== === === ====== ======
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1995
REVENUE
The Company derives its revenue from providing a comprehensive range of
INDUSTRIAL STRENGTH Internet solutions, including business connectivity, Web
server hosting, consulting and education services and security and other
network products. Revenue grew 202% from $0.7 million in the three months
ended March 31, 1995 to $2.2 million in the three months ended March 31, 1996,
primarily due to the change in the Company's strategy to focus exclusively on
business customers, who generally require high bandwidth connectivity, the
development of its Web server hosting business and the Company's expansion of
its sales and marketing efforts including the creation of a direct sales
force. However, revenue in the three months ended March 31, 1996 was adversely
affected by severe weather in the northeast U.S. in January 1996, which
delayed installations and recurring revenue from such installations.
COST OF REVENUE
Cost of revenue consists primarily of local access costs, network
infrastructure, leased network backbone circuit costs and network operations
and support costs. Network operations and support costs consist primarily of
personnel expenses relating to the operation of the network infrastructure,
including monitoring network traffic and quality, and costs of providing
technical support to customers. Cost of revenue increased 309% from $0.5
million in the three months ended March 31, 1995 to $2.0 million in the same
period in 1996. Cost of revenue increased as a percentage of revenues from 65%
in the 1995 period to 88% in the 1996 period. The increase in cost of revenue
was primarily due to costs associated with the Company's change in strategy to
focus exclusively on business customers. These costs include the hiring of
additional personnel to support the Company's expanding customer base and the
higher support requirements of business customers as well as the expansion of
the network backbone, the establishment of a 24x7x365 NOC, and the building of
redundant facilities. For example, the Company's customer support and network
operations personnel increased from 25 at March 31, 1995 to 51 at March 31,
1996. The Company plans to continue to expand its network through 1996 and
1997, thereby continuing to increase cost of revenue. As the costs associated
with this expansion have been and will be incurred by the Company in
anticipation of growth in its customer base, the Company believes that, over
time, cost of revenue as a percentage of revenues will decline as its customer
base expands.
21
<PAGE>
SALES AND MARKETING
Sales and marketing costs consist primarily of salaries and expenses of
sales and marketing personnel, advertising, promotion and marketing materials.
Sales and marketing costs rose 479% from $0.1 million in the three months
ended March 31, 1995 to $0.7 million in the same period in 1996. Sales and
marketing costs increased as a percentage of revenues from 16% in the 1995
period to 30% in the 1996 period. The increase in sales and marketing costs
was primarily due to the Company's change in strategy to focus exclusively on
business customers. The Company's prior business strategy required minimal
sales and marketing. The change in strategy required the hiring of additional
sales and marketing personnel (from 9 at March 31, 1995 to 38 at March 31,
1996) and the expansion of advertising and promotional activities and product
development efforts. The Company expects to continue to invest heavily in
sales and marketing in 1996 and 1997.
GENERAL AND ADMINISTRATIVE
General and administrative costs consist primarily of expenses associated
with the Company's management, accounting, finance and administrative
functions. General and administrative costs increased 535% from $0.3 million
in the three months ended March 31, 1995 to $0.9 million in the same period in
1996. These costs increased as a percentage of revenues from 37% in the three
months ended March 31, 1995 to 40% in the same period in 1996. This increase
in general and administrative expenses was due primarily to the hiring of
additional senior management, finance, accounting and administrative personnel
to support the Company's expanding operations. General and administrative
costs were also affected by a $121,000 non-cash compensation charge in the
three months ended March 31, 1996 related to the grant of stock options. The
increase in these costs resulted principally from the increase in the
Company's general and administrative staff from 6 at March 31, 1995 to 23 at
March 31, 1996. The Company expects to hire additional personnel in
anticipation of continued expansion of its operations.
INTEREST EXPENSE
Interest expense increased from $688 in the three months ended March 31,
1995 to $541,000 in the same period in 1996. The increase in interest expense
during the 1996 period was primarily due to the Company's issuance of
subordinated debentures in November 1995 and February 1996 and increased
equipment financing and capital lease obligations incurred to finance network
expansion and to fund working capital requirements.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
REVENUE
Revenue grew 222% from $1.6 million in 1994 to $5.1 million in 1995,
primarily due to the change in the Company's strategy to focus exclusively on
business customers, who generally require high bandwidth connectivity, and the
development of its Web server hosting business. In addition, the equity
financing in March 1995 contributed to this increase by allowing the Company
to greatly expand its customer acquisition effort by building a direct sales
force. The Company's leased line and server customers expanded from
approximately 16 accounts at December 31, 1994 to approximately 500 accounts
at December 31, 1995.
COST OF REVENUE
Cost of revenue increased 346% from $1.0 million in 1994 to $4.5 million in
1995. Cost of revenue increased as a percentage of revenues from 63% in 1994
to 88% in 1995. The increase in cost of revenue was primarily due to costs
associated with the Company's change in strategy to focus exclusively on
business customers. These costs included the hiring of additional personnel to
support
22
<PAGE>
the Company's expanding customer base as well as the expansion of the network
backbone, the establishment of a 24x7x365 NOC, and the building of redundant
facilities. The Company's customer support and network operations personnel
increased from 21 at December 31, 1994 to 53 at December 31, 1995. The
increased use of the network and the increase in capital expenditures to expand
the network infrastructure created an increase in depreciation and amortization
expense during 1995.
SALES AND MARKETING
Sales and marketing costs rose 550% from $0.3 million in 1994 to $1.7 million
in 1995. Sales and marketing costs increased as a percentage of revenues from
17% in 1994 to 34% in 1995. The increase in sales and marketing costs was
primarily due to the Company's change in strategy to focus exclusively on
business customers. The Company's prior business strategy required minimal
sales and marketing. The Company's change in focus required the hiring of
additional sales and marketing personnel (from 8 at December 31, 1994 to 36 at
December 31, 1995), expanding advertising and promotional activities and
product development efforts. The Company expects to continue to invest heavily
in sales and marketing in 1996.
GENERAL AND ADMINISTRATIVE
General and administrative costs increased 650% from $0.4 million in 1994 to
$2.7 million in 1995. These costs increased as a percentage of revenues from
23% in 1994 to 53% in 1995. This increase in general and administrative
expenses was due primarily to the hiring of additional management, finance,
accounting and administrative personnel to support the Company's expanding
operations. General and administrative costs were also affected by a $475,000
non-cash compensation charge in 1995 related to the grant of stock options and
a $310,000 write-off of accounts receivable in 1995 compared to a $15,000
write-off during 1994. The Company's general and administrative staff increased
from 5 at December 31, 1994 to 17 at December 31, 1995. The Company expects to
hire additional personnel in anticipation of continued expansion of its
operation.
INTEREST EXPENSE
Interest expense increased from $24,000 in 1994 to $227,000 in 1995. The
increase in interest expense during 1995 was primarily due to interest of
$124,000 on $2.0 million of subordinated debentures and an increase in
equipment financing and capital lease obligations incurred to finance network
expansion and to fund working capital requirements.
YEAR ENDED DECEMBER 31, 1994 COMPARED WITH YEAR ENDED DECEMBER 31, 1993.
REVENUE
Revenue grew 266% from $0.4 million in 1993 to $1.6 million in 1994,
primarily as a result of increases in the number of the Company's customers due
to the commercialization of the Internet and significant growth in its usage.
The customer base in 1993 and 1994 was comprised primarily of individual dial-
up customers.
COST OF REVENUE
Cost of revenue increased 363% from $0.2 million in 1993 to $1.0 million in
1994. Cost of revenue increased as a percentage of revenues from 50% in 1993 to
63% in 1994. The increase in cost of revenue was primarily due to an increase
in the hiring of additional personnel to support the Company's expanding
customer base, relocation of the Company's headquarters to larger facilities
and the increase in capital expenditures to expand the network infrastructure,
which created an increase in the depreciation and amortization expense during
1994.
23
<PAGE>
SALES AND MARKETING
Sales and marketing costs rose from $18,000 in 1993 to $263,000 in 1994.
Sales and marketing costs increased as a percentage of revenues from 4% in
1993 to 17% in 1994. The increase in sales and marketing costs was due to
expansion of the advertising and promotional activities, and the hiring of
dedicated sales representatives.
GENERAL AND ADMINISTRATIVE
General and administrative costs increased 171% from $0.1 million in 1993 to
$0.4 million in 1994. These costs decreased as a percentage of revenues from
32% in 1993 to 23% in 1994. This increase in general and administrative costs
was due primarily to the hiring of additional management, finance, accounting
and administrative personnel to support the Company's expanding customer base.
INTEREST EXPENSE
Interest expense was $24,000 in 1994. There was no interest expense in 1993.
The interest expense incurred during 1994 was primarily due to equipment
financing and capital lease obligations incurred to finance network expansion
and to fund working capital requirements.
INCOME TAXES
Income tax expense decreased from $26,000 in 1993 to $3,000 in 1994 due to
the operating loss.
QUARTERLY RESULTS
The following table sets forth unaudited quarterly revenue for the five
quarters ended March 31, 1996. In the opinion of management, the unaudited
information set forth below has been prepared in accordance with generally
accepted accounting principles for interim financial information and Item
310(b) of Regulation S-B.
<TABLE>
<CAPTION>
1996
1995 THREE MONTHS
THREE MONTHS ENDED ENDED
----------------------------------------- ------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
-------- ------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenue.................. $ $ $ $ $
</TABLE>
The Company's quarterly results may in the future vary significantly
depending on a variety of factors. See "Risk Factors--Potential Fluctuations
in Quarterly Operating Results." In view of the significant historic growth of
the Company's operations, the Company believes that period-to-period
comparisons of revenue should not be relied upon to estimate future revenue.
LIQUIDITY AND CAPITAL RESOURCES
The Company satisfied its cash requirements in 1995 and in the first quarter
of 1996 principally through a combination of sales of equity and debt
securities to venture capital investors. The Company received $6.0 million in
1995 from the sale of equity and debt securities to venture capital investors.
In February 1996, the Company sold additional debt securities to venture
capital investors, together with warrants to purchase shares of Common Stock,
for gross proceeds of $1.0 million. Proceeds from these financings were used
to fund the rapid expansion of the Company's network infrastructure and
internal operations, including purchases of capital equipment and the hiring
of additional personnel. See "Certain Transactions."
24
<PAGE>
In April 1996, to provide additional liquidity, the Company entered into a
Loan and Security Agreement with Silicon Valley Bank that provides a revolving
credit line secured by accounts receivable. The credit line allows the Company
to borrow a maximum of $1.5 million, subject to restrictions based on the
available collateral, at the rate announced from time to time by Silicon
Valley Bank as its "prime rate" plus 1% per annum. Also in April 1996, the
Company obtained a commitment for an equipment lease line under which the
Company may lease equipment with a total cost of up to $2.0 million through
December 31, 1996. The lease terms will range from 42 months to 50 months and
will be accounted for as capital leases with annual effective interest rates
approximating 14% per annum.
In May 1996, the Company entered into agreements with venture capital
investors pursuant to which the Company issued shares of Series B Preferred
Stock in exchange for total cash consideration of $5.0 million. Proceeds from
this transaction are being used to finance the Company's network
infrastructure expansion. See "Certain Transactions."
In June 1996, the Company entered into a multi-year private network
agreement with WinStar. As part of the agreement, WinStar has agreed to
advance $5.0 million in cash for connectivity services to be provided under
such agreement and received warrants to purchase 600,000 shares of Common
Stock. See "Certain Transactions."
The Company generated positive cash flow from operating activities of
$124,000 in 1993 and $133,000 in 1994, compared to a negative cash flow from
operating activities of $2.5 million in 1995. The change in operating cash
flows from 1994 to 1995 was due primarily to increased costs relating to
expansion of the Company's network and organizational infrastructure,
including the hiring of additional management, marketing and sales, finance,
accounting and administrative personnel. In addition, purchase of fixed assets
increased from $98,000 in 1993, to $350,000 in 1994, and to $1.2 million in
1995, primarily to support the expansion of the Company's network
infrastructure.
The Company currently anticipates that funds agreed to be advanced by
WinStar under the terms of its private network agreement, and the net proceeds
of the 1996 Venture Financing and the Offering, together with existing
financing arrangements and funds from operations, will be sufficient to meet
its presently anticipated working capital and capital expenditure
requirements. The Company may need to raise additional funds through public or
private debt or equity financings in order to take advantage of unanticipated
opportunities, including the acquisition of business-focused regional ISPs or
the purchase of their subscriber bases, international expansion, acquisitions
of complementary businesses or technologies, development of new products or
otherwise responding to unanticipated competitive pressures. In addition, the
Company may need to raise additional funds in the event that the Company's
estimates of operating losses and capital requirements change or prove
inaccurate. There can be no assurance that the Company will be able to raise
such capital on favorable terms or at all. See "Risk Factors--Future Capital
Needs; Uncertainty of Additional Financing and Risks Associated With Current
Financing Relationships" and "Use of Proceeds."
25
<PAGE>
BUSINESS
DIGEX is a leading independent national ISP that focuses exclusively on
businesses, government agencies and other institutional customers ("business
customers"). The Company offers a comprehensive range of INDUSTRIAL STRENGTH
Internet solutions, including business connectivity, Web server hosting,
consulting and education services and security and other network products.
After receiving its first major infusion of institutional equity capital in
March 1995, the Company reoriented its strategy to focus exclusively on
business customers, who generally require high bandwidth connectivity, and
also began to develop its Web server hosting business. Additionally, the
Company brought in an experienced management team in the first quarter of
1996. As a result, the Company's leased line and server customers have grown
from approximately 65 accounts at April 30, 1995 to approximately 750 accounts
at May 31, 1996.
The Company offers its INDUSTRIAL STRENGTH Internet solutions through four
separate and highly focused business units. The Business Connectivity Group
offers Internet connectivity solutions and other value-added solutions to
business customers, while the Telecommute Products Group focuses on the home-
office connectivity requirements of small businesses and high-end
professionals employed by companies that are served by the Business
Connectivity Group. The Internet Server Products Group provides Web server
hosting solutions enabling customers to deploy highly reliable Web servers
that are connected directly to the Internet backbone and are monitored on a
24x7x365 basis at the Company's network operations center ("NOC"). The Private
Networks Group seeks to create customized solutions for businesses looking to
provide private label Internet services without building their own facilities.
The Company recently entered into its first multi-year private network
agreements with LCI and WinStar. The Company expects that its ability to
attract additional private network customers will be significantly enhanced by
the announcement of these two agreements.
INDUSTRY BACKGROUND
The Internet is a global collection of computer networks that enables
businesses, government agencies, other institutional customers and individuals
to communicate, access and share information and conduct business remotely.
Use of the Internet has grown rapidly since the early 1990s, due in large part
to increasing personal computer and modem penetration, the development of the
World Wide Web, the introduction of easy-to-use navigational tools and
utilities for the Web and the availability of informational, entertainment and
commercial applications. Technological advances relating to the Internet have
occurred and continue to occur rapidly, resulting in a more robust, lower-cost
infrastructure, improved security and increased value-added services and
content. IDC has estimated that the number of Internet users will reach
approximately 200 million in 1999, from approximately 56 million in 1995.
While there has been significant media interest in the use of the Internet
by consumers, business customers currently account for a more significant
percentage of Internet use. According to IDC, approximately 71%, or 40
million, of the approximately 56 million Internet users in 1995 were business-
related users. Internet capabilities, including corporate Internet sites, are
becoming an increasingly important part of doing business. According to
Netcraft, Ltd., the number of corporate Internet sites, defined as domain
names ending in ".com", has increased from 4,912 in August 1995 to 171,738 in
June 1996.
Because Internet and corporate intranet solutions are increasingly achieving
"mission critical" status, business customers are demanding advanced, highly
reliable solutions designed specifically for the needs of business.
Furthermore, as the use of the Internet expands, business customers are
26
<PAGE>
requiring that providers offer a comprehensive range of services, including
connectivity, Web server hosting, consulting, education services and security
and other networks products. Finally, business customers often require
knowledgeable and highly responsive sales and customer service representatives
in order to determine their optimal Internet strategy quickly and to resolve
any problems with their current solutions.
THE DIGEX SOLUTION
The Company provides a comprehensive range of INDUSTRIAL STRENGTH
Internet SM solutions that serves the needs of business customers, who often
desire a responsive, single-source provider of reliable, high-performance
Internet connectivity and Web server hosting products and services.
Connectivity. DIGEX offers a complete product line of Internet connectivity
solutions to its business customers with a variety of service and pricing
programs based on bandwidth requirements. To complement its connectivity
offerings, the Company also sells customer-premise routers, firewall security
options and other value-added services such as education and training as well
as assigns and manages IP and E-mail addresses.
Web Server Hosting. The Company also offers a complete range of Web server
hosting solutions. The Company's business customers are able to locate highly
reliable Web sites on dedicated servers at the Company's "Server Farm," which
enables users to gain high speed access to the Web server given the server's
direct connection to the Internet backbone. In addition, the Company provides
24x7x365 monitoring of the server and Internet connection by the Company's
highly experienced technical staff, as well as easy server upgradability as
the customer's speed and capacity requirements grow.
The Company's Internet solutions are supported by its state-of-the-art
network infrastructure, including the Company's NOC and Server Farm located in
suburban Washington, D.C. The Company has built a redundant nationwide DS-3
backbone connecting to the three major Internet peering points at 45 Mbps and
has established peering relationships with other national ISPs, allowing DIGEX
to route its customers' traffic to the desired Internet address. The Company
believes that its combination of a nationwide network and peering
relationships significantly differentiates the Company from regional ISPs who,
without peering relationships, must pay retail rates to national providers in
order to exchange network traffic.
THE DIGEX STRATEGY
After receiving its first major infusion of institutional equity capital in
March 1995, the Company reoriented its strategy to focus on becoming the ISP
of choice for business customers. DIGEX's strategy focuses on five key
elements:
Focus on Businesses Customers. The Company believes that business customers
offer the greatest potential market for the Company's solutions due to this
market's low customer turnover and need for the higher value-added Internet
solutions which the Company provides. By focusing on these customers, the
Company believes it will be able to develop innovative, specialized products
and services that address the constantly evolving needs of business customers
at competitive prices. In addition, the Company believes that its less-focused
competition will have difficulty fulfilling the demanding needs of these
customers.
27
<PAGE>
Provide Comprehensive Range of Internet Solutions. The Company provides a
comprehensive range of Internet solutions, enabling it to satisfy the needs of
business customers, who often seek a sole provider for all their Internet
requirements. The Company's sales forces for each of its business units are
incentivized to cross-market all of DIGEX's products and services.
Expand and Optimize Its Nationwide Network. The Company aims to expand its
highly reliable, nationwide DS-3 network, which the Company has designed to
specifically address the growing reliability and bandwidth requirements of
business customers, so as to offer a comprehensive range of connectivity
solutions to such customers across the United States. The Company believes
that as it expands its network to more cities, it can offer its solutions to
additional business customers more cost-effectively than its consumer-focused
competitors, because fewer POPs are required to reach business customers, who
are largely concentrated in urban centers. In addition, the Company attempts
to optimize its network efficiency by counterbalancing business connectivity,
which makes greater use of the Company's network during business hours, with
Web server hosting, which makes greater use of the network during non-business
hours.
Implement Multiple Distribution Channels. The Company aims to reach its
customers through the Company's own direct sales force as well as through
other innovative methods of distribution. These methods currently include
agent relationships with advertising agencies and Web site developers who
resell the Company's Web server hosting solutions and the efforts of the
Company's Private Networks Group, which enters into long-term agreements with
telecommunications service providers to resell the Company's connectivity
solutions under their own brand names.
Focus on Customer Acquisition and Retention. In addition to acquiring
customers through its existing distribution channels, the Company believes
that as consolidation of the industry continues and it becomes more difficult
for regional ISPs to compete, it will be able to acquire opportunistically
business-focused regional ISPs or purchase their subscriber bases. The Company
also believes that customer responsiveness is becoming a key ingredient of
success for ISPs and has formed four focused business units to better serve
and retain customers. To aid in this effort, the Company has developed a
highly trained direct sales force with extensive Internet expertise which,
based on customer feedback, the Company believes significantly differentiates
the Company from its competitors.
NETWORK INFRASTRUCTURE
DIGEX's current network infrastructure is based upon a DS-3 ring around the
continental United States which provides two 45 Mbps paths between the east
and west coasts, allowing for a combined bandwidth of 90 Mbps when fully
operational. In the event of single points of failure, traffic will be routed
around the loop, providing for a minimum of 45 Mbps even in the event of such
a failure. The network backbone uses state-of-the-art routing platforms,
including Cisco Systems, Inc. ("Cisco") 7513 routers, with customer circuits
and other backbone circuits to non-"ring" cities being connected either to the
core Cisco 7513 routers or to other Cisco routers located at a POP.
DIGEX customers are connected via high-speed leased lines, frame relay, SMDS
or other technologies to the local DIGEX POP, where data enters the DIGEX
backbone. If the destination of the data is on the DIGEX network, then the
data is delivered without ever leaving DIGEX's facilities. If the data is
destined for an Internet customer connected via another national ISP which has
a peering relationship with DIGEX, then the data is routed to the nearest
peering location where the data is passed from the DIGEX router to the router
of the other ISP, who then carries that traffic to the final destination. If
the destination is an ISP which does not have a peering relationship, then the
data is delivered to the national ISP from whom such ISP purchases its
Internet connectivity.
28
<PAGE>
Currently, DIGEX's comprehensive range of connectivity solutions are
available in 24 U.S. cities through 30 POPs, and the Company expects to make
its connectivity solutions available in a total of 55 U.S. cities through 61
POPs by the end of 1996. MCI and Cable & Wireless provide the majority of
DIGEX's intercity backbone DS-3 circuits, as well as collocation space at
their facilities for DIGEX equipment. Other DIGEX backbone network segments
and customer connections are provided through LECs and CAPs.
[Map of United States showing DIGEX's Internet backbone and POPs as of June
30, 1996 and POPs as of the end of 1996]
DIGEX's network is monitored on a 24x7x365 basis by its NOC. Trouble calls
are serviced by the technical staff of either the Business Connectivity Group,
in the case of backbone or customer leased line difficulties, or the Internet
Server Products Group, in the case of problems with customer servers. MCI and
Cable & Wireless provide "remote hands" service to assist DIGEX at all
locations where the Company collocates equipment. For equipment for its remote
POPs, DIGEX purchases routers from Cisco, CSU/DSUs from Digital Link
Corporation, IDSUs and DSUs from Kentrox Industries Inc. and modems and ISDN
from Ascend Communications Inc. Protected AC or DC power is used at all sites
to protect against power outages affecting the network.
In addition to these backbone facilities, DIGEX presently operates a Server
Farm at its suburban Washington, D.C. headquarters and intends to construct an
additional Server Farm and a back-up NOC on the west coast by the end of 1996.
The Company may decide to build additional Server Farms in the future to
better serve customer needs. Multiple Server Farms allow Internet users to
access the server closest to them and thus provide a better level of service,
and would allow DIGEX to minimize the amount of server-related traffic which
it must carry long distances over its network. Geographic distribution of
customer data also provides for redundancy in case of hardware, software or
network failure, contributing to increased uptime and service reliability.
PRODUCTS AND SERVICES
The Company offers its INDUSTRIAL STRENGTH Internet solutions through four
separate and highly focused business units.
Business Connectivity Group
DIGEX provides complete connectivity solutions to its business customers,
including frame relay, leased lines and SMDS, with availability limited only
by the capabilities of the in-market LECs. See""--Network Infrastructure." The
Company offers several configurations and monthly pricing plans, each based on
the bandwidth supplied and thus on the speed and capacity of the facility. The
retail pricing of Business Connectivity products ranges from $400 per month to
$34,000 per month, and customers are strongly encouraged to enter into long-
term contracts. The Company's products are highly scalable and are designed to
facilitate ease of upgrade as the customer's needs evolve. The following chart
describes the Company's Business Connectivity options:
29
<PAGE>
<TABLE>
<CAPTION>
SERVICE TYPE SUMMARY DESCRIPTION
----------------------------------------- -----------------------------------
<C> <S>
Frame Relay Flat rate, scalable 32 Kbps to 1.54
Mbps connectivity solutions based
on frame relay technology for small
to medium size business customers,
running all standard Internet
applications.
Leased Line A complete range (56 Kbps to 45
Mbps) of dedicated, clear channel
circuits for local-area/wide-area
networks and enterprises running
all standard and high-bandwidth
Internet applications.
Ethernet Plus 2 Mbps to 16 Mbps connectivity
solutions for small to large
business customers; provides an
easy "plug and play" solution for
Ethernet-based networks running all
Internet applications.
Switched Multimegabit Data Service (SMDS) A wide range of scalable solutions
(1.17 Mbps to 34 Mbps); designed
for metropolitan-central business
customers seeking a cost-effective
way to support all Internet
applications.
</TABLE>
In addition to basic connectivity service, DIGEX sells and configures
customer-premise routers, firewall security options and other value-added
services. In addition, the Company helps customers with initial use of their
particular DIGEX solution and offers training and education for its customers
to become sophisticated Internet users. The Company plans to introduce new
products on a controlled basis, to ensure that the quality of delivery, from
both a sales and a support perspective, is in place, thus solidifying the
Company's reputation and building on its promise for delivering INDUSTRIAL
STRENGTH Internet solutions.
Internet Server Products Group
The Company offers a complete range of Web server hosting solutions. The
Company's business customers are able to locate highly reliable Web sites on
dedicated servers at the Company's "Server Farm," which enables users to gain
high speed access to the Web server given the server's direct connection to
the Internet backbone. In addition, the Company provides 24x7x365 monitoring
of the server and Internet connection by the Company's highly experienced
technical staff as well as easy server upgradability as the customer's speed
and capacity requirements grow. As Web server needs evolve, DIGEX's goal is to
continue to meet the market with the most advanced server solutions available.
DIGEX offers the following Web server products under the DIGEX WEBenefit
Series brand:
IntroWeb. To serve entry-level business customers using their Web sites to
display general information, the Company offers the IntroWeb product line. The
IntroWeb product line includes a dedicated server running on either a UNIX or
a Windows NT platform.
WebPlus. To serve business customers using their Web sites both to display
general information and to establish a greater level of interactivity with
their customers, the Company offers the WebPlus product line. The WebPlus
product line includes dedicated-server products with greater processing power
and memory than those included in the IntroWeb product line.
30
<PAGE>
WebPreferred. To serve business customers using their Web sites to conduct
more sophisticated marketing and customer service efforts, such as displaying
company-specific information and interacting with customers as well as
transacting sales with customers who are attracted to their Web sites by
broader-based media advertising, the Company offers the WebPreferred product
line. The WebPreferred product line includes Netscape's Web Commerce server
software to help ensure that customers are able to effect business
transactions securely.
WebPremier. To serve the most advanced business customers using their Web
sites as a core sales, marketing or customer support tool or primary
distribution vehicle for their products, the Company offers the WebPremier
product line. Within the WebPremier product line, the Company also allows
customers to collocate a specialized, customer-owned server at DIGEX's
facilities.
Private Networks Group
The Private Networks Group creates customized solutions for
telecommunications service providers looking to offer highly reliable private
label Internet connectivity solutions without incurring the lead time and
costs associated with building their own facilities. In turn, these providers
absorb customer-acquisition costs that would otherwise be borne by the
Company. When an individual contract is secured, a customized implementation
and service organization will be created to provide a premium level of support
for the private network customer. The Company expects that the operations of
the private network customer and the DIGEX support team will be integrated to
enhance customer support.
The Company recently entered into multi-year private network agreements with
LCI and WinStar. The Company expects that its ability to attract additional
private network customers will be significantly enhanced by the announcement
of these two agreements.
Telecommute Products Group
The Telecommute Products Group offers a variety of high-end, dial-up options
to business professionals, telecommuters and small businesses. The group's
products range from lower-cost, limited-access capability products to premium-
priced, high-speed, low-latency products. This group focuses on two distinct
customer groups: (i) professionals who require reliable at-home Internet
connectivity and whose usage is frequently paid for as part of an integrated,
total-solution connectivity package procured on a large scale by their
employers and (ii) small businesses that are likely to broaden and upgrade
their solutions, eventually becoming Business Connectivity Group and Internet
Server Products Group customers. The Company believes that the Telecommute
Products Group complements the Business Connectivity Group by providing high-
end solutions to professionals employed by Business Connectivity customers.
CUSTOMERS
The Company's leased line and server customers have expanded to
approximately 750 accounts at May 31, 1996. In 1995, no customer accounted for
more than five percent of the Company's total revenues. In addition to its
leased line and server customers, the Company had approximately 5,000 dial-up
customers at May 31, 1996. The following is a list of selected DIGEX customers
to which DIGEX billed monthly service fees in excess of $500 for Business
Connectivity solutions and in excess of $350 for Internet Server products in
May 1996.
31
<PAGE>
BUSINESS CONNECTIVITY INTERNET SERVERS
ALCOA AMTRAK Campmor, Inc.
Credit Suisse CIGNA Corp.
Disclosure, Inc. Federal Reserve Bank of Richmond
Hunton & Williams Grand Heritage Hotel Company
Merrill Lynch & Co., Inc. Maryland Dept. of Agriculture
National Basketball Association Graduate School
Oracle Corporation National Association of Investors
Pointcast, Inc. Orbit Questal Inc.
PRC, Inc. Philadelphia Federal Credit Union
Securities and Exchange Commission Pointcast, Inc.
University of Maryland Roy F. Weston Inc.
Westinghouse Electric Corp. TeeVee Toons, Inc. The World Bank
The World Bank
SALES AND MARKETING
As of May 31, 1996, the Company employed 43 people in sales and marketing.
To date, the Company has sold its Internet solutions primarily through its
direct telephone sales force. Call activity is generated both by "cold
calling" and in response to customer referrals, E-mail correspondence through
the Company's Web site and a variety of promotional programs, including
advertising in general business and specialty periodicals, participation in
industry trade shows and press relations. In addition, the Company engages in
local promotional programs to support newly opened service locations. In order
to better serve the needs of its customers, the Company has developed a
specialized marketing approach for each business unit.
The sales force for the Company's Business Connectivity Group continues to
grow to meet the demands of customers along DIGEX's growing nationwide
network. The Company plans to add sales representatives who will focus on the
cities where the Company is opening new POPs along the network and to support
them with marketing programs to generate quality sales leads. In addition, the
Company plans to purchase prequalified sales leads, to solicit customers
through direct mail advertising, to conduct sales seminars, to advertise in
national trade publications and to participate in industry trade shows. The
Company believes that active marketing and lead generation efforts will allow
the sales force to become even more productive and efficient.
In addition to using the Business Connectivity Group's sales force for
marketing its products and services, the Internet Server Products Group is
creating a network of agents around the country to sell its products. DIGEX is
currently entering into agent agreements with organizations in select cities
nationwide, such as advertising agencies, graphic design firms and development
companies whose primary business is the creation of Web sites. In addition,
DIGEX intends to deploy regional account executives to support these
organizations and to develop and maintain relationships with targeted end
users.
The Private Networks Group has a dedicated business development team which
targets a number of types of potential customers, including IXCs, LECs, cable
operators, large private network providers, and CAPs. The Company seeks to
enter into long-term, non-exclusive arrangements with these potential
resellers.
The Telecommute Products Group sells its services through the Company's
direct sales force, through private network providers and through direct
marketing to the group's target markets. The Company's targeted businesses
include telecommuters who may purchase connectivity through a customer of the
Business Connectivity Group and small or home office users who are likely to
upgrade their services in the future.
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<PAGE>
COMPETITION
The market for all types of Internet connectivity services is extremely
competitive. There are no substantial barriers to entry, and the Company
expects that competition will intensify in the future.
Connectivity
ISPs. Currently, the Company's primary competitors are other ISPs focused on
business customers including UUNET, BBN and PSI. UUNET, BBN and PSI in
particular have significantly greater market presence and financial,
technological and personnel resources than the Company and have extensive
coast-to-coast Internet backbones.
A number of these competitors, however, including UUNET and PSI, have chosen
to pursue individual connectivity customers in an effort to balance the use of
their networks, since business customers tend to use the Internet during
business hours, while individual customers tend to use the Internet after
business hours. As a result, these ISPs have been forced to build out their
networks beyond what would be necessary to serve business customers. DIGEX, on
the other hand, has found that it can maintain its focus on business customers
and build a network infrastructure that can serve a substantial majority of
the business marketplace with significantly fewer POPs than its competitors.
In addition, the Company's Web server hosting business, while offering
additional Internet solutions to its business customers, generates a
substantial portion of its traffic after business hours, and thus balances the
usage of the Company's network. Thus, given its more focused business strategy
and more efficient use of capital, DIGEX can offer a comprehensive range of
business Internet solutions on a cost-effective basis.
To a lesser extent, the Company competes with other national and regional
ISPs, of which there are currently over 1500. Many of these competitors,
however, including NETCOM, do not share DIGEX's business focus. In addition,
due to the substantial increase in the amount of data traffic carried by the
networks of certain national ISPs, the Company expects the industry's current
practice regarding peering to evolve by the end of 1996 to require an ISP to
possess (i) a coast-to-coast DS-3 backbone, (ii) 45 Mbps connections to three
U.S. peering points and (iii) a 24x7x365 NOC in order to qualify for peering
with the major national ISPs. The Company expects ISPs which do not satisfy
these requirements by the end of 1996 either to be acquired by the large
national ISPs or to be forced to become resellers of Internet connectivity
services, purchasing their network bandwidth at retail rates from national
ISPs.
Telecommunications Companies. The Company currently competes with AT&T, MCI
and Sprint. In addition, a number of regulatory obstacles to the entry of
other telecommunications companies into the Internet connectivity market are
being removed. Accordingly, the Company expects competition to increase with
other major telecommunications companies, including MFS and the RBOCs. In
addition, deregulation of the telecommunications industry has already led to
significant horizontal integration through acquisitions and joint ventures,
and the Company expects these trends to continue.
The telecommunications companies the Company competes with have access to
significantly greater financial, technological and personnel resources than
the Company and large existing commercial customer bases. In addition, IXCs,
including AT&T, MCI and Sprint, possess existing nationwide telecommunications
networks and generally face lower network infrastructure costs in providing
Internet connectivity than the Company. Although its WorldNet offering targets
the consumer market, AT&T is party to an agreement with BBN pursuant to which
it can market BBN's business connectivity services to AT&T's commercial
customer base or, in the alternative, provide its own Internet connectivity.
While these telecommunications companies have little experience with TCP/IP
networking in general, and Internet connectivity in particular, they now may
employ their larger sales organizations to sell Internet connectivity to their
existing telephony customers, both commercial and consumer. However, the
Company believes that its sales and marketing personnel, which have
33
<PAGE>
backgrounds in data-oriented services, particularly TCP/IP will be able to
sell Internet connectivity more effectively than the sales forces of most
telecommunications companies, which possess backgrounds in only voice-oriented
services.
LECs, such as the RBOCs, and CAPs, such as MFS, on the other hand, do not
currently possess nationwide networks. In order to address the Internet
connectivity requirements of their current business customer bases, these
companies must either buy connectivity to an Internet network infrastructure
or build such a network. For example, MFS has announced that it has agreed to
acquire UUNET to offer expanded Internet connectivity along with its
traditional telecommunications services. The Company seeks to capitalize on
the market opportunity created by telecommunications companies that have
chosen to buy, not build, Internet connectivity for resale through its Private
Networks Group, which sells DIGEX's Internet connectivity services to
telecommunications companies to be remarketed under their own brands.
Cable Television and Direct Broadcast Satellite. Certain companies are
exploring the possibility of providing high-speed data services using
alternative delivery methods. For example, @Home, a joint venture between
Tele-Communications, Inc. and Kleiner Perkins Caulfield & Byers, has stated
its intent to provide high-speed data services over cable television plant,
and Hughes Network Systems, Inc. has lauched DirecPC, which will deliver high-
speed data through direct broadcast satellite technology. CAI Wireless
Systems, Inc., a wireless cable television service, also has announced that it
has begun testing the first Internet connectivity product delivered by
wireless cable. However, since they do not currently possess nationwide
networks, these companies, in order to provide Internet access, must either
buy access to an Internet network infrastructure or build such a network.
On-Line Service Providers. The Company also competes, to a lesser extent,
with certain on-line service providers who offer Internet connectivity in
conjunction with their primary products or services. For example, Microsoft
provides connectivity to the Internet through the Microsoft Network, which was
built by UUNET (of which Microsoft holds a significant minority stake), as a
standard integrated feature of its Windows 95 operating system, and IBM's OS/2
WARP operating system is preconfigured to provide Internet connectivity
through the Advantis network, which is controlled by IBM. In addition, AOL,
CompuServe and Prodigy, currently provide connectivity to the Internet, and
many have announced plans to offer expanded Internet connectivity
capabilities. Currently, on-line service providers are primarily focused on
the consumer marketplace.
Web Server Hosting
The market for Web server hosting is highly fragmented and extremely
competitive. There are no substantial barriers to entry and the Company
expects the competition will intensify in the future. Currently, the Company's
primary competitors are other ISPs, including BBN, UUNET and PSINet, and
companies whose primary business is developing and operating "Server Farms"
such as Internet Direct. In addition, many organizations currently host Web
servers at their own facilities. The Company believes, however, that as
bandwidth requirements increase, it will become more economical for these
organizations to outsource their needs. The Company believes that it
significantly differentiates itself from its competitors by offering flat-rate
billing, dedicated servers, 24x7x365 monitoring, upgradability and other
value-added services demanded by high-end business customers.
However, as a result of an increase in the number of competitors, and
vertical and horizontal integration in the industry, the Company expects to
encounter significant pricing pressure and other competition in the future.
Advances in technology as well as changes in the marketplace and the
regulatory environment are constantly occurring, and the Company cannot
predict the effect that ongoing or future developments may have on the
Internet industry generally or on the Company specifically. See "Risk
Factors--Competition," "--Dependence Upon Product Development; Risks of
34
<PAGE>
Changing Technology and Industry Standards" and "--Potential Liability for
Information Disseminated Over Network; Regulation."
PROPERTIES
The Company's administrative offices, as well as its NOC and Server Farm,
are located in Beltsville, Maryland, where the Company currently leases
approximately 54,000 square feet under a lease that expires in 2000. The
Company believes that this facility will meet its needs through at least the
remainder of 1996. The Company intends to lease space on the west coast of the
United States to house its second Server Farm, which the Company expects to
construct in 1996. The Company also leases space (typically less than 200
square feet) in various geographic locations to house the telecommunications
equipment for each of its POPs. See "Network Infrastructure" for a description
of the components of the Company's nationwide network, the Company's NOC and
the current Server Farm.
EMPLOYEES
As of May 31, 1996, the Company employed 143 persons full-time, including 43
in sales and marketing, 24 in network operations (including 8 in technical
support) and 54 in general and administrative functions. None of the Company's
employees is represented by a labor union, and the Company considers its
employee relations to be good.
LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
35
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
June 1, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Christopher R. McCleary 43 Chairman of the Board, President,
Chief Executive Officer
Clyde A. Heintzelman 57 Senior Vice President, Chief Operating
Officer, General Manager--Business
Connectivity Group
Thomas M. Brandt, Jr. 44 Senior Vice President, Chief Financial
Officer
Earl P. Galleher 36 Vice President, General Manager--
Internet Server Products Group
Nicholas J. Magliato 30 Vice President, General Manager--
Private Networks Group
Brian M. Deobald 34 Vice President, General Manager--
Telecommute Products Group
William A. Pendley 32 Vice President, Assistant General
Manager--Business Connectivity Group,
Secretary
John C. Welling 31 Vice President, Controller
Douglas E. Humphrey 36 Senior Vice President, Chief
Technology Officer, Director
Sheryl R. Richeson 40 Vice President, Customer Service--
Business Connectivity Group
Edward J. Kern 27 Vice President, Network--Business
Connectivity Group
William F. Webb, Jr. 30 Vice President, Internet Server
Technical Operations
Michael T. Doughney 37 Vice President, Director
Frank A. Adams(1)(2) 50 Director
William F. Earthman III(1)(2) 44 Director
Ray A. Rothrock(1)(2) 41 Director
Robert M. Stewart 41 Director
John H. Wyant 50 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Christopher R. McCleary joined DIGEX as President and Chief Executive
Officer in February 1996. Mr. McCleary has served as a director since joining
the Company and was elected Chairman of the Board of Directors in June 1996,
succeeding Frank A. Adams, who remains a director. Mr. McCleary was one of the
founding management team members at American Mobile Satellite
36
<PAGE>
Corporation ("AMSC"), where he served as a Vice President and General Manager,
Satellite Telephone Service. Prior to joining AMSC, Mr. McCleary was founder
and President of the Satellite Network Antenna Division of Radiation Systems,
Inc. Mr. McCleary received his Bachelor of Arts degree from the University of
Kentucky.
Clyde A. Heintzelman has served as Senior Vice President and Chief Operating
Officer since May 1995. Prior to May of 1995, Mr. Heintzelman was Vice
President of Sales and Marketing for Connective Strategies, Inc. ("CSI"), an
ISDN startup company. Mr. Heintzelman spent 28 years prior to CSI with Bell
Atlantic, serving as General Manager of Marketing and Sales for Bell Atlantic
Directory Services from 1990 until 1992 and as Vice President of Sales and
Marketing for the Business Market at C&P Telephone from 1985 to 1990. Mr.
Heintzelman was President and CEO of Bell Atlanticom from 1983 to 1985 and,
prior to that, was the general manager who established Bell Atlantic's Federal
Systems Division. Mr. Heintzelman is an alumnus of the University of Delaware
and has also done graduate work at the Wharton School, the University of
Pittsburgh, and the University of Michigan.
Thomas M. Brandt, Jr. joined DIGEX as Senior Vice President and Chief
Financial Officer in June 1996. Mr. Brandt was a director at Price Waterhouse
LLP from 1993 until he joined DIGEX. From 1987 through 1992, Mr. Brandt served
as Vice President and Chief Financial Officer for U.S. Metalsource
Corporation, a metals distribution business. Mr. Brandt received his M.B.A.
degree from the Wharton School of the University of Pennsylvania and his
Bachelor's degree from Duke University.
Earl P. Galleher joined DIGEX as Vice President and General Manager--
Internet Server Products in March 1996. Prior to joining DIGEX, Mr. Galleher
was Director of Marketing at AMSC. Mr. Galleher led the development of AMSC's
product positioning, branding strategy and subscriber acquisition investment
plan. Prior to AMSC, Mr. Galleher was Manager of Market Development at
Southwestern Bell Mobile Systems Washington-Baltimore system. Mr. Galleher
received his Bachelor of Arts degree from Denison University.
Nicholas J. Magliato joined DIGEX as Vice President and General Manager--
Private Networks in March 1996. Prior to joining DIGEX, Mr. Magliato was the
Director of Land Mobile Sales and Distribution at AMSC. His responsibilities
at AMSC included creating product plans for wireless voice and data services
and developing and implementing a nationwide sales and distribution strategy.
Prior to AMSC, Mr. Magliato was a telecommunications consulting manager at
Andersen Consulting LLP. Mr. Magliato received a Bachelor of Science degree,
concentrating in Computer and Information Services, from Syracuse University.
Brian M. Deobald joined DIGEX as Vice President and General Manager--
Telecommute Products in March 1996. Prior to joining DIGEX, Mr. Deobald was
the Director of Product Management at AMSC. At AMSC, Mr. Deobald created the
company's business plan and developed and introduced services, subscriber
hardware, and pricing. Mr. Deobald joined AMSC from AT&T International
Communications Services where he managed strategic and business planning. Mr.
Deobald received an M.B.A. from the Wharton School and holds a Master's degree
from Johns Hopkins University and a Bachelor's degree from Georgetown
University.
William A. Pendley joined DIGEX in December 1994 as Chief Financial Officer
and currently serves as Vice President and Assistant General Manager--Business
Connectivity. In 1995, Mr. Pendley was responsible for developing DIGEX's
financial business plan and securing the first-level financing with venture
capital investors. Prior to joining DIGEX, Mr. Pendley was Chief Financial
Officer for Intrafed, Inc., a software developer and system integrator, and,
prior to that, served in a financial management position for IBM Federal
Systems. Mr. Pendley holds an M.B.A. in finance from New York University and a
Bachelor of Science of Business Administration degree from Georgetown
University.
John C. Welling joined DIGEX as a Vice President and Controller in April
1996. Prior to joining DIGEX, Mr. Welling was a senior manager at KPMG Peat
Marwick LLP, focusing on publicly-held
37
<PAGE>
companies. Mr. Welling received a Bachelor of Business Administration degree,
with a concentration in accounting, from Loyola College in Baltimore,
Maryland.
Douglas E. Humphrey is the Senior Vice President, Chief Technology Officer
and co-founder of DIGEX. Mr. Humphrey has also served as a director of the
Company since 1990 and served as the Chief Executive Officer from the
Company's inception until Mr. McCleary joined DIGEX in February 1996. Prior to
founding DIGEX, Mr. Humphrey was a senior TCP/IP networking and computer
security specialist for Tandem Computers, Inc. from September 1987 to March
1993. From 1983 to 1987, Mr. Humphrey was President and CEO of Computer Time
Share Corporation.
Sheryl R. Richeson is Vice President, Customer Service--Business
Connectivity. Ms. Richeson joined DIGEX as Director of Customer Service in
October 1995. Ms. Richeson is an experienced telecommunications executive with
more than 14 years of management experience with Bell Atlantic. Ms. Richeson
served as Director of Large Business Services and as regional manager for
Field Sales Support for Bell Atlantic. Ms. Richeson holds a Masters of
Administrative Science degree from Johns Hopkins University and a Bachelor of
Science degree from the University of Colorado.
Edward J. Kern joined DIGEX in 1993 as Manager of Systems and was promoted
to Vice President, Network--Business Connectivity in May 1996. Prior to
joining DIGEX, Mr. Kern spent seven years building and managing TCP/IP
networks as a consultant for various companies. Mr. Kern is an active member
of the Internet Engineering Task Force.
William F. Webb, Jr. joined DIGEX as Vice President, Internet Server
Technical Operations in May 1996. Prior to joining DIGEX, Mr. Webb was a
manager at Andersen Consulting LLP. At Andersen Consulting, Mr. Webb worked in
the Telecommunications Industry Market Unit, focusing on service activation
systems for major telecommunications clients. Mr. Webb holds an M.B.A. degree
from Virginia Polytechnic Institute and State University and a Bachelor of
Science degree in Computer Science and Mathematics from Eastern Nazarene
College.
Michael T. Doughney is a Vice President and co-founder of DIGEX and has
served as a director of the Company since 1990. Mr. Doughney majored in
computer science and electrical engineering at the University of Maryland.
Frank A. Adams has been a director of the Company since April 1995. Mr.
Adams served as Chairman of the Board from April 1995 until June 1996, when
Mr. McCleary was elected Chairman. Mr. Adams is currently President and CEO of
Grotech Capital Group which he co-founded in 1984. Mr. Adams has held
positions with public companies, including PHH Corporation, RLC/Matlack and
Westinghouse. Mr. Adams is also a director of several private companies. Mr.
Adams holds B.S. and Juris Doctor degrees from the University of Baltimore and
has completed advanced management programs at Stanford University and Harvard
University.
William F. Earthman III has been a director of the Company since April 1995.
Mr. Earthman is a general partner of Southern Venture Fund II, L.P. and a
Partner of Massey Burch Capital Corporation. Before joining Massey Burch as
Vice President in 1989, he served at the firms of J.C. Bradford & Co.,
Prudential-Bache Securities and, most recently, First Nashville Corporation.
Mr. Earthman is also a director of Ensys Environmental Products Inc. Mr.
Earthman received his Bachelor of Arts degree from the University of Virginia.
Ray A. Rothrock has been a director of the Company since April 1995. Mr.
Rothrock is a general partner for Venrock Associates and has been with the
firm since 1988. Mr. Rothrock was with Sun Microsystems Inc. for four years
prior to joining Venrock Associates. Mr. Rothrock received his M.B.A. degree
from Harvard Business School, an MS in Nuclear Engineering from Massachusetts
Institute of Technology, and a Bachelor of Science in Nuclear Engineering from
Texas A&M University. He also serves as a director of Spyglass, Inc. and
several private companies, including Checkpoint Software Technologies of Tel
Aviv, Israel. He is also a director and treasurer of the New York Venture
Capital Forum.
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<PAGE>
Robert M. Stewart has been a director of the Company since December 1995.
Mr. Stewart is a Managing Director of the Anchor Financial Group LLC, a
private investment banking firm in Washington, D.C. Prior to joining Anchor
Financial Group, Mr. Stewart was a Principal with Armata Partners L.P. and,
previously to that, a Vice President of Legg Mason Wood Walker, Inc. Mr.
Stewart holds an M.B.A. from the Babcock Graduate School of Management of Wake
Forest University and a B.A. from Hampden-Sydney College.
John H. Wyant began serving as a director of the Company in June 1996. Mr.
Wyant is the founder and president of Blue Chip Venture Company. Mr. Wyant is
also a director of Zaring Homes Inc. and several private companies. Mr. Wyant
received his B.A. degree from Denison University and his J.D. degree from
Chase College of Law.
Each officer serves at the discretion of the Board of Directors. There are
no family relationships among any of the Directors and executive officers of
the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee consists of Mr. Rothrock (Chairman), Mr. Adams and Mr.
Earthman. The Audit Committee makes recommendations to the Board of Directors
regarding the selection of independent auditors, reviews the results and scope
of the audit and other services provided by the Company's independent
auditors, and reviews and evaluates the Company's audit and control functions.
The Compensation Committee consists of Mr. Adams (Chairman), Mr. Earthman
and Mr. Rothrock. The Compensation Committee administers the Company's
Incentive Stock Plan and makes decisions concerning salaries and incentive
compensation for employees and consultants of the Company.
DIRECTORS' COMPENSATION
Non-employee directors are reimbursed for reasonable expenses incurred by
them in attending Board meetings. Pursuant to the terms of the Securities
Purchase Agreement by and among the Company, Mr. Humphrey, Mr. Doughney,
Grotech Capital Partners IV, L.P. ("Grotech IV"), Venrock Associates
("Venrock"), and Southern Venture Fund II, L.P. ("Southern"), dated as of
March 24, 1995 (the "Securities Purchase Agreement"), the Company pays to each
of Grotech IV, Venrock and Southern an annual directors fee of $10,000 for the
respective directors designated by such entities. Under that certain Purchase
and Exchange Agreement (as defined), the Company also pays Blue Chip an annual
directors fee of $10,000 for the director designated by such entity.
BOARD COMPOSITION
All directors hold office until their successors have been elected and
qualified. Upon consummation of the Offering, the Company's Board of Directors
is expected to be divided into three classes, with each class of directors to
serve three-year staggered terms (after their initial terms).
Under the Securities Purchase, Conversion and Exchange Agreement, (the
"Purchase and Exchange Agreement"), dated as of May 30, 1996, by and among the
Company, Grotech IV, Grotech Partners III, L.P. ("Grotech Partners"), Grotech
III Companion Fund, L.P. ("Grotech Companion"), Grotech III Pennsylvania Fund,
L.P. ("Grotech Pennsylvania"), Venrock, Venrock Associates II, L.P. ("Venrock
II"), Southern, Blue Chip Capital Fund Limited Partnership ("Blue Chip"),
Crisler Capital Company, Limited Partnership ("Crisler," and together with
Grotech IV, Grotech Partners, Grotech Companion, Grotech Pennsylvania,
Venrock, Venrock II, Southern, and Blue Chip, the "1996 Venture Investors"),
Mr. Humphrey and Mr. Doughney, the 1996 Venture Investors and Messrs. Humphrey
and Doughney have agreed to vote their shares of voting stock of the Company
for the election of: (i) four directors designated by Messrs. Humphrey and
Doughney (Mr. Humphrey, Mr. Doughney, Mr. Stewart and Mr. McCleary), (ii) one
director designated by Grotech IV (Mr. Adams), (iii) one director designated
39
<PAGE>
by Venrock (Mr. Rothrock), (iv) one director designated by Southern (Mr.
Earthman), (v) one director designated by Blue Chip (Mr. Wyant) and (vi) one
director to be jointly designated by the 1996 Venture Investors and Mr.
Humphrey. This agreement superseded provisions of the Securities Purchase
Agreement concerning the election of directors.
EXECUTIVE COMPENSATION
The following table summarizes all compensation earned by Douglas E.
Humphrey (the "Named Executive Officer"), who served as the Company's Chief
Executive Officer during the fiscal year ended December 31, 1995. No other
executive officers of the Company earned in excess of $100,000 of salary and
bonus during the fiscal year ended December 31, 1995.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARD
-------------------- ------------------
SECURITIES
NAME AND UNDERLYING ALL OTHER
PRINCIPAL FISCAL SALARY BONUS OPTIONS COMPENSATION
POSITION YEAR ($) ($) (#) ($)(2)
- --------- ------ ---------- --------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
Douglas E. Humphrey(1).. 1995 $ 100,000 $ 20,000 0 $6,600
Chief Executive Officer
</TABLE>
- --------
(1) Mr. Humphrey was Chief Executive Officer of the Company until February
1996, when Mr. McCleary succeeded him. Mr. Humphrey is currently a Senior
Vice President and Chief Technology Officer of the Company.
(2) This amount represents a car allowance.
OPTION GRANTS IN 1995
No options were granted for the fiscal year ended December 31, 1995 to the
Named Executive Officer and no stock appreciation rights have been granted to
date.
INCENTIVE STOCK OPTION PLAN
The Board of Directors has adopted an Incentive Stock Option Plan (the
"Stock Option Plan"). The Stock Option Plan is not qualified under Section 422
of the Internal Revenue Code of 1986. Under the Stock Option Plan, employees
are entitled to purchase Common Stock of the Company by cash payment or by
delivery of existing shares of Common Stock held by such employee, the fair
value of which shall be determined in good faith by the Board of Directors.
The purpose of the Stock Option Plan and of granting options to specified
employees of the Company pursuant thereto is to further the growth,
development and financial success of the Company by providing additional
incentives to such persons by assisting them to acquire shares of Common Stock
of the Company and to benefit directly from the Company's growth, development
and financial success. Options granted under the Stock Option Plan vest in
accordance with one of the following schedules or in accordance with an
alternative schedule approved by the Board of Directors: (i) 25% of the
aggregate amount of options granted to a particular employee upon the first
anniversary of the date of hire of such employee and the remaining 75% of the
aggregate amount of options on a quarterly basis, evenly spread out over the
three-year period following the first anniversary of the date of hire or (ii)
33% of the aggregate amount of options granted to a particular employee upon
the first anniversary of the date of hire of such employee and the remaining
67% of the aggregate amount of options on a quarterly basis, evenly spread out
over the two-year period following the first anniversary of the date of hire.
Options granted under the Stock Option Plan expire on the tenth anniversary of
the date of grant. The Company has reserved 4,367,239 shares of Common Stock
for issuance under the Stock Option Plan, none of which have been issued to
date. As of May 31, 1996, options for the purchase of 4,315,950 shares of
Common Stock are outstanding. The exercise price for all of such outstanding
options ranges from $0.10 to $1.49 per share.
40
<PAGE>
EMPLOYMENT CONTRACTS
In May 1995, the Company entered into an employment agreement with Mr.
Heintzelman. Pursuant to the terms of the agreement, Mr. Heintzelman's base
salary is $125,000 per year, plus a bonus, which was $20,000 in 1995. In
addition, Mr. Heintzelman also receives a $12,000 per year auto allowance
pursuant to the agreement. Mr. Heintzelman was granted options to purchase
500,000 shares of Common Stock of the Company at an exercise price of $0.10
per share at the time of entering into the agreement and additional options to
purchase 27,000 shares of Common Stock of the Company at an exercise price of
$0.10 per share in January 1996. Grants were made pursuant to the Stock Option
Plan and vest as follows: 100,000 options vested 90 days after the date of the
agreement, one-third of the remaining aggregate options vested on the first
anniversary of the date of hire and the remainder will vest ratably on a
quarterly basis during the two years following the first anniversary. In May
1996, options to purchase 373,000 shares of Common Stock of the Company at an
exercise price of $1.49 per share were granted to Mr. Heintzelman pursuant to
the Stock Option Plan. These options vest as follows: one-third of the options
will vest on the first anniversary of the date of grant and the remaining two-
thirds of the options will vest ratably on a quarterly basis during the two
years following the first anniversary of the date of grant.
In February 1996, the Company entered into an employment agreement with Mr.
McCleary. Pursuant to the terms of the agreement, Mr. McCleary's base salary
is $175,000 per year ($25,000 of which is conditioned upon the completion of
the Offering), plus a bonus to be awarded annually each December as part of
the Company's bonus program for its management. Under the agreement, Mr.
McCleary is also entitled to participate in any Company incentive compensation
plans, savings plans, retirement plans, and other employee benefit plans as
well as to receive an auto and expenses allowance. Mr. McCleary was also
granted options to purchase 604,684 shares of Common Stock of the Company at
an exercise price of $0.10 per share at the time of entering into the
agreement. The grant was made pursuant to the Stock Option Plan and vests as
follows: one-third of the options vest on the first anniversary of the date of
hire and the remaining two-thirds of the options vest ratably on a quarterly
basis during the two years following the first anniversary. In May 1996,
options to purchase an additional 593,316 shares of Common Stock of the
Company at an exercise price of $1.49 per share were granted to Mr. McCleary
pursuant to the Stock Option Plan. These options vest as follows: one-third of
the options vest on the first anniversary of the date of grant and the
remaining two-thirds of the options vest ratably on a quarterly basis during
the two years following the first anniversary of the date of grant. The
initial term of the agreement expires on December 31, 1999, but the agreement
is subject to automatic renewal terms of one year each.
In March 1996, the Company entered into employment agreements with Messrs.
Deobald, Galleher, and Magliato. Pursuant to the terms of these agreements,
these officers' base salaries are $85,000 per year, plus a bonus to be awarded
annually as part of the Company's bonus program for management. These officers
are also entitled to participate in any Company incentive compensation plans,
retirement plans, and other employee benefit plans as well as to receive a
$6,600 per year auto allowance. Messrs. Deobald, Galleher, and Magliato were
each granted options to purchase 100,000 shares of Common Stock of the Company
at an exercise price of $0.10 per share at the time of entering into their
respective employment agreements and were each granted additional options to
purchase 40,000 shares of Common Stock of the Company at an exercise price of
$1.49 per share, effective as of May 30, 1996. Grants were made pursuant to
the Stock Option Plan and vest in accordance with the four-year schedule
contained therein. The initial terms of the agreements expire in March 1997,
but the agreements are subject to automatic renewal terms of one year each.
In April 1996, the Company entered into an employment agreement with Mr.
Pendley. Pursuant to the terms of the agreement, Mr. Pendley's base salary is
$115,000 per year, plus a bonus to be awarded annually each December as part
of the Company's bonus program for its management. Under the agreement, Mr.
Pendley is also entitled to participate in any Company incentive
41
<PAGE>
compensation plans, savings plans, retirement plans, and other employee
benefit plans as well as to receive an auto and expenses allowance. Mr.
Pendley was also granted options to purchase 300,000 shares of Common Stock of
the Company at an exercise price of $0.10 per share in September 1995 and
options to purchase an additional 16,000 shares of Common Stock of the Company
at an exercise price of $0.10 per share in January 1996. Grants were made
pursuant to the Stock Option Plan and vest as follows: one-third of the
aggregate options vested on December 15, 1995, the first anniversary of the
date of hire, and the remaining two-thirds of the aggregate options vest
ratably on a quarterly basis during the two years following the first
anniversary, a portion of which have already vested. In May 1996, options to
purchase an additional 224,000 shares of Common Stock of the Company at an
exercise price of $1.49 per share were granted to Mr. Pendley pursuant to the
Stock Option Plan. These options vest as follows: one-third of the options
will vest on the first anniversary of the date of grant and the remaining two-
thirds of the options will vest ratably on a quarterly basis during the two
years following the first anniversary of the date of grant. The initial term
of the agreement expires on March 31, 1997, but the agreement is subject to
automatic renewal terms of one year each.
In June 1996, the Company entered into an employment agreement with Mr.
Brandt. Pursuant to the terms of the agreement, Mr. Brandt's base salary is
$125,000 per year, plus a bonus to be awarded annually each December as part
of the Company's bonus program for its management. Under the agreement, Mr.
Brandt is also entitled to participate in any Company incentive compensation
plans, savings plans, retirement plans, and other employee benefit plans as
well as to receive an auto and expenses allowance. Mr. Brandt was also granted
options to purchase 100,000 shares of Common Stock of the Company, at an
exercise price of $1.49 per share, effective as of May 30, 1996. The grant was
made pursuant to the Stock Option Plan and the options vest in accordance with
the four-year schedule contained therein. The initial term of the agreement
expires on May 31, 1997, but the agreement is subject to automatic renewal
terms of one year each.
42
<PAGE>
CERTAIN TRANSACTIONS
The Company was incorporated on January 8, 1990 by Mr. Humphrey and Mr.
Doughney (the "Founders"). Mr. Humphrey contributed certain computer hardware
to the Company in exchange for 2,426,861 shares of Common Stock, and Mr.
Doughney contributed certain computer software to the Company in exchange for
1,617,907 shares of Common Stock.
On July 1, 1994, the Company borrowed $300,000 from individuals generally
affiliated or associated with Armata Partners L.P. These loans were evidenced
by 8% promissory notes (the "Bridge Notes") secured by a pledge by the
Founders of their shares of Common Stock. At the same time, the Company issued
warrants to purchase 477,189 shares of Common Stock to seven of these
individuals.
On March 24, 1995, the Company entered into the Securities Purchase
Agreement with the Founders and Grotech, Venrock and Southern, pursuant to
which the Company issued a total of 45,454.54 shares of convertible preferred
stock (since redesignated Series A Convertible Preferred Stock), par value
$1.00 per share ("Series A Preferred Stock"), together with warrants to
purchase of 2,800,000 shares of Common Stock of the Company for an aggregate
investment of $4,000,000. The Bridge Notes were repaid at their face amount
with a portion of the proceeds of this investment. Grotech IV was issued
18,181.82 shares of Series A Preferred Stock and warrants to purchase
1,120,000 shares of Common Stock of the Company, Venrock was issued 15,909.09
shares of Series A Preferred Stock (4,925.83 shares of which were assigned to
Venrock II and warrants to purchase 980,000 shares of Common Stock (303,382 of
which were assigned to Venrock II) and Southern was issued 11,363.63 shares of
Series A Preferred Stock and warrants to purchase 700,000 shares of Common
Stock. Representatives of each of Grotech IV, Venrock and Southern were
elected to the Company's Board of Directors pursuant to the Securities
Purchase Agreement.
Pursuant to a Stockholders Agreement, dated March 24, 1995, by and among the
Company, Grotech IV, Venrock, Southern, Mr. Humphrey and Mr. Doughney, the
parties thereto agreed to grant rights of first refusal to the other parties
to such agreement in the event of the death, disability or termination of
employment of either Mr. Humphrey or Mr. Doughney or in the event that either
Mr. Humphrey or Mr. Doughney wishes to transfer any of their shares of Common
Stock of the Company.
As part of a fee for arranging the above investment, the Company made a cash
payment of $200,000 and issued warrants to purchase 228,020 shares of Common
Stock to nine individuals generally affiliated or associated with Armata
Partners L.P.
On November 28, 1995, the Company issued 10% promissory notes in the
principal amount of $2,000,000 (the "November 1995 Notes") and warrants to
purchase 749,866 shares of Common Stock to Grotech IV, Venrock, Southern and
Venrock Associates, II L.P. ("Venrock II" and, together with Venrock, Grotech
and Southern, the "Investors") as follows: Grotech IV purchased promissory
notes in the principal amount of $800,000 and warrants to purchase 299,946
shares of Common Stock; Venrock purchased promissory notes in the amount of
$483,307 and warrants to purchase 181,213 shares of Common Stock; Venrock II
purchased promissory notes in the principal amount of $216,693 and warrants to
purchase 81,240 shares of Common Stock; and Southern purchased promissory
notes in the principal amount of $500,000 and warrants to purchase 187,467
shares of Common Stock.
On February 23, 1996, the Company issued additional promissory notes in the
principal amount of $1,000,000 (the "February 1996 Notes") on the same terms
as the November 1995 Notes and additional warrants to purchase 415,945 shares
of Common Stock to the Investors as follows:
43
<PAGE>
Grotech IV purchased promissory notes in the principal amount of $400,000 and
warrants to purchase 166,378 shares of Common Stock; Venrock purchased
promissory notes in the principal amount of $217,000 and warrants to purchase
100,509 shares of Common Stock; Venrock II purchased promissory notes in the
principal amount of $133,000 and warrants to purchase 45,072 shares of Common
Stock; and Southern purchased promissory notes in the principal amount of
$250,000 and warrants to purchase 103,986 shares of Common Stock.
On May 21, 1996, the Company issued additional promissory notes in the
principal amount of $1,000,000 (the "Convertible Notes") convertible into
shares of Series B Preferred Stock of the Company to the Investors as follows:
Grotech IV purchased promissory notes in the principal amount of $400,000;
Venrock purchased promissory notes in the principal amount of $217,000;
Venrock II purchased promissory notes in the principal amount of $133,000; and
Southern purchased promissory notes in the principal amount of $250,000.
On May 30, 1996, the Company, the Founders, the Investors, Grotech Partners,
Grotech Companion, Grotech Pennsylvania, Blue Chip and Crisler Capital
Company, Limited Partnership ("Crisler," and together with the Investors,
Grotech Partners, Grotech Companion, Grotech Pennsylvania and Blue Chip, the
"Purchasers") entered into the Purchase and Exchange Agreement, whereby the
Investors exchanged the November 1995 Notes and the February 1996 Notes held
by them for 31,263.89 shares of Series B Convertible Preferred Stock of the
Company, par value $1.00 per share (the "Series B Preferred Stock") and
converted the Convertible Notes into 10,000 shares of Series B Preferred
Stock. In addition, the Purchasers paid $4,000,000 in cash in exchange for a
further 40,000 shares of Series B Preferred Stock. The above-referenced
exchange, conversion, and purchase resulted in the following acquisitions of
Series B Preferred Stock: Grotech IV acquired 22,505.56 shares of Series B
Preferred Stock; Grotech Partners acquired 8,537 shares of Series B Preferred
Stock; Grotech Companion acquired 930 shares of Series B Preferred Stock;
Grotech Pennsylvania acquired 533 shares of Series B Preferred Stock; Venrock
acquired 10,914.77 shares of Series B Preferred Stock; Venrock II acquired
5,860.92 shares of Series B Preferred Stock. Southern acquired 11,982.64
shares of Series B Preferred Stock; Blue Chip acquired 16,000 shares of Series
B Preferred Stock; and Crisler acquired 4,000 shares of Series B Preferred
Stock.
The transactions of May 21 and May 30, 1996 are collectively referred to
herein as the "1996 Venture Financing." A representative of Blue Chip holds a
seat on the Company's Board of Directors pursuant to the terms of the Purchase
and Exchange Agreement. The rights of representatives of each of Grotech IV,
Venrock and Southern, as well as each of the Founders, to have seats on the
Company's Board of Directors, granted pursuant to the Securities Purchase
Agreement, were restated in the Purchase and Exchange Agreement. In addition,
pursuant to the Purchase and Exchange Agreement, Crisler obtained the right to
designate a representative to act as an observer at meetings of the Company's
Board of Directors. See "Management--Board Composition."
All outstanding shares of Series A Preferred Stock and Series B Preferred
Stock will be converted into 6,700,839 shares of Common Stock upon
consummation of the Offering (the "Preferred Stock Conversion"). In addition,
all holders of warrants to purchase Common Stock (other than WinStar) will
exercise such warrants to purchase 4,671,020 shares of Common Stock upon
consummation of the Offering (the "Warrant Exercise").
44
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of June 1, 1996 and as adjusted to
reflect the Preferred Stock Conversion and the Warrant Exercise, certain
information with respect to the beneficial ownership of the Company's Common
Stock by: (i) each person (or group of affiliated persons) of the Company
known by the Company to own beneficially more than five percent of the
outstanding Common Stock; (ii) each director of the Company; (iii) the Named
Executive Officer and (iv) all directors and executive officers as a group.
Information is set forth on both a pre-Offering and a post-Offering basis.
Except as indicated in the footnotes to this table, the persons named in the
table, based on information provided by such persons, have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to the terms of the Securities Purchase
Agreement and the Purchase and Exchange Agreement, pursuant to which the
parties thereto have agreed to vote their shares of Common Stock for directors
nominated by certain of the other parties thereto. See "Certain Transactions."
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL SHARES(1)
SHARES OF -----------------
STOCK BENEFICIALLY BEFORE AFTER
NAME OWNED OFFERING OFFERING
---- ------------------ -------- --------
<S> <C> <C> <C>
Grotech Investors(2)...................... 4,266,659 27.7%
Venrock Investors(3)...................... 2,950,777 19.1
Douglas E. Humphrey....................... 2,426,861 15.7
Southern Venture Fund II, L.P.(4)......... 2,107,698 13.7
Michael T. Doughney....................... 1,617,907 10.5
Blue Chip Capital Fund Limited Partner-
ship(5).................................. 1,073,213 7.0
Robert M. Stewart......................... 98,679 *
Frank A. Adams(2)......................... 4,266,659 27.7
Ray A. Rothrock(3)........................ 2,950,777 19.1
William F. Earthman III(4)................ 2,107,698 13.7
John H. Wyant(5).......................... 1,073,213 7.0
Christopher R. McCleary(6)................ -- --
All directors and executive officers as a
group
(11 persons)(7).......................... 15,082,752 94.5%
</TABLE>
- --------
*Less than one percent.
(1) Assumes no exercise of the Underwriters' over-allotment option. The
Company has granted the Underwriters an over-allotment option to purchase
up to shares of Common Stock.
(2) The Grotech Investors consist of Grotech IV, Grotech Partners, Grotech
Companion, and Grotech Pennsylvania. The address of the Grotech Investors
is 9690 Deereco Road, Timonium, MD 21093. The shares represent 3,595,902,
572,626, 62,380, and 35,751 shares owned by Grotech, Grotech Partners,
Grotech Companion, and Grotech Pennsylvania respectively. Mr. Adams, a
director of the Company, is also the general partner of Grotech Partners,
Grotech Capital Group IV, Inc. (the general partner of Grotech IV), and
Grotech Capital Group, Inc. (the general partner of Grotech Companion and
Grotech Pennsylvania). Mr. Adams disclaims beneficial ownership of the
shares held by the Grotech Investors, except to the extent of his economic
interest in the shares held by the Grotech Investors.
(3) The Venrock Investors consist of Venrock and Venrock II. The address of
the Venrock Investors is 30 Rockefeller Plaza, Suite 5508, New York, New
York 10112. The shares represent 1,992,536 shares held by Venrock and
958,241 shares held by Venrock II. Mr. Rothrock, a director of the
Company, is also a general partner of Venrock and Venrock II. Mr. Rothrock
disclaims beneficial ownership of the shares held by the Venrock
Investors, except to the extent of his economic interest in the shares
held by the Venrock Investors.
(4) The address of Southern Venture Fund II, L.P. is 310 25th Avenue, North,
Suite 103, Nashville, TN 37203. Mr. Earthman, a director of the Company,
is also the general partner of Southern. Mr. Earthman disclaims beneficial
ownership of the shares held by Southern, except to the extent of his
economic interest in the shares held by Southern.
45
<PAGE>
(5) Blue Chip Capital Fund Limited Partnership's address is 2000 PNC Center,
201 East Fifth Street, Cincinnati, OH 45202. Mr. Wyant is the president of
Blue Chip Venture Company, the general partner of Blue Chip. Mr. Wyant
disclaims beneficial ownership of the shares held by Blue Chip, except to
the extent of his economic interest in the shares held by Blue Chip.
(6) Mr. McCleary, the Chairman, President and Chief Executive Officer of the
Company holds options to purchase 1,198,000 shares of Common Stock, none of
which are exercisable within 60 days of June 1, 1996.
(7) Includes 540,958 options held by Messrs. Heintzelman, Kern, and Pendley
that are presently exercisable or that will become exercisable within 60
days of June 1, 1996. See Notes 2, 3, 4, and 5 above.
CAPITAL STOCK OF THE COMPANY
The following description of the Company's capital stock does not purport to
be complete and is subject in all respects to applicable Delaware law and to
the provisions of the Company's Certificate of Incorporation and Bylaws, copies
of which have been filed as exhibits to the Registration Statement of which
this Prospectus is a part.
The authorized capital stock of the Company consists of 49,800,000 shares of
Common Stock, $0.01 par value, and 330,000 shares of Preferred Stock, $1.00 par
value. As of June 1, 1996 there were 4,044,768 shares of Common Stock issued
and outstanding, 45,454.54 shares of Series A Preferred Stock issued and
outstanding, and 81,263.89 shares of Series B Preferred Stock issued and
outstanding. Upon consummation of the Offering, the Preferred Stock Conversion
and the Warrant Exercise and assuming no exercise of the Underwriters' over-
allotment option, there will be shares of Common Stock issued and
outstanding and no shares of Preferred Stock issued and outstanding. An
additional 4,315,950 shares of Common Stock will be issuable upon exercise of
outstanding options granted under the Company's Stock Option Plan, and 600,000
shares of Common Stock will be issuable upon exercise of warrants held by
WinStar.
COMMON STOCK
Each holder of Common Stock is entitled to one vote per share of record on
all matters to be voted upon by the shareholders. Holders will not have
cumulative voting rights in connection with the election of directors (or any
other matter). Subject to the preferential rights of any preferred stock that
may at the time be outstanding, each share of Common Stock will have an equal
and ratable right to receive dividends when, if and as declared from time to
time by the Board of Directors out of funds legally available therefor. The
Company has been, and may in the future be, subject to certain agreements which
restrict the payment of dividends. The Company does not anticipate paying cash
dividends in the foreseeable future. See "Dividend Policy."
In the event of liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share ratably in all assets remaining
after payments to creditors and after satisfaction of the liquidation
preference, if any, of any preferred stock that may at the time be outstanding.
Holders of Common Stock have no preemptive or redemption rights and are not
subject to further calls or assessments by the Company. Immediately upon
consummation of the Offering, all of the then outstanding shares of Common
Stock will be validly issued, fully paid and nonassessable.
46
<PAGE>
PREFERRED STOCK
The holders of all outstanding shares of Preferred Stock have agreed to
convert all of such shares into a total of 6,700,839 shares of Common Stock
upon consummation of the Offering. Thereafter, the Board of Directors will
have the authority to issue up to 200,000 shares of Preferred Stock in one or
more series, to fix the rights, preferences, privileges and restrictions
granted to or imposed upon any unissued shares of Preferred Stock and to fix
the number of shares constituting any series and the designations of such
series, without any further vote or action by the stockholders. The Board of
Directors, without stockholder approval, will be able to issue Preferred Stock
with voting and conversion rights which could adversely affect the voting
power of the holders of Common Stock. The Company has no present plans to
issue any Preferred Stock.
WARRANTS
The Company has issued warrants to purchase an aggregate of 5,271,020 shares
of Common Stock. Upon consummation of the Offering and the Warrant Exercise,
only the warrants held by WinStar to purchase 600,000 shares of Common Stock
(the "WinStar Warrants") will remain outstanding. The exercise price of the
WinStar Warrants is $1.50 per share, and the WinStar Warrants expire on June
10, 2001.
DELAWARE LAW AND LIMITATIONS ON CHANGES IN CONTROL
Section 203 of the Delaware General Corporation Law (the "DGCL") prevents an
"interested stockholder" (defined in Section 203, generally, as a person
owning 15% or more of a corporation's outstanding voting stock) from engaging
in a "business combination" (as defined in Section 203) with a publicly-held
Delaware corporation for three years following the date such person became an
interested stockholder unless (i) before such person became an interested
stockholder, the board of directors of the corporation approved the
transaction in which the interested stockholder became an interested
stockholder or approved the business combination; (ii) upon consummation of
the transaction that resulted in the interested stockholder's becoming an
interested stockholder, the interested stockholder owns at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding stock held by directors who are also officers of the
corporation and by employee stock plans that do not provide employees with the
right to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer); or (iii) following the transaction
in which such person became an interested stockholder, the business
combination is approved by the board of directors of the corporation and
authorized at a meeting of stockholders by the affirmative vote of the holders
of 66 2/3 of the outstanding voting stock of the corporation not owned by the
interested stockholder.
The Company's Bylaws generally require 50 days advance notice of any action
to be proposed at any meeting of stockholders and set forth other specific
procedures that a stockholder must follow. There are also specific procedures,
including advance notice, for the nomination of a person to the Board of
Directors when such person is nominated other than at the direction of the
Board. In addition, the Certificate of Incorporation provides that a special
meeting of the Company's stockholders may only be called by certain officers
of the Company or by the Board of Directors; no such meeting may be called by
the stockholders. Further, the Certificate of Incorporation eliminates the
ability of stockholders to act by written consent and consequently
stockholders may only act at meetings thereof. Any amendment of the Bylaws or
certain provisions of the Certificate of Incorporation by stockholders will
require the affirmative vote of the holders of at least 66 2/3 of the shares
of the Common Stock then outstanding.
These Bylaws provisions, the provisions authorizing the Board of Directors
to issue preferred stock without stockholder approval and the provisions of
Section 203 of the DGCL could have the effect of delaying, deferring or
preventing a change in control of the Company or the removal of existing
management. See "Risk Factors--Control by Certain Stockholders; Anti-Takeover
Measures."
47
<PAGE>
LIMITATION ON DIRECTORS' AND OFFICERS' LIABILITY
The Certificate of Incorporation provides that a director of the Company
will not be personally liable to the Company or its stockholders for monetary
damages for any breach of fiduciary duty as a director, except in certain
cases where liability is mandated by the DGCL. The provision has no effect on
any non-monetary remedies that may be available to the Company or its
stockholders, no does it relieve the Company or its directors from compliance
with federal or state securities laws. The Bylaws of the Company generally
provide that the Company shall indemnify, to the fullest extent permitted by
law, any person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action, suit, investigation,
administrative hearing or any other proceeding (each, a "Proceeding") by
reason of the fact that he is or was a director or officer of the Company, or
is or was serving at the request of the Company as a director, officer,
employee or agent of another entity, against expenses (including attorneys'
fees) and losses, claims, liabilities, judgments, fines and amounts paid in
settlement actually incurred by him in connection with such Proceeding. The
Company has entered into agreements to provide indemnification for the
Company's directors and executive officers in addition to the indemnification
provided for in the Bylaws. These agreements, among other things, will
indemnify the Company's directors and executive officers for certain expenses
(including attorney's fees), and all losses, claims, liabilities, judgments,
fines and settlement amounts incurred by such person arising out of or in
connection with such person's service as a director or executive officer of
the Company to the fullest extent permitted by applicable law.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
Upon consummation of the Offering, there will be shares of Common Stock
available for future issuance without shareholder approval (assuming no
exercise of the Underwriters' over-allotment option). These additional shares
may be utilized for a variety of corporate purposes, including future public
offerings to raise additional capital or to facilitate corporate acquisitions.
The Company does not currently have plans to issue additional shares of
capital stock, other than shares of Common Stock which may be issued upon the
conversion of the Company's convertible securities or exercise of options or
the warrants. See "Shares Eligible for Future Sale."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is .
SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Future sales of substantial amounts of the Company's Common Stock could
adversely affect the market price of the Common Stock. Several of the
Company's principal stockholders hold a significant portion of the Company's
outstanding Common Stock, and a decision by one or more of these stockholders
to sell their shares could adversely affect the market price of the Common
Stock. The Shares offered hereby (plus any shares issued upon exercise of the
Underwriters' over-allotment option) will be freely tradeable without
restriction, except to the extent that such shares are purchased by
"affiliates" of the Company. The holders of Common Stock, and warrants to
purchase Common Stock, of the Company, including officers and directors of the
Company, have entered into contractual agreements with the Underwriters (the
"Lock-Up Agreements") providing that they will not offer, sell or contract to
sell, or otherwise dispose of, directly or indirectly, or announce an offering
of, any shares of Common Stock of the Company beneficially owned by them or
any securities convertible into, or exchangeable for, the Company's Common
Stock for a period of 180 days after the date of the Underwriting Agreement
without the prior written consent of the representatives of the Underwriters,
other than shares of stock disposed of as bona fide gifts. As a result,
notwithstanding possible earlier
48
<PAGE>
eligibility for sale under the provisions of Rules 144 and 144(k) under the
Securities Act of 1933, as amended (the "Act"), shares subject to the Lock-Up
Agreements will not be saleable until the Lock-Up Agreements expire or their
terms are waived by the Underwriters' representatives. Assuming the
Underwriters' representatives do not release stockholders from the Lock-Up
Agreements, the following shares will be eligible for sale in the public
market at the following times: beginning on the Effective Date, only the
shares sold in the Offering to non-affiliates will be immediately available
for sale in the public market; beginning 180 days after the date of the
Underwriting Agreement, 4,044,768 shares will be eligible for sale pursuant to
Rule 144, all of which are held by affiliates of the Company. An additional
11,371,859 shares will become eligible for sale pursuant to Rule 144 at
various times during the two-year period following the Effective Date
(although such shares will continue to be subject to the Lock-Up Agreements
until the expiration of the terms thereof). The holders of approximately
10,666,650 shares of the Common Stock are entitled to certain rights with
respect to the registration of such shares under the Act beginning six months
after the Effective Date. In addition, the Company may register certain shares
of Common Stock issuable under the Stock Option Plan, and such registration
shall be effective upon filing with the Commission. As of May 31, 1996, there
were outstanding options under the Stock Option Plan to purchase 4,315,950
shares, of which options for 598,081 shares were fully vested and exercisable.
No shares have been issued to date under the Stock Option Plan. See "Shares
Eligible for Future Sale."
In general, under Rule 144 as currently in effect, a person (or person whose
shares are aggregated), including an affiliate of the Company, who has
beneficially owned shares for at least two years (including holding periods of
prior owners other than affiliates) is entitled to sell, within any three-
month period commencing 90 days after the closing of this Offering, a number
of shares of that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock ( shares immediately after the Offering)
or (ii) the average weekly trading volume in the Common Stock during the four
calendar weeks preceding such sale, subject to the filing of a Form 144 with
respect to such sale and certain other limitations and restrictions. In
addition, a person who is not deemed to have been an affiliate of the Company
at any time during 90 days preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least three years (including holding
periods of prior owners other than affiliates), would have entitled to sell
such shares under Rule 144(k) without regard to the requirements described
above.
REGISTRATION RIGHTS
Pursuant to the Securities Purchase Agreement, as amended by the Purchase
and Exchange Agreement, Grotech IV, Grotech Partners, Grotech Companion,
Grotech Pennsylvania, Venrock, Venrock II, Southern, Blue Chip and Crisler are
entitled to certain rights with respect to the registration of Registrable
Securities (as defined therein) under the Securities Act. Subject to certain
limitations, if the Company registers any of its securities under the
Securities Act, either for its own account or the account of other security
holders, such holders are entitled to written notice of the registration and
are entitled to include (at the Company's expense) such shares therein;
provided, among other conditions, that the underwriters of any such offering
have the right to limit the number of such shares included in the
registration. Pursuant to the warrant certificate evidencing the WinStar
Warrants, WinStar also holds these rights described above. In addition,
holders of at least a majority of the shares of Registrable Securities can
require the Company, at any time after six months after the effective date of
the initial offering of shares of its Common Stock pursuant to a registration
statement under the Securities Act, but on only one occasion, to file a
registration statement under the Securities Act with respect to such shares,
and the Company is required to use its best efforts to effect such
registration, subject to certain conditions and limitations. All fees, costs
and expenses of such registration of securities (other than underwriting
discounts in the case of the first type of registrations described above, and
other than legal and accounting expenses of such holders) will be borne by the
Company.
49
<PAGE>
UNDERWRITING
Upon the terms and subject to the conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the Underwriters named
below (the "Underwriters"), for whom Salomon Brothers Inc and Montgomery
Securities are acting as representatives (the "Representatives"), and each of
such Underwriters have severally agreed to purchase from the Company the
respective number of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Salomon Brothers Inc.....................................
Montgomery Securities....................................
----
Total................................................
====
</TABLE>
In the Underwriting Agreement, the several Underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all the shares of
Common Stock offered hereby (other than those subject to the over-allotment
option described below) if any such shares are purchased. In the event of a
default by an Underwriter, the Underwriting Agreement provides that, in
certain circumstances, the purchase commitments of the non-defaulting
Underwriters may be increased or the Underwriting Agreement may be terminated.
The Representatives have advised the Company that the several Underwriters
propose initially to offer the shares of Common Stock to the public at the
price to public set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share. The
Underwriters may allow and such dealers may reallow a concession not in excess
of $ per share to certain other dealers. After the initial public offering,
the price to public and such concessions may be changed.
The Company has granted the Underwriters an option, exercisable within 30
days of the date of this Prospectus, to purchase up to additional shares
of Common Stock from the Company at the same price per share as the initial
shares of Common Stock to be purchased by the Underwriters. The
Underwriters may exercise such option only to cover over-allotments, if any,
incurred in connection with the Offering. To the extent the Underwriters
exercise such option, each Underwriter will have a firm commitment, subject to
certain conditions, to purchase the same proportion of such additional shares
of Common Stock as the number of shares of Common Stock to be purchased and
offered by such Underwriter in the table above bears to the total number of
shares of Common Stock initially offered by the Underwriters hereby.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including liabilities under
the Act, or contribute to payments the Underwriters may be required to make in
respect thereof.
50
<PAGE>
The Company, its directors, officers and holders of its Common Stock, and
warrants to purchase its Common Stock, have each agreed with the Underwriters
not to offer, sell or contract to sell, or otherwise dispose of, directly or
indirectly, or announce the offering of, or file or cause to be filed any
registration statements under the Act with respect to any shares of Common
Stock or any securities or options convertible into, or exchangeable or
exercisable for, shares of Common Stock for a period of 180 days from the date
of the Underwriting Agreement without the prior written consent of the
Representatives.
The Representatives do not intend to confirm sales to any account over which
they exercise discretionary authority.
Prior to this Offering, there has been no public market for the Common
Stock. Accordingly, the initial public offering price for the Common Stock was
determined by negotiation among the Company and the Representatives. Among the
factors considered in determining the initial public offering price were the
services, the experience of management, the economic conditions of the
Company's industry in general, the general condition of the equity securities
market and the demand for similar securities of companies considered
comparable to the Company and other relevant factors. There can be no
assurance, however, that the prices at which the Common Stock will sell in the
public market after this Offering will not be lower than the price at which
the Shares are sold by the Underwriters.
LEGAL MATTERS
The legality of the Common Stock offered hereby will be passed upon for the
Company by Latham & Watkins, Washington, D.C. Certain legal matters will be
passed upon for the Underwriters by Cravath, Swaine & Moore, New York, New
York.
EXPERTS
The financial statements of the Company at December 31, 1994, December 31,
1995 and March 31, 1996, and for each of the three years in the period ended
December 31, 1995 and the three-month period ended March 31, 1996, appearing
in this Prospectus and Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such report given upon the authority of such firm as experts
in accounting and auditing.
51
<PAGE>
GLOSSARY
<TABLE>
<S> <C>
56 Kbps....................... Equivalent to a single high-speed telephone
service line; capable of transmitting one voice
call or 56 Kbps of data. Currently in widespread
use by medium and large businesses primarily for
entry level high-speed data and very low-speed
video applications.
ATM........................... Asynchronous Transfer Mode. An information
transfer standard for routing traffic based on
an address contained within the first five bytes
of a fifty-three byte-long, fixed-length packet
or cell.
Backbone...................... A centralized high-speed network that
interconnects smaller, independent networks.
Bandwidth..................... The number of bits of information which can move
through a communications medium in a given
amount of time; the capacity of a
telecommunications circuit/network to carry
voice, data and video information. Typically
measured in Kbps and Mbps. Bandwidth from public
networks is typically available to business and
residential end-users in increments from 56 Kbps
to T-3.
CAP........................... Competitive Access Provider. A
telecommunications company that provides an
alternative to a LEC for local transport of
private line and special access
telecommunications services.
CSU/DSU (also IDSU, SMDSU).... Channel Service Unit/Digital Service Unit. A
device used to terminate telephone company
equipment and prepare data for router interface.
DS-1 or T-1................... A data communications circuit capable of
transmitting data at 1.5 Mbps; can transmit
compressed full motion video. Currently in
widespread use by medium and large businesses
for video, voice, and data applications.
DS-3 or T-3................... A data communications circuit capable of
transmitting data at 45 Mbps. Equivalent to 28
T-1's of data capacity. Can also transmit
uncompressed, TV broadcast quality, full motion
video. Currently used only by
businesses/institutions and carriers for high
end applications.
Ethernet...................... A common method of networking computers in a
LAN. Ethernet will handle about 10 Mbps and can
be used with almost any kind of computer.
</TABLE>
52
<PAGE>
<TABLE>
<S> <C>
FDDI......................... Fiber Distributed Data Interface. A standard for
transmitting data on optical-fiber cables at a
rate of around 100 Mbps (10 times as fast as
Ethernet, about twice as fast as T-3).
Firewall..................... A system placed between networks that filters
data passing through it and prevents
unauthorized traffic, thereby enhancing the
security of the network.
Frame Relay.................. An information transfer standard for relaying
traffic based on an address contained in the six
byte header of a variable length packet that is
up to 2,106 bytes long. Frame Relay has less
overhead than ATM but may be difficult to
implement at speeds greater than 45 Mbps.
Internet..................... A global collection of interconnected computer
networks which use TCP/IP, a common
communication protocol.
ISDN......................... Integrated Services Digital Network. An
information transfer standard for transmitting
digital voice and data over telephone lines at
speeds up to 128 Kbps.
IXC.......................... Interexchange Carrier. A telecommunications
company that provides telecommunications
services between local exchanges on an
interstate or intrastate basis.
Kbps......................... Kilobits per second. A transmission rate. One
kilobit equals 1,024 bits of information.
LAN.......................... Local Area Network. A data communications
network designed to interconnect personal
computers, workstations, minicomputers, file
servers and other communications and computing
devices within a localized environment.
Leased line.................. Telecommunications line dedicated to a
particular customer along a predetermined
routes.
LEC.......................... Local Exchange Carrier. A telecommunications
Company that provides telecommunications
services in a geographic area in which calls
generally are transmitted without toll charges.
MAE-East..................... A major peering point (exchange point for
traffic) among ISPs, located in Falls Church,
Virginia.
MAE-West..................... A major peering point (exchange point for
traffic) among ISPs, located in Santa Clara,
California.
Mbps......................... Megabits per second. A transmission rate. One
megabit equals 1,024 kilobits.
Modem........................ A device for transmitting digital information
over an analog telephone line.
</TABLE>
53
<PAGE>
<TABLE>
<S> <C>
NAP............................ Network Access Point. A location at which ISPs
exchange each other's traffic.
On-line service................ Commercial information services that offer a
computer user access to a specified slate of
information, entertainment, and communications
menus on what appears to be a single system.
Peering........................ The commercial practice under which nationwide
ISPs exchange each other's traffic without the
payment of settlement charges.
POP............................ Point of Presence. Telecommunications facility
through which the Company provides local
connectivity to its customers.
Router......................... A system placed between networks that relays
data to those networks based upon a destination
address contained in the data packets being
routed.
SLIP........................... Serial Line Internet Protocol. An information
transfer standard for transmitting Internet
Protocol packets over asynchronous data
connections between two points.
TCP/IP......................... Transmission Control Protocol/Internet Protocol.
A suite of network protocols that allow
computers with different architectures and
operating system software to communicate with
other computers on the Internet.
UNIX........................... A computer operating system for workstations and
PCs and noted for its portability and
communications functionality.
Web Site....................... A server connected to the Internet from which
Internet users can obtain information.
World Wide Web or Web.......... A collection of computer systems supporting a
communications protocol that permits multi-media
presentation of information over the Internet.
</TABLE>
54
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Balance Sheets at December 31, 1994 and 1995 and March 31, 1996.......... F-3
Statements of Operations for each of the three years in the period ended
December 31, 1995 and for the three months ended March 31, 1995 and
1996.................................................................... F-4
Statements of Shareholders Equity (Deficit) for each of the three years
in the period ended December 31, 1995 and for the three months ended
March 31, 1996.......................................................... F-5
Statements of Cash Flows for each of the three years in the period ended
December 31, 1995 and for the three months ended March 31, 1995 and
1996.................................................................... F-6
Notes to Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders DIGEX, Incorporated
We have audited the accompanying balance sheets of DIGEX, Incorporated as of
December 31, 1994, December 31, 1995 and March 31, 1996, and the related
statements of operations, shareholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1995 and the three-
month period ended March 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DIGEX, Incorporated at
December 31, 1994, December 31, 1995 and March 31, 1996, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1995 and the three-month period ended March 31, 1996 in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Baltimore, Maryland June 10, 1996
F-2
<PAGE>
DIGEX, INCORPORATED
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- PRO FORMA
1994 1995 MARCH 31, 1996 MARCH 31, 1996
-------- ---------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.. $ 2,441 $ 832,582 $ 727,750 $ 6,412,331
Accounts receivable, less
allowance of $0 in 1994,
$50,000 in 1995 and
$91,375 in 1996........... 141,488 908,572 1,110,617 1,110,617
Due from officers and em-
ployees................... 24,124 -- 1,093 1,093
Inventory and prepaid ex-
penses.................... 41,926 49,631 108,534 108,534
Deferred income taxes...... 14,679 7,681 7,681 7,681
-------- ---------- ----------- -----------
Total current assets.... 224,658 1,798,466 1,955,675 7,640,256
Property and equipment:
Computer equipment......... 431,415 3,439,014 4,851,099 4,851,099
Office furniture and equip-
ment...................... 20,630 152,805 158,538 158,538
Leasehold improvements..... 8,871 163,811 170,405 170,405
-------- ---------- ----------- -----------
460,916 3,755,630 5,180,042 5,180,042
Accumulated depreciation
and amortization.......... 109,789 764,966 1,111,798 1,111,798
-------- ---------- ----------- -----------
351,127 2,990,664 4,068,244 4,068,244
Deferred financing costs... 77,857 -- -- --
Other assets............... 1,500 262,656 301,556 301,556
-------- ---------- ----------- -----------
Total assets............... $655,142 $5,051,786 $ 6,325,475 $12,010,056
======== ========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and ac-
crued expenses............ $208,329 $ 959,528 $ 2,331,305 $ 2,331,305
Notes payable, net of dis-
count of $13,734.......... 286,266 -- -- --
Deferred revenue........... 153,049 389,472 397,271 397,271
Income taxes payable....... 20,910 -- -- --
Current portion of capital
lease obligations......... -- 858,765 929,279 929,279
10% Convertible Debentures,
net of discount of
$588,835 in 1995 and
$511,213 in 1996.......... -- 1,411,165 2,488,787 --
-------- ---------- ----------- -----------
Total current liabili-
ties................... 668,554 3,618,930 6,146,642 3,657,855
Deferred income taxes...... 6,998 -- -- --
Capital lease obligations,
less current portion...... -- 821,709 915,864 915,864
Series A Mandatorily
Redeemable Convertible
Preferred Stock, $1 par
value; 200,000 shares
authorized; 45,455 shares
issued and outstanding
(pro forma: none);
redemption price and
liquidation preference of
$100 per share,
aggregating $4,545,500.... -- 2,138,889 2,262,195 --
Commitments and contingen-
cies...................... -- -- -- --
Shareholders' equity (defi-
cit):
Common stock, $.01 par
value:
Authorized shares--1,000
shares in 1994 and
49,800,000 in 1995 and
1996...................
Issued and outstanding
shares--4,294,768 in
1994; 4,044,768 in 1995
and 1996 (pro forma:
15,416,627)............ 42,948 40,448 40,448 154,166
Additional paid-in capi-
tal...................... 25,393 2,836,172 3,319,034 13,640,879
Accumulated deficit....... (88,751) (4,404,362) (6,358,708) (6,358,708)
-------- ---------- ----------- -----------
Total shareholders' equity
(deficit)................. (20,410) (1,527,742) (2,999,226) 7,436,337
-------- ---------- ----------- -----------
Total liabilities and
shareholders' equity (def-
icit)..................... $655,142 $5,051,786 $ 6,325,475 $12,010,056
======== ========== =========== ===========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
DIGEX, INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- -----------------------
1993 1994 1995 1995 1996
-------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue:
On-line services...... $431,098 $1,577,609 $ 4,425,172 $ 739,671 $ 1,996,213
Equipment sales....... -- -- 650,144 -- 236,249
-------- ---------- ----------- --------- -----------
431,098 1,577,609 5,075,316 739,671 2,232,462
Costs and Expenses:
Data communications
and operations....... 216,656 1,002,503 4,013,377 478,646 1,771,095
Cost of equipment
sales................ -- -- 458,123 -- 188,726
Sales and marketing... 18,326 263,075 1,710,234 116,342 673,800
General and adminis-
trative.............. 135,238 366,392 2,715,752 278,852 903,887
-------- ---------- ----------- --------- -----------
Total expenses.......... 370,220 1,631,970 8,897,486 873,840 3,537,508
-------- ---------- ----------- --------- -----------
Income (loss) from oper-
ations................. 60,878 (54,361) (3,822,170) (134,169) (1,305,046)
Other income (expense):
Interest and other in-
come................. -- -- 72,002 -- 14,933
Interest expense...... -- (23,693) (226,745) (688) (540,927)
-------- ---------- ----------- --------- -----------
-- (23,693) (154,743) (688) (525,994)
-------- ---------- ----------- --------- -----------
Income (loss) before in-
come taxes............. 60,878 (78,054) (3,976,913) (134,857) (1,831,040)
Income taxes............ (25,540) (3,470) -- -- --
-------- ---------- ----------- --------- -----------
Net income (loss)....... 35,338 (81,524) (3,976,913) (134,857) (1,831,040)
Accretion of Series A
Mandatorily Redeemable
Convertible Preferred
Stock to redemption
value.................. -- -- (338,698) -- (123,306)
-------- ---------- ----------- --------- -----------
Net income (loss)
attributable to common
shareholders........... $ 35,338 $ (81,524) $(4,315,611) $(134,857) $(1,954,346)
======== ========== =========== ========= ===========
Net income (loss) per
common share
attributable to common
shareholders........... $ -- $ (0.01) $ (0.27) $ (0.01) $ (0.13)
======== ========== =========== ========= ===========
Pro forma net loss per
common share
attributable to common
shareholders........... $ (0.20) $ (0.07)
=========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
DIGEX, INCORPORATED
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1993....... $42,948 $ -- $ (42,565) $ 383
Net income for 1993.............. -- -- 35,338 35,338
------- ---------- ----------- -----------
Balance at December 31, 1993..... 42,948 -- (7,227) 35,721
Issuance of 477,188 warrants to
purchase common stock........... -- 25,393 -- 25,393
Net loss for 1994................ -- -- (81,524) (81,524)
------- ---------- ----------- -----------
Balance at December 31, 1994..... 42,948 25,393 (88,751) (20,410)
Issuance of warrants to purchase
2,800,000 shares of common
stock, net of expenses of
$262,756........................ -- 1,650,459 -- 1,650,459
Issuance of warrants to purchase
749,866 shares of common stock.. -- 682,378 -- 682,378
Value of vested common stock
options granted to employees.... -- 475,442 -- 475,442
Accretion of Series A Mandatorily
Redeemable Convertible Preferred
Stock to redemption value....... -- -- (338,698) (338,698)
Retirement of 250,000 shares of
common stock.................... (2,500) 2,500 -- --
Net loss for 1995................ -- -- (3,976,913) (3,976,913)
------- ---------- ----------- -----------
Balance at December 31, 1995..... 40,448 2,836,172 (4,404,362) (1,527,742)
Issuance of warrants to purchase
415,945 shares of common stock.. -- 361,872 -- 361,872
Value of vested common stock
options granted to employees.... -- 120,990 -- 120,990
Accretion of Series A Mandatorily
Redeemable Convertible Preferred
Stock to redemption value....... -- -- (123,306) (123,306)
Net loss for three months ended
March 31, 1996.................. -- -- (1,831,040) (1,831,040)
------- ---------- ----------- -----------
Balance at March 31, 1996........ $40,448 $3,319,034 $(6,358,708) $(2,999,226)
======= ========== =========== ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
DIGEX, INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------- -----------------------
1993 1994 1995 1995 1996
--------- --------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)....... $ 35,338 $ (81,524) $(3,976,913) $(134,857) $(1,831,040)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization.......... 22,158 83,948 655,177 37,373 346,832
Amortization of debt
discount charged to
interest expense...... -- 11,659 107,277 -- 439,494
Non-cash compensation
recorded for vested
stock option grants... -- -- 475,442 -- 120,990
Deferred income taxes.. 17,859 (25,540) -- -- --
Changes in operating
assets and
liabilities:
Accounts receivable... (72,352) (65,868) (767,084) (34,321) (202,045)
Inventory and prepaid
expenses............. -- (41,926) (7,705) (60,280) (58,903)
Cash overdraft........ 4,347 (4,347) -- -- --
Accounts payable and
accrued expenses..... 43,873 163,461 751,199 (82,277) 1,371,777
Deferred revenue...... 64,901 79,976 236,423 79,460 7,799
Income taxes payable.. 7,681 13,229 (20,910) (20,910) --
--------- --------- ----------- --------- -----------
Net cash provided by
(used in) operating
activities............. 123,805 133,068 (2,547,094) (215,812) 194,904
Investing activities:
Due from officers and
employees.............. (22,670) (6,222) 24,124 (1,500) (1,093)
Purchase of property and
equipment.............. (98,273) (350,132) (1,199,160) (174,550) (1,109,240)
Decrease (increase) in
other assets........... (5,084) 3,584 (261,156) -- (38,900)
--------- --------- ----------- --------- -----------
Net cash used in
investing activities... (126,027) (352,770) (1,436,192) (176,050) (1,149,233)
Financing activities:
Proceeds from issuance
of (repayment of) notes
payable and detachable
stock warrants......... -- 300,000 (300,000) -- --
Repayment of capital
leases................. -- -- (415,080) -- (150,503)
Proceeds from issuance
of 10% Convertible
Debentures and
detachable stock
warrants............... -- -- 2,000,000 -- 1,000,000
Proceeds from issuance
of Series A Mandatorily
Redeemable Convertible
Preferred Stock and
detachable stock
warrants, net of
expenses of issuance... -- -- 3,528,507 831,775 --
Increase in deferred
financing costs........ -- (77,857) -- (5,973) --
--------- --------- ----------- --------- -----------
Net cash provided by
financing activities... -- 222,143 4,813,427 825,802 849,497
--------- --------- ----------- --------- -----------
Net increase (decrease)
in cash and cash
equivalents............ (2,222) 2,441 830,141 433,940 (104,832)
Cash and cash
equivalents at
beginning of period.... 2,222 -- 2,441 2,441 832,582
--------- --------- ----------- --------- -----------
Cash and cash
equivalents at end of
period................. $ -- $ 2,441 $ 832,582 $ 436,381 $ 727,750
========= ========= =========== ========= ===========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business
DIGEX, Incorporated (the "Company") is a national Internet Service Provider.
The Company's principal customers are businesses, government agencies and
other institutional customers. The services provided by the Company include
business connectivity, Web server hosting, consulting and education services
and security and other network products.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all short-term, highly liquid investments with
maturities of three months or less when purchased to be cash equivalents.
Inventory
Inventory, consisting primarily of computer equipment, is stated at the
lower of the first-in, first- out cost, or market.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed for owned
assets using the straight-line method over estimated useful lives of five
years. Assets capitalized under capital leases are amortized using the
straight-line method over the lesser of the lease term or the useful life of
the asset.
Deferred Financing Costs
Deferred financing costs consist of costs incurred in 1994 to obtain equity
financing. These costs were capitalized in 1994 and accounted for as a
reduction of Series A Mandatorily Redeemable Convertible Preferred Stock in
1995 upon the closing of the transaction (see Note 7).
Other Assets
Other assets consist primarily of security deposits on leased computer
equipment and office furniture and equipment. The deposits will be applied
against the final month's lease payments.
Deferred Revenue
Proceeds from annual subscriptions are recorded at the time of sale as
deferred revenue and are included in revenues on a pro rata basis over the
term of the service contract.
Revenue Recognition and Accounts Receivable
On-line services revenue is recognized ratably over the period services are
provided. Equipment sales are recognized upon shipment. Receivables generally
are due within 30 days. The Company does not generally require collateral from
its customers.
F-7
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense
totaled approximately $3,100, $24,600 and $488,900 in 1993, 1994 and 1995,
respectively.
Stock Options Granted to Employees
The Company records compensation expense for all stock-based compensation
plans using the intrinsic value method prescribed by APB Opinion 25,
Accounting for Stock Issued to Employees. In October 1995, the Financial
Accounting Standards Board issued FASB Statement No. 123, Accounting for
Stock-Based Compensation, which encourages companies to recognize expense for
stock-based awards based on their estimated value on the date of grant.
Statement 123, effective for 1996, does not require companies to change their
existing accounting for stock-based awards, but if the new fair value method
is not adopted, pro forma income and earnings per share data should be
provided in the notes to the financial statements. The Company intends to
continue to account for stock-based compensation plans using the intrinsic
value method, and will supplementally disclose in its 1996 annual financial
statements the required pro forma information as if the fair value method had
been adopted.
Income Taxes
The Company uses the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Interim Financial Data
The financial statements of the Company for the three months ended March 31,
1995 and 1996 have been prepared on the same basis as the annual financial
statements and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary to state fairly
the financial information set forth therein, in accordance with generally
accepted accounting principles.
The results of operations for the three months ended March 31, 1996 are not
necessarily indicative of results expected for the full fiscal year.
2. EARNINGS PER SHARE
The following table summarizes the computations of share amounts used in the
computation of historical earnings (loss) per share presented in the
accompanying statements of operations (in thousands of shares):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS
31, ENDED MARCH 31,
-------------------- ------------------
1993 1994 1995 1995 1996
------ ------ ------ ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average number of shares of
common stock outstanding during the
period................................ 4,295 4,295 4,270 4,045 4,045
Options and warrants to purchase common
stock issued within one year of
registration statement................ 6,082 6,082 6,082 6,082 6,082
Convertible debentures and preferred
stock issued within one year of
registration statement................ 5,453 5,453 5,453 5,453 5,453
------ ------ ------ ------ ------
Total common and common equivalent
shares of stock considered outstanding
during the year....................... 15,829 15,829 15,805 15,580 15,580
====== ====== ====== ====== ======
</TABLE>
F-8
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Earnings (loss) per share is based upon the average number of shares of
common stock outstanding during each period. As required by the Securities and
Exchange Commission, all common stock warrants, options, convertible
debentures, and convertible preferred stock issued by the Company at exercise
prices or conversion rates below the expected public offering price during the
twelve-month period prior to the anticipated offering date have been included
in the computations as if they were outstanding for all periods presented. As
the Company expects the initial public offering price to exceed the exercise
prices or conversion rates for all securities issued after May 1995, all of
the securities issued between June 1, 1995 and the initial filing date have
been included in the computation of historical net income (loss) per common
share attributable to common shareholders.
The assumed conversion of all other potentially dilutive securities (issued
prior to June 1995) is anti-dilutive for all years presented, and therefore is
not considered in the computations.
Pro forma net loss per share is presented to disclose the additional effect
on loss per share for the year ended December 31, 1995 and for the three
months ended March 31, 1996 assuming that the convertible securities which are
not included in the historical calculations and which converted into common
stock after March 31, 1996 were converted into common stock on January 1,
1995, or their issuance date, whichever date is later. Historical net loss was
reduced by $450,871 for the year ended December 31, 1995 and $623,074 for the
quarter ended March 31, 1996 to adjust for interest expense and preferred
stock accretion.
The following table summarizes the computations of share amounts used in the
computation of pro forma earnings (loss) per share presented in the
accompanying statements of operations (in thousands of shares):
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
DECEMBER 31, MARCH 31,
1995 1996
------------ ---------
(UNAUDITED)
<S> <C> <C>
Weighted average number of shares of common stock
outstanding during the period.......................... 4,270 4,045
Options and warrants to purchase common stock issued
within one year of registration statement.............. 6,082 6,082
Convertible debentures and preferred stock issued within
one year of registration statement..................... 5,453 5,453
Pro forma conversion of preferred stock and warrants.... 3,440 4,755
------ ------
Total common and common equivalent shares of stock
considered outstanding during the year................. 19,245 20,335
====== ======
</TABLE>
3. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------- --------------------
1993 1994 1995 1995 1996
------- ------------------ ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash paid during the period
for:
Interest..................... $ -- $ -- $ 105,100 $ 700 $ 41,200
Taxes........................ $ 7,700 $ -- $ -- $ -- $ --
Non-cash investing and financ-
ing activities:
Equipment acquired under cap-
ital lease.................. $ -- $ -- $ 2,095,600 $60,800 $315,200
</TABLE>
F-9
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. NOTES PAYABLE
In July 1994, the Company received $300,000 in connection with the issuance
of notes with a face value of $300,000 and detachable stock warrants to
purchase 477,189 shares of common stock for $0.63 per share. The portion of
the proceeds allocable to the warrants of $25,393, as estimated by the
Company, was accounted for as additional paid-in capital. The notes were
repaid in conjunction with the issuance of the Series A Mandatorily Redeemable
Convertible Preferred Stock in March 1995.
5. CAPITAL LEASE OBLIGATIONS
The Company leases equipment under capital leases. Property and equipment
includes the following amounts for leases that have been capitalized at March
31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996
----------------- --------------
<S> <C> <C>
Computer equipment............................. $1,985,436 $2,300,608
Office furniture and equipment................. 110,118 110,118
---------- ----------
2,095,554 2,410,726
Less accumulated amortization.................. 444,683 (678,782)
---------- ----------
$1,650,871 $1,731,944
========== ==========
</TABLE>
Amortization of leased assets is included in depreciation and amortization
expense.
Future minimum payments under capital lease obligations consist of the
following at March 31, 1996:
<TABLE>
<S> <C>
Through December 31, 1996........................................... $ 888,039
1997................................................................ 839,206
1998................................................................ 277,249
1999................................................................ 19,686
2000................................................................ 1,332
----------
Total minimum lease payments........................................ 2,025,512
Amounts representing interest....................................... 180,369
----------
Present value of net minimum lease payments (including current por-
tion of $929,279).................................................. $1,845,143
==========
</TABLE>
6. 10% CONVERTIBLE DEBENTURES AND DETACHABLE STOCK WARRANTS
On November 28, 1995, the Company issued $2,000,000 of 10% Convertible
Debentures with detachable stock warrants for cash proceeds of $2,000,000. The
debentures were due on June 1, 1996. As discussed more fully in Note 15, in
May 1996 the holders of the 10% Convertible Debentures converted their
debentures into shares of Series B Preferred Stock.
The detachable stock warrants entitle the holders to purchase 749,866 shares
of common stock at an exercise price of $0.10 per share and expire in November
2001. The exercise price is payable either in cash or through the retirement
of stock warrants. The warrants were valued at $682,378, or $0.91 per share,
based on an independent valuation of the Company's common stock and the use of
a generally accepted warrant valuation methodology. The estimated value of the
warrants was recorded as additional paid-in capital and the 10% Convertible
Debentures have been recorded net of a discount of $682,378. The Company
recognized interest expense of $93,543 and $319,475 for the year ended
December 31, 1995 and the three months ended March 31, 1996, respectively,
related to the amortization of this discount.
F-10
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
On February 15, 1996, the Company issued $1,000,000 of 10% Convertible
Debentures with detachable stock warrants for cash proceeds of $1,000,000. The
debentures have terms identical to those issued in November 1995, and were
also converted into Series B Preferred Stock in May 1996. The detachable stock
warrants entitle the holders to purchase 415,945 shares of common stock at an
exercise price of $0.10 per share and expire in February 2002. The exercise
price is payable either in cash or through the retirement of stock warrants.
The warrants were valued at $361,872, or $0.87 per share, based on an
independent valuation of the Company's common stock and the use of a generally
accepted warrant valuation methodology. The estimated value of the warrants
was recorded as additional paid-in capital and the 10% Convertible Debentures
have been recorded net of a discount of $361,872. The Company recognized
interest expense of $120,019 the period from February 15, 1996 through March
31, 1996 related to the amortization of this discount.
7. SERIES A MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND DETACHABLE
STOCK WARRANTS
The Company has authorized the issuance of 200,000 shares of Series A
Mandatorily Redeemable Convertible Preferred Stock ("Series A"). In March and
April 1995, the Company issued 45,455 shares of Series A with detachable stock
warrants for cash proceeds of $4,000,000. Dividends on the Series A are
cumulative at an annual rate of $6 per share beginning March 15, 1997 and $10
per share beginning March 15, 1999.
The detachable stock warrants entitle the holders to purchase 2,800,000
shares of common stock for an aggregate exercise price of $100 and expire six
years from the date of the final redemption of the Series A. The warrants were
valued at $1,913,215, or $0.68 per share, based on an estimate at the date of
the transaction of the relative values of the Series A and the warrants. The
costs of the issuance of $549,350 have been deducted proportionately from the
proceeds allocated to the warrants and the Series A.
The Series A was recorded at estimated fair value on the date of issuance,
less issue costs. The excess of the redemption value over the carrying value
is being accreted by periodic charges to retained earnings over the life of
the issue using the interest method.
The Company must redeem the Series A in 24 equal monthly installments of
1,894 shares commencing January 1, 2000 at a redemption price of $100 per
share plus any accrued and unpaid dividends. The Company may, at its option,
redeem at any time all, but not less than all, of the Series A for $100 per
share plus any accrued and unpaid dividends. If the Company redeems the Series
A prior to March 15, 1997, the redemption price will be reduced, but in no
event will the redemption price be less than $88 per share. The Series A is
also convertible at any time into 1,250,000 shares of common stock based on a
conversion rate defined in the Amended and Restated Articles of Incorporation.
The Series A will automatically convert into 1,250,000 shares of common stock
immediately prior to the closing of an initial public offering consummated on
or before December 31, 1996 generating net proceeds to the Company of at least
$25 million.
Each share of Series A has substantially the same voting rights as the
number of shares of common stock into which it can be converted, as provided
for in the Amended and Restated Articles of Incorporation. The holders of the
Series A (in conjunction with the holders of the Series B Preferred Stock
issued in May 1996 as discussed in Note 15) independently appoint three
directors to the Board of Directors. In the event the Company fails to meet
its obligations to the holders of the Series A under the aforementioned
redemption provisions or upon certain other events, the holders of the
preferred stock are entitled to elect a majority of the directors of the Board
of Directors.
F-11
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In connection with the issuance of the Series A, the Company also issued
warrants to purchase 228,020 shares of common stock with an exercise price of
$1.05 per share to investment bankers. These warrants expire in March 2002.
8. COMMON STOCK
In March 1995, the Company amended and restated the Articles of
Incorporation to authorize the issuance of 49,800,000 shares of $.01 par value
common stock and 200,000 shares of $1 par value Series A Mandatorily
Redeemable Convertible Preferred Stock with a redemption price and liquidation
value of $100 per share. In conjunction with the amendment, the Board of
Directors approved a 505.26-for-one stock split, effected in the form of a
stock dividend. In August 1995, the Board of Directors approved a ten-for-one
stock split, also effected in the form of a stock dividend. All share and per
share amounts in the accompanying financial statements have been restated to
retroactively reflect both splits.
9. SHARES RESERVED FOR FUTURE ISSUANCE
The Company as of March 31, 1996 has reserved 10,577,825 shares of common
stock for future issuance upon the conversion of 10% Convertible Debentures
and Series A Mandatorily Redeemable Convertible Preferred Stock, and the
exercise of all outstanding stock purchase warrants and all outstanding stock
options.
10. STOCK OPTION PLAN
In 1995, the Company approved and adopted its 1995 Stock Option Plan (the
"Plan"). The Plan is administered by the Board of Directors. The Plan provides
for the granting of either qualified or non-qualified options to purchase an
aggregate of up to 4,367,239 shares of common stock to eligible employees,
officers, directors and consultants of the Company. The options are
exercisable for up to ten years following the date of grant.
The following table summarizes the stock option activity of the Company:
<TABLE>
<CAPTION>
SHARES EXERCISE PRICE
OUTSTANDING EXERCISABLE PER SHARE
----------- ----------- --------------
<S> <C> <C> <C>
Balances at January 1, 1995.............. -- -- --
Granted................................. 1,580,700 $0.10
Became exercisable...................... 470,771 $0.10
Exercised/Surrendered................... -- -- --
Cancelled............................... (5,125) -- $0.10
--------- ------- -----
Balances at December 31, 1995............ 1,575,575 470,771 $0.10
Granted................................. 1,034,584 $0.10
Became exercisable...................... 57,646 $0.10
Exercised/Surrendered................... -- --
Cancelled............................... (18,875) -- $0.10
--------- ------- -----
Balances at March 31, 1996............... 2,591,284 528,417 $0.10
========= ======= =====
</TABLE>
F-12
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
All of the options granted through March 31, 1996 are non-qualified stock
options and vest over 3 or 4 years. At the dates of grant, the estimated fair
value of a share of the Company's common stock ranged from $0.91 to $1.14. The
Company will record compensation expense of $2,651,960 over the vesting period
of the options. For the year ended December 31, 1995 and the three months
ended March 31, 1996 the Company recorded $475,442 and $120,990 of
compensation expense, respectively. The Company will record additional
compensation expense related to option grants through March 31, 1996 as
follows:
<TABLE>
<S> <C>
Nine months ended December 31, 1996................................. $ 630,227
Year ended December 31, 1997........................................ 694,172
1998................................................................ 487,657
1999................................................................ 211,967
2000................................................................ 31,505
----------
Total............................................................. $2,055,528
==========
</TABLE>
On May 31, 1996, the Board of Directors approved the grant of an additional
1,577,316 qualified options to purchase common stock for $1.49 per share, the
fair market value of a share of common stock as determined by independent
appraisal. These options vest over 3 or 4 years.
11. FAIR VALUES OF FINANCIAL INSTRUMENTS
At March 31, 1996, the fair value of the 10% Convertible Debentures, issued
in November 1995 and February 1996, approximates their carrying value at March
31, 1996. The debentures converted into Series B Preferred Stock in May 1996.
The Series A and Series B Mandatorily Redeemable Convertible Preferred Stock
will automatically convert into common stock upon the expected closing of an
initial public offering in August 1996. Upon conversion, the securities will
not be considered financial instruments.
12. INCOME TAXES
The tax provisions for the three months ended March 31, 1995 and 1996 are
based on the estimated annual effective tax rate applicable for the full
years.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1994 1995
-------- -----------
<S> <C> <C>
Deferred tax liability:
Tax over book depreciation.............................. $ 6,998 $ 49,581
Deferred tax assets:
Net operating loss carryforward......................... 32,402 1,382,447
Allowance for doubtful accounts......................... -- 19,310
Stock option compensation expense....................... -- 183,615
Accrued bonuses......................................... -- 23,172
-------- -----------
Total deferred tax assets................................ 32,402 1,608,544
-------- -----------
Net future income tax benefit............................ 25,404 1,558,963
Valuation allowance for net deferred tax assets.......... (17,723) (1,551,282)
-------- -----------
Net deferred tax assets.................................. $ 7,681 $ 7,681
======== ===========
</TABLE>
As of December 31, 1995, the Company had net operating loss carryforwards of
$3.6 million. These carryforwards expire in 2009 and 2010. The amount
available to be used in any given year will be limited by operation of certain
provisions of the Internal Revenue Code.
F-13
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1993 1994 1995
-------- --------- -------
<S> <C> <C> <C>
Current:
Federal.......................................... $ 5,237 $ 22,250 $ --
State............................................ 2,444 6,760 --
-------- --------- -----
7,681 29,010 --
Deferred (benefit):
Federal.......................................... 14,622 (20,911) --
State............................................ 3,237 (4,629) --
-------- --------- -----
17,859 (25,540) --
-------- --------- -----
$ 25,540 $ 3,470 $ --
======== ========= =====
</TABLE>
The Company's provision for income taxes resulted in effective tax rates
that varied from the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------- -------- -----------
<S> <C> <C> <C>
Expected federal income tax (benefit) at 34%..... $20,699 $(26,538) $(1,352,150)
State income taxes, net of federal benefit....... 2,813 (3,606) (183,733)
Expenses not deductible for tax purposes......... 2,028 4,357 3,602
Effect of valuation allowance.................... -- 17,723 1,533,559
Other............................................ -- 11,534 (1,278)
------- -------- -----------
Total............................................ $25,540 $ 3,470 $ --
======= ======== ===========
</TABLE>
13. OPERATING LEASES
The Company leases certain office space and equipment under noncancelable
operating leases that expire in various years through 2000. Future minimum
payments under noncancelable operating leases with initial terms of one year
or more consisted of the following at December 31, 1995:
<TABLE>
<S> <C>
1996.......................................................... $ 531,665
1997.......................................................... 504,723
1998.......................................................... 485,930
1999.......................................................... 314,931
2000.......................................................... 205,184
----------
Total minimum lease payments.................................. $2,042,433
==========
</TABLE>
Rental expense consisted of the following:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Office and storage................................. $18,882 $19,200 $123,749
Furniture and equipment............................ 4,037 28,915 133,889
------- ------- --------
$22,919 $48,115 $257,638
======= ======= ========
</TABLE>
F-14
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. EMPLOYEE BENEFIT PLAN
The Company established a defined contribution benefit plan effective July
1, 1995. The plan covers substantially all employees who have three months of
service with the Company or who were employed by the Company on July 1, 1995.
Participants may contribute from 1% to 15% of their annual compensation to the
plan. In addition, the Company may make discretionary profit-sharing
contributions to the plan. No contributions were made by the Company during
1995.
15. PRO FORMA BALANCE SHEET AND SUBSEQUENT EVENTS
Amendment to Articles of Incorporation, Issuance of Series B Preferred Stock
and Conversion of 10% Convertible Debentures
In May 1996, the Company amended its Articles of Incorporation to authorize
the issuance of 130,000 shares of Series B Preferred Stock ("Series B") with a
par value of $1. Cumulative annual cash dividends on the Series B at the rate
of $8 per share become payable monthly commencing on the first date
outstanding through March 15, 1999, and after March 15, 1999, at the rate of
$12 per share per annum. The Company must redeem the Series B in monthly
installments of 3,387 shares beginning January 1, 2001 at $100 per share plus
any unpaid dividends or, immediately, if certain events specified in the
Articles of Incorporation occur and holders of 63% of the shares of Series B
vote for redemption. In addition, at any time after the earlier of May 24,
1999 or the date on which all shares of Series A Preferred Stock have been
redeemed, the holders of the Series B may require the Company to redeem their
shares at the greater of $200 per share or fair market value, as determined by
an independent investment banking firm. Each share of Series B is convertible
at the option of the holder at any time after issuance into 67.08 shares of
common stock. The Series B holders have the same voting rights as the holders
of common stock, assuming conversion.
On May 30, 1996, the Company issued 50,000 shares of Series B for $5
million. The Series B will automatically convert into 3,353,789 shares of
common stock immediately prior to the closing of an initial public offering
consummated on or before December 31, 1996 generating net proceeds to the
Company of at least $25 million.
In connection with the issuance of the Series B, the holders of the 10%
Convertible Debentures (face value of $3 million, plus accrued interest of
$130,000) agreed to convert the debentures into 31,264 shares of Series B. In
addition, the holders of warrants to purchase 4,671,020 shares of common stock
agreed to exercise their warrants immediately prior to the closing of an
initial public offering consummated on or before December 31, 1996 that
generates net proceeds to the Company of at least $25 million.
March 31, 1996 Pro Forma Balance Sheet
The accompanying March 31, 1996 balance sheet assumes that the issuance of
the Series B occurred on March 31, 1996. In addition, in June 1996 the Board
of Directors approved the filing of a registration statement for the sale of
common stock with the Securities and Exchange Commission that, upon closing,
would meet the criteria for the automatic exercise of warrants to purchase
4,671,020 shares of common stock, and the conversion of the outstanding Series
A Preferred Stock and Series B Preferred Stock, all into common stock.
F-15
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the components of the pro forma balance sheet
(in thousands):
<TABLE>
<CAPTION>
ASSUMED
HISTORICAL CONVERSION TOTAL
MARCH 31, ISSUANCE OF SECURITIES PRO
1996 OF SERIES B UPON IPO FORMA
---------- ----------- ------------- -------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents... $ 728 $ 5,000 $ 685 $ 6,413
Other current assets........ 1,228 -- -- 1,228
------- ------- ------- -------
Total current assets......... 1,956 5,000 685 7,641
Property and equipment, net.. 4,068 -- -- 4,068
Other noncurrent assets...... 301 -- -- 301
------- ------- ------- -------
Total assets................. $ 6,325 $ 5,000 $ 685 $12,010
======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses................... $ 2,331 $ -- $ -- $ 2,331
10% Convertible Debentures.. 2,489 (2,489) -- --
Other current liabilities... 1,327 -- -- 1,327
------- ------- ------- -------
Total current liabilities.... 6,147 (2,489) -- 3,658
Capital lease obligations.... 916 -- -- 916
Series A Preferred Stock..... 2,262 -- (2,262) --
Series B Preferred Stock..... -- 7,489 (7,489) --
Shareholders' equity:
Common stock................ 40 -- 114 154
Additional paid-in capital.. 3,319 -- 10,322 13,641
Accumulated deficit......... (6,359) -- -- (6,359)
------- ------- ------- -------
Total shareholders' equity... (3,000) -- 10,436 7,436
------- ------- ------- -------
Total liabilities and share-
holders' equity............. $ 6,325 $ 5,000 $ 685 $12,010
======= ======= ======= =======
</TABLE>
Other Subsequent Financing Arrangements
In April 1996, the Company entered into a loan agreement with a bank that
provides a revolving line of credit secured by accounts receivable. The credit
line allows the Company to borrow a maximum of $1.5 million, subject to
restrictions based on the available collateral, and expires on February 28,
1997. The credit line bears interest at a floating rate equal to the bank's
prime rate plus 1% per annum. In connection with this credit line, the Company
is required to comply with certain financial ratios and covenants.
In April 1996, the Company obtained a commitment for an equipment lease line
under which the Company may lease equipment with a total cost of up to $2
million through December 31, 1996. The lease terms will range from 42 months
to 50 months and will be accounted for as capital leases with annual effective
interest rates approximating 14% per annum.
In June 1996, the Company entered into a multi-year private network
agreement with WinStar. As part of the agreement, WinStar will purchase $10
million of connectivity services, of which $5 million will be paid in advance
in June 1996. WinStar also received warrants to purchase 600,000 shares of
common stock for $1.50 per share.
F-16
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. NEITHER THE DELIV-
ERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUM-
STANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS PRO-
SPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANY-
ONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO
DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information.................................................... 3
Reports to Stockholders................................................... 3
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 16
Dilution.................................................................. 16
Capitalization............................................................ 17
Dividend Policy........................................................... 18
Selected Financial and Pro Forma
Financial Data........................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Business.................................................................. 26
Management................................................................ 36
Certain Transactions...................................................... 43
Principal Stockholders.................................................... 45
Capital Stock of the Company.............................................. 46
Shares Eligible for Future Sale........................................... 48
Underwriting.............................................................. 50
Legal Matters............................................................. 51
Experts................................................................... 51
Glossary.................................................................. 52
Index to Financial Statements............................................. F-1
</TABLE>
UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
SHARES
DIGEX, INCORPORATED
COMMON STOCK
($.01 PAR VALUE)
[DIGEX BUSINESS INTERNET LOGO APPEARS HERE]
SALOMON BROTHERS INC
MONTGOMERY SECURITIES
PROSPECTUS
DATED , 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Amended and Restated Certificate of Incorporation of DIGEX, Incorporated
(the "Company"), as amended (the "Amended and Restated Certificate of
Incorporation"), provides that the Registrant shall indemnify to the fullest
extent permitted by Section 145 of the General Corporation Law of the State of
Delaware (the "Delaware Law") any person whom it may indemnify thereunder. The
By-laws of the Registrant provide that indemnification shall be made by the
Registrant only upon a determination that indemnification is proper in the
circumstances because the individual met the applicable standard of conduct.
Advances for such indemnification may be made pending such determination upon
receipt of an undertaking by the director or officer to repay all amounts so
advanced in the event that it shall ultimately be determined that such
director or officer is not entitled to be indemnified by the Registrant. In
addition, the Amended and Restated Certificate of Incorporation provides for
the limitation to the extent permitted by the Delaware Law of personal
liability of directors to the Registrant and its stockholders for monetary
damages for breach of fiduciary duty as directors of the Registrant.
The Company is obtaining a directors' and officers' insurance and company
reimbursement policy in the amount of $ . The policy insures directors and
officers against unindemnified loss arising from certain wrongful acts in
their capacities and reimburses the Registrant for such loss for which the
Registrant has lawfully indemnified its directors and officers. The policy
contains various exclusions, none of which will relate to the offering
hereunder.
ITEM 25. OTHER EXPENSES OF ISSUANCES AND DISTRIBUTION.
The following table sets forth the fees and expenses in connection with the
issuance and distribution of the securities being registered hereunder. Except
for the SEC registration fee and the NASD fee, all amounts are estimates.
<TABLE>
<S> <C>
SEC Registration Fee............................................. $18,965.52
NASD Filing Fee.................................................. 6,000.00
Printing and Engraving Expenses.................................. *
Legal Fees and Expenses.......................................... *
Accounting Fees and Expenses..................................... *
Blue Sky Fees and Expenses....................................... 4,125.00
Miscellaneous Expenses........................................... *
----------
Total......................................................... $ *
==========
</TABLE>
- --------
* To be supplied by amendment
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The Company was incorporated on January 8, 1990 by Mr. Humphrey and Mr.
Doughney (the "Founders"). Mr. Humphrey contributed certain computer hardware
to the Company in exchange for 2,426,861 shares of Common Stock, and Mr.
Doughney contributed certain computer software to the Company in exchange for
1,617,907 shares of Common Stock.
On July 1, 1994, the Company borrowed $300,000 from individuals generally
affiliated or associated with Armata Partners L.P. These loans were evidenced
by 8% promissory notes (the "Bridge Notes") secured by a pledge by the
Founders of their shares of Common Stock. At the same time, the Company issued
warrants to purchase 477,189 shares of Common Stock to seven of these
individuals.
II-1
<PAGE>
On March 25, 1995, the Company entered into the Securities Purchase
Agreement with the Founders and Grotech, Venrock and Southern, pursuant to
which the Company issued a total of 45,454.54 shares of convertible preferred
stock (since redesignated Series A Convertible Preferred Stock), par value
$1.00 per share ("Series A Preferred Stock"), together with warrants to
purchase of 2,800,000 shares of Common Stock of the Company for an aggregate
investment of $4,000,000. The Bridge Notes were repaid at their face amount
with a portion of the proceeds of this investment. Grotech IV was issued
18,181.82 shares of Series A Preferred Stock and warrants to purchase
1,120,000 shares of Common Stock of the Company, Venrock was issued 15,909.09
shares of Series A Preferred Stock (4,924.85 shares of which were assigned to
Venrock II and warrants to purchase 980,000 shares of Common Stock (303,371 of
which were assigned to Venrock II) and Southern was issued 11,363.63 shares of
Series A Preferred Stock and warrants to purchase 700,000 shares of Common
Stock.
As part of a fee for arranging the above investment, the Company made a cash
payment of $200,000 and issued warrants to purchase 228,020 shares of Common
Stock to nine individuals generally affiliated or associated with Armata
Partners L.P.
On November 28, 1995, the Company issued 10% promissory notes in the
principal amount of $2,000,000 (the "November 1995 Notes") and warrants to
purchase 749,866 shares of Common Stock to Grotech IV, Venrock, Southern and
Venrock Associates, II L.P. ("Venrock II" and, together with Venrock, Grotech
and Southern, the "Investors") as follows: Grotech IV purchased promissory
notes in the principal amount of $800,000 and warrants to purchase 299,946
shares of Common Stock; Venrock purchased promissory notes in the amount of
$483,307 and warrants to purchase 181,198 shares of Common Stock; Venrock II
purchased promissory notes in the principal amount of $216,693 and warrants to
purchase 81,225 shares of Common Stock; and Southern purchased promissory
notes in the principal amount of $500,000 and warrants to purchase 187,467
shares of Common Stock.
On February 23, 1996, the Company issued additional promissory notes in the
principal amount of $1,000,000 (the "February 1996 Notes") on the same terms
as the November 1995 Notes and additional warrants to purchase 415,975 shares
of Common Stock to the Investors as follows: Grotech IV purchased promissory
notes in the principal amount of $400,000 and warrants to purchase 166,378
shares of Common Stock; Venrock purchased promissory notes in the principal
amount of $217,000 and warrants to purchase 100,524 shares of Common Stock;
Venrock II purchased promissory notes in the principal amount of $133,000 and
warrants to purchase 45,087 shares of Common Stock; and Southern purchased
promissory notes in the principal amount of $250,000 and warrants to purchase
103,986 shares of Common Stock.
On May 21, 1996, the Company issued additional promissory notes in the
principal amount of $1,000,000 (the "Convertible Notes") convertible into
shares of Series B Preferred Stock of the Company to the Investors as follows:
Grotech IV purchased promissory notes in the principal amount of $400,000;
Venrock purchased promissory notes in the principal amount of $217,000;
Venrock II purchased promissory notes in the principal amount of $133,000; and
Southern purchased promissory notes in the principal amount of $250,000.
On May 30, 1996, the Company, the Founders, the Investors, Grotech Partners,
Grotech Companion, Grotech Pennsylvania, Blue Chip and Crisler Capital
Company, Limited Partnership ("Crisler," and together with the Investors,
Grotech Partners, Grotech Companion, Grotech Pennsylvania and Blue Chip, the
"Purchasers") entered into the Purchase and Exchange Agreement, whereby the
Investors exchanged the November 1995 Notes and the February 1996 Notes held
by them for 31,263.89 shares of Series B Convertible Preferred Stock of the
Company, par value $1.00 per share (the "Series B Preferred Stock") and
converted the Convertible Notes into 10,000 shares of
II-2
<PAGE>
Series B Preferred Stock. In addition, the Purchasers paid $4,000,000 in cash
in exchange for a further 40,000 shares of Series B Preferred Stock. The
above-referenced exchange, conversion, and purchase resulted in the following
acquisitions of Series B Preferred Stock: Grotech IV acquired 22,505.56 shares
of Series B Preferred Stock; Grotech Partners acquired 8,537 shares of Series
B Preferred Stock; Grotech Companion acquired 930 shares of Series B Preferred
Stock; Grotech Pennsylvania acquired 533 shares of Series B Preferred Stock;
Venrock acquired 10,914.77 shares of Series B Preferred Stock; Venrock II
acquired 5,860.92 shares of Series B Preferred Stock. Southern acquired
11,982.64 shares of Series B Preferred Stock; Blue Chip acquired 16,000 shares
of Series B Preferred Stock; and Crisler acquired 4,000 shares of Series B
Preferred Stock.
In June 1996, the Company entered into a multi-year private network
agreement with WinStar. As part of the agreement, WinStar agreed to pay
$5,000,000 to the Company for connectivity services and received warrants to
purchase 600,000 shares of Common Stock.
No underwriters were involved in any of the foregoing transactions. The
sales of all such securities were deemed to be exempt from registration under
the Act, in reliance on Section 4(2) thereunder, as transactions by an issuer
not involving any public offering.
Since September 18, 1995, the Company at various times has granted options
to purchase shares of Common Stock of the Company to certain Company
employees. As of May 31, 1996 options to purchase 4,288,200 shares of Common
Stock have been granted in the aggregate, at exercise prices ranging from $.10
to $1.49 per share. These grants were exempt from registration pursuant to
Section 4(2) of the Act, Rule 701 thereunder or other applicable exemptions.
II-3
<PAGE>
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation of the
Registrant.
3.2* Restated By-Laws of the Registrant.
4.1* Form of Common Stock certificate.
5.1* Opinion of Latham & Watkins with respect to the legality of the
securities being registered.
10.1* MCI Special Customer Arrangement between MCI Telecommunications
Corporation and Digital Express Group, Inc. dated March 28, 1996.
10.2* Customer contract with LCI International, Inc. dated May 29, 1996.
10.3* Customer contract with WinStar Communications, Inc. dated June 6,
1996.
10.4* Warrant agreement with WinStar Communications, Inc. dated June 6,
1996.
10.5 Peering agreements
*(a) Agreement for T1 Gateway Attachment Services, as amended,
with ANS CO+RE Systems Inc. dated February 1, 1994.
*(b) Bilateral Interconnection Agreement with PSINet Inc. dated
February 7, 1996.
*(c) Peering Agreement with MCI Telecommunications Corporation
dated April 21, 1995.
10.6* Agreement with Hughes Network Systems, Inc. dated June 7, 1996.
10.7* Lease agreement with Banbury Associates Limited Partnership dated
November 17, 1994.
10.8* Lease Agreement with George Christancos, dated December 4, 1995.
10.9 Lease Agreement with Executive Office Network, Ltd.
10.10* Sublease Agreement with A.S. McGaughaan.
10.11 Employment and consulting agreements
(a) Clyde A. Heintzelman, dated March 19, 1995.
(b) Christopher R. McCleary, dated February 1, 1996.
(c) Brian M. Deobald, dated March 25, 1996.
(d) Earl P. Galleher, dated March 25, 1996.
(e) Nicholas J. Magliato, dated March 25, 1996.
(f) William A. Pendley, dated April 1, 1996.
(g) Thomas M. Brandt, Jr., dated June 1, 1996.
10.12* Incentive Stock Option Plan.
10.13 Securities Purchase Agreement with Grotech Partners IV, L.P.,
Venrock Associates, Southern Venture Fund II, L.P., Douglas E.
Humphery and Michael T. Doughney dated March 24, 1995.
10.14 Stockholders Agreement with Grotech Partners IV, L.P., Venrock
Associates, Southern Ventures II, L.P. Douglas E. Humphery and
Michael T. Doughney dated March 24, 1995.
10.15 (a) Warrant Agreement with Grotech Partners IV, L.P. dated March
24, 1995.
(b) Warrant Agreement with Venrock Associates dated March 24,
1995.
(c) Warrant Agreement with Southern Venture Fund II, L.P. dated
March 24, 1995.
10.16 Loan and Security Agreement with Silicon Valley Bank dated April
11, 1996.
10.17 First Amendment to Loan and Security Agreement with Silicon Valley
Bank dated May , 1996.
10.18 Revolving Promissory Note with Silicon Valley Bank dated April 11,
1996.
10.19 Securities Purchase, Conversion and Exchange Agreement with
Grotech Partners IV, L.P., Grotech Partners III, L.P., Grotech III
Companion Fund, L.P., Grotech III Pennsylvania Fund, L.P., Venrock
Associates, Venrock Associates II, L.P., Southern Venture Fund II,
L.P., Blue Chip Capital Fund Limited Partnership, Crisler Capital
Company, Limited Partnership dated May 30, 1996.
23.1 Consent of Ernst & Young LLP.
23.2* Consent of Latham & Watkins (to be included in Exhibit 5.1).
</TABLE>
- --------
* To be filed by amendment
II-4
<PAGE>
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes that:
(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the small business issuer pursuant to the
foregoing provisions, or otherwise, the small business issuer has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred
or paid by a director, officer or controlling person of the small business
issuer in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the small business issuer will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issue.
(2) For determining any liability under the Act, treat the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the small business issuer under Rule 424(b)(1), or (4),
or 497(h) under the Act as part of this registration statement as of the
time the Commission declared it effective.
(3) For determining any liability under the Act, treat each post-
effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
(4) It will provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to
each purchaser.
II-5
<PAGE>
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL OF THE REQUIREMENTS FOR FILING ON FORM SB-2 AND AUTHORIZED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, IN THE
CITY OF BELTSVILLE, STATE OF MARYLAND, ON JUNE 12, 1996.
DIGEX, Incorporated
/s/ Christopher R. McCleary
By: _________________________________
Christopher R. McCleary
Chief Executive Officer, President
and Chairman of the Board
POWER OF ATTORNEY
EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY CONSTITUTES AND APPOINTS
CHRISTOPHER R. MCCLEARY AND THOMAS M. BRANDT, JR. AS HIS ATTORNEYS-IN-FACT AND
AGENTS, WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION FOR HIM IN ANY AND
ALL CAPACITIES, TO SIGN ANY OR ALL AMENDMENTS OR POST-EFFECTIVE AMENDMENTS TO
THIS REGISTRATION STATEMENT, OR ANY REGISTRATION STATEMENT FOR THE SAME
OFFERING THAT IS TO BE EFFECTIVE UPON FILING PURSUANT TO RULE 462(B) UNDER THE
SECURITIES ACT OF 1933, AND TO FILE THE SAME, WITH EXHIBITS THERETO AND OTHER
DOCUMENTS IN CONNECTION THEREWITH OR IN CONNECTION WITH THE REGISTRATION OF
THE COMMON STOCK UNDER THE SECURITIES ACT OF 1934, AS AMENDED, WITH THE
SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO EACH OF SUCH ATTORNEYS-IN-
FACT AND AGENTS FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT
AND THING REQUISITE AND NECESSARY IN CONNECTION WITH SUCH MATTERS AND HEREBY
RATIFYING AND CONFIRMING ALL THAT EACH OF SUCH ATTORNEYS-IN-FACT AND AGENTS OR
HIS SUBSTITUTES MAY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Frank A. Adams Director June 12, 1996
- -------------------------------------
FRANK A. ADAMS
/s/ Christopher R. McCleary Chief Executive June 12, 1996
- ------------------------------------- Officer, President
CHRISTOPHER R. MCCLEARY and Chairman of the
Board (principal
executive officer)
/s/ Thomas M. Brandt, Jr. Senior Vice June 12, 1996
- ------------------------------------- President, Chief
THOMAS M. BRANDT, JR. Financial Officer
(principal
financial officer)
/s/ John C. Welling Vice President, June 12, 1996
- ------------------------------------- Controller
JOHN C. WELLING (principal
accounting officer)
II-6
<PAGE>
SIGNATURE TITLE DATE
/s/ Douglas E. Humphrey Senior Vice June 12, 1996
- ------------------------------------- President, Director
DOUGLAS E. HUMPHREY
/s/ Michael T. Doughney Vice President, June 12, 1996
- ------------------------------------- Director
MICHAEL T. DOUGHNEY
/s/ William F. Earthman, III Director June 12, 1996
- -------------------------------------
WILLIAM F. EARTHMAN, III
/s/ Ray A. Rothrock Director June 12, 1996
- -------------------------------------
RAY A. ROTHROCK
/s/ Robert M. Stewart Director June 12, 1996
- -------------------------------------
ROBERT M. STEWART
/s/ John H. Wyant Director June 12, 1996
- -------------------------------------
JOHN H. WYANT
II-7
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
PAGE
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBER
----------- ---------------------- ----------
<C> <S> <C>
1.1* Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation of
the Registrant.
3.2* Restated By-Laws of the Registrant.
4.1* Form of Common Stock certificate.
5.1* Opinion of Latham & Watkins with respect to the
legality of the securities being registered.
10.1* MCI Special Customer Arrangement between MCI
Telecommunications Corporation and Digital Express
Group, Inc. dated March 28, 1996.
10.2* Customer contract with LCI International, Inc. dated
May 29, 1996.
10.3* Customer contract with WinStar Communications, Inc.
dated June 6, 1996.
10.4* Warrant agreement with WinStar Communications, Inc.
dated June 6, 1996.
10.5 Peering Agreements
*(a) Agreement for T1 Gateway Attachment Services, as
amended, with ANS CO+RE Systems Inc. dated February
1, 1994.
*(b) Bilateral Interconnection Agreement with PSINet
Inc. dated February 7, 1996.
*(c) Peering Agreement with MCI Telecommunications
Corporation dated April 21, 1995.
10.6* Agreement with Hughes Network Systems, Inc. dated
June 7, 1996.
10.7* Lease agreement with Banbury Associates Limited
Partnership dated November 17, 1994.
10.8* Lease Agreement with George Christancos, dated
December 4, 1995.
10.9 Lease Agreement with Executive Office Network, Ltd.
10.10* Sublease Agreement with A.S. McGaughaan.
10.11 Employment and consulting agreements
(a) Clyde A. Heintzelman, dated March 19, 1995.
(b) Christopher R. McCleary, dated February 1, 1996.
(c) Brian M. Deobald, dated March 25, 1996.
(d) Earl P. Galleher, dated March 25, 1996.
(e) Nicholas J. Magliato, dated March 25, 1996.
(f) William A. Pendley, dated April 1, 1996.
(g) Thomas M. Brandt, Jr., dated June 1, 1996.
10.12* Incentive Stock Option Plan.
10.13 Securities Purchase Agreement with Grotech Partners
IV, L.P., Venrock Associates, Southern Venture Fund
II, L.P., Douglas E. Humphery and Michael T.
Doughney dated March 24, 1995.
10.14 Stockholders Agreement with Grotech Partners IV,
L.P., Venrock Associates, Southern Ventures II, L.P.
Douglas E. Humphery and Michael T. Doughney dated
March 24, 1995.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
PAGE
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBER
----------- ---------------------- ----------
<C> <S> <C>
10.15 (a) Warrant Agreement with Grotech Partners IV, L.P.
dated March 24, 1995.
(b) Warrant Agreement with Venrock Associates dated
March 24, 1995.
(c) Warrant Agreement with Southern Venture Fund II,
L.P. dated March 24, 1995.
10.16 Loan and Security Agreement with Silicon Valley Bank
dated April 11, 1996.
10.17 First Amendment to Loan and Security Agreement with
Silicon Valley Bank dated May , 1996.
10.18 Revolving Promissory Note with Silicon Valley Bank
dated April 11, 1996.
10.19 Securities Purchase, Conversion and Exchange
Agreement with Grotech Partners IV, L.P., Grotech
Partners III, L.P., Grotech III Companion Fund,
L.P., Grotech III Pennsylvania Fund, L.P., Venrock
Associates, Venrock Associates II, L.P., Southern
Venture Fund II, L.P., Blue Chip Capital Fund
Limited Partnership, Crisler Capital Company,
Limited Partnership dated May 30, 1996.
23.1 Consent of Ernst & Young LLP.
23.2* Consent of Latham & Watkins (to be included in
Exhibit 5.1).
</TABLE>
- --------
* To be filed by amendment
<PAGE>
Exhibit 10.9
HEADQUARTERS COMPANIES
General Services Agreement [INSERT LOGO OF HEADQUARTERS
COMPANIES HERE]
================================================================================
NAME OF CLIENT DIGITAL EXPRESS GROUP
- --------------------------------------------------------------------------------
ADDRESS: 6800 Virginia Manor Road
- --------------------------------------------------------------------------------
CITY, STATE, ZIP: Beltsville, MD 20705
- --------------------------------------------------------------------------------
TELEPHONE:( )
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT (hereafter GSA) made between client whose name appears above
(hereafter Client) and Executive Office Network, Ltd. (hereafter Owner), the
------------------------------
owner and operator of Headquarters Companies Center located at 666 Fifth Avenue
----------------
(hereafter HQ Center).
1. The term of service under GSA shall be six mos., commencing 5/16/95.
-----------------------------
Such term, and any extension given with the express written consent of Owner, is
hereafter called term. If Owner is unable to deliver possession of premises to
Client at the commencement of term, Owner will not be liable for any resulting
damage, nor will GSA be affected, except that Client will not have to pay the
basic charge (as hereafter defined) until Owner can deliver possession. Client
will give Owner forty-five (45) days prior written notice of Client's intention
to discontinue service at the end of any term or extension.
2. During the term, subject to all provisions below, Client is entitled to
the services and facilities included in the services or groups of services and
facilities selected by Client, as noted herein. The extent of allowances and
basic monthly charges are as follows:
- --------------------------------------------------------------------------------
SERVICE DESCRIPTION ALLOWANCE MONTHLY BASIC CHARGES
- --------------------------------------------------------------------------------
[X] CEO 2 HOURS CONFERENCE
- OFFICE 3754 --- ROOM PER MONTH 1,800.
------
- --------------------------------------------------------------------------------
[_] CEO ________ INCLUDES ____ MESSAGE UNITS,
________ HOURS PER MONTH
OFFICE USE
- --------------------------------------------------------------------------------
[X] TELECOMMUNICATIONS unlimited incoming
- PACKAGE calls and messages incl.
- --------------------------------------------------------------------------------
[X] TELEPHONE EQUIPMENT one SL1 handset with
- RENTAL 3 outgoing lines 125.
- --------------------------------------------------------------------------------
[X] FURNITURE standard incl.
-
- --------------------------------------------------------------------------------
[X] OTHER one fax/modem line 35.
-
- --------------------------------------------------------------------------------
1,960.
TOTAL
---------------------------
OPENING CHARGES:
FIRST MONTH'S BASIC CHARGES 1,960.
--------
START-UP & TELEPHONE INSTALLATION FEE 475.
--------
REFUNDABLE SERVICE RETAINER 3,920.
--------
OTHER (two mos.)
--------
TOTAL AMOUNT DUE $ 6,355.
--------
Allowances not utilized in any month may not be carried forward for use in
succeeding months. CLIENT IS GRANTED A LICENSE, REVOCABLE FOR CAUSE BY OWNER, TO
USE THE FACILITIES INCLUDED IN THE APPLICABLE SCHEDULE. CLIENT SHALL HAVE NO
REAL PROPERTY INTEREST IN OR RIGHTS TO THE PREMISES.
<PAGE>
3. Client will pay the basic monthly charge as specified herein (hereafter
basic charge), monthly in advance on the first day of each month. Client will
pay basic charge, and any other charge to the office of Owner or to any agent
designated in writing by Owner, without making any deduction or offset. Client
will pay on any installment of basic charge, or any other charge which is not
paid within ten (10) days after the date on which it is due, a late charge equal
to the greater of (i) five percent (5%) of such installment or, (ii) five
dollars ($5.00).
4. Client agrees that:
(a) If Client vacates or abandons the premises, or if Client is dispossessed by
process of law or otherwise, personal property belonging to Client and left on
premises will be considered abandoned or, at Owner's option, Owner may store it
in Client's name, at Client's cost and without notice to Client.
(b) Client will use premises for general office purposes and for no other
purpose without prior written consent of Owner. Client agrees that Client will
not offer or use premises to provide to others services provided by Owner to
Owner's clients, nor make nor permit use of premises which is forbidden by law
or regulation, or may be hazardous or unsafe, or may invalidate or increase the
premium of any policy of insurance carried on HQ Center or may tend to impair
the character, reputation, appearance or operation of HQ Center.
(c) Owner has made no promise to alter or improve premises or HQ Center or make
any representation concerning the condition thereof. By taking possession of
premises, Client acknowledges that they are in good order and condition. Client
will maintain premises in good condition and repair, will not make holes in
walls for any reason, or cause or permit premises to be damaged or defaced.
Client will make no alterations or additions to premises without Owners' prior
written consent. Client will return premises and any furniture contracted for
hereunder at the end of term, (or, when appropriate, at the end of each usage)
in as good condition and repair as when Client received premises or such
furniture, as the case may be, normal wear and tear excepted. If Client has
CEO 1 service, Client shall provide, at Client's expense, a plastic chair mat of
the type normally used and will use it at all times. Owner may, but is not
required to, make repairs or replacements for Client's account, and Client will
pay to Owner all costs and expenses thereof upon demand.
(d) Client will not attempt to sublet premises or permit their occupancy by any
person except Client's employees and business invitees.
(e) Owner has the right at any time, and upon reasonable notice, to enter
premises to inspect them, to provide services to be furnished by Owner, to make
repairs and alterations to premises or other portion of HQ Center, and to show
premises to prospective clients.
(f) Should Client continue in possession of premises after expiration or any
other termination of term and without Owner's consent, such possession shall be
under the provisions of GSA and Client shall be obligated to pay a basic charge,
computed at an amount equal to two (2) times the basic charge in effect at the
time of such termination, until such possession is surrendered. Owner shall be
entitled to exercise all remedies available to Owner on account of such
continued possession, and Client's obligation to pay such doubled basic charge
shall be in addition and without prejudice to such remedies.
(g) Client understands that occupancy of premises is subject to, in addition to
GSA, the provisions of the lease or leases pursuant to which Owner occupies the
property including premises (hereafter leases). Client will comply with all
rules, regulations and requirements of the building in which HQ Center and
premises are located and with other reasonable rules and regulations established
by Owner and relating to the premises and Client's use thereof. Owner will have
no responsibility to Client for violation of any lease provisions or rules and
regulations by any other client of Owner. Client will attorn to the lessors
under the leases in such cases as may be required by the leases. Termination of
the leases will terminate GSA and all of Owner's obligations hereunder.
(h) No advertising of any type (newspaper, radio, direct mail, etc.) using the
Center's address may be used by Client without the prior written approval of
Owner. If the telephone number used by Client on premises is assigned to Client
by Owner, Client may not place a display ad in the Yellow Pages of any telephone
directory without Owner's prior written consent. Client may not retain the
assigned number upon termination of service.
(i) Client will fill out and sign additional documents and do such other things
as may be required by Owner, the Postal Service, telephone company, or other
entity in order to permit Owner to provide services and facilities.
(j) Client will complete an Answering Service Agreement for each Center, which
will set forth the name and title of individuals authorized to use the
Headquarters, Companies services and incur charges at that Center (hereafter
authorized persons), the term of authorization, and Client's agreement to pay
promptly all charges incurred by authorized persons.
(k) Client will defend, indemnify and hold harmless each HQ Center, all Owners
and the Headquarters Companies, a California corporation (hereafter HQ) and
their respective officers, employees and agents,
2
<PAGE>
from any and all claims, liabilities or loss, and all damages, direct or
consequential, incurred by each HQ Center, all Owners, HQ, Client, authorized
persons or any other person, and all costs and expenses including attorney's
fees arising in any manner, directly or indirectly, out of or in connection with
or incident to (i) any injury to or death of persons including, but not limited
to, Client, authorized persons, and employees and invitees of any of them, or
any damage to or destruction of property, including, but not limited to,
properly of Client, authorized persons, and employees and invitees of any of
them, occurring on or about premises, or (ii) the furnishing to, or use by,
Client, authorized persons, or employees and invitees of any of them or any
services or facilities (which term as used herein includes occupancy of the
premises) hereunder, Client shall maintain adequate insurance for the foregoing.
(i) All services and facilities (which term includes occupancy of the premises)
provided pursuant to GSA are furnished without warranty of any sort whatsoever.
Client's sole remedy, and Owner's sole obligation, for any failure to render
any service or facility, any error or omission, or any delay or interruption
with respect thereto is limited to an adjustment to Client's billing in an
amount equal to the charge for such service or facility for the period during
which the failure, delay or interruption continues. (For example, if a telephone
message is improperly recorded, Client's billing will be reduced by the amount
charged for one message unit). With the sole exception of the remedy set forth
in the first two sentences of this subparagraph (i), CLIENT EXPRESSLY AGREES TO
WAIVE, AND AGREES NOT TO MAKE, ANY CLAIM FOR DAMAGES, DIRECT OR CONSEQUENTIAL,
ARISING OUT OF ANY FAILURE TO FURNISH ANY SERVICE OR FACILITY, ANY ERROR OR
OMISSION WITH RESPECT THERETO, OR ANY DELAY OR INTERRUPTION OF THE SAME,
NOTWITHSTANDING ANYTHING IN THIS SUBPARAGRAPH, THERE SHALL BE NO BILLING
ADJUSTMENT IF CLIENT IS IN DEFAULT HEREUNDER.
5. Subject to paragraph 4(h) above, Client is hereby authorized to use the
address of HQ Center as Client's business address. Client acknowledges that
Client has read and understood United States Post Office Form F1583 and
understands that in the event Client's use of this address terminates, it will
be Client's responsibility to notify all parties of termination of the use of
the above described address. In the event that this GSA terminates or any or all
charges are not kept current, Owner may terminate Client's right to use the
address and at Owner's election and upon reasonable notice may either (i) return
all mail to senders or (ii) destroy said mail.
6. If Client does not pay any sum payable by Client to Owner with ten
(10) days after it becomes due and payable or if Client fails to perform any of
Client's other agreements and does not cure such other failure within five (5)
days after written notice to Client from Owner, Owner will have the right, with
or without notice to Client, in addition to and not in lieu of other remedies
available to terminate all of Client's rights under GSA, or such of those rights
as Owner designates in the written notice. If Client's rights under GSA are so
terminated. Owner may, after complying with any applicable requirements of law,
take possession of premises. Upon any such action by Owner, Client will remain
liable for all obligations which have previously accrued, and, to the maximum
extent permitted by law, for all obligations which may subsequently accrue.
7. Upon execution of GSA, Client shall pay to Owner the amount listed on
the applicable schedule as a refundable service retainer (hereafter retainer).
If Client fails to perform any of Client's obligations hereunder when
performance is due, or abandons premises, Owner may apply the retainer to the
payment of any basic charge or any other payment due from Client, or of any sum
which Owner may spend or be required to spend by reason of Client's failure.
Upon written demand by Owner, Client will pay to Owner any amount so applied so
that the retainer is replenished. If at the end of the term Client has performed
all of the provisions of GSA, the retainer, or any remaining balance, will be
returned to Client without interest.
8. Client may not assign GSA, in whole or in part, without the written
consent of Owner. Subject to that provision, all provisions of GSA are for the
benefit of and are binding upon Client's successors and assigns and those of
Owner.
9. Client shall comply with all laws, permit and licensing rules, and
other requirements regulating the conduct of Client's business.
10. Client agrees that during the term of this Agreement and for six (6)
months after its termination Client will not offer employment to or hire any of
the employees of Owner, if Client does not keep that agreement, Client will be
liable to Owner for damages in the sum of twenty-five percent (25%) of the
annual compensation of each employee involved, it being mutually agreed by
Client and Owner that this provision for liquidation damages is reasonable and
that the actual damage which would be sustained by Owner as the result of a
failure to keep the agreement would be from the nature of the case,
impracticable or extremely difficult to fix.
11. In the event of any legal action or proceeding by Client or Owner
against the other under GSA, the prevailing party shall be entitled to recover
all expenses and costs, including attorney's fees and costs of appeal of any
such amount as is reasonable.
<PAGE>
12. All notices by Client or Owner to the other must be in writing. Notices
to Client will be considered given if delivered personally to one of Client's
officers or mailed by registered or certified mail, postage prepaid, addressed
to Client at premises. Notices to Owner will be considered given if mailed by
registered or certified mail, postage prepaid, to Owner at Owner's address set
forth in the applicable schedule, or such other address as Owner shall designate
to Client in writing.
13. The invalidity or unenforceability of any provision hereof shall not
effect or impair the validity of any other provision. No waiver of any default
of Client shall be implied from any failure by Owner to take action with respect
to such default.
14. This GSA supersedes any prior agreement and embodies the entire
agreement between Client, Owner and HQ relative to its subject matter, and may
not be modified, changed or altered in any way except in writing, GSA shall be
interpreted and enforced in accordance with the laws of this state.
- --------------------------------------------------------------------------------
ADDENDUM TO GSA
1. Upon the termination date set forth herein, or any extension thereof, this
Agreement shall be amended for the same period of time as the initial term,
upon the same terms and conditions as contained herein, unless either party
notifies the other in writing at least 45 days prior to the expiration date,
that the Agreement will not be extended. If Client has three or more offices,
such notice must be given at least 60 days prior to the expiration of this
Agreement.
Upon each anniversary date of this Agreement, whether during the original
term or as extended as provided herein, the Monthly Basic Charge shall be
increased by a minimum of seven (7) percent of the Monthly Basic Charge due
for the month preceding the anniversary date.
2. So long as this Agreement remains in effect and provided there are no
defaults, Owner agrees to provide certain services to Client as described in
Schedule "A" attached. There shall be no charge for Schedule "A" services
excepting specified installation charges.
In addition, provided Client is not in default hereunder and provided the
cost thereof does not exceed Client's Refundable Service Retainer, Owner
shall make available to Client certain other services as described in
Schedule attached. Schedule B services shall be performed at a rate which is
then prevailing throughout the Premises which may be changed by Owner upon
thirty (30) days written notice.
Client shall not offer at the Premises any of the services which Owner
provides to its Clients including, but not limited to, services described in
Schedule A or B.
3. Client will make no alterations or additions to Premises or telephone
equipment without Owner's prior written consent. Client will return premises
and any furniture contracted for hereunder at the end or term (or, when
appropriate, at the end of each usage) in as good condition and repair as
when Client received Premises or such furniture, as the case may be, normal
wear and tear excepted. If Premises and or furniture are damaged, Client
understands funds will be deducted from Refundable Services Retainer for
repair charges.
4. Additional electrical outlets may be made available to Client at Client's
request and expense subject to Owner's discretion. Furthermore, Client
understands there will be an additional monthly surcharge for excess
electrical usage.
5. Extension cords are not permitted at any time due to building fire codes.
6. Client hereby agrees to pay to Owner as reimbursement for New York City
-----------------------------------------------------------------------
Commercial Rent in an amount equal to three percent (3%) of Client's Basic
--------------------------------------------------------------------------
Monthly Office Charge.
---------------------
7. Client acknowledges and agrees to the following for the provision of phone
service. Owner will answer all incoming phone calls during normal business
hours of regular business days. Client agrees that no charge telephone
answering services shall be limited to normal business communications
excluding inbound telemarketing and advertising response which requires pre-
approval by Owner and shall be charged at prevailing rates.
Only phone equipment and systems provided by Owner will be used and Client
agrees that no ringing devices (bells) are required on Client's phones except
during non-business hours. Client will pay to Owner a monthly equipment
rental fee as provided under Number 2 of this addendum - Schedule B for the
use of each telephone instrument. Additionally, Client agrees that local dial
tone and basic monthly phone service shall be provided by Owner and a
monthly fee will be charged as provided under Number 2 of this addendum -
Schedule B, and Client will reimburse Owner at published rates for local call
charges and current rates established by Owner for long distance service.
Monthly equipment rental and monthly local dial tone and basic phone service
fees are payable on the first day of the month. Variable charges for local
message units and long distance service are payable net 10 days after billing
by Owner. Client agrees that if its average monthly long distance charges
exceeds one third of its Refundable Service Retainer, the Refundable Service
Retainer shall be increased so as not to be less than three times the average
monthly long distance phone bill.
8. If any damage whether to the Premises or to the building, or any part
thereof, or whether to the Owner or to other clients in the building, results
from any act or neglect of the Client or of the Client's guests, agents or
employees, Owner may, at Owner's option, repair such damage and Client shall,
upon demand by Owner, reimburse Owner for the total cost of such repairs.
Neither Owner nor Client shall be liable for any damage caused by its act or
neglect if Owner or Client has recovered the full amount of the damages from
insurance.
Executive Office Network, Ltd.
dbz Headquarters Companies CLIENT [SIGNATURE APPEARS HERE]
------------------------------ --------------------------------------
CENTER OWNER
BY: [SIGNATURE APPEARS HERE] BY: CFO
------------------------------ --------------------------------------
TITLE TITLE
DATE OF AGREEMENT
--------------------------------------
<PAGE>
Exhibit 10.11(a)
DIGEX, INCORPORATED
OFFICER EMPLOYMENT AGREEMENT
Employment Agreement dated as of 1 April , 1996 between Digital
Express Group, a Maryland corporation ("Employer"), and Clyde Heintzelman (the
"Officer") .
Employer and the Officer wish to provide for the terms of the
Officer's employment by Employer.
1. Term. The employment of the Officer under this Agreement shall
----
commence as of 1 April, 1996 and shall continue until 31 March, 1997(the
"Initial Term"). The Officer's employment is subject to automatic renewal for
one year terms, (each a "Renewal Term," and together with the Initial Term the
"Term") unless either party gives at least ninety (90) days written notice
before the beginning of a renewal term that the Agreement shall not be renewed.
The term is subject to earlier termination as set forth in this Agreement.
2. Position and Duties. The Officer shall be employed as Senior
-------------------
Vice President and General Manager, Business Connectivity Group, Chief Operating
Officer. During the Term, Officer shall devote substantially all of his business
time , energy and best efforts to his duties with the Employer, subject to
reasonable annual vacation time, and shall use his best efforts to promote the
interests and success of the Employer. Employer reserves the right to modify
title and responsibilities at anytime during the Initial Term of this agreement.
3. Compensation and Benefits.
-------------------------
(a) Base Salary. During his employment under this Agreement,
-----------
Employer shall pay the Officer a base salary (the "Base Salary") at the annual
rate of $125,000. The Base Salary will be subject to annual review and positive
adjustment(s), if any are determined by Christopher McCleary, President and
Chief Executive Officer. The Officer's Base Salary shall be payable in regular
and equal installments in accordance with Employer's regular payroll procedures.
The first annual review is set for 31 December, 1996.
(b) Benefit Plans and Fringe Benefits. During his employment
---------------------------------
under this Agreement, the Officer shall be entitled to participate in: (i) all
incentive compensation plans, savings plans and retirement plans of Employer;
(ii) all employee benefit plans maintained by Employer (including, without
limitation, medical prescription, dental, disability, salary continuance,
employee life, group life, accidental death and travel accident insurance plans
and programs). The Officer shall also be entitled to all fringe benefits for
which his status and level of employment qualify him in accordance with
Employer's policies as approved by the Board.
(c) Expense Reimbursement. Employer shall reimburse the Officer
---------------------
for the ordinary and necessary business expenses incurred by
him in the performance of his duties as an officer of
Employer in accordance with Employer's policies and
procedures, and upon receipt by Employer of appropriate
documentation of such expenses.
-1-
<PAGE>
(d) Auto Allowance. Employer shall provide Officer an auto
--------------
allowance in the amount of $550 per month.
(e) Bonus. Officer shall participate in the DIGEX Management
-----
Bonus program which is paid annually in December.
(f) Withholding Taxes. All salary, benefits, reimbursements and
-----------------
any other payments to Officer under this Agreement shall be
subject to all applicable payroll and withholding taxes and
deductions required by any law, rule or regulation of any
federal, state or local authority.
(g) Stock Options. Officer shall participate in the DIGEX
-------------
Employees Stock Option program and receive grants from time
to time at the discretion of the Board of Directors.
4. Termination.
-----------
(a) Death and Disability. The Officer's employment under this
--------------------
Agreement shall terminate upon his death. Employer may terminate the Officer's
employment under this Agreement if the Management determines in good faith that
he is physically or mentally incapacitated or has been unable to perform his
duties under this Agreement for a period of (i) at least 60 consecutive days, or
(ii) at least 100 days (whether or not consecutive) in any period of 365
consecutive days. In order to assist the Board in making that determination,
the Officer shall, as reasonably requested by the Management, (A) make himself
available for medical examinations by one or more physicians chosen by the Board
and (B) grant the Management and any such physicians access to all relevant
medical records to them and use his reasonable efforts to cause his own
physicians to be available to discuss his health with the physicians chosen by
the Management to examine the Officer.
(b) Termination by Employer for Cause. Employer may terminate
---------------------------------
the Officer's employment under this Agreement for Cause. For the purposes of
this Agreement, "Cause" shall mean any of the following: (i) the Officer's
failure to perform his duties under this Agreement, (ii) recklessness in the
performance of the Officer's duties, (iii) breach by the Officer of the
provisions of Section 6(a) below, (iv) the Officer's conviction for, admission
of or plea of nolo contendere to a felony (whether or not in connection with his
employment), and (v) embezzlement, theft or willful misappropriation of, or the
commission of any fraud related to, Employer's funds, assets, or opportunities.
5. Consequences of Termination.
---------------------------
(a) Death, Disability, Termination by Employer for Cause or
-------------------------------------------------------
Termination by the Officer. If the Officer's employment under this Agreement is
- --------------------------
(i) terminated pursuant to Section 4(a) or 4(b), or (ii) terminated by the
Officer, the Officer's employment shall immediately be terminated and the
Officer shall not thereafter be entitled to receive any salary or other payments
or benefits under this Agreement, other than the payment pursuant to Section
3(a) of Base Salary earned and the reimbursement pursuant to Section 3(c) of
expenses incurred, through the date of termination.
-2-
<PAGE>
6. Certain Restrictions.
--------------------
(a) Confidentiality. Officer covenants and agrees that from and
---------------
after the date of this Agreement and forever thereafter, he shall keep secret
and confidential, and shall not divulge outside the scope of his employment with
Employer to any person or entity, any information, knowledge or data (the
"Information") whether or not learned or possessed by Officer prior to, on or
after the date of this Agreement, of or pertaining to (i) the Employer, and (ii)
any other person, firm, corporation or business organization with which the
Employer may do business during the Term, that is not in the public domain (and
whether relating to methods, processes, techniques, discoveries, pricing,
marketing or any other matters).
(b) Competitive Activity. Officer acknowledges that his
--------------------
services pursuant to this Agreement are unique and extraordinary, that the
Employer will be dependent upon Officer for the development and growth of its
business and related functions, and that he will continue to develop personal
relationships with significant customers of the Employer and to have control of
confidential information concerning, and lists of customers of, the Employer.
Officer further acknowledges the Employer would suffer serious and irreparable
harm if during the term of his employment with the Employer, and within a
reasonable time after the termination of his employment, he should enter into a
business competitive with the Employer.
Accordingly, in order to protect such legitimate and
valuable interests of the Employer, and in consideration of the Employer's
obligations under this Agreement, it is agreed that until two (2) years
following the termination of the Officer's employment with the Employer
(regardless of the reason for termination even if the termination was not for
cause):
(1) Officer will not, directly or indirectly, operate,
engage in, render services to, or hold any ownership interest in (whether as an
individual, on his own account or as an employee, consultant, agent, salesman,
officer, director, shareholder, partner or member of any other firm or entity)
(i) any entity or enterprise engaged in any business competitive with that of
the Employer or (ii) any business which is or has at any time been a customer,
supplier or distributor of the Employer; and
(2) Officer will not, directly or indirectly, whether on
his own behalf or on behalf of any other person or entity, in any manner (i)
solicit the business of or otherwise contact in any commercial capacity any
person or entity which was a customer, supplier, distributor or competitor of
the Employer for the purpose of obtaining business of the type performed by the
Employer, or (ii) solicit for employment any persons who were officers,
shareholders, directors, department heads, supervisors or sales persons of the
Employer in the two (2) year period prior to the date of termination or during
the non-competition period.
(3) Officer agrees that the time period, the geographical
area and the scope of the restrictions contained above, as well as the
provisions of subsections (a) and (b) above, are divisible and severable and
that if any of the foregoing provisions are held invalid by a court of competent
jurisdiction, such provisions shall be deemed modified to the smallest extent
necessary to make them valid and enforceable and the enforceability of the other
provisions shall not be affected in any way.
-3-
<PAGE>
(c) Remedy for Breach and Modification. The Officer
----------------------------------
acknowledges that the provisions of this Section 6 are reasonable and necessary
for the protection of Employer and that Employer will be irrevocably damaged if
these provisions are not specifically enforced. Accordingly, the Officer agrees
that, in addition to any other relief or remedies available to Employer,
Employer shall be entitled to seek and obtain an appropriate injunction or other
equitable remedy for the purposes of restraining the Officer from any actual or
threatened breach of or otherwise enforcing these provisions and no bond or
security will be required in connection therewith.
7. Miscellaneous.
-------------
(a) Notices. Any notice or other communication made or given in
-------
connection with this Agreement shall be in writing and shall be deemed to have
been duly given when delivered or mailed by registered mail, return receipt
requested, to a party at his or its address set forth below or at such other
address as a party may specify by notice to the other:
To the Officer: Clyde Heintzelman
12103 Greenledge Ct.
Fairfax, VA 22033
To Employer: Christopher R. McCleary
DIGEX, Incorporated
6800 Virginia Manor Road
Beltsville, Maryland 20705
(b) Entire Agreement; Amendment. This Agreement supersedes all
---------------------------
prior agreements between the parties with respect to its subject matter, is
intended with the documents referred to herein as a complete and exclusive
statement of the terms of the Agreement between the parties with respect thereto
and may be amended only by a writing signed by both parties hereto.
(c) Waiver. The failure of any party to insist upon strict
------
adherence to any term of this Agreement on any occasion shall not be considered
a waiver or deprive that party of the right thereafter to insist upon strict
adherence to that term or any other term of this Agreement. Any waiver must be
in writing.
(d) Assignment. Except as otherwise provided in this Section
----------
7(d), this Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective heirs, representatives, successors and
assigns. This Agreement shall not be assignable by the Officer.
(e) Captions. The captions in this Agreement are for
--------
convenience of reference only and shall not be given any effect in the
interpretation of this Agreement.
-4-
<PAGE>
(f) Governing Law. This Agreement and (unless otherwise
-------------
provided) all amendments hereof and waivers and consents hereunder shall be
governed by the internal law of the State of Maryland, without regard to the
conflicts of law principles thereof. All litigation or arbitration shall be
conducted in Maryland.
(g) Survivorship. The respective rights and obligations of the
------------
parties hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
IN WITNESS WHEREOF, the parties have executed and sealed this Employment
Agreement on the date first above written.
DIGEX, Incorporated.
By: /s/ Christopher R. McCleary (SEAL)
-----------------------------------
Christopher R. McCleary
President & Chief Executive Office
/s/ Clyde Heintzelman (SEAL)
-----------------------------------
Clyde Heintzelman
Senior Vice President and General Manager,
Business Connectivity Group & Chief
Operating Officer
-5-
<PAGE>
Exhibit 10.11(b)
DIGEX, INCORPORATED
OFFICER EMPLOYMENT AGREEMENT
Employment Agreement dated as of 1 February, 1996 between Digital Express
Group, a Maryland corporation ("Employer"), and Christopher R. McCleary (the
"Officer").
Employer and the Officer wish to provide for the terms of the Officer's
employment by Employer.
1. Term. The employment of the Officer under this Agreement shall
----
commence as of February 2, 1996 and shall continue until December 31, 1999 (the
"Initial Term"). The Officer's employment is subject to automatic renewal for
one year terms, (each a "Renewal Term," and together with the Initial Term the
"Term") unless either party gives at least ninety (90) days written notice
before the beginning of a renewal term that the Agreement shall not be renewed.
The term is subject to earlier termination as set forth in this Agreement.
2. Position and Duties. The Officer shall be employed as President &
-------------------
Chief Executive Officer. During the Term, Officer shall devote substantially
all of his business time, energy and best efforts to his duties with the
Employer, subject to reasonable annual vacation time, and shall use his best
efforts to promote the interests and success of the Employer. Officer is also
elected as a Director of the Corporation.
3. Compensation and Benefits.
-------------------------
(a) Base Salary. During his employment under this Agreement, Employer
-----------
shall pay the Officer a base salary (the "Base Salary") at the annual rate of
$175,000. The Base Salary will be subject to annual review and positive
adjustment(s), if any are determined by DIGEX Board of Directors. The Officer's
Base Salary shall be payable in regular and equal installments in accordance
with Employer's regular payroll procedures. The first annual review is set for
31 December, 1996. Until such time as the Company has secured final financing of
at least $20 million, Officer agrees to defer $25,000 the annualized base
salary.
(b) Benefit Plans and Fringe Benefits. During his employment under
---------------------------------
this Agreement, the Officer shall be entitled to participate in: (i) all
incentive compensation plans, savings plans and retirement plans of Employer;
(ii) all employee benefit plans maintained by Employer (including, without
limitation, medical prescription, dental, disability, salary continuance,
employee life, group life, accidental death and travel accident insurance plans
and programs). The Officer shall also be entitled to all fringe benefits for
which his status and level of employment qualify him in accordance with
Employer's policies as approved by the Board.
(c) Expense Reimbursement. Employer shall reimburse the Officer for
---------------------
the ordinary and necessary business expenses incurred by him in
the performance of his duties as an officer of Employer in
accordance with Employer's policies and procedures, and upon
receipt by Employer of appropriate documentation of such
expenses.
-1-
<PAGE>
(d) Auto Allowance. Employer shall provide Officer a company
--------------
automobile, insurance and reasonable expenses.
(e) Bonus. Officer shall participate in the DIGEX Management Bonus
-----
program which is paid annually in December.
(f) Withholding Taxes. All salary, benefits, reimbursements and any
-----------------
other payments to Officer under this Agreement shall be subject
to all applicable payroll and withholding taxes and deductions
required by any law, rule or regulation of any federal, state or
local authority.
(g) Stock Options. Officer shall participate in the DIGEX Employees
-------------
Stock Option program and receive grants from time to time at the
discretion of the Board of Directors.
4. Termination.
-----------
(a) Death and Disability. The Officer's employment under this
--------------------
Agreement shall terminate upon his death. Employer may terminate the Officer's
employment under this Agreement if the Management determines in good faith that
he is physically or mentally incapacitated or has been unable to perform his
duties under this Agreement for a period of (i) at least 60 consecutive days, or
(ii) at least 100 days (whether or not consecutive) in any period of 365
consecutive days. In order to assist the Board in making that determination,
the Officer shall, as reasonably requested by the Management, (A) make himself
available for medical examinations by one or more physicians chosen by the Board
and (B) grant the Management and any such physicians access to all relevant
medical records to them and use his reasonable efforts to cause his own
physicians to be available to discuss his health with the physicians chosen by
the Management to examine the Officer.
(b) Termination by Employer for Cause. Employer may terminate the
---------------------------------
Officer's employment under this Agreement for Cause. For the purposes of this
Agreement, "Cause" shall mean any of the following: (i) the Officer's failure
to perform his duties under this Agreement, (ii) recklessness in the performance
of the Officer's duties, (iii) breach by the Officer of the provisions of
Section 6(a) below, (iv) the Officer's conviction for, admission of or plea of
nolo contendere to a felony (whether or not in connection with his employment),
and (v) embezzlement, theft or willful misappropriation of, or the commission of
any fraud related to, Employer's funds, assets, or opportunities.
5. Consequences of Termination.
---------------------------
(a) Death, Disability, Termination by Employer for Cause or
-------------------------------------------------------
Termination of the Officer. If the Officer's employment under
--------------------------
this Agreement is (i) terminated pursuant to Section 4(a) or
4(b), or (ii) terminated by the Officer, the Officer's employment
shall immediately be terminated and the Officer shall not
thereafter be entitled to receive any salary or other payments or
benefits under this Agreement, other than the payment pursuant to
Section 3(a) of Base Salary earned and the reimbursement pursuant
to Section 3(c) of expenses incurred, through the date of
termination.
-2-
<PAGE>
(b) Termination of the Officer without cause. If the Officers
-------------------------------------------
employment is terminated without cause, all unvested options will
immediately vest at the date of termination. The base salary at
the time of termination times the number of months remaining for
the initial term shall be computed at the termination date.
6. Certain Restrictions.
--------------------
(a) Confidentiality. Officer covenants and agrees that from and after
---------------
the date of this Agreement and forever thereafter, he shall keep secret and
confidential, and shall not divulge outside the scope of his employment with
Employer to any person or entity, any information, knowledge or data (the
"Information") whether or not learned or possessed by Officer prior to, on or
after the date of this Agreement, of or pertaining to (i) the Employer, and (ii)
any other person, firm, corporation or business organization with which the
Employer may do business during the Term, that is not in the public domain (and
whether relating to methods, processes, techniques, discoveries, pricing,
marketing or any other matters).
(b) Competitive Activity. Officer acknowledges that his services
--------------------
pursuant to this Agreement are unique and extraordinary, that the Employer will
be dependent upon Officer for the development and growth of its business and
related functions, and that he will continue to develop personal relationships
with significant customers of the Employer and to have control of confidential
information concerning, and lists of customers of, the Employer. Officer
further acknowledges the Employer would suffer serious and irreparable harm if
during the term of his employment with the Employer, and within a reasonable
time after the termination of his employment, he should enter into a business
competitive with the Employer.
Accordingly, in order to protect such legitimate and valuable
interests of the Employer, and in consideration of the Employer's obligations
under this Agreement, it is agreed that until two (2) years following the
termination of the Officer's employment with the Employer (regardless of the
reason for termination even if the termination was not for cause):
(1) Officer will not, directly or indirectly, operate, engage
in, render services to, or hold any ownership interest in (whether as an
individual, on his own account or as an employee, consultant, agent, salesman,
officer, director, shareholder, partner or member of any other firm or entity)
(i) any entity or enterprise engaged in any business competitive with that of
the Employer or (ii) any business which is or has at any time been a customer,
supplier or distributor of the Employer; and
(2) Officer will not, directly or indirectly, whether on his own
behalf or on behalf of any other person or entity, in any manner (i) solicit the
business of or otherwise contact in any commercial capacity any person or entity
which was a customer, supplier, distributor or competitor of the Employer for
the purpose of obtaining business of the type performed by the Employer, or (ii)
solicit for employment any persons who were officers, shareholders, directors,
department heads, supervisors or sales persons of the Employer in the two (2)
year period prior to the date of termination or during the non-competition
period.
-3-
<PAGE>
(3) Officer agrees that the time period, the geographical area
and the scope of the restrictions contained above, as well as the provisions of
subsections (a) and (b) above, are divisible and severable and that if any of
the foregoing provisions are held invalid by a court of competent jurisdiction,
such provisions shall be deemed modified to the smallest extent necessary to
make them valid and enforceable and the enforceability of the other provisions
shall not be affected in any way.
(c) Remedy for Breach and Modification. The Officer acknowledges that
----------------------------------
the provisions of this Section 6 are reasonable and necessary for the protection
of Employer and that Employer will be irrevocably damaged if these provisions
are not specifically enforced. Accordingly, the Officer agrees that, in addition
to any other relief or remedies available to Employer, Employer shall be
entitled to seek and obtain an appropriate injunction or other equitable remedy
for the purposes of restraining the Officer from any actual or threatened breach
of or otherwise enforcing these provisions and no bond or security will be
required in connection therewith.
7. Miscellaneous.
-------------
(a) Notices. Any notice or other communication made or given in
-------
connection with this Agreement shall be in writing and shall be deemed to have
been duly given when delivered or mailed by registered mail, return receipt
requested, to a party at his or its address set forth below or at such other
address as a party may specify by notice to the other:
To the Officer: Christopher M. McCleary
771 Stacy Oak Way
Millersville, MD 21108
To Employer: DIGEX, Incorporated
6800 Virginia Manor Road
Beltsville, Maryland 20705
(b) Entire Agreement; Amendment. This Agreement supersedes all prior
---------------------------
agreements between the parties with respect to its subject matter, is intended
with the documents referred to herein as a complete and exclusive statement of
the terms of the Agreement between the parties with respect thereto and may be
amended only by a writing signed by both parties hereto.
(c) Waiver. The failure of any party to insist upon strict adherence
------
to any term of this Agreement on any occasion shall not be considered a waiver
or deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must be in writing.
(d) Assignment. Except as otherwise provided in this Section 7(d),
----------
this Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective heirs, representatives, successors and assigns.
This Agreement shall not be assignable by the Officer.
-4-
<PAGE>
(e) Captions. The captions in this Agreement are for convenience of
--------
reference only and shall not be given any effect in the interpretation of this
Agreement.
(f) Governing Law. This Agreement and (unless otherwise provided) all
-------------
amendments hereof and waivers and consents hereunder shall be governed by the
internal law of the State of Maryland, without regard to the conflicts of law
principles thereof. All litigation or arbitration shall be conducted in
Maryland.
(g) Survivorship. The respective rights and obligations of the
------------
parties hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
IN WITNESS WHEREOF, the parties have executed and sealed this Employment
Agreement on the date first above written.
DIGEX, Incorporated.
By: Signature appears here (SEAL)
-------------------------------
DIGEX, Incorporated
/s/ Christopher R. McCleary (SEAL)
----------------------------------
Officer
-5-
<PAGE>
Exhibit 10.11(c)
DIGEX, INCORPORATED
OFFICER EMPLOYMENT AGREEMENT
Employment Agreement dated as of 25 March, 1996 between DIGEX,
Incorporated, a Maryland corporation ("Employer"), and Brian Deobald (the
"Officer").
Employer and the Officer wish to provide for the terms of the Officer's
employment by Employer.
1. Term. The employment of the Officer under this Agreement shall
----
commence as of 25 March, 1996 and shall continue until 24 March, 1997 (the
"Initial Term"). The Officer's employment is subject to automatic renewal for
one year terms, (each a "Renewal Term," and together with the Initial Term the
"Term") unless either party gives at least ninety (90) days written notice
before the beginning of a renewal term that the Agreement shall not be renewed.
The term is subject to earlier termination as set forth in this Agreement.
2. Position and Duties. The Officer shall be employed as Vice President
-------------------
and General Manager, Individual Connectivity Group. During the Term, Officer
shall devote substantially all of his business time , energy and best efforts to
his duties with the Employer, subject to reasonable annual vacation time, and
shall use his best efforts to promote the interests and success of the Employer.
Employer reserves the right to modify title and responsibilities at anytime
during the Initial Term of this agreement.
3. Compensation and Benefits.
-------------------------
(a) Base Salary. During his employment under this Agreement, Employer
-----------
shall pay the Officer a base salary (the "Base Salary") at the annual rate of
$85,000. The Base Salary will be subject to annual review and positive
adjustment(s), if any are determined by Christopher McCleary, President and
Chief Executive Officer. The Officer's Base Salary shall be payable in regular
and equal installments in accordance with Employer's regular payroll procedures.
The first annual review is set for 31 December, 1996.
(b) Benefit Plans and Fringe Benefits. During his employment under
---------------------------------
this Agreement, the Officer shall be entitled to participate in: (i) all
incentive compensation plans, savings plans and retirement plans of Employer;
(ii) all employee benefit plans maintained by Employer (including, without
limitation, medical prescription, dental, disability, salary continuance,
employee life, group life, accidental death and travel accident insurance plans
and programs). The Officer shall also be entitled to all fringe benefits for
which his status and level of employment qualify him in accordance with
Employer's policies as approved by the Board.
(c) Expense Reimbursement. Employer shall reimburse the Officer for
---------------------
the ordinary and necessary business expenses incurred by him in
the performance of his duties as an officer of Employer in
accordance with Employer's policies and procedures, and upon
receipt by Employer of appropriate documentation of such
expenses.
-1-
<PAGE>
(d) Auto Allowance. Employer shall provide Officer an auto allowance
--------------
in the amount of $550 per month.
(e) Bonus. Officer shall participate in the DIGEX Management Bonus
-----
program which is paid annually in December.
(f) Withholding Taxes. All salary, benefits, reimbursements and any
-----------------
other payments to Officer under this Agreement shall be subject
to all applicable payroll and withholding taxes and deductions
required by any law, rule or regulation of any federal, state or
local authority.
(g) Stock Options. Officer shall participate in the DIGEX Employees
-------------
Stock Option program and receive grants from time to time at the
discretion of the Board of Directors.
4. Termination.
-----------
(a) Death and Disability. The Officer's employment under this
--------------------
Agreement shall terminate upon his death. Employer may terminate the Officer's
employment under this Agreement if the Management determines in good faith that
he is physically or mentally incapacitated or has been unable to perform his
duties under this Agreement for a period of (i) at least 60 consecutive days, or
(ii) at least 100 days (whether or not consecutive) in any period of 365
consecutive days. In order to assist the Board in making that determination, the
Officer shall, as reasonably requested by the Management, (A) make himself
available for medical examinations by one or more physicians chosen by the Board
and (B) grant the Management and any such physicians access to all relevant
medical records to them and use his reasonable efforts to cause his own
physicians to be available to discuss his health with the physicians chosen by
the Management to examine the Officer.
(b) Termination by Employer for Cause. Employer may terminate the
---------------------------------
Officer's employment under this Agreement for Cause. For the purposes of this
Agreement, "Cause" shall mean any of the following: (i) the Officer's failure to
perform his duties under this Agreement, (ii) recklessness in the performance of
the Officer's duties, (iii) breach by the Officer of the provisions of Section
6(a) below, (iv) the Officer's conviction for, admission of or plea of nolo
contendere to a felony (whether or not in connection with his employment), and
(v) embezzlement, theft or willful misappropriation of, or the commission of any
fraud related to, Employer's funds, assets, or opportunities.
5. Consequences of Termination.
---------------------------
(a) Death, Disability, Termination by Employer for Cause or
-------------------------------------------------------
Termination by the Officer. If the Officer's employment under this Agreement is
- --------------------------
(i) terminated pursuant to Section 4(a) or 4(b), or (ii) terminated by the
Officer, the Officer's employment shall immediately be terminated and the
Officer shall not thereafter be entitled to receive any salary or other payments
or benefits under this Agreement, other than the payment pursuant to Section
3(a) of Base Salary earned and the reimbursement pursuant to Section 3(c) of
expenses incurred, through the date of termination.
-2-
<PAGE>
6. Certain Restrictions.
--------------------
(a) Confidentiality. Officer covenants and agrees that from and after
---------------
the date of this Agreement and forever thereafter, he shall keep secret and
confidential, and shall not divulge outside the scope of his employment with
Employer to any person or entity, any information, knowledge or data (the
"Information") whether or not learned or possessed by Officer on or after the
date of this Agreement, of or pertaining to (i) the Employer, and (ii) any other
person, firm, corporation or business organization with which the Employer may
do business during the Term, that is not in the public domain.
(b) Competitive Activity. Officer acknowledges that his services
--------------------
pursuant to this Agreement are unique and extraordinary, that the Employer will
be dependent upon Officer for the development and growth of its business and
related functions, and that he will continue to develop personal relationships
with significant customers of the Employer and to have control of confidential
information concerning, and lists of customers of, the Employer. Officer
further acknowledges the Employer would suffer serious and irreparable harm if
during the term of his employment with the Employer, and within a reasonable
time after the termination of his employment, he should enter into a business
competitive with the Employer.
Accordingly, in order to protect such legitimate and valuable
interests of the Employer, and in consideration of the Employer's obligations
under this Agreement, it is agreed that until two (2) years following the
termination of the Officer's employment with the Employer (regardless of the
reason for termination even if the termination was not for cause):
(1) Officer will not, directly or indirectly, operate, engage
in, render services to, or hold any material ownership interest in (whether as
an individual, on his own account or as an employee, consultant, agent,
salesman, officer, director, shareholder, partner or member of any other firm or
entity) (i) any entity or enterprise engaged in any business directly
competitive with that of the Employer; and
(2) Officer will not, directly or indirectly, whether on his own
behalf or on behalf of any other person or entity, in any manner solicit for
employment any persons who were officers, shareholders, directors, department
heads, supervisors or sales persons of the Employer in the two (2) year period
prior to the date of termination or during the non-competition period.
(3) Officer agrees that the time period, the geographical area
and the scope of the restrictions contained above, as well as the provisions of
subsections (a) and (b) above, are divisible and severable and that if any of
the foregoing provisions are held invalid by a court of competent jurisdiction,
such provisions shall be deemed modified to the smallest extent necessary to
make them valid and enforceable and the enforceability of the other provisions
shall not be affected in any way.
(c) Remedy for Breach and Modification. The Officer acknowledges that
----------------------------------
the provisions of this Section 6 are reasonable and necessary for the protection
of Employer and that Employer will be irrevocably damaged if these provisions
are not specifically enforced. Accordingly, the Officer agrees that, in addition
to any other relief or remedies available to Employer, Employer shall be
entitled to
-3-
<PAGE>
seek and obtain an appropriate injunction or other equitable remedy for the
purposes of restraining the Officer from any actual or threatened breach of or
otherwise enforcing these provisions and no bond or security will be required in
connection therewith.
7. Miscellaneous.
-------------
(a) Notices. Any notice or other communication made or given in
-------
connection with this Agreement shall be in writing and shall be deemed to have
been duly given when delivered or mailed by registered mail, return receipt
requested, to a party at his or its address set forth below or at such other
address as a party may specify by notice to the other:
To the Officer: Brian Deobald
1658 A. Avon Place, NW
Washington, DC 20007
To Employer: Christopher R. McCleary
DIGEX, Incorporated
6800 Virginia Manor Road
Beltsville, Maryland 20705
(b) Entire Agreement; Amendment. This Agreement supersedes all prior
---------------------------
agreements between the parties with respect to its subject matter, is intended
with the documents referred to herein as a complete and exclusive statement of
the terms of the Agreement between the parties with respect thereto and may be
amended only by a writing signed by both parties hereto.
(c) Waiver. The failure of any party to insist upon strict adherence
------
to any term of this Agreement on any occasion shall not be considered a waiver
or deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must be in writing.
(d) Assignment. Except as otherwise provided in this Section 7(d),
----------
this Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective heirs, representatives, successors and assigns.
This Agreement shall not be assignable by the Officer.
(e) Captions. The captions in this Agreement are for convenience of
--------
reference only and shall not be given any effect in the interpretation of this
Agreement.
(f) Governing Law. This Agreement and (unless otherwise provided) all
-------------
amendments hereof and waivers and consents hereunder shall be governed by the
internal law of the State of Maryland, without regard to the conflicts of law
principles thereof. All litigation or arbitration shall be conducted in
Maryland.
-4-
<PAGE>
(g) Survivorship. The respective rights and obligations of the
------------
parties hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
IN WITNESS WHEREOF, the parties have executed and sealed this Employment
Agreement on the date first above written.
DIGEX, Incorporated.
By: /s/ Christopher R. McCleary (SEAL)
-----------------------------
Christopher R. McCleary
President & Chief Executive Officer
/s/ Brian Deobald (SEAL)
-----------------------------
Brian Deobald
Vice President and General Manager,
Individual Connectivity Group
-5-
<PAGE>
Exhibit 10.11(d)
DIGEX, INCORPORATED
OFFICER EMPLOYMENT AGREEMENT
Employment Agreement dated as of 25 March, 1996 between Digital Express
Group, a Maryland corporation ("Employer"), and Earl Galleher (the "Officer").
Employer and the Officer wish to provide for the terms of the Officer's
employment by Employer.
1. Term. The employment of the Officer under this Agreement shall
----
commence as of 11 March, 1996 and shall continue until 10 March, 1997 (the
"Initial Term"). The Officer's employment is subject to automatic renewal for
one year terms, (each a "Renewal Term," and together with the Initial Term the
"Term") unless either party gives at least ninety (90) days written notice
before the beginning of a renewal term that the Agreement shall not be renewed.
The term is subject to earlier termination as set forth in this Agreement.
2. Position and Duties. The Officer shall be employed as Vice President
-------------------
and General Manager, Internet Server Products Group. During the Term, Officer
shall devote substantially all of his business time, energy and best efforts to
his duties with the Employer, subject to reasonable annual vacation time, and
shall use his best efforts to promote the interests and success of the Employer.
Employer reserves the right to modify title and responsibilities at anytime
during the Initial Term of this agreement.
3. Compensation and Benefits.
-------------------------
(a) Base Salary. During his employment under this Agreement, Employer
-----------
shall pay the Officer a base salary (the "Base Salary") at the annual rate of
$85,000. The Base Salary will be subject to annual review and positive
adjustment(s), if any are determined by Christopher McCleary, President and
Chief Executive Officer. The Officer's Base Salary shall be payable in regular
and equal installments in accordance with Employer's regular payroll procedures.
The first annual review is set for 31 December, 1996.
(b) Benefit Plans and Fringe Benefits. During his employment under
---------------------------------
this Agreement, the Officer shall be entitled to participate in: (i) all
incentive compensation plans, savings plans and retirement plans of Employer;
(ii) all employee benefit plans maintained by Employer (including, without
limitation, medical prescription, dental, disability, salary continuance,
employee life, group life, accidental death and travel accident insurance plans
and programs). The Officer shall also be entitled to all fringe benefits for
which his status and level of employment qualify him in accordance with
Employer's policies as approved by the Board.
(c) Expense Reimbursement. Employer shall reimburse the Officer for
---------------------
the ordinary and necessary business expenses incurred by him in
the performance of his duties as an officer of Employer in
accordance with Employer's policies and procedures, and upon
receipt by Employer of appropriate documentation of such
expenses.
-1-
<PAGE>
(d) Auto Allowance. Employer shall provide Officer an auto allowance
--------------
in the amount of $550 per month.
(e) Bonus. Officer shall participate in the DIGEX Management Bonus
-----
program which is paid annually in December.
(f) Withholding Taxes. All salary, benefits, reimbursements and any
-----------------
other payments to Officer under this Agreement shall be subject
to all applicable payroll and withholding taxes and deductions
required by any law, rule or regulation of any federal, state or
local authority.
(g) Stock Options. Officer shall participate in the DIGEX Employees
-------------
Stock Option program and receive grants from time to time at the
discretion of the Board of Directors.
4. Termination.
-----------
(a) Death and Disability. The Officer's employment under this
--------------------
Agreement shall terminate upon his death. Employer may terminate the Officer's
employment under this Agreement if the Management determines in good faith that
he is physically or mentally incapacitated or has been unable to perform his
duties under this Agreement for a period of (i) at least 60 consecutive days, or
(ii) at least 100 days (whether or not consecutive) in any period of 365
consecutive days. In order to assist the Board in making that determination,
the Officer shall, as reasonably requested by the Management, (A) make himself
available for medical examinations by one or more physicians chosen by the Board
and (B) grant the Management and any such physicians access to all relevant
medical records to them and use his reasonable efforts to cause his own
physicians to be available to discuss his health with the physicians chosen by
the Management to examine the Officer.
(b) Termination by Employer for Cause. Employer may terminate the
---------------------------------
Officer's employment under this Agreement for Cause. For the purposes of this
Agreement, "Cause" shall mean any of the following: (i) the Officer's failure
to perform his duties under this Agreement, (ii) recklessness in the performance
of the Officer's duties, (iii) breach by the Officer of the provisions of
Section 6(a) below, (iv) the Officer's conviction for, admission of or plea of
nolo contendere to a felony (whether or not in connection with his employment),
and (v) embezzlement, theft or willful misappropriation of, or the commission of
any fraud related to, Employer's funds, assets, or opportunities.
5. Consequences of Termination.
---------------------------
(a) Death, Disability, Termination by Employer for Cause or
-------------------------------------------------------
Termination by the Officer. If the Officer's employment under this Agreement is
- --------------------------
(i) terminated pursuant to Section 4(a) or 4(b), or (ii) terminated by the
Officer, the Officer's employment shall immediately be terminated and the
Officer shall not thereafter be entitled to receive any salary or other payments
or benefits under this Agreement, other than the payment pursuant to Section
3(a) of Base Salary earned and the reimbursement pursuant to Section 3(c) of
expenses incurred, through the date of termination.
-2-
<PAGE>
6. Certain Restrictions.
--------------------
(a) Confidentiality. Officer covenants and agrees that from and after
---------------
the date of this Agreement and forever thereafter, he shall keep secret and
confidential, and shall not divulge outside the scope of his employment with
Employer to any person or entity, any information, knowledge or data (the
"Information") whether or not learned or possessed by Officer prior to, on or
after the date of this Agreement, of or pertaining to (i) the Employer, and (ii)
any other person, firm, corporation or business organization with which the
Employer may do business during the Term, that is not in the public domain (and
whether relating to methods, processes, techniques, discoveries, pricing,
marketing or any other matters).
(b) Competitive Activity. Officer acknowledges that his services
--------------------
pursuant to this Agreement are unique and extraordinary, that the Employer will
be dependent upon Officer for the development and growth of its business and
related functions, and that he will continue to develop personal relationships
with significant customers of the Employer and to have control of confidential
information concerning, and lists of customers of, the Employer. Officer
further acknowledges the Employer would suffer serious and irreparable harm if
during the term of his employment with the Employer, and within a reasonable
time after the termination of his employment, he should enter into a business
competitive with the Employer.
Accordingly, in order to protect such legitimate and valuable
interests of the Employer, and in consideration of the Employer's obligations
under this Agreement, it is agreed that until two (2) years following the
termination of the Officer's employment with the Employer (regardless of the
reason for termination even if the termination was not for cause):
(1) Officer will not, directly or indirectly, operate, engage
in, render services to, or hold any ownership interest in (whether as an
individual, on his own account or as an employee, consultant, agent, salesman,
officer, director, shareholder, partner or member of any other firm or entity)
(i) any entity or enterprise engaged in any business competitive with that of
the Employer or (ii) any business which is or has at any time been a customer,
supplier or distributor of the Employer; and
(2) Officer will not, directly or indirectly, whether on his own
behalf or on behalf of any other person or entity, in any manner (i) solicit the
business of or otherwise contact in any commercial capacity any person or entity
which was a customer, supplier, distributor or competitor of the Employer for
the purpose of obtaining business of the type performed by the Employer, or (ii)
solicit for employment any persons who were officers, shareholders, directors,
department heads, supervisors or sales persons of the Employer in the two (2)
year period prior to the date of termination or during the non-competition
period.
(3) Officer agrees that the time period, the geographical area
and the scope of the restrictions contained above, as well as the provisions of
subsections (a) and (b) above, are divisible and severable and that if any of
the foregoing provisions are held invalid by a court of competent jurisdiction,
such provisions shall be deemed modified to the smallest extent necessary to
make them valid and enforceable and the enforceability of the other provisions
shall not be affected in any way.
-3-
<PAGE>
(c) Remedy for Breach and Modification. The Officer acknowledges that
----------------------------------
the provisions of this Section 6 are reasonable and necessary for the protection
of Employer and that Employer will be irrevocably damaged if these provisions
are not specifically enforced. Accordingly, the Officer agrees that, in addition
to any other relief or remedies available to Employer, Employer shall be
entitled to seek and obtain an appropriate injunction or other equitable remedy
for the purposes of restraining the Officer from any actual or threatened breach
of or otherwise enforcing these provisions and no bond or security will be
required in connection therewith.
7. Miscellaneous.
-------------
(a) Notices. Any notice or other communication made or given in
-------
connection with this Agreement shall be in writing and shall be deemed to have
been duly given when delivered or mailed by registered mail, return receipt
requested, to a party at his or its address set forth below or at such other
address as a party may specify by notice to the other:
To the Officer: Earl Galleher
5910 Cranston Road
Bethesda, MD 20816
To Employer: Christopher R. McCleary
DIGEX, Incorporated
6800 Virginia Manor Road
Beltsville, Maryland 20705
(b) Entire Agreement; Amendment. This Agreement supersedes all prior
---------------------------
agreements between the parties with respect to its subject matter, is intended
with the documents referred to herein as a complete and exclusive statement of
the terms of the Agreement between the parties with respect thereto and may be
amended only by a writing signed by both parties hereto.
(c) Waiver. The failure of any party to insist upon strict adherence
------
to any term of this Agreement on any occasion shall not be considered a waiver
or deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must be in writing.
(d) Assignment. Except as otherwise provided in this Section 7(d),
----------
this Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective heirs, representatives, successors and assigns.
This Agreement shall not be assignable by the Officer.
(e) Captions. The captions in this Agreement are for convenience of
--------
reference only and shall not be given any effect in the interpretation of this
Agreement.
-4-
<PAGE>
(f) Governing Law. This Agreement and (unless otherwise provided) all
-------------
amendments hereof and waivers and consents hereunder shall be governed by the
internal law of the State of Maryland, without regard to the conflicts of law
principles thereof. All litigation or arbitration shall be conducted in
Maryland.
(g) Survivorship. The respective rights and obligations of the
------------
parties hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
IN WITNESS WHEREOF, the parties have executed and sealed this Employment
Agreement on the date first above written.
DIGEX, Incorporated.
By: /s/ Christopher R. McCeary (SEAL)
----------------------------------------
Christopher R. McCleary
President & Chief Executive Officer
/s/ Earl Galleher (SEAL)
----------------------------------------
Earl Galleher
Vice President and General Manager,
Internet Server Products Group
-5-
<PAGE>
Exhibit 10.11(e)
DIGEX, INCORPORATED
OFFICER EMPLOYMENT AGREEMENT
Employment Agreement dated as of 25 March, 1996 between DIGEX,
Incorporated, a Maryland corporation ("Employer"), and Nicholas Magliato (the
"Officer").
Employer and the Officer wish to provide for the terms of the Officer's
employment by Employer.
1. Term. The employment of the Officer under this Agreement shall
----
commence as of 25 March, 1996 and shall continue until 24 March, 1997 (the
"Initial Term"). The Officer's employment is subject to automatic renewal for
one year terms, (each a "Renewal Term," and together with the Initial Term the
"Term") unless either party gives at least ninety (90) days written notice
before the beginning of a renewal term that the Agreement shall not be renewed.
The term is subject to earlier termination as set forth in this Agreement.
2. Position and Duties. The Officer shall be employed as Vice President
-------------------
and General Manager, Private Networks Group. During the Term, Officer shall
devote substantially all of his business time , energy and best efforts to his
duties with the Employer, subject to reasonable annual vacation time, and shall
use his best efforts to promote the interests and success of the Employer.
Employer reserves the right to modify title and responsibilities at anytime
during the Initial Term of this agreement.
3. Compensation and Benefits.
-------------------------
(a) Base Salary. During his employment under this Agreement,
-----------
Employer shall pay the Officer a base salary (the "Base Salary") at the annual
rate of $85,000. The Base Salary will be subject to annual review and positive
adjustment(s), if any are determined by Christopher McCleary, President and
Chief Executive Officer. The Officer's Base Salary shall be payable in regular
and equal installments in accordance with Employer's regular payroll procedures.
The first annual review is set for 31 December, 1996.
(b) Benefit Plans and Fringe Benefits. During his employment under
---------------------------------
this Agreement, the Officer shall be entitled to participate in: (i) all
incentive compensation plans, savings plans and retirement plans of Employer;
(ii) all employee benefit plans maintained by Employer (including, without
limitation, medical prescription, dental, disability, salary continuance,
employee life, group life, accidental death and travel accident insurance plans
and programs). The Officer shall also be entitled to all fringe benefits for
which his status and level of employment qualify him in accordance with
Employer's policies as approved by the Board.
(c) Expense Reimbursement. Employer shall reimburse the Officer for
---------------------
the ordinary and necessary business expenses incurred by him in
the performance of his duties as an officer of Employer in
accordance with Employer's policies and procedures, and upon
receipt by Employer of appropriate documentation of such
expenses.
-1-
<PAGE>
(d) Auto Allowance. Employer shall provide Officer an auto allowance
--------------
in the amount of $550 per month.
(e) Bonus. Officer shall participate in the DIGEX Management Bonus
-----
program which is paid annually in December.
(f) Withholding Taxes. All salary, benefits, reimbursements and any
-----------------
other payments to Officer under this Agreement shall be subject
to all applicable payroll and withholding taxes and deductions
required by any law, rule or regulation of any federal, state or
local authority.
(g) Stock Options. Officer shall participate in the DIGEX Employees
-------------
Stock Option program and receive grants from time to time at the
discretion of the Board of Directors.
4. Termination.
-----------
(a) Death and Disability. The Officer's employment under this
--------------------
Agreement shall terminate upon his death. Employer may terminate the Officer's
employment under this Agreement if the Management determines in good faith that
he is physically or mentally incapacitated or has been unable to perform his
duties under this Agreement for a period of (i) at least 60 consecutive days, or
(ii) at least 100 days (whether or not consecutive) in any period of 365
consecutive days. In order to assist the Board in making that determination,
the Officer shall, as reasonably requested by the Management, (A) make himself
available for medical examinations by one or more physicians chosen by the Board
and (B) grant the Management and any such physicians access to all relevant
medical records to them and use his reasonable efforts to cause his own
physicians to be available to discuss his health with the physicians chosen by
the Management to examine the Officer.
(b) Termination by Employer for Cause. Employer may terminate the
---------------------------------
Officer's employment under this Agreement for Cause. For the purposes of this
Agreement, "Cause" shall mean any of the following: (i) the Officer's failure
to perform his duties under this Agreement, (ii) recklessness in the performance
of the Officer's duties, (iii) breach by the Officer of the provisions of
Section 6(a) below, (iv) the Officer's conviction for, admission of or plea of
nolo contendere to a felony (whether or not in connection with his employment),
and (v) embezzlement, theft or willful misappropriation of, or the commission of
any fraud related to, Employer's funds, assets, or opportunities.
5. Consequences of Termination.
---------------------------
(a) Death, Disability, Termination by Employer for Cause or
-------------------------------------------------------
Termination by the Officer. If the Officer's employment under this Agreement is
- --------------------------
(i) terminated pursuant to Section 4(a) or 4(b), or (ii) terminated by the
Officer, the Officer's employment shall immediately be terminated and the
Officer shall not thereafter be entitled to receive any salary or other payments
or benefits under this Agreement, other than the payment pursuant to Section
3(a) of Base Salary earned and the reimbursement pursuant to Section 3(c) of
expenses incurred, through the date of termination.
-2-
<PAGE>
6. Certain Restrictions.
--------------------
(a) Confidentiality. Officer covenants and agrees that from and
---------------
after the date of this Agreement and forever thereafter, he shall keep secret
and confidential, and shall not divulge outside the scope of his employment with
Employer to any person or entity, any information, knowledge or data (the
"Information") whether or not learned or possessed by Officer on or after the
date of this Agreement, of or pertaining to (i) the Employer, and (ii) any other
person, firm, corporation or business organization with which the Employer may
do business during the Term, that is not in the public domain.
(b) Competitive Activity. Officer acknowledges that his services
--------------------
pursuant to this Agreement are unique and extraordinary, that the Employer will
be dependent upon Officer for the development and growth of its business and
related functions, and that he will continue to develop personal relationships
with significant customers of the Employer and to have control of confidential
information concerning, and lists of customers of, the Employer. Officer
further acknowledges the Employer would suffer serious and irreparable harm if
during the term of his employment with the Employer, and within a reasonable
time after the termination of his employment, he should enter into a business
competitive with the Employer.
Accordingly, in order to protect such legitimate and valuable
interests of the Employer, and in consideration of the Employer's obligations
under this Agreement, it is agreed that until two (2) years following the
termination of the Officer's employment with the Employer (regardless of the
reason for termination even if the termination was not for cause):
(1) Officer will not, directly or indirectly, operate, engage
in, render services to, or hold any material ownership interest in (whether as
an individual, on his own account or as an employee, consultant, agent,
salesman, officer, director, shareholder, partner or member of any other firm or
entity) (i) any entity or enterprise engaged in any business directly
competitive with that of the Employer; and
(2) Officer will not, directly or indirectly, whether on his own
behalf or on behalf of any other person or entity, in any manner solicit for
employment any persons who were officers, shareholders, directors, department
heads, supervisors or sales persons of the Employer in the two (2) year period
prior to the date of termination or during the non-competition period.
(3) Officer agrees that the time period, the geographical area
and the scope of the restrictions contained above, as well as the provisions of
subsections (a) and (b) above, are divisible and severable and that if any of
the foregoing provisions are held invalid by a court of competent jurisdiction,
such provisions shall be deemed modified to the smallest extent necessary to
make them valid and enforceable and the enforceability of the other provisions
shall not be affected in any way.
(c) Remedy for Breach and Modification. The Officer acknowledges
----------------------------------
that the provisions of this Section 6 are reasonable and necessary for the
protection of Employer and that Employer will be irrevocably damaged if these
provisions are not specifically enforced. Accordingly, the Officer agrees that,
in addition to any other relief or remedies available to Employer, Employer
shall be entitled to
-3-
<PAGE>
seek and obtain an appropriate injunction or other equitable remedy for the
purposes of restraining the Officer from any actual or threatened breach of or
otherwise enforcing these provisions and no bond or security will be required in
connection therewith.
7. Miscellaneous.
-------------
(a) Notices. Any notice or other communication made or given in
-------
connection with this Agreement shall be in writing and shall be deemed to have
been duly given when delivered or mailed by registered mail, return receipt
requested, to a party at his or its address set forth below or at such other
address as a party may specify by notice to the other:
To the Officer: Nicholas Magliato
6106 Temple Street
Bethesda, MD 20817
To Employer: Christopher R. McCleary
DIGEX, Incorporated
6800 Virginia Manor Road
Beltsville, Maryland 20705
(b) Entire Agreement; Amendment. This Agreement supersedes all prior
---------------------------
agreements between the parties with respect to its subject matter, is intended
with the documents referred to herein as a complete and exclusive statement of
the terms of the Agreement between the parties with respect thereto and may be
amended only by a writing signed by both parties hereto.
(c) Waiver. The failure of any party to insist upon strict adherence
------
to any term of this Agreement on any occasion shall not be considered a waiver
or deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must be in writing.
(d) Assignment. Except as otherwise provided in this Section 7(d),
----------
this Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective heirs, representatives, successors and assigns.
This Agreement shall not be assignable by the Officer.
(e) Captions. The captions in this Agreement are for convenience of
--------
reference only and shall not be given any effect in the interpretation of this
Agreement.
(f) Governing Law. This Agreement and (unless otherwise provided)
-------------
all amendments hereof and waivers and consents hereunder shall be governed by
the internal law of the State of Maryland, without regard to the conflicts of
law principles thereof. All litigation or arbitration shall be conducted in
Maryland.
-4-
<PAGE>
(g) Survivorship. The respective rights and obligations of the
------------
parties hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
IN WITNESS WHEREOF, the parties have executed and sealed this Employment
Agreement on the date first above written.
DIGEX, Incorporated.
By:/s/ Christopher R. McCleary (SEAL)
--------------------------------------
Christopher R. McCleary
President & Chief Executive Officer
/s/ Nicholas Magliato (SEAL)
-----------------------------------------
Nicholas Magliato
Vice President and General Manager,
Private Networks Group
-5-
<PAGE>
Exhibit 10.11(g)
DIGEX, Incorporated
OFFICER EMPLOYMENT AGREEMENT
Employment Agreement dated as of 1 June, 1996 between Digital Express
Group, a Maryland corporation ("Employer"), and Thomas M. Brandt, Jr. (the
"Officer").
Employer and the Officer wish to provide for the terms of the Officer's
employment by Employer.
1. Term. The employment of the Officer under this Agreement
----
shall commence as of 1 June, 1996 and shall continue until 31 May 1997 (the
"Initial Term"). The Officer's employment is subject to automatic renewal for
one year terms, (each a "Renewal Term," and together with the Initial Term the
"Term") unless either party gives at least ninety (90) days written notice
before the beginning of a renewal term that the Agreement shall not be renewed.
The term is subject to earlier termination as set forth in this Agreement.
2. Position and Duties. The Officer shall be employed as Senior
-------------------
Vice President - Finance and Administration, Chief Financial Officer. During
the Term, Officer shall devote substantially all of his business time, energy
and best efforts to his duties with the Employer, subject to reasonable annual
vacation time, and shall use his best efforts to promote the interests and
success of the Employer. Employer reserves the right to modify title and
responsibilities at anytime during the Initial Term of this agreement.
3. Compensation and Benefits.
-------------------------
(a) Base Salary. During his employment under this
-----------
Agreement, Employer shall pay the Officer a base salary (the "Base Salary") at
the annual rate of $125,000. The Base Salary will be subject to annual review
and positive adjustment(s), if any are determined by Christopher McCleary,
President and Chief Executive Officer. The Officer's Base Salary shall be
payable in regular and equal installments in accordance with Employer's regular
payroll procedures. The first annual review is set for 31 December, 1996.
(b) Benefit Plans and Fringe Benefits. During his
---------------------------------
employment under this Agreement, the Officer shall be entitled to participate
in: (i) all incentive compensation plans, savings plans and retirement plans of
Employer, (ii) all employee benefit plans maintained by Employer (including,
without limitation, medical prescription, dental, disability, salary
continuance, employee life, group life, accidental death and travel accident
insurance plans and programs). The Officer shall also be entitled to all fringe
benefits for which his status and level of employment qualify him in accordance
with Employer's policies as approved by the Board.
(c) Expense Reimbursement. Employer shall reimburse the
---------------------
Officer for the ordinary and necessary business expenses
incurred by him in the performance of his duties as an
officer of Employer in accordance with Employer's policies
and procedures, and upon receipt by Employer of
appropriate documentation of such expenses.
-1-
<PAGE>
(d) Auto Allowance. Employer shall provide Officer an auto
--------------
allowance in the amount of $550 per month.
(e) Bonus. Officer shall participate in the DIGEX Management
-----
Bonus program which is paid annually in December.
(f) Withholding Taxes. All salary, benefits, reimbursements
-----------------
and any other payments to Officer under this Agreement
shall be subject to all applicable payroll and withholding
taxes and deductions required by any law, rule or
regulation of any federal, state or local authority.
(g) Stock Options. Officer shall participate in the DIGEX
-------------
Employees Stock Option program and receive grants from
time to time at the discretion of the Board of Directors.
4. Termination.
-----------
(a) Death and Disability. The Officer's employment under
--------------------
this Agreement shall terminate upon his death. Employer may terminate the
Officer's employment under this Agreement if the Management determines in good
faith that he is physically or mentally incapacitated or has been unable to
perform his duties under this Agreement for a period of (i) at least 60
consecutive days, or (ii) at least 100 days (whether or not consecutive) in any
period of 365 consecutive days. In order to assist the board in making that
determination, the Officer shall, as reasonably requested by the Management, (A)
make himself available for medical examinations by one or more physicians chosen
by the Board and (B) grant the Management and any such physicians access to all
relevant medical records to them and use his reasonable efforts to cause his own
physicians to be available to discuss his health with the physicians chosen by
the Management to examine the Officer.
(b) Termination by Employer for Cause. Employer may
---------------------------------
terminate the Officer's employment under this Agreement for Cause. For the
purposes of this Agreement, "Cause" shall mean any of the following: (i) the
Officer's failure to perform his duties under this Agreement, (ii) recklessness
in the performance of the Officer's duties, (iii) breach by the Officer of the
provisions of Section 6(a) below, (iv) the Officer's conviction for, admission
of or plea of nolo contendere to a felony (whether or not in connection with his
employment), and (v) embezzlement, theft or willful misappropriation of, or the
commission of any fraud related to, Employer's funds, assets, or opportunities.
5. Consequences of Termination.
---------------------------
(a) Death, Disability, Termination by Employer for Cause or
-------------------------------------------------------
Termination by the Officer. If the Officer's employment under this Agreement is
- --------------------------
(i) terminated pursuant to Section 4(a) or 4(b), or (ii) terminated by the
Officer, the Officer's employment shall immediately be terminated and the
Officer shall not thereafter be entitled to receive any salary or other payments
or benefits under this Agreement, other than the payment pursuant to Section
3(a) of Base Salary earned and the reimbursement pursuant to Section 3(c) of
expenses incurred, through the date of termination.
-2-
<PAGE>
6. Certain Restrictions.
--------------------
(a) Confidentiality. Officer covenants and agrees that from
---------------
and after the date of this Agreement and forever thereafter, he shall keep
secret and confidential, and shall not divulge outside the scope of his
employment with Employer to any person or entity, any information, knowledge or
data (the "Information") whether or not learned or possessed by Officer prior
to, on or after the date of this Agreement, of or pertaining to (i) the
Employer, and (ii) any other person, firm, corporation or business organization
with which the Employer may do business during the Term, that is not in the
public domain (and whether relating to methods, processes, techniques,
discoveries, pricing, marketing or any other matters).
(b) Competitive Activity. Officer acknowledges that his
--------------------
services pursuant to this Agreement are unique and extraordinary, that the
Employer will be dependent upon Officer for the development and growth of its
business and related functions, and that he will continue to develop personal
relationships with significant customers of the Employer and to have control of
confidential information concerning, and lists of customers of, the Employer.
Officer further acknowledges the Employer would suffer serious and irreparable
harm if during the term of his employment with the Employer, and within a
reasonable time after the termination of his employment, he should enter into a
business competitive with the Employer.
Accordingly, in order to protect such legitimate and
valuable interests of the Employer, and in consideration of the Employer's
obligations under this Agreement, it is agreed that until two (2) years
following the termination of the Officer's employment with the Employer
(regardless of the reason for termination even if the termination was not for
cause):
(1) Officer will not, directory or indirectly,
operate, engage in, render services to, or hold any ownership interest in
(whether as an individual, on his own account or as an employee, consultant,
agent, salesman, officer, director, shareholder, partner or member of any other
firm or entity)(i) any entity or enterprise engaged in any business competitive
with that of the Employer or (ii) any business which is or has at any time been
a customer, supplier or distributor of the Employer, and
(2) Officer will not, directly or indirectly, whether
on his own behalf or on behalf of any other person or entity,
in any manner (i) solicit the business of or otherwise contact in any commercial
capacity any person or entity which was a customer, supplier, distributor or
competitor of the Employer for the purpose of obtaining business of the type
performed by the Employer, or (ii) solicit for employment any persons who were
officers, shareholders, directors, department heads, supervisors or sales
persons of the Employer in the two (2) year period prior to the date of
termination or during the non-competition period.
(3) Officer agrees that the time period, the
geographical area and the scope of the restrictions contained above, as well as
the provisions of subsections (a) and (b) above, are divisible and severable and
that if any of the foregoing provisions are held invalid by a court of competent
jurisdiction, such provisions shall be deemed modified to the smallest extent
necessary to make them valid and enforceable and the enforceability of the other
provisions shall not be affected in any way.
-3-
<PAGE>
(c) Remedy for Breach and Modification. The Officer
----------------------------------
acknowledges that the provisions of this section 6 are reasonable and necessary
for the protection of Employer and that Employer will be irrevocably damaged if
these provisions are not specifically enforced. Accordingly, the Officer agrees
that, in addition to any other relief or remedies available to Employer,
Employer shall be entitled to seek and obtain an appropriate injunction or other
equitable remedy for the purposes of restraining the Officer from any action or
threatened breach of or otherwise enforce these provisions and no bound or
security will be required in connection therewith.
7. Miscellaneous.
-------------
(a) Notices. Any notice or other communication made or
-------
given in connection with this Agreement shall be in writing and shall be deemed
to have been duly given when delivered or mailed by registered mail, return
receipt requested, to a party at his or its address set forth below or at such
other address as a party may specify by notice to the other.
To the Officer: Thomas M. Brandt, Jr.
5133 President Point Drive
Annapolis, Maryland 21403
To Employer: Christopher R. McCleary
DIGEX, Incorporated
6800 Virginia Manor Road
Beltsville, Maryland 20705
(b) Entire Agreement Amendment. This Agreement supersedes
--------------------------
all prior agreements between the parties with respect to its subject matter, is
intended with the documents referred to herein as a complete and exclusive
statement of the terms of the Agreement between the parties with respect thereto
and may be amended only by a writing signed by both parties hereto.
(c) Waiver. The failure of any party to insist upon strict
------
adherence to any term of this agreement on any occasion shall not be considered
a waiver or deprive that party of the right thereafter to insist upon strict
adherence to that term or any other term of this Agreement. Any waiver must be
in writing.
(d) Assignment. Except as otherwise provided in this
section 7(d), this Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective heirs, representatives, successors and
assigns. This Agreement shall not be assignable by the Officer.
(e) Captions. The captions in this Agreement are for
convenience of reference only and shall not be gived any effect in the
interpretation of this Agreement.
-4-
<PAGE>
(f) Governing Law. This Agreement and (unless otherwise
-------------
provided) all amendments hereof and waivers and consents hereunder shall be
governed by the internal law of the State of Maryland, without regard to the
conflicts of law principles thereof. All litigation or arbitration shall be
conducted in Maryland.
(g) Survivorship. The respective rights and obligations
------------
of the parties hereunder shall survive any termination of this Agreement to the
extent necessary to the intended preservation of such rights and obligations.
IN WITNESS WHEREOF, the parties have executed and scaled this
Employment Agreement on the date first above written.
DIGEX. Incorporated.
By: /s/ Christopher R. McCleary (SEAL)
-------------------------------
Christopher R. McCleary
President & Chief Executive Officer
/s/ Thomas M. Brandt, Jr. (SEAL)
----------------------------------
Thomas M. Brandt, Jr.
Senior Vice President-Finance and
Administration,
Chief Financial Officer
-5-
<PAGE>
Exhibit 10.13
SECURITIES PURCHASE AGREEMENT
BY AND AMONG
DIGITAL EXPRESS GROUP, INC.,
DOUGLAS E. HUMPHREY,
MICHAEL T. DOUGHNEY,
GROTECH PARTNERS IV, L.P.,
VENROCK ASSOCIATES, AND
SOUTHERN VENTURE FUND II, L.P.
DATED AS OF MARCH 24, 1995.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
I. DEFINITIONS AND RULES OF CONSTRUCTION
SECTION 1.01. Definitions
SECTION 1.02. Rules of Construction
II. ISSUANCE AND PURCHASE OF PREFERRED STOCK
AND WARRANTS
SECTION 2.01. Authorization of Shares
SECTION 2.02. Issuance and Purchase of the Preferred Stock
SECTION 2.03. Issuance of Warrants
SECTION 2.04. Payment
SECTION 2.05. Closing
III. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
SECTION 3.01. Organization, Qualification,
Business and Corporate Power
SECTION 3.02. Authorization of Agreement, Etc.
SECTION 3.03. Issuance of Shares
SECTION 3.04. Capital Stock
SECTION 3.05. Consents
SECTION 3.06. No Conflicts
SECTION 3.07. Financial Statements; Accounts Receivables
SECTION 3.08. Payables and Liabilities
SECTION 3.09. No Undisclosed Liabilities
SECTION 3.10. No Changes
SECTION 3.11. Title to and Condition of Assets
SECTION 3.12. Intellectual Property Rights
SECTION 3.13. Governmental Approvals
SECTION 3.14. Compliance With Laws
SECTION 3.15. Litigation
SECTION 3.16. Contracts
SECTION 3.17. Leases
SECTION 3.18. Environmental Laws
SECTION 3.19. Subsidiaries
SECTION 3.20. Taxes
SECTION 3.21. Insurance
SECTION 3.22. Brokerage Fee
SECTION 3.23. Employee Benefits
SECTION 3.24. Licenses and Permits
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 3.25. Interest in Competitors, Suppliers, Customers, Etc.
SECTION 3.26. Employment Matters
SECTION 3.27. Discrimination; Occupational Safety; Labor
SECTION 3.28. Related Party Transactions
SECTION 3.29. Questionable Payments
SECTION 3.30. Investment Company Act
SECTION 3.31. Offering of the Shares
SECTION 3.32. Officers, Directors and Stockholders
SECTION 3.33. Disclosure
SECTION 3.34. Effect of Certificates
IV. REPRESENTATIONS AND WARRANTIES OF THE MANAGEMENT STOCKHOLDERS
SECTION 4.01. Title to Capital Stock
SECTION 4.02. Authorization of Agreement
SECTION 4.03. No Conflicts
SECTION 4.04. Disclosure
V. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
SECTION 5.01. Authorization
SECTION 5.02. Validity
SECTION 5.03. Investment
SECTION 5.04. Accredited Investor
SECTION 5.05. Investigation
SECTION 5.06. Reliance on Information
SECTION 5.07. Disclosure
VI. AFFIRMATIVE COVENANTS
SECTION 6.01. Financial Statements
SECTION 6.02. Projections and Budgets
SECTION 6.03. Books, Records, and Inspections
SECTION 6.04. Lawsuits; Defaults
SECTION 6.05. Board of Directors
SECTION 6.06. Reports to Stockholders
SECTION 6.07. Insurance
SECTION 6.08. Taxes
SECTION 6.09. Intellectual Property Rights
SECTION 6.10. Right of First Refusal
SECTION 6.11. Maintenance of Corporate Existence; Compliance
SECTION 6.12. Full Access
SECTION 6.13. Assets
SECTION 6.14. Contracts and Obligations
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 6.15. Residence
SECTION 6.16. Termination of Covenants
VII. NEGATIVE COVENANTS
SECTION 7.01. Ordinary Course
SECTION 7.02. Issuance of Capital Stock or Securities
SECTION 7.03. Extraordinary Actions
SECTION 7.04. Sale of Assets
SECTION 7.05. Encumbrances
SECTION 7.06. Distributions
SECTION 7.07. Capital Improvements
SECTION 7.08. Transactions with Related Persons
SECTION 7.09. Termination of Covenants
VIII.CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS, THE COMPANY AND THE
MANAGEMENT STOCKHOLDERS AT THE CLOSING
SECTION 8.01. Purchasers Conditions to Closing
SECTION 8.02. Companys and Management
Stockholders Conditions to Closing
IX. REGISTRATION RIGHTS
SECTION 9.01. Demand Registration
SECTION 9.02. Company Registrations
SECTION 9.03. Further Obligations of the Company
SECTION 9.04. Underwritten Registrations
SECTION 9.05. Registration Expenses
SECTION 9.06. Indemnification; Contribution
SECTION 9.07. Furnish Information
SECTION 9.08 Transfer of Registration Rights
X. ADDITIONAL OBLIGATIONS
SECTION 10.01 Unlocking
SECTION 10.02 Anti-Dilution
SECTION 10.03 Calculation of Consideration
XI. INDEMNIFICATION
SECTION 11.01. Company Indemnification
SECTION 11.02. Management Stockholders Indemnification
SECTION 11.03. Separate Obligations
</TABLE>
-iii-
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 11.04. Purchasers Indemnification
XII. MISCELLANEOUS
SECTION 12.01. Expenses; Fees
SECTION 12.02. Survival of Representations, Warranties,
Covenants and Indemnification
SECTION 12.03. Brokers
SECTION 12.04. Restrictive Legends
SECTION 12.05. Notices
SECTION 12.06. Amendment, etc.
SECTION 12.07. Binding Effect
SECTION 12.08. Gender, etc.
SECTION 12.09. Headings
SECTION 12.10. Governing Law
SECTION 12.11. Further Assurances
SECTION 12.12. Enforceability
SECTION 12.13. Assignment
SECTION 12.14. Entire Agreement
SECTION 12.15. Counterparts
</TABLE>
LIST OF SCHEDULES
LIST OF EXHIBITS
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<PAGE>
SECURITIES PURCHASE AGREEMENT
-----------------------------
THIS SECURITIES PURCHASE AGREEMENT (this "Agreement"), is made this
24th day of March, 1995, by and among GROTECH PARTNERS IV, L.P., a Delaware
limited partnership ("Grotech"), VENROCK ASSOCIATES, a New York limited
partnership ("Venrock"), and SOUTHERN VENTURE FUND II, L.P., a Delaware limited
partnership ("Southern Venture") (Grotech, Venrock and Southern Venture being
sometimes collectively referred to as "Purchasers"), DIGITAL EXPRESS GROUP, INC.
(the "Company"), DOUGLAS E. HUMPHREY ("Humphrey") and MICHAEL T. DOUGHNEY
("Doughney") (Humphrey and Doughney being sometimes collectively referred to
herein as the "Management Stockholders").
WHEREAS, the Purchasers wish to purchase from the Company, and the
Company wishes to sell, shares of the Companys Preferred Stock (as hereinafter
defined) for the aggregate total amount of Four Million Dollars ($4,000,000),
together with Warrants (as hereinafter defined), upon and subject to the terms
and conditions of this Agreement. Each Purchaser will acquire such number of
shares of Preferred Stock, for such consideration, as is listed opposite his or
its name on Schedule 2.02 hereof, and Warrants for the percentage amount of
-------------
shares of Common Stock set forth on Schedule 1.01.56 hereof.
----------------
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and conditions contained herein, the parties, intending to be legally
bound, hereby agree as follows:
I.
DEFINITIONS AND RULES OF CONSTRUCTION
SECTION 1.01. DEFINITIONS. As used in this Agreement, and unless the
-----------
context requires a different meaning, the following terms have the meanings
indicated:
1.01.01. "ACT" means the Securities Act of 1933, as amended, and
---
the rules and regulations of the Securities and Exchange Commission thereunder.
1.01.02. "AGREEMENT" means this Securities Purchase Agreement and
---------
the Exhibits and Schedules hereto, as the same may be amended, supplemented or
modified in accordance with the terms hereof.
1.01.03. "ARTICLES OF AMENDMENT AND RESTATEMENT" shall mean the
-------------------------------------
Articles of Amendment and Restatement of the Company in the form attached hereto
and made a part hereof as Exhibit 1.01.03.
---------------
<PAGE>
1.01.04. "AMENDED AND RESTATED BYLAWS" shall mean the amended and
---------------------------
restated bylaws of the Company in the form attached hereto and
made a part hereof as Exhibit 1.01.04.
---------------
1.01.05. "APSV" shall have the meaning set forth in Section
----
10.02(b) hereof.
1.01.06 "ASSETS" shall mean all of the real, personal, tangible
------
and intangible property of the Company, and all rights thereto.
1.01.07. "BOARD OF DIRECTORS" shall mean the Board of Directors
------------------
of the Company.
1.01.08. "BUSINESS" shall mean the business of the Company of
--------
developing, distributing, licensing, marketing and/or selling a full spectrum of
Internet access and related services.
1.01.09. "CAPITAL STOCK" shall mean, with regard to any
-------------
corporation, partnership or other business entity, any and all shares,
interests, participations or other equivalents (however designated), whether
voting or non-voting, representing ownership (whether direct, indirect or
contingent) of such corporation, partnership or other business entity.
1.01.10. "CLOSING DATE" shall mean March 24, 1995.
------------
1.01.11. "CLOSING" shall mean the execution and delivery of this
-------
Agreement and all agreements and documents contemplated or required by this
Agreement to be executed or delivered contemporaneously therewith.
1.01.12. "CODE" shall mean the Internal Revenue Code of 1986, as
----
amended.
1.01.13. "COMMISSION" shall mean the Securities and Exchange
----------
Commission or any similar agency having jurisdiction to enforce
the Act.
1.01.14. "COMMON STOCK" shall mean the common stock of the
------------
Company, par value of One Cent ($0.01) per share.
1.01.15. "COMPANY" means Digital Express Group, Inc., a Maryland
-------
corporation.
1.01.16. "CONTRACTS" shall have the meaning set forth in Section
---------
3.16 hereof.
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<PAGE>
1.01.17. "DILUTIVE TRANSACTION" shall have the meaning set forth
--------------------
in Section 10.02(a) hereof .
1.01.18. "EMPLOYEE AGREEMENT" shall mean the form of employee
------------------
agreement attached hereto and made a part hereof as Exhibit 1.01.18 to be
---------------
executed by each of the Management Stockholders and Bill Pendley for the benefit
of the Company on the Closing Date.
1.01.19. "ERISA shall mean the Employee Retirement Income
-----
Security Act of 1974, as amended.
1.01.20. "FINANCIAL STATEMENTS" shall have the meaning set forth
--------------------
in Section 3.07(a) hereof.
1.01.21. "GROTECH" shall mean Grotech Partners IV., L.P., a
-------
Delaware limited partnership.
1.01.22. "HOLDERS" shall mean the Purchasers and any other Person
-------
who from time to time is the registered owner of Preferred Stock or of shares of
Common Stock issued upon conversion of the shares of Preferred Stock.
1.01.23. "INCENTIVE STOCK PLAN" shall mean a management incentive
--------------------
stock option plan to be established by the Company, subject to the approval of
the Board of Directors of the Company, following the date hereof for (i) up to
twelve percent (12%) of the sum of the Companys outstanding shares of Common
Stock as of the Closing Date plus the shares of Common Stock issuable upon
exercise of the Warrants and all other warrants or options for shares of Common
Stock outstanding on the Closing Date plus the shares of Common Stock issuable
upon conversion of the Shares as of the Closing Date (all as adjusted to take
into account any pro rata stock split or other pro rata recapitalization of the
Company), plus (ii) if, for the period beginning March 1, 1995 and ending
February 29, 1996 (including, for this purpose, the Companys Revenue and Pre-Tax
Profit results for the calendar months January, 1995 and February, 1995), the
Company achieves both Revenue of $15 million and Pre-Tax Profit of $2.1 million,
up to an additional four percent (4%) of the sum of the Companys outstanding
shares of Common Stock as of the Closing Date plus the shares of Common Stock
issuable upon exercise of the Warrants and all other warrants or options for
shares of Common Stock outstanding on the Closing Date plus the shares of Common
Stock issuable upon conversion of the Shares as of the Closing Date (all as
adjusted to take into account any pro rata stock split or other pro rata
recapitalization of the Company).
1.01.24. "INTELLECTUAL PROPERTY RIGHTS" shall mean (i) any
----------------------------
Patents, Trademarks, Trade Secrets, copyrights, designs and any pending
applications for any of the foregoing, (ii) any item, design, concept,
technique, invention, discovery or improvement, whether or not subject to a
Patent (or similar protection) and whether or
-3-
<PAGE>
not patentable, copyrightable, or capable or being similarly protected,
including all Know How, and (iii) any other right in intellectual property of
any type or description, including, but not limited to, source codes and
software, in each case on a worldwide basis.
1.01.25. "INVESTMENT COMPANY ACT" shall mean the Investment
----------------------
Company Act of 1940, as amended, and the rules and regulations of the Commission
promulgated thereunder.
1.01.26. "KNOW HOW" shall mean all (i) technical data or
--------
information contained in design drawings, manuals, memoranda, formulations and
methods, (ii) specifications and performance criteria, (iii) operating
instructions and maintenance procedures, (iv) manufacturing and/or production
information, (v) computer-aided design (vi) all rights under employment, non-
competition, or similar agreements, and (vii) information relating to disclosure
and applications for Patents.
1.01.27. "LEASES" shall have the meaning set forth in Section
------
3.17 hereof.
1.01.28. "LEGAL OPINION" shall mean the form of legal opinion
-------------
of the Company attached hereto and made a part hereof as Exhibit 1.01.28.
---------------
1.01.29. "LIEN" shall mean (i) with respect to any asset, any
----
mortgage, pledge, lien, encumbrance, charge or adverse claim affecting title or
resulting in an encumbrance against real or personal property whether tangible
or intangible, or a security interest of any kind (including a conditional sale
or other title retention agreement, a license of any Intellectual Property
Right, any lease in the nature thereof, any option or other agreement to sell
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code or equivalent statutes) of any jurisdiction, and (ii) in the
case of securities, any lien, adverse pledge, claim, encumbrance, restriction,
purchase option, call or similar right of a third party with respect to such
securities.
1.01.30. "LOSSES" shall have the meaning set forth in Section
------
11.01 hereof.
1.01.31. "MANAGEMENT STOCKHOLDERS" shall mean Humphrey and
-----------------------
Doughney.
1.01.32. "PATENT" shall mean any and all (i) patents, (ii) patent
------
applications, (iii) divisional patents or renewals, reissues, extensions,
continuations or continuations-in-part, (iv) inventors certificates or the like,
and (v) design registrations, irrespective of the name in which such patents,
patent applications, divisional patents or renewals, reissues, extensions,
continuations or continuations-in-part or inventor's
-4-
<PAGE>
certificates or design registrations are or were pending, granted or registered
in any country or jurisdiction in the world.
1.01.33. "PAYABLES" shall have the meaning set forth in Section
--------
3.08 hereof.
1.01.34. "PERMITS" shall have the meaning set forth in Section
-------
3.24 hereof.
1.01.35. "PERSON" shall mean any individual, corporation,
------
partnership, limited liability company, joint venture, association, joint-stock
company, trust, unincorporated organization or government or other agency or
political subdivision thereof.
1.01.36. "PLANS" shall have the meaning set forth in Section 3.23
-----
hereof.
1.01.37. "PREFERRED STOCK" shall mean the convertible preferred
---------------
stock of the Company, par value of One Dollar ($1.00) per share, authorized
pursuant to the Articles of Amendment and Restatement.
1.01.38. "PRE-TAX PROFIT" shall mean, with respect to any given
--------------
period, the net income of the Company, calculated in accordance with United
States generally accepted accounting policies, principles and practices,
consistently applied, without taking into account or recognizing any payment of
or provision for Federal, state, foreign or local taxes on or measured by
income.
1.01.39. "PUBLIC OFFERING" shall mean the consummation of any
---------------
offering of the Companys Common Stock to the public pursuant to a Registration
Statement based upon a Company valuation of at least $20 million in which at
least $10 million of net proceeds are received by the Company and as the result
of which shares of Common Stock of the Company are listed on either the New York
Stock Exchange, the American Stock Exchange, or NASDAQ.
1.01.40. "PURCHASE DOCUMENTS" shall mean this Agreement, the
------------------
Shares, the Warrants, the Stockholders Agreement, the Employee Agreements, the
Amended and Restated Bylaws, and the Articles of Amendment and Restatement, all
as required pursuant to this Agreement as each may be amended from time to time.
1.01.41. "PURCHASERS" shall mean Grotech, Venrock, and Southern
----------
Venture, collectively.
1.01.42. "RECLASSIFICATION" shall have the meaning set forth in
----------------
Section 10.02(l) hereof.
-5-
<PAGE>
1.01.43. "REGISTRABLE SECURITIES" shall mean (a) the shares of
----------------------
Common Stock held beneficially or of record by the Warrant Holders upon exercise
of the Warrants, and (b) the shares of Common Stock issuable upon exercise of
the Warrants, and (c) the shares of Common Stock issued and issuable upon
conversion of the shares of Preferred Stock.
1.01.44. "REGISTRATION STATEMENT" shall mean any registration
----------------------
statement filed by the Company with the Commission for a Public Offering and the
sale of securities of the Company (other than a registration statement on Form
S-4, S-8, or any successor forms thereto).
1.01.45. "RETURNS" shall have the meaning set forth in Section
-------
3.20 hereof.
1.01.46. "REVENUE" shall mean, with respect to any given period,
-------
the gross revenue of the Company net of all returns and allowances, calculated
in accordance with United States generally accepted accounting policies,
principles and practices, consistently applied.
1.01.47. "SDAT" shall mean the State Department of Assessments
----
and Taxation of the State of Maryland .
1.01.48. "SECURITIES EXCHANGE ACT" shall mean the Securitity
-----------------------
Exchange Act of 1934, as amended, and the rules and regulations of the
Commission thereunder.
1.01.49. "SHARES" shall mean the shares of Preferred Stock to be
------
issued and sold under this Agreement.
1.01.50. "SOUTHERN VENTURE" shall mean Southern Venture Fund II,
----------------
L.P., a Delaware limited partnership.
1.01.51. "STOCKHOLDERS AGREEMENT" shall mean that certain
----------------------
Stockholders Agreement by and among the Company, each of the Management
Stockholders and each of the Purchasers in the form attached hereto and made a
part hereof as Exhibit 1.01.51.
---------------
1.01.52. "TANGIBLE PERSONAL PROPERTY" shall mean all tangible
--------------------------
personal property of all kinds, owned, used or held by or on behalf of any
Person, whether or not in current use or production, including, but not limited
to, computer equipment, vehicles, equipment, inventory, furniture, supplies,
tools, and records.
-6-
<PAGE>
1.01.53. "TRADE SECRETS" shall mean all information that (i)
-------------
derives independent economic value, actual or potential, from not being
generally known to, and not being readily ascertainable through proper means by,
Persons who could (directly or indirectly) obtain economic value from its
disclosure or use, and (ii) is the subject of efforts that are reasonable under
the circumstances to maintain its secrecy by any Person with a proprietary
interest therein.
1.01.54. "TRADEMARKS" shall mean any and all state, common law,
----------
United States and foreign trademarks, service marks, trade names, logos, trade
dress, packaging design, and similar means of identification of products and
services, including incidental use of any trade name for such purpose, and
applications or registrations for same.
1.01.55. "VENROCK" shall mean Venrock Associates, a New York
-------
limited partnership.
1.01.56. "WARRANTS" shall mean the detachable warrants of the
--------
Company issued to each of the Purchasers on the date hereof, in the form
attached as Exhibit 1.01.56, as additional consideration for purchase of the
---------------
Preferred Stock, entitling each Purchaser or other Warrant Holder to purchase
the percentage of shares of Common Stock set forth on Schedule 1.01.56 hereof.
----------------
1.01.57. "WARRANT HOLDERS" shall mean the Purchasers and any
---------------
other Person who from time to time holds Warrants.
SECTION 1.02. RULES OF CONSTRUCTION. Unless the context otherwise
---------------------
requires:
1.02.1. A term has the meaning assigned to it;
1.02.2. Or is not exclusive;
1.02.3. Provisions apply to successive events and transactions;
and
1.02.4. Herein, hereof and other words of similar import refer
to this Agreement as a whole and not to any particular Article, Section or other
subdivision unless otherwise so provided.
II.
ISSUANCE AND PURCHASE OF SECURITIES AND WARRANTS
SECTION 2.01. AUTHORIZATION OF SHARES. The Company has duly authorized
-----------------------
the sale and issuance of Forty-Five Thousand Four Hundred Fifty-Four and
-7-
<PAGE>
Fifty-Four One-Hundredths (45,454.54) shares of its Preferred Stock pursuant to
this Agreement, having the rights, restrictions, privileges, and preferences set
forth in the Articles of Amendment and Restatement.
SECTION 2.02. ISSUANCE AND PURCHASE OF THE PREFERRED STOCK. Based
--------------------------------------------
upon the representations, warranties and covenants contained herein, and subject
to the terms and conditions set forth in Section 2.04(b), (c), (d) and (e)
hereof, in exchange for the payment by each Purchaser to the Company of the
amount set forth on Schedule 2.02 attached hereto and made a part hereof, the
-------------
Company agrees to sell and issue to each Purchaser on the Closing Date, and each
Purchaser agrees to purchase, the number of shares of Preferred Stock set forth
opposite such Purchasers name on Schedule 2.02.
-------------
SECTION 2.03. ISSUANCE OF WARRANTS. Based upon the representations,
--------------------
warranties and covenants contained herein, as additional consideration for the
purchase of the Preferred Stock, the Company agrees to issue to each Purchaser,
Warrants to purchase that percentage of shares of Common Stock as is set forth
opposite such Purchasers name on Schedule 1.01.56 hereof.
----------------
SECTION 2.04. PAYMENT.
-------
(a) As payment in full for the Preferred Stock being issued and
against delivery thereof as aforesaid, and subject to Section 2.04(b), (c), (d)
and (e) hereof, on the Closing Date, each Purchaser shall deliver to the Company
funds by wire transfer (or, in the case of Venrock, by check) in an amount equal
to that amount set forth opposite its name on Schedule 2.02 attached hereto
-------------
and made a part hereof.
(b) Notwithstanding anything herein to the contrary, the parties
hereto acknowledge and agree that, at Closing, Three Million Dollars
($3,000,000) (the "Escrowed Purchase Price") of the aggregate amount set forth
on Schedule 2.02 hereof, determined with respect to each Purchaser on a pro rata
-------------
basis (the portion of the amount set forth on Schedule 2.02 hereof not included
-------------
in the Escrowed Purchase Price is referred to herein as the "Initial Funding"),
and the corresponding number of Shares set forth on Schedule 2.02 hereof,
-------------
determined with respect to each Purchaser on a pro rata basis (the "Escrowed
Shares"), will be transferred by the Company and the Purchasers to a mutually
acceptable escrow agent (the "Escrow Agent"), with the Escrowed Purchase Price
to be held in an interest bearing account, and the Escrowed Shares to be held by
the Escrow Agent, subject to the provisions of this Section 2.04, until the
Purchasers receive a true and complete copy of the audited financial statements
for the Company dated as of December 31, 1994, prepared in accordance with
generally accepted accounting principles, consistently applied, including a
balance sheet as of such date, statement of income and expenses, cash flows, and
retained earnings, for the period ending December 31, 1994, together with the
report of the independent certified public accountant (the "Audited 1994
Financial Statements"), or, if earlier, the date on which the Purchasers holding
a majority of the outstanding Shares provide written notice to the
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<PAGE>
Company and the Escrow Agent instructing the Escrow Agent to transfer and
deliver the Escrowed Purchase Price to the Company and the Escrowed Shares to
the Purchasers.
(c) Upon receipt of the Audited 1994 Financial Statements, the
Purchasers shall have five (5) days to determine (which determination shall be
made by the Purchasers holding a majority of the outstanding Shares, in their
sole discretion), whether the Audited 1994 Financial Statements disclose or
indicate a material adverse change ("Material Adverse Change") from the
financial position of the Company as reflected in the Unaudited Financial
Statements, as defined in Section 3.07 hereof. For purposes of this Section
2.04, Material Adverse Change shall mean any of the following: (i) Revenue of
the Company set forth in the Audited 1994 Financial Statements is at least
thirty percent (30%) less than gross revenue, net of all returns and allowances,
set forth in the Unaudited Financial Statements; (ii) the pre-tax loss of the
Company set forth in the Audited 1994 Financial Statements is at least thirty
percent (30%) greater than the pre-tax loss set forth on the Unaudited Financial
Statements; or (iii) the amount of the liabilities of the Company, taken as a
whole, set forth on the Audited 1994 Financial Statements is at least thirty
percent (30%) greater than the amount of the liabilities set forth on the
Unaudited Financial Statements. If the Purchasers give the Company and the
Escrow Agent written notice within such five (5) day period that they have
determined that there has been such a Material Averse Change, such notice
stating the nature of such Material Adverse Change, then the Escrow Agent shall
be authorized and directed to immediately transfer and deliver the Escrowed
Purchase Price to the Purchasers and return the Escrowed Shares to the Company.
If (i) the Purchasers give the Company and the Escrow Agent written notice
within such five (5) day period that no such Material Adverse Change has
occurred or (ii) the Purchasers fail to give any written notice to the Company
and the Escrow Agent within such five (5) day period, then the Escrow Agent
shall be authorized and directed to immediately transfer and deliver the
Escrowed Purchase Price to the Company and the Escrowed Shares to the
Purchasers.
(d) The parties hereto further agree that, notwithstanding any
provision of this Agreement to the contrary, if the Purchasers, upon receipt of
the Audited 1994 Financial Statements, determine that there has been a Material
Adverse Change from the Unaudited Financial Statements and elect to have
returned to them the Escrowed Purchase Price, as provided in subsection (c)
above, then the Purchasers shall have no obligation to purchase the Shares as
contemplated herein and, as provided in the Articles of Amendment and
Restatement, the Company shall immediately redeem all of the Shares issued to
the Purchasers, other than the Escrowed Shares.
(i) The "Redemption Price" (as defined in the Articles of
Amendment and Restatement) for the Shares to be redeemed pursuant to the
preceding sentence shall be paid by issuance of promissory notes of the Company
to the Purchasers, substantially in the form of, and containing the terms set
forth in, the promissory note attached hereto and made a part hereof as Exhibit
-------
2.04 (collectively, the "Redemption
- ----
-9-
<PAGE>
Notes"), payable in full on the one year anniversary of the date on which the
Purchasers provide the written notice set forth in Section 2.04(c) hereof.
(ii) Upon receipt by the Purchasers of the Redemption
Notes, the Purchasers shall immediately transfer and return the Warrants to the
Company. If, and to the extent, the Warrants are not exercised prior to the
issuance of the Redemption Notes as provided in subsection (e) below, the
Redemption Notes shall have warrants attached (collectively, the "Redemption
Note Warrants") which warrants shall be on substantially the same terms and
conditions as the Warrants and shall provide the Purchasers with the same rights
as set forth in the Warrants; provided, however, that the Redemption Note
Warrants (A) shall only entitle the Purchasers to purchase (on the terms and
conditions set forth in the Warrants), in the aggregate, the total number of
shares issuable under the Warrants times a fraction, the numerator of which
shall be the Initial Funding and the denominator of which shall be Four Million
Dollars ($4,000,000), (B) if not exercised, shall expire at the time the
Redemption Notes are paid in full, and (C) shall not be transferable by the
Purchasers.
(iii) Following the receipt by the Purchasers of the
Escrowed Purchase Price, full payment of the Redemption Notes by the Company,
and the delivery of the Shares and Warrants to the Company, neither party shall
have any further obligation to the other except as set forth in Section 12.01 of
this Agreement, notwithstanding any other provision of this Agreement to the
contrary.
(e) Notwithstanding anything in the Warrants to the contrary,
prior to the transfer and delivery of the Escrowed Purchase Price by the Escrow
Agent to the Company pursuant to Section 2.04(b) hereof, the Warrants shall
entitle the Purchasers to purchase (on the terms and conditions set forth in the
Warrants), in the aggregate, the total number of shares issuable under the
Warrants time a fraction, the numerator of which shall be the Initial Funding
and the denominator of which shall be Four Million ($4,000,000).
SECTION 2.05. CLOSING. The Closing shall take place at the office of
-------
Venable, Baetjer and Howard, LLP, l800 Mercantile Bank and Trust Building, 2
Hopkins Plaza, Baltimore, Maryland 21201 on the Closing Date.
III.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
In order to induce the Purchasers to enter into the Purchase Documents
and to purchase the Preferred Stock, the Company hereby represents and warrants
to the Purchasers as of the date of this Agreement as follows:
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<PAGE>
SECTION 3.01. ORGANIZATION, QUALIFI-CATION, BUSINESS AND CORPORATE
----------------------------------------------------
POWER.
- -----
(a) The Company is duly incorporated and organized, validly
existing and in good standing under the laws of the State of Maryland, and is
duly licensed or qualified as a foreign corporation in each other jurisdiction,
if any, in which the nature of business transacted by it or the character of the
properties owned or leased by it makes such licensing or qualification
necessary, except where the failure to be licensed or qualified would not have a
material adverse effect on the Business or Assets. The Company has full power
and authority (corporate and other) to own and hold its properties and to
conduct the Business as currently conducted. The Company has the corporate power
and authority to execute, deliver and perform this Agreement and all of the
other Purchase Documents required to be executed by it pursuant hereto, to
execute, issue and deliver the Shares and the Warrants, and to issue the Common
Stock to the Warrant Holders upon exercise of the Warrants. The Company is
engaged solely in the activities constituting the Business.
(b) A copy of the Companys Articles of Incorporation, and
all amendments thereto, as certified by the SDAT, a Certificate of Good Standing
in the State of Maryland issued by the SDAT as of the Closing Date, and a copy
of the Companys By-Laws, as amended to date, as certified by its Secretary, are
each attached hereto as Exhibit 3.01. Such Articles of Incorporation and By-Laws
------------
are true, complete and correct copies of the Articles of Incorporation and By-
Laws of the Company as amended and presently in effect. Except as set forth on
Schedule 3.01, (i) all minutes of the Company are contained in the minute books
- -------------
of the Company and have been furnished to the Purchasers for examination, (ii)
no minutes have been included in such minute books since such examination by the
Purchasers which have not heretofore been furnished to the Purchasers, and (iii)
no corporate action not reflected in said minute books has been taken.
SECTION 3.02. AUTHORIZATION OF AGREEMENT, ETC.
-------------------------------
(a) The execution and delivery of this Agreement, the
consummation of the transactions contemplated hereby, and the performance and
compliance with the terms and provisions hereof by the Company, and of each of
the other Purchase Documents, has been duly and validly authorized by the
Company and no other proceedings (corporate or otherwise) on the part of the
Company are necessary to authorize this Agreement or the other Purchase
Documents, or the transactions contemplated hereby or thereby. This Agreement
and the other Purchase Documents have been duly and validly executed and
delivered by the Company, and each constitutes the legal, valid and binding
agreement of the Company, enforceable in accordance with their respective terms.
-11-
<PAGE>
(b) The Company has taken as of Closing all corporate action
required to approve and adopt the Articles of Amendment and Restatement and the
Amended and Restated Bylaws. At the time of Closing, the Articles of Amendment
and Restatement will have been accepted for record by the SDAT and will have
become effective, and the Amended and Restated Bylaws will have been duly
authorized and approved by the Board of Directors.
SECTION 3.03. ISSUANCE OF SHARES. The issuance, sale, and delivery of
------------------
the Shares in accordance with this Agreement, and the issuance and delivery of
the shares of Common Stock issuable upon exercise of the Warrants, upon
conversion of the Shares, or as dividends paid in kind on the Shares, have been
duly authorized and reserved for issuance, as the case may be, by all necessary
corporate action on the part of the Company, except that, with respect to shares
of Common Stock issuable as dividends paid in kind, the Company has reserved
Eighty Thousand (80,000) shares of Common Stock. The Shares, when so issued,
sold and delivered against payment therefor in accordance with the provisions of
this Agreement, and the shares of Common Stock issuable upon exercise of the
Warrants, when issued upon such exercise, conversion or as dividends paid in
kind, will be duly and validly issued, fully paid, and nonassessable.
SECTION 3.04. CAPITAL STOCK.
-------------
(a) The authorized Capital Stock of the Company immediately
prior to the Closing will consist of Forty-Nine Million Eight Hundred Thousand
(49,800,000) shares of Common Stock, par value One Cent ($0.01) per share, of
which Four Hundred Twenty-Nine Thousand Four Hundred Sixty-Nine and Twelve One-
Hundredths (429,469.12) shares of Common Stock are validly issued and
outstanding, fully paid and nonassessable, and Two Hundred Thousand (200,000)
shares of Preferred Stock, par value of One Dollar ($1.00) per share, of which
no shares are issued and outstanding.
(b) As of the date of this Agreement, the number of shares of
Common Stock owned by each of the Management Stockholders is set forth on
Schedule 3.04 attached hereto and made part hereof, and each owns
- -------------
and has good and marketable title to said number of shares, free and clear of
all Liens of any kind.
(c) Except as set forth in Schedule 3.04, (i) no subscription,
warrant, option, convertible security or other right (contingent or other) to
purchase or acquire any shares of any class of Capital Stock of the Company in
favor of anyone other than the Purchasers is authorized or outstanding, (ii)
there exists no commitment of the Company to issue any shares, warrants, options
or other such rights or to distribute to holders of any class of Capital Stock
any evidences of indebtedness or assets, (iii) the Company is not obligated
(contingently or otherwise) to purchase, redeem or otherwise acquire any shares
of its Capital Stock or any interest therein or to pay any dividend or make any
other distribution with respect to its Capital Stock, and (iv) no person or
entity
-12-
<PAGE>
is entitled to any rights with respect to the registration of Capital
Stock of the Company under the Act.
(d) The Company has previously delivered to the Purchasers true,
correct and complete copies of all warrants, options or other rights set forth
on Schedule 3.04 (the Existing Warrants). The issuance, delivery and sale of the
-------------
Existing Warrants were duly authorized by all necessary corporate action by
the Company, and the shares of Common Stock to be issued upon exercise of such
Existing Warrants will be duly and validly issued, fully-paid and non-assessable
when issued and paid pursuant to the terms of such Existing Warrants. The
issuance, sale and delivery of the "Existing Warrants" were exempt from
registration under Federal and state securities laws in effect at the time of
such issuance, sale and delivery, and all required filings, consents or
approvals with the Commission or applicable state securities commissions, if
applicable, were made or obtained, as the case may be.
SECTION 3.05. CONSENTS. There is no authorization, consent, order or
--------
approval of, or notice to or filing with, any individual or entity required to
be obtained or given in order for the Company to consummate the transactions
contemplated hereby and to fully perform its obligations hereunder.
SECTION 3.06. NO CONFLICTS. The execution, delivery and performance
------------
by the Company of this Agreement and the other Purchase Documents and compliance
by the Company with the terms and provisions hereof and thereof, do not and will
not (i) violate, any provision of any law, rule or regulation, order, writ,
judgment, injunction, statute, decree, determination or award having
applicability to the Company or any of its Assets, (ii) conflict with or result
in a breach of or constitute a default under any provision of the charter or by-
laws of the Company, (iii) require any consent, approval or notice under (except
as previously obtained or made), or result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation or acceleration) under any
of the terms, conditions or provisions of any debenture, bond, mortgage,
indenture or loan or credit agreement, license, or any other agreement or
instrument or obligation to which the Company is a party or by which the Company
or any of the Assets may be bound, or (iv) result in, or require the creation or
imposition of, any Lien upon or with respect to any of the Assets now owned by
the Company.
SECTION 3.07. FINANCIAL STATEMENTS; ACCOUNTS RECEIVABLE.
-----------------------------------------
(a) The Company has attached as Exhibit 3.07 hereof true and complete
------------
copies of the audited financial statements for the Company dated December 31,
1993 and reviewed financial statements for the Company dated June 30, 1994,
including balance sheets as of each such dates, statements of income and
expense, cash flows, and retained earnings for the periods ending on each such
date, together with the report of independent accountants thereon (collectively,
the "Audited and Reviewed Financial
-13-
<PAGE>
Statements"), and unaudited financial statements prepared by the Company on a
cash basis, dated as of December 31, 1994, including a balance sheet as of such
date, statements of income and expense, cash flows, and retained earnings, dated
as of such date (the "Unaudited Financial Statements") (the Audited and Reviewed
Financial Statements and the Unaudited Financial Statements are collectively
referred to as the Financial Statements). The Audited and Reviewed Financial
Statements (i) have been prepared in accordance with generally accepted
accounting principles consistently applied, (ii) present fairly and accurately
the financial position and condition of the Company and the related results of
operations as at the dates and for the periods then ended, and (iii) contain no
material misstatements or omissions.
(b) Subject to applicable reserves for bad debts shown on the balance
sheet attached to the Audited and Reviewed Financial Statements, all accounts
and notes receivable reflected on said balance sheet are, and all accounts and
notes receivable accruing as of the date hereof are (subject to applicable
reserves for bad debts), (i) valid, genuine and subsisting, (ii) to the Companys
knowledge, subject to no known defenses, set-offs or counterclaims, and (iii) to
the Company's knowledge, current and collectible.
SECTION 3.08. PAYABLES AND LIABILITIES. The accounts and trade
------------------------
payables (collectively, the "Payables") of the Company as of the date of the
Audited and Reviewed Financial Statements, and those incurred since the date
thereof through the date of this Agreement, all were incurred in the ordinary
course of business of the Company. The Company is current and is not in default
with respect to all such Payables and all capital lease and other debt
obligations and liabilities with respect to which there is a current portion
due.
SECTION 3.09. NO UNDISCLOSED LIABILITIES. Except as, and to the
--------------------------
extent, reserved for in the Financial Statements and the notes thereto or as set
forth on Schedule 3.09 attached hereto and made a part hereof, the Company does
-------------
not on the date hereof have any material liabilities or obligations, whether
accrued, absolute or contingent, determined or undetermined, known or unknown,
or whether due or to become due, nor, to the Companys knowledge, does any basis
exist for such liabilities or obligations other than those incurred in the
ordinary course of business since December 31, 1994.
SECTION 3.10. NO CHANGES. Except as set forth on Schedule 3.10, since
---------- -------------
September 30, 1994 there has not been any (i) material adverse change in the
condition (financial or otherwise) of the Assets, liabilities, earnings, net
worth, Business, operations or prospects of the Company, or any fact or
condition which could cause such a change (ii) entry into any transaction,
commitment or agreement material to the Company, or outside the ordinary course
of business, (iii) material damage, destruction or loss to the Assets or
Business (whether or not covered by insurance), (iv) material change in the
accounting principles, methods or practices followed, (v) increase in the rate
or terms of compensation payable, or to become payable, by the Company to its
officers, or any change in the terms of any employment agreement or compensatory
arrangement, or
-14-
<PAGE>
any bonus, pension, insurance or other employee benefit plan, or any payment or
benefit made to or for any officer, (vi) sale, transfer or other disposition of
any Asset to any party, except for payment of third-party obligations incurred
in the ordinary course of business in accordance with the Companys regular
payment practices, (vii) termination or waiver of any material rights of value
to the Business, (viii) failure by the Company to pay its Payables or other
obligations in the ordinary course of business of the Company, (ix) capital
expenditure for additions to property or equipment by the Company in excess of
$25,000, (x) split, combination, exchange or reclassification of shares of
Capital Stock of the Company, (xi) issuance of shares of Capital Stock of the
Company of securities convertible into or rights to acquire any such shares of
Capital Stock, (xii) action or inaction which might cause the Company to incur
any tax liability not in the ordinary course of business, (xiii) payment by the
Company of fees or expenses of the Management Stockholders counsel, accountants
and other agents of the Management Stockholders, or (xiv) agreement, whether in
writing or otherwise, to take any action described in this Section 3.10.
SECTION 3.11. TITLE TO AND CONDITION OF ASSETS. Except as set forth
--------------------------------
on Schedule 3.11 attached hereto, the Company has good and marketable title to
-------------
all of the Assets, including, without limitation, those reflected on the
Financial Statements and those acquired since the date of the Financial
Statements (except as since sold or otherwise disposed of in the ordinary course
of business), free and clear of any Lien of any nature whatsoever except for
those disclosed on the Financial Statements. All of the Companys Tangible
Personal Property is in good operating condition and repair, ordinary wear and
tear excepted. The Company does not own any inventories. The Company does not
hold fee title to any real property.
SECTION 3.12. INTELLECTUAL PROPERTY RIGHTS. Schedule 3.12 attached
---------------------------- -------------
hereto and made a part hereof contains an accurate and complete description of
all Intellectual Property Rights presently owned or held by the Company or in
which the Company owns or holds any direct or indirect interest or which are
used in the conduct of the Business. The Company owns or has the right to use,
and has the right and power to sell and license, said Intellectual Property
Rights. Neither said Intellectual Property Rights, nor the use thereof by the
Company, nor any products manufactured, distributed or sold by the Company, nor
the conduct or operation of the Business infringes upon any Patents, Trademarks,
copyrights or any other intangible rights, of any individual or entity. No
claims have been asserted by any individual or entity with respect to the
Companys Intellectual Property Rights or challenging or questioning the validity
of any Intellectual Property Rights of the Company, and there is no valid basis
for any such claim.
SECTION 3.13. GOVERNMENTAL APPROVALS. Except as set forth on Schedule
---------------------- --------
3.13, other than the filing by the Company of a Form D with the Commission and
- ----
the respective securities commissions of any applicable states, if applicable,
no registration or filing with, or consent or approval of, or other action by,
any federal, state or other governmental agency or instrumentality is necessary
for the valid execution,
-15-
<PAGE>
delivery and performance of this Agreement or the issuance, sale and delivery of
the Shares, except for filing of the Articles of Amendment and Restatement with
the SDAT.
SECTION 3.14. COMPLIANCE WITH LAWS. The Company is not in violation
--------------------
of any order, writ, decree, judgment, or order of any court, arbitrator, or
governmental or regulatory body which violation would (i) affect the legality,
validity or enforceability of this Agreement or any of the other Purchase
Documents, (ii) have a material adverse effect on the Assets (individually or in
the aggregate) or Business, or (iii) impair the Companys obligation to perform
fully on a timely basis any obligations which it has or will have under this
Agreement or under any of the other Purchase Documents.
SECTION 3.15. LITIGATION. Except as set forth on Schedule 3.15
---------- -------------
attached hereto and made a part hereof, there are no actions, lawsuits,
proceedings or investigations pending or, to the Companys knowledge, threatened
against the Company before or by any court, governmental body or regulatory
authority (federal, state, local or foreign). To the best knowledge of the
Company, no such actions, lawsuits, proceedings or investigations, are being
contemplated which, if determined adversely to the Company, would adversely
affect the Assets or the Business, or the transactions contemplated by this
Agreement. The Company has provided the Purchasers with copies of all pleadings
filed by the Company in all actions brought by the Company against others. The
Company has provided the Purchasers with copies of all pleadings of all actions
and lawsuits disclosed on Schedule 3.15.
-------------
SECTION 3.16. CONTRACTS. Schedule 3.16 is a true and complete list of
--------- -------------
all material contracts, leases (other than with respect to real property leased
by the Company), instruments and other agreements (whether oral or written) to
which the Company is a party or by which the Company or any of its properties
may be bound (collectively, the "Contracts"). All of the Contracts are in full
force and effect, and there exists no default under any Contract. There are no
written or oral binding side agreements with any individual or business whereby
the Company has agreed to do any material act or thing beyond the requirements
of formal written contracts executed by the Company. For purposes of this
Section 3.16, a "material" Contract includes a Contract that (i) obligates the
Company to pay an amount in excess of five percent (5%) of the gross receipts of
the Company as such gross receipts are reflected on the Unaudited Financial
Statements, (ii) requires the delivery of goods or services by the Company for
which it will receive an amount at least equal to one percent (1%) of the gross
receipts of the Company as such gross receipts are reflected on the Unaudited
Financial Statements, or (iii) relates to or evidences any shared revenue
agreement or arrangement.
SECTION 3.17 LEASES. The Company is the sole lessee with respect
------
toand is in actual possession of, those real properties described on Schedule
--------
3.17 (the "Premises"). The Company has attached as Exhibit 3.17 copies of all
- ---- ------------
leases with respect to said leasehold interests (collectively, the "Leases"),
and said leasehold interests are the
-16-
<PAGE>
only interests in real property now owned or leased or ever owned or leased by
the Company. Each person or entity claiming to be the fee simple owner of said
leasehold interests has expressly or by law covenanted to the Company that the
Company will have quiet enjoyment to all such leasehold interests covered by the
Leases. The Company has made all payments required to be made with respect to
the Leases, and there is no default, or alleged default, by the Company under
the Leases, nor, to the Company's knowledge, has any event occurred which, with
the passage of time or notice, or both, would constitute a default by the
Company under the Leases, nor will the execution and delivery of the Purchase
Documents by the Company, nor the performance of its obligations thereunder,
constitute a default by the Company under the Leases.
SECTION 3.18. ENVIRONMENTAL LAWS. The Company is in compliance with
------------------
all environmental laws, ordinances, and regulations of federal, state, and local
authorities pertaining to the Company's use of the Premises. The Company has
not, nor to the Company's knowledge has any other Person, (i) used, brought,
stored, or released on, in or under the Premises, any Hazardous Material, or
(ii) emitted any Hazardous Material into the ambient air other than exhaust from
the heating, ventilation, and air conditioning systems. "Hazardous Material"
means (a) any "hazardous waste" as defined by the Resource Conservation and
Recovery Act of 1976 (42 U.S.C. (S)(S)6901 et seq.), as amended from time to
time, and regulations promulgated thereunder, (b) any "hazardous substance" as
defined by the Comprehensive Environmental Response, Compensation and Liability
Act of 1980 (42 U.S.C. (S)(S)9601 et seq.), as amended from time to time, and
regulations promulgated thereunder; (c) any "oil, petroleum products, and their
by-products" as defined by the Maryland Natural Resources Code Ann. (S)8-
1411(a)(3), as amended from time to time, and regulations promulgated
thereunder; (d) any "hazardous substance" as defined by the Maryland Health
Environmental Code Ann., Title 7, subtitle 2, as amended from time to time, and
regulations promulgated thereunder; (e) any substance the presence of which on
the Premises is prohibited by any law similar to those set forth in this
definition; and (f) any other substance that by law requires special handling in
its collection, storage, treatment, or disposal.
SECTION 3.19. SUBSIDIARIES. The Company does not own any equity
------------
interest in, and is not in a control position with respect to, any entity.
SECTION 3.20. TAXES.
-----
(a) Except as set forth on Schedule 3.20, the Company has duly
-------------
and timely filed all federal, foreign and applicable state and local returns,
declarations or statements with respect to all federal, state and local income,
property, sales, value added, use, occupancy, employment, payroll, excise,
withholding, customs duties and other taxes of any nature whatsoever which are
required to be filed as of the Closing Date (collectively, the "Returns"). All
taxes (and other charges) shown on such Returns or otherwise required to be
paid, and any deficiency assessments, penalties, interest and other charges with
respect thereto have been paid, and there is otherwise no
-17-
<PAGE>
current liability for any unpaid taxes (or other charges) due in connection with
such Returns or otherwise. There are no tax liens (other than for taxes not yet
due) on any of the Assets and no basis exists for the imposition of any such
liens.
(b) No federal, state, local, foreign and other Returns of the
Company for tax years that remain open under any applicable statute of
limitations have been examined by the IRS or other tax authorities and no
deficiencies have been asserted or assessments made as a result of examinations
(including all penalties and interest). Except as set forth on Schedule 3.20,
-------------
there are no waivers, agreements or other arrangements providing for extension
of time with respect to the assessment or collection of any unpaid tax,
interest, or penalties relating to the Company. No issues have been raised by
(or are currently pending before) the IRS or any other taxing authority in
connection with any of the Returns which could reasonably be expected to have a
material adverse effect on the financial condition of the Company if decided
adversely to the Company, nor, to the Companys knowledge, are there any such
issues which have not been so raised but if so raised by the IRS or any other
taxing authority in connection with any of the Returns could, in the aggregate,
reasonably be expected to have such a material adverse effect.
(c) The Company has not made, has not become obligated to make
nor will, as a result of the transactions contemplated by this Agreement, make
or become obligated to make, any excess parachute payment as defined in Code
Section 280G.
(d) The Company has delivered to Grotech true, correct and
complete copies of all federal, state and local tax returns and reports for the
Company, to the extent such returns were required to be filed, for each of the
most recent two (2) full taxable years as of the Closing Date. All information
set forth on such returns is materially true, complete and accurate.
SECTION 3.21. INSURANCE. Schedule 3.21 attached hereto and made a
--------- -------------
part hereof is a description of all insurance policies held by the Company
concerning the Business, its operations and the Assets. All of these policies
are in the respective principal amounts set forth on Schedule 3.21, and such
-------------
insurance is placed with unaffiliated companies which, to the Companys
knowledge, are financially sound. Each of the policies referred to in Schedule
--------
3.21 is in force and the premiums with respect thereto are fully paid through
- ----
the dates indicated thereon.
SECTION 3.22. BROKERAGE FEE. Except as set forth on Schedule 3.22,
------------- -------------
the Company has not dealt with any broker, finder, commission agent or other
party in connection with the transactions contemplated by this Agreement, and is
not under any obligation to pay any brokers fee or commission in connection with
such transactions to any Person except for those amounts set forth on Schedule
--------
3.22.
- ----
-18-
<PAGE>
SECTION 3.23. EMPLOYEE BENEFITS.
-----------------
(a) Schedule 3.23 attached hereto and made a part hereof lists
-------------
all employee benefit plans relating to employee benefits with respect to which
the Company has incurred or may incur any obligations, including, but not
limited to, any future or contingent obligations, including, without limitation,
all plans, agreements or arrangements relating to deferred compensation,
pensions, profit sharing, retirement income or other benefits, stock purchase,
stock ownership and stock option plans, stock appreciation rights, bonuses,
severance arrangements, health and welfare benefits, insurance benefits and all
other employee benefits or fringe benefits, including, but not limited to, any
employee benefit plans for former employees or their dependents (collectively
referred to as the Plans). The Company has never contributed to any multi-
employer plan within the meaning of ERISA Section 4001(a)(3), nor is the Company
or any of the Management Stockholders affiliated with any entity such that the
Company has, or might have in the future, any multi-employer plan withdrawal
liability under Subtitle E of Part IV of ERISA.
(b) Each Plan has been administered and operated in all respects
in accordance with its terms and applicable law. Where applicable, each Plan is
qualified within the meaning of Code Section 401(a) and has a current favorable
Internal Revenue Service determination letter to that effect, and each related
trust is exempt from tax under Code Section 501(a). No liability under ERISA,
the Code or otherwise has been incurred or, based upon existing facts, may be
expected to be incurred with respect to any Plan.
(c) The Company has not engaged in, or assumed any liability or
responsibility for, any transaction in connection with which either, directly or
indirectly, the Company would be subject to either a civil penalty assessed
pursuant to ERISA Section 502(i) or a tax imposed by Code Section 4975. No
liability to the Pension Benefit Guaranty Corporation (PBGC) has been or is
expected to be incurred with respect to any Plan. The PBGC has not instituted
proceedings to terminate any Plan. No reportable event, within the meaning of
ERISA Section 4043(c), has occurred with respect to any Plan. There exists no
condition or set of circumstances which presents a risk of termination or
partial termination of any Plan and which could result in a liability on the
part of the Company to the PBGC.
(d) Full payment has been made of all amounts which the Company
was required under the terms of any of the Plans to have paid as contributions
to such Plans on or prior to the date hereof, and no accumulated funding
deficiency (as defined in ERISA Section 302(a)(2) and Code Section 412(a))
whether or not waived, exists with respect to any such Plan.
(e) Other than for claims in the ordinary course for benefits
under the Plans, there are no actions, suits, claims or proceedings pending or
threatened,
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<PAGE>
nor does there exist any basis therefor, which may result in any liability with
respect to any Plan to the Company or any Plan or trust thereof.
(f) The present value of accrued benefits under each Plan which
is subject to Title IV of ERISA does not presently exceed the current value of
all the assets of such Plan allocable to such accrued benefits by more than
$5,000. For purposes of the representation in the preceding sentence, the
phrases present value, current value and accrued benefit have the meanings
specified in ERISA Sections 3(26), 3(27) and 3(23), respectively.
(g) Except for continuation coverage under ERISA Sections 601 et
--
seq., no former employee of the Company, or any affiliate thereof, nor any
- ---
dependent of any such former employee, is entitled to any medical or dental
benefits under any Plan.
SECTION 3.24. LICENSES AND PERMITS. Schedule 3.24 attached hereto
-------------------- -------------
and made a part hereof is a complete list of all governmental licenses and
permits and other governmental authorizations and approvals required for the
conduct of the Business as presently conducted (collectively, the Permits).
Except as set forth on Schedule 3.24, the Company has received all Permits
-------------
necessary for the conduct of the Business as presently conducted.
SECTION 3.25. INTEREST IN COMPETITORS, SUPPLIERS, CUSTOMERS, ETC.
---------------------------------------------------
Neither any of the Management Stockholders nor any officer or director of the
Company has any direct ownership interest in any significant competitor,
supplier or customer of the Company or any property used in the operation of the
Business.
SECTION 3.26. EMPLOYMENT MATTERS. Schedule 3.26 attached hereto and
------------------ -------------
made a part hereof is a complete list of all oral and written employment
contracts and all compensation, pension, bonus, profit sharing, stock option,
life, health, retirement welfare, or other agreements or arrangements (except as
disclosed on Schedule 3.23) providing for employee remuneration or benefits to
-------------
which the Company is a party or by which the Company is bound, and all these
contracts and arrangements are in full force and effect. There have been no
claims of defaults and there are no facts or conditions which if continued, or
on notice, will result in a default under these contracts or arrangements.
SECTION 3.27. DISCRIMINATION; OCCUPATIONAL SAFETY; LABOR. To the
------------------------------------------
Companys knowledge, no Person (including, but not limited to, governmental
agencies of any kind) has any claim for any action or proceeding, against the
Company arising out of any statute, ordinance or regulation relating to
discrimination in employment or employment practices or occupational safety and
health standards (including, but without limiting the foregoing, The Fair Labor
Standards Act, as amended; Title VII of the Civil Rights Act of 1964, as
amended; 42 U.S.C. 1981 or the Age Discrimination in
-20-
<PAGE>
Employment Act of 1967, as amended), which, if upheld, would have a material
adverse effect on the Business or condition, financial or otherwise, of the
Company. There is no pending or threatened federal or state equal employment
opportunity enforcement action or labor dispute, strike, or work stoppage
affecting the Business. The Company does not have any collective bargaining or
similar agreements, nor does it have any obligation to bargain with any labor
organization as the representative of the Companys employees, and there is
neither pending, nor to the Companys knowledge threatened, any labor dispute,
strike or work stoppage which affects or which may affect the Business or which
may interfere with the continued operation of the Company. To the Companys
knowledge, no present or former employee of the Company has any claim against
the Company for (i) overtime pay, other than overtime pay for the current
payroll period, (ii) wages or salary (excluding bonuses and amounts accruing
under pension and profit sharing plans) for any period other than the current
payroll period, (iii) except as set forth in the Financial Statements, vacation,
time off or pay in lieu of vacation or time off, other than that earned in
respect of the current fiscal year, or (iv) any violation of any statute,
ordinance or regulation relating to minimum wages or maximum hours of work.
SECTION 3.28. RELATED PARTY TRANSACTIONS. Except as set forth on
--------------------------
Schedule 3.28 attached hereto and made a part hereof, the Company has not made
- -------------
or entered into any loan, contract, lease, commitment, arrangement or
understanding with any of the Management Stockholders or any officer, director,
shareholder or partner of the Company or any Management Stockholder or with any
affiliate or associate thereof, except normal compensation arrangements with the
Management Stockholders.
SECTION 3.29. QUESTIONABLE PAYMENTS. Neither the Company nor the
---------------------
Management Stockholders, nor, to the Companys knowledge, any other director,
officer, agent, employee or other person associated with or acting on behalf of
the Company has directly or indirectly: (i) used any corporate funds for
unlawful contributions, gifts, entertainment or other unlawful expenses relating
to political activity, (ii) made any unlawful payment to government officials or
employees or to political parties or campaigns from corporate funds, (iii)
violated any provision of the Foreign Corrupt Practices Act of 1977, as amended,
(iv) established or maintained any unlawful or unrecorded fund of corporate
monies or other assets, (v) made any false or fictitious entry on the books or
records of the Company, (vi) made any bribe, rebate, payoff, influence payment,
kickback or other unlawful payment, (vii) given any favor or gift which is not
deductible for federal income tax purposes, or (viii) made any bribe or other
payment of a similar or comparable nature to any person or entity, private or
public, regardless of form, to obtain favorable treatment in securing business
or to obtain special concessions or treatment.
SECTION 3.30. INVESTMENT COMPANY ACT. The Company is not an
----------------------
investment company or a company controlled by an investment company within the
meaning of the Investment Company Act.
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<PAGE>
SECTION 3.31. OFFERING OF THE SHARES. The Company has not, nor has
-----------------------
any Person or entity authorized or employed by the Company directly or
indirectly as agent, broker, dealer or otherwise in connection with the offering
or sale of the Shares, offered the Shares or any similar security for sale to,
or solicited any offers to buy the Shares or any similar security of the Company
from, or otherwise approached or negotiated with respect thereto with, any
Person or Persons, other than the Purchasers, under circumstances that have
involved the use of any form of general advertising or solicitation as such
terms are used in Regulation D under the Act, and the Company has not, nor, to
the knowledge of the Company, has any Person acting on its behalf, taken any
action (including, without limitation, any offer, issuance or sale of any
security of the Company under circumstances which would require the integration
of such security with the offering of the Preferred Stock and/or the issuance of
the Warrants or the Common Stock issuable upon exercise thereof, under the Act
or the rules and regulations of the Commission thereunder) in a manner which
would make the exemptions afforded by the Act unavailable for the offering,
issuance or sale of the Shares.
SECTION 3.32. OFFICERS, DIRECTORS AND STOCKHOLDERS. Schedule 3.32
------------------------------------ -------------
attached hereto and made a part hereof is a true and complete list of all
current officers, directors and stockholders of the Company. Except as set
forth on Schedule 3.32, during the ten (10) years ending with the Closing Date,
-------------
none of the Companys officers or directors, and none of the Management
Stockholders, have been arrested or convicted of any crime (except for
misdemeanor traffic or other minor violations of law), nor have any of them been
insolvent, the bankrupt in a bankruptcy, receivership or similar proceeding, or
an officer or director of any entity that was the bankrupt in any bankruptcy,
receivership or similar proceeding.
SECTION 3.33. DISCLOSURE. Neither this Agreement nor any exhibit or
----------
schedule hereto, nor any other document furnished to any of the Purchasers in
connection with the transactions contemplated by this Agreement, contains any
material misstatement of fact or omits to state a material fact necessary to
make the statements contained herein or therein not misleading. Except as set
forth on Schedule 3.33, the offering circular provided by the Company to the
-------------
Purchasers, a copy of which is attached hereto as Exhibit 3.33 (the Offering
------------
Circular), is materially complete and correct to the best of the Companys
knowledge as of October 30, 1994. The Company does not have any information or
knowledge of any fact which has not been disclosed to the Purchasers and which,
if disclosed, would reasonably be expected to deter a reasonable businessman
from completing the transactions contemplated by this Agreement and the other
Purchase Documents upon the price and terms set forth herein and therein.
SECTION 3.34. EFFECT OF CERTIFICATES. All certificates of the
----------------------
Company delivered hereunder shall be deemed to be additional representations and
warranties of the Company.
-22-
<PAGE>
IV.
REPRESENTATIONS AND WARRANTIES OF THE MANAGEMENT STOCKHOLDERS
Each of the Management Stockholders individually represents and
warrants to the Purchasers as set forth in this Article IV as of the date of the
Agreement. Representations, warranties and covenants of each Management
Stockholder as to matters involving himself are absolute. Representations,
warranties and covenants of each Management Stockholder made in Section 4.04 are
limited in the manner set forth therein.
SECTION 4.01. TITLE TO CAPITAL STOCK. Each Management Stockholder is
-----------------------
the record and beneficial owner of that number of shares of Common Stock set
forth on Schedule 3.04 hereof, and, except as set forth on Schedule 3.04, each
------------- -------------
own and has good and marketable title to such number of shares free and clear of
any Lien of any kind. Each Management Stockholder received his shares of Company
Stock upon the formation of the Company, and at such time each Management
Stockholder paid in full the consideration for his respective shares of Common
Stock. No Management Stockholder has granted to any Person any right to purchase
or otherwise acquire, or granted any interest in, any of his respective shares
of Common Stock, except pursuant to the other Purchase Documents or as
contemplated by the other Purchase Documents.
SECTION 4.02. AUTHORIZATION OF AGREEMENT. Each Management
---------------------------
Stockholder has taken as of Closing all action required to execute and deliver
the Purchase Documents required to be executed by him pursuant hereto, and such
Purchase Documents have been duly and validly executed and delivered by such
Management Stockholder, and each such Purchase Document constitutes the legal,
valid and binding agreement of such Management Stockholder, enforceable in
accordance with its respective terms.
SECTION 4.03. NO CONFLICTS. The execution, delivery and performance
------------
by each Management Stockholder of this Agreement and the other Purchase
Documents required to be executed by him, and compliance by such Management
Stockholder with the terms and provisions hereof and thereof do not and will not
violate, in any material respect, any provision of any law, rule, regulation,
order, writ, judgment, injunction, statute, decree, determination, or award
currently in effect and having applicability to the Management Stockholders.
SECTION 4.04. DISCLOSURE. Neither this Agreement nor any exhibit or
----------
schedule hereto, nor any other document furnished to any of the Purchasers in
connection with the transactions contemplated by this Agreement contains any
material misstatement of fact or omits to state a material fact necessary to
make the statements contained herein or therein not misleading. Except as set
forth on Schedule 3.33, the Offering Circular
-------------
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<PAGE>
provided by the Company to the Purchasers is materially complete and correct to
the best of each Management Stockholders knowledge, after diligent inquiry, as
of October 30, 1994. Each Management Stockholder has no actual information or
knowledge of any fact which has not been disclosed to the Purchasers and which,
if disclosed, would reasonably be expected to deter a prudent businessman from
completing the transactions contemplated by this Agreement and the other
Purchase Documents.
V.
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each of the Purchasers severally represents and warrants to the
Company and to each other as follows:
SECTION 5.01. AUTHORIZATION. Each Purchaser has full power and
-------------
authority to execute and deliver this Agreement and the Stockholders Agreement
in accordance with their respective terms. All action on the part of the
Purchasers necessary for the authorization, execution, delivery and performance
of all obligations of the Purchasers under this Agreement and the Stockholders
Agreement has been taken.
SECTION 5.02. VALIDITY. This Agreement, when executed and delivered
--------
by the Purchasers shall constitute a legal, valid and binding obligation of the
respective Purchasers, enforceable against each of the Purchasers in accordance
with its terms.
SECTION 5.03. INVESTMENT. Each Purchaser is acquiring its respective
----------
shares of Preferred Stock for its own account and not with a view toward the
distribution or resale of the Preferred Stock in any transaction which would be
in violation of the securities laws of the United States of America or any
State, without prejudice, however, to the Purchasers rights as set forth herein
at all times to sell or otherwise dispose of all or any part of the shares of
Preferred Stock to any Person pursuant to a registration statement under the Act
and any comparable State act or under an exemption from such registration
available under the Act and any comparable State act. Each of the Purchasers
has been advised that the Shares have not been registered under the Act or the
securities laws of any State, on the grounds that no distribution or public
offering of the Shares is presently contemplated by the Purchasers.
SECTION 5.04. ACCREDITED INVESTOR. Each of the Purchasers is an
-------------------
accredited investor as defined in Rule 501 of Regulation D promulgated by the
Commission pursuant to the Act.
SECTION 5.05. INVESTIGATION. Prior to making a decision to enter
-------------
into this Agreement and acquire the Shares, each of the Purchasers has been
provided the opportunity to ask questions of, and receive answers from the
executive officers of the Company concerning the Company, and to obtain from the
Company information
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<PAGE>
requested from the Company. On the basis of the foregoing, and on the basis of
the representations, warranties and covenants of the Company and the Management
Stockholders contained in this Agreement and the representations contained in
the other Purchase Documents, each of the Purchasers acknowledges that it
possesses sufficient information to understand the merits and risks associated
with an investment in the Shares.
SECTION 5.06. RELIANCE ON INFORMATION. Each of the Purchasers
-----------------------
acknowledges that it has relied upon the information provided by the executive
officers of the Company and upon the representations of the Company and the
Management Shareholders contained herein and contained in the other Purchase
Documents and in the Offering Circular. The Purchasers have not relied upon
information provided by any other Person other than the brokers set forth in
Section 12.03 hereof.
SECTION 5.07. DISCLOSURE. No representation or warranty by any of
----------
the Purchasers, nor any document furnished or to be furnished to the Company
pursuant hereto or in connection with the transactions contemplated hereby,
contains or will contain any material misstatement of fact or omits or will omit
to state a material fact necessary to make the statements contained herein or
therein not misleading.
VI.
AFFIRMATIVE COVENANTS
The Company covenants and agrees to take, and each Management
Stockholder jointly and severally covenants and agrees to use his best efforts
to cause the Company to take, the following actions:
SECTION 6.0L. FINANCIAL STATEMENTS. The Company shall provide to
--------------------
each Holder and Warrant Holder, (i) within four (4) months after the Closing
Date, the Audited 1994 Financial Statements (as defined in Section 2.04(b)
hereof), (ii) within Forty-Five (45) days after the end of each month, year-to-
date unaudited balance sheets as of the end of such month and unaudited
statements of income and expense and of changes in financial condition of the
Company for such month and for the current fiscal year prepared, beginning with
the sixth calendar month after the Closing Date, in accordance with generally
accepted accounting principles consistently applied as certified by the chief
financial officer of the Company, and (iii) within Forty-Five (45) days after
the end of each month, a one-page management summary of operations for the
Company, and (iv) within ninety (90) days after the fiscal year end of the
Company, an audited balance sheet as of the end of such year and audited
statements of income and of changes in financial condition of the Company for
such year, certified by independent certified public accountants selected by the
Company and acceptable to the Purchasers, prepared in accordance with generally
accepted accounting principles consistently applied, and, (v) within fifteen
(15) days after the end of each fiscal quarter of the Company a
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<PAGE>
certificate signed by the President of the Company that no default has occurred
within the prior quarter, or describing the nature of any such default, with
respect to (A) any loan, contract or obligation under which the Company is
obligated to pay or entitled to receive at least the sum of Twenty-Five Thousand
Dollars ($25,000), and (B) with respect to the Companys obligations under the
Purchase Documents.
SECTION 6.02. PROJECTIONS AND BUDGETS.
-----------------------
(i) At least thirty (30) days prior to the end of each
fiscal year of the Company, the Company shall provide each Holder and each
Warrant Holder with projected financial statements of the Company for each of
the following two (2) fiscal years, to be prepared in accordance with the format
used for the statements required in Section 6.01. All such projections shall
represent the good faith estimate of the Management Stockholders as to such
future operations (and shall contain a brief certificate to such effect), but it
is acknowledged that such projections are not intended and shall not be deemed
to guaranty the future operations of the Company consistent therewith.
(ii) At least forty-five (45) days prior to the end of each
fiscal year of the Company, the Management Stockholders shall produce a
comprehensive operating budget for the Company for the succeeding fiscal year,
which budget shall be submitted to the Board of Directors of the Company for its
approval. Upon approval by the Board of Directors of the operating budget for
the Company (the approved budget is hereinafter referred to as the Budget), the
Company shall use its best efforts to conduct the Business in accordance with
the Budget for such fiscal year unless otherwise approved by the Board of
Directors and in all events shall conduct such Business so that the Companys
Revenues and Pre-Tax Profit, on a quarterly basis during such fiscal year, equal
or exceed fifty percent (50%) of the projected Revenue and Pre-Tax Profit
amounts set forth in the Budget for such fiscal quarter. For the Companys 1995
fiscal year, the parties agree that the Budget shall be the budget for such
period attached hereto and made a part hereof as Exhibit 6.02.
------------
SECTION 6.03. BOOKS, RECORDS, AND INSPECTIONS. The Company will
-------------------------------
at all times (i) maintain complete and accurate books and records, and (ii) upon
reasonable notice at any reasonable time and from time to time, the Company will
permit any of the Holders or Warrant Holders or their respective agents,
employees, attorneys or accountants to enter, examine, audit, and inspect all
properties, books, operations, and records of the Company wherever such
properties, books, and records are located.
SECTION 6.04. LAWSUITS; DEFAULTS. Within thirty (30) days after
------------------
filing or receipt, the Company shall provide the Holders and the Warrant Holders
with copies of all pleadings filed in connection with any suits or proceedings
filed by or against the Company. Within ten (10) days after receipt of any
notification, the Company shall provide the Holders and Warrant Holders with
copies of any notifications received by it
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<PAGE>
relating to any failure of the Company to pay or perform any loan, lease,
contract or other agreement to which the Company is a party after expiration of
any applicable grace or cure period, except where the Companys failure to so pay
or perform is based on circumstances beyond its control or is otherwise
reasonable under the circumstances, and a copy of any such notification shall be
delivered to the Board of Directors.
SECTION 6.05. BOARD OF DIRECTORS.
------------------
(i) Except as provided in the Articles of Amendment and
Restatement, the Company shall have a Board of Directors consisting of seven (7)
persons. The Holders shall be entitled to elect (and remove) from time to time
three (3) directors in the manner provided in the Articles of Amendment and
Restatement. The Holders (by a vote of Sixty-Three Percent (63%) or more of the
Shares issued and outstanding) and Humphrey, so long as Humphrey is employed by
the Company (and until his death or disability), shall be entitled to designate
(and remove) from time to time one (1) additional independent director as they
may agree upon, provided that, for the twelve (12) month period beginning on the
Closing Date, Humphrey shall have the sole right to elect such independent
director. So long as the Holders own any shares of Capital Stock of the Company,
the Holders and the Management Stockholders each agree to vote their shares of
Capital Stock for the one (1) independent director jointly designated by the
Holders and Humphrey, or, with respect to the twelve (12) month period beginning
on the Closing Date, designated by Humphrey. If the Holders and Humphrey are
unable to agree as to the identity of such director after attempting in good
faith to so agree, the Holders shall be entitled to designate such director,
subject to the approval of Humphrey, and the Holders and the Management
Stockholders shall in all events vote their respective shares of Capital Stock
in support of such director who has been designated and approved as herein
provided. At the Closing, the directors elected by the Holders shall be added as
members of the Board of Directors. All members of the Board of Directors shall
be reimbursed by the Company for all reasonable expenses incurred by them in
attending Board Meetings, and, beginning twelve (12) months after the Closing
Date, the Company shall pay to each of Grotech, Venrock and Southern Venture,
for the respective directors elected by such Holders, an annual directors fee of
Ten Thousand Dollars ($10,000). Board Meetings shall be held no less frequently
than monthly.
(ii) So long as the Holders own any shares of Capital Stock
of the Company (whether such shares of Capital Stock are the Shares, shares of
Common Stock or otherwise), each of the Management Stockholders and each of the
Holders agrees to vote his or its respective shares of Capital Stock in support
of the three directors nominated by the Management Stockholders, and one
director nominated by Grotech, one director nominated by Venrock and one
director nominated by Southern Venture; provided that if any of such Purchasers
no longer owns any shares of Capital Stock of the Company, then the remaining
Purchaser or Purchasers (as the case may be) shall be
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<PAGE>
entitled to nominate the director(s) formerly nominated by such Purchaser(s) who
are no longer stockholders of the Company.
(iii) The Purchasers hereby agree that, in the event of a
Voting Period (as defined in the Articles of Amendment and Restatement), the
additional directors to be elected by the Holders pursuant to the Articles of
Amendment and Restatement shall be elected by the affirmative vote of Sixty-
Three Percent (63%) or more of the outstanding Shares.
SECTION 6.06. REPORTS TO STOCKHOLDERS. The Company will furnish to
-----------------------
the Holders and the Warrant Holders, within thirty (30) days after filing or
making thereof, at least one (1) copy of all financial statements, reports,
notices, and proxy statements sent by it to its stockholders, and of all other
documents and reports filed by the Company with any governmental agency,
including but not limited to, the Commission, the Internal Revenue Service and
the Environmental Protection Agency.
SECTION 6.07. INSURANCE. The Company shall maintain in full force
---------
and effect the insurance coverage relating to the Business, including, but not
limited to Federal flood insurance (if the Business is located in a designated
Federal Flood Area), in amounts not less than those maintained as of the date of
this Agreement, as set forth on Schedule 3.21 hereof, but in all events in such
-------------
amounts, and on such terms, as are acceptable to the Holders. The Holders shall
be designated as loss payees on all such insurance policies in an amount, in the
aggregate, not less than the sum of the stated value of all shares of Preferred
Stock then outstanding plus all accrued and unpaid dividends thereon. Within
thirty (30) days after the end of each fiscal year of the Company, the Company
shall provide the Holders and the Warrant Holders with a list of all insurance
then maintained by the Company, setting forth the amount of coverage thereof and
such other terms as the Holders and the Warrant Holders may request. The
Company shall also purchase and maintain key man life insurance on the life of
Humphrey in the amount of $4,550,000, and the Holders shall be designated as
loss payees on such policy in an amount, in the aggregate, not less than the sum
of the liquidation value of all shares of Preferred Stock then outstanding plus
all accrued and unpaid dividends thereon.
SECTION 6.08. TAXES. The Company shall duly and timely file with
-----
appropriate federal, foreign, state and other governmental agencies all tax
returns and other reports required to be filed by it. The Company shall timely
pay in full and/or make adequate provisions for the payment of all taxes,
interest, penalties, assessments or deficiencies shown to be due on tax returns
or by any taxing authorities, and not enter into any agreement, waiver, or other
arrangement providing any extension of time with respect to the filing of any
tax return or report, or the payment or assessment of tax, unless the Company
determines it is in the best interests of the Company to extend such time.
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<PAGE>
SECTION 6.09. INTELLECTUAL PROPERTY RIGHTS. The Company shall in
----------------------------
good faith consult with representatives of the Holders and the Warrant Holders
from time to time regarding the protection of the Companys Intellectual Property
Rights now owned, if any, or which are acquired or developed, and shall
thereafter take all steps that (based upon such consultation and upon diligent
inquiry of management and various legal counsel qualified to render advice in
matters involving the Intellectual Property Rights in various jurisdictions) are
reasonably necessary to protect its Intellectual Property Rights, whether now
existing or hereafter developed or acquired, including, but not limited to,
filing copyright or patent protection in the United States and elsewhere,
prosecuting any actions necessary to preserve or defend such rights and causing
its employees and agents to execute confidentiality and proprietary rights
agreements in favor of the Company; provided, in all events, that the Company
will take such actions to protect its Intellectual Property Rights at least
equal to those that a company engaged in the Business, and of its size, would
customarily take to protect such rights.
SECTION 6.10. RIGHT OF FIRST REFUSAL. If the Company desires to
----------------------
issue any shares of its Capital Stock or any securities exercisable for any
stock rights, warrants or other securities convertible into, or exchangeable for
shares of Capital Stock, it shall first afford the Holders, the Warrant Holders
and the Management Stockholders (collectively, the ROFR Holders), by written
notice, the right to purchase such shares of Capital Stock or other securities
within thirty (30) days of such notice for cash (or on such other terms as are
intended to be offered by the Company) at the price at which such shares of
Capital Stock or such other securities are to be issued. The ROFR Holders shall
be entitled to exercise such right by providing written notice to the Company to
such effect within such thirty (30) day period. Each ROFR Holder desiring to
purchase such shares of Capital Stock or other securities shall be entitled to
purchase that number of shares of Capital Stock or other securities equal to the
number of such shares of Capital Stock or other securities times a fraction, (i)
the numerator of which shall be, in the case of a Holder or Warrant Holder, the
number of Registrable Securities issued, plus the number of Registrable
Securities issuable to such Holder or Warrant Holder, and, in the case of a
Management Stockholder, the number of shares of Common Stock issued to such
Management Stockholder, and (ii) the denominator of which shall be the total
number of shares of Common Stock issued, plus the total number of Registrable
Securities issued, plus the total number of Registrable Securities issuable, to
all ROFR Holders who timely elect to purchase such shares.
The rights of the ROFR Holders set forth herein shall not apply to any
securities to be issued (i) to the public pursuant to a Public Offering, (ii) to
officers, directors, or employees of the Company as part of the Incentive Stock
Plan, (iii) pursuant to the exercise of the Warrants or the Existing Warrants,
(iv) pursuant to any conversion of the Preferred Stock, (v) as a result of a
stock split, stock dividend or reclassification of shares of Common Stock, or
(vi) in exchange for the acquisition of a business on terms and conditions
approved by the Board of Directors.
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<PAGE>
SECTION 6.11. MAINTENANCE OF CORPORATE EXISTENCE; COMPLIANCE. The
----------------------------------------------
Company shall take all necessary steps to maintain its corporate existence and
all rights to the Assets, and will engage only in such business activities as
currently constitute the Business or as the Business is constituted, from time
to time, with the approval of the Board of Directors. Except with the prior
approval of the Board of Directors or in accordance with the Budget, the Company
shall keep the Business and its Assets substantially intact, including its
present operations, physical facilities, working conditions and relationships
with lessors, licensees, suppliers, customers, employees and others having
business relationships with it.
SECTION 6.12. FULL ACCESS. The Company shall permit and provide the
-----------
Holders and the Warrant Holders and their respective agents, employees,
attorneys and accountants to have full and free access at all reasonable times
upon reasonable notice to all premises, properties, personnel, books, records
and documents of the Company.
SECTION 6.13. ASSETS. The Company shall maintain the Assets and
------
facilities in a usable and serviceable operating condition, reasonable wear and
tear excepted, on a basis consistent with prior years and with past practices.
SECTION 6.14. CONTRACTS AND OBLIGATIONS. The Company shall (i)
-------------------------
maintain in full force and effect and perform all of its obligations under all
of the Contracts, licenses, permits, authorizations, and approvals necessary
for, or related to, the conduct of the Business, its operations and Assets, and
(ii) perform all of its obligations under all debt and similar instruments.
SECTION 6.15. RESIDENCE. So long as any shares of the Preferred
---------
Stock are issued and outstanding, Humphrey shall maintain his principal
residence in the Washington, D.C. metropolitan area or the surrounding suburbs,
except for legitimate business purposes with the approval of the Board of
Directors.
SECTION 6.16. TERMINATION OF COVENANTS. The covenants of the Company
------------------------
contained in this Article VI shall terminate, and shall be of no further force
and effect, upon the first to occur of a Public Offering, the conversion to
Common Stock of all shares of Preferred Stock, the redemption by the Company of,
and full payment for, all of the shares of Preferred Stock and all accrued and
unpaid dividends thereon, or the Holders and the Warrant Holders ceasing to own,
in the aggregate, at least five percent (5%) of the sum of the number of issued
and outstanding shares of Common Stock plus the number of shares of Common Stock
issuable upon exercise of the Warrants and upon conversion of the Preferred
Stock.
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<PAGE>
VII.
NEGATIVE COVENANTS
The Company hereby covenants and agrees that the Company and the
Management Stockholders shall not undertake any of the following actions without
the prior written consent of the Holders and Warrant Holders, which consent
shall not be unreasonably withheld:
SECTION 7.01. ORDINARY COURSE. Without taking any action or making
---------------
any expenditure outside of the normal and ordinary course of business, the
Company shall (i) carry on its business in substantially the same manner
consistent with past operations, (ii) not enter into any obligation out of the
ordinary course of business requiring the annual payment in an amount in excess
of Ten Thousand Dollars ($10,000) in the aggregate for each such obligation
unless such obligation is undertaken in accordance with the Budget, (iii) not
incur or increase any indebtedness for borrowed money such that the aggregate
amount of such indebtedness outstanding at any time exceeds One Hundred Thousand
Dollars ($100,000), unless such indebtedness is undertaken in accordance with
the Budget, (iv) except as contemplated by the Budget, preserve its present
business organization intact, (v) except as contemplated by the Budget, use its
best efforts to keep available the services of present officers, (vi) except in
accordance with the Budget, make no material increase in levels of officer
staffing, (vii) use its best efforts to preserve its present relationships with
Persons having business dealings with the Company, and (viii) not increase the
amount of, or prepay, any payment pursuant to any Contract.
SECTION 7.02. ISSUANCE OF CAPITAL STOCK OR SECURITIES. Except with
---------------------------------------
respect to the exercise of the Existing Warrants, the Company shall not issue
any shares of Capital Stock, nor issue any rights to acquire any shares of
Capital Stock nor issue any securities or other obligations convertible into
shares of Capital Stock, nor redeem any of its shares of Capital Stock other
than the shares of Preferred Stock hereby purchased by the Purchasers.
SECTION 7.03. EXTRAORDINARY ACTIONS. The Company shall not negotiate
---------------------
or enter into any merger, consolidation or other combination with or into, or
purchase any other business entity or the assets constituting a principal
portion of another business, or liquidate or dissolve, or amend its charter or
bylaws, or alter its corporate structure, purchase an equity interest in any
entity, or establish any partly or wholly owned subsidiaries or joint ventures,
or change the location or nature of its Business, or invest in any endeavor not
related to the Business and the property for the Business.
SECTION 7.04. SALE OF ASSETS. Except with the prior approval of the
--------------
Board of Directors, the Company shall not negotiate or enter into, or
consummate, any
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agreement with respect to the sale, transfer or other disposition of any of its
Assets outside the normal and ordinary course of its business consistent with
its past practices.
SECTION 7.05. ENCUMBRANCES. Except with the prior approval of the
------------
Board of Directors, the Company shall not pledge, sell, lease, transfer, dispose
or otherwise encumber any of its Assets, or permit the creation or existence of
any Lien on any of its Assets, other than liens for indebtedness existing on the
Closing Date, liens for indebtedness in accordance with the Budget, and liens
with respect to permitted capital improvements pursuant to the provisions of
Section 7.07 hereof.
SECTION 7.06. DISTRIBUTIONS. The Company shall not declare or pay
-------------
any dividends, or make any distributions in cash, securities, capital stock or
otherwise, on its shares of Capital Stock (other than dividends payable with
respect to shares of Preferred Stock), or in any other manner whatsoever
advance, transfer or distribute cash or cash equivalents to the Management
Stockholders or other holders of Common Stock, or its directors or other
personnel (except for salaries, bonuses, benefits and other compensation in
accordance with the Budget), or repurchase any outstanding shares of Capital
Stock (other than the Preferred Stock).
SECTION 7.07. CAPITAL IMPROVEMENTS. The Company shall not expend in
--------------------
excess of $500,000 in the aggregate in any fiscal year for capital improvements
or similar corporate purposes except in accordance with the Budget.
SECTION 7.08. TRANSACTIONS WITH RELATED PERSONS. Except with the
---------------------------------
prior approval of the Board of Directors, the Company shall not enter into any
Contract or other obligation with any Person or affiliate of any person who
directly or indirectly owns any shares of its Capital Stock, or any officer,
director or other management personnel or employee (except for salaries,
bonuses, benefits and other compensation in accordance with the Budget), or
affiliate, on terms and conditions any less favorable than would be received
from any independent third party in the ordinary course of business. For
purposes of this Section 7.08, if the Company enters into any Contract or other
obligation with a Management Stockholder or an affiliate of a Management
Stockholder, whether said Contract or other obligation is on terms and
conditions no less favorable than would be received from an independent third
party in the ordinary course of business shall be determined by the members of
the Board of Directors elected by the Holders. If the Company enters into any
Contract or other obligation with a Holder or Warrant Holder or any Person
directly or indirectly controlled by a Holder or Warrant Holder and which Person
owns any shares of Capital Stock, whether said Contract or other obligation is
on terms and conditions no less favorable than would be received from an
independent third party in the ordinary course of business shall be determined
by the members of the Board of Directors other than the members elected by the
Holders.
SECTION 7.09. TERMINATION OF COVENANTS. The covenants contained in
------------------------
this Article VII shall terminate and shall be of no further force and effect
upon the first to
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occur of a Public Offering, the conversion to Common Stock of all shares of
Preferred Stock, the redemption by the Company of, and full payment for, all of
the shares of Preferred Stock and all accrued and unpaid dividends thereon, or
the Holders and the Warrant Holders ceasing to own, in the aggregate, at least
five percent (5%) of the sum of the number of issued and outstanding shares of
Common Stock plus the number of shares of Common Stock issuable upon exercise of
the Warrants and upon conversion of the Preferred Stock.
VIII.
CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS,
THE COMPANY AND MANAGEMENT STOCKHOLDERS AT THE CLOSING
SECTION 8.01. PURCHASERS CONDITIONS TO CLOSING. The obligation of
--------------------------------
each of the Purchasers to purchase and pay for the Shares (subject to Section
2.04(b) hereof) and to consummate the other transactions contemplated by the
Purchase Documents on the Closing Date is subject to the fulfillment, or the
waiver by each such Purchaser, of each of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES TO BE TRUE AND CORRECT. The
-----------------------------------------------------
representations and warranties of the Company and the Management Stockholders
contained herein 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 and as of such date, and the Purchasers shall have
received a certificate in the form attached hereto as Exhibit 8.01(a) executed
---------------
by each of the Management Stockholders and the Company certifying that such
representations and warranties are true and correct as of such date.
(b) PERFORMANCE. The Company and the Management Stockholders
-----------
shall have performed and complied in all respects with all agreements,
conditions and covenants contained herein required to be performed or complied
with by them prior to or at the Closing Date.
(c) ALL PROCEEDINGS TO BE SATISFACTORY. All corporate and other
----------------------------------
proceedings to be taken by the Company and the Management Stockholders in
connection with the transactions contemplated hereby, and all documents incident
thereto shall be satisfactory in form and substance to the Purchasers, and the
Purchasers shall have received all such counterpart originals or certified or
other copies of such documents as they may reasonably request.
(d) CONSENT OF DIRECTORS. The Company shall deliver to the
--------------------
Purchasers resolutions of the Directors of the Company, certified by a duly
authorized officer of the Company, substantially in the form attached hereto as
Exhibit 8.01(d)
- ---------------
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<PAGE>
hereto, authorizing and approving all matters in connection with this Agreement
and the transactions contemplated hereby.
(e) CHARTER AND BYLAWS. The Company shall deliver to the
------------------
Purchasers true and correct copies of the charter and bylaws of the Company.
(f) CORPORATE CHANGES, ETC. The Articles of Amendment and
----------------------
Restatement shall have been filed with, and approved by, the SDAT, the Amended
and Restated Bylaws shall have been duly approved by the Board of Directors, and
Frank A. Adams, Ray A. Rothrock and William F. Earthman, III, as the directors
elected by the Holders, and Thomas F. McKiernan, as the designee of Humphrey,
shall each have been duly elected to the Board of Directors of the Company.
(g) WARRANTS. The Company shall have issued the Warrants to
each of the Purchasers, respectively, in the amounts set forth on Schedule
--------
1.01.56.
- --------
(h) EMPLOYEE AGREEMENT, ETC. The Company and each of the
------------------------
Management Stockholders and Bill Pendley shall have executed the Employee
Agreements, the Company and each of the Management Stockholders shall have
executed the Stockholders Agreement, and the Company and the holders of the
Existing Warrants shall have executed a buy-sell agreement satisfactory to the
Purchasers, and a true, corrected complete copy of such buy-sell agreement shall
have been delivered to the Purchasers.
(i) NO LITIGATION; NO VIOLATION. No investigation, suit, action
---------------------------
or other proceeding shall be threatened or pending which, in the sole judgment
of any of the Purchasers, may result in a restraint or prohibition on, or an
award of damages or other relief in connection with, the Purchase Documents or
the consummation of the transactions contemplated by the Purchase Documents or
that would have an adverse effect on the Company, its Assets, its prospects
(financial or otherwise) or the Business. The consummation of the transactions
contemplated by this Agreement must not violate any applicable laws or
regulations.
(j) DUE DILIGENCE. The Purchasers shall have received a credit
-------------
report on the Company and the Management Stockholders, in substance reasonably
satisfactory to the Purchasers. The Company shall have retained its independent
certified public accountants to (i) conduct an audit of the Company and (ii)
produce the Audited 1994 Financial Statements (as defined in Section 2.04
hereof). The Purchasers shall have conducted an inspection of the principal
premises of the Company including a review of all relevant operations
constituting the Business , which inspection shall be satisfactory to the
Purchasers in their sole discretion. The Purchasers shall have received a
favorable report from Venable, Baetjer and Howard, LLP as to certain legal
matters.
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(k) LEGAL OPINION. The Purchasers shall have received the Legal
-------------
Opinion, dated as of the Closing Date, from counsel to the Company.
SECTION 8.02. COMPANYS AND MANAGEMENT STOCKHOLDERS CONDITIONS TO
--------------------------------------------------
CLOSING. The obligation of the Company to issue, sell and deliver the Shares
- -------
and to consummate the other transactions contemplated by the Purchase Documents
on the Closing Date is subject to fulfillment, or the waiver thereof, of each of
the following conditions:
(a) REPRESENTATIONS AND WARRANTIES TO BE TRUE AND CORRECT. The
-----------------------------------------------------
representations and warranties of the Purchasers contained herein 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 and as of
such date.
(b) NO LITIGATION. No investigation, suit, action or other
-------------
proceeding shall be threatened or pending before any court or governmental
agency which, in the sole opinion of the Company, may result in a restraint or
prohibition on, or an award of damages or other relief in connection with, the
Purchase Documents or the consummation of the transactions contemplated by the
Purchase Documents. The consummation of the transactions contemplated by this
Agreement must not violate any applicable laws or regulations.
(c) STOCKHOLDERS AGREEMENT. The Purchasers shall have executed
----------------------
the Stockholders Agreement.
(d) PAYMENT OF PURCHASE PRICE. Subject to the terms and
-------------------------
conditions set forth in Section 2.04 hereof, the Purchasers shall have paid the
respective amounts set forth on Schedule 2.02 hereof.
-------------
IX.
REGISTRATION RIGHTS
SECTION 9.01. DEMAND REGISTRATION.
-------------------
(a) At any time after six (6) months after the effective date of
the initial offering of the Companys Capital Stock to the public pursuant to a
Registration Statement, one or more of the holders of Registrable Securities
holding a majority of the Registrable Securities may notify the Company in
writing that such holder or holders request the Company to register all or any
portion of their Registrable Securities under the Act for sale to the public.
Within five (5) days of the receipt of such notification by the holders of a
majority of the Registrable Securities, the Company will notify all of the
remaining holders of Registrable Securities of the Company of its receipt of
such notification from such holders. Upon the written request of any such holder
of
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Registrable Securities delivered to the Company within thirty (30) days after
receipt from the Company of such notification, the Company will cause such of
the shares of Registrable Securities as may be requested by any such holder
(including the holders of Registrable Securities giving the initial notice of
intent to register hereunder) to be registered under the Act as promptly as
practicable in accordance with the terms of this Section 9.01. The Company shall
be requried to effect only one (1) registration pursuant to this Section 9.01. A
registration shall be effective for this purpose only if such registration has
been declared or ordered effective by the Commission and has remained in effect
for a period of nine (9) months.
In addition to the foregoing, the Board of Directors of the Company
shall be entitled to delay a registration pursuant to this Section 9.01 for a
period not to exceed ninety (90) days from the date of a written request
hereunder (the Deferral Period) if, in the best judgment of the Board of
Directors of the Company, such a delay is in the best interests of the Company
and of the stockholders of the Company, provided that such a delay would not
have an adverse effect on the proposed registration, including, but not limited
to, the proposed offering price and the amount of any underwriting discount.
If, during the Deferral Period, it appears reasonably likely that a continuation
of the Deferral Period would have an adverse effect on the proposed
registration, including, but not limited to, the proposed offering price and the
amount of any underwriting discount, then the holders of Registrable Securities
who requested such registration shall so notify the Company in writing, the
Company shall cause the Registrable Securities of such holder and all other
holders requesting registration pursuant to the provisions of this Section 9.01
to be registered under the Act as promptly as practicable in accordance with the
balance of the provisions of this Section 9.01, and the Company shall not be
entitled to any additional deferral with respect to said registration.
(b) In any public offering of Registrable Securities effected
pursuant to Section 9.01(a), the Board of Directors of the Company shall have
the right to select the investment banker or bankers and manager or managers to
administer the offering, which selection shall be subject to the approval of the
holders of Registrable Securities, by majority vote of such holders who
requested such registration and who are to be included in such registration. The
holders of Registrable Securities participating in such registration and the
Company shall enter into an underwriting agreement in such customary form as
shall have been agreed to by the majority of such holders.
(c) If the Company shall have received notice of a requested
registration under Section 9.01 hereof and the Company shall have obtained a
written opinion of counsel, which opinion is satisfactory to counsel for the
requesting holders of Registrable Securities, that registration under the Act is
not required in connection with such proposed disposition, then the Company
shall have no obligation to comply with such request, and the receipt of such
opinion shall not be construed as a registration under Section 9.01 for the
purposes of determining the Companys obligations under Section 9.01.
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(d) Except as otherwise permitted under the provisions of
Section 9.01, if the Company fails to fulfill its registration obligations
pursuant to the provisions of Section 9.01, then the Holders shall be entitled
to immediately require the Company to purchase the Warrants and the Registrable
Securities at a price per share of Common Stock equal to the average trading
price of such Common Stock during the thirty (30) day period beginning sixty
(60) days after the Companys receipt of the initial notification by a holder of
Registrable Securities who requested registration thereof as provided in Section
9.01(a).
SECTION 9.02. COMPANY REGISTRATIONS.
---------------------
(a) On each of the first two occasions from the date of
execution of this Agreement on which the Company proposes to register any of its
securities under the Act or under any successor legislation for sale to the
public, whether for its own account or for the account of other security holders
(other than the Purchasers) or both (other than registrations on Form S-8 or
Form S-4 or any successor form for the same type of offering), each such time
the Company will give prior written notice thereof to the holders of Registrable
Securities of its intention to do so and a description of the intended method of
distribution not less than thirty (30) days prior to the filing of the initial
Registration Statement with respect to such proposed registration.
If any holder of Registrable Securities desires that the Company
include any shares of its Registrable Securities in any such proposed
registration, such holder shall give the Company notice to that effect within
thirty (30) days after receipt of the notice delivered by the Company pursuant
to this Section 9.02. The Company will use its best efforts thereupon to 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; provided, however, that in connection with
any underwritten offering by the Company of any of its securities, if the
managing underwriter shall impose a limitation on the number of securities which
may be included in such registration by a group consisting of the holders of
Registrable Securities and other holders of securities having registration
rights similar to those held by the holders of Registrable Securities because in
its reasonable and good faith judgment inclusion of all shares sought to be
registered would adversely affect the offering of the Companys securities, such
limitation (to the extent thereof) shall (i) first be imposed upon such other
holders of securities having registration rights, and, (ii) thereafter, upon
such holders of Registrable Securities whose Registrable Securities are to
otherwise be registered hereunder, pro rata, such that each such holder of
Registrable Securities shall be entitled to include in such registration that
number of its shares of Registrable Securities in the aggregate equal to (A) the
total number of shares of Registrable Securities owned or held by, or issuable
to, such holder and proposed to be included in such Registration Statement,
divided by (B) the total number of such shares owned or held by all such selling
holders proposed to be included in such Registration Statement, multiplied by
(C)
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the total number of shares of Registrable Securities permitted to be included in
such registration by all selling holders of Registrable Securities. The holders
of Registrable Securities participating in such registration shall enter into an
underwriting agreement as shall have been negotiated and agreed to by the
Company and the underwriter.
Any shares of Registrable Securities so excluded may be included by
such holder of Registrable Securities in any subsequent registration pursuant to
this Section 9.02. In the event of a non-underwritten public offering, the
Companys Board of Directors, with the affirmative vote of a member of the
directors elected by the holders of Preferred Stock, may in its reasonable and
good faith judgment impose some or all of the limitations which may be exercised
by the managing underwriter pursuant to the immediately preceding paragraph. In
the event of any limitation pursuant to this paragraph of Section 9.02, (i)
securities of Persons not having similar registration rights will not be
included in such registration, and (ii) such limitation (to the extent thereof)
shall first be imposed upon holders of securities having similar registration
rights, other than holders of Registrable Securities.
(b) Without in any way limiting the types of registrations to
which this Section 9.02 shall apply, if the Company shall effect any shelf
registrations under Rule 415 promulgated under the Act, or any other similar
rule or regulation, then for each shelf registration effected by the Company,
the Company shall take all necessary action, including, without limitation, the
filing of post-effective amendments, to permit the holders of Registrable
Securities to include their shares in such registrations subject to and in
accordance with the terms of this Section 9.02; provided that at least five (5)
days prior to the distribution of the Registrable Securities, the holders
thereof shall advise the Company, in writing, of the dates on which the
distribution will commence and terminate, the number of the Registrable
Securities to be sold, and the terms and manner of sale.
SECTION 9.03. FURTHER OBLIGATIONS OF THE COMPANY. In connection with
----------------------------------
the registration by the Company of Registrable Securities, the Company agrees
that it shall also do the following:
(a) Prepare and file with the Commission a Registration
Statement and prospectus, and such amendments and supplements to the applicable
Registration Statement and the prospectus used in connection therewith as may be
necessary to keep the Registration Statement effective for a period of not less
than 120 days (or such shorter period as shall terminate when all securities
covered by such Registration Statement have been sold or withdrawn), and to
comply with the provisions of the Act, with respect to the sale of securities
covered by the Registration Statement for said period, and to use its best
efforts to cause such registration 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 Registrable Securities covered by such registration
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<PAGE>
draft copies of all such documents proposed to be filed a reasonable time prior
thereto, which documents will be subject to the reasonable review of such
counsel and such holders, and the Company will not file any Registration
Statement or amendment thereto or any prospectus or any supplement thereto to
which holders of a majority of the Registrable Securities covered by such
Registration Statement (except in the case of a registration pursuant to Section
9.02 hereof) shall reasonably object, and will notify each such holder of any
stop order issued or threatened by the Commission in connection therewith and
take all reasonable actions required to prevent the entry of such stop order or
to remove it if entered;
(b) Furnish to the holders of Registrable Securities such copies
of each preliminary and final prospectus, amendments and supplements, and such
other documents as each such holder may reasonably request to facilitate the
public offering or other disposition of such shares of Common Stock or
Registrable Securities;
(c) Enter into an underwriting agreement with customary
provisions reasonably required by the underwriter, if any, of the offering;
(d) Use its best efforts to register or qualify the Common Stock
or Registrable Securities covered by the Registration Statement under the
securities or blue-sky laws of such jurisdictions as the managing underwriter or
underwriters, in the case of underwritten offerings, or, in the case of all
other offerings, the holders of Registrable Securities, as decided by the
participating holders of a majority of the shares of Registrable Securities,
shall reasonably request, and to keep such registrations or qualifications
effective during the period in which such registrations or qualifications are
required to be effective, and to do all such other acts or things necessary or
advisable to enable the disposition in all such jurisdictions of the Registrable
Securities covered by the applicable registration statement; provided that the
Company shall not for any such purpose be required to qualify generally to
transact business as a foreign corporation in any jurisdiction where it would
not have been so qualified but for the offering; and if the Company includes
securities in the offering, the Company shall not be required so to register or
qualify a holder of Registrable Securities in any state where securities to be
sold by the Company are not to be registered or qualified;
(e) If requested by the managing underwriter or underwriters or
any holder of Registrable Securities covered by the Registration Statement,
promptly incorporate in a prospectus supplement or post-effective amendment such
information as the managing underwriter or underwriters or such holder, as the
case may be, reasonably requests to be included therein;
(f) Use its best efforts to cause the Registrable Securities
covered by the Registration Statement to be registered with or approved by such
other governmental agencies or authorities within the United States as may be
necessary to enable the seller or sellers thereof or the underwriter or
underwriters, if any, to
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<PAGE>
consummate the disposition of such securities; provided, however, that the
Company shall be required to keep the Registration Statement effective for only
nine (9) months; and
(g) Use its best efforts (if the offering is underwritten) to
furnish to each selling holder of Registrable Securities, at his request, a
signed counterpart of:
(i) an opinion dated such date of counsel for the Company
for the purposes of such registration, addressed to the underwriters, to such
effects as may reasonably be requested by counsel for the underwriters;
(ii) a signed copy of the Registration Statement and any
post-effective amendment thereto, and a conformed copy of the prospectus and any
amendments or supplements thereto and any documents incorporated by reference
therein; and
(iii) a letter dated such date from the independent public
accountants retained by the Company, addressed to the underwriters, covering
such financial matters with respect to the registration in respect of which such
letter is being given as such underwriters may reasonably request.
SECTION 9.04. UNDERWRITTEN REGISTRATIONS.
--------------------------
(a) Except as otherwise provided herein, the Board of Directors
of the Company shall select the managing underwriter or underwriters for any
underwritten offering made pursuant to a registration hereunder, which selection
shall be subject to the approval of the holders of Registrable Securities, by
majority vote of such holders who requested such registration. Holders of
Registrable Securities desiring to have their shares of Registrable Securities
included in any such underwritten offering agree to sell their shares on the
basis provided in the underwriting arrangement, as required by the underwriter,
and to complete all questionnaires, powers of attorney, indemnities,
underwriting agreements, and other documents reasonably requested under the
terms of the underwriting agreement.
(b) In connection with any of the Company's underwritten
offerings from and after the date hereof and subject to the terms of Sections
9.01 and 9.02, the holders of Registrable Securities shall agree, if requested
by the managing underwriter or underwriters thereof, not to sell any of their
shares of Registrable Securities in any transaction other than pursuant to such
underwritten offering for a period of up to 90 days beginning on the effective
date of the Registration Statement, provided that the Companys officers and
directors also agree to such limitations.
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<PAGE>
SECTION 9.05. REGISTRATION EXPENSES; OTHER OBLIGATIONS.
----------------------------------------
(a) All expenses incident to the Companys performance of or
compliance with the provisions of this Article IX, including, but not limited to
the fees and disbursements of counsel for the Company and its independent
certified public accountants, the fees and expenses related to blue-sky law
compliance, discounts or commissions, and the fees and expenses of any special
experts retained by the Company, in connection with each registration hereunder,
will be borne by the Company, except with respect to registrations pursuant to
Section 9.02 hereof, to the extent that the holders of Registrable Securities
participate therein, such participating holders shall bear only their pro rata
portion of any underwriters discount.
(b) During such time as the holders of Registrable Securities
may be engaged in a distribution of the Registrable Securities pursuant to an
effective Registration Statement, such holders shall comply with Rules 10b-2,
10b-6 and 10b-7 promulgated under the Securities Exchange Act of 1934 (the
"Exchange Act") and pursuant thereto, such holders shall: (i) not engage in any
stabilization activity in connection with the securities of the Company in
contravention of such rules; (ii) distribute the Registrable Securities solely
in the manner described in the Registration Statement; (iii) cause to be
furnished to each broker through whom the Registrable Securities may be offered,
or to the offeree if an offer is not made through a broker, such copies of the
prospectus and any amendment or supplement thereto and documents incorporated by
reference therein as may be required by such broker or offeree; and (iv) not bid
for or purchase any securities of the Company or attempt to induce any person to
purchase any securities of the Company other than as permitted under the
Exchange Act.
SECTION 9.06. INDEMNIFICATION; CONTRIBUTION.
-----------------------------
(a) The Company will indemnify each underwriter, each holder of
Registrable Securities so registered and each Person controlling any of them
against all claims, losses, damages and liabilities including legal and other
expenses incurred in investigating or defending against the same, arising out of
or based upon any untrue statement or alleged untrue statement of a material
fact contained in any Registration Statement 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, or arising out of any violation by
the Company of the Act, any State securities or blue-sky laws or any rule or
regulation thereunder in connection with such registration, except insofar as
the same may have been caused by an untrue statement or omission based upon
information furnished in writing (including the omission from a written
statement of information necessary to make such written statement not
misleading) to the Company by the Person seeking indemnification hereunder
expressly for use therein. Each holder of Registrable Securities so registered
will indemnify the Company, its directors and officers, each underwriter and
each Person controlling any of them, against all claims,
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losses, damages and liability to which the Company or such other Person may
become subject under the Securities Act or otherwise, caused by any untrue
statement of a material fact contained in information furnished to the Company
by such holder of Registrable Securities, or for omission from such furnished
information to state a material fact required to be stated therein or necessary
to make the statements therein not misleading.
(b) In case any proceeding (including any governmental
investigation) shall be instituted involving any Person in respect of which
indemnity may be sought pursuant to Section 9.06(a), such Person (the
Indemnified Party) shall promptly notify the party or parties from whom
indemnification is sought hereunder (collectively, the "Indemnifying Party") in
writing, provided that the omission to so notify the Indemnifying Party will not
relieve the Indemnifying Party of any liability it may have under this Agreement
or otherwise except to the extent of any loss, damage, liability or expense
arising from such omission. The Indemnifying Party, upon the request of the
Indemnified Party, shall retain counsel reasonably satisfactory to such
Indemnified Party to represent such Indemnified Party and any others the
Indemnifying Party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any Indemnified Party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Party unless (i) the Indemnifying Party and the Indemnified
Party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the Indemnified Party and the Indemnifying Party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. In the case of any such separate counsel for
an Indemnified Party, such separate counsel shall be designated in writing by
the Indemnified Party. The Indemnifying Party shall not be liable for any
settlement of any proceeding effected without its written consent.
(c) If the indemnification provided for in this Section 9.06
shall for any reason be unavailable to an Indemnified Party in respect of any
loss, claim, damage or liability, or any action in respect thereof, referred to
therein, then the Indemnifying Party shall, in lieu of indemnifying such
Indemnified Party, contribute to the amount paid or payable by such Indemnified
Party as a result of such loss, claim, damage or liability, or action in respect
thereof in such proportion as shall be appropriate to reflect both the relative
benefits received by the Indemnifying Party and the Indemnified Party from the
offering of the Registrable Securities and the relative fault of the
Indemnifying Party and the Indemnified Party in connection with the statements
or omissions which resulted in such loss, claim, damage or liability, or action
in respect thereof, as well as any other relevant equitable considerations. The
relative fault shall be determined by reference to whether the untrue and
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact relates to information supplied by the Indemnifying Party,
on the one hand, or the Indemnified Party, on the
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other, the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such statement of omission.
The amount paid or payable by an Indemnified Party as a result of the loss,
claim, damage or liability, or action in respect thereof, referred to above in
this paragraph shall be deemed to include, for purposes of this paragraph, any
legal or other expenses reasonably incurred by such Indemnified Party in
connection with investigating or defending any such action or claim. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation.
SECTION 9.07. FURNISH INFORMATION. It shall be a condition precedent
-------------------
to the obligations of the Company to file a Registration Statement pursuant to
this Article IX that each holder of Registrable Securities shall furnish to the
Company such information regarding it, the Registrable Securities held by it and
the intended method of disposition thereof as the Company shall reasonably
request and as shall be required in connection with the action to be taken by
the Company, and shall otherwise cooperate with the Company.
SECTION 9.08. TRANSFER OF REGISTRATION RIGHTS. The registration
-------------------------------
rights provided under this Article IX hereof may be transferred to any other
person or entity upon the transfer of the Warrants, the shares of Preferred
Stock or the Registrable Securities, as the case may be, and shall inure to the
parties hereto and persons to whom the Warrants, the shares of Preferred Stock
or the Registrable Securities may from time to time be transferred and with
respect to the shares of Registrable Securities issuable upon exercise of the
Warrants or upon conversion of the shares of Preferred Stock.
X.
ADDITIONAL OBLIGATIONS
SECTION 10.01. UNLOCKING.
---------
(a) If, at any time after four (4) years from the Closing Date,
the Company or the Management Stockholders, as the case may be, receive a bona
fide offer to purchase all or substantially all, of the Companys Assets or
Capital Stock, whether such offer is the result of solicitation by or of the
Holders, the Warrant Holders, the Management Stockholders, the officers of the
Company or otherwise, the Company and the Management Stockholders shall provide
written notice to the Holders within ten (10) days of its or their receipt of
said offer, setting forth all of the relevant terms and conditions thereof. If
the Holders holding Sixty-Three Percent (63%) or more of the outstanding shares
of Preferred Stock, or, if no shares of Preferred Stock are then outstanding,
the Holders or Warrant Holders holding Sixty-Three Percent (63%) or more of the
Registrable Securities, desire for such offer to be accepted, they shall provide
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written notice to the Company and/or the Management Stockholders within thirty
(30) days thereafter to that effect.
(b) If such Holders provide the written notice to the Company
and/or the Management Stockholders as set forth in Section 10.01(a) hereof, the
Company and/or the Management Stockholders, as the case may be, shall thereafter
either accept the offer (in which event the provisions of Section 10.01(c) shall
apply) or, no later than ninety (90) days after receipt of such notice, the
Company shall (i) acquire all of the Warrants and Registrable Securities held by
the Holders and Warrant Holders on the same terms and conditions as the proposed
offer, and (ii) redeem all of the outstanding shares of Preferred Stock, and pay
all accrued but unpaid dividends thereon, as of the closing of the sale of the
Assets or Capital Stock, as the case may be, as a condition of such closing.
Notwithstanding the foregoing, if the Company is unable to fully pay for all of
such Warrants, Registrable Securities, and shares of Preferred Stock and all
accrued but unpaid dividends thereon in cash by the end of such ninety (90) day
period, such offer must be accepted by the Company or the Management
Stockholders, as the case may be, the provisions of Section 10.01(c) hereof
shall apply, and closing with respect thereto shall occur as soon as possible.
(c) If the Company and/or the Management Stockholders elect to
accept such offer then, at the time of the closing with respect to the
transaction contemplated by such offer, each such Holder and Warrant Holder
shall receive that proportion of the net proceeds received, or which would be
received by the Companys stockholders, from such sale equal to such net proceeds
times a fraction, (A) the numerator of which shall be the sum of the number of
Registrable Securities issued, plus the number of Registrable Securities
issuable, to each such Holder or Warrant Holder, and (B) the denominator of
which shall be the sum of the total number of issued and outstanding shares of
Common Stock plus the total number of Registrable Securities issued and issuable
to all Holders and Warrant Holders.
(d) If the Holders of Sixty-Three Percent (63%) or more of the
outstanding shares of Preferred Stock, or, if no shares of Preferred Stock are
then outstanding, the Holders or Warrant Holders holding Sixty-Three Percent
(63%) or more of the Registrable Securities, do not accept such offer, then the
Company or the Management Stockholders who received such offer, as the case may
be, shall reject such offer. If such Holders or Warrant Holders, as the case may
be, fail to communicate approval or disapproval of such offer within such thirty
(30) day period, such failure shall be deemed to be a rejection of the offer.
SECTION 10.02. ANTI-DILUTION.
-------------
(a) Upon each issuance after the date hereof, and prior to the
consummation of a Public Offering, of shares of Common Stock, or options,
warrants, contracts or securities convertible or exchangeable into or evidencing
the right to
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purchase shares of Common Stock of the Company, other than (i) any
shares of Common Stock of the Company issuable or issued pursuant to the
Incentive Stock Plan, (ii) shares of Common Stock of the Company issuable or
issued upon conversion of the Shares and (iii) shares of Common Stock of the
Company issuable or issued upon exercise of the Warrants or Existing Warrants,
for a total consideration per share of Common Stock, or per share of Common
Stock issued or issuable with respect to such an option, warrant, contract or
security convertible into or evidencing the right to purchase shares of Common
Stock, of less than the APSV, as described below (each a "Dilutive
Transaction"), then, upon each issuance of such securities, the Company shall
immediately issue to the Holders and Warrant Holders additional shares of Common
Stock, and, if prior to full exercise of the Warrants and conversion of all the
Shares into shares of Common Stock, the Company shall immediately adjust the
APSV and the total number of shares of Common Stock which are issuable upon
exercise of the Warrants and upon conversion of the Shares such that the sum of
the number of shares of Common Stock issued and issuable upon exercise of the
Warrants and the number of shares of Common Stock issued and issuable upon
conversion of the Shares shall be equal to that amount as determined by dividing
Four Million Dollars ($4,000,000) by the APSV.
(b) The "Assumed Per Share Value" ("APSV") shall be that amount
equal to the quotient of (i) (A) the APSV immediately prior to such Dilutive
Transaction, (B) multiplied by the sum of the number of shares of Common Stock
outstanding immediately prior to such Dilutive Transaction plus the number of
shares of Common Stock issuable upon exercise or conversion, as the case may be,
of all options, warrants and other rights to purchase (including but not limited
to all shares issued and issuable pursuant to the Incentive Stock Plan), or
securities convertible into, shares of Common Stock outstanding immediately
prior to such Dilutive Transaction, plus (C) the aggregate consideration, if
any, received or to be received by the Company upon such Dilutive Transaction,
divided by (ii) the sum of the number of shares of Common Stock outstanding
immediately after such Dilutive Transaction, plus the number of shares of Common
Stock issuable upon exercise or conversion, as the case may be, of all options,
warrants and other rights to purchase (including but not limited to all shares
issued and issuable pursuant to the Incentive Stock Plan), or securities
convertible into, shares of Common Stock outstanding immediately after such
Dilutive Transaction. The initial Assumed Per Share Value shall be $10.526.
----------------------------------------------------
Except as set forth in Section 10.02(c) and (d), subsequent APSVs shall be
determined in accordance with the foregoing formula and shall be rounded to the
nearest tenth of one cent ($0.001).
(c) Notwithstanding anything in Section 10.02(b) hereof to the
contrary, the APSV, as otherwise determined herein, shall be adjusted on March
1, 1996 (or as soon as practicable thereafter) to take into account the results
of operations of the Company for the period beginning March 1, 1995 through
February 29, 1996, including, for this purpose, the Companys Revenue and Pre-Tax
Profit results for the calendar months January, 1995 and February, 1995 (the
"Measurement Period"). If the Company meets each of the Revenue and Pre-Tax
Profits targets with respect to the Measurement
-45-
<PAGE>
Period set forth on a particular line in columns (A) and (B) respectively,
below, the APSV (as previously determined pursuant to this Section 10.02) shall
be adjusted so that the number of shares of Common Stock issued and issuable
upon exercise of the Warrants and upon conversion of the Shares shall equal the
product of the applicable percentage interest in the Common Stock set forth on
the corresponding line in column (C) below, times the sum of the number of
shares of Common Stock issued and outstanding plus the total number of shares of
Common Stock issuable upon exercise or conversion, as the case may be, of all
options, warrants and other rights to purchase (including, but not limited to,
shares issuable pursuant to the Incentive Stock Plan), or securities convertible
into, shares of Common Stock:
<TABLE>
<CAPTION>
(A) (B) (C)
Company Company % Common Stock
Revenue Pre-Tax Profit (fully-diluted)
------- -------------- ---------------
<S> <C> <C>
$7 million or less $0.00 43.0
$7,000,001.00 $0.00 38.0
$11 million $2.0 million 37.0
$12 million $2.0 million 36.0
$13 million $2.0 million 35.0
$14 million $2.0 million 34.0
$15 million $2.1 million 33.0
$16 million $2.5 million 31.0
$17 million $3.5 million 29.0
$18 million $4.0 million 27.0
$19 million $4.5 million 26.0
$20 million $5.0 million 25.5
</TABLE>
For purposes of this Section 10.02(c), (a) if the Company achieves the $10
million Revenue/$2 million Pre-Tax Profit target and produces a minimum of $3.75
million in Revenue during the last three months of the Measurement Period, then
the $15 million Revenue/$2.1 million Pre-Tax Profit target will be deemed to
have been reached, and (b) the Pre-Tax Profit targets shall be reduced on a
dollar-for-dollar basis (up to a maximum of $500,000) for any expansion
opportunities approved by the Board of Directors which are not reflected in the
Budget.
After March 1, 1996 (or, if later, the date on which the APSV is
determined pursuant to this Section 10.02(c)), the APSV shall be further
adjusted from time to time upon the occurrence of Dilutive Transaction in
accordance with Section 10.02(b) hereof.
(d) Notwithstanding anything in Section 10.02(b) or (c) to the
contrary, for purposes of determining the number of shares of Common Stock
issuable upon conversion of the Shares in the event of a Public Offering or the
sale by the
-46-
<PAGE>
Company of all or substantially all of its assets, or a merger, consolidation or
other combination of the Company with or into another business entity ("Sale"),
in the event of a Public Offering or Sale prior to termination of the
Measurement Period, based upon a Company valuation of at least $40 million, (A)
the APSV, as otherwise determined herein shall immediately be adjusted in the
manner set forth in Section 10.02(c) hereof, and (B) the Company shall be deemed
to have met the $15 million Revenue/$2.1 million Pre-Tax Profit target set forth
in Section 10.02(c).
(e) As an illustration of the provisions of paragraphs (a) and
(b) hereof, if after the date hereof the Company sells one million (1,000,000)
shares of its Common Stock at One Dollar and Fifty Cents ($1.50) per share, then
the number of shares issuable upon exercise of the Warrants (or the total number
of shares to which the Warrant Holders are entitled if subsequent to exercise of
the Warrants) and the number of shares of Common Stock issuable upon conversion
of the Shares (or the total number of shares to which the Holders are entitled
if subsequent to conversion of the Shares) shall equal the quotient of Four
Million Dollars ($4,000,000) divided by the APSV. The APSV would be determined
as follows:
APSV = ($10.526 X 1,000,000) + $1,500,000 = $6.013
-------------------------------------------
2,000,000 shares
This APSV would result in 665,225.34 shares of Common Stock in the aggregate
($4,000,000/$6.013).
As an additional illustration of this formula, if the Company were to
next sell five hundred thousand (500,000) shares of its Common Stock at One
Dollar ($1.00) per share, then the number of shares issuable upon exercise of
the Warrants (or the total number of shares to which the Warrant Holders are
entitled if subsequent to full exercise of the Warrants) and the number of
shares of Common Stock issuable upon conversion of the Shares (or the total
number of shares of Common Stock to which the Holders are entitled if subsequent
to conversion of the Shares) shall equal Four Million Dollars ($4,000,000)
divided by the new APSV. This new APSV would be determined as follows:
APSV = ($6.013 X 2,285,213.94) + $500,000 = $5.113
-------------------------------------------
2,785,213.94 shares
This APSV would result in 782,319.57 shares ($4,000,000/$5.113).
As an illustration of the provisions of Section 10.02(c) hereof, if
after the date hereof and prior to March 1, 1996, the APSV is reduced to $5.113
as a result of the Dilutive Transactions described above, and on March 1, 1996,
the Corporation is determined to have met each of the $15 million Revenue and
$2.1 million Pre-Tax Profit targets during the Measurement Period, then,
notwithstanding any prior determination of
-47-
<PAGE>
the APSV, such APSV shall be adjusted, pursuant to section 10.02(c) hereof, so
that the number of shares of Common Stock issued and issuable upon exercise of
the Warrants and upon conversion of the Shares shall equal Thirty-Three Percent
(33%) of the total number of shares of Common Stock issued and outstanding plus
the total number of shares of Common Stock issuable upon exercise or conversion,
as the case may be, of all options, warrants and other rights to purchase
(including, but not limited to, shares issued and issuable pursuant to the
Incentive Stock Plan), or securities convertible into shares of Common Stock.
(f) If the Company shall at any time issue or grant any options
or rights to subscribe for or to purchase shares of Common Stock or its
equivalent, all shares of Common Stock or its equivalent which the holders of
such options or rights shall be entitled to subscribe for or to purchase shall
be deemed to be issued as of the date of such issuing or granting of such
options or rights; and the minimum aggregate consideration specified in such
options or rights for the shares covered thereby, plus the cash consideration,
if any, received by the Company for such options or rights, shall be deemed to
be the consideration actually received by the Company for the issuance of
shares.
(g) If the Company shall at any time issue any stock or
obligations directly or indirectly convertible into or exchangeable for shares
of Common Stock or its equivalent, then such issue shall be deemed to be an
issue (as of the date of issue of such stock or obligations) of the total
maximum number of shares of Common Stock necessary to effect the exchange or
conversion of all such stock or obligations. The amount received or receivable
by the Company in consideration for the issue of such stock or obligations
(deducting therefrom any commissions or expenses paid or incurred by the Company
for any underwriting of, or otherwise in connection with, such issue, plus the
minimum aggregate amount of premiums, if any, payable to the Company upon
exchange or conversion) shall be deemed to be the consideration actually
received by the Company for the issue of such Common Stock.
(h) In the case of any issue of shares of Common Stock for cash,
the consideration received by the Company therefor shall be deemed to be the net
proceeds received for such shares, deducting therefrom any commissions or
expenses paid or incurred by the Company for any underwriting of, or otherwise
in connection with, the issue of such shares; provided, however, that in any
such case where the shares of stock so issued are part of a unit or combination
of securities of the Company, if the amount of the cash consideration received
by the Company for the shares of stock so issued is not determinable at the time
of such issuance, such amount shall be equal to such portion of the total cash
consideration received by the Company for such units or combinations as
reasonably constitutes consideration therefor, regardless of the accounting
treatment thereof by the Company.
-48-
<PAGE>
(i) In the case of an issue of shares of Common Stock for a
consideration part or all of which shall be other than cash, the amount of the
consideration other than cash therefore shall be deemed to be the fair value of
such consideration as reasonably constitutes such consideration other than cash,
regardless of the accounting treatment thereof by the Company.
(j) The sale or other disposition of any shares of Common Stock
of the Company or other securities held in the treasury of the Company, or of
any securities resulting from any reclassification or reclassifications or such
shares or other securities which were effected while they were held in the
treasury of the Company, shall be deemed an issuance thereof.
(k) If at any time the Company shall adjust the subscription,
exercise, conversion or exchange price of any Common Stock or its equivalent
issued or subject to issuance by the Company, such adjustment shall constitute a
Dilutive Transaction and the total consideration for each share thereof shall be
the price as so adjusted.
(l) In case prior to full exercise of the Warrants and full
conversion of the Shares, the Company shall undertake any reclassification,
stock split, reverse stock split, stock dividend or any similar proportionately-
applied change (collectively, a "Reclassification") of outstanding shares of
Common Stock (other than a change in, of, or from par value), each Holder shall
thereafter be entitled, upon exercise of its Warrants and conversion of its
Shares, to purchase or receive, as the case may be, the kind and amount of
shares of stock and other securities and property receivable upon such
Reclassification by a holder of the number of shares of Common Stock which such
Warrants or Shares entitles such Holder to purchase or receive, as the case may
be, immediately prior to such Reclassification. Concurrently with any
Reclassification, the APSV automatically shall be adjusted proportionately to
reflect such Reclassification (e.g., in a two-for-one stock split, the APSV
----
would be divided by two or in a one-for-two reverse stock split, the APSV would
be multiplied by two).
(m) In case, prior to exercise of the Warrants or conversion of
all of the Shares into shares of Common Stock of the Company, the Company shall
consolidate or merge with, or convey all, or substantially all, of its property
or assets to, any other corporation or corporations, then, as a condition
precedent to such consolidation, merger, or conveyance, lawful and adequate
provision shall be made whereby the Holders shall thereafter have the right to
receive from the Company or the successor corporation, as the case may be, upon
the basis and upon the terms and conditions specified in the Warrants or the
Articles of Amendment and Restatement, as the case may be, in lieu of the shares
of Common Stock of the Company theretofore purchasable upon the exercise of the
Warrants and issuable upon conversion of the Shares, such shares of stock,
securities, or assets as may be issued or payable with respect to, or in
exchange for, the number of shares of Common Stock of the Company
-49-
<PAGE>
theretofore purchasable upon the exercise of the Warrants and issuable upon
conversion of the Shares, had such consolidation, merger, or conveyance not
taken place; and in any such event the rights of the Holders to an adjustment of
the number of shares of Common Stock purchasable upon the exercise of the
Warrants and issuable upon conversion of the Shares shall continue and be
preserved in respect of any stock or securities which the Holder becomes
entitled to purchase. It shall be a condition of such consolidation, merger, or
conveyance that the Company and/or each successor corporation, as the case may
be, shall assume in manner and form reasonably satisfactory to the Holders the
obligation to deliver to the Holders, upon the exercise of the Warrants and upon
conversion of the Shares, such shares of Common Stock, securities, or assets as,
in accordance with the provisions of the Warrant or the Articles of Amendment
and Restatement, as the case may be, shall have been provided for that purpose.
SECTION 10.03 CALCULATION OF CONSIDERATION. Upon any sale of
----------------------------
substantially all of the Assets of the Company, or any sale or exchange by the
Management Stockholders to a third party of substantially all of their shares of
Capital Stock of the Company, any and all personal gain to the Management
Stockholders for any non-competition agreements or similar agreements which
provide for payments above prevailing industry standards shall be included, to
the extent of said excess, and any other emoluments or profits received by the
Management Stockholders (other than as compensation for services under any
personal incentive agreement with the Company or as direct payment for their
shares of Common Stock of the Company or through dividends or return of capital
paid in respect thereof) shall be fully included, in calculating the total
consideration being paid for the assets of the Company or the shares of Capital
Stock held by such Management Stockholders, as the case may be, and each Holder
and Warrant Holder shall be entitled to receive with respect to any such sale,
in addition to any other amounts each is entitled to receive, in cash an amount
equal to the product of the total consideration so calculated times a fraction,
(i) the numerator of which shall be the number of Registrable Shares issued plus
the number of Registrable Shares issuable to such Holder or Warrant Holder, as
the case may be, and (ii) the denominator of which shall be the sum of the
number of all issued and outstanding shares of Common Stock plus the number of
all other Registrable Shares issued or issuable.
XI.
INDEMNIFICATION
SECTION 11.01. COMPANY INDEMNIFICATION. In addition to any and all
-----------------------
obligations of the Company to indemnify the Purchasers hereunder, and to any
rights or remedies granted hereunder or under the other Purchase Documents, the
Company shall, without limitation as to time, indemnify and hold harmless the
Holders, the Warrant Holders and their officers, directors, agents and
affiliates, to the fullest extent lawful, from and against any and all losses,
claims, damages, liabilities, costs (including the costs of preparation and
reasonable attorneys' fees) and expenses (collectively, "Losses") that
-50-
<PAGE>
arise out of (i) any breach of, or inaccuracy in, any representation or warranty
of the Company contained in this Agreement or the other Purchase Documents or
any instrument or other document delivered pursuant hereto or thereto or in
connection herewith or therewith, and (ii) any breach of any covenant,
undertaking or agreement of the Company contained in this Agreement or the other
Purchase Documents, whether or not any Holder or Warrant Holder is made a party
to any proceeding involving said Loss.
SECTION 11.02. MANAGEMENT STOCKHOLDERS INDEMNIFICATION. In addition
---------------------------------------
to any rights or remedies granted hereunder or under the Purchase Documents,
each of the Management Stockholders (individually, and not in his capacity as an
officer of the Company) shall, without limitation as to time, indemnify and hold
harmless the Holders, the Warrant Holders and their officers, directors, agents
and affiliates, to the fullest extent lawful, from and against any and all
Losses that arise out of (i) any breach of, or inaccuracy in, any representation
or warranty of such Management Stockholder contained in this Agreement or any
instrument or other document delivered pursuant hereto or in connection
herewith, and (ii) any breach of any covenant, undertaking or agreement of such
Management Stockholder contained in this Agreement or the other Purchase
Documents, whether or not any Holder or Warrant Holder is made a party to any
proceeding involving such Loss.
SECTION 11.03. SEPARATE OBLIGATIONS. The obligations of the Company
--------------------
and each of the Management Stockholders under this Article XI shall be separate
obligations. The Management Stockholders indemnification provided pursuant to
Section 11.02 hereof shall be limited, with respect to a particular Management
Stockholder, to the representations, warrants and covenants made by such
Management Stockholder.
SECTION 11.04. PURCHASERS INDEMNIFICATION. The Purchasers shall,
--------------------------
without limitation as to time, severally indemnify and hold harmless the Company
and its officers, directors, agents and affiliates, to the fullest extent
lawful, from and against any and all Losses that arise out of (i) any breach of,
or inaccuracy in, any representation or warranty of such Purchaser contained in
this Agreement, and (ii) any breach of any covenant, undertaking or agreement of
such Purchaser contained in this Agreement or the other Purchase Documents
whether or not the Company is made a party to any proceeding involving such
Loss.
XII.
MISCELLANEOUS
SECTION 12.01. EXPENSES; FEES.
--------------
(a) Each party hereto will pay its own expenses in connection
with the transactions contemplated hereby; provided, however, that the Company
shall
-51-
<PAGE>
pay whether or not the transactions contemplated by this Agreement are
consummated (i) the fees and expenses of each of the Purchasers legal counsel
incurred in connection with the negotiation and execution of the Purchase
Documents in an amount not to exceed $50,000, (ii) all reasonable due diligence
expenses of the Purchasers, and (iii) all filing, recording, registration and
other similar fees and expenses in connection with the consummation of the
transactions contemplated in this Agreement regardless of whether such
transactions are consummated. If the Company fails to close the transactions
contemplated by this Agreement because it receives alternate financing, the
Company will pay to Grotech the sum of $25,000 as liquidated damages and not as
a penalty; provided, however, that, if Grotech elects, as the result of its due
diligence review, not to consummate the transactions contemplated by this
Agreement, or if the parties cannot agree on final terms and conditions
necessary to consummate such transactions, then the Company shall have no
obligation to make such liquidated damage payment to Grotech, but shall be
required to pay all other fees and expenses of Grotech and the other Purchasers
as set forth in this subparagraph (a).
(b) The Company shall pay $75,000 to Grotech as a nonrefundable
commitment fee immediately upon the transfer and delivery of the Escrowed
Purchase Price by the Escrow Agent to the Company pursuant to Section 2.04(b)
hereof.
SECTION 12.02. SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND
------------------------------------------------------
INDEMNIFICATIONS. All agreements, representations, warranties, covenants and
- ----------------
indemnifications made herein shall survive the execution and delivery of this
Agreement and the issuance, sale and delivery of the Shares pursuant hereto.
SECTION 12.03. BROKERS. No broker or finder has acted on behalf of
-------
the Company in connection with this Agreement or the transactions contemplated
hereby other than Armata Partners and Thomas F. McKiernan ("McKiernan"), and the
Purchasers have made no agreement to pay any agent, finder, broker or any other
representative, any fee or commission in the nature of a finders or originators
fee arising out of or in connection with the subject matter of this Agreement
other than the fee owed to Armata Partners and the fee owed to McKiernan, which
fees are set forth on Schedule 3.22 hereof. Each party hereto will indemnify
-------------
and hold harmless the others against and in respect of any claim for brokerage
or other commissions relative to this Agreement or to the transactions
contemplated hereby, based in any way on agreements, arrangements or
understandings made or claimed to have been made by such party with any third
party.
SECTION 12.04. RESTRICTIVE LEGENDS. The parties hereto acknowledge
-------------------
that each certificate evidencing the Shares shall bear on the face thereof the
following legends:
"The shares of Stock evidenced by this certificate have not been
registered under the Securities Act of 1933 or under the securities
-52-
<PAGE>
act of any state and may not be sold, transferred or otherwise
disposed of to any person, including without limitation, a pledgee or
donee, in contravention of such Acts without an opinion of counsel,
reasonably satisfactory to the Corporation, that such sale, transfer
or disposition will not violate the registration requirements of such
Acts.
The Corporation will furnish a full statement of the designations and
any preferences, relative rights and preferences between series,
conversion and other rights, voting powers, restrictions, limitations
and conditions of redemption of the stock of each class which the
Corporation is authorized to issue to any stockholder on request and
without charge."
SECTION 12.05. NOTICES. All notices, requests, consents and other
-------
communications hereunder shall be in writing and shall be delivered personally
or mailed by first class registered or certified mail or by Federal Express or
other reliable courier service, postage prepaid, in either case addressed as
follows:
(a) if to the Company or the Management Stockholders, at 6800
Virginia Manor Road, Beltsville, Maryland 20705, Attn:
Douglas E. Humphrey, CEO, with a copy to Jennifer S. Blank,
Esq. at Reed Smith Shaw & McClay, 1200 18th Street, N.W.,
Washington, DC 20036;
(b) if to Grotech, at 9690 Deereco Road, Timonium, Maryland
21093, Attn: Frank A. Adams, with a copy to Robert J.
Bolger, Esq., Venable, Baetjer and Howard, LLP, 1800 Two
Hopkins Plaza, Baltimore, Maryland 21201;
(c) If to Venrock, at 30 Rockefeller Plaza, Suite 5508, New
York, New York 10112, Attn: Ray A. Rothrock, with a copy to
Bernard E. Kury, Esq., Dewey Ballantine, 1301 Avenue of the
Americas, New York, New York 10019;
(d) If to Southern Venture Fund II, L.P., at 310 25th Avenue,
North, Suite 103, Nashville, Tennessee 37203, Attn: William
F. Earthman, III.
or, in any such case, at such other address or addresses as shall have been
furnished in writing by such party to the others. Any such communication shall
be deemed given when delivered personally against written receipt or if mailed,
upon the earlier to occur of the date of actual receipt or 48-hours after the
date of mailing to the address indicated.
-53-
<PAGE>
SECTION 12.06. AMENDMENT, ETC. Neither this Agreement nor any term,
--------------
condition, representation, warranty, covenant, or agreement contained herein may
be changed, waived, discharged or terminated orally, but only by an instrument
in writing by the party against whom such change, waiver, discharge or
termination is sought.
SECTION 12.07. BINDING EFFECT. All of the terms, conditions,
--------------
stipulations, warranties, representations, and covenants of this Agreement shall
apply to and be binding upon, and shall inure to the benefit of, the parties
hereto and each of their respective heirs, personal representatives, successors
and assigns, as the case may be.
SECTION 12.08. GENDER, ETC. Whenever used herein, the singular
-----------
number shall include the plural, the plural the singular, and the use of the
masculine, feminine, or neuter gender shall include all genders.
SECTION 12.09. HEADINGS. The section and subsection headings in this
--------
Agreement are for convenience of reference only and shall not limit or otherwise
affect any of the terms hereof.
SECTION 12.10. GOVERNING LAW. This Agreement and all transactions
-------------
contemplated hereby shall be deemed to be made under, and shall be governed by,
and construed in accordance with, the laws of the State of Maryland, without
regard to principles of conflict of laws.
SECTION 12.11. FURTHER ASSURANCES. The parties hereto agree that
------------------
they will, from time to time, execute and deliver, or cause to be executed and
delivered, such supplements hereto and such further instruments as may
reasonably be required for carrying out the intention of the parties to, or
facilitating the performance of, this Agreement.
SECTION 12.12. ENFORCEABILITY. The invalidity or unenforceability of
--------------
any provision of this Agreement shall not affect or limit the validity and
enforceability of the other provisions hereof.
SECTION 12.13. ASSIGNMENT. This Agreement may not be assigned, in
----------
whole or in part, by any of the parties hereto without the prior written consent
of all of the other parties hereto.
SECTION 12.14. ENTIRE AGREEMENT. This Agreement and the other
----------------
Purchase Documents constitute the entire agreement of the parties hereto with
respect to the subject matter hereof and supersedes all prior agreements and
understandings relating thereto.
-54-
<PAGE>
SECTION 12.15. COUNTERPARTS. This Agreement may be executed in two
------------
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
[End of Section 12]
[This space intentionally left blank]
-55-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf by its duly authorized officers and its corporate seal to
be hereunto affixed, and each of the Management Stockholders and the Purchasers
has executed this Agreement, or has caused this Agreement to be executed on
their behalf by their duly authorized representatives, as of the day and year
first above written.
WITNESS/ATTEST: DIGITAL EXPRESS GROUP, INC.
By: /s/ Douglas E. Humphrey
___________________________________ ______________________________(SEAL)
Douglas E. Humphrey, President
GROTECH PARTNERS IV, L.P.
By: GROTECH CAPITAL GROUP IV, INC.
General Partner
By: /s/ Frank A. Adams
___________________________________ ______________________________(SEAL)
Frank A. Adams, President
VENROCK ASSOCIATES
By: Signature appears here
___________________________________ ______________________________(SEAL)
SOUTHERN VENTURE FUND II, L.P.
By: Signature appears here
___________________________________ ______________________________(SEAL)
-56-
<PAGE>
/s/ Douglas E. Humphrey
___________________________________ ______________________________(SEAL)
Douglas E. Humphrey
/s/ Michael T. Doughney
___________________________________ ______________________________(SEAL)
Michael T. Doughney
-57-
<PAGE>
SECURITIES PURCHASE AGREEMENT
BY AND AMONG
DIGITAL EXPRESS GROUP, INC.,
DOUGLAS E. HUMPHREY,
MICHAEL T. DOUGHNEY,
GROTECH PARTNERS IV, L.P.,
VENROCK ASSOCIATES,
AND
SOUTHERN VENTURE FUND II, L.P.
------------------------------
LIST OF SCHEDULES AND EXHIBITS
------------------------------
<TABLE>
<CAPTION>
SCHEDULES
---------
<S> <C>
1.01.56 Warrants
2.02 Purchasers
3.01 Organization, Qualification, etc.
3.04 Capital Stock
3.09 Liabilities
3.10 Changes
3.11 Title to Assets
3.12 Intellectual Property Rights
3.13 Governmental Approvals
3.15 Litigation
3.16 Contracts
3.17 Leases
3.20 Taxes
3.21 Insurance
3.22 Brokerage Fee
3.23 Employee Benefits
3.24 Licenses and Permits
3.26 Employment Matters
3.28 Related Party Transactions
3.32 Officers, Directors, Stockholders
3.33 Disclosure
EXHIBITS
- --------
1.01.03 Articles of Amendment and Restatement
1.01.04 Amended and Restated Bylaws
1.01.18 Employee Agreement
1.01.28 Legal Opinion
</TABLE>
-58-
<PAGE>
SECURITIES PURCHASE AGREEMENT
BY AND AMONG
DIGITAL EXPRESS GROUP, INC.,
DOUGLAS E. HUMPHREY,
MICHAEL T. DOUGHNEY,
GROTECH PARTNERS IV, L.P.,
[VENROCK ASSOCIATES],
AND
SOUTHERN VENTURE FUND II, L.P.
------------------------------
LIST OF SCHEDULES AND EXHIBITS
------------------------------
(CONTINUED)
-----------
<TABLE>
<S> <C>
1.01.51 Stockholders Agreement
1.01.56 Warrants
2.04 Form of Redemption Note
3.01 Certified Charter, Bylaws and Good Standing Certificate
3.07 Financial Statements
3.17 Leases
3.33 Offering Circular
6.02 Budget
8.01(a) Certificate of Company and Management Stockholders
8.01(d) Certified Copy of Board of Directors Resolutions
</TABLE>
-59-
<PAGE>
SCHEDULE 1.01.56
----------------
WARRANTS
--------
<TABLE>
<CAPTION>
Percentage of Shares
of Common Stock
Purchasable on a Fully
Diluted Basis (as More
Particularly Provided
Holder in the Warrants)
- ------ ----------------------
<S> <C>
Grotech Partners IV, L.P. 10.20%
Venrock Associates 8.925%
Southern Venture 6.375%
------
Total 25.5%
</TABLE>
-60-
<PAGE>
SCHEDULE 2.02
-------------
PURCHASERS
----------
<TABLE>
<CAPTION>
Shares of
---------
Preferred
---------
Name Amount Paid Stock Purchased
- ---- ----------- ---------------
<S> <C> <C>
Grotech Partners IV, L.P. $1,600,000 18,181.82
Venrock Associates $1,400,000 15,909.09
Southern Venture $1,000,000 11,363.63
---------- ---------
Total $4,000,000 45,454.54
========== =========
</TABLE>
-61-
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Exhibit 10.14
STOCKHOLDERS AGREEMENT
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THIS STOCKHOLDERS AGREEMENT (the "Agreement") is executed this 24th
day of March, 1995, by and among DIGITAL EXPRESS GROUP, INC., a Maryland
corporation (the "Company"), GROTECH PARTNERS IV, L.P., a Delaware limited
partnership ("Grotech"), VENROCK ASSOCIATES, a New York limited partnership
("Venrock"), SOUTHERN VENTURE FUND II, L.P., a Delaware limited partnership
("Southern Venture") (Grotech, Venrock and Southern Venture are hereinafter
collectively referred to as the "Preferred Stockholders"), DOUGLAS E. HUMPHREY
("Humphrey") and MICHAEL T. DOUGHNEY ("Doughney") (Humphrey and Doughney are
hereinafter collectively referred to as the "Management Stockholders").
WHEREAS, the Preferred Stockholders have purchased, in the aggregate,
Forty Five Thousand Four Hundred Fifty Four and Fifty Four One Hundredths
(45,454.54) shares of Convertible Preferred Stock of the Company (the "Preferred
Stock") pursuant to that certain Securities Purchase Agreement of even date
herewith by and among the Company, the Preferred Stockholders and the Management
Stockholders (the "Securities Purchase Agreement"); and
WHEREAS, the Management Stockholders currently own that number of
shares of common stock (the "Common Stock") of the Company set forth on Schedule
A attached hereto and made a part hereof (collectively, the "MS Stock"); and
WHEREAS, the Company has issued to the Preferred Stockholders warrants
(the "Warrants") to purchase from the Company that number of shares of the
Company's Common Stock equal to a total of twenty-five and one-half percent
(25.5%) of the sum of (i) all shares of Common Stock issued and outstanding as
of the date of issuance of the Warrants, plus (ii) the number of shares of
Common Stock of the Company issuable by the Company pursuant to the exercise of
the Warrants and all other warrants, options and rights to acquire shares of
Common Stock of the Company, as more particularly described in the Warrants (the
shares of Common Stock issuable upon exercise of the Warrants are hereinafter
collectively referred to as the "Warrant Shares"); and
WHEREAS, the Company, the Management Stockholders and the Preferred
Stockholders desire to assure continuity and to perpetuate harmony in the
Company's management, policies and operations and, to that end, have agreed to
certain limitations with respect to the transfer of the MS Stock; and
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WHEREAS, in order to induce the Preferred Stockholders to purchase the
shares of Preferred Stock, the Company has agreed to acquire the Preferred
Stockholders' shares of Common Stock and Warrant Shares under certain
circumstances, as more particularly set forth herein; and
WHEREAS, the Management Stockholders, the Preferred Stockholders and
the Company deem it in their best interests to impose certain restrictions and
obligations on themselves in order to effectuate the foregoing purposes.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth below, it is hereby agreed as follows:
1. RECITALS. The foregoing recitals and statements
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are made a part of this Agreement.
2. PURCHASE AND SALE. The Company agrees to purchase and redeem, and
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each Management Stockholder and Preferred Stockholder, respectively, agrees to
sell and transfer, or purchase, as the case may be, the MS Stock and the shares
of Common Stock and Warrant Shares of a Preferred Stockholder, as the case may
be, in the manner and upon the terms provided in this Agreement. No purchase,
sale, gift, endorsement, assignment, transfer, pledge, encumbrances or other
disposition, whether voluntary, involuntary or by operation of law, including,
without limitation, any transfer pursuant to a divorce decree, (hereinafter
collectively referred to as "Transfer") of any shares of MS Stock shall be valid
and binding except as provided in, and in accordance with, the terms and
conditions of this Agreement.
3. DEATH OF MANAGEMENT STOCKHOLDERS.
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(a) Upon the death of Humphrey:
(i) The personal representative (the "Personal
Representative") of Humphrey's estate shall have the option, for a period of
sixty (60) days following his appointment, to either offer to sell and sell (to
the extent such offer is accepted) all of the shares of MS Stock held by
Humphrey and all of such shares held by any Permitted Transferee of Humphrey, to
the Company and/or to Doughney and the Preferred Stockholders as hereinafter
provided and at the price and upon the terms provided in Sections 7 and 8 of
this Agreement, or elect not to offer to sell all such shares of MS Stock, in
which event the provisions of Section 3(c) shall apply.
(ii) If the Personal Representative elects to sell all of the
shares of MS Stock held by Humphrey, for a period of thirty (30) days following
the expiration of the sixty (60) day period provided in Section 3(a)(i) hereof,
the Company shall have an option to purchase all or any shares of MS Stock then
registered in
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Humphrey's name, or in the name of any Permitted Transferee of Humphrey, at the
price and upon the terms provided in Sections 7 and 8 hereof, upon notice to the
Personal Representative.
(iii) Any shares of such MS Stock with respect to which the
Company shall fail to exercise its option to purchase pursuant to Section
3(a)(ii) hereof within the time period therein provided shall be deemed to have
been offered at the same price and at the same terms to Doughney (provided that
he is still employed by the Company) and the Preferred Stockholders, who shall
have the option, for a period of thirty (30) days after the expiration of the
thirty (30) day period provided in Section 3(a)(ii), to purchase all or any such
shares of MS Stock at the price and upon the terms provided in Sections 7 and 8
hereof, upon notice to the Personal Representative. If more than one such
stockholder desires to purchase such remaining shares of MS Stock, such shares
shall be purchased by them in such proportions as they may agree. In the
absence of agreement, each such stockholder desiring to purchase such remaining
shares of MS Stock shall be entitled to purchase up to that number of shares of
said MS Stock which is equal to the number of remaining shares of MS Stock
multiplied by a fraction, the numerator of which shall be the sum of (A) the
number of shares of Common Stock registered in the name of the stockholder who
desires to purchase such remaining shares, plus (B) the number of shares of
Common Stock held by all Permitted Transferees of Doughney, if he desires to
purchase such remaining shares, plus (C) if the stockholder desiring to purchase
is a Preferred Stockholder, the number of shares of Common Stock which a
Preferred Stockholder is entitled to receive upon conversion of its shares of
Preferred Stock and the number of Warrant Shares issuable to such stockholder
upon exercise of the Warrants, and the denominator of which shall be the sum of
(X) the number of shares of Common Stock registered in the name of all
stockholders who desire to purchase such shares, plus (Y) the number of shares
of Common Stock held by all Permitted Transferees of Doughney, if he desires to
purchase such shares, plus (Z) the number of shares of Common Stock which all
Preferred Stockholders who desire to purchase are entitled to receive upon
conversion of the shares of Preferred Stock and the number of Warrant Shares
issuable to all Preferred Stockholders who desire to so purchase upon exercise
of all of their respective Warrants.
(iv) If, for any reason, the Company, Doughney and the
Preferred Stockholders collectively purchase less than all of the authorized,
issued and outstanding shares of Humphrey's MS Stock and of the Permitted
Transferees of Humphrey, such shares of MS Stock not purchased shall continue to
be subject to the terms and conditions of this Agreement, and the heirs and
recipients of such MS Stock shall, as a condition of receipt of such shares,
execute an instrument acceptable to counsel for the Preferred Stockholders and
counsel for the Company pursuant to which they become parties to this Agreement
and agree to be bound by all of the applicable provisions and terms and
conditions hereof.
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(b) Upon the death of Doughney:
(i) The Personal Representative of Doughney's estate shall
have the option for a period of sixty (60) days following his appointment, to
either offer to sell and sell (to the extent such offer is accepted) all of the
shares of MS Stock held by Doughney and all of the shares held by any Permitted
Transferee of Doughney, to Humphrey, the Company and to the Preferred
Stockholders as hereinafter provided and at the price and upon the terms
provided in Sections 7 and 8 of this Agreement, or elect not to offer to sell
all such shares of MS Stock, in which event the provisions of Section 3(c) shall
apply.
(ii) If the Personal Representative elects to sell all of the
shares of MS Stock held by Doughney, for a period of thirty (30) days following
the expiration of the sixty (60) day period provided in Section 3(b)(i) hereof,
Humphrey shall have the option to purchase all or any such shares of MS Stock
then registered in Doughney's name, or the name of any Permitted Transferee of
Doughney, at the price and upon the terms provided in Sections 7 and 8 hereof,
upon notice to the Personal Representative; provided, however, that Humphrey
shall not have the option set forth in this Section 3(b)(ii) if Humphrey is not
then employed by the Company.
(iii) Any shares of MS Stock with respect to which Humphrey
shall fail to exercise his option to purchase pursuant to Section 3(b)(ii)
hereof within the time period therein provided shall be deemed to have been
offered at the same price and the same terms to the Company which shall have an
option, for a period of thirty (30) days after the expiration of the thirty (30)
day period provided in Section 3(b)(ii), to purchase all or any of such
remaining shares of MS Stock at the price and upon the terms provided in
Sections 7 and 8 hereof, upon notice to the Personal Representative.
(iv) Any shares of MS Stock with respect to which Humphrey
and the Company shall fail to exercise his or its respective options to purchase
pursuant to Section 3(b)(iii) hereof within the time period therein provided
shall be deemed to have been offered at the same price and the same terms to the
Preferred Stockholders, who shall have the option, for a period of thirty (30)
days after the expiration of the thirty (30) day period provided in Section
3(b)(iii), to purchase all or any of such shares of MS Stock at the price and
upon the terms provided in Sections 7 and 8 hereof, upon notice to the Personal
Representative. If more than one such stockholder desires to purchase such
remaining shares of MS Stock, such shares shall be purchased by them in such
proportions as they may agree. In the absence of agreement, each such
stockholder desiring to purchase such remaining shares of MS Stock shall be
entitled to purchase up to that number of shares of said MS Stock which is equal
to the number of remaining shares of MS Stock multiplied by a fraction the
numerator of which shall be the sum of (A) the number of shares of Common Stock
registered in the name of such stockholder, plus (B) the number of shares of
Common Stock which such Preferred
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Stockholder is entitled to receive upon conversion of his or its shares of
Preferred Stock and the number of Warrant Shares issuable to such stockholder
upon exercise of the Warrants, and the denominator of which shall be the sum of
(X) the number of shares of Common Stock registered in the name of all Preferred
Stockholders who desire to purchase such shares, plus (Y) the number of shares
of Common Stock which all Preferred Stockholders who desire to purchase are
entitled to receive upon conversion of the shares of Preferred Stock and the
number of Warrant Shares issuable to all Preferred Stockholders desire to so
purchase upon exercise of all of their respective Warrants.
(v) If, for any reason, Humphrey, the Company, and the
Preferred Stockholders collectively purchase less than all of the authorized,
issued and outstanding shares of Doughney's MS Stock and of the Permitted
Transferees of Doughney, such shares of MS Stock not purchased shall continue to
be subject to the terms and conditions of this Agreement and heirs and
recipients of such MS Stock shall, as a condition of receipt of such shares,
execute an instrument acceptable to counsel for the Preferred Stockholders and
counsel for the Company pursuant to which they become parties to this Agreement
and agree to be bound by all of the applicable provisions and terms and
conditions hereof.
(c) If the Personal Representative elects not to offer to sell all of
such shares of MS Stock (as provided in Section 3(a)(i) or 3(b)(i) hereof), or
if the other Management Stockholder, the Company, and the Preferred Stockholders
collectively purchase less then all of such shares of MS Stock (pursuant to
Sections 3(a)(ii)-(iii) or 3(b)(ii)-(iv)), as the case may be, the estate of the
deceased Management Stockholder and the heirs and recipients of such retained
shares of MS Stock shall be entitled to retain the economic benefits of
ownership of such retained shares; provided that each of such heirs and
recipients shall (i) before the expiration of the sixty (60) day period provided
in Section 3(a)(i) or 3(b)(i) hereof, or within sixty (60) days of the
expiration of the options provided in Sections 3(a)(iii) or 3(b)(iv), as the
case may be, execute and deliver to (X) in the event of Doughney's death, to
Humphrey, if and for so long as he is employed by the Company, and then to the
Preferred Stockholders or (Y) in the event of Humphrey's death, or in the event
of Doughney's death and Humphrey is not employed by the Company, to the
Preferred Stockholders, an irrevocable ten (10) year proxy to vote all such
shares of MS Stock (and further provided that if such ten (10) year period shall
for any reason be found to be unenforceable under the provisions of applicable
law, such period shall be automatically revised without further action of the
parties to equal the maximum period of time which is enforceable under the
provisions of applicable law), and (ii) as a condition of receipt of such
shares, execute an instrument acceptable to counsel for the Preferred
Stockholders and counsel for the Company pursuant to which they agree to become
parties to this Agreement and agree to be bound by all of the applicable
provisions and terms and conditions hereof. Failure of all of such heirs and
recipients to timely execute and deliver said proxy and such instrument shall be
deemed to be an offer to sell all of such retained shares of MS Stock of the
deceased Management Stockholder and his Permitted Transferees, subject to the
provisions of
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Sections 3(a)(ii) through 3(a)(iii) hereof or Sections 3(b)(ii) through
3(b)(iv), as the case may be.
(d) Each Management Stockholder hereby agrees that if the Company, the
other Management Stockholder, or the Preferred Stockholders exercise its or
their option(s) pursuant to Sections 3(a) or 3(b) hereof, his Personal
Representative, the trustees and beneficiaries of any voting trust or similar
trust to which any of his shares of Common Stock have been transferred and all
Permitted Transferees of such Management Stockholder shall be bound to take any
and all action necessary to enable the Company, the other Management Stockholder
and the Preferred Stockholders, as the case may be, to purchase his shares of MS
Stock and the shares of MS Stock held by his Permitted Transferees.
4. DISABILITY OF MANAGEMENT STOCKHOLDERS.
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(a) Upon the Total Disability (as defined in subsection (e) of
this Section 4) of Humphrey:
(i) Humphrey, or his legal representative, if one has been
appointed, shall have the option, for a period of sixty (60) days following the
Total Disability, to either offer to sell and sell (to the extent such offer is
accepted) all of the shares of MS Stock held by Humphrey and his Permitted
Transferees, to the Company and/or to Doughney and the Preferred Stockholders as
hereinafter provided and at the price and upon the terms provided in Sections 7
and 8 of this Agreement, or elect not to offer to sell all such shares of MS
Stock, in which event the provisions of Section 4(c) shall apply.
(ii) If Humphrey or his legal representative elects to sell all of
the shares of MS Stock held by Humphrey and his Permitted Transferees, for a
period of thirty (30) days following the expiration of the sixty (60) day period
provided in Section 4(a)(i) hereof, the Company shall have an option to purchase
all or any shares of MS Stock then registered in Humphrey's name and in the name
of his Permitted Transferees, at the price and upon the terms provided in
Sections 7 and 8 hereof, upon notice to Humphrey or his legal representative.
(iii) Any shares of such MS Stock with respect to which the
Company shall fail to exercise its option to purchase pursuant to Section
4(a)(ii) hereof within the time period therein provided shall be deemed to have
been offered at the same price and on the same terms to Doughney (provided that
he is still employed by the Company) and the Preferred Stockholders, who shall
have the option for a period of thirty (30) days after the expiration of the
thirty (30) day period provided in Section 4(a)(ii) to purchase all or any such
shares of MS Stock at the price and upon the terms provided in Sections 7 and 8
hereof, upon notice to Humphrey or his legal representative. If more than one
such stockholder desires to purchase such remaining shares of MS Stock, such
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shares shall be purchased by them in such proportions as they may agree. In the
absence of agreement, each such stockholder desiring to purchase such remaining
shares of MS Stock shall be entitled to purchase up to that number of shares of
said MS Stock which is equal to the number of remaining shares of MS Stock
multiplied by a fraction, the numerator of which shall be the sum of (A) the
number of shares of Common Stock registered in the name of the stockholder who
desires to purchase such remaining shares, plus (B) the number of shares of
Common Stock held by all Permitted Transferees of Doughney, if he desires to
purchase such remaining shares, plus (C) the number of shares of Common Stock
which a Preferred Stockholder is entitled to receive upon conversion of his or
its shares of Preferred Stock and the number of Warrant Shares issuable to such
Stockholder upon exercise of the Warrants, and the denominator of which shall be
the sum of (X) the number of shares of Common Stock registered in the name of
all stockholders who desire to purchase such shares, plus (Y) the number of
shares of Common Stock held by all Permitted Transferees of Doughney, if he
desires to purchase such shares, plus (Z) the number of shares of Common Stock
which all Preferred Stockholders who desire to purchase are entitled to receive
upon conversion of their shares of Preferred Stock and the number of Warrant
Shares issuable to all Preferred Stockholders who desire to so purchase upon
exercise of all of their respective Warrants.
(iv) If, for any reason, the Company, Doughney and the Preferred
Stockholders collectively purchase less than all of the authorized, issued and
outstanding shares of a Humphrey's MS Stock and the MS Stock of his Permitted
Transferees, such shares of MS Stock not purchased shall continue to be subject
to the terms and conditions of this Agreement.
(b) Upon a Total Disability of Doughney:
(i) Doughney, or his legal representative, if one has been
appointed shall have the option, for a period of sixty (60) days following the
Total Disability, to either offer to sell and to sell (to the extent such offer
is accepted) all the shares of MS Stock held by Doughney and his Permitted
Transferees, to Humphrey, the Company and/or the Preferred Stockholders as
hereinafter provided and at the price and upon the terms provided in Sections 7
and 8 of this Agreement, or elect not to offer to sell all such shares of MS
Stock in which event the provisions of Section 4(c) shall apply.
(ii) If Doughney or his legal representative elects to sell all
the shares of MS Stock held by Doughney and his Permitted Transferees, for a
period of thirty (30) days following the expiration of the sixty (60) day period
provided in Section 4(b)(i) hereof, Humphrey shall have the option to purchase
all or any shares of MS Stock then registered in Doughney's name and in the name
of his Permitted Transferees, at the price and upon the terms provided in
Sections 7 and 8 hereof, upon notice to Doughney or his legal representative;
provided, however, that Humphrey shall not have the option set forth in this
Section 4(b)(ii) if Humphrey is not then employed by the Company.
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(iii) Any shares of MS Stock with respect to which Humphrey shall
fail to exercise his option to purchase as provided in Section 4(b)(i) hereof
within the time period therein provided shall be deemed to have been offered at
the same price and at the same terms to the Company, which shall have the option
for a period of thirty (30) days after the expiration of the ninety (90) day
period provided in Section 4(b)(i) to purchase all or any such remaining shares
of MS Stock at the price and upon the terms provided in Section 7 and 8 hereof,
upon notice to Doughney or his legal representative.
(iv) Any shares of such MS Stock with respect to which Humphrey
and the Company shall fail to exercise his or its respective options to purchase
pursuant to Sections 4(b)(i) and (ii) hereof within the time periods therein
provided shall be deemed to have been offered at the same price and at the same
terms to the Preferred Stockholders, who shall have the option for a period of
thirty (30) days after the expiration of the thirty (30) day period provided in
Section 4(b)(ii) to purchase all or any such remaining shares of MS Stock at the
price and upon the terms provided in Sections 7 and 8 hereof, upon notice to
Doughney or his legal representative. If more than one Preferred Stockholder
desires to purchase such remaining shares of MS Stock, such shares shall be
purchased by them in such proportions as they may agree. In the absence of
agreement, each Preferred Stockholder desiring to purchase the remaining shares
of MS Stock shall be entitled to purchase up to that number of shares of said MS
Stock which is equal to the number of remaining shares of MS Stock multiplied by
a fraction, the numerator of which shall be the sum of (A) the number of shares
of Common Stock registered in the name of the Preferred Stockholder who desires
to purchase such remaining shares, plus (B) the number of shares of Common Stock
which such Preferred Stockholder is entitled to receive upon conversion of his
or its shares of Preferred Stock and the number of Warrant Shares issuable to
said Preferred Stockholder upon exercise of his Warrants, and the denominator of
which shall be the sum of (X) the number of shares of Common Stock registered in
the name of all Preferred Stockholders who desire to purchase such shares, plus
(Y) the number of shares of Common Stock which all Preferred Stockholders who
desire to purchase are entitled to receive upon conversion of their shares of
Preferred Stock and the number of Warrant Shares issuable to all Preferred
Stockholders who desire to so purchase upon exercise of all of their respective
Warrants.
(v) If, for any reason, Humphrey, the Company and the Preferred
Stockholders collectively purchase less than all of the authorized, issued, and
outstanding shares of Doughney's MS Stock and the MS Stock of his Permitted
Transferees, such shares of MS Stock not purchased shall continue to be subject
to the terms and conditions of this Agreement.
(c) If either Humphrey or Doughney, as the case may be, who is subject
to the Total Disability (the "Disabled Management Stockholder"), or his legal
representative, elects not to offer to sell all of such shares of MS Stock (as
provided in
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Sections 4(a)(i) or 4(b)(i) hereof), or if the other Management Stockholder, the
Company and the Preferred Stockholders collectively purchase less than all of
such shares of MS Stock (pursuant to Sections 4(a)(ii)-(iii) or 4(b)(ii)-(iv)),
as the case may be, the Disabled Management Stockholder, his successors and
recipients of such retained shares of MS Stock shall be entitled to retain the
economic benefits of ownership of such retained shares; provided that such
Disabled Management Stockholder, or his legal representative, and each of such
successors and recipients shall (i) before the expiration of the sixty (60) day
period provided in Sections 4(a)(i) and 4(b)(i) hereof, or within sixty (60)
days of the expiration of the options provided in Sections 4(a)(iii) or 4(b)(iv)
as the case may be, execute and deliver (X) if Doughney is the Disabled
Management Stockholder, to Humphrey, if and for so long as he is employed by the
Company, and then to the Preferred Stockholders or (Y) if Humphrey is the
Disabled Management Stockholder, or if Doughney is the Disabled Management
Stockholder and Humphrey is not employed by the Company, to the Preferred
Stockholders, an irrevocable ten (10) year proxy to vote all such shares of MS
Stock (and further provided that if such ten (10) year period shall for any
reason be found to be unenforceable under the provisions of applicable law, such
period shall be automatically revised without further action of the parties to
equal the maximum period of time which is enforceable under the provisions of
applicable law), and (ii) as a condition of receipt of such shares, execute an
instrument acceptable to counsel for the Preferred Stockholders and counsel for
the Company pursuant to which they agree to become parties to this Agreement and
agree to be bound by all of the applicable provisions and terms and conditions
hereof. Failure of all of such heirs and recipients to timely execute and
deliver said proxy and such instrument shall be deemed to be an offer to sell
all of such retained shares of MS Stock of the Disabled Management Stockholder
and his Permitted Transferees, subject to the provisions of Sections 4(a)(ii)
through (iii) and Sections 4(b)(ii) through 4(b)(iv) hereof, as the case may be.
(d) Each Management Stockholder hereby agrees that if the Company, the
other Management Stockholder, or the Preferred Stockholders exercise its or
their option(s) pursuant to Sections 4(a) or 4(b), his legal representative, and
the trustees and beneficiaries of any voting trust or similar trust to which any
of his shares of Common Stock have been transferred and all Permitted
Transferees of such Management Stockholder shall be bound to take any and all
action necessary to enable the Company, the other Management Stockholders or the
Preferred Stockholders, as the case may be, to purchase his shares of MS Stock.
(e) For purposes of this Section 4, a Management Stockholder shall be
considered to be "Totally Disabled" if he is unable to perform the material
duties required of him by the Company and historically performed by him for a
continuous period of six (6) months due to a "mental incompetence" or "physical
disability," as hereinafter defined. A Management Stockholder shall be
considered to be mentally incompetent and/or physically disabled (i) if he is
under a legal decree of incompetency (the date of such decree being deemed the
date on which such mental incompetence occurred for purposes of this Section 4),
or (ii) because of a "Medical Determination of
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Mental and/or Physical Disability." A Medical Determination of Mental and/or
Physical Disability shall mean the written determination by (Y) the physician
regularly attending the Disabled Management Stockholder and (Z) a physician
selected by the Company and approved by the Preferred Stockholders holding
sixty-three percent (63%) of the outstanding shares of Preferred Stock (or, if
there be no such shares outstanding, holding sixty-three percent (63%) of the
shares of Common Stock issued upon conversion of the shares of Preferred Stock
and the Warrant Shares), that because of a medically determinable mental and/or
physical disability, said Management Stockholder is unable to perform each of
his material duties in connection with his regular full-time employment with the
Company, and that such mental and/or physical disability is determined or
reasonably expected to last twelve (12) months or longer after the date of
determination, based on medically available information. If the two physicians
do not agree, they shall jointly choose a third consulting physician and the
written opinion of the majority of these three (3) physicians shall be
conclusive as to such disability and shall be binding on the parties. The date
of any written opinion which is conclusive as to the mental and/or physical
disability shall be deemed the date on which such mental and/or physical
disability commenced for purposes of this Section 4(d), if the written opinion
concludes that said Management Stockholder is totally disabled. In conjunction
with determining mental and/or physical disability for purposes of this
Agreement, each Management Stockholder hereby consents to such examinations
which are relevant to a determination of whether he is mentally and/or
physically disabled and which is jointly required by any two (2) of the
aforesaid physicians, and to furnish such medical information as may be
reasonably requested, and waives any applicable physician patient privilege that
may arise because of such examination. All physicians selected hereunder shall
be Board-certified in the specialty most closely related to the nature of the
mental and/or physical disability alleged to exist.
For purposes of determining whether the Management Stockholder is
Totally Disabled, a disability shall be deemed to continue from the date of any
legal decree of incompetency, or written opinion which is conclusive as to the
mental and/or physical disability, through the date the legal decree expires or
is otherwise revoked or removed, or the date on which the Total Disability is
found to cease to exist as determined by the physicians described above pursuant
to the procedures provided therein, as set forth in a written opinion of said
physicians.
5. TERMINATION OF EMPLOYMENT OF MANAGEMENT STOCKHOLDERS.
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(a) Upon the termination or resignation of employment with the
Company ("Termination") of Humphrey:
(i) Humphrey shall have the option, for a period of sixty
(60) days following Termination, to either offer to sell and sell (to the extent
such offer is accepted) all of the shares of MS Stock held by Humphrey and his
Permitted
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Transferees, to the Company and/or to Doughney and the Preferred Stockholders as
hereinafter provided and at the price and upon the terms provided in Sections 7
and 8 of this Agreement, or elect not to offer to sell all such shares of MS
Stock, in which event the provisions of Section 5(c) shall apply.
(ii) If Humphrey elects to sell all of the shares of MS Stock
held by him and his Permitted Transferees, for a period of thirty (30) days
following the expiration of the sixty (60) day period provided in Section
5(a)(i) hereof, the Company shall have the option to purchase all or any shares
of MS Stock then registered in Humphrey's name and the name of his Permitted
Transferees, at the price and upon the terms provided in Sections 7 and 8
hereof, upon notice to Humphrey.
(iii) Any shares of such MS Stock with respect to which the
Company shall fail to exercise its option to purchase pursuant to Section
5(a)(i) hereof within the time period therein provided shall be deemed to have
been offered at the same price and at the same terms to the Doughney (provided
that he is still employed by the Company) and the Preferred Stockholders, who
shall have the option for a period of thirty (30) days after the expiration of
the thirty (30) day period provided in Section 5(a)(i) to purchase all or any
such shares of MS Stock at the price and upon the terms provided in Sections 7
and 8 hereof, upon notice to Humphrey. If more than one such stockholder desires
to purchase such remaining shares of MS Stock, such shares shall be purchased by
them in such proportions as they may agree. In the absence of agreement, each
such stockholder desiring to purchase such remaining shares of MS Stock shall be
entitled to purchase up to that number of shares of said MS Stock which is equal
to the number of remaining shares of MS Stock multiplied by a fraction, the
numerator of which shall be the sum of (A) the number of shares of Common Stock
registered in the name of the stockholder who desires to purchase such remaining
shares, plus (B) the number of shares of Common Stock held by all Permitted
Transferees of Doughney, if he desires to purchase such remaining shares, plus
(C) the number of shares of Common Stock which a Preferred Stockholder is
entitled to receive upon conversion of his or its shares of Preferred Stock and
the number of Warrant Shares issuable to such stockholder upon exercise of the
Warrants, and the denominator of which shall be the sum of (X) the number of
shares of Common Stock registered in the name of all stockholders who desire to
purchase such shares, plus (Y) the number of shares of Common Stock held by all
Permitted Transferees of Doughney, if he desires to purchase such shares, plus
(Z) the number of shares of Common Stock which all Preferred Stockholders who
desire to purchase are entitled to receive upon conversion of their shares of
Preferred Stock and the number of Warrant Shares issuable to all Preferred
Stockholders who desire to so purchase upon exercise of all of their respective
Warrants.
(iv) If, for any reason, the Company, Doughney and the Preferred
Stockholders collectively purchase less than all of the authorized, issued and
outstanding shares of Humphrey's MS Stock and the MS Stock of his Permitted
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Transferees, such shares of MS Stock not purchased shall continue to be subject
to the terms and conditions of this Agreement.
(b) Upon the Termination of Doughney:
(i) Doughney shall have the option, for a period of sixty (60)
days following the Termination, to either offer to sell and sell (to the extent
such offer is accepted) all of the shares of MS Stock held by Doughney and his
Permitted Transferees, to Humphrey, the Company and the Preferred Stockholders
as hereinafter provided and at the price and upon the terms provided in Sections
7 and 8 of this Agreement, or elect not to offer to sell all such shares of MS
Stock, in which event the provisions of Section 5(c) shall apply.
(ii) If Doughney elects to sell all of the shares of MS Stock
held by him and his Permitted Transferees, then, for a period of thirty (30)
days following the expiration of the sixty (60) day period provided in Section
5(b)(i) hereof, Humphrey shall have the option to purchase all or any shares of
MS Stock registered in Doughney's name and the name of his Permitted
Transferees, at the price and upon the terms provided in Sections 7 and 8 hereof
upon notice to Doughney; provided, however, that Humphrey shall not have the
option set forth in this Section 5(b)(ii) if Humphrey is not then employed by
the Company.
(iii) Any shares of MS Stock with respect to which Humphrey shall
fail to exercise his option to purchase as provided in Section 5(b)(ii) hereof
within the time period therein provided shall be deemed to have been offered at
the same price and at the same terms to the Company, which shall have the option
for a period of thirty (30) days after the expiration of the thirty (30) day
period provided in Section 5(b)(ii) to purchase all or any such remaining shares
of MS Stock at the price and upon the terms provided in Section 7 and 8 hereof,
upon notice to Doughney.
(iv) Any shares of such MS Stock with respect to which Humphrey
and the Company shall fail to exercise his and its respective options to
purchase pursuant to Sections 5(b)(ii) and (iii) hereof within the time periods
therein provided shall be deemed to have been offered at the same price and at
the same terms to the Preferred Stockholders, who shall have the option for a
period of thirty (30) days after the expiration of the thirty (30) day period
provided in Section 5(b)(iii) to purchase all or any such remaining shares of MS
Stock at the price and upon the terms provided in Sections 7 and 8 hereof, upon
written notice to Doughney. If more than one Preferred Stockholder desires to
purchase such remaining shares of MS Stock, such shares shall be purchased by
them in such proportions as they may agree. In the absence of agreement, each
Preferred Stockholder desiring to purchase the remaining shares of MS Stock
shall be entitled to purchase up to that number of shares of said MS Stock which
is equal to the number of remaining shares of MS Stock multiplied by a fraction,
the numerator of which shall be the sum of (A) the number of shares of Common
Stock registered in the name of
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<PAGE>
the Preferred Stockholder who desires to purchase such remaining shares, plus
(B) the number of shares of Common Stock which such Preferred Stockholder is
entitled to receive upon conversion of his or its shares of Preferred Stock and
the number of Warrant Shares issuable to said Preferred Stockholder upon
exercise of his Warrants, and the denominator of which shall be the sum of (X)
the number of shares of Common Stock registered in the name of all Preferred
Stockholders who desire to purchase such shares, plus (Y) the number of shares
of Common Stock which all Preferred Stockholders who desire to purchase are
entitled to receive upon conversion of their shares of Preferred Stock and the
number of Warrant Shares issuable to all Preferred Stockholders who desire to so
purchase upon exercise of all of their respective Warrants.
(v) If, for any reason, Humphrey, the Company and the Preferred
Stockholders collectively purchase less than all of the authorized, issued, and
outstanding shares of Doughney's and his Permitted Transferees' MS Stock, such
shares of MS Stock not purchased shall continue to be subject to the terms and
conditions of this Agreement.
(c) If either Humphrey or Doughney (each a "Terminated Management
Stockholder") elects not to offer to sell all of such shares of MS Stock (as
provided in Sections 5(a)(i) or 5(b)(i) hereof, or if the other Management
Stockholder, the Company and the Preferred Stockholders collectively purchase
less than all of such shares of MS Stock pursuant to Sections 5(a)(ii)-(iii) or
5(b)(ii)-(iv), as the case may be, the Terminated Management Stockholder, his
successor and recipients of such retained shares of MS Stock shall be entitled
to retain the economic benefits of ownership of such retained shares; provided
that such Terminated Management Stockholder and each of such successors and
recipients shall (i) before the expiration of the sixty (60) day period provided
in Section 5(a)(i) or 5(b)(i) hereof, or within sixty (60) days of the
expiration of the options provided in Sections 5(a)(iii) or 5(b)(iv), as the
case may be, execute and deliver (X) if Doughney is the Terminated Management
Stockholder, to Humphrey, if and for so long as he is employed by the Company,
and then to the Preferred Stockholders, or (Y) if Humphrey is the Terminated
Management Stockholder, or if Doughney is the Terminated Management Stockholder
and Humphrey is not employed by the Company, to the Preferred Stockholders, an
irrevocable ten (10) year proxy to vote all such shares of MS Stock (and further
provide that if such ten (10) year period shall for any reason be found to be
unenforceable under the provisions of applicable law, such period shall be
automatically revised without further action of the parties to equal the maximum
period of time which is enforceable under the provisions of applicable law), and
(ii) as a condition of receipt of such shares, execute an instrument acceptable
to counsel for the Preferred Stockholders and counsel for the Company pursuant
to which they agree to become parties to this Agreement and agree to be bound by
all of the applicable terms and conditions hereof. Failure of all of such heirs
and recipients to timely execute and deliver said proxy and such instrument
shall be deemed to be an offer to sell all of such retained shares of MS Stock
of the Terminated Management
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<PAGE>
Stockholder and its Permitted Transferees subject to the provisions of Sections
5(a)(ii)-(iii) and Sections 5(b)(ii)-(iv) hereof, as the case may be.
(d) Each Management Stockholder hereby agrees that if the Company, the
other Management Stockholder, or the Preferred Stockholders exercise its or
their option(s) pursuant to Sections 5(a) or 5(b), his legal representatives,
and the trustees and beneficiaries of any voting trust or similar trust to which
any of his shares of Common Stock have been transferred and all Permitted
Transferees of such Management Stockholder shall be bound to take any and all
action necessary to enable the Company, the other Management Stockholder or the
Preferred Stockholders, as the case may be, to purchase his shares of MS Stock.
6. LIFETIME TRANSFERS OF MS STOCK.
------------------------------
(a) In order to induce the Preferred Stockholders to purchase the
shares of Preferred Stock from the Company, the Management Stockholders agree
that, except as otherwise permitted pursuant to the provisions of Section 6(e)
hereof, during their respective lifetimes each Management Stockholder shall not
Transfer any of his respective shares of MS Stock until such time as all shares
of Preferred Stock have been converted into shares of the Company's Common Stock
or the Company shall have redeemed and paid for all shares of Preferred Stock
and shall have paid all accrued and unpaid dividends with respect thereto, and
thereafter only upon satisfaction of all of the terms and conditions set forth
in Sections 6(b) through 6(d) hereof.
(b) Offer From Third Party.
----------------------
If, after all shares of Preferred Stock have been converted into
shares of the Company's Common Stock or the Company has redeemed and paid for
all shares of Preferred Stock and all accrued and unpaid dividends with respect
thereto, a Management Stockholder or any Permitted Transferee (the "Transferring
Stockholder") receives a bona fide offer from an independent third party which
the Transferring Stockholder is willing to accept to purchase all or any of the
authorized, issued and outstanding shares of MS Stock then registered in the
Transferring Stockholder's name, the Transferring Stockholder shall first comply
with the provisions of this Section 6(b).
(i) If the Transferring Stockholder is Humphrey or any of his
Permitted Transferees, such Transferring Stockholder shall first offer in
writing (the "First Offer") to sell the shares of MS Stock (the "Offered Stock")
to the Company at the price and on the terms on which the Transferring
Stockholder proposes to transfer the Offered Stock to the proposed third party
transferee. The First Offer shall set forth (i) the number of shares of the
Offered Stock, (ii) the name and address of the proposed transferee, (iii) the
amount of consideration to be received by the Transferring Stockholder, and (iv)
the method of proposed payment. A copy of the First Offer shall also be sent to
the Preferred Stockholders and to Doughney, if he is still employed by the
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<PAGE>
Company. The Company shall have the option to acquire all or any of the shares
of Offered Stock at the price and upon the terms provided in the First Offer.
The Company shall have the right to exercise its option for a period of ninety
(90) days (the "First Option Period") following its receipt of the First Offer
by notifying the Transferring Stockholder in writing of its intention to
purchase at Closing (as defined in Section 9 hereof) all or any shares of the
Offered Stock.
(ii) If the Company does not accept the First Offer to purchase
all of the shares of Offered Stock within the period of ninety (90) days
provided in Section 6(b)(i) hereof, the Transferring Stockholder, immediately
thereafter, shall be deemed to have made an offer (the "Second Offer") to sell
any remaining shares of the Offered Stock to Doughney (provided that he is still
employed by the Company) and the Preferred Stockholders, at the same price and
on the same terms contained in the First Offer. Doughney and the Preferred
Stockholders shall have the option to acquire all or any of the remaining shares
of Offered Stock at the price and upon the terms provided in the First Offer, by
notifying the Transferring Stockholder in writing of their intention to so
purchase at Closing, within thirty (30) days following the expiration of the
First Option Period (the "Second Option Period"), all or any portion of the
remaining shares of Offered Stock. If more than one such stockholder desires to
purchase the remaining shares of Offered Stock, such remaining shares of Offered
Stock shall be purchased by them in such proportions as they may agree. In the
absence of agreement, each such stockholder desiring to purchase the remaining
shares of Offered Stock shall be entitled to purchase up to that number of
remaining shares of Offered Stock which is equal to that number of remaining
shares of Offered Stock multiplied by a fraction, the numerator of which shall
be the sum of (A) the number of shares of Common Stock registered in the name of
the stockholder who desires to purchase such shares, plus (B) the number of
shares of Common Stock held by all Permitted Transferees of Doughney, if he
desires to purchase such remaining shares, plus (C) the number of shares of
Common Stock which a Preferred Stockholder is entitled to receive upon
conversion of his or its shares of Preferred Stock and the number of Warrant
Shares issuable to said Preferred Stockholder upon exercise of the Warrants, and
the denominator of which shall be the sum of (X) the number of shares of Common
Stock registered in the name of all Preferred Stockholders who desire to
purchase such shares, plus (Y) the number of shares of Common Stock held by all
Permitted Transferees of Doughney, if he desires to purchase such shares, plus
(Z) the number of shares of Common Stock which all Preferred Stockholders who
desire to purchase are entitled to receive upon conversion of their shares of
Preferred Stock and the number of Warrant Shares issuable to all Preferred
Stockholders who desire to so purchase upon exercise of their respective
Warrants.
(iii) If the Transferring Stockholder is Doughney or any of his
Permitted Transferees, and provided that Humphrey is then employed by the
Company, such Transferring Stockholder shall make the first offer (the "Humphrey
Offer") to sell the shares of Offered Stock to Humphrey at the price and upon
the terms which the Transferring Stockholder proposes to transfer the Offered
Stock to the
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<PAGE>
proposed third party transferee. Said Humphrey Offer shall set forth the
information described in Section 6(b)(ii) above with respect to the First Offer.
A copy of the Humphrey Offer shall also be sent to the Company and the Preferred
Stockholders. Humphrey shall have the option to acquire all or any of the shares
of Offered Stock at the price upon the terms provided in the Humphrey Offer.
Humphrey shall have the right to exercise his option or a period of thirty (30)
days (the "Humphrey Option Period") following his receipt of the Humphrey Offer
by notifying the Transferring Stockholder in writing of his intention to
purchase at closing (as defined in Section 9 hereof) all or any of the shares of
the Offered Stock.
(iv) If Humphrey does not accept the Humphrey Offer to purchase
all the shares of Offered Stock within the Humphrey Option Period, or if Section
6(b)(iii) is not applicable, the Transferring Stockholder shall make, or be
deemed to have immediately made, an offer (the "Company Offer") to sell all or
the remaining shares, as the case may be, of Offered Stock to the Company, at
the same price and on the same terms which the Transferring Stockholder proposes
to transfer the Offered Stock to the proposed third party transferee. A copy of
the Company Offer shall also be sent to the Preferred Stockholders. The Company
shall have the option to acquire all or any of such shares of Offered Stock at
the price and upon the terms provided in the Company Offer, by notifying the
Transferring Stockholder in writing of its intention to purchase at Closing,
within a period of sixty (60) days following the expiration of the Humphrey
Option Period (or if Section 6(b)(iii) is not applicable, for a period of ninety
(90) days following receipt of the Company Offer (the "Company Option Period"))
all or any portion of the remaining shares of Offered Stock.
(v) If the Company does not accept the Company Offer to purchase
all of the shares of Offered Stock within the Company Option Period provided in
Section 6(b)(iv) hereof, the Transferring Stockholder, immediately thereafter,
shall be deemed to have made an offer (the "Preferred Stockholder Offer") to
sell any remaining shares of the Offered Stock to the Preferred Stockholders, at
the price and on the terms contained in the Company Offer. The Preferred
Stockholders shall have the option to acquire all or any of remaining shares of
Offered Stock at the price and upon the terms provided in the Company Offer, by
notifying the Transferring Stockholder in writing of their intention to so
purchase at Closing, within thirty (30) days following the expiration of the
Company Option Period (the "Preferred Stockholder Option Period"), all or any
portion of the remaining shares of Offered Stock. If more than one of the
Preferred Stockholders desire to purchase the remaining shares of Offered Stock,
such remaining shares of Offered Stock shall be purchased by them in such
proportions as they may agree. In the absence of agreement, each Preferred
Stockholder desiring to purchase the remaining shares of Offered Stock shall be
entitled to purchase up to that number of remaining shares of Offered Stock
which is equal to that number of remaining shares of Offered Stock multiplied by
a fraction, the numerator which shall be the sum of (A) the number of shares of
Common Stock registered in the name of the Preferred Stockholder who desires to
purchase such shares, plus (B) the number of shares of Common Stock
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<PAGE>
which such Preferred Stockholder is entitled to receive upon conversion of his
or its shares of Preferred Stock and the number of Warrant Shares issuable to
said Preferred Stockholder upon exercise of the Warrants, and the denominator
which shall be the sum of (X) the number of shares of Common Stock registered in
the name of all Preferred Stockholders who desire to purchase such shares, plus
(Y) the number of shares of Common Stock which all Preferred Stockholders who
desire to purchase or entitled to receive upon conversion of their shares of
Preferred Stock and the number of Warrant Shares issuable to all Preferred
Stockholders who desire to so purchase upon exercise of their respective
Warrants.
(vi) If the Company, the Preferred Stockholders and the other
Management Stockholder collectively do not exercise their respective options to
purchase all of the shares of Offered Stock pursuant to Sections 6(b)(i)-(ii) or
Sections 6(b)(iii)-(v) hereof, as the case may be, the Transferring Stockholder
may either (X) elect to proceed to Closing with respect to those shares of
Offered Stock which the Company, the Preferred Stockholders and the other
Management Stockholder have elected to purchase, and sell any remaining shares
pursuant to, and subject to the terms and conditions of, Section 6(c) hereof, or
(Y) elect not to sell any of the shares of Offered Stock by providing notice to
the Company and/or the Preferred Stockholders and/or the other Management
Stockholder, as the case may be, within fifteen (15) days from the expiration of
the Second Option Period provided in Section 6(b)(ii) hereof or the Preferred
Stockholder Option Period provided in Section 6(b)(v) hereof, as the case may
be, and proceed to sell all of the Offered Stock pursuant to and subject to the
terms and conditions of Section 6(c) hereof; subject, however, to the option of
the Company, for a period of fifteen (15) days from receipt of such notice of
the Transferring Stockholder, to elect, upon notice to the Transferring
Stockholder, to purchase all of the remaining shares of the Offered Stock not
purchased pursuant to Sections 6(b)(i)-(ii) or Sections 6(b)(iii)-(v) hereof, as
the case may be, at the price and upon the terms provided in the First Offer, or
the Company Offer, as the case may be, in which case the Transferring
Stockholder shall be obligated to sell all of the Offered Stock to the Company,
the Preferred Stockholders and/or the other Management Stockholder who desire to
purchase such Offered Stock pursuant to such sections.
(c) Transfers to Third Parties. If (i) the Transferring Stockholder
--------------------------
elects to transfer all or a portion of his shares of Offered Stock, (ii) the
Transferring Stockholder strictly complies with the provisions of Section 6(b)
hereof, (iii) the Company, the Preferred Stockholders and the other Management
Stockholders collectively fail to so purchase all of such shares of Offered
Stock, (iv) all of the shares of Preferred Stock held by the Preferred
Stockholders have been converted into shares of the Company's Common Stock or
redeemed and paid for by the Company, and all accrued and unpaid dividends with
respect to such shares of Preferred Stock have been paid, and (v) the
Transferring Stockholder complies with the terms of this Section 6(c), then all
of such shares of Offered Stock, or if the Transferring Stockholder has elected
to proceed to Closing (pursuant to clause (X) of Section 6(b)(vi)) on the sale
of a portion of the shares
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<PAGE>
of Offered Stock, any such shares of Offered Stock which are not so purchased by
the Company, the Preferred Stockholders and the other Management Stockholder, as
the case may be, may be sold by the Transferring Stockholder to the third party
named in the First Offer or the Company Offer, as the case may be, within a
period of ninety (90) days after the expiration of the Second Option Period
provided in Section 6(b)(ii) hereof or the Preferred Stockholder Option Period
provided in Section 6(b)(v) hereof, as the case may be. Such shares of Offered
Stock may be transferred to the third party named in the First Offer or Company
Offer provided that such shares are sold at the price and on the terms set forth
in the First Offer or Company Offer. Any shares of Offered Stock not actually
sold or transferred to such third party by the Transferring Stockholder within
such ninety (90) day period at the price and on the terms set forth in the First
Offer or Company Offer shall remain subject to all of the provisions of this
Agreement. In all events, the Offered Stock shall continue to be subject to the
terms and conditions of this Agreement, and any new stockholder purchasing all
or any portion of the shares of Offered Stock shall execute a counterpart to
this Agreement.
(d) Involuntary Transfer. If any portion of a Management
--------------------
Stockholder's shares of MS Stock or shares of any Permitted Transferee are
attached or taken in execution, or if a Management Stockholder or Permitted
Transferee applies for the benefit of, or files a case under, any provision of
the federal bankruptcy laws or any other law relating to insolvency or relief of
debtors, or if a case or proceeding is brought against a Management Stockholder
or Permitted Transferee under any provision of the federal bankruptcy laws or
any other law relating to insolvency or relief of debtors which is not dismissed
within sixty (60) days after the commencement thereof, or if a Management
Stockholder or Permitted Transferee makes an assignment for the benefit of
creditors, or if any portion of a Management Stockholder's shares of MS Stock or
shares of any Permitted Transferee is made subject to a charging order, or is
transferred pursuant to a divorce decree (each such event shall be referred to
as an "Involuntary Transfer"), said Management Stockholder shall give immediate
written notice of the Involuntary Transfer to the Company, the other Management
Stockholder, and the Preferred Stockholders, and the Company, the other
Management Stockholder, and the Preferred Stockholders shall have the respective
options, as provided in Sections 6(d)(i)-(ii) or Sections 6(d)(iii)-(v) hereof,
as the case may be, to purchase any or all of the shares of MS Stock subject to
the Involuntary Transfer (the "Involuntary Transfer Stock") at the price and
upon the terms provided in Sections 7 and 8 in accordance with the provisions of
this Section 6(d).
(i) If the Involuntary Transfer Stock is owned by Humphrey or his
Permitted Transferee, the Company shall have an option, exercisable upon written
notice to said Management Stockholder for a period of ninety (90) days following
receipt by the Company of written notice of such Involuntary Transfer, to
purchase all or any shares of the Involuntary Transfer Stock at the price and
upon the terms provided in Section 7 and 8 hereof, subject to Section 6(d)(vi).
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<PAGE>
(ii) Any shares of Involuntary Transfer Stock with respect to
which the Company shall fail to exercise its option to purchase as provided in
Section 6(d)(i) hereof within the time period therein provided shall be deemed
to have been offered at the same price and on the same terms to Doughney
(provided that he is still employed by the Company) and the Preferred
Stockholders, who shall have the option, for a period of thirty (30) days after
the expiration of the ninety (90) day period provided in Section 6(d)(i), to
purchase all or any such shares of Involuntary Transfer Stock at the price and
upon the terms provided in Sections 7 and 8 hereof (subject to Section
6(d)(iv)), upon notice to said Management Stockholder. If more than one such
stockholder desires to purchase such remaining shares of Involuntary Transfer
Stock, such shares shall be purchased by them in such proportions as they may
agree. In the absence of agreement, each such stockholder desiring to purchase
the remaining shares of Involuntary Transfer Stock shall be entitled to purchase
up to that number of shares of said Involuntary Transfer Stock which is equal to
the number of remaining shares of Involuntary Transfer Stock multiplied by a
fraction, the numerator of which shall be the sum of (A) the number of shares of
Common Stock registered in the name of the stockholder who desires to purchase
such remaining shares, plus (B) the number of shares of Common Stock held by all
Permitted Transferees of Doughney, if he desires to purchase such remaining
shares, plus (C) the number of shares of Common Stock which a Preferred
Stockholder is entitled to receive upon conversion of his or its shares of
Preferred Stock and the number of Warrant Shares issuable to such stockholder
upon exercise of his Warrants, and the denominator of which shall be the sum of
(X) the number of shares of Common Stock registered in the name of all
stockholders who desire to purchase such shares, plus (Y) the number of shares
of Common Stock held by all Permitted Transferees of Doughney, if he desires to
purchase such shares, plus (Z) the number of shares of Common Stock which all
Preferred Stockholders who desire to purchase are entitled to receive upon
conversion of their shares of Preferred Stock and the number of Warrant Shares
issuable to all Preferred Stockholders who desire to so purchase upon exercise
of all of their respective Warrants.
(iii) If the Involuntary Stock is owned by Doughney or his
Permitted Transferee, Humphrey shall have the option, exercisable upon written
notice to said Management Stockholder for a period of thirty (30) days following
receipt by Humphrey of written notice of such Involuntary Transfer, to purchase
all or any shares of the Involuntary Transfer Stock at the price and upon the
terms provided in Sections 7 and 8 hereof subject to Section 6(d)(vi); provided
however that Humphrey shall not have the option set forth in this Section
6(d)(iii) if Humphrey is not then employed by the Company.
(iv) Any shares of Involuntary Transfer Stock with respect to
which Humphrey shall fail to exercise his option to purchase as provided in
Section 6(d)(iii) hereof within the time period therein provided shall be deemed
to have been offered at the same price and at the same terms to the Company,
which shall have the option for a period of sixty (60) days after the expiration
of the thirty (30) day period
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<PAGE>
provided in Section 6(d)(iii) (or if Section 6(d)(iii) is not applicable, for a
period of ninety (90) days following receipt by the Company of written notice of
such Involuntary Transfer) to purchase all or any and such remaining shares of
Involuntary Transfer Stock at the price and upon the terms provided in Section 7
and 8 hereof upon notice to said Management Stockholder.
(v) Any shares of such Involuntary Transfer Stock with respect to
which the Company shall fail to exercise its option to purchase as provided in
Section 6(d)(iv) hereof within the time period therein provided shall be deemed
to have been offered at the same price and terms to the Preferred Stockholders,
who shall have the option, for a period of thirty (30) days after the expiration
of the applicable option period provided in Section 6(d)(iv), to purchase all or
any such remaining shares of Involuntary Transfer Stock at the price and upon
the terms provided in Sections 7 and 8 hereof (subject to Section 6(d)(iv), upon
notice to said Management Stockholder. If more than one such Preferred
Stockholder desires to purchase such remaining shares of Involuntary Transfer
Stock, such shares shall be purchased by them in such proportions as they may
agree. In the absence of agreement, each such Preferred Stockholder desiring to
purchase the remaining shares of Involuntary Transfer Stock shall be entitled to
purchase up to that number of shares of said Involuntary Transfer Stock which is
equal to the number of remaining shares of Involuntary Transfer Stock multiplied
by a fraction, the numerator which shall be the sum of (A) the number of shares
of Common Stock registered in the name of the Preferred Stockholder who desires
to purchase such remaining shares, plus (B) the number of shares of Common Stock
which such Preferred Stockholder is entitled to receive upon conversion of his
or its shares of Preferred Stock and the number of Warrant Shares issuable to
such Stockholder upon exercise of his Warrants, and the denominator of which
shall be the sum of (X) the number of shares of Common Stock registered in the
name of all Preferred Stockholders who desire to purchase such shares, plus (Y)
the number of shares of Common Stock which all Preferred Stockholders who desire
to purchase are entitled to receive upon conversion of their shares of Preferred
Stock and the number of Warrant Shares issuable to all Preferred Stockholders
who desire to so purchase upon exercise of all of their respective Warrants.
(vi) If the Company, the other Management Stockholder or a
Preferred Stockholder has actual knowledge of an Involuntary Transfer by a
Management Stockholder or his Permitted Transferee, the Company, the other
Management Stockholder or the Preferred Stockholder, as the case may be, shall
give written notice to such effect to said Management Stockholder and Permitted
Transferee and to the other Preferred Stockholders, and giving such written
notice shall constitute said Management Stockholder's giving written notice to
the Company, the other Management Stockholder and to the Preferred Stockholders
for purposes of this Section 6(d).
(vii) The Company, the other Management Stockholder or the
Preferred Stockholders, as the case may be, shall settle with an assignee,
trustee in
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bankruptcy, attaching court or officer or successor in interest holding shares
of the Involuntary Transfer Stock received in an Involuntary Transfer by taking
any or all such shares in execution and paying to them the purchase price for
each share as provided in Section 7, but not exceeding the Management
Stockholder's (or Permitted Transferee's) indebtedness and proper items of
expense. The balance of the value of such shares of Involuntary Transfer Stock
shall be distributable to said Management Stockholder or Permitted Transferee in
accordance with the provisions of Section 8 hereof.
(e) Notwithstanding the provisions of Sections 6(a) through (d)
hereof, subject to the provisions of Sections 3, 4 and 5 hereof, the Management
Stockholders may transfer the beneficial interest in all or any portion of their
respective shares of MS Stock to, or for the exclusive benefit of, any spouse,
lineal descendant of the transferring Management Stockholder, or any trust
established for the exclusive benefit of said spouse and/or lineal descendant
(each a "Permitted Transferee"); provided that, in all events (i) each
transferee agrees to be bound by all of the terms and provisions of this
Agreement and executes, as a condition precedent to said transfer, a counterpart
of this Agreement, and (ii) voting control of said shares is either retained by
the transferring Management Stockholder or transferred to a voting trust
controlled by said Management Stockholder.
(f) Notwithstanding any provisions of this Stockholders Agreement to
the contrary, the Management Stockholders and their Permitted Transferees shall
be entitled to sell all or any portion of their shares of Common Stock to the
public, subject to compliance with all applicable Federal and state securities
laws, if there has been an offering of the Company's Common Stock to the public
pursuant to any registration statement filed by the Company with the Securities
and Exchange Commission based upon a Company valuation of at least $20 million
in which at least $10 million of net proceeds are received by the Company and as
the result of which shares of Common Stock of the Company are listed on either
the New York Stock Exchange, the American Stock Exchange or NASDAQ (a "Public
Offering").
7. PURCHASE PRICE FOR MS STOCK.
---------------------------
(a) In the event of the death or disability of a Management
Stockholder, Termination, or an Involuntary Transfer (each individually a "Sale
Event"), the purchase price for the shares of MS Stock to be purchased as the
result of said Sale Event pursuant to Sections 3, 4, 5 or 6(d) shall be the fair
market value of said shares as of the date of the Sale Event.
(b) Fair Market Value.
-----------------
(i) Agreement of Parties. For purposes of determining the fair
--------------------
market value of the shares of MS Stock sold pursuant to Section 7(a) hereof, if
the purchasing Management Stockholder and/or the Company and/or the purchasing
-21-
<PAGE>
Preferred Stockholders, as the case may be, on the one hand (the purchasing
Management Stockholder, the Company and the purchasing Preferred Stockholders
are hereinafter sometimes collectively referred to as the "Purchaser"), and the
selling Management Stockholder, on the other hand, agree in writing as to the
purchase price for the shares of MS Stock to be sold as the result of a Sale
Event, such agreed value shall be the fair market value of said shares of MS
Stock, and shall be the purchase price of said shares of MS Stock for purposes
of Section 7(a) of this Agreement. If no agreement on the fair market value of
the shares of MS Stock to be sold pursuant to Section 7(a) hereof is reached
within thirty (30) days from the date upon which the last option period pursuant
to which any Purchaser elected to purchase such shares of MS Stock has expired,
then the fair market value of said shares of MS Stock shall be determined
pursuant to Section 7(b)(ii) hereof.
(ii) Third Party Appraisal. If the fair market value for the
---------------------
shares of MS Stock to be sold pursuant to Section 7(a) hereof is not agreed upon
as provided in Section 7(b)(i) within the period therein stated, then within
fourteen (14) days thereafter an appraiser or appraisers (experienced in valuing
closely held businesses) shall be jointly selected by the selling Management
Stockholder, on the one hand, and the Purchaser on the other hand, and the
determination of such jointly selected appraiser or appraisers as to the "Fair
Market Value Per Share of Common Stock" shall be binding and conclusive upon all
parties. If the selling Management Stockholder and the Purchaser are unable to
reach an agreement as to an appraiser, the provisions of subsection (iii) below
shall apply.
For purposes of this Section 7(b)(ii), the purchase price for the
shares of MS Stock to be sold shall be an amount equal to the product of the
"Fair Market Value Per Share of Common Stock" multiplied by the number of shares
of Common Stock which are being sold and purchased hereunder. In addition, for
purposes of determining the fair market value of the shares of MS Stock sold
pursuant to Section 7(a) hereof, the purchase price shall also reflect any
applicable discounts for minority ownership and/or lack of marketability as
determined by appraisal pursuant to this Section 7(b).
"Fair Market Value Per Share of Common Stock" shall be an amount equal
to the fair market value of all of the authorized, issued and outstanding shares
of Common Stock as of the date of the Sale Event as determined by appraisal
pursuant to this Section 7(b)(ii), divided by the total number of shares of
Common Stock authorized, issued and outstanding as of such date. For this
purpose, all Warrant Shares and all other shares issuable upon exercise of all
outstanding warrants, options and other rights to acquire shares of Common Stock
shall be deemed to be issued and outstanding shares of Common Stock as of such
date.
(iii) Additional Appraiser. If the selling Management Stockholder
--------------------
on the one hand, and the Purchaser, on the other hand, do not agree upon the
selection of an appraiser or appraisers, as provided in Section 7(b)(ii) hereof,
within the
-22-
<PAGE>
period therein stated, then, within fourteen (14) days after the expiration of
the fourteen (14) day period provided for in Section 7(b)(ii) hereof, each of
the selling Management Stockholders, on the one hand, and the Purchaser, on the
other hand, shall select one (1) appraiser within fourteen (14) days after the
expiration of the foregoing fourteen (14) day period by providing written notice
to the other party of his or its selection, the appraisers so selected shall
appoint a third appraiser within seven (7) days thereafter, and such third
appraiser shall, within thirty (30) days of being selected, determine the Fair
Market Value Per Share of Common Stock. If either party fails to timely select
an appraiser, then the appraiser selected by the other party shall determine the
Fair Market Value Per Share of Common Stock. If the appraiser cannot agree on a
third appraiser, the appraiser shall be selected by the managing partner of the
Washington, D.C. office of the national public accounting firm of Ernst & Young.
The determination of such appraiser shall be determinative of the Fair Market
Value Per Share of Common Stock for the purposes of this Agreement, and shall be
binding, final and conclusive on all parties hereto.
(iv) Costs of Appraisals. All expenses incurred in the appraisal
-------------------
process shall be borne and paid equally by the selling Management Stockholder,
on the one hand, and the Purchaser, on the other hand.
(c) The purchase price of the shares of MS Stock determined in
accordance with Sections 7(a) and (b) shall constitute the full and exclusive
purchase price of such shares of MS Stock for sales and purchases made under
Sections 3, 4, 5, and 6(d). After payment of the purchase price provided for
herein, the Management Stockholder whose shares of MS Stock are sold, if he no
longer owns any shares of MS Stock as the result of said sale, shall cease to be
a party to, and shall have no further rights under, this Agreement.
8. PAYMENT OF PURCHASE PRICE.
-------------------------
(a) Except as otherwise provided herein, the purchase price for the
shares of MS Stock as determined pursuant to Section 7 hereof shall be paid at
the Closing Date (as defined in Section 9 hereof) in such manner and on such
terms which are agreed upon in writing by the selling Management Stockholder or
his Personal Representative, legal representative or successor, as the case may
be, on the one hand, and the Purchaser, on the other hand. If, despite using
their best efforts, the parties are unable to reach an agreement on the terms of
payment of the Purchase Price for the shares of MS Stock to be sold, then the
Purchase Price shall be paid as follows: (i) Ten Percent (10%) of the Purchase
Price shall be paid by certified or cashier's check, or by wire transfer of
immediately available funds, on the Closing Date; and (ii) the balance shall be
represented by a promissory note of the Purchaser, in form and substance
reasonably acceptable to the selling Management Stockholder, or his Personal
Representative, legal representative or successor, as the case may be, due and
payable in one payment of principal and accrued interest on the first
anniversary date of the Closing Date. Simple interest shall accrue from the
Closing Date until the note is paid in full at the prime rate
-23-
<PAGE>
of interest published in the Wall Street Journal (Eastern Edition), or any
successor thereto, on the Closing Date.
(b) Any debt due by the selling Management Stockholder to the Company,
if applicable, shall be payable according to its terms, as shall any debt due by
the Company to the selling Management Stockholder; provided, however, that,
regardless of the terms of any such debt due by said Management Stockholder to
the Company, any cash payment due under this Section 8 with respect to the
purchase of any shares of MS Stock, shall, instead of being paid to said
Management Stockholder, be first applied to the discharge of any such
indebtedness until all such indebtedness is fully discharged. If the amount of
any indebtedness of such selling Management Stockholder to the Company is in
dispute, any cash payment due under this Section 8 shall be paid into an escrow
account with an escrow agent mutually acceptable to the Purchaser and the
selling Management Stockholder until the dispute is resolved or finally settled.
9. CLOSING. Closing on the sale of any shares of
-------
MS Stock sold pursuant to this Agreement shall, unless otherwise agreed to in
writing by the Purchaser and the selling Management Stockholder or his personal
or legal representative, or successor, as the case may be, be held at the
principal place of business of the Company ninety (90) days from the earlier of
(i) the date on which an option is exercised to purchase all of the shares of MS
Stock offered for sale pursuant to this Agreement (or, if an election is made to
sell less than all of the offered shares of MS Stock then upon the date on which
an option is subsequently exercised to purchase the remaining portion of such
offered shares of MS Stock), or (ii) if all of such shares of MS Stock offered
for sale are not purchased pursuant to this Agreement, the date on which the
last option period to purchase such offered shares of MS Stock expires
(collectively, the "Closing Date"); provided, however, that if an appraiser is
appointed to determine the purchase price pursuant to Section 7, then
notwithstanding the foregoing to the contrary, the Closing shall take place on,
and the Closing Date shall be, a date no later than ninety (90) days from the
receipt by the selling Management Stockholder (or his personal or legal
representative, or successor, as the case may be), on the one hand, and the
Purchaser, on the other hand, of the determination of the fair market value of
the shares of MS Stock in accordance with the provisions of Section 7(b), if
such Closing Date would occur later than the Closing Date otherwise determined
pursuant to this Section 9. At the Closing, the selling Management Stockholder
shall surrender the certificates representing the shares of MS Stock to be
transferred, properly endorsed or executed for transfer.
10. PREFERRED STOCKHOLDERS PUT OPTION.
---------------------------------
(a) At any time after March 15, 2000, each Preferred Stockholder shall
have the option to sell to the Company all or any portion of (i) the shares of
Common Stock owned by the Preferred Stockholder (including Warrant Shares) and
(ii) the Warrant Shares issuable upon the exercise of its respective Warrants
(collectively, the "Put Option"), and the Company shall be obligated to purchase
said
-24-
<PAGE>
shares of Common Stock and Warrant Shares, at the price and upon the terms
provided in Sections 10(b) and 10(c) hereof. Each of the Preferred Stockholders
desiring to exercise a Put Option shall provide ninety (90) days prior notice to
the Company of its exercise of the Put Option, which notice shall specify the
number of shares of Common Stock and Warrant Shares which said Preferred
Stockholder desires to sell to the Company. The Company shall, within ten (10)
days after receipt of said notice, forward a copy of said notice to all other
Preferred Stockholders, and each such Preferred Stockholder shall thereafter be
entitled, at its option, to sell all or any part of its respective shares of
Common Stock and Warrant Shares to the Company, by providing written notice to
each Preferred Stockholder which initially exercised its Put Option (the
"Initial Preferred Stockholder") and the Company within ten (10) days after
receipt of the Company's notice, as herein provided, of its desire to exercise
its Put Option. Closing with respect thereto shall occur simultaneously with
the closing of the sale of the shares of Common Stock and Warrant Shares of the
Initial Preferred Stockholder.
(b) The purchase price for the shares of Common Stock and Warrant
Shares of a Preferred Stockholder purchased by the Company pursuant to the
provisions of Section 10(a) hereof shall be the fair market value of such
shares. For purposes of determining the fair market value of such shares, the
principles of Section 7(b) shall apply; provided, however, that (i) the term
"selling Preferred Stockholder" shall be substituted for "selling Management
Stockholder," (ii) the term "Shares of Common Stock and Warrant Shares of a
selling Preferred Stockholder" shall be substituted for the term "MS Stock," and
(iii) the term "Purchaser" shall mean the Company.
(c) Closing with respect to any purchase pursuant to Section 10(a)
hereof shall occur no later than ninety (90) days after the determination of the
purchase price for the share of Common Stock and Warrant Shares being sold
pursuant to this Section 10. At Closing, the purchase price for the shares of
Common Stock shall be paid by the Company by certified or cashier check or wire
transfer to the Selling Stockholder.
11. CALCULATION OF CONSIDERATION UPON SALE. Upon any sale of
--------------------------------------
substantially all of the assets of the Company, or any sale or exchange by the
Management Stockholders to a third party of substantially all of their shares of
MS Stock, any and all personal gain to the Management Stockholders for any non-
competition agreements or similar agreements which provide for payments above
prevailing industry standards shall be included to the extent of said excess,
and any other emoluments or profits received by the Management Stockholders
(other than as direct payment for their shares of Common Stock of the Company or
through dividends or return of capital paid in respect thereof or through any
personal incentive agreements with the Company) shall be fully included in
calculating the total consideration being paid for the assets of the Company or
the shares of MS Stock, as the case may be, and the Preferred Stockholders shall
be entitled to receive with respect to any such sale, in addition to any other
amounts they are entitled to receive, in cash an amount equal to the product of
(i) the total
-25-
<PAGE>
consideration so calculated times (ii) a fraction, the numerator of which shall
be the sum of (A) the number of shares of Common Stock registered in the name of
the Preferred Stockholders, plus (B) the number of shares of Common Stock which
the Preferred Stockholders are entitled to receive upon conversion of their
shares of Preferred Stock and the number of Warrant Shares issuable to the
Preferred Stockholders upon exercise of the Warrants, and the denominator of
which shall be the sum of (W) the number of shares of Common Stock registered in
the name of all stockholders, plus (X) the number of shares of Common Stock held
by all Permitted Transferees of all Management Stockholders, plus (Y) the number
of shares of Common Stock which all Preferred Stockholders are entitled to
receive upon conversion of their shares of Preferred Stock and the number of
Warrant Shares issuable to the Preferred Stockholders upon exercise of the
Warrants, plus (Z) the number of shares of Common Stock issuable upon the
exercise of all other issued and outstanding options and warrants.
12. VOTING OF STOCK. Under any circumstances permitting the
---------------
Company to purchase shares of MS Stock from a Management Stockholder, said
selling Management Stockholder shall vote his shares of MS Stock with respect to
that matter in the manner requested by the holders of sixty-three percent (63%)
of the outstanding shares of Preferred Stock (or, if no shares of Preferred
Stock are then outstanding, by the holders of sixty three percent (63%) of the
Warrant Shares).
13. REDEMPTIONS. Except as set forth in Sections 3, 4, 5 and 6 hereof,
-----------
the Company shall not redeem any shares of Common Stock of any stockholder (the
"Redeemed Stockholder") without first also offering to redeem (and actually
redeeming and paying for, if said offer is accepted) from each Preferred
Stockholder at least that number of shares of Common Stock held by each said
Preferred Stockholder equal to the product of (i) the number of shares of Common
Stock held by each said Preferred Stockholder times, (ii) a fraction, the
numerator of which shall be the number of shares of Common Stock of the Redeemed
Stockholder which the Company proposes to redeem, and the denominator of which
shall be the total number of shares of Common Stock held by the Redeemed
Stockholder (the "Redemption Fraction"); provided that, in all events, if the
Company proposes to redeem more than one Redeemed Stockholder, the Redemption
Fraction shall be the highest fraction as derived above with respect to the
Redeemed Stockholders.
14. STOCK COVERED. Except as otherwise provided herein, the provisions
-------------
of this Agreement shall apply to the shares of MS Stock, and as specifically
provided herein, the shares of Common Stock owned by a Preferred Stockholder,
including Warrant Shares, as the case may be, now owned or which may be issued
hereafter to each of the Management Stockholders and the Preferred Stockholders,
as the case may be, in consequence of any additional issuance, purchase,
exchange or reclassification of shares of stock, corporate reorganization, or
any other form of recapitalization or consolidation or merger or share split or
share dividend, or which are acquired by each stockholder in any other manner.
For purposes of this Agreement, the
-26-
<PAGE>
term "MS Stock" shall include all shares of Common Stock of the Company now
owned by any Management Stockholder or issued to or acquired by any Management
Stockholder hereafter, including, without limitation, shares of Common Stock
which may be acquired hereafter pursuant to the exercise of any warrants,
options or other rights to acquire Common Stock.
15. SPECIFIC PERFORMANCE. Inasmuch as the MS Stock, the shares
--------------------
of Common Stock owned by the Preferred Stockholders and the Warrants cannot be
readily purchased or sold in the open market, irreparable damage would result in
the event this Agreement is not specifically enforced. Therefore, the rights and
obligations of any party hereunder shall be enforceable in a court of equity by
a decree of specific performance, and appropriate injunctive relief may be
applied for and granted in connection therewith. Such remedies, and all other
remedies provided for in this Agreement, shall be cumulative and not exclusive
and shall be in addition to any other remedies which any party may have under
this Agreement or otherwise.
16. ENDORSEMENT OF CERTIFICATE. Upon the execution of this Agreement,
--------------------------
each certificate of shares of MS Stock of the Company now registered or to be
issued in the name of the Management Stockholders shall be endorsed by the
Secretary of the Company as follows:
"This certificate is transferable only upon compliance with the
provisions of a restrictive shareholder's agreement dated March 24,
1995, by and among Digital Express Group, Inc., Grotech Partners IV,
L.P., Venrock Associates, Southern Venture Fund II, L.P., Douglas E.
Humphrey and Michael T. Doughney, a copy of which is on file in the
office of the Secretary of the Company and is available upon request
of any Stockholder without charge."
All certificates for any shares of Common Stock hereinafter issued to
the Management Stockholders shall bear the same endorsement, and this Agreement
shall cover all such stock.
17. TERM. Except as otherwise provided herein, this Agreement shall
----
terminate, and all rights and obligations hereunder shall cease, upon the
written agreement of each of the then parties. Notwithstanding the foregoing,
Sections 3 through 6 (other than Section 6(f)) shall terminate immediately prior
to the consummation of the first Public Offering of securities of the Company,
or a successor thereto.
18. NOTICES. All notices, offers, acceptances, requests and other
-------
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered or mailed by certified or registered mail to the
stockholders at their addresses on the Company records, and to the Company at
the Company's principal place
-27-
<PAGE>
of business. Any party hereto may change his or its address for notice by giving
notice thereof in the manner herein above provided.
19. MISCELLANEOUS. This Agreement, the Securities Purchase Agreement
-------------
and the documents referred to herein embody the entire agreement and
understanding among the parties hereto with respect to the subject matter hereof
and may be amended, modified or canceled only by written agreement of the
parties hereto. This Agreement shall be binding upon, and inure to the benefit
of, and shall be enforceable by, the heirs, successors, assigns, and personal
representatives, as the case may be, of the parties hereto. This Agreement
shall be governed by, and construed in accordance with, the laws of the State of
Maryland. In case any term of this Agreement shall be held invalid, illegal or
unenforceable in whole or in part, neither the validity of the remaining part of
such term nor the validity of the remaining terms of this Agreement shall in any
way be affected thereby. Each of the parties agrees that he will consent to and
approve any amendments of the Articles of Incorporation or By-Laws of the
Company which may be necessary or advisable in order to conform any of the
provisions of this Agreement or any amendments hereto to the applicable laws of
the State of Maryland as now or hereafter enacted, including, without
limitation, the Maryland General Corporation Law. Each Management Stockholder
and Preferred Stockholder further agrees to execute and deliver such documents
as may be necessary in order to implement the provisions of the preceding
sentence. Any amendments hereto shall be in writing and executed by each of the
parties hereto.
20. COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts, each of which shall be considered an original and all of which
taken together shall constitute one and the same instrument.
21. GENDER. The use of the singular shall include the plural and the
------
use of the masculine gender shall include the feminine and neutral genders and
vice versa.
IN WITNESS WHEREOF, the parties hereto have executed this agreement
the day and year first above written.
ATTEST/WITNESS: DIGITAL EXPRESS GROUP, INC.
By: /s/ Douglas E. Humphrey (SEAL)
- ------------------------------ ------------------------------
Douglas E. Humphrey, President
-28-
<PAGE>
GROTECH PARTNERS IV, L.P.
By: GROTECH CAPITAL GROUP IV, INC.
General Partner
By: /s/ Frank A. Adams (SEAL)
- ------------------------------- ----------------------------------------
Frank A. Adams, President
VENROCK ASSOCIATES
By: Signature appears here (SEAL)
- ------------------------------- ----------------------------------------
SOUTHERN VENTURE FUND II, L.P.
By: Signature appears here (SEAL)
- ------------------------------- ----------------------------------------
/s/ Douglas E. Humphrey (SEAL)
- ------------------------------- -------------------------------------------
Douglas E. Humphrey
/s/ Michael T. Doughney (SEAL)
- ------------------------------- -------------------------------------------
Michael T. Doughney
-29-
<PAGE>
SCHEDULE A
----------
Number of Shares of
Management Stockholder Common Stock
--------------------- -------------------
Douglas E. Humphrey 257,681.47
Michael T. Doughney 171,787.65
-30-
<PAGE>
Exhibit 10.15(a)
THE WARRANT AND THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT")
OR THE SECURITIES ACT OF ANY STATE. THESE SECURITIES HAVE BEEN ISSUED OR SOLD
IN RELIANCE ON THE EXEMPTIONS FROM REGISTRATION CONTAINED IN SECTION 4(2) OF THE
SECURITIES ACT AND IN THE SECURITIES LAWS OF VARIOUS STATES AND MAY NOT BE SOLD
OR TRANSFERRED EXCEPT PURSUANT TO EFFECTIVE REGISTRATION UNDER SUCH ACTS OR IN A
TRANSACTION WHICH IS EXEMPT UNDER SUCH ACTS.
DIGITAL EXPRESS GROUP, INC.
A MARYLAND CORPORATION
STOCK WARRANT
TO PURCHASE COMMON STOCK OF THE COMPANY
Warrant No. 1
FOR VALUE RECEIVED, DIGITAL EXPRESS GROUP, INC., a Maryland corporation
(the "Company"), grants the following rights to GROTECH PARTNERS IV, L.P., a
Delaware limited partnership, its successors and assigns (individually and
collectively, the "Holder").
Section 1. Grant.
-----
The Holder is hereby granted the right (collectively, the "Purchase
Rights"), in accordance with the terms and conditions of this Warrant, during
the Exercise Period (as defined in Section 3), to purchase from the Company that
number of fully paid and non-assessable shares of Common Stock of the Company,
par value One Cent ($0.01) per share, set forth in Section 2 hereof, at the
Exercise Price (as defined in Section 5), upon delivery of this Warrant to the
Company with the subscription form described in Section 4 hereof, duly executed,
and upon tender of the Exercise Price for the shares of Common Stock to be
purchased.
Section 2. Number of Shares of Common Stock Purchasable.
--------------------------------------------
2.1 Subject to the provisions of this Section 2, this Warrant entitles
the Holder to purchase from time to time an aggregate number of shares of Common
Stock (the "Warrant Shares") equal to Ten and Two Tenths Percent (10.2%) (the
"Percentage") of the sum of
<PAGE>
(i) the total number of shares of Common Stock issued and
outstanding as of the date hereof, plus
----
(ii) the total number of shares of Common Stock issuable
pursuant to this Warrant and all other warrants, options, contracts or
securities issued and outstanding as of the date hereof convertible into or
evidencing the right to purchase shares of Common Stock, upon whose exercise or
conversion, shares of Common Stock are issuable (including shares of Common
Stock issued and issuable pursuant to a management incentive stock option plan
(the "Incentive Stock Plan") to be established by the Company, up to twelve
percent (12%) of the sum of the Company's outstanding shares of Common Stock as
of the date hereof on a fully diluted basis).
The Company acknowledges that greater shares of Common Stock may be issued upon
exercise of this Warrant under certain circumstances described in this
Section 2.
2.2 (a) Upon each issuance after the date hereof, and prior to the
consummation of an offering of the Company's shares of Common Stock or options,
warrants, contracts or securities convertible or exchangeable into or evidencing
the right to purchase shares of Common Stock of the Company to the public
pursuant to a registration statement filed by the Company with the Securities
and Exchange Commission (other than a registration statement on Form S-4 or S-8,
or their successors) based on a Company valuation of at least $20 million in
which at least $10 million of net proceeds are received by the Company and as
the result of which shares of Common Stock of the Company are traded on either
the New York Stock Exchange, the American Stock Exchange, or NASDAQ (a "Public
Offering"), of shares of Common Stock, or options, warrants, contracts or
securities convertible or exchangeable into or evidencing the right to purchase
shares of Common Stock of the Company, other than (i) any shares of Common Stock
of the Company issuable or issued pursuant to the Incentive Stock Plan, (ii)
shares of Common Stock of the Company issuable or issued upon conversion of
shares of Preferred Stock of the Company issued and outstanding as of the date
hereof, and (iii) shares of Common Stock of the Company issuable or issued upon
exercise of all warrants outstanding on the date hereof, for a total
consideration per share of Common Stock, or shares of Common Stock issued or
issuable with respect to such an option, warrant, contract or security
convertible into or evidencing the right to purchase shares of Common Stock, of
less than the then-current Assumed Per Share Value, as defined below ("APSV")
(each, a "Dilutive Transaction"), then, upon issuance of such securities the
Company shall immediately issue to the Holder additional shares of Common Stock,
and, if prior to full exercise of this Warrant, the Company shall immediately
issue to the Holder additional warrants, such that the total number of shares of
Common Stock issued and issuable upon full exercise of this Warrant shall be
equal to that amount as determined by dividing One Million Seventy-Three
Thousand Six Hundred Eighty-Four Dollars and Ten Cents ($1,073,684.10) by the
APSV. Upon request of the Holder, the Company shall execute an acknowledgment,
in the form attached hereto and made a part hereof as Exhibit A, of any
---------
adjustment made pursuant to this Section 2.2.
<PAGE>
(b) The "Assumed Per Share Value" shall be that amount equal to
the quotient of (i) (A) the APSV immediately prior to such Dilutive Transaction,
(B) multiplied by the sum of the number of shares of Common Stock of the Company
outstanding immediately prior to such Dilutive Transaction plus the number of
shares of Common Stock issuable upon exercise or conversion, as the case may be,
of all options, warrants and other rights to purchase (including, but not
limited to, all shares issued and issuable pursuant to the Incentive Stock
Plan), or securities convertible into, shares of Common Stock of the Company
outstanding immediately prior to such Dilutive Transaction, plus (C) the
aggregate consideration, if any, received or to be received by the Company upon
such Dilutive Transaction, divided by (ii) the sum of the number of shares of
Common Stock of the Company outstanding immediately after such Dilutive
Transaction, plus the number of shares of Common Stock issuable upon exercise or
conversion, as the case may be, of all options, warrants and other rights to
purchase (including, but not limited to, shares issued and issuable pursuant to
the Incentive Stock Plan), or securities convertible into, shares of Common
Stock of the Company outstanding immediately after such Dilutive Transaction.
The initial Assumed Per Share Value shall be $10.526. Subsequent APSVs shall be
- ----------------------------------------------------
determined in accordance with the foregoing formula and shall be rounded to the
nearest tenth of one cent ($0.001).
(c) As an illustration of the provisions of paragraphs (a) and (b)
hereof, if after the date hereof the Company sells One Million (1,000,000)
shares of its Common Stock at One Dollar and Fifty Cents ($1.50) per share, then
the number of shares issuable upon exercise of this Warrant (or the total number
of shares to which the Holder is entitled if subsequent to full exercise of this
Warrant) shall equal the quotient of One Million Seventy-Three Thousand Six
Hundred Eighty-Four Dollars and Ten Cents ($1,073,684.10) divided by the new
APSV. The new APSV would be determined as follows:
APSV = ($10.526 x 1,000,000) + $1,500,000 = $6.013
----------------------------------
2,000,000 shares
This APSV would result in 178,560.46 shares of Common Stock
($1,073,684.10/$6.013).
As an additional illustration of this formula, if the Company were to
next sell five hundred thousand (500,000) shares of its Common Stock at One
Dollar ($1.00) per share, then the number of shares issuable upon exercise of
this Warrant (or the total number of shares to which the Holder is entitled if
subsequent to full exercise of this Warrant) shall equal One Million Seventy-
Three Thousand Six Hundred Eighty-Four Dollars and Ten Cents ($1,073,684.10)
divided by the new APSV. This new APSV would be determined as follows:
APSV = ($6.013 x 2,285,213.94) + $500,000 = $5.113
----------------------------------
2,785,213.94 shares
This APSV would result in 209,991.02 shares of Common Stock
($1,073,684.10/$5.113).
<PAGE>
(d) If the Company shall at any time issue or grant any options or
rights to subscribe for or to purchase shares of Common Stock or its equivalent,
all shares of Common Stock or its equivalent which the holders of such options
or rights shall be entitled to subscribe for or to purchase shall be deemed to
be issued as of the date of such issuing or granting of such options or rights;
and the minimum aggregate consideration specified in such options or rights for
the shares covered thereby, plus the cash consideration, if any, received by the
Company for such options or rights, shall be deemed to be the consideration
actually received by the Company for the issuance of shares.
(e) If the Company shall at any time issue any stock or
obligations directly or indirectly convertible into or exchangeable for shares
of Common Stock or its equivalent, then such issue shall be deemed to be an
issue (as of the date of issue of such stock or obligations) of the total
maximum number of shares of Common Stock necessary to effect the exchange or
conversion of all such stock or obligations. The amount received or receivable
by the Company in consideration for the issue of such stock or obligations
(deducting therefrom any commissions or expenses paid or incurred by the Company
for any underwriting of, or otherwise in connection with, such issue), plus the
minimum aggregate amount of premiums, if any, payable to the Company upon
exchange or conversion shall be deemed to be the consideration actually received
by the Company for the issue of such Common Stock.
(f) In the case of any issue of shares of Common Stock for cash,
the consideration received by the Company therefor shall be deemed to be the net
proceeds received for such shares, deducting therefrom any commissions or
expenses paid or incurred by the Company for any underwriting of, or otherwise
in connection with, the issue of such shares; provided, however, that in any
such case where the shares of stock so issued are part of a unit or combination
of securities of the Company, if the amount of the cash consideration received
by the Company for the shares of stock so issued is not determinable at the time
of such issuance, such amount shall be equal to such portion of the total cash
consideration received by the Company for such units or combinations as
reasonably constitutes consideration therefor regardless of the accounting
treatment thereof by the Company.
(g) In the case of an issue of shares of Common Stock for a
consideration part or all of which shall be other than cash, the amount of the
consideration other than cash therefore shall be deemed to be the fair value of
such consideration as reasonably constitutes such consideration other than cash,
regardless of the accounting treatment thereof by the Company.
(h) The sale or other disposition of any shares of Common Stock of
the Company or other securities held in the treasury of the Company, or of any
securities resulting from any reclassification or reclassifications of such
shares
<PAGE>
or other securities which were effected while they were held in the treasury of
the Company, shall be deemed an issuance thereof.
(i) If at any time the Company shall adjust the subscription,
exercise, conversion or exchange price of any Common Stock or its equivalent
issued or subject to issuance by the Company, such adjustment shall constitute a
Dilutive Transaction and the total consideration for each share thereof shall be
the price as so adjusted.
2.3 In case, prior to the expiration of these Purchase Rights by
exercise or by the terms of this Warrant, the Company shall undertake any
reclassification, stock split, reverse stock split, stock dividend or any
similar proportionately-applied change (collectively, a "Reclassification") of
outstanding shares of Common Stock (other than a change in, of, or from par
value), the Holder shall thereafter be entitled, upon exercise of this Warrant,
to purchase the kind and amount of shares of stock and other securities and
property receivable upon such Reclassification by a holder of the number of
shares of Common Stock which this Warrant entitles the Holder hereof to purchase
immediately prior to such Reclassification. Concurrently with any
Reclassification, the APSV automatically shall be adjusted proportionately to
reflect such Reclassification (e.g., in a two-for-one stock split, the APSV
would be divided by two, or in a one-for-two reverse stock split, the APSV would
be multiplied by two).
2.4 In case, prior to the expiration of these Purchase Rights by
exercise or by the terms of this Warrant, the Company shall consolidate or merge
with, or convey all, or substantially all, of its property or assets to, any
other corporation or corporations, then, as a condition precedent to such
consolidation, merger, or conveyance, lawful and adequate provision shall be
made whereby the Holder shall thereafter have the right to receive from the
Company or the successor corporation, as the case may be, upon the basis and
upon the terms and conditions specified in this Warrant, in lieu of the shares
of Common Stock of the Company theretofore purchasable upon the exercise of the
Purchase Rights, such shares of stock, securities, or assets as may be issued or
payable with respect to, or in exchange for, the number of shares of Common
Stock of the Company theretofore purchasable upon the exercise of the Purchase
Rights had such consolidation, merger, or conveyance not taken place; and in any
such event the rights of the Holder to an adjustment of the number of shares of
Common Stock purchasable upon the exercise of the Purchase Rights as herein
provided, shall continue and be preserved in respect of any stock or securities
which the Holder becomes entitled to purchase. It shall be a condition of such
consolidation, merger, or conveyance that the Company and/or each successor
corporation, as the case may be, shall assume in manner and form reasonably
satisfactory to the Holder the obligation to deliver to the Holder, upon the
exercise of the Purchase Rights, such shares of Common Stock, securities, or
assets as, in accordance with the provisions of this Warrant, shall have been
provided for that purpose.
<PAGE>
Section 3. Exercise Period; Registration Statement Notice.
----------------------------------------------
3.1 The Purchase Rights represented hereby shall be exercisable in
whole or in part from time to time beginning on the date hereof and continuing
until six (6) years from the date on which all shares of Preferred Stock of the
Company issued and outstanding as of the date of the original issuance of this
Warrant have been redeemed and paid by the Company and/or converted, as the case
may be (the "Exercise Period"), and all accrued and unpaid dividends thereon
have been paid.
3.2 The Company shall give the Holder written notice, at the address
of the Holder set forth on the Company's books, not less than thirty (30) days
prior to the filing of any registration statement with respect to a Public
Offering.
Section 4. Method of Exercise. The Purchase Rights represented by
------------------
this Warrant are exercisable upon the terms and conditions set forth herein at
the option of the Holder in whole at any time and in part from time to time
during the Exercise Period, upon the delivery of a notice to the Company's
principal office, in the form attached hereto and made a part hereof as Exhibit
-------
B, to the Company with such notice duly executed and upon payment in cash or
- -
bank cashier's or certified check of the Exercise Price. The Purchase Rights
shall be deemed to have been exercised, and the Holder shall be deemed to have
become a stockholder of record of the Company for the purposes of receiving
dividends and for all other purposes whatsoever with respect to the shares of
Common Stock so purchased, as of the date of delivery of such notice accompanied
by tender of the Exercise Price.
Section 5. Exercise Price. The aggregate Exercise Price for the shares
--------------
of Common Stock issuable to the Holder hereunder is Forty Dollars ($40.00) (the
"Exercise Price"). If the Holder exercises a portion of the Purchase Rights
granted hereunder, the Exercise Price for the shares of Common Stock issuable
upon such exercise shall equal the product of (i) Forty Dollars ($40.00) and
(ii) a fraction, the numerator of which is the number of shares of Common Stock
issuable upon such exercise, and the denominator of which is the total number of
shares of Common Stock issuable hereunder.
Section 6. Company's Warranties and Covenants as to Capital Stock.
------------------------------------------------------
The Company has taken all action necessary and appropriate to properly authorize
and issue those shares of Common Stock issuable to the Holder pursuant to this
Warrant including an authorization of issuance and setting of price. The Common
Stock deliverable on the exercise of the Purchase Rights represented hereby
shall, when issued, be duly and validly issued, fully paid and nonassessable.
The Company shall at all times reserve and hold available sufficient shares of
Common Stock to satisfy all dividend, conversion and purchase rights of all
outstanding convertible securities and warrants.
Section 7. Transfer. The Purchase Rights shall be registered on the
--------
books of the Company, which shall be kept by it at its principal office for that
purpose. The Purchase Rights shall be transferable on said books, in whole or
in part, by the
<PAGE>
Holder in person or by duly authorized attorney upon surrender of this Warrant
properly endorsed. The Company agrees that, while the Purchase Rights remain
valid and outstanding, its stock transfer books shall not be closed for any
purpose whatsoever except under arrangements which shall insure to persons
exercising warrants or applying for transfer of stock all rights and privileges
which they might have had or received if the stock transfer books had not been
closed and they had exercised their Purchase Rights at any time during which
such transfer book shall have been closed.
Section 8. Charges, Taxes and Expenses. Issuance of certificates for
---------------------------
shares of Common Stock issuable upon the exercise of this Warrant or any portion
thereof shall be made without charge to the Holder hereof for any issue taxes or
any other incidental expenses in respect of the issuance of such certificates to
and in the name of the registered Holder of this Warrant, all of which taxes and
expenses shall be paid by the Company, and such certificates shall be issued in
the name of the Holder of this Warrant. Certificates will be issued in a name
other than that of the Holder upon the request of a Holder and payment by the
Holder of any applicable transfer taxes and compliance with all applicable
securities laws.
Section 9. Exchange For Other Denominations. This Warrant is
--------------------------------
exchangeable for new certificates of like tenor and date representing in the
aggregate the right to purchase the number of shares purchasable hereunder in
denominations designated by the Holder at the time of surrender. In the event
of the purchase, at any time prior to the expiration of the Exercise Period, of
less than all of the shares of Common Stock purchasable hereunder, the Company
will cancel this Warrant upon surrender thereof, and will forthwith execute and
deliver to the Holder hereof a new warrant of like tenor and date for the
balance of the shares purchasable hereunder.
Section 10. Loss, Theft, Destruction or Mutilation of Warrant. Upon
-------------------------------------------------
receipt by the Company of evidence reasonably satisfactory to it of the loss,
theft, destruction or mutilation of this Warrant, and, in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it, and upon
reimbursement to the Company of all reasonable expenses incidental thereto, and
upon surrender and cancellation of this Warrant, if mutilated, the Company will
make and deliver a new warrant of like tenor and date, in lieu of this Warrant.
Section 11. Remedies. The Company acknowledges and agrees that the
--------
remedies at law of the Holder in the event of any default or threatened default
by the Company in the performance of or compliance with any of the terms of this
Warrant are not and will not be adequate, and that such terms may be
specifically enforced by a decree for the specific performance of any agreement
contained herein or by an injunction against a violation of any of the terms
hereof or otherwise.
Section 12. Miscellaneous. This Warrant shall be binding upon the
-------------
Company's successors. This Warrant shall be governed, construed and enforced in
accordance with the laws of the State of Maryland. In case any provision of
this Warrant
<PAGE>
shall be invalid, illegal or unenforceable, or partially invalid, illegal or
unenforceable, the provision shall be enforced to the extent, if any, that it
may legally be enforced and the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby. This
Warrant and any term hereof may be changed, waived, discharged or terminated
only by a statement in writing signed by the party against which enforcement of
such change, waiver, discharge or termination is sought. The headings in this
Warrant are for purposes of reference only, and shall not limit or otherwise
affect any of the terms hereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed, under seal and delivered on its behalf this 24th day of March, 1995.
ATTEST: DIGITAL EXPRESS GROUP, INC.
/s/ Richard L. Butler By: /s/ Douglas E. Humphrey (SEAL)
- --------------------------------- ---------------------------------
Richard L. Butler, Secretary Douglas E. Humphrey, President
<PAGE>
EXHIBIT A
---------
ACKNOWLEDGMENT PURSUANT TO
SECTION 2.2 TO ATTACHED STOCK WARRANT
_________, 19__
The undersigned, DIGITAL EXPRESS GROUP, INC. (the "Company"), hereby
acknowledges an adjustment to the number of Warrant Shares purchasable pursuant
to that certain Warrant No. 1 (the "Warrant") of the Company by the Holder
thereof, pursuant to the provisions of Section 2.2 of the Warrant, by virtue of
an offering of _____ shares of Common Stock, or options, warrants or securities
convertible into or evidencing the right to purchase _________ shares of Common
Stock of the Company, for total consideration per share of less than the current
Assumed Per Share Value of $_________.
DIGITAL EXPRESS GROUP, INC.
By:______________________ (SEAL)
, President
<PAGE>
EXHIBIT B
---------
EXERCISE OF OPTION TO PURCHASE PURSUANT TO
ATTACHED STOCK WARRANT
_________, 19__
To ___________________:
The undersigned, the Holder of record of the attached Warrant of
DIGITAL EXPRESS GROUP, INC., hereby exercises the option granted by the Purchase
Rights evidenced by the attached Warrant to purchase upon the terms set forth in
such Warrant ____ shares of Common Stock, which constitutes all [or a portion]
of the shares of Common Stock issuable pursuant to the Purchase Rights
represented by this Warrant, of DIGITAL EXPRESS GROUP, INC., and hereby tenders
payment of the Exercise Price as determined by the Warrant.
By:______________________________
[Title___________________________]
<PAGE>
Exhibit 10.15(b)
THE WARRANT AND THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT")
OR THE SECURITIES ACT OF ANY STATE. THESE SECURITIES HAVE BEEN ISSUED OR SOLD
IN RELIANCE ON THE EXEMPTIONS FROM REGISTRATION CONTAINED IN SECTION 4(2) OF THE
SECURITIES ACT AND IN THE SECURITIES LAWS OF VARIOUS STATES AND MAY NOT BE SOLD
OR TRANSFERRED EXCEPT PURSUANT TO EFFECTIVE REGISTRATION UNDER SUCH ACTS OR IN A
TRANSACTION WHICH IS EXEMPT UNDER SUCH ACTS.
DIGITAL EXPRESS GROUP, INC.
A MARYLAND CORPORATION
STOCK WARRANT
TO PURCHASE COMMON STOCK OF THE COMPANY
Warrant No. 2
FOR VALUE RECEIVED, DIGITAL EXPRESS GROUP, INC., a Maryland corporation
(the "Company"), grants the following rights to VENROCK ASSOCIATES, a New York
limited partnership, its successors and assigns (individually and collectively,
the "Holder").
Section 1. Grant.
-----
The Holder is hereby granted the right (collectively, the "Purchase
Rights"), in accordance with the terms and conditions of this Warrant, during
the Exercise Period (as defined in Section 3), to purchase from the Company that
number of fully paid and non-assessable shares of Common Stock of the Company,
par value One Cent ($0.01) per share, set forth in Section 2 hereof, at the
Exercise Price (as defined in Section 5), upon delivery of this Warrant to the
Company with the subscription form described in Section 4 hereof, duly executed,
and upon tender of the Exercise Price for the shares of Common Stock to be
purchased.
Section 2. Number of Shares of Common Stock Purchasable.
--------------------------------------------
2.1 Subject to the provisions of this Section 2, this Warrant
entitles the Holder to purchase from time to time an aggregate number of shares
of Common Stock (the "Warrant Shares") equal to Eight and Nine Hundred Twenty-
Five Thousandths Percent (8.925%) (the "Percentage") of the sum of
<PAGE>
(i) the total number of shares of Common Stock issued and
outstanding as of the date hereof, plus
----
(ii) the total number of shares of Common Stock issuable pursuant
to this Warrant and all other warrants, options, contracts or securities issued
and outstanding as of the date hereof convertible into or evidencing the right
to purchase shares of Common Stock, upon whose exercise or conversion, shares of
Common Stock are issuable (including shares of Common Stock issued and issuable
pursuant to a management incentive stock option plan (the "Incentive Stock
Plan") to be established by the Company, up to twelve percent (12%) of the sum
of the Company's outstanding shares of Common Stock as of the date hereof on a
fully diluted basis).
The Company acknowledges that greater shares of Common Stock may be issued upon
exercise of this Warrant under certain circumstances described in this
Section 2.
2.2 (a) Upon each issuance after the date hereof, and prior to the
consummation of an offering of the Company's shares of Common Stock or options,
warrants, contracts or securities convertible or exchangeable into or evidencing
the right to purchase shares of Common Stock of the Company to the public
pursuant to a registration statement filed by the Company with the Securities
and Exchange Commission (other than a registration statement on Form S-4 or S-8,
or their successors) based on a Company valuation of at least $20 million in
which at least $10 million of net proceeds are received by the Company and as
the result of which shares of Common Stock of the Company are traded on either
the New York Stock Exchange, the American Stock Exchange, or NASDAQ (a "Public
Offering"), of shares of Common Stock, or options, warrants, contracts or
securities convertible or exchangeable into or evidencing the right to purchase
shares of Common Stock of the Company, other than (i) any shares of Common Stock
of the Company issuable or issued pursuant to the Incentive Stock Plan, (ii)
shares of Common Stock of the Company issuable or issued upon conversion of
shares of Preferred Stock of the Company issued and outstanding as of the date
hereof, and (iii) shares of Common Stock of the Company issuable or issued upon
exercise of all warrants outstanding on the date hereof, for a total
consideration per share of Common Stock, or shares of Common Stock issued or
issuable with respect to such an option, warrant, contract or security
convertible into or evidencing the right to purchase shares of Common Stock, of
less than the then-current Assumed Per Share Value, as defined below ("APSV")
(each, a "Dilutive Transaction"), then, upon issuance of such securities the
Company shall immediately issue to the Holder additional shares of Common Stock,
and, if prior to full exercise of this Warrant, the Company shall immediately
issue to the Holder additional warrants, such that the total number of shares of
Common Stock issued and issuable upon full exercise of this Warrant shall be
equal to that amount as determined by dividing Nine Hundred Thirty-Nine Thousand
Four Hundred Seventy-Three Dollars and Sixty-Four Cents ($939,473.64) by the
APSV. Upon request of the Holder, the Company shall execute an acknowledgment,
in the form attached hereto and made a part hereof as Exhibit A, of any
---------
adjustment made pursuant to this Section 2.2.
<PAGE>
(b) The "Assumed Per Share Value" shall be that amount equal to
the quotient of (i) (A) the APSV immediately prior to such Dilutive Transaction,
(B) multiplied by the sum of the number of shares of Common Stock of the Company
outstanding immediately prior to such Dilutive Transaction plus the number of
shares of Common Stock issuable upon exercise or conversion, as the case may be,
of all options, warrants and other rights to purchase (including, but not
limited to, all shares issued and issuable pursuant to the Incentive Stock
Plan), or securities convertible into, shares of Common Stock of the Company
outstanding immediately prior to such Dilutive Transaction, plus (C) the
aggregate consideration, if any, received or to be received by the Company upon
such Dilutive Transaction, divided by (ii) the sum of the number of shares of
Common Stock of the Company outstanding immediately after such Dilutive
Transaction, plus the number of shares of Common Stock issuable upon exercise or
conversion, as the case may be, of all options, warrants and other rights to
purchase (including, but not limited to, shares issued and issuable pursuant to
the Incentive Stock Plan), or securities convertible into, shares of Common
Stock of the Company outstanding immediately after such Dilutive Transaction.
The initial Assumed Per Share Value shall be $10.526. Subsequent APSVs shall be
- -----------------------------------------------------
determined in accordance with the foregoing formula and shall be rounded to the
nearest tenth of one cent ($0.001).
(c) As an illustration of the provisions of paragraphs (a) and
(b) hereof, if after the date hereof the Company sells One Million (1,000,000)
shares of its Common Stock at One Dollar and Fifty Cents ($1.50) per share, then
the number of shares issuable upon exercise of this Warrant (or the total number
of shares to which the Holder is entitled if subsequent to full exercise of this
Warrant) shall equal the quotient of Nine Hundred Thirty-Nine Thousand Four
Hundred Seventy-Three Dollars and Sixty-Four Cents ($939,473.64) divided by the
new APSV. The new APSV would be determined as follows:
APSV = ($10.526 x 1,000,000) + $1,500,000 = $6.013
----------------------------------
2,000,000 shares
This APSV would result in 156,240.41 shares of Common Stock
($939,473.64/$6.013).
As an additional illustration of this formula, if the Company were to
next sell five hundred thousand (500,000) shares of its Common Stock at One
Dollar ($1.00) per share, then the number of shares issuable upon exercise of
this Warrant (or the total number of shares to which the Holder is entitled if
subsequent to full exercise of this Warrant) shall equal Nine Hundred Thirty-
Nine Thousand Four Hundred Seventy-Three Dollars and Sixty-Four Cents
($939,473.64) divided by the new APSV. This new APSV would be determined as
follows:
APSV = ($6.013 x 2,285,213.94) + $500,000 = $5.113
----------------------------------
2,785,213.94 shares
This APSV would result in 183,742.15 shares of Common Stock
($939,473.64/$5.113).
<PAGE>
(d) If the Company shall at any time issue or grant any options
or rights to subscribe for or to purchase shares of Common Stock or its
equivalent, all shares of Common Stock or its equivalent which the holders of
such options or rights shall be entitled to subscribe for or to purchase shall
be deemed to be issued as of the date of such issuing or granting of such
options or rights; and the minimum aggregate consideration specified in such
options or rights for the shares covered thereby, plus the cash consideration,
if any, received by the Company for such options or rights, shall be deemed to
be the consideration actually received by the Company for the issuance of
shares.
(e) If the Company shall at any time issue any stock or
obligations directly or indirectly convertible into or exchangeable for shares
of Common Stock or its equivalent, then such issue shall be deemed to be an
issue (as of the date of issue of such stock or obligations) of the total
maximum number of shares of Common Stock necessary to effect the exchange or
conversion of all such stock or obligations. The amount received or receivable
by the Company in consideration for the issue of such stock or obligations
(deducting therefrom any commissions or expenses paid or incurred by the Company
for any underwriting of, or otherwise in connection with, such issue), plus the
minimum aggregate amount of premiums, if any, payable to the Company upon
exchange or conversion shall be deemed to be the consideration actually received
by the Company for the issue of such Common Stock.
(f) In the case of any issue of shares of Common Stock for cash,
the consideration received by the Company therefor shall be deemed to be the net
proceeds received for such shares, deducting therefrom any commissions or
expenses paid or incurred by the Company for any underwriting of, or otherwise
in connection with, the issue of such shares; provided, however, that in any
such case where the shares of stock so issued are part of a unit or combination
of securities of the Company, if the amount of the cash consideration received
by the Company for the shares of stock so issued is not determinable at the time
of such issuance, such amount shall be equal to such portion of the total cash
consideration received by the Company for such units or combinations as
reasonably constitutes consideration therefor regardless of the accounting
treatment thereof by the Company.
(g) In the case of an issue of shares of Common Stock for a
consideration part or all of which shall be other than cash, the amount of the
consideration other than cash therefore shall be deemed to be the fair value of
such consideration as reasonably constitutes such consideration other than cash,
regardless of the accounting treatment thereof by the Company.
(h) The sale or other disposition of any shares of Common Stock
of the Company or other securities held in the treasury of the Company, or of
any securities resulting from any reclassification or reclassifications of such
shares
<PAGE>
or other securities which were effected while they were held in the
treasury of the Company, shall be deemed an issuance thereof.
(i) If at any time the Company shall adjust the subscription,
exercise, conversion or exchange price of any Common Stock or its equivalent
issued or subject to issuance by the Company, such adjustment shall constitute a
Dilutive Transaction and the total consideration for each share thereof shall be
the price as so adjusted.
2.3 In case, prior to the expiration of these Purchase Rights by
exercise or by the terms of this Warrant, the Company shall undertake any
reclassification, stock split, reverse stock split, stock dividend or any
similar proportionately-applied change (collectively, a "Reclassification") of
outstanding shares of Common Stock (other than a change in, of, or from par
value), the Holder shall thereafter be entitled, upon exercise of this Warrant,
to purchase the kind and amount of shares of stock and other securities and
property receivable upon such Reclassification by a holder of the number of
shares of Common Stock which this Warrant entitles the Holder hereof to purchase
immediately prior to such Reclassification. Concurrently with any
Reclassification, the APSV automatically shall be adjusted proportionately to
reflect such Reclassification (e.g., in a two-for-one stock split, the APSV
would be divided by two, or in a one-for-two reverse stock split, the APSV would
be multiplied by two).
2.4 In case, prior to the expiration of these Purchase Rights by
exercise or by the terms of this Warrant, the Company shall consolidate or merge
with, or convey all, or substantially all, of its property or assets to, any
other corporation or corporations, then, as a condition precedent to such
consolidation, merger, or conveyance, lawful and adequate provision shall be
made whereby the Holder shall thereafter have the right to receive from the
Company or the successor corporation, as the case may be, upon the basis and
upon the terms and conditions specified in this Warrant, in lieu of the shares
of Common Stock of the Company theretofore purchasable upon the exercise of the
Purchase Rights, such shares of stock, securities, or assets as may be issued or
payable with respect to, or in exchange for, the number of shares of Common
Stock of the Company theretofore purchasable upon the exercise of the Purchase
Rights had such consolidation, merger, or conveyance not taken place; and in any
such event the rights of the Holder to an adjustment of the number of shares of
Common Stock purchasable upon the exercise of the Purchase Rights as herein
provided, shall continue and be preserved in respect of any stock or securities
which the Holder becomes entitled to purchase. It shall be a condition of such
consolidation, merger, or conveyance that the Company and/or each successor
corporation, as the case may be, shall assume in manner and form reasonably
satisfactory to the Holder the obligation to deliver to the Holder, upon the
exercise of the Purchase Rights, such shares of Common Stock, securities, or
assets as, in accordance with the provisions of this Warrant, shall have been
provided for that purpose.
<PAGE>
Section 3. Exercise Period; Registration Statement Notice.
----------------------------------------------
3.1 The Purchase Rights represented hereby shall be exercisable
in whole or in part from time to time beginning on the date hereof and
continuing until six (6) years from the date on which all shares of Preferred
Stock of the Company issued and outstanding as of the date of the original
issuance of this Warrant have been redeemed and paid by the Company and/or
converted, as the case may be (the "Exercise Period"), and all accrued and
unpaid dividends thereon have been paid.
3.2 The Company shall give the Holder written notice, at the
address of the Holder set forth on the Company's books, not less than thirty
(30) days prior to the filing of any registration statement with respect to a
Public Offering.
Section 4. Method of Exercise. The Purchase Rights represented by
------------------
this Warrant are exercisable upon the terms and conditions set forth herein at
the option of the Holder in whole at any time and in part from time to time
during the Exercise Period, upon the delivery of a notice to the Company's
principal office, in the form attached hereto and made a part hereof as
Exhibit B, to the Company with such notice duly executed and upon payment in
- ---------
cash or bank cashier's or certified check of the Exercise Price. The Purchase
Rights shall be deemed to have been exercised, and the Holder shall be deemed to
have become a stockholder of record of the Company for the purposes of receiving
dividends and for all other purposes whatsoever with respect to the shares of
Common Stock so purchased, as of the date of delivery of such notice accompanied
by tender of the Exercise Price.
Section 5. Exercise Price. The aggregate Exercise Price for the
--------------
shares of Common Stock issuable to the Holder hereunder is Thirty-Five Dollars
($35.00) (the "Exercise Price"). If the Holder exercises a portion of the
Purchase Rights granted hereunder, the Exercise Price for the shares of Common
Stock issuable upon such exercise shall equal the product of (i) Thirty-Five
Dollars ($35.00) and (ii) a fraction, the numerator of which is the number of
shares of Common Stock issuable upon such exercise, and the denominator of which
is the total number of shares of Common Stock issuable hereunder.
Section 6. Company's Warranties and Covenants as to Capital Stock.
------------------------------------------------------
The Company has taken all action necessary and appropriate to properly authorize
and issue those shares of Common Stock issuable to the Holder pursuant to this
Warrant including an authorization of issuance and setting of price. The Common
Stock deliverable on the exercise of the Purchase Rights represented hereby
shall, when issued, be duly and validly issued, fully paid and nonassessable.
The Company shall at all times reserve and hold available sufficient shares of
Common Stock to satisfy all dividend, conversion and purchase rights of all
outstanding convertible securities and warrants.
Section 7. Transfer. The Purchase Rights shall be registered on the
--------
books of the Company, which shall be kept by it at its principal office for that
purpose.
<PAGE>
The Purchase Rights shall be transferable on said books, in whole or
in part, by the Holder in person or by duly authorized attorney upon surrender
of this Warrant properly endorsed. The Company agrees that, while the Purchase
Rights remain valid and outstanding, its stock transfer books shall not be
closed for any purpose whatsoever except under arrangements which shall insure
to persons exercising warrants or applying for transfer of stock all rights and
privileges which they might have had or received if the stock transfer books had
not been closed and they had exercised their Purchase Rights at any time during
which such transfer book shall have been closed.
Section 8. Charges, Taxes and Expenses. Issuance of certificates for
---------------------------
shares of Common Stock issuable upon the exercise of this Warrant or any portion
thereof shall be made without charge to the Holder hereof for any issue taxes or
any other incidental expenses in respect of the issuance of such certificates to
and in the name of the registered Holder of this Warrant, all of which taxes and
expenses shall be paid by the Company, and such certificates shall be issued in
the name of the Holder of this Warrant. Certificates will be issued in a name
other than that of the Holder upon the request of a Holder and payment by the
Holder of any applicable transfer taxes and compliance with all applicable
securities laws.
Section 9. Exchange For Other Denominations. This Warrant is
--------------------------------
exchangeable for new certificates of like tenor and date representing in the
aggregate the right to purchase the number of shares purchasable hereunder in
denominations designated by the Holder at the time of surrender. In the event
of the purchase, at any time prior to the expiration of the Exercise Period, of
less than all of the shares of Common Stock purchasable hereunder, the Company
will cancel this Warrant upon surrender thereof, and will forthwith execute and
deliver to the Holder hereof a new warrant of like tenor and date for the
balance of the shares purchasable hereunder.
Section 10. Loss, Theft, Destruction or Mutilation of Warrant. Upon
-------------------------------------------------
receipt by the Company of evidence reasonably satisfactory to it of the loss,
theft, destruction or mutilation of this Warrant, and, in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it, and upon
reimbursement to the Company of all reasonable expenses incidental thereto, and
upon surrender and cancellation of this Warrant, if mutilated, the Company will
make and deliver a new warrant of like tenor and date, in lieu of this Warrant.
Section 11. Remedies. The Company acknowledges and agrees that the
--------
remedies at law of the Holder in the event of any default or threatened default
by the Company in the performance of or compliance with any of the terms of this
Warrant are not and will not be adequate, and that such terms may be
specifically enforced by a decree for the specific performance of any agreement
contained herein or by an injunction against a violation of any of the terms
hereof or otherwise.
Section 12. Miscellaneous. This Warrant shall be binding upon the
-------------
Company's successors. This Warrant shall be governed, construed and enforced in
<PAGE>
accordance with the laws of the State of Maryland. In case any provision of
this Warrant shall be invalid, illegal or unenforceable, or partially invalid,
illegal or unenforceable, the provision shall be enforced to the extent, if any,
that it may legally be enforced and the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
This Warrant and any term hereof may be changed, waived, discharged or
terminated only by a statement in writing signed by the party against which
enforcement of such change, waiver, discharge or termination is sought. The
headings in this Warrant are for purposes of reference only, and shall not limit
or otherwise affect any of the terms hereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed, under seal and delivered on its behalf this 24th day of March, 1995.
ATTEST: DIGITAL EXPRESS GROUP, INC.
/s/ Richard L. Butler By: /s/ Douglas E. Humphrey (SEAL)
- -------------------------------- ------------------------------
Richard L. Butler, Secretary Douglas E. Humphrey, President
<PAGE>
EXHIBIT A
---------
ACKNOWLEDGMENT PURSUANT TO
SECTION 2.2 TO ATTACHED STOCK WARRANT
__________________, 19__
The undersigned, DIGITAL EXPRESS GROUP, INC. (the "Company"), hereby
acknowledges an adjustment to the number of Warrant Shares purchasable pursuant
to that certain Warrant No. 2 (the "Warrant") of the Company by the Holder
thereof, pursuant to the provisions of Section 2.2 of the Warrant, by virtue of
an offering of _____ shares of Common Stock, or options, warrants or securities
convertible into or evidencing the right to purchase _________ shares of Common
Stock of the Company, for total consideration per share of less than the current
Assumed Per Share Value of $_________.
DIGITAL EXPRESS GROUP, INC.
By:_______________________(SEAL)
, President
<PAGE>
EXHIBIT B
---------
EXERCISE OF OPTION TO PURCHASE PURSUANT TO
ATTACHED STOCK WARRANT
______________, 19__
To ___________________:
The undersigned, the Holder of record of the attached Warrant of
DIGITAL EXPRESS GROUP, INC., hereby exercises the option granted by the Purchase
Rights evidenced by the attached Warrant to purchase upon the terms set forth in
such Warrant ____ shares of Common Stock, which constitutes all [or a portion]
of the shares of Common Stock issuable pursuant to the Purchase Rights
represented by this Warrant, of DIGITAL EXPRESS GROUP, INC., and hereby tenders
payment of the Exercise Price as determined by the Warrant.
By:____________________
[Title_________________]
<PAGE>
EXHIBIT 10.15(C)
THE WARRANT AND THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT")
OR THE SECURITIES ACT OF ANY STATE. THESE SECURITIES HAVE BEEN ISSUED OR SOLD
IN RELIANCE ON THE EXEMPTIONS FROM REGISTRATION CONTAINED IN SECTION 4(2) OF THE
SECURITIES ACT AND IN THE SECURITIES LAWS OF VARIOUS STATES AND MAY NOT BE SOLD
OR TRANSFERRED EXCEPT PURSUANT TO EFFECTIVE REGISTRATION UNDER SUCH ACTS OR IN A
TRANSACTION WHICH IS EXEMPT UNDER SUCH ACTS.
DIGITAL EXPRESS GROUP, INC.
A MARYLAND CORPORATION
STOCK WARRANT
TO PURCHASE COMMON STOCK OF THE COMPANY
Warrant No. 3
FOR VALUE RECEIVED, DIGITAL EXPRESS GROUP, INC., a Maryland corporation
(the "Company"), grants the following rights to SOUTHERN VENTURE FUND II, L.P.,
a Delaware limited partnership, its successors and assigns (individually and
collectively, the "Holder").
Section 1. Grant.
-----
The Holder is hereby granted the right (collectively, the "Purchase
Rights"), in accordance with the terms and conditions of this Warrant, during
the Exercise Period (as defined in Section 3), to purchase from the Company that
number of fully paid and non-assessable shares of Common Stock of the Company,
par value One Cent ($0.01) per share, set forth in Section 2 hereof, at the
Exercise Price (as defined in Section 5), upon delivery of this Warrant to the
Company with the subscription form described in Section 4 hereof, duly executed,
and upon tender of the Exercise Price for the shares of Common Stock to be
purchased.
Section 2. Number of Shares of Common Stock Purchasable.
--------------------------------------------
2.1 Subject to the provisions of this Section 2, this Warrant
entitles the Holder to purchase from time to time an aggregate number of shares
of Common Stock (the "Warrant Shares") equal to Six and Three Hundred Seventy-
Five Thousandths Percent (6.375%) (the "Percentage") of the sum of
<PAGE>
(i) the total number of shares of Common Stock issued
and outstanding as of date hereof, plus
----
(ii) the total number of shares of Common Stock issuable
pursuant to this Warrant and all other warrants, options, contracts or
securities issued and outstanding as of the date hereof convertible into or
evidencing the right to purchase shares of Common Stock, upon whose exercise or
conversion, shares of Common Stock are issuable (including shares of Common
Stock issued and issuable pursuant to a management incentive stock option plan
(the "Incentive Stock Plan") to be established by the Company, up to twelve
percent (12%) of the sum of the Company's outstanding shares of Common Stock as
of the date hereof on a fully diluted basis).
The Company acknowledges that greater shares of Common Stock may be issued upon
exercise of this Warrant under certain circumstances described in this Section
2.
2.2 (a) Upon each issuance after the date hereof, and
prior to the consummation of an offering of the Company's shares of Common
Stock or options, warrants, contracts or securities convertible or exchangeable
into or evidencing the right to purchase shares of Common Stock of the Company
to the public pursuant to a registration statement filed by the Company with the
Securities and Exchange Commission (other than a registration statement on Form
S-4 or S-8, or their successors) based on a Company valuation of at least $20
million in which at least $10 million of net proceeds are received by the
Company and as the result of which shares of Common Stock of the Company are
traded on either the New York Stock Exchange, the American Stock Exchange, or
NASDAQ (a "Public Offering"), of shares of Common Stock, or options, warrants,
contracts or securities convertible or exchangeable into or evidencing the right
to purchase shares of Common Stock of the Company, other than (i) any shares of
Common Stock of the Company issuable or issued pursuant to the Incentive Stock
Plan, (ii) shares of Common Stock of the Company issuable or issued upon
conversion of shares of Preferred Stock of the Company issued and outstanding as
of the date hereof, and (iii) shares of Common Stock of the Company issuable or
issued upon exercise of all warrants outstanding on the date hereof, for a total
consideration per share of Common Stock, or shares of Common Stock issued or
issuable with respect to such an option, warrant, contract or security
convertible into or evidencing the right to purchase shares of Common Stock, of
less than the then-current Assumed Per Share Value, as defined below ("APSV")
(each, a "Dilutive Transaction"), then, upon issuance of such securities the
Company shall immediately issue to the Holder additional shares of Common Stock,
and, if prior to full exercise of this Warrant, the Company shall immediately
issue to the Holder additional warrants, such that the total number of shares of
Common Stock issued and issuable upon full exercise of this Warrant shall be
equal to that amount as determined by dividing Six Hundred Seventy-One Thousand
Fifty-Two Dollars and Sixty Cents ($671,052.60) by the APSV. Upon request of the
Holder, the Company shall execute an acknowledgment, in the form attached hereto
and made a part hereof as Exhibit A, of any adjustment made pursuant to
---------
this Section 2.2.
<PAGE>
(b) The "Assumed Per Share Value" shall be that
amount equal to the quotient of (i) (A) the APSV immediately prior to such
Dilutive Transaction, (B) multiplied by the sum of the number of shares of
Common Stock of the Company outstanding immediately prior to such Dilutive
Transaction plus the number of shares of Common Stock issuable upon exercise or
conversion, as the case may be, of all options, warrants and other rights to
purchase (including, but not limited to, all shares issued and issuable pursuant
to the Incentive Stock Plan), or securities convertible into, shares of Common
Stock of the Company outstanding immediately prior to such Dilutive Transaction,
plus (C) the aggregate consideration, if any, received or to be received by the
Company upon such Dilutive Transaction, divided by (ii) the sum of the number of
shares of Common Stock of the Company outstanding immediately after such
Dilutive Transaction, plus the number of shares of Common Stock issuable upon
exercise or conversion, as the case may be, of all options, warrants and other
rights to purchase (including, but not limited to, shares issued and issuable
pursuant to the Incentive Stock Plan), or securities convertible into, shares of
Common Stock of the Company outstanding immediately after such Dilutive
Transaction. The initial Assumed Per Share Value shall be $10.526. Subsequent
APSVs shall be determined in accordance with the foregoing formula and shall be
rounded to the nearest tenth of one cent ($0.001).
(c) As an illustration of the provisions of
paragraphs (a) and (b) hereof, if after the date hereof the Company sells One
Million (1,000,000) shares of its Common Stock at One Dollar and Fifty Cents
($1.50) per share, then the number of shares issuable upon exercise of this
Warrant (or the total number of shares to which the Holder is entitled if
subsequent to full exercise of this Warrant) shall equal the quotient of Six
Hundred Seventy-One Thousand Fifty-Two Dollars and Sixty Cents ($671,052.60)
divided by the new APSV. The new APSV would be determined as follows:
APSV = ($10.526 x 1,000,000) + $1,500,000 = $6.013
----------------------------------
2,000,000 shares
This APSV would result in 111,600.29 shares of Common Stock
($671,052.60/$6.013).
As an additional illustration of this formula, if the Company were to
next sell five hundred thousand (500,000) shares of its Common Stock at One
Dollar ($1.00) per share, then the number of shares issuable upon exercise of
this Warrant (or the total number of shares to which the Holder is entitled if
subsequent to full exercise of this Warrant) shall equal Six Hundred Seventy-One
Thousand Fifty-Two Dollars and Sixty Cents ($671,052.60) divided by the new
APSV. This new APSV would be determined as follows:
APSV = ($6.013 x 2,285,213.94) + $500,000 = $5.113
----------------------------------
2,785,213.94 shares
-------------------
This APSV would result in 131,244.39 shares of Common Stock
($671,052.60/$5.113).
<PAGE>
(d) If the Company shall at any time issue or
grant any options orrights to subscribe for or to purchase shares of Common
Stock or its equivalent, all shares of Common Stock or its equivalent which the
holders of such options or rights shall be entitled to subscribe for or to
purchase shall be deemed to be issued as of the date of such issuing or granting
of such options or rights; and the minimum aggregate consideration specified in
such options or rights for the shares covered thereby, plus the cash
consideration, if any, received by the Company for such options or rights, shall
be deemed to be the consideration actually received by the Company for the
issuance of shares.
(e) If the Company shall at any time issue any
stock or obligations directly or indirectly convertible into or exchangeable for
shares of Common Stock or its equivalent, then such issue shall be deemed to be
an issue (as of the date of issue of such stock or obligations) of the total
maximum number of shares of Common Stock necessary to effect the exchange or
conversion of all such stock or obligations. The amount received or receivable
by the Company in consideration for the issue of such stock or obligations
(deducting therefrom any commissions or expenses paid or incurred by the Company
for any underwriting of, or otherwise in connection with, such issue), plus the
minimum aggregate amount of premiums, if any, payable to the Company upon
exchange or conversion shall be deemed to be the consideration actually received
by the Company for the issue of such Common Stock.
(f) In the case of any issue of shares of Common
Stock for cash, the consideration received by the Company therefor shall be
deemed to be the net proceeds received for such shares, deducting therefrom any
commissions or expenses paid or incurred by the Company for any underwriting of,
or otherwise in connection with, the issue of such shares; provided, however,
that in any such case where the shares of stock so issued are part of a unit or
combination of securities of the Company, if the amount of the cash
consideration received by the Company for the shares of stock so issued is not
determinable at the time of such issuance, such amount shall be equal to such
portion of the total cash consideration received by the Company for such units
or combinations as reasonably constitutes consideration therefor regardless of
the accounting treatment thereof by the Company.
(g) In the case of an issue of shares of Common
Stock for a consideration part or all of which shall be other than cash, the
amount of the consideration other than cash therefore shall be deemed to be the
fair value of such consideration as reasonably constitutes such consideration
other than cash, regardless of the accounting treatment thereof by the Company.
(h) The sale or other disposition of any shares of
Common Stock of the Company or other securities held in the treasury of the
Company, or of any securities resulting from any reclassification or
reclassifications of such shares or other securities which were effected while
they were held in the treasury of the Company, shall be deemed an issuance
thereof.
<PAGE>
(i) If at any time the Company shall adjust the
subscription, exercise, conversion or exchange price of any Common Stock or its
equivalent issued or subject to issuance by the Company, such adjustment shall
constitute a Dilutive Transaction and the total consideration for each share
thereof shall be the price as so adjusted.
2.3 In case, prior to the expiration of these Purchase
Rights by exercise or by the terms of this Warrant, the Company shall undertake
any reclassification, stock split, reverse stock split, stock dividend or any
similar proportionately-applied change (collectively, a "Reclassification") of
outstanding shares of Common Stock (other than a change in, of, or from par
value), the Holder shall thereafter be entitled, upon exercise of this Warrant,
to purchase the kind and amount of shares of stock and other securities and
property receivable upon such Reclassification by a holder of the number of
shares of Common Stock which this Warrant entitles the Holder hereof to purchase
immediately prior to such Reclassification. Concurrently with any
Reclassification, the APSV automatically shall be adjusted proportionately to
reflect such Reclassification (e.g., in a two-for-one stock split, the APSV
would be divided by two, or in a one-for-two reverse stock split, the APSV would
be multiplied by two).
2.4 In case, prior to the expiration of these Purchase
Rights by exercise or by the terms of this Warrant, the Company shall
consolidate or merge with, or convey all, or substantially all, of its property
or assets to, any other corporation or corporations, then, as a condition
precedent to such consolidation, merger, or conveyance, lawful and adequate
provision shall be made whereby the Holder shall thereafter have the right to
receive from the Company or the successor corporation, as the case may be, upon
the basis and upon the terms and conditions specified in this Warrant, in lieu
of the shares of Common Stock of the Company theretofore purchasable upon the
exercise of the Purchase Rights, such shares of stock, securities, or assets as
may be issued or payable with respect to, or in exchange for, the number of
shares of Common Stock of the Company theretofore purchasable upon the exercise
of the Purchase Rights had such consolidation, merger, or conveyance not taken
place; and in any such event the rights of the Holder to an adjustment of the
number of shares of Common Stock purchasable upon the exercise of the Purchase
Rights as herein provided, shall continue and be preserved in respect of any
stock or securities which the Holder becomes entitled to purchase. It shall be a
condition of such consolidation, merger, or conveyance that the Company and/or
each successor corporation, as the case may be, shall assume in manner and form
reasonably satisfactory to the Holder the obligation to deliver to the Holder,
upon the exercise of the Purchase Rights, such shares of Common Stock,
securities, or assets as, in accordance with the provisions of this Warrant,
shall have been provided for that purpose.
Section 3. Exercise Period; Registration Statement Notice.
-----------------------------------------------
3.1 The Purchase Rights represented hereby shall be
exercisable in whole or in part from time to time beginning on the date hereof
and
<PAGE>
continuing until six (6) years from the date on which all shares of
Preferred Stock of the Company issued and outstanding as of the date of the
original issuance of this Warrant have been redeemed and paid by the Company
and/or converted, as the case may be (the "Exercise Period"), and all accrued
and unpaid dividends thereon have been paid.
3.2 The Company shall give the Holder written notice, at
the address of the Holder set forth on the Company's books, not less than thirty
(30) days prior to the filing of any registration statement with respect to a
Public Offering.
Section 4. Method of Exercise. The Purchase Rights represented by
------------------
this Warrant are exercisable upon the terms and conditions set forth herein at
the option of the Holder in whole at any time and in part from time to time
during the Exercise Period, upon the delivery of a notice to the Company's
principal office, in the form attached hereto and made a part hereof as Exhibit
-------
B, to the Company with such notice duly executed and upon payment in cash or
- -
bank cashier's or certified check of the Exercise Price. The Purchase Rights
shall be deemed to have been exercised, and the Holder shall be deemed to have
become a stockholder of record of the Company for the purposes of receiving
dividends and for all other purposes whatsoever with respect to the shares of
Common Stock so purchased, as of the date of delivery of such notice accompanied
by tender of the Exercise Price.
Section 5. Exercise Price. The aggregate Exercise Price for the
--------------
shares of Common Stock issuable to the Holder hereunder is Twenty-Five Dollars
($25.00) (the "Exercise Price"). If the Holder exercises a portion of the
Purchase Rights granted hereunder, the Exercise Price for the shares of Common
Stock issuable upon such exercise shall equal the product of (i) Twenty-Five
Dollars ($25.00) and (ii) a fraction, the numerator of which is the number of
shares of Common Stock issuable upon such exercise, and the denominator of which
is the total number of shares of Common Stock issuable hereunder.
Section 6. Company's Warranties and Covenants as to Capital Stock.
------------------------------------------------------
The Company has taken all action necessary and appropriate to properly authorize
and issue those shares of Common Stock issuable to the Holder pursuant to this
Warrant including an authorization of issuance and setting of price. The Common
Stock deliverable on the exercise of the Purchase Rights represented hereby
shall, when issued, be duly and validly issued, fully paid and nonassessable.
The Company shall at all times reserve and hold available sufficient shares of
Common Stock to satisfy all dividend, conversion and purchase rights of all
outstanding convertible securities and warrants.
Section 7. Transfer. The Purchase Rights shall be registered on the
--------
books of the Company, which shall be kept by it at its principal office for that
purpose. The Purchase Rights shall be transferable on said books, in whole or
in part, by the Holder in person or by duly authorized attorney upon surrender
of this Warrant properly endorsed. The Company agrees that, while the Purchase
Rights remain valid and outstanding, its stock transfer books shall not be
closed for any purpose whatsoever
<PAGE>
except under arrangements which shall insure to persons exercising warrants or
applying for transfer of stock all rights and privileges which they might have
had or received if the stock transfer books had not been closed and they had
exercised their Purchase Rights at any time during which such transfer book
shall have been closed.
Section 8. Charges, Taxes and Expenses. Issuance of certificates for
---------------------------
shares of Common Stock issuable upon the exercise of this Warrant or any portion
thereof shall be made without charge to the Holder hereof for any issue taxes or
any other incidental expenses in respect of the issuance of such certificates to
and in the name of the registered Holder of this Warrant, all of which taxes and
expenses shall be paid by the Company, and such certificates shall be issued in
the name of the Holder of this Warrant. Certificates will be issued in a name
other than that of the Holder upon the request of a Holder and payment by the
Holder of any applicable transfer taxes and compliance with all applicable
securities laws.
Section 9. Exchange For Other Denominations. This Warrant is
--------------------------------
exchangeable for new certificates of like tenor and date representing in the
aggregate the right to purchase the number of shares purchasable hereunder in
denominations designated by the Holder at the time of surrender. In the event
of the purchase, at any time prior to the expiration of the Exercise Period, of
less than all of the shares of Common Stock purchasable hereunder, the Company
will cancel this Warrant upon surrender thereof, and will forthwith execute and
deliver to the Holder hereof a new warrant of like tenor and date for the
balance of the shares purchasable hereunder.
Section 10. Loss, Theft, Destruction or Mutilation of Warrant. Upon
-------------------------------------------------
receipt by the Company of evidence reasonably satisfactory to it of the loss,
theft, destruction or mutilation of this Warrant, and, in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it, and upon
reimbursement to the Company of all reasonable expenses incidental thereto, and
upon surrender and cancellation of this Warrant, if mutilated, the Company will
make and deliver a new warrant of like tenor and date, in lieu of this Warrant.
Section 11. Remedies. The Company acknowledges and agrees that the
--------
remedies at law of the Holder in the event of any default or threatened default
by the Company in the performance of or compliance with any of the terms of this
Warrant are not and will not be adequate, and that such terms may be
specifically enforced by a decree for the specific performance of any agreement
contained herein or by an injunction against a violation of any of the terms
hereof or otherwise.
Section 12. Miscellaneous. This Warrant shall be binding upon the
-------------
Company's successors. This Warrant shall be governed, construed and enforced in
accordance with the laws of the State of Maryland. In case any provision of
this Warrant shall be invalid, illegal or unenforceable, or partially invalid,
illegal or unenforceable, the provision shall be enforced to the extent, if any,
that it may legally be enforced and the validity, legality and enforceability of
the remaining provisions shall not in any way be
<PAGE>
affected or impaired thereby. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by a statement in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. The headings in this Warrant are for purposes of reference only, and
shall not limit or otherwise affect any of the terms hereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed, under seal and delivered on its behalf this 24th day of March, 1995.
ATTEST: DIGITAL EXPRESS GROUP, INC.
/s/ Richard L. Butler By: /s/ Douglas E. Humphrey (SEAL)
- ----------------------------- ------------------------------
Richard L. Butler, Secretary Douglas E. Humphrey, President
<PAGE>
EXHIBIT A
---------
ACKNOWLEDGMENT PURSUANT TO
SECTION 2.2 TO ATTACHED STOCK WARRANT
__________, 19__
The undersigned, DIGITAL EXPRESS GROUP, INC. (the "Company"), hereby
acknowledges an adjustment to the number of Warrant Shares purchasable pursuant
to that certain Warrant No. 3 (the "Warrant") of the Company by the Holder
thereof, pursuant to the provisions of Section 2.2 of the Warrant, by virtue of
an offering of _____ shares of Common Stock, or options, warrants or securities
convertible into or evidencing the right to purchase _________ shares of Common
Stock of the Company, for total consideration per share of less than the current
Assumed Per Share Value of $_________.
DIGITAL EXPRESS GROUP, INC.
By: (SEAL)
------------------------
, President
<PAGE>
EXHIBIT B
---------
EXERCISE OF OPTION TO PURCHASE PURSUANT TO
ATTACHED STOCK WARRANT
_______________, 19____
To ___________________:
The undersigned, the Holder of record of the attached Warrant of
DIGITAL EXPRESS GROUP, INC., hereby exercises the option granted by the Purchase
Rights evidenced by the attached Warrant to purchase upon the terms set forth in
such Warrant ____ shares of Common Stock, which constitutes all [or a portion]
of the shares of Common Stock issuable pursuant to the Purchase Rights
represented by this Warrant, of DIGITAL EXPRESS GROUP, INC., and hereby tenders
payment of the Exercise Price as determined by the Warrant.
By:________________________
[Title_____________________ ]
<PAGE>
Exhibit 10.16
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (this "Agreement") is entered into as of
April 11, 1996, by and between SILICON VALLEY BANK, a California-chartered bank
("Bank") with its principal place of business at 3003 Tasman Drive, Santa Clara,
California 95054 and with a loan production office located at One Central Plaza,
11300 Rockville Pike, Suite 701, Rockville, Maryland 20852, doing business under
the name "Silicon Valley East" and DIGITAL EXPRESS GROUP, INC., a Maryland
corporation ("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
---------
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
----------------------------
1.1 Definitions. As used in this Agreement, the following terms
-----------
shall have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"Advance" or "Advances" means an Advance under the Committed
Revolving Line.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls or
is controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, and partners.
"Bank Expenses" means all: reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, administration, and enforcement of the Loan
Documents; and Bank's reasonable attorneys' fees
<PAGE>
and expenses incurred in amending, enforcing or defending the Loan Documents,
whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and records
including: ledgers; records concerning Borrower's assets or liabilities, the
Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Borrowing Base" has the meaning set forth in Section 2.1
hereof.
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of California or Maryland are authorized
or required to close.
"Closing Date" means the date of this Agreement.
"Code" means the Maryland Uniform Commercial Code.
"Collateral" means the property described on Exhibit A attached
hereto.
"Committed Revolving Line" means One Million Five Hundred
Thousand Dollars ($1,500,000).
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
2
<PAGE>
"Current Assets" means, as of any applicable date, all amounts
that should, in accordance with GAAP, be included as current assets on the
consolidated balance sheet of Borrower and its Subsidiaries as at such date.
"Current Liabilities" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current liabilities
on the consolidated balance sheet of Borrower and its Subsidiaries, as at such
date, plus, to the extent not already included therein, all outstanding Advances
made under this Agreement, including all Indebtedness that is payable upon
demand or within one year from the date of determination thereof unless such
Indebtedness is renewable or extendable at the option of Borrower or any
Subsidiary to a date more than one year from the date of determination, but
excluding Subordinated Debt and all deferred revenue.
"Daily Balance" means the amount of the Obligations owed at the
end of a given day.
"Eligible Accounts" means those Accounts that arise in the
ordinary course of Borrower's business that comply with all of Borrower's
representations and warranties to Bank set forth in Section 5.4; provided, that
--------
standards of eligibility may be fixed and revised from time to time by Bank in
Bank's reasonable judgment and upon notification thereof to Borrower in
accordance with the provisions hereof. Unless otherwise agreed to by Bank,
Eligible Accounts shall not include the following:
(a) Accounts that the account debtor has failed to pay within
ninety (90) days of invoice date;
(b) Accounts with respect to an account debtor, fifty percent
(50%) of whose Accounts the account debtor has failed to pay within ninety (90)
days of invoice date;
(c) Accounts with respect to which the account debtor is an
officer, employee, or agent of Borrower;
(d) Accounts with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and hold,
or other terms by reason of which the payment by the account debtor may be
conditional;
(e) Accounts with respect to which the account debtor is an
Affiliate (other than by virtue of being directly or indirectly under common
ownership or control with Borrower) of Borrower;
3
<PAGE>
(f) Accounts with respect to which the account debtor does not
have its principal place of business in the United States, except for Eligible
Foreign Accounts, and Accounts arising from products shipped to or services
provided to branches or offices located in the United States of any account
debtor that does not have its principal place of business in the United States;
(g) Accounts with respect to which the account debtor is a
federal, state, or local governmental entity or any department, agency, or
instrumentality thereof;
(h) Accounts with respect to which Borrower is liable to the
account debtor for goods sold or services rendered by the account debtor to
Borrower, but only to the extent of any amounts owing to the account debtor
against amounts owed to Borrower;
(i) Accounts with respect to an account debtor, including
Subsidiaries and Affiliates, whose total obligations to Borrower exceed twenty-
five percent (25%) of all Accounts, to the extent such obligations exceed the
aforementioned percentage, except as approved in writing by Bank;
(j) Accounts with respect to which the account debtor disputes
liability or makes any claim with respect thereto as to which Bank believes, in
its sole discretion, that there may be a basis for dispute (but only to the
extent of the amount subject to such dispute or claim), or is subject to any
Insolvency Proceeding, or becomes insolvent, or goes out of business; and
(k) Accounts the collection of which Bank reasonably determines
to be doubtful.
"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments
in which Borrower has any interest.
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"Event of Default" has the meaning given to such term under
Section 8 hereof.
"GAAP" means generally accepted accounting principles as in
effect from time to time.
4
<PAGE>
"Indebtedness" means (a) all indebtedness for borrowed money or
the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
"Inventory" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing.
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, the
Revolving Promissory Note and any other agreement entered into between Borrower
and Bank in connection with this Agreement, all as amended or extended from time
to time.
"Material Adverse Effect" means a material adverse effect on (i)
the business operations or condition (financial or otherwise) of Borrower and
its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.
5
<PAGE>
"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper, and Borrower's
Books relating to any of the foregoing.
"Note" means the Revolving Promissory Note, as the same may be
amended or replaced from time to time.
"Obligations" means all debt, principal, interest, Bank Expenses
and other amounts owed to Bank by Borrower pursuant to the Note, this Agreement
or any other agreement, whether absolute or contingent, due or to become due,
now existing or hereafter arising, including any interest that accrues after the
commencement of an Insolvency Proceeding and including any debt, liability, or
obligation owing from Borrower to others that Bank may have obtained by
assignment or otherwise.
"Payment Date" means the first calendar day of each month.
"Periodic Payments" means all installments or similar recurring
payments that Borrower may now or hereafter become obligated to pay to Bank
pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under
this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in
the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary
course of business; and
(e) Operating or capital leases arising under Section 7.12 of
this Agreement.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule;
6
<PAGE>
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any State thereof
maturing within one (1) year from the date of acquisition thereof, (ii)
commercial paper maturing no more than one (1) year from the date of creation
thereof and currently having the highest rating obtainable from either Standard
& Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates
of deposit maturing no more than one (1) year from the date of investment
therein issued by Bank; and
(c) investments constituting acquisitions permitted under
Section 7.3 of this Agreement.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed in the
Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings, provided the same have no priority over any of Bank's
--------
security interests;
(c) Liens (i) upon or in any equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time of
its acquisition, provided that the Lien is confined solely to the property so
--------
acquired and improvements thereon, and the proceeds of such equipment;
(d) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (a) through (c) above, provided that any extension, renewal or
--------
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.
"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum,
most recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.
7
<PAGE>
"Quick Assets" means, at any date as of which the amount thereof
shall be determined, the consolidated cash, cash-equivalents, accounts
receivable (net of the allowances for bad debt) and investments, with maturities
not to exceed ninety (90) days, of Borrower determined in accordance with GAAP.
"Responsible Officer" means each of the Chief Executive Officer,
the Chief Financial Officer and the Controller of Borrower.
"Revolving Maturity Date" means February 28, 1997.
"Revolving Promissory Note" means that certain Revolving
Promissory Note of even date herewith in substantially the form of Exhibit E
---------
hereto in the maximum principal amount of One Million Five Hundred Thousand
Dollars ($1,500,000) from Borrower in favor of Bank, together with all renewals,
amendments, modifications and substitutions therefore.
"Schedule" means the schedule of exceptions attached hereto.
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank
(and identified as being such by Borrower and Bank).
"Subsidiary" means any corporation or partnership in which (i)
any general partnership interest or (ii) more than fifty percent (50%) of the
stock of which by the terms thereof ordinary voting power to elect the Board of
Directors, managers or trustees of the entity shall, at the time as of which any
determination is being made, be owned by Borrower, either directly or through an
Affiliate.
"Tangible Capital Funds" means at any date as of which the
amount thereof shall be determined the sum of the Borrower's Tangible Net Worth
plus Subordinated Debt, as determined in accordance with GAAP.
"Tangible Net Worth" means at any date as of which the amount
thereof shall be determined, the consolidated total assets of Borrower and its
Subsidiaries minus, without duplication, (i) the sum of any amounts attributable
-----
to (a) goodwill, (b) intangible items such as unamortized debt discount and
expense, patents, trade and service marks and names, copyrights and research and
development expenses except prepaid expenses, and (c) all reserves not already
deducted from assets, and (ii) Total Liabilities.
---
8
<PAGE>
"Total Liabilities" means at any date as of which the amount
thereof shall be determined, all obligations that should, in accordance with
GAAP be classified as liabilities on the consolidated balance sheet of Borrower,
including in any event all Indebtedness, but specifically excluding Subordinated
Debt.
1.2 Accounting Terms. All accounting terms not specifically defined
----------------
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP. When used herein, the terms
"financial statements" shall include the notes and schedules thereto.
2. LOAN AND TERMS OF PAYMENT
-------------------------
2.1 Advances. Subject to and upon the terms and conditions of this
--------
Agreement, Bank agrees to make Advances to Borrower in an aggregate amount not
to exceed the Committed Revolving Line or the Borrowing Base, whichever is less.
For purposes of this Agreement, "Borrowing Base" shall mean an amount equal to
eighty percent (80%) of Eligible Accounts, provided, that the definition of
Borrowing Base may be fixed and revised from time to time by Bank in Bank's
reasonable judgment and upon notification thereof to Borrower in accordance with
the provisions hereof. Subject to the terms and conditions of this Agreement,
amounts borrowed pursuant to this Section 2.1 may be repaid and reborrowed at
any time during the term of this Agreement.
On the Closing Date, Borrower shall execute and deliver to Bank the
Revolving Promissory Note.
Whenever Borrower desires an Advance, Borrower will notify Bank by
facsimile transmission or telephone no later than 3:00 p.m. Washington, D.C.
time, on the Business Day that the Advance is to be made. Each such
notification shall be promptly confirmed by a Payment/Advance Form in
substantially the form of Exhibit B hereto. Bank is authorized to make Advances
---------
under this Agreement, based upon instructions received from a Responsible
Officer, or without instructions if in Bank's discretion such Advances are
necessary to meet Obligations which have become due and remain unpaid. Bank
shall be entitled to rely on any telephonic notice given by a person who Bank
reasonably believes to be a Responsible Officer, and Borrower shall indemnify
and hold Bank harmless for any damages or loss suffered by Bank as a result of
such reliance. Bank will credit the amount of Advances made under this Section
2.1 to Borrower's deposit account.
The Committed Revolving Line shall terminate on the Revolving Maturity
Date, at which time all Advances under this Section 2.1 and other amounts due
under this Agreement (except as otherwise expressly specified herein) shall be
immediately due and payable.
9
<PAGE>
2.2 Overadvances. If at any time the Obligations owed by Borrower
------------
to Bank pursuant to Section 2.1 of this Agreement is greater than the lesser of
(i) the Committed Revolving Line or (ii) the Borrowing Base, Borrower shall
immediately pay to Bank, in cash, the amount of such excess.
2.3 Interest Rates, Payments and Calculations.
-----------------------------------------
(a) Interest Rate. All Advances shall bear interest, on the
-------------
average Daily Balance, at the rate or rates set forth in the Note.
(b) Default Rate. All Obligations shall bear interest,
------------
from and after the occurrence of an Event of Default, at a rate equal to five
(5) percentage points above the interest rate applicable immediately prior to
the occurrence of the Event of Default.
(c) Payments. Interest under each Note shall be due and
--------
payable on the Payment Date of each month during the term thereof. Borrower
hereby authorizes Bank to debit any accounts with Bank, including, without
limitation, Account Number #_____________________ for payments of principal and
interest due on the Obligations and any other amounts owing by Borrower to Bank.
Bank will notify Borrower of all debits which Bank makes against Borrower's
accounts. Any such debits against Borrower's accounts in no way shall be deemed
a set-off. Any interest not paid when due shall be compounded by becoming a part
of the Obligations, and such interest shall thereafter accrue interest at the
rate then applicable hereunder.
(d) Computation. In the event the Prime Rate is changed
-----------
from time to time hereafter, the applicable rate of interest under the Note
shall be increased or decreased effective as of 12:01 a.m. on the day the Prime
Rate is changed, by an amount equal to such change in the Prime Rate. All
interest chargeable under the Loan Documents shall be computed on the basis of a
three hundred sixty (360) day year for the actual number of days elapsed.
2.4 Crediting Payments. Prior to the occurrence of an Event of
------------------
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After the
occurrence of an Event of Default, the receipt by Bank of any wire transfer of
funds, check, or other item of payment shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment on
account unless such payment is of immediately available federal funds or unless
and until such check or other item of payment is honored when presented for
payment. Notwithstanding anything to the contrary contained herein, any wire
transfer or payment received by Bank after 10:00 a.m. Washington, D.C. time
shall be deemed to have been received by Bank as of the opening of business on
the immediately following Business Day. Whenever any payment to Bank under the
Loan Documents would otherwise be due (except by reason of acceleration) on a
date that is not
10
<PAGE>
a Business Day, such payment shall instead be due on the next Business Day, and
additional fees, if any, or interest, as the case may be, shall accrue and be
payable for the period of such extension.
2.5 Fees. Borrower shall pay to Bank the following:
----
(a) Facility Fee. A Facility Fee equal to Eighteen
------------
Thousand Seven Hundred Fifty Dollars ($18,750), Five Thousand Dollars ($5,000)
of which fee has already been paid and the balance of which fee ($13,750) shall
be due on the Closing Date and once paid shall be fully earned and non-
refundable;
(b) Financial Examination and Appraisal Fees. Bank's
----------------------------------------
customary fees and out-of-pocket expenses for Bank's audits of Borrower's
Accounts, and for each appraisal of Collateral and financial analysis and
examination of Borrower performed from time to time by Bank or its agents;
(c) Bank Expenses. Upon demand from Bank, including,
-------------
without limitation, upon the date hereof, all Bank Expenses incurred through the
date hereof, including reasonable attorneys' fees and expenses, and, after the
date hereof, all Bank Expenses, including reasonable attorneys' fees and
expenses, as and when they become due.
2.6 Additional Costs. In case any law, regulation, treaty or
----------------
official directive or the interpretation or application thereof by any court or
any governmental authority charged with the administration thereof or the
compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law):
(a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income of Bank imposed by the United States of America or any
political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets held
by, or deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect to its performance under
this Agreement,
(c) imposes upon Bank any other condition with respect to
its performance under this Agreement,
11
<PAGE>
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
the amount of such increase in cost, reduction in income or additional expense
as and when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error.
2.7 Term. Except as otherwise set forth herein, this Agreement
----
shall become effective on the Closing Date and, subject to Section 12.4, shall
continue in full force and effect for a term ending on the Revolving Maturity
Date. Notwithstanding the foregoing, Bank shall have the right to terminate its
obligation to make Advances under this Agreement immediately and without notice
upon the occurrence and during the continuance of an Event of Default.
Notwithstanding termination, Bank's Lien on the Collateral shall remain in
effect for so long as any Obligations are outstanding.
3. CONDITIONS OF LOANS
-------------------
3.1 Conditions Precedent to Initial Advance. The obligation of Bank
---------------------------------------
to make the initial Advance is subject to the condition precedent that Bank
shall have received, in form and substance satisfactory to Bank, the following:
(a) this Agreement;
(b) the Revolving Promissory Note;
(c) a certificate of the Secretary of Borrower with respect to
incumbency and resolutions authorizing the execution and delivery of this
Agreement;
(d) an opinion of Borrower's counsel;
(e) financing statements (Forms UCC-1);
(f) insurance certificate;
(g) payment of the fees and Bank Expenses then due specified in
Section 2.5 hereof; and
(h) such other documents, and completion of such other matters,
as Bank may reasonably deem necessary or appropriate.
12
<PAGE>
3.2 Conditions Precedent to all Advances. The obligation of Bank to
------------------------------------
make each Advance, including the initial Advance, is further subject to the
following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as
provided in Section 2.1; and
(b) the representations and warranties contained in Section 5
shall be true and correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each Advance as though made at
and as of each such date, and no Event of Default shall have occurred and be
continuing, or would result from such Advance. The making of each Advance shall
be deemed to be a representation and warranty by Borrower on the date of such
Advance as to the accuracy of the facts referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
-----------------------------
4.1 Grant of Security Interest. Borrower grants and pledges to
--------------------------
Bank a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations and in order to secure prompt performance by Borrower of each of
its covenants and duties under the Loan Documents. Except as set forth in the
Schedule, such security interest constitutes a valid, first priority security
interest in the presently existing Collateral, and will constitute a valid,
first priority security interest in Collateral acquired after the date hereof.
4.2 Delivery of Additional Documentation Required. Borrower shall
---------------------------------------------
from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 Right to Inspect. Bank (through any of its officers, employees,
----------------
or agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours, to inspect Borrower's Books and to make
copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
------------------------------
13
<PAGE>
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower is a corporation
----------------------------------
duly existing and in good standing under the laws of its state of incorporation
and qualified and licensed to do business in, and is in good standing in, any
state in which the conduct of its business or its ownership of property requires
that it be so qualified.
5.2 Due Authorization; No Conflict. The execution, delivery, and
------------------------------
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.
5.3 No Prior Encumbrances. Borrower has good and indefeasible title
---------------------
to the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 Bona Fide Eligible Accounts. The Eligible Accounts are bona
---------------------------
fide existing obligations. The property giving rise to such Eligible Accounts
has been delivered to the account debtor or to the account debtor's agent for
immediate shipment to and unconditional acceptance by the account debtor.
Borrower has not received notice of actual or imminent Insolvency Proceeding of
any account debtor that is included in any Borrowing Base Certificate as an
Eligible Account.
5.5 Merchantable Inventory. All Inventory is in all material
----------------------
respects of good and marketable quality, free from all material defects.
5.6 Name; Location of Chief Executive Office. Except as disclosed
----------------------------------------
in the Schedule, Borrower has not done business under any name other than that
specified on the signature page hereof. The chief executive office of Borrower
is located at the address indicated in Section 10 hereof.
5.7 Litigation. Except as set forth in the Schedule, there are no
----------
actions or proceedings pending by or against Borrower or any Subsidiary before
any court or administrative agency in which an adverse decision could have a
Material Adverse Effect or a material adverse effect on Borrower's interest or
Bank's security interest in the Collateral. Borrower does not have knowledge of
any such pending or threatened actions or proceedings.
5.8 No Material Adverse Change in Financial Statements. All
--------------------------------------------------
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the
14
<PAGE>
date thereof and Borrower's consolidated results of operations for the period
then ended. There has not been a material adverse change in the consolidated
financial condition of Borrower since the date of the most recent of such
financial statements submitted to Bank.
5.9 Solvency. Borrower is solvent and able to pay its debts
--------
(including trade debts) as they mature .
5.10 Regulatory Compliance. Borrower and each Subsidiary has met the
---------------------
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA. No event has occurred resulting from Borrower's failure to
comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of the important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, violation of which could have a Material
Adverse Effect.
5.11 Environmental Condition. None of Borrower's or any Subsidiary's
-----------------------
properties or assets has ever been used by Borrower or any Subsidiary or, to the
best of Borrower's actual knowledge, by previous owners or operators, in the
disposal of, or to produce, store, handle, treat, release, or transport, any
hazardous waste or hazardous substance other than in accordance with applicable
law; to the best of Borrower's actual knowledge, none of Borrower's properties
or assets has ever been designated or identified in any manner pursuant to any
environmental protection statute as a hazardous waste or hazardous substance
disposal site, or a candidate for closure pursuant to any environmental
protection statute; no lien arising under any environmental protection statute
has attached to any revenues or to any real or personal property owned by
Borrower or any Subsidiary; and neither Borrower nor any Subsidiary has received
a summons, citation, notice, or directive from the Environmental Protection
Agency or any other federal, state or other governmental agency concerning any
action or omission by Borrower or any Subsidiary resulting in the releasing, or
otherwise disposing of hazardous waste or hazardous substances into the
environment.
5.12 Taxes. Borrower and each Subsidiary has filed or caused to be
-----
filed all tax returns required to be filed, and has paid, or has made adequate
provision for the payment of, all taxes reflected therein.
5.13 Subsidiaries. Borrower does not own any stock, partnership
------------
interest or other equity securities of any Person, except for Permitted
Investments.
15
<PAGE>
5.14 Government Consents. Borrower and each Subsidiary has obtained
-------------------
all consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted.
5.15 Full Disclosure. No representation, warranty or other statement
---------------
made by Borrower in any certificate or written statement furnished to Bank
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained in such certificates or
statements not misleading.
6. AFFIRMATIVE COVENANTS
---------------------
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
an Advance hereunder, Borrower shall do all of the following:
6.1 Good Standing. Borrower shall maintain its and each of its
-------------
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
6.2 Government Compliance. Borrower shall meet, and shall cause
---------------------
each Subsidiary to meet, the minimum funding requirements of ERISA with respect
to any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
6.3 Financial Statements, Reports, Certificates. Borrower shall
-------------------------------------------
deliver to Bank: (a) as soon as available, but in any event within fifteen (15)
days after the end of each month, a company prepared financial statement
covering Borrower's operations during such period and a current aging of
accounts, all certified by an officer of Borrower reasonably acceptable to Bank;
(b) as soon as available, but in any event within forty five (45) days after the
end of each calendar quarter, company prepared financial projections for the
following twelve (12) month period, together with a current aging of accounts
payables, certified by an officer of Borrower reasonably acceptable to Bank; (c)
as soon as available, but in any event within one hundred eighty (180) days
after the end of Borrower's fiscal year a management letter prepared by an
independent certified public accounting firm reasonably acceptable to Bank; (d)
as soon as available, but in any event within ninety (90) days after the end of
Borrower's fiscal year, audited financial statements of
16
<PAGE>
Borrower prepared in accordance with GAAP, consistently applied, together with
an unqualified opinion on such financial statements of an independent certified
public accounting firm reasonably acceptable to Bank; (e) promptly upon receipt
of notice thereof, a report of any legal actions pending or threatened against
Borrower or any Subsidiary that could result in damages or costs to Borrower or
any Subsidiary of One Hundred Thousand Dollars ($100,000) or more; and (f) such
budgets, sales projections, operating plans or other financial information as
Bank may reasonably request from time to time.
Within fifteen (15) days after the last day of each month, Borrower
shall deliver to Bank a Borrowing Base Certificate signed by a Responsible
Officer in substantially the form of Exhibit C hereto, together with aged
---------
listings of accounts receivable.
Within fifteen (15) days after the last day of each month, Borrower
shall deliver to Bank with the monthly financial statements a Compliance
Certificate signed by a Responsible Officer in substantially the form of Exhibit
-------
D hereto.
- -
Bank shall have a right from time to time hereafter to audit
Borrower's Books at Borrower's expense, provided that such audits will be
conducted no more often than every six (6) months unless an Event of Default has
occurred and is continuing.
6.4 Inventory; Returns. Borrower shall keep all Inventory in good
------------------
and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on the
same basis and in accordance with the usual customary practices of Borrower, as
they exist at the time of the execution and delivery of this Agreement. Borrower
shall promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than Fifty
Thousand Dollars ($50,000).
6.5 Taxes. Borrower shall make, and shall cause each Subsidiary to
-----
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by GAAP)
by Borrower.
6.6 Insurance.
---------
17
<PAGE>
(a) Borrower, at its expense, shall keep the Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts, as ordinarily insured against by other
owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain insurance
relating to Borrower's ownership and use of the Collateral in amounts and of a
type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such form, with
such companies, and in such amounts as reasonably satisfactory to Bank. All such
policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof and all liability insurance policies shall show Bank as an
additional insured, and shall specify that the insurer must give at least twenty
(20) days notice to Bank before canceling its policy for any reason. Borrower
shall deliver to Bank certified copies of such policies of insurance and
evidence of the payments of all premiums therefor. All proceeds payable under
any such policy shall, at the option of Bank, be payable to Bank to be applied
on account of the Obligations.
6.7 Principal Depository. Borrower shall maintain its principal
--------------------
depository and operating accounts with Bank and shall invest the majority of its
marketable securities through Bank.
6.8 Quick Asset Ratio. Borrower shall maintain at all times after
-----------------
September 30, 1996, tested as of the last day of each calendar month, a ratio of
Quick Assets to Current Liabilities of at least 1.2 to 1.0.
6.9 Working Capital. From the date hereof through and including
---------------
September 30, 1996, Borrower shall maintain at all times a sum of cash, plus
eighty percent (80%) of accounts receivable (net of allowances), less all
borrowings under the Committed Revolving Line of not less than $500,000.
6.10 Leverage. Borrower shall maintain, tested as of the last day of
--------
each calendar month, from the date hereof through and including September 30,
1996, a ratio of Total Liabilities to Tangible Capital Funds of not more than
2.25 to 1.0, and thereafter at all times, a ratio of Total Liabilities to
Tangible Capital Funds of not more than 1.0 to 1.0.
6.11 Profitability. Borrower shall not suffer a loss during the
-------------
first and second calendar quarters of 1996 in excess of $1,600,000 per quarter,
or suffer a loss during the third calendar quarter of 1996 in excess of
$500,000, and thereafter have net income at all times.
18
<PAGE>
6.12 Minimum Tangible Funds. Borrower shall maintain as of the date
----------------------
hereof through September 30, 1996, minimum Tangible Capital Funds of not less
than $1,500,000. Commencing thereafter through fiscal year 1996, Borrower shall
maintain minimum Tangible Capital Funds of not less than $3,000,000. Thereafter,
this covenant shall be revised on an annual basis, so that Borrower shall
maintain at all times during its fiscal year minimum Tangible Capital Funds of
not less than the greater of the minimum Tangible Capital Funds for the prior
year or ninety percent (90%) of Tangible Capital Funds as of the end of the
prior year. For example, during fiscal year 1997, Borrower shall maintain
minimum Tangible Capital Funds equal to the greater of $3,000,000 or ninety
percent (90%) of Tangible Capital Funds as of the end of fiscal year 1996.
6.13 Minimum Liquidity. Borrower shall maintain at all times, tested
-----------------
as of the last day of each calendar month, cash and marketable securities
(measured at the fair market value determined by Bank) of not less than Five
Hundred Thousand Dollars ($500,000).
6.14 Further Assurances. At any time and from time to time Borrower
------------------
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
------------------
Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until payment in full of the outstanding Obligations or
for so long as Bank may have any commitment to make any Advances, Borrower will
not do any of the following:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise
------------
dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to
Transfer, all or any part of its business or property, other than: (i) Transfers
of Inventory in the ordinary course of business; (ii) Transfers of non-exclusive
licenses and similar arrangements for the use of the property of Borrower or its
Subsidiaries; or (iii) Transfers of worn-out or obsolete Equipment.
7.2 Change in Business. Engage in any business, or permit any of
------------------
its Subsidiaries to engage in any business, other than the businesses currently
engaged in by Borrower and any business substantially similar or related thereto
(or incidental thereto), or suffer a material change in Borrower's ownership,
management or directors. Borrower will not, without thirty (30) days prior
written notification to Bank, relocate its chief executive office.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of
-----------------------
its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person.
Notwithstanding the foregoing, if no Event of Default has occurred and is
19
<PAGE>
continuing or would result from such action, Borrower may acquire the assets of
other business organizations related to Borrower's principle line of business,
provided that all of the following conditions are satisfied:
(a) Borrower is the surviving entity;
(b) no additional Indebtedness is incurred, whether direct or
indirect; and
(c) the consideration for the purchase is in the form of
Borrower's stock in an amount that does not significantly dilute the percent of
ownership held in Borrower by Grotech Partners IV, L.P., Venrock Associates,
Venrock Associates II, L.P. and Southern Venture Fund II, L.P.
7.4 Indebtedness. Create, incur, assume or be or remain liable with
------------
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien
------------
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions. Pay any dividends or make any other distribution
-------------
or payment on account of or in redemption, retirement or purchase of any capital
stock.
7.7 Investments. Directly or indirectly acquire or own, or make any
-----------
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 Transactions with Affiliates. Directly or indirectly enter into
---------------------------
or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a nonaffiliated Person.
7.9 Subordinated Debt. Make any payment in respect of any
-----------------
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.
7.10 Inventory. Store the Inventory with a bailee, warehouseman, or
---------
similar party unless Bank has received a pledge of the warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing,
Borrower shall keep the Inventory only at the location set forth in
20
<PAGE>
Section 10 hereof and such other locations of which Borrower gives Bank prior
written notice and as to which Borrower signs and files a financing statement
where needed to perfect Bank's security interest.
7.11 Compliance. Become an "investment company" controlled by an
----------
"investment company," within the meaning of the Investment Company Act of 1940,
or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose.
Fail to meet the minimum funding requirements of ERISA, permit a Reportable
Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply
with the Federal Fair Labor Standards Act or violate any law or regulation,
which violation could have a Material Adverse Effect or a material adverse
effect on the Collateral or the priority of Bank's Lien on the Collateral, or
permit any of its Subsidiaries to do any of the foregoing.
7.12 Capital Expenditures. Make or commit to make any expenditure in
--------------------
respect of the purchase or other acquisition (including any obligations under
any leases of any personal property, which should be, in accordance with GAAP,
capitalized) of any fixed or capital assets in the aggregate for Borrower in
excess of $3,100,000.
8. EVENTS OF DEFAULT
-----------------
Any one or more of the following events shall constitute an "Event of
Default" by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay, when due, any of the
---------------
Obligations.
8.2 Covenant Default.
----------------
(a) If Borrower fails to perform any obligation under Sections
6.7, 6.8, 6.9, 6.10, 6.11 or 6.12 or violates any of the covenants contained in
Article 7 of this Agreement, o r
(b) If Borrower fails or neglects to perform, keep, or observe
any other material term, provision, condition, covenant, or agreement contained
in this Agreement, in any of the Loan Documents, or in any other present or
future agreement between Borrower and Bank and as to any default under such
other term, provision, condition, covenant or agreement that can be cured, has
failed to cure such default within ten (10) days after Borrower receives notice
thereof or any officer of Borrower becomes aware thereof; provided, however,
that if the default cannot by its nature be cured within the ten (10) day period
or cannot after diligent attempts by Borrower be cured within such ten (10) day
period, and such default is likely to be cured within a reasonable time, then
Borrower shall have an additional reasonable period (which shall not in any case
exceed
21
<PAGE>
thirty (30) days) to attempt to cure such default, and within such reasonable
time period the failure to have cured such default shall not be deemed an Event
of Default (provided that no Advances will be required to be made during such
cure period);
8.3 Material Adverse Change. If there (i) occurs a material adverse
-----------------------
change in the business, operations, or condition (financial or otherwise) of the
Borrower, or (ii) is a material impairment of the prospect of repayment of any
portion of the Obligations or (iii) is a material impairment of the value or
priority of Bank's security interests in the Collateral;
8.4 Attachment. If any material portion of Borrower's assets is
----------
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Advances will be required to be made during such cure period);
8.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency
----------
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within ten (10) days (provided
that no Advances will be made prior to the dismissal of such Insolvency
Proceeding);
8.6 Other Agreements. If there is a default in any agreement to
----------------
which Borrower is a party with a third party or parties resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($100,000) or that could have a Material Adverse Effect;
8.7 Subordinated Debt. If Borrower makes any payment on account of
-----------------
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 Judgments. If a judgment or judgments for the payment of money
---------
in an amount, individually or in the aggregate, of at least Fifty Thousand
Dollars ($50,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of ten (10) days (provided that no
Advances will be made prior to the satisfaction or stay of such judgment); or
22
<PAGE>
8.9 Misrepresentations. If any material misrepresentation or
------------------
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate delivered to Bank by any Responsible
Officer pursuant to this Agreement or to induce Bank to enter into this
Agreement or any other Loan Document.
9. BANK'S RIGHTS AND REMEDIES
--------------------------
9.1 Rights and Remedies. Upon the occurrence and during the
-------------------
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable (provided that upon the occurrence of an Event of Default described in
Section 8.5 all Obligations shall become immediately due and payable without any
action by Bank);
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement or under any other agreement between
Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(d) Without notice to or demand upon Borrower, make such
payments and do such acts as Bank considers necessary or reasonable to protect
its security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to Bank as
Bank may designate. Borrower authorizes Bank to enter the premises where the
Collateral is located, to take and maintain possession of the Collateral, or any
part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien which in Bank's determination appears to be prior or superior to
its security interest and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's owned premises, Borrower hereby grants Bank a
license to enter into possession of such premises and to occupy the same,
without charge, for up to one hundred twenty (120) days in order to exercise any
of Bank's rights or remedies provided herein, at law, in equity, or otherwise;
(e) Without notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank, or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
23
<PAGE>
(f) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Bank is hereby granted a license or other right, solely
pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1, Borrower's
rights under all licenses and all franchise agreements shall inure to Bank's
benefit;
(g) Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable;
(h) Bank may credit bid and purchase at any public sale; and
(i) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
9.2 Power of Attorney. Effective only upon the occurrence and
-----------------
during the continuance of an Event of Default, Borrower hereby irrevocably
appoints Bank (and any of Bank's designated officers, or employees) as
Borrower's true and lawful attorney to: (a) send requests for verification of
Accounts or notify account debtors of Bank's security interest in the Accounts;
(b) endorse Borrower's name on any checks or other forms of payment or security
that may come into Bank's possession; (c) sign Borrower's name on any invoice or
bill of lading relating to any Account, drafts against account debtors,
schedules and assignments of Accounts, verifications of Accounts, and notices to
account debtors; (d) make, settle, and adjust all claims under and decisions
with respect to Borrower's policies of insurance; and (e) settle and adjust
disputes and claims respecting the accounts directly with account debtors, for
amounts and upon terms which Bank determines to be reasonable; provided Bank may
exercise such power of attorney to sign the name of Borrower on any of the
documents described in Section 4.2 regardless of whether an Event of Default has
occurred. The appointment of Bank as Borrower's attorney in fact, and each and
every one of Bank's rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been fully repaid and performed
and Bank's obligation to provide advances hereunder is terminated.
9.3 Accounts Collection. At any time from the date of this
-------------------
Agreement, Bank may notify any Person owing funds to Borrower of Bank's security
interest in such funds and verify the amount of such Account. Borrower shall
collect all amounts owing to Borrower for Bank, receive in trust all payments as
Bank's trustee, and immediately deliver such payments to Bank in their original
form as received from the account debtor, with proper endorsements for deposit.
24
<PAGE>
9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish
-------------
any required proof of payment due to third persons or entities, as required
under the terms of this Agreement, then Bank may do any or all of the following:
(a) make payment of the same or any part thereof; (b) set up such reserves under
the Committed Revolving Line as Bank deems necessary to protect Bank from the
exposure created by such failure; or (c) obtain and maintain insurance policies
of the type discussed in Section 6.6 of this Agreement, and take any action with
respect to such policies as Bank deems prudent. Any amounts so paid or deposited
by Bank shall constitute Bank Expenses, shall be immediately due and payable,
and shall bear interest at the then applicable rate hereinabove provided, and
shall be secured by the Collateral. Any payments made by Bank shall not
constitute an agreement by Bank to make similar payments in the future or a
waiver by Bank of any Event of Default under this Agreement.
9.5 Bank's Liability for Collateral. So long as Bank complies with
-------------------------------
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk
of loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 Remedies Cumulative. Bank's rights and remedies under this
-------------------
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the specific
purpose for which it was given.
9.7 Demand; Protest. Borrower waives demand, protest, notice of
---------------
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
10. NOTICES
-------
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
25
<PAGE>
delivery service, certified mail, postage prepaid, return receipt requested, or
by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
If to Borrower Digital Express Group, Inc.
6800 Virginia Manor Road
Beltsville, Maryland 20705
Attn: William Pendley, CFO
FAX: (301) 847-5215
If to Bank: Silicon Valley East
One Central Plaza
11300 Rockville Pike, Suite 701
Rockville, Maryland 20852
Attn: Brent H. Donnell
Vice President
FAX: (301) 984-6282
With a Copy to; Silicon Valley Bank
3003 Tasman Drive
Santa Clara, California 95054
Attn: Loan Services
Fax: (408) 496-2421
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
------------------------------------------
This Agreement shall be governed by, and construed in accordance with,
the internal laws of the State of Maryland, without regard to principles of
conflicts of law. BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS
PROPERTIES, UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR
FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF MARYLAND IN ANY ACTION,
SUIT, OR PROCEEDING OF ANY KIND, AGAINST IT WHICH ARISES OUT OF OR BY REASON OF
THIS AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY REASON BANK CANNOT AVAIL
ITSELF OF THE COURTS OF MARYLAND, BORROWER ACCEPTS JURISDICTION OF THE COURTS
AND VENUE IN SANTA CLARA COUNTY, CALIFORNIA. BORROWER AND BANK EACH HEREBY WAIVE
THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS
CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT
26
<PAGE>
CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS.
EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A
MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS
AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
------------------
12.1 Successors and Assigns. This Agreement shall bind and inure to
----------------------
the benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
-------- -------
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
12.2 Indemnification. Borrower shall defend, indemnify and hold
---------------
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement, except
for obligations, demands, claims and liabilities caused by Bank's gross
negligence or willful misconduct; and (b) all losses or Bank Expenses in any way
suffered, incurred, or paid by Bank as a result of or in any way arising out of,
following, or consequential to transactions between Bank and Borrower whether
under this Agreement, or otherwise (including without limitation reasonable
attorneys fees and expenses), except for losses caused by Bank's gross
negligence or willful misconduct.
12.3 Time of Essence. Time is of the essence for the performance of
---------------
all obligations set forth in this Agreement.
12.4 Severability of Provisions. Each provision of this Agreement
--------------------------
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
12.5 Amendments in Writing, Integration. This Agreement cannot be
----------------------------------
amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
27
<PAGE>
12.6 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by different parties on separate counterparts, each of which,
when 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.
12.7 Survival. All covenants, representations and warranties made
--------
in this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run,
provided that so long as the obligations set forth in the first sentence of this
Section 12.7 have been satisfied, and Bank has no commitment to make any
Advances or to make any other loans to Borrower, Bank shall release all security
interests granted hereunder and redeliver all Collateral held by it in
accordance with applicable law.
12.8 Confidentiality. In handling any confidential information
---------------
Bank shall exercise the same degree of care that it exercises with respect to
its own proprietary information of the same types to maintain the
confidentiality of any non-public information thereby received or received
pursuant to this Agreement except that disclosure of such information may be
made (i) to the subsidiaries or affiliates of Bank in connection with their
present or prospective business relations with Borrower, (ii) to prospective
transferees or purchasers of any interest in the Loans, provided that they have
entered into a comparable confidentiality agreement in favor of Borrower and
have delivered a copy to Borrower, (iii) as required by law, regulations, rule
or order, subpoena, judicial order or similar order and (iv) as may be required
in connection with the examination, audit or similar investigation of Bank.
Confidential information hereunder shall not include information that either:
(a) is in the public domain or in the knowledge or possession of Bank when
disclosed to Bank, or becomes part of the public domain after disclosure to Bank
through no fault of Bank; or (b) is disclosed to Bank by a third party, provided
Bank does not have actual knowledge that such third party is prohibited from
disclosing such information.
12.9 Countersignature. This Agreement shall become effective only
----------------
when it shall have been executed by Borrower and Bank (provided, however, in on
event shall this Agreement become effective until signed by and officer of Bank
in California).
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
28
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
DIGITAL EXPRESS GROUP, INC.
By: Signature appears here
------------------------------------
Name:
Title:
SILICON VALLEY BANK, doing business as
SILICON VALLEY EAST
By: /s/ Brent Donnell
------------------------------------
Brent Donnell
Vice President
SILICON VALLEY BANK
By: Signature appears here
------------------------------------
Name:
Title:
(Signed in Santa Clara County, California)
29
<PAGE>
EXHIBIT A
---------
The Collateral shall consist of all right, title and interest of Borrower in and
to the following:
(a) All goods and equipment now owned or hereafter acquired, including, without
limitation, all machinery, fixtures, vehicles (including motor vehicles and
trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any
of the foregoing and any documents of title representing any of the above,
and Borrower's Books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks,
servicemarks, trade styles, trade names, patents, patent applications,
leases, license agreements, franchise agreements, blueprints, drawings,
purchase orders, customer lists, route lists, infringements, claims,
computer programs, computer discs, computer tapes, literature, reports,
catalogs, design rights, income tax refunds, payments of insurance and
rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods, the licensing of
technology or the rendering of services by Borrower, whether or not earned
by performance, and any and all credit insurance, guaranties, and other
security therefor, as well as all merchandise returned to or reclaimed by
Borrower and Borrower's Books relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities, letters of credit,
certificates of deposit, instruments and chattel paper now owned or
hereafter acquired and Borrower's Books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright registrations and
like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter acquired; all
trade secret rights, including all rights to unpatented inventions, know-
how, operating manuals, license rights and agreements and confidential
information, now owned or hereafter acquired; all mask work or similar
rights available for
30
<PAGE>
the protection of semiconductor chips, now owned or hereafter acquired; all
claims for damages by way of any past, present and future infringement of
any of the foregoing; and
(g) Any and all claims, rights and interests in any of the above and all
substitutions for, additions and accessions to and proceeds thereof.
31
<PAGE>
EXHIBIT B
---------
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS __:00 P.M., __.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:
FAX#: TIME:
FROM:
CLIENT NAME: DIGITAL EXPRESS GROUP, INC.
REQUESTED BY:_______________________
AUTHORIZED SIGNATURE:_______________________
PHONE NUMBER:
FROM ACCOUNT # _______________ TO ACCOUNT #
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
-------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $
PRINCIPAL PAYMENT (ONLY) $
INTEREST PAYMENT (ONLY) $
PRINCIPAL AND INTEREST (PAYMENT) $
OTHER INSTRUCTIONS:
All representations and warranties of Borrower stated in the Loan and
Security Agreement dated ____________, 1996 are true, correct and complete in
all material respects as of the date of the telephone request for and Advance
confirmed by this Borrowing Certificate; provided, however,
32
<PAGE>
that those representations and warranties expressly referring to another date
shall be true, correct and complete in all material respects as of such date.
33
<PAGE>
BANK USE ONLY
TELEPHONE REQUEST:
- -----------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
Authorized Requester Phone #
Received By (Bank) Phone #
Authorized Signature (Bank)
34
<PAGE>
EXHIBIT C
BORROWING BASE CERTIFICATE
<TABLE>
<CAPTION>
Borrower: Digital Express Group, Inc.
Bank: Silicon Valley Bank
Commitment Amount: $1,500,000
ACCOUNTS RECEIVABLE
<S> <C> <C> <C>
1. Accounts Receivable Book Value as of____ $____________
2. Additions (please explain on reverse) $____________
3. TOTAL ACCOUNTS RECEIVABLE $_____________
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $________________
5. Balance of 50% over 90 day accounts $_____________
6. Concentration Limits $_____________
7. Foreign Accounts $______________
8. Governmental Accounts $______________
9. Contra Accounts $______________
10. Promotion or Demo Accounts $________________
11. Intercompany/Employee Accounts $________________
12. Other (please explain on reverse) $________________
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $_____________
14. Eligible Accounts (#3 minus #13) $________________
15. LOAN VALUE OF ACCOUNTS (80% of #14) $________________
BALANCES
16. Maximum Loan Amount $1,500,000
----------------
17. Total Funds Available
[Lesser of #15 or #15 plus #17)] $________________
18. Present balance owing on Line of Credit $________________
19. RESERVE POSITION (#17 minus #18) $______________
</TABLE>
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Silicon Valley Bank.
35
<PAGE>
COMMENTS:
DIGITAL EXPRESS GROUP, INC.
By: _______________________
Authorized Signer
36
<PAGE>
EXHIBIT D
---------
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: DIGITAL EXPRESS GROUP, INC.
The undersigned authorized officer of DIGITAL EXPRESS GROUP, INC. hereby
certifies that in accordance with the terms and conditions of the Loan and
Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is
in complete compliance for the period ending , 199 with all
required covenants except as noted below and (ii) all representations and
warranties of Borrower stated in the Agreement are true and correct in all
material respects as of the date hereof. Attached herewith are the required
documents supporting the above certification. The Officer further certifies
that these are prepared in accordance with Generally Accepted Accounting
Principles (GAAP) and are consistently applied from one period to the next
except as explained in an accompanying letter or footnotes. The Officer
expressly acknowledges that no borrowings may be requested by Borrower at any
time or the date of determination that Borrower is not in compliance with any of
the terms of the Agreement, and that such compliance is determined not just at
the date this certificate is delivered.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES"
COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
- ------------------ -------- --------
<S> <C> <C>
Monthly financial statements Monthly within 15 days Yes No
Annual (CPA Audited) FYE within 90 days Yes No
Annual Management Letter FYE within 180 days Yes No
A/P Agings Quarterly within 45 days Yes No
Financial Projections Quarterly within 45 days Yes No
A/R Agings Monthly within 15 days Yes No
Borrowing Base Certificate Monthly within 15 days Yes No
A/R Audit Initial and Semi-Annual Yes No
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
- ------------------ -------- ------ --------
<S> <C> <C> <C>
Monthly:
Asset Ratio 1.2 to 1.0. ___ to 1.0 Yes No
Working Capital (9/30/96) $500,000 $_________ Yes No
Leverage (9/30/96) 2.25 to 1.0. ___ to 1.0 Yes No
(Thereafter) 1.0 to 1.0 ___ to 1.0
Liquidity. $500,000 $_________ Yes No
Quarterly:
Profitability (3/30/96 and 6/30/96) ($1,600,000) $_________ (9/30/960
Thereafter Profitable $_________ Yes No
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Annually:
Minimum Tangible Capital Funds
<S> <C> <C> <C>
(9/30/96) $1,500,000 $__________ Yes No
FYE 1996 $3,000,000 $_________ Yes No
Thereafter $3,000,000 $_________ Yes No
+ 90%
</TABLE>
BANK USE ONLY
Received by:
AUTHORIZED SIGNER
Date:
Verified:
AUTHORIZED SIGNER
Date:
Compliance Status: Yes No
COMMENTS REGARDING EXCEPTIONS: See Attached.
Sincerely,
DIGITAL EXPRESS GROUP, INC.
BY:_______________________
Title
Date
38
<PAGE>
DISBURSEMENT REQUEST AND AUTHORIZATION
Borrower: DIGITAL EXPRESS GROUP, INC.
LOAN TYPE. This is a Variable Rate, Revolving Line of Credit of a principal
amount up to $1,500,000.
==========
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.
SPECIFIC PURPOSE. The specific purpose of this loan is: _______________.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Bank's conditions for making the loan have been
satisfied. Please disburse the loan proceeds as follows:
<TABLE>
<CAPTION>
Revolving Line
--------------
<S> <C>
Amount paid to Borrower directly: $_________
Undisbursed Funds $_________
Principal $_________
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
Prepaid Finance Charges Paid in Cash: $_________
Loan Fee
$ 18,750 Accounts Receivables Audit
--------
Other Charges Paid in Cash: $_________
$______ UUC Search Fees
$______ UCC Filing Fees
$____ Outside Counsel Fees and Expenses (Estimate)
Total Charges Paid in Cash $_________
</TABLE>
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct
from Borrower's account numbered ______________ the amount of any loan payment.
If the funds in the account are insufficient to cover any payment, Bank shall
not be obligated to advance funds to cover the payment.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS
DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK. THIS
AUTHORIZATION IS DATED AS OF ____________________, 1996.
BORROWER:
DIGITAL EXPRESS GROUP, INC.
39
<PAGE>
Authorized Officer
40
<PAGE>
AGREEMENT TO PROVIDE INSURANCE
Grantor: __________ BANK: Silicon Valley Bank
INSURANCE REQUIREMENTS. _________________ ("Grantor") understands that
insurance coverage is required in connection with the extending of a loan or the
providing of other financial accommodations to Grantor by Bank. These
requirements are set forth in the Loan Documents. The following minimum
insurance coverages must be provided on the following described collateral (the
"Collateral"):
Collateral: All Inventory, Equipment and Fixtures.
Type: All risks, including fire, theft and liability.
Amount: Full insurable value.
Basis: Replacement value.
Endorsements: Loss payable clause to Bank with stipulation
that coverage will not be cancelled or diminished without a minimum of twenty
(20) days' prior written notice to Bank.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance company
Grantor may choose that is reasonably acceptable to Bank. Grantor understands
that credit may not be denied solely because insurance was not purchased through
Bank.
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Bank, on or
before closing, evidence of the required insurance as provided above, with an
effective date of _____________, 19___, or earlier. Grantor acknowledges and
agrees that if Grantor fails to provide any required insurance or fails to
continue such insurance in force, Bank may do so at Grantor's expense as
provided in the Loan and Security Agreement. The cost of such insurance, at the
option of Bank, shall be payable on demand or shall be added to the indebtedness
as provided in the security document. GRANTOR ACKNOWLEDGES THAT IF BANK SO
PURCHASES ANY SUCH INSURANCE, THE INSURANCE WILL PROVIDE LIMITED PROTECTION
AGAINST PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN;
HOWEVER, GRANTOR'S EQUITY IN THE COLLATERAL MAY NOT BE INSURED. IN ADDITION, THE
INSURANCE MAY NOT PROVIDE ANY PUBLIC LIABILITY OR PROPERTY DAMAGE
INDEMNIFICATION AND MAY NOT MEET THE REQUIREMENTS OF ANY FINANCIAL
RESPONSIBILITY LAWS.
AUTHORIZATION. For purposes of insurance coverage on the Collateral,
Grantor authorizes Bank to provide to any person (including any insurance agent
or company) all information Bank deems appropriate, whether regarding the
Collateral, the loan or other financial accommodations, or both.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO
PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED
___________, 19___.
GRANTOR:
x
Authorized Officer
================================================================================
FOR BANK USE ONLY
INSURANCE VERIFICATION
================================================================================
1
<PAGE>
Exhibit 10.17
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Agreement") is
entered into as of May __, 1996, by and between SILICON VALLEY BANK, a
California-chartered bank ("Bank") with its principal place of business at 3003
Tasman Drive, Santa Clara, California 95054 and with a loan production office
located at One Central Plaza, 11300 Rockville Pike, Suite 701, Rockville,
Maryland 20852, doing business under the name "Silicon Valley East" and DIGITAL
EXPRESS GROUP, INC., a Maryland corporation ("Borrower").
RECITALS.
--------
A. Borrower and Bank have entered into that certain Loan and Security
Agreement dated April 11, 1996 (the "Loan Agreement"). Unless otherwise
defined herein, capitalized terms used herein shall have the respective meanings
set forth in the Loan Agreement.
B. Borrower has requested that Bank modify certain terms and conditions
of the Loan Agreement to permit the issuance of one or more letters of credit
for the account of Borrower and Bank has agreed on the condition, among others,
that this Agreement be executed and delivered by Borrower to Bank.
NOW, THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Borrower and Bank do hereby agree as follows:
<PAGE>
1. Recitals. The parties hereto acknowledge and agree that the above
--------
Recitals are true and correct in all material respects and that the same are
incorporated herein and made a part hereof by reference.
2. Advances. Section 2.1 of the Loan Agreement is hereby deleted in its
--------
entirety and the following is inserted in substitution thereof:
2.1 Advances. Subject to and upon the terms and conditions of this
--------
Agreement, Bank agrees to make Advances to Borrower in an aggregate amount
not to exceed the Committed Revolving Line or the Borrowing Base, whichever
is less minus (ii) the face amount of all outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit). For purposes of this
Agreement, "Borrowing Base" shall mean an amount equal to eighty percent
(80%) of Eligible Accounts, provided, that the definition of Borrowing Base
may be fixed and revised from time to time by Bank in Bank's reasonable
judgment and upon notification thereof to Borrower in accordance with the
provisions hereof. Subject to the terms and conditions of this Agreement,
amounts borrowed pursuant to this Section 2.1 may be repaid and reborrowed
at any time during the term of this Agreement.
On the Closing Date, Borrower shall execute and deliver to Bank the
Revolving Promissory Note.
Whenever Borrower desires an Advance, Borrower will notify Bank by
facsimile transmission or telephone no later than 3:00 p.m. Washington,
D.C. time, on the Business Day that the Advance is to be made. Each such
notification shall be promptly confirmed by a Payment/Advance Form in
substantially the form of Exhibit B hereto. Bank is authorized to make
---------
Advances under this Agreement, based upon instructions received from a
Responsible Officer, or without instructions if in Bank's discretion such
Advances are necessary to meet Obligations which have become due and remain
unpaid. Bank shall be entitled to rely on any telephonic notice given by a
person who Bank reasonably believes to be a Responsible Officer, and
Borrower shall indemnify and hold Bank harmless for any damages or loss
suffered by Bank as a result of such reliance. Bank will credit the amount
of Advances made under this Section 2.1 to Borrower's deposit account.
The Committed Revolving Line shall terminate on the Revolving Maturity
Date, at which time all Advances under this Section 2.1 and other amounts
due under this
2
<PAGE>
Agreement (except as otherwise expressly specified herein)
shall be immediately due and payable.
3. Letters of Credit. The following Sections are added to the Loan
-----------------
Agreement immediately following Section 2.7, as Sections 2.8 and 2.9 of the Loan
Agreement:
2.8 Letters of Credit.
-----------------
(a) Subject to the terms and conditions of this Agreement, Bank
agrees to issue or cause to be issued letters of credit (each a "Letter of
Credit" and collectively, the "Letters of Credit") for the account of
Borrower in an aggregate face amount not to exceed (i) the lesser of the
Committed Revolving Line or the Borrowing Base minus (ii) the then
outstanding principal balance of the Advances provided that the face amount
of outstanding Letters of Credit (including drawn but unreimbursed Letters
of Credit) shall not in any case exceed One Million Five Hundred Thousand
Dollars ($1,500,000). Each such letter of credit shall have an expiry date
no later than ninety (90) days after the Revolving Maturity Date provided
that Borrower's letter of credit reimbursement obligation shall be secured
by cash on terms acceptable to Bank at any time after the Revolving
Maturity Date if the term of this Agreement is not extended by Bank. All
such Letters of Credit shall be, in form and substance, acceptable to Bank
in its sole discretion and shall be subject to the terms and conditions of
Bank's form of application and letter of credit agreement which shall be
executed and delivered to Bank not less than two (2) Business Days prior to
the date on which a Letter of Credit is requested to be opened. In the
event of any conflict between the provisions of this Agreement and the
provisions of any form of application and letter of credit agreement, the
provisions of this Agreement shall prevail and control unless otherwise
expressly provided in the such application and letter of credit agreement.
The application and letter of credit agreement shall specify, among other
things: (i) the name and address of the beneficiary of the Letter of
Credit, (ii) the amount of the Letter of Credit, (iii) whether the Letter
of Credit is to be revocable or irrevocable, (iv) the Business Day on which
the Letter of Credit is to be opened and the date on which the Letter of
Credit is to expire, (v) the terms of payment of any draft or drafts which
may be drawn under the Letter of Credit and (vi) any other terms or
provisions Borrower desires to be contained in the Letter of Credit.
(b) The Obligation of Borrower to immediately reimburse Bank for
drawings made under Letters of Credit shall be absolute, unconditional and
irrevocable, and shall be performed strictly in accordance with the terms
of this Agreement and such Letters of Credit, under all circumstances
whatsoever. Borrower shall indemnify, defend and hold
3
<PAGE>
Bank harmless from any loss, cost, expense or liability, including, without
limitation, reasonable attorneys' fees, arising out of or in connection
with any letters of credit.
(c) Prior to or simultaneously with the opening of each Letter of
Credit, Borrower shall pay to Bank a letter of credit fee in such an amount
as Bank customarily charges in connection with the opening, negotiation,
processing and administration of a letter of credit on the date such Letter
of Credit is opened.
2.9 Letter of Credit Reimbursement; Reserve.
---------------------------------------
(a) Borrower may request that Bank issue a letter of credit payable
in a currency other than United States Dollars. If a demand for payment is
made under any such letter of credit, Bank shall treat such demand as an
advance to Borrower of the equivalent of the amount thereof (plus cable
charges) in United States currency at the then prevailing rate of exchange
in San Francisco, California, for sales of that other currency for cable
transfer to the country of which it is the currency.
(b) Upon the issuance of any letter of credit payable in a currency
other than United States Dollars, Bank shall create a reserve under the
Committed Revolving Line for letters of credit against fluctuations in
currency exchange rates, in an amount equal to twenty percent (20%) of the
face amount of such letter of credit. The amount of such reserve may be
amended by Bank from time to time to account for fluctuations in the
exchange rate. The availability of funds under the Committed Revolving Line
shall be reduced by the amount of such reserve for so long as such letter
of credit remains outstanding.
4. Events of Default. The following is added to Section 9.1 of the Loan
-----------------
Agreement immediately after subsection (i) as subsection (j):
(j) Demand that Borrower (i) deposit cash with Bank in an amount
equal to the amount of any Letters of Credit remaining undrawn, as
collateral security for the repayment of any future drawings under such
Letters of Credit, and Borrower shall forthwith deposit and pay such
amounts, and (ii) pay in advance all Letters of Credit fees scheduled to be
paid or payable over the remaining term of the Letters of Credit.
4
<PAGE>
1. Exhibit C. From and after the effective date of this Agreement,
---------
Exhibit C to the Loan Agreement is replaced in its entirety with Exhibit C
- --------- ---------
attached hereto.
2. Representations. Borrower hereby confirms that the covenants set
---------------
forth in Section 5 of the Loan Agreement as hereby amended, are true and correct
as of the date hereof, and that no Event of Default has occurred or is
continuing immediately prior to or upon the execution of this Agreement.
3. Counterparts. This Agreement may be executed in any number of
------------
duplicate originals or counterparts, each of which duplicate original or
counterpart shall be deemed to be an original and all taken together shall
constitute one and the same instrument.
4. Loan Documents; Governing Law; Etc. This Agreement is one of the Loan
----------------------------------
Documents defined in the Loan Agreement and shall be governed and construed in
accordance with the laws of the State of Maryland. The headings and captions in
this Agreement are for the convenience of the parties only and are not a part of
this Agreement.
5. Acknowledgements. Borrower hereby confirms to Bank the enforceability
----------------
and validity of each of the Loan Documents. In addition, Borrower hereby agrees
to the execution and delivery of this Agreement and the terms and provisions,
covenants or agreements contained in this Agreement shall not in any manner
release, impair, lessen, modify, waive or otherwise limit the liability and
obligations of Borrower under the terms of any of the Loan Documents, except as
otherwise specifically set forth in this Agreement. Borrower issues, ratifies
and confirms the representations, warranties and covenants contained in the Loan
Documents.
5
<PAGE>
6. Modifications. This Agreement may not be supplemented, changed,
-------------
waived, discharged, terminated, modified or amended, except by written
instrument executed by the parties.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
DIGITAL EXPRESS GROUP, INC.
By: Signature appears here
-----------------------------------
Name:
Title:
SILICON VALLEY BANK, doing business as
SILICON VALLEY EAST
By: Signature appears here
-----------------------------------
Brent Donnell
Vice President
SILICON VALLEY BANK
By: Signature appears here
-----------------------------------
Name:
Title:
(Signed in Santa Clara County, California)
7
<PAGE>
EXHIBIT C
BORROWING BASE CERTIFICATE
Borrower: Digital Express Group, Inc.
Bank: Silicon Valley Bank
Commitment Amount: $1,500,000
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of____ $__________
2. Additions (please explain on reverse) $__________
3. TOTAL ACCOUNTS RECEIVABLE $__________
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $__________
5. Balance of 50% over 90 day accounts $__________
6. Concentration Limits $__________
7. Foreign Accounts $__________
8. Governmental Accounts $__________
9. Contra Accounts $__________
10. Promotion or Demo Accounts $__________
11. Intercompany/Employee Accounts $__________
12. Other (please explain on reverse) $__________
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $__________
14. Eligible Accounts (#3 minus #13) $__________
15. LOAN VALUE OF ACCOUNTS (80% of #14) $__________
BALANCES
16. Maximum Loan Amount $1,500,000
--------------
17. Outstanding Letters of Credit $__________
18. Total Funds Available
[Lesser of #15 minus #17 or #16 minus #17)] $__________
19. Present balance owing on Line of Credit $__________
20. RESERVE POSITION (#18 minus #19) $__________
8
<PAGE>
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Silicon Valley Bank.
COMMENTS:
DIGITAL EXPRESS GROUP, INC.
By: _______________________
Authorized Signer
9
<PAGE>
Exhibit 10.18
REVOLVING PROMISSORY NOTE
-------------------------
$1,500,000 Rockville, Maryland
April 11, 1996
FOR VALUE RECEIVED, the undersigned, DIGITAL EXPRESS GROUP, INC., a
Maryland corporation ("Borrower") promises to pay to the order of SILICON VALLEY
BANK, a California-chartered bank ("Bank"), at such place as the holder hereof
may designate, in lawful money of the United States of America, the aggregate
unpaid principal amount of all advances ("Advances") made by Bank to Borrower in
accordance with the terms and conditions of the Loan and Security Agreement
between Borrower and Bank of even date herewith, as amended from time to time
(the "Loan Agreement"), up to a maximum principal amount of One Million Five
Hundred Thousand Dollars ($1,500,000) ("Principal Sum"), or so much thereof as
may be advanced or readvanced and remains unpaid.
Borrower shall pay interest on the outstanding Principal Sum, as follows:
Commencing as of the date hereof and continuing until repayment in full of
all sums due hereunder, the unpaid Principal Sum shall bear interest at the
variable rate of interest, per annum, most recently announced by Bank as its
"prime rate," whether or not such announced rate is the lowest rate available
from Bank (the "Prime Rate") plus one percent (1.0%) per annum. The rate of
interest charged under this Note shall change immediately and contemporaneously
with any change in the Prime Rate. All interest payable under the terms of this
Note shall be calculated on the basis of a 360-day year and the actual number of
days elapsed.
The unpaid Principal Sum, together with interest thereon at the rate or
rates provided above, shall be payable as follows:
(a) Interest only on the unpaid principal amount shall be due and
payable monthly, commencing May 1, 1996, and on the first day of each month
thereafter to maturity; and
(b) Unless sooner paid, the unpaid Principal Sum, together with
interest accrued and unpaid thereon, shall be due and payable in full on
February 28, 1997.
The fact that the balance hereunder may be reduced to zero from time to
time pursuant to the Loan Agreement will not affect the continuing validity of
this Note or the Loan Agreement, and the balance may be increased to the
Principal Sum after any such reduction to zero.
This Note is secured as provided in the Loan Agreement. All capitalized
terms used herein and not otherwise defined shall have the meanings given to
such terms in the Loan Agreement.
Borrower irrevocably waives the right to direct the application of any and
all payments at any time hereafter received by Bank from or on behalf of
Borrower and Borrower irrevocably
<PAGE>
agrees that Bank shall have the continuing exclusive right to apply any and all
such payments against the then due and owing obligations of Borrower as Bank may
deem advisable. In the absence of a specific determination by Bank with respect
thereto, all payments shall be applied in the following order: (a) then due and
payable fees and expenses; (b) then due and payable interest payments and
mandatory prepayments; and (c) then due and payable principal payments and
optional prepayments.
Bank is hereby authorized by Borrower to endorse on Bank's books and
records each Advance made by Bank under this Note and the amount of each payment
or prepayment of principal of each such Advance received by Bank; it being
understood, however, that failure to make any such endorsement (or any error in
notation) shall not affect the obligations of Borrower with respect to Advances
made hereunder, and payments of principal by Borrower shall be credited to
Borrower notwithstanding the failure to make a notation (or any errors in
notation) thereof on such books and records.
The occurrence of any one or more of the following events shall constitute
an event of default (individually, an "Event of Default" and collectively, the
"Events of Default") under the terms of this Note:
(a) The failure of Borrower to pay to Bank when due any and all
amounts payable by Borrower to Bank under the terms of this Note; or
(b) The occurrence of an event of default (as defined therein) under
the terms and conditions of any of the other Loan Documents.
Upon the occurrence of an Event of Default, at the option of Bank, all
amounts payable by Borrower to Bank under the terms of this Note shall
immediately become due and payable by Borrower to Bank without notice to
Borrower or any other person, and Bank shall have all of the rights, powers, and
remedies available under the terms of this Note, any of the other Loan Documents
and all applicable laws. Borrower and all endorsers, guarantors, and other
parties who may now or in the future be primarily or secondarily liable for the
payment of the indebtedness evidenced by this Note hereby severally waive
presentment, protest and demand, notice of protest, notice of demand and of
dishonor and non-payment of this Note and expressly agree that this Note or any
payment hereunder may be extended from time to time without in any way affecting
the liability of Borrower, guarantors and endorsers.
Upon the occurrence of an Event of Default, Borrower hereby authorizes any
attorney designated by Bank or any clerk of any court of record to appear for
Borrower in any court of record and confess judgment without prior hearing
against Borrower in favor of Bank for and in the amount of the unpaid Principal
Sum, all interest accrued and unpaid thereon, all other amounts
2
<PAGE>
payable by Borrower to Bank under the terms of this Note or any of the other
Loan Documents, costs of suit, and attorneys' fees of fifteen percent (15%) of
the unpaid Principal Sum and interest then due hereunder. Borrower hereby
releases, to the extent permitted by applicable law, all errors and all rights
of exemption, appeal, stay of execution, inquisition, and other rights to which
Borrower may otherwise be entitled under the laws of the United States of
America or of any state or possession of the United States of America now in
force and which may hereafter be enacted. The authority and power to appear for
and enter judgment against Borrower shall not be exhausted by one or more
exercises thereof or by any imperfect exercise thereof and shall not be
extinguished by any judgment entered pursuant thereto. Such authority may be
exercised on one or more occasions or from time to time in the same or different
jurisdictions as often as Bank shall deem necessary or desirable, for all of
which this Note shall be a sufficient warrant.
Borrower promises to pay all costs and expense of collection of this Note
and to pay all reasonable attorneys' fees incurred in such collection, whether
or not there is a suit or action, or in any suit or actio to collet this Note or
in any appeal thereof. Borrower waives presentment, demand, protest, notice of
protest, notice of dishonor, notice of nonpayment, and any and all other notices
and demands in connection with the delivery, acceptance, performance default or
enforcement of this Note, as well as any applicable statutes of limitations. No
delay by Bank in exercising any power or right hereunder shall operate as a
waiver of any power or right. Time is of the essence as to all obligations
hereunder.
This Note is issued pursuant to the Loan Agreement, which shall govern the
rights and obligations of Borrower with respect to all obligations hereunder.
Borrower acknowledges and agrees that this Note shall be governed by the
laws of the State of Maryland, excluding conflicts of laws principles, even
though for the convenience and at the request of Borrower, this Note may be
executed elsewhere.
BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES,
UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF
COMPETENT JURISDICTION IN THE STATE OF MARYLAND IN ANY ACTION, SUIT, OR
PROCEEDING OF ANY KIND, AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS
AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY REASON BANK CANNOT AVAIL ITSELF OF
THE COURTS OF MARYLAND, BORROWER ACCEPTS JURISDICTION OF THE COURTS AND VENUE IN
SANTA CLARA COUNTY, CALIFORNIA. BORROWER AND BANK EACH HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND
3
<PAGE>
ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT
THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
IN WITNESS WHEREOF, Borrower has caused this Note to be executed under seal
by its duly authorized officers as of the date first written above.
WITNESS OR ATTEST: DIGITAL EXPRESS GROUP, INC.
- ------------------------------- By: Signature appears here
-------------------------------(SEAL)
Name:
Title:
4
<PAGE>
Exhibit 10.19
SECURITIES PURCHASE, CONVERSION
AND
EXCHANGE AGREEMENT
This Securities Purchase, Conversion and Exchange Agreement (the
"Agreement") is entered into as of this 30th day of May, 1996 by and among
- ----------
DIGITAL EXPRESS GROUP, INC., a Maryland corporation (the "Company"), GROTECH
-------
PARTNERS IV, L.P., a Delaware limited partnership ("Grotech"), GROTECH PARTNERS
-------
III, L.P., a Delaware limited partnership ("Grotech III"), GROTECH III COMPANION
-----------
FUND, L.P., a Delaware limited partnership ("Grotech Companion"), GROTECH III
-----------------
PENNSYLVANIA FUND, L.P., a Pennsylvania limited partnership ("Grotech
-------
Pennsylvania"), VENROCK ASSOCIATES, a New York limited partnership ("Venrock"),
- ------------ -------
VENROCK ASSOCIATES II, L.P., a New York limited partnership ("Venrock II"),
----------
SOUTHERN VENTURE FUND II, L.P., a Delaware limited partnership ("Southern"),
--------
BLUE CHIP CAPITAL FUND LIMITED PARTNERSHIP, a Delaware limited partnership
("Blue Chip"), CRISLER CAPITAL COMPANY, LIMITED PARTNERSHIP, a Delaware limited
- -----------
partnership ("Crisler," and, together with Grotech, Grotech III, Grotech
-------
Companion, Grotech Pennsylvania, Venrock, Venrock II, Southern, and Blue Chip,
the "Purchasing Holders") and, solely as to the matters set forth in Article
------------------
VII, Article XII and Section 9.5 hereof, the other holders of the outstanding
equity securities of the Company listed on Schedule 1 hereto (collectively, the
----------
"Management Stockholders" and, together with the Purchasing Holders, the
-----------------------
"Holders").
- --------
RECITALS:
--------
WHEREAS, the authorized capital stock of the Company currently
consists of (i) forty-nine million eight hundred thousand (49,800,000) shares of
common stock, par value $ .01 per share (the "Common Stock"), of which 4,044,768
------------
shares are issued and outstanding and held of record by the Holders identified
on Schedule 2 hereto, and (ii) two hundred thousand (200,000) shares of
----------
convertible preferred stock, par value $1.00 per share (the "Convertible
-----------
Preferred Stock"), of which 45,454.54 shares are issued and outstanding and held
- ---------------
of record by certain Purchasing Holders as specified on Schedule 2 hereto;
----------
WHEREAS, the Company has issued to certain Purchasing Holders
promissory notes due June 1, 1996 (the "Notes") in an aggregate principal amount
-----
of Three Million Dollars ($3,000,000), as listed on Schedule 3 hereto;
----------
WHEREAS, the Company has issued to the Holders and the other persons
listed on Schedule 4 hereto (the "Warrant Holders") warrants ("Warrants") to
---------- --------------- --------
purchase shares of Common Stock;
<PAGE>
WHEREAS, the Company has issued to certain Purchasing Holders
convertible promissory notes due June 20, 1996 (the "Convertible Notes") in an
-----------------
aggregate principal amount of One Million Dollars ($1,000,000), as listed on
Schedule 6 hereto;
- ----------
WHEREAS, concurrently with the execution of this Agreement, the
Company is adopting the Articles of Amendment and Restatement of the Company in
the form attached hereto as Annex A hereto (the "Amended Articles"), which
------- ----------------
amends and restates the Articles of Incorporation of the Company to, among other
things, (i) clarify the description of, and make certain corrections with
respect to, the terms of the Convertible Preferred Stock, including certain
corrections in the number of shares of Common Stock into which each share of
Convertible Preferred Stock is convertible, (ii) redesignate the Convertible
Preferred Stock as the "Series A Convertible Preferred Stock" of the Company (as
so redesignated, the "Series A Preferred Stock") and (iii) provide for the
------------------------
authorization of a new series of preferred stock of the Company, the Series B
Convertible Preferred Stock, par value $1.00 per share, of the Company (the
"Series B Preferred Stock" and, together with the Series A Preferred Stock, the
------------------------
"Preferred Stock") having the rights, privileges and preferences set forth in
---------------
the Amended Articles;
WHEREAS, the parties desire that the Company and the Purchasing
Holders effect (i) an exchange of the Notes for shares of Series B Preferred
Stock on the terms and conditions set forth herein (the "Exchange Transaction"),
--------------------
(ii) the conversion of the Convertible Notes for shares of Series B Preferred
Stock on the terms and conditions provided for in the Convertible Notes and more
precisely set forth herein (the "Conversion"), and (iii) the issuance and sale
----------
by the Company to the Purchasing Holders of shares of Series B Preferred Stock
on the terms and conditions set forth herein (the "Stock Purchase Transaction");
--------------------------
and
WHEREAS, in connection with the Exchange Transaction, the Conversion
and the Stock Purchase Transaction, the parties desire to enter into certain
agreements which provide for, among other things, (i) correction of the terms of
the instruments evidencing the Warrants held by the Purchasing Holders (the
"Subject Warrants") (including, without limitation, the terms relating to the
----------------
exercise thereof), which, in certain cases, were inconsistent with the intent of
the parties, (ii) the exercise of the Subject Warrants and the conversion of the
issued and outstanding shares of the Series A Preferred Stock and the Series B
Preferred Stock upon the consummation of a Qualifying IPO (as hereinafter
defined), (iii) certain agreements relating to the increase in options issuable
under the Incentive Stock Option Plan of the Company (the "Option Plan") and
-----------
(iv) certain agreements with respect to the contemplated loan to the Company by
Sirrom Capital Corporation ("Sirrom") of up to $5,000,000 and the issuance to
------
Sirrom by the Company of its secured promissory notes and warrants to purchase
up to 5% of the Company's common stock on a fully diluted basis (the "Sirrom
------
Financing").
- ---------
AGREEMENT:
---------
NOW, THEREFORE, in consideration of the foregoing, and the covenants
and agreements of the parties set forth herein, the parties hereto hereby agree
as follows:
2
<PAGE>
ARTICLE I
EXCHANGE TRANSACTION
--------------------
1.1 Authorization of Shares. Concurrently herewith, the Company has
-----------------------
duly authorized the issuance of 81,263.89 shares of its Series B Preferred Stock
pursuant to this Agreement, having the rights, restrictions, privileges and
preferences set forth in the Amended Articles.
1.2 Exchange of Notes and Shares. Upon the terms and subject to the
----------------------------
conditions contained herein, (i) the Company hereby agrees, at the Closing (as
hereinafter defined), to issue to each Purchasing Holder identified on Schedule
--------
3 hereto, in exchange for the surrender and cancellation of Notes in the
- -
principal amount set forth opposite such Purchasing Holder's name on Schedule 3
----------
and as payment of accrued but unpaid interest in respect of such Notes (through
May 24, 1996), the number of shares of Series B Preferred Stock set forth
opposite such Purchasing Holder's name on Schedule 5 hereto and (ii) each
----------
Purchasing Holder hereby agrees, at the Closing, to deliver to the Company, in
exchange for the issuance by the Company to such Purchasing Holder of that
number of shares of Series B Preferred Stock set forth opposite such Purchasing
Holder's name on Schedule 5 hereto, Notes in the principal amount set forth
----------
opposite such Purchasing Holder's name on Schedule 3 hereto (being all the Notes
----------
owned by such Purchasing Holder). Delivery by the Purchasing Holder to the
Company of Notes in the principal amount set forth opposite such Purchasing
Holder's name on Schedule 3 hereto and the issuance by the Company to such
----------
Purchasing Holder of the number of shares of Series B Preferred Stock set forth
opposite such Purchasing Holder's name on Schedule 5 hereto at the Closing as
----------
contemplated by this Section 1.2 and payment of interest accruing on the Notes
after May 24, 1996 in accordance with Section 4.2 hereof shall constitute
cancellation of all rights of such Purchasing Holder with respect to the Notes,
including, without limitation, such Purchasing Holder's right to receive any
payment with respect to the principal amount thereof or any accrued and unpaid
interest thereon, and all obligations of the Company with respect to the Notes
shall be deemed to have been satisfied in full; provided, however, that such
cancellation of the Notes shall not affect the rights of such Purchasing Holder
under the Subject Warrants issued to such Purchasing Holder in connection with
the issuance of such Notes.
ARTICLE II
CONVERSION OF CONVERTIBLE NOTES
-------------------------------
2.1 Conversion of Convertible Notes. Upon the terms and subject to
-------------------------------
the conditions set forth in the Convertible Notes and contained herein, (i) the
Company hereby agrees, at the Closing, to (A) issue to each Purchasing Holder
identified on Schedule 6, in conversion of the Convertible Notes in the
----------
principal amount set forth opposite such Purchasing Holder's name on Schedule 6
----------
(which does not include the amount of accrued interest thereon
3
<PAGE>
to be paid in cash at the Closing), the number of shares of Series B Preferred
Stock set forth opposite such Purchasing Holder's name on Schedule 7 and (B) pay
----------
in cash to such Purchasing Holder all accrued and unpaid interest on the
Convertible Notes held by such Holder and all interest on the Notes accruing
after May 24, 1996; and (ii) each Purchasing Holder identified on Schedule 6
----------
hereby agrees, at the Closing, to deliver to the Company, upon the issuance by
the Company to such Purchasing Holder of that number of shares of Series B
Preferred Stock set forth opposite such Purchasing Holder's name on Schedule 7
----------
and payment of all accrued and unpaid interest on the Convertible Notes held by
such Purchasing Holder, Convertible Notes in the principal amount set forth
opposite such Purchasing Holder's name on Schedule 6 (being all the Convertible
----------
Notes owned by such Purchasing Holder). Delivery by the Purchasing Holder to the
Company of Convertible Notes in the principal amount set forth opposite such
Purchasing Holder's name on Schedule 6 hereto and the issuance by the Company to
----------
such Purchasing Holder of the number of shares of Series B Preferred Stock set
forth opposite such Purchasing Holder's name on Schedule 7 hereto (together with
----------
payment of all accrued and unpaid interest in respect of such Convertible Notes)
at the Closing as contemplated by this Section 2.1 shall constitute cancellation
of all rights of such Purchasing Holder with respect to the Convertible Notes,
including, without limitation, such Purchasing Holder's right to receive any
payment with respect to the principal amount thereof or any accrued and unpaid
interest thereon, and all obligations of the Company with respect to the
Convertible Notes shall be deemed to have been satisfied in full.
ARTICLE III
STOCK PURCHASE TRANSACTION
--------------------------
3.1 Issuance and Sale of the Series B Preferred Stock. Upon the
-------------------------------------------------
terms and conditions set forth herein, (i) the Company hereby agrees, at the
Closing, to issue and sell to each Purchasing Holder that number of shares of
Series B Preferred Stock set forth opposite such Purchasing Holder's name on
Schedule 8 hereto in exchange for the payment by each Purchasing Holder to the
- ----------
Company of the aggregate purchase price set forth opposite such holder's name on
Schedule 8 hereto and (ii) each Purchasing Holder hereby agrees, at the Closing,
- ----------
to purchase from the Company, for the aggregate purchase price set forth
opposite such Purchasing Holder's name on Schedule 8 hereto, that number of
----------
shares of Series B Preferred Stock set forth opposite such Purchasing Holder's
name on Schedule 8 hereto.
----------
4
<PAGE>
ARTICLE IV
CLOSING
-------
4.1 Closing. The consummation of the Conversion, the Exchange
-------
Transaction and the Stock Purchase Transaction contemplated hereby (the
"Closing") shall take place on the date hereof at the offices of Latham &
-------
Watkins, 1001 Pennsylvania Avenue, Washington, D.C., or at such other place as
the parties may agree, upon receipt by the Company and the Purchasing Holders of
satisfactory confirmation that the Amended Articles have been filed with the
State Department of Assessment and Taxation of the State of Maryland (the
"SDAT"). The Exchange Transaction, the Conversion and the Stock Purchase
----
Transaction are interdependent and all will be deemed to occur simultaneously.
4.2 Deliveries at Closing. At the Closing, the Company will deliver
---------------------
to each Purchasing Holder certificates evidencing that number of shares of
Series B Preferred Stock set forth opposite such Purchasing Holder's name on
each of Schedule 5, Schedule 7, and Schedule 8 and shall pay to each Purchasing
---------- ---------- ----------
Holder identified on Schedule 6 all accrued and unpaid interest in respect of
----------
the Convertible Notes held by such Purchasing Holder and all interest on the
Notes accruing after May 24, 1996 and each Purchasing Holder shall, as
applicable, (i) deliver to the Company Notes in the principal amount set forth
opposite such Purchasing Holder's name on Schedule 3 hereto (or such other
----------
evidence satisfactory to the Company evidencing cancellation thereof), (ii)
deliver to the Company Convertible Notes in the principal amount set forth
opposite such Purchasing Holder's name on Schedule 6 hereto and (iii) pay to the
----------
Company, by wire transfer of immediately available funds to an account
designated in writing by the Company, the aggregate purchase price for the
shares of Series B Preferred Stock being purchased by such Purchasing Holder, as
set forth opposite such Purchasing Holder's name on Schedule 8 hereto.
----------
ARTICLE V
REPRESENTATIONS OF THE COMPANY
------------------------------
In order to induce the Purchasing Holders to enter into this Agreement
and to consummate the transactions contemplated hereby, the Company hereby
represents and warrants to the Purchasing Holders as of the date of this
Agreement as follows:
5.1. Organization and Qualification.
------------------------------
(a) The Company is duly incorporated, validly existing and in
good standing as a corporation under the laws of the State of Maryland and is
duly licensed or qualified as a foreign corporation in each other jurisdiction
in which the nature of business transacted by it or the character of the
properties owned or leased by it makes such licensing
5
<PAGE>
or qualification necessary, except where the failure to be licensed or qualified
would not have a material adverse effect on the business of the Company. The
Company has full corporate power and authority to own or lease its properties
and to conduct its business as currently conducted. The Company has the
corporate power and authority to execute, deliver and perform its obligations
under this Agreement and to consummate the transactions contemplated hereby.
(b) Following the filing of the Amended Articles with the SDAT,
the Amended Articles in the form of Annex A hereto shall be the true, correct
-------
and complete Articles of Incorporation of the Company, and the By-Laws of the
Company attached as Annex B hereto constitute the true, correct and complete By-
-------
Laws of the Company.
5.2. Authorization of Agreement.
--------------------------
(a) The execution and delivery of this Agreement, the
performance of the transactions contemplated hereby and the performance and
compliance with the terms and provisions hereof by the Company has been duly and
validly authorized by all necessary corporate action on the part of the Company
and no other proceeding on the part of the Company is necessary to authorize
this Agreement or the transactions contemplated hereby. This Agreement has been
duly and validly executed and delivered by the Company and constitutes the
legal, valid and binding obligation of the Company, enforceable in accordance
with its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
similar laws affecting creditors rights generally and subject to the application
of general principles of equity.
(b) The Company has taken all corporate action required to
approve and adopt the Amended Articles, subject to the necessary filing of the
Amended Articles with the SDAT.
(c) The issuance and delivery of the Notes, the Convertible
Notes, the Warrants and the shares of Common Stock issuable upon exercise of the
Warrants, as well as the execution, delivery and performance of all agreements
relating thereto, were duly and validly authorized by all necessary corporate
action on the part of the Company.
5.3. Issuance of Shares. The issuance, sale and delivery of the
------------------
shares of Series B Preferred Stock contemplated hereby in accordance with this
Agreement, the issuance and delivery of the shares of Common Stock issuable upon
conversion of the shares of Series B Preferred Stock and the issuance of the
shares of Series B Preferred Stock as dividends paid in kind in respect of the
shares of Series B Preferred Stock have been duly authorized by all necessary
corporate action on the part of the Company. The shares of Series B Preferred
Stock, when so issued, sold and delivered against payment therefor (or, against
delivery to the Company of the Notes or the Convertible Notes, as the case may
be) in accordance with the provisions of this Agreement, will be duly and
validly issued, fully paid and nonassessable, and the shares of Common Stock
issuable upon conversion of the shares of Series B Preferred
6
<PAGE>
Stock and the shares of Series B Preferred Stock issuable as dividends on the
shares of Series B Preferred Stock, when so issued, will be duly and validly
issued, fully paid and nonassessable.
5.4. Capital Stock.
-------------
(a) Immediately following the consummation of the transactions
contemplated hereby, the authorized capital stock (the "Capital Stock") of the
-------------
Company will consist of (i) forty-nine million eight hundred thousand
(49,800,000) shares of Common Stock, of which four million forty-four thousand
seven hundred sixty-eight (4,044,768) shares will be issued and outstanding,
(ii) seventy thousand (70,000) shares of Series A Preferred Stock, of which
forty-five thousand four hundred fifty-four and 54/100 (45,454.54) shares will
be issued and outstanding, and (iii) one hundred thirty thousand (130,000)
shares of Series B Preferred Stock, of which eighty-one thousand two hundred
sixty-three and 89/100 (81,263.89) shares will be issued and outstanding.
(b) Other than (A) the Warrants, (B) options to purchase up to
4,167,239 shares of Common Stock granted or to be granted pursuant to the Option
Plan, (C) shares issuable upon conversion of, or as payment of "in-kind"
dividends on, the Series A Preferred Stock and Series B Preferred Stock, and (D)
as contemplated by the terms of the Sirrom Financing, (i) the Company has not
issued any subscription, warrant, option, convertible security or other right
(contingent or other) to purchase or acquire any shares of any class of Capital
Stock of the Company in favor of anyone other than the Purchasing Holders, (ii)
there exists no commitment of the Company to issue any shares, warrants, options
or other such rights or to distribute to holders of any class of Capital Stock
any evidences of indebtedness or assets, (iii) the Company is not obligated
(contingently or otherwise) to purchase, redeem or otherwise acquire any shares
of its Capital Stock or any interest therein or to pay any dividend or make any
other distribution with respect to its Capital Stock (other than pursuant to the
terms of the Preferred Stock), and (iv) no person or entity (other than the
Purchasing Holders) is entitled to any rights with respect to the registration
of Capital Stock of the Company under the Securities Act of 1933, as amended
(the "Act").
---
(c) The issuance, sale and delivery of the Notes, the
Convertible Notes, the outstanding shares of Common Stock and Series A Preferred
Stock and the Warrants were, and (assuming the accuracy of the representations
of the Purchasing Holders set forth herein) the issuance, sale and delivery of
the shares of Series B Preferred Stock pursuant to this Agreement will be,
exempt from the registration requirements of the Act and any applicable State
securities laws in effect at the time of such issuance, sale and delivery, and
all required filings with, and consents and approvals of, the Securities and
Exchange Commission (the "Commission"), and any similar filings or approvals
----------
with or by applicable state securities commissions, if applicable, have been or
will be timely made or obtained, as the case may be.
7
<PAGE>
(d) Following consummation of the transactions contemplated
hereby, the Warrants shall be exercisable for that number of shares of Common
Stock set forth on Schedule 4 hereto at the respective exercise prices set forth
----------
on Schedule 4 hereto. The number of shares issuable upon, and the exercise price
----------
of, the Warrants (other than the Subject Warrants) are not, by their terms,
subject to adjustment other than upon the occurrence of (i) a consolidation or
merger of the Company, (ii) the conveyance of all or substantially all the
assets of the Company or (iii) a reclassification, stock split, reverse stock
split or stock dividend in respect of the Common Stock or any similar change in
the outstanding shares of Common Stock.
5.5. Consents. There is no authorization, consent, order or approval
--------
of, or notice to or filing with, any governmental authority or other third party
required to be obtained or given in order for the Company to consummate the
transactions contemplated hereby and to fully perform its obligations hereunder,
other than (i) the filing of the Amended Articles with the SDAT and (ii) any
consents, filings or waivers which have been obtained or made as of the date
hereof.
5.6 No Conflicts. The execution, delivery and performance by the
------------
Company of this Agreement and compliance by the Company with the terms and
provisions hereof, does not and will not (i) violate any provision of any law,
rule or regulation, order, writ, judgment, injunction, statute, decree,
determination or award having applicability to the Company or any of its assets,
(ii) conflict with or result in a breach of or constitute a default under any
provision of the Articles of Incorporation or by-laws of the Company, (iii)
result in a violation or breach of, or constitute (with or without due notice or
lapse of time or both) a default (or give rise to any right of termination,
cancellation or acceleration) under any of the terms, conditions or provisions
of any debenture, bond, mortgage, indenture or loan or credit agreement,
license, or any other agreement or instrument or obligation to which the Company
is a party or by which the Company or any of its assets may be bound, or (iv)
result in, or require the creation or imposition of any lien, security interest,
charge, encumbrance or other adverse claim (a "Lien") upon or with respect to
----
any of the assets now owned by the Company.
5.7. Financial Statements. The Company has attached as Schedule 5.7
-------------------- ------------
hereof true and complete copies of the unaudited balance sheets of the Company
as of December 31, 1995 and March 31, 1996, and the related statements of
operations, shareholders' equity (deficit) and cash flows for each of the two
years in the period ended December 31, 1995 and the three-month period ended
March 31, 1996, and the audited balance sheet of the Company as of December 31,
1994 and the related statement of operations, shareholders' equity (deficit) and
cash flow for the twelve-month period ended December 31, 1994 (the "Financial
---------
Statements"). The Financial Statements (i) have been prepared in accordance
- ----------
with generally accepted accounting principles, consistently applied, (ii)
present fairly the financial position of the Company as of the dates indicated
and the related results of operation of the Company for the periods then ended,
and (iii) contain no material misstatement or omission.
8
<PAGE>
(b) Subject to applicable reserves for bad debts shown on the
balance sheet of the Company as of March 31, 1996 included in the Financial
Statements (the "March 31 Balance Sheet"), all accounts and notes receivable
----------------------
reflected on the March 31 Balance Sheet are, and all accounts and notes
receivable accrued as of the date hereof are (subject to applicable reserves for
bad debts), (i) valid, genuine and existing, (ii) to the Company's knowledge,
subject to no known and valid defenses, set-offs or counterclaims and (iii) to
the Company's knowledge, current and collectible.
5.8. Payment and Liabilities. The accounts and trade payables
-----------------------
(collectively, the "Payables") of the Company as of March 31, 1996 reflected on
the March 31 Balance Sheet, and those incurred since March 31, 1996, all were
incurred in the ordinary course of business of the Company. The Company is
current and is not in default with respect to all such Payables and all capital
lease and other debt obligations and liabilities with respect to which there is
a current portion due.
5.9. No Undisclosed Liabilities. Except as, and to the extent,
--------------------------
reserved for in the Financial Statements and the notes thereto, the Company does
not on the date hereof have any material liabilities or obligations, whether
accrued, absolute or contingent, determined or undetermined, known or unknown,
or whether due or to become due, nor, to the Company's knowledge, does any basis
exist for such liabilities or obligations other than (i) those listed on
Schedule 5.9 hereto, (ii) those incurred in the ordinary course of business
- ------------
since March 31, 1996 and (iii) the obligations evidenced by the Convertible
Notes.
5.10. No Changes. Since March 31, 1996, there has not been any (i)
----------
material adverse change in the condition (financial or otherwise) of the assets,
liabilities, earnings, net worth, business, operations or prospects of the
Company, or any fact or condition which could cause such a change, (ii) entry
into any transaction, commitment or agreement material to the Company or outside
the ordinary course of business other than the transactions contemplated hereby
or described herein, (iii) material damage, destruction or loss to the assets or
business of the Company (whether or not covered by insurance), (iv) material
adverse change in the accounting principles, methods or practices followed, (v)
sale, transfer or other disposition of any asset of the Company to any party,
except for payment of third-party obligations incurred in the ordinary course of
business in accordance with the Company's regular payment practices, (vi) waiver
of any material rights of value to the Company, (vii) failure by the Company to
pay its Payables or other obligations in the ordinary course of business of the
Company, (viii) split, combination, exchange or reclassification of shares of
the Capital Stock, (ix) except as contemplated hereby, issuance of shares of
Capital Stock or securities convertible into or rights to acquire any such
shares of Capital Stock, (x) action or inaction which might cause the Company to
incur any tax liability not in the ordinary course of business, (xi) payment by
the Company of fees or expenses of the Management Stockholders' counsel,
accountants and other agents of the Management Stockholders, or (xii) agreement,
whether in writing or otherwise, to take any of the foregoing actions.
9
<PAGE>
5.11. Compliance With Laws. The Company is not in violation of any
--------------------
applicable order, writ, decree or judgment of any court, arbitrator or
governmental or regulatory body which violation would (i) affect the legality,
validity or enforceability of this Agreement or any instrument, agreement or
certificate executed and delivered by the Company in connection with the
transactions contemplated hereby (the "Ancillary Documents"), (ii) have a
-------------------
material adverse effect on the assets or business of the Company (individually
or in the aggregate), or (iii) impair the Company's obligation to perform fully
on a timely basis any obligations which it has or will have under this Agreement
or the Ancillary Documents.
5.12. Litigation. There are no actions, lawsuits, proceedings or
----------
investigations pending or, to the Company's knowledge, threatened against the
Company before or by any court, governmental body or regulatory authority
(federal, state, local or foreign) which, if determined adversely to the
Company, would have a materially adverse effect on the assets or the business of
the Company or the ability of the Company to consummate the transactions
contemplated by this Agreement.
5.13. Title to and Condition of Assets. The Company has good and
--------------------------------
marketable title to all of the assets reflected on the March 31 Balance Sheet as
owned by the Company, and those acquired by the Company since March 31, 1996
(except as since sold or otherwise disposed of in the ordinary course of
business), free and clear of any lien, charge or encumbrance of any nature
whatsoever except for those disclosed in the Financial Statements and except for
those liens and encumbrances which, in the aggregate, are not material to the
Company. All of the Company's tangible personal property is in good operating
condition and repair, ordinary wear and tear excepted. The Company does not
hold fee title to any real property.
5.14. Intellectual Property Rights. The Company owns or has the right
----------------------------
to use all material patents, trademarks, copyrights or other intellectual
property rights necessary to conduct the business as currently conducted.
Neither said intellectual property rights, nor the use thereof by the Company,
nor any products manufactured, distributed or sold by the Company, nor the
conduct or operation of the business of the Company infringes upon any patents,
trademarks, copyrights or any other intangible rights, of any individual or
entity. No claims have been asserted by any individual or entity with respect to
the Company's intellectual property rights or challenging or questioning the
validity of any intellectual property rights of the Company, and there is no
valid basis for any such claim.
5.15. Litigation. There are no actions, lawsuits, proceedings or
----------
investigations pending or, to the Company's knowledge, threatened against the
Company before or by any court, governmental body or regulatory authority
(federal, state, local or foreign). To the best knowledge of the Company, no
such actions, lawsuits, proceedings or investigations, are being contemplated
which, if determined adversely to the Company, would adversely affect the assets
or the business of the Company or the ability of the Company to consummate the
transactions contemplated by this Agreement.
10
<PAGE>
5.16. Contracts. All of the contracts to which the Company is a
---------
party which are material to the business of the Company (the "Contracts) are in
---------
full force and effect, and there exists no default on the part of the Company
or, to the knowledge of the Company, any other party thereto under any Contract.
For purposes hereof, a "material" Contract includes a Contract that (i)
obligates the Company to pay an amount in excess of five percent (5%) of the
gross receipts of the Company for its most recent fiscal year as such gross
receipts are reflected on the Financial Statements, (ii) requires the delivery
of goods or services by the Company for which it will receive an amount at least
equal to one percent (1%) of the gross receipts of the Company for its most
recent fiscal year as such gross receipts are reflected on the Financial
Statements, or (iii) relates to or evidences any shared revenue agreement or
arrangement.
5.17. Leases. The Company is the sole lessee with respect to, and is
------
in actual possession of, those parcels or portion of parcels of real property
used and/or operated by the Company in connection with conduct of its business
(the "Premises"). The Company has made all payments required to be made with
--------
respect to the leases to which it is a party relating to the Premises (the
"Leases"), and there is no default, or alleged default, by the Company under the
------
Leases, nor to the Company's knowledge, has any event occurred which, with the
passage of time or notice, or both, would constitute a default by the Company
under the Leases, nor will the execution and delivery of this Agreement by the
Company, nor the performance of its obligations hereunder, constitute a default
by the Company under the Leases.
5.18. Environmental Laws. The Company is in compliance with all
------------------
environmental laws, ordinances, and regulations of federal, state, and local
authorities pertaining to the Company's use of the Premises. The Company has
not, nor to the Company's knowledge has any other Person, (i) used, brought,
stored, or released on, in or under the Premises, any Hazardous Material, or
(ii) emitted any Hazardous Material into the ambient air other than exhaust from
the heating, ventilation, and air conditioning systems. "Hazardous Material"
means (a) any "hazardous waste" as defined by the Resource Conservation and
Recovery Act of 1976 (42 U.S.C. (S)(S)6901 et seq.), as amended from time to
time, and regulations promulgated thereunder, (b) any "hazardous substance" as
defined by the Comprehensive Environmental Response, Compensation and Liability
Act of 1980 (42 U.S.C. (S)(S)9601 et seq.), as amended from time to time, and
regulations promulgated thereunder, (c) any "oil, petroleum products, and their
byproducts" as defined by the Maryland Natural Resources Code Ann. (S)8-
1411(a)(3), as amended from time to time, and regulations promulgated
thereunder; (d) any "hazardous substance" as defined by the Maryland Health
Environmental Code Ann., Title 7, subtitle 2, as amended from time to time, and
regulations promulgated thereunder; and (e) any substance the presence of which
on the Premises is prohibited by any law similar to those set forth in this
definition.
5.19. Taxes.
-----
11
<PAGE>
(a) The Company has duly and timely filed all federal, foreign and
applicable state and local returns, declarations or statements with respect to
all federal, state and local income. property, sales, value added, use,
occupancy, employment, payroll, excise, withholding, customs duties and other
taxes of any nature whatsoever which are required to be filed as of the date
hereof (collectively, the "Returns"). All taxes (and other charges) shown on
-------
such Returns or otherwise required to be paid, and any deficiency assessments,
penalties, interest and other charges with respect thereto have been paid, and
there is otherwise no current liability for any unpaid taxes (or other charges)
due in connection with such Returns or otherwise. There are no tax liens (other
than for taxes not yet due) on any of the assets of the Company and no basis
exists for the imposition of any such liens.
(b) No federal, state, local, foreign and other Returns of the
Company for tax years that remain open under any applicable statute of
limitations have been examined by the Internal Revenue Service or other tax
authorities and no deficiencies have been asserted or assessments made as a
result of examinations (including all penalties and interest). The Company is
not a party to any waivers, agreements or other arrangements providing for
extension of time with respect to the assessment or collection of any unpaid
tax, interest, or penalties relating to the Company. No issues have been raised
by (or are currently pending before) the Internal Revenue Service or any other
taxing authority in connection with any of the Returns which could reasonably be
expected to have a material adverse effect on the financial condition of the
Company if decided adversely to the Company, nor, to the Company's knowledge,
are there any such issues which have not been so raised but if so raised by the
Internal Revenue Service or any other taxing authority in connection with any of
the Returns could, in the aggregate, reasonably be expected to have such a
material adverse effect.
(c) The Company has not made, has not become obligated to make nor
will, as a result of the transactions contemplated by this Agreement, make or
become obligated to make, any "excess parachute payment" as defined in Section
280G of the Internal Revenue Code of 1986, as amended (the "Code").
----
5.20. Insurance. The Company maintains policies of insurance with
---------
respect to its assets and business which insure against such risks and provide
such coverage which, in general, is usual and customary for similar companies or
firms in the same industry as the Company All such policies are placed with
unaffiliated companies which, to the Company's knowledge, are financially sound.
Each such policy is in force and the premiums with respect thereto are fully
paid through the date hereof.
5.21. Licenses and Permits. The Company holds all material
----------------------------
governmental licenses and permits and other governmental authorizations and
approvals required for the conduct of the business of the Company as presently
conducted.
5.22. Interest in Competitors, Suppliers, Customers, Etc. Neither
---------------------------------------------------
the Management Stockholders nor any officer or director of the Company has any
direct
12
<PAGE>
ownership interest in any significant competitor, supplier or customer of the
Company or any property used in the operation of the business of the Company.
5.23 Employee Benefits.
-----------------
(a) Each employee benefit plan relating to employee benefits with
respect to which the Company has incurred or may incur any obligations,
including, but not limited to, any future or contingent obligations, including,
without limitation, all plans, agreements or arrangements relating to deferred
compensation, pensions, profit sharing, retirement income or other benefits,
stock purchase, stock ownership and stock option plans, stock appreciation
rights, bonuses, severance arrangements, health and welfare benefits, insurance
benefits and all other employee benefits or fringe benefits, including, but not
limited to, any employee benefit plans for former employees or their dependents
(collectively referred to as the "Plans") has been administered and operated in
-----
all material respects in accordance with its terms and applicable law. The
Company has never contributed to any multi-employer plan within the meaning of
Section 4001(a)(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), nor is the Company affiliated with any entity such that the
-----
Company has, or might have in the future, any multi-employer plan withdrawal
liability under Subtitle E of Part IV of ERISA.
(b) Where applicable, each Plan is "qualified" within the meaning of
Section 401(a) of the Code and has a current favorable Internal Revenue Service
determination letter to that effect, and each related trust is exempt from tax
under Code Section 501(a).
(c) The Company has not engaged in, or assumed any liability or
responsibility for, any transaction in connection with which either, directly or
indirectly, the Company would be subject to either a civil penalty assessed
pursuant to ERISA Section 502(i) or a tax imposed by Code Section 4975. Except
as reflected on the Financial Statements, no liability to the Pension Benefit
Guaranty Corporation ("PBGC") has been or is expected to be incurred with
----
respect to any Plan. The PBGC has not instituted proceedings to terminate any
Plan. No "reportable event," within the meaning of ERISA Section 4043(c), has
occurred with respect to any Plan. There exists no condition or set of
circumstances which presents a risk of termination or partial termination of any
Plan and which could result in a liability on the part of the Company to the
PBGC.
(d) Except as indicated on the Financial Statements, full payment
has been made of all amounts which the Company was required under the terms of
any of the Plans to have paid as contributions to such Plans on or prior to the
date hereof, and no "accumulated funding deficiency" (as defined in ERISA
Section 302(a)(2) and Code Section 412(a)) whether or not waived, exists with
respect to any such Plan.
(e) Other than for claims in the ordinary course for benefits under
the Plans, there are no actions, suits, claims or proceedings pending or
threatened, nor does there exist any basis therefor, which may result in any
Plan to the Company or any Plan or trust thereof.
13
<PAGE>
(f) Except as indicated on the Financial Statements, the present
value of accrued benefits under each Plan which is subject to Title IV of ERISA
does not presently exceed the current value of all the assets of such Plan
allocable to such accrued benefits by more than $5,000. For purposes of the
representation in the preceding sentence, the phrases "present value," "current
value" and "accrued benefit" have the meanings specified in ERISA Sections
3(26), 3(27) and 3(23), respectively.
5.24. Employment Matters. There have been no claims of defaults and
------------------
there are no facts or conditions which if continued, or on notice, will result
in a material default under any contracts or arrangements relating to the
employment, compensation or benefits of the employees of the Company.
5.25. Discrimination: Occupational Safety: Labor. To the Company's
------------------------------------------
knowledge, no person (including, but not limited to, governmental agencies of
any kind) has made any written claim for any action or proceeding against the
Company arising out of any statute, ordinance or regulation relating to
discrimination in employment or employment practices or occupational safety and
health standards (including, but without limiting the foregoing, The Fair Labor
Standards Act, as amended; Title VII of the Civil Rights Act of 1964, as
amended; 42 U.S.C. 1981 or the Age Discrimination in Employment Act of 1967, as
amended), which, if upheld, would have a material adverse effect on the business
or condition, financial or otherwise, of the Company. There is no pending or, to
the knowledge of the Company, threatened federal or state equal employment
opportunity enforcement action or labor dispute, strike, or work stoppage
affecting the business of the Company. The Company does not have any collective
bargaining or similar agreements, nor does it have any obligation to bargain
with any labor organization as the representative of the Company's employees,
and there is neither pending, nor to the Company's knowledge threatened, any
labor dispute, strike or work stoppage which affects or which may affect the
business of the Company or which may interfere with the continued operation of
the Company.
5.26. Questionable Payments. Neither the Company nor the Management
---------------------
Stockholders, nor, to the Company's knowledge, any other director, officer,
agent, employee or other person associated with or acting on behalf of the
Company has directly or indirectly: (i) used any funds of the Company for
unlawful contributions, gifts, entertainment or other unlawful expenses relating
to political activity, (ii) made any unlawful payment to government officials or
employees or to political parties or campaigns from corporate funds, (iii)
violated any provision of the Foreign Corrupt Practices Act of 1977, as amended,
(iv) established or maintained any unlawful or unrecorded fund of corporate
monies or other assets, (v) made any false or fictitious entry on the books or
records of the Company, (vi) made any unlawful bribe, rebate, payoff, influence
payment, kickback or other unlawful payment, or (vii) made any bribe or other
payment of a similar or comparable nature to any person or entity, private or
public, regardless of form, to obtain favorable treatment in securing business
or to obtain special concessions or treatment, which, at the time made, violated
any applicable law.
14
<PAGE>
5.27. Effect of Certificates. Any certificates of the Company
----------------------
delivered hereunder shall be deemed to be additional representations and
warranties of the Company.
5.28. Subsidiaries. The Company does not own any equity interest in,
------------
and is not in a control position with respect to, any entity.
5.29. Brokerage Fee. The Company is not under any obligation to pay
-------------
any broker's fee or commission in connection with the transactions contemplated
hereby to any broker or finder.
5.30. Investment Company Act. The Company is not an "investment
----------------------
company" or a company "controlled" by an "investment company" within the meaning
of the Investment Company Act of 1940, as amended.
5.31. Offering of the Shares. The Company has not, nor, to the
----------------------
knowledge of the Company, has any person or entity authorized or employed by the
Company directly or indirectly as agent, broker, dealer or otherwise in
connection with the offering or sale of the Series B Preferred Stock, offered
shares of Series B Preferred Stock for sale to, or solicited any offers to buy
from, or otherwise approached or negotiated with respect thereto with, any
person or persons, other than the Purchasers, under circumstances that have
involved the use of any form of general advertising or solicitation as such
terms are used in Regulation D under the Act. Assuming the accuracy of the
representations of the Purchasing Holders set forth herein, the Company has not,
nor, to the knowledge of the Company, has any Person acting on its behalf, taken
any action (including, without limitation, any offer, issuance or sale of any
security of the Company under circumstances which would require the integration
of such security with the offering of the Preferred Stock and/or the issuance of
the Warrants or the Common Stock issuable upon exercise thereof, under the Act
or the rules and regulations of the Commission thereunder) in a manner which
would make the exemptions afforded by the Act unavailable for the offering,
issuance or sale of the shares of Series B Preferred Stock contemplated hereby.
5.32. Securities Purchase Agreement. The representations and
-----------------------------
warranties of the Company set forth in the Securities Purchase Agreement (as
defined below) were true and correct in all material respects on the date of the
Securities Purchase Agreement.
5.33. MCI. The Company is in the process of negotiating the terms of
---
an agreement with MCI Communications ("MCI"), pursuant to which MCI would
---
provide to the Company "network internet backbone services." In connection with
such negotiations, the Company has posted a letter of credit with a face amount
of $500,000, of which MCI is a beneficiary, and MCI has provided the Company
with a proposed schedule for installation.
5.34. Disclosure. Neither this Agreement (together with the
----------
Schedules and Annexes hereto) nor the Ancillary Documents contains any material
misstatement of fact or omits to state a material fact necessary to make the
statements contained herein or therein not misleading.
15
<PAGE>
ARTICLE VI
REPRESENTATIONS OF PURCHASING HOLDERS
-------------------------------------
Each of the Purchasing Holders, severally and only as to itself,
hereby represents and warrants to the Company as of the date hereof as follows:
6.1 Authorization of Agreement. The execution and delivery of this
--------------------------
Agreement, the performance of the transactions contemplated hereby and the
performance and compliance with the terms and provisions hereof by such
Purchasing Holder has been duly and validly authorized by such Purchasing Holder
and no other proceeding (corporate or otherwise) on the part of such Purchasing
Holder is necessary to authorize this Agreement or the transactions contemplated
hereby. This Agreement has been duly and validly executed and delivered by such
Purchasing Holder and constitutes the legal, valid and binding obligation of
such Purchasing Holder, enforceable against such Purchaser Holder in accordance
with its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, fraudulent conveyances, reorganization, moratorium and
similar laws affecting creditors rights generally and subject to the application
of general principles of equity.
6.2 Consents. There is no authorization, consent, order or approval
--------
of, or notice to or filing with any individual or entity required to be obtained
or given (collectively, "Consents"), in order for such Purchasing Holder to
--------
consummate the transactions contemplated hereby and to fully perform its
obligations hereunder, other than those Consents, if any, required to be
obtained or made by the Company.
6.3 No Conflicts. The execution, delivery and performance by such
------------
Purchasing Holder of this Agreement and compliance by such Purchasing Holder
with the terms and provisions hereof, does not and will not (i) violate any
provision of any law, rule or regulation, order, writ, judgment, injunction,
statute, decree, determination or award having applicability to such Purchasing
Holder or any of its assets (subject, however, to the Company's obtaining or
making all Consents required on the part of the Company), (ii) conflict with or
result in a breach of or constitute a default under any provision of the
partnership agreement, charter or by-laws or other organizational documents of
such Purchasing Holder (if any), or (iii) result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation or acceleration) under any
of the terms, conditions or provisions of any debenture, bond, mortgage,
indenture or loan or credit agreement, license, or any other agreement or
instrument or obligation to which such Purchasing Holder is a party or by which
such Purchasing Holder or any of its assets may be bound.
6.4 Purchasing Holder for Own Account. The shares of Series B
---------------------------------
Preferred Stock to be issued to such Purchasing Holder pursuant to this
Agreement are, and the shares of Common Stock to be issued upon conversion of
the shares of Series B Preferred Stock and the shares of Series B Preferred
Stock issuable as dividends in respect of the Series B Preferred
16
<PAGE>
Stock will be, acquired by such Purchasing Holder for its own account with no
intention of distributing or reselling such securities or any part thereof in
any transaction that would be in violation of the Act or any state security law,
without prejudice, however, to the rights of such Purchasing Holder at all times
to sell or otherwise dispose of all or any part of the shares of Series B
Preferred Stock and any shares of Common Stock issued upon conversion of the
shares of Series B Preferred Stock and any shares of Series B Preferred Stock
issuable as payment of dividends in respect of the shares of Series B Preferred
Stock under an effective registration statement under the Act or pursuant to an
exemption from such registration available under the Act (or any applicable
state securities law) and subject, nevertheless, to the disposition of such
Purchasing Holder's property being at all times within its control. If such
Purchasing Holder should in the future decide to dispose of any of its shares of
Series B Preferred Stock or any shares of Common Stock issuable upon conversion
of the shares of Series B Preferred Stock or any shares of Series B Preferred
Stock issuable as payment of dividends in respect of the shares of Series B
Preferred Stock, such Purchasing Holder understands and agrees that it may do so
only in compliance with the Act and applicable state securities laws, as then in
effect. Such Purchasing Holder agrees to the imprinting, so long as required by
law, of legends on certificates representing all of its shares of Series B
Preferred Stock or any shares of Common Stock issued upon conversion of the
shares of Series B Preferred Stock or any shares of Series B Preferred Stock
issuable as payment of dividends on the shares of Series B Preferred Stock to
the following effect:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
-----------------------------------------------------------------------------
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND
- -------------------------------------------------------------------------------
MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE
- ------------------------------------------------------------------------
REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR
- -----------------------------------------------------------------------------
PURSUANT TO AN EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH
- ------------------------------------------------------------------------------
LAWS.
- ----
THE CORPORATION WILL FURNISH A FULL STATEMENT OF THE DESIGNATIONS AND ANY
- -------------------------------------------------------------------------
PREFERENCES, RELATIVE RIGHTS AND PREFERENCES BETWEEN SERIES, CONVERSION AND
- ---------------------------------------------------------------------------
OTHER RIGHTS, VOTING POWERS, RESTRICTIONS, LIMITATIONS AND CONDITIONS OF
- ------------------------------------------------------------------------
REDEMPTION OF STOCK OF EACH CLASS WHICH THE CORPORATION IS AUTHORIZED TO ISSUE
- ------------------------------------------------------------------------------
TO ANY STOCKHOLDER ON REQUEST WITHOUT CHARGE."
- ----------------------------------------------
6.5 Title to Notes. Such Purchasing Holder is the sole record and
--------------
beneficial owner of the principal amount of Notes and Convertible Notes set
forth opposite such Purchasing Holder's name on Schedule 3 and Schedule 6,
---------- ----------
respectively, and such Purchasing Holder holds such Notes free and clear of any
and all Liens.
17
<PAGE>
ARTICLE VII
ADDITIONAL AGREEMENTS OF HOLDERS
--------------------------------
7.1 Certain Agreements Concerning Subject Warrants.
----------------------------------------------
(a) The Holders acknowledge that, as a result of certain errors in
documentation, in certain instances the instruments evidencing the Subject
Warrants (the "Warrant Certificates") do not accurately reflect the number of
--------------------
shares of Common Stock for which the Subject Warrants are exercisable and the
exercise prices of the Subject Warrants. Accordingly, each Purchasing Holder
hereby acknowledges and confirms that (i) the Subject Warrants held by such
Purchasing Holder are exercisable for that number of shares of Common Stock set
forth opposite such Purchasing Holder's name on Schedule 4 hereto for the
----------
exercise prices set forth opposite such Purchasing Holder's name on Schedule 4
----------
hereto, (ii) the Subject Warrants described on Schedule 4 hereto as held by such
----------
Purchasing Holder constitute all of the securities held by such Purchasing
Holder which are exercisable or exchangeable for, or convertible into, shares of
the Capital Stock (other than any shares of Series A Preferred Stock or Series B
Preferred Stock held by the Purchasing Holders and reflected on the Schedules
hereto) and (iii) notwithstanding any contrary provision contained in the
Warrant Certificates or the Securities Purchase Agreement (including, without
limitation, Section 10.02 thereof), there shall be no adjustment to the number
of shares issuable upon exercise of the Subject Warrants held by such Purchasing
Holder or the exercise price of such Subject Warrants as a result of the
consummation of the transactions contemplated hereby, the issuance of any shares
of Common Stock upon conversion of the shares of Series A Preferred Stock or
Series B Preferred Stock or the issuance of shares of Series A Preferred Stock
and Series B Preferred Stock as dividends on the Series A Preferred Stock and
the Series B Preferred Stock, respectively. The parties further agree that the
terms of the Warrant Certificates and the Securities Purchase Agreement
(including, without limitation, Section 10.02 thereof) shall be deemed amended
(to the extent necessary) so that the number of shares of Common Stock issuable
upon exercise of the Subject Warrants, as well as the exercise price of the
Subject Warrants, shall be adjusted upon the occurrence of (and only upon the
occurrence of) the events described in subparagraphs B.4(c) through (h) of
Article Fourth of the Amended Articles in a manner consistent with the terms
thereof, as provided in Schedule 7.1 hereto. Following the Closing, each
------------
Purchasing Holder agrees to execute and deliver such documents and to do such
acts and things as may be necessary to amend the existing Warrant Certificates
to give further evidence to the foregoing acknowledgement and confirmation.
(b) In addition, each Holder hereby waives any breach of the terms
of that certain Securities Purchase Agreement dated as of March 24, 1995 by and
among the Company and certain Purchasing Holders (the "Securities Purchase
-------------------
Agreement") or any other agreement to which such Holder is a party insofar as
- ---------
such breach is the result of the issuance of the Warrants (as specified on
Schedule 4 hereto) or any inaccuracy in the description or disclosure of the
number of shares of Common Stock for which such Warrants are exercisable or the
exercise price of the Warrants.
18
<PAGE>
7.2 Agreements Regarding Exercise of Warrants and Conversion of
-----------------------------------------------------------
Preferred Stock Upon Sale or Public Offer.
- -----------------------------------------
(a) Each Purchasing Holder hereby agrees that, immediately prior
to, and conditioned upon, the consummation by the Company of a Qualifying IPO,
such Purchasing Holder shall exercise all Subject Warrants held by such
Purchasing Holder.
(b) Each Purchasing Holder waives such Purchasing Holder's right
to cause the Company to redeem its shares of Series A Preferred Stock and Series
B Preferred Stock upon consummation of a Qualifying IPO as provided in Paragraph
B.3(a)(iv) of Article Fourth of the Amended Articles and agrees that such
Purchasing Holder shall, immediately prior to, and conditioned upon, the
consummation of a Qualifying IPO, exercise its right to convert all shares of
Series A Preferred Stock and Series B Preferred Stock held by it into shares of
Common Stock as provided in the Amended Articles; provided that, this Section
7.2 shall not obligate any Purchasing Holder to exercise such Purchasing
Holder's Subject Warrants or convert any shares of Preferred Stock upon the
consummation of a Public Offering (as defined below) that does not constitute a
Qualifying IPO. For the purpose hereof "Qualifying IPO" shall mean an
--------------
underwritten public offering of shares of the Common Stock of the Company which
is consummated on or before December 31, 1996, the net proceeds of which exceed
$25,000,000.
7.3 Agreements Concerning Option Plan. The Holders hereby consent
---------------------------------
to the amendment of the Option Plan to permit the issuance of additional options
to purchase shares of Common Stock under the Option Plan; provided that the
aggregate number of shares of Common Stock issuable upon exercise of all options
issued or issuable under the Option Plan following such amendment shall not
exceed 4,167,239 shares. The Holders hereby consent to the issuance of such
additional options under the Option Plan and hereby acknowledge that the
issuance of such options shall not result in any adjustment to the number of
shares issuable upon exercise of the Subject Warrants.
7.4 Potential Debt Financing. The Holders acknowledge that the
------------------------
Company has entered into negotiations concerning the Sirrom Financing, which is
expected to involve the issuance of warrants to purchase shares of Common Stock
(the "Financing Warrants") to the party or parties providing such debt
------------------
financing. The Holders hereby consent to the consummation of the Sirrom
Financing on terms approved by the Board of Directors of the Company; provided
that (i) such transaction does not involve the incurrence of indebtedness by the
Company in excess of $5,000,000 in aggregate principal amount, (ii) the
Financing Warrants shall not entitle the holder thereof to purchase more than
(A) 5% of the Common Stock (on a fully diluted basis), if the Company fails to
complete an initial public offering of its Common Stock on or before December
31, 1996, the gross proceeds of which exceed $20 million, or (B) 2.5% of the
Common Stock (on a fully-diluted basis), if the Company completes an initial
public offering of its Common Stock on or before December 31, 1996, the gross
proceeds of which exceed $20 million, (iii) the Sirrom Financing is consummated
on or
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<PAGE>
before December 31, 1996 and (iv) there are no adjustments to the number of
shares of Common Stock issuable upon exercisable of the options issued or
issuable under the Option Plan or the exercise price of such options as a result
of the Sirrom Financing. Each Holder hereby irrevocably waives any and all
preemptive or other rights to subscribe for any securities of the Company in
connection with the Sirrom Financing and any and all rights of such Holder to
any adjustment to the number of shares issuable upon conversion of the shares of
Series B Preferred Stock or any shares of Series A Preferred Stock held by such
Holder or upon the exercise of the Warrants or options held by such Holder as a
result of the issuance of the Financing Warrants in connection with the Sirrom
Financing.
7.5. Waiver of Preemptive and Other Rights. In order to facilitate
-------------------------------------
the transactions contemplated by this Agreement, each Holder hereby:
(a) Waives (A) any preemptive rights, rights of first refusal or
other rights to subscribe for or purchase shares of Capital Stock (including,
without limitation, any right set forth in Section 6.10 of the Securities
Purchase Agreement), (B) any breach of Section 7.08 of the Securities Purchase
Agreement and (C) any right to any adjustment to the terms of any Warrant, to
the extent that such rights or breaches described in the foregoing clauses (A)
through (C) arise in connection with or as a result of (i) the transactions
contemplated hereby, (ii) the issuance of shares of Common Stock upon conversion
of any shares of Preferred Stock and (iii) the issuance of shares of Series A
Preferred Stock and Series B Preferred Stock as dividends on shares of Series A
Preferred Stock and Series B Preferred Stock, respectively;
(b) Consents to the transactions contemplated hereby; and
(c) Consents to the pledge of any or all of the assets of the
Company as the Board of Directors, acting in its discretion, may deem
appropriate in connection with the Sirrom Financing.
7.6 Capitalization of the Company. Given the lack of clarity of
-----------------------------
certain agreements and other instruments previously entered into among the
Company and the Holders relating to the capitalization of the Company, the
parties deem it advisable to set forth their agreement and understanding
concerning the capitalization of the Company. Accordingly, the parties agree
that, notwithstanding any agreement or other instrument to the contrary
(including, without limitation, the terms of the Warrant Certificates and
Section 10.02 of the Securities Purchase Agreement), Schedule 9 attached hereto
----------
sets forth with respect to each Holder (i) the number of shares of the Capital
Stock or other securities of the Company that will be held by such Holder upon
consummation of the transactions contemplated hereby and the class or series of
such shares of Capital Stock and the type of such other securities, (ii) the
shares of Common Stock that would be held by such Holder if, immediately
following the consummation of the transactions contemplated hereby, (A) all
outstanding shares of Series A Preferred Stock and Series B Preferred Stock were
converted into shares of Common Stock in accordance with the terms of the
Amended Articles and (B) all of the Warrants and all of the
20
<PAGE>
options issuable under the Option Plan (following amendment to the Option Plan
contemplated by Section 7.3 hereof) were exercised in full.
ARTICLE VIII
REGISTRATION RIGHTS
-------------------
The definition of "Registrable Securities" set forth in the Securities
Purchase Agreement is hereby amended to include (i) all shares of Common Stock
issuable upon conversion of the shares of Series B Preferred Stock, all shares
of Common Stock issued or issuable upon conversion of any shares of Series B
Preferred Stock issued as dividends in respect of the shares of Series B
Preferred Stock and (ii) all shares of Common Stock issued or issuable upon
exercise of all Subject Warrants. The Securities Purchase Agreement is further
amended to reflect the fact that, for the purpose thereof, Blue Chip and Crisler
are holders of Registrable Securities and to require the consent of Blue Chip
and Crisler (or their respective successors and assigns) to any amendment to
Article IX thereof as long as Blue Chip and Crisler, respectively, or their
respective successors and assigns hold any Registrable Securities.
ARTICLE IX
COVENANTS OF THE COMPANY
The Company covenants and agrees to take the following actions:
9.1. Financial Statements. The Company shall provide to each
--------------------
Purchasing Holder, (i) within Forty-Five (45) days after the end of each month,
year-to-date unaudited balance sheets as of the end of such month and unaudited
statements of income and expense and of cash flows of the Company for such month
and for the current fiscal year prepared, in accordance with generally accepted
accounting principles consistently applied as certified by the chief financial
officer of the Company, and (ii) within Forty-Five (45) days after the end of
each month, a one-page management summary of operations for the Company, and
(iii) within ninety (90) days after the fiscal year end of the Company, an
audited balance sheet as of the end of such year and audited statements of
income and of cash flows of the Company for such year, certified by independent
certified public accountants selected by the Company and acceptable to the
Purchasing Holders, prepared in accordance with generally accepted accounting
principles consistently applied, and, (iv) within fifteen (15) days after the
end of each fiscal quarter of the Company a certificate signed by the President
of the Company that no default has occurred within the prior quarter, or
describing the nature of any such default, with respect to (A) any loan,
contract or obligation under which the Company is obligated to pay or entitled
to receive at least the sum of Twenty-Five Thousand Dollars ($25,000), and (B)
with respect to the Company's obligations under this Agreement, the Securities
Purchase Agreement or any Ancillary Document.
21
<PAGE>
9.2. Projections and Budgets.
-----------------------
(i) At least thirty (30) days prior to the end of each fiscal
year of the Company, the Company shall provide each Purchasing Holder with
projected financial statements of the Company for each of the following two (2)
fiscal years, to be prepared in accordance with the format used for the
statements required in Section 9.1. All such projections shall represent the
good faith estimate of the Company as to such future operations (and shall
contain a brief certificate to such effect), but it is acknowledged that such
projections are not intended and shall not be deemed to guaranty the future
operations of the Company consistent therewith.
(ii) At least forty-five (45) days prior to the end of each
fiscal year of the Company, the Company shall produce a comprehensive operating
budget for the Company for the succeeding fiscal year, which budget shall be
submitted to the Board of Directors of the Company for its approval. Upon
approval by the Board of Directors of the operating budget for the Company (the
approved budget is hereinafter referred to as the "Budget"), the Company shall
------
use its best efforts to conduct its business in accordance with the Budget for
such fiscal year unless otherwise approved by the Board of Directors and in all
events shall conduct such business so that the Company's revenues and pre-tax
profit, on a quarterly basis during such fiscal year, equal or exceed fifty
percent (50%) of the projected revenue and pre-tax profit amounts set forth in
the Budget for such fiscal quarter.
9.3. Books, Records, and Inspections. The Company will at all times
-------------------------------
(i) maintain complete and accurate books and records, and (ii) upon reasonable
notice at any reasonable time and from time to time, the Company will permit any
of the Purchasing Holders or their respective agents, employees, attorneys or
accountants to enter, examine, audit, and inspect all properties, books,
operations, and records of the Company wherever such properties, books, and
records are located.
9.4. Lawsuits: Defaults. Within thirty (30) days after filing or
------------------
receipt, the Company shall provide the Purchasing Holders with copies of all
pleadings filed in connection with any suits or proceedings filed by or against
the Company. Within ten (10) days after receipt of any notification, the Company
shall provide the Purchasing Holders with copies of any notifications received
by it relating to any failure of the Company to pay, or perform any loan, lease,
contract or other agreement to which the Company is a party after expiration of
any applicable grace or cure period, except where the Company's failure to so
pay or perform is based on circumstances beyond its control or is otherwise
reasonable under the circumstances, and a copy of any such notification shall be
delivered to the Board of Directors.
22
<PAGE>
9.5 Board of Directors.
------------------
(i) The Company shall have a Board of Directors consisting
of nine (9) persons. As provided in the Amended Articles, the holders of the
issued and outstanding shares of the Series A Preferred Stock and the Series B
Preferred Stock have the right to elect (and remove) from time to time four (4)
directors in the manner provided in the Amended Articles. The Purchasing Holders
(by a vote of Sixty-Three Percent (63%) or more of the total number of votes
that may be cast by the holders of all issued and outstanding shares of
Preferred Stock (the "Preferred Votes")) and Humphrey, so long as Humphrey is
---------------
employed by the Company (and until his death or disability), shall be entitled
to designate (and remove) from time to time one (1) additional independent
director as they may agree upon. So long as the Purchasing Holders own any
shares of the Capital Stock, the Purchasing Holders and Management Stockholders
each agree to vote their shares of Capital Stock for the one (1) independent
director jointly designated by the Purchasing Holders and Humphrey. If the
Purchasing Holders and Humphrey are unable to agree as to the identity of such
director after attempting in good faith to so agree, the Purchasing Holders
shall be entitled to designate such director, subject to the approval of
Humphrey, and the Purchasing Holders and the Management Stockholders shall in
all events vote their respective shares of Capital Stock in support of such
director who has been designated and approved as herein provided. All members of
the Board of Directors shall be reimbursed by the Company for all reasonable
expenses incurred by them in attending Board meetings, and the Company shall pay
to each of Grotech, Venrock, Southern and Blue Chip, for the respective
directors designated by such Holders, an annual directors fee of Ten Thousand
Dollars ($10,000). Board Meetings shall be held no less frequently than monthly.
(ii) So long as the Purchasing Holders own any shares of
Capital Stock of the Company, the Purchasing Holders and Management Stockholders
agree to vote their respective shares of Capital Stock in support of (A) four
directors nominated by the Management Stockholders, (B) one director nominated
by Grotech, (C) one director nominated by Venrock, (D) one director nominated by
Southern, (E) one director nominated by Blue Chip and (F) one director nominated
by the Purchasing Holders and Humphrey as provided in clause (i) of this Section
9.5; provided that if any Purchasing Holder no longer owns any shares of Capital
Stock, then the remaining Purchasing Holders shall be entitled to nominate the
director(s) formerly nominated by such Purchasing Holder who is no longer a
stockholder of the Company (by vote of 63% of the Preferred Votes held by such
remaining Purchasing Holders).
(iii) So long as Crisler owns any shares of the Capital Stock,
it shall have the right to designate one person who shall have the right to
receive notice of, and participate as an observer at, each meeting of the Board
of Directors of the Company.
(iv) The Purchasing Holders hereby agree that, in the event
of a Voting Period (as defined in the Amended Articles), the additional
directors to be elected by
23
<PAGE>
the holders of the Preferred Stock pursuant to the Amended Articles shall be
elected by the affirmative vote of Sixty-Three Percent (63%) or more of the
Preferred Votes.
(v) This Section 9.5 supersedes Section 6.05 of the
Securities Purchase Agreement.
9.6. Reports to Stockholders. The Company will furnish to the
-----------------------
Purchasing Holders, within thirty (30) days after filing or making thereof, at
least one (1) copy of all financial statements, reports, notices, and proxy
statements sent by it to its stockholders, and of all other documents and
reports filed by the Company with any governmental agency, including but not
limited to, the Commission, the Internal Revenue Service and the Environmental
Protection Agency.
9.7. Insurance. The Company shall maintain in full force and effect
---------
the insurance coverage relating to its business, including, but not limited to
Federal flood insurance (if the business is located in a designated Federal
Flood Area), in amounts not less than those maintained as of the date of this
Agreement, but in all events in such amounts, and on such terms, as are
acceptable to the Purchasing Holders. Within thirty (30) days after the end of
each fiscal year of the Company, the Company shall provide the Purchasing
Holders with a list of all insurance then maintained by the Company, setting
forth the amount of coverage thereof and such other terms as the Purchasing
Holders may request. The Company shall also use its best efforts to purchase
(within thirty days of the date hereof) and maintain key man life insurance (at
reasonable premium rates from insurers of recognized responsibility) on the life
of Christopher R. McCleary in the amount of $4,550,000, payable to the Company;
provided that the Company shall no longer be obligated under the Securities
Purchase Agreement to maintain such insurance with respect to Humphrey. The
Company does not know of any reason why such insurance cannot be obtained.
9.8. Right of First Refusal. If the Company desires to issue any
----------------------
shares of its Capital Stock or any securities exercisable for any Capital Stock
or any stock rights, warrants or other securities convertible into or
exchangeable for shares of Capital Stock, it shall first afford the Purchasing
Holders, the Management Stockholders and their respective successors and assigns
(collectively, the "ROFR Holders") by written notice, the right to purchase such
------------
shares of Capital Stock or other securities within thirty (30) days of such
notice for cash (or on such other terms as are intended to be offered by the
Company) at the price at which such shares of Capital Stock or such other
securities are to be issued. The ROFR Holders shall be entitled to exercise such
right by providing written notice to the Company to such effect within such
thirty (30) day period. Each ROFR Holder desiring to purchase such shares of
Capital Stock or other securities shall be entitled to purchase that number of
shares of Capital Stock or other securities equal to the number of such shares
of Capital Stock or other securities times a fraction, (i) the numerator of
which shall be, in the case of a Purchasing Holder (or its assignee), the number
of Registrable Securities (as defined in the Securities Purchase Agreement, as
amended by this Agreement) issued, plus the number of Registrable Securities
issuable to such Purchasing Holder, and, in the case of a Management
Stockholder, the
24
<PAGE>
number of shares of Common Stock issued to such Management Stockholder, and (ii)
the denominator of which shall be, without duplication, (A) the total number of
shares of Common Stock issued to the ROFR Holders who timely elect to purchase
such shares, plus (B) the total number of Registrable Securities issued or
issuable to all ROFR Holders who timely elect to purchase such shares.
The rights of the ROFR Holders set forth herein shall not apply to any
securities to be issued (i) to the public pursuant to a Public Offering, (ii) to
officers, directors, or employees of the Company as part of the Stock Option
Plan, (iii) pursuant to the exercise of the Warrants, (iv) pursuant to any
conversion of the Series A Preferred Stock or the Series B Preferred Stock or
the exercise of any Warrants, (v) as a result of a stock split, stock dividend
or reclassification of shares of Common Stock. or (vi) in exchange for the
acquisition of a business on terms and conditions approved by the Board of
Directors.
This Section 9.8 supersedes Section 6.10 of the Securities Purchase
Agreement.
9.9. Taxes. The Company shall duly and timely file with appropriate
-----
federal, foreign, state and other governmental agencies all tax returns and
other reports required to be filed by it. The Company shall timely pay in full
and/or make adequate provisions for the payment of all taxes, interest,
penalties, assessments or deficiencies shown to be due on tax returns or by any
taxing authorities, and not enter into any agreement, waiver, or other
arrangement providing any extension of time with respect to the filing of any
tax return or report, or the payment or assessment of tax, unless the Company
determines it is in the best interests of the Company to extend such time.
9.10. Intellectual Property Rights. The Company shall in good faith
----------------------------
consult with representatives of the Purchasing Holders from time to time
regarding the protection of the Company's intellectual property rights now
owned, if any, or which are acquired or developed, and shall thereafter take all
steps that (based upon such consultation and upon diligent inquiry, of
management and various legal counsel qualified to render advice in matters
involving such intellectual property rights in various jurisdictions) are
reasonably necessary to protect its intellectual property rights, whether now
existing, or hereafter developed or acquired, including, but not limited to,
filing copyright or patent protection in the United States and elsewhere,
prosecuting any actions necessary to preserve or defend such rights and causing
its employees and agents to execute confidentiality and proprietary rights
agreements in favor of the Company; provided, in all events, that the Company
will take such actions to protect its intellectual property rights at least
equal to those that a company engaged in the business of the Company, and of its
size, would customarily take to protect such rights.
9.11. Maintenance of Corporate Existence; Compliance. The Company
----------------------------------------------
shall take all necessary steps to maintain its corporate existence and all
rights to its assets, and will engage only in such business activities as
currently, constitute the business of the Company or as such business is
constituted, from time to time, with the approval of the Board of Directors.
Except with the prior approval of the Board of Directors or in accordance with
the Budget,
25
<PAGE>
the Company shall keep its business and its assets substantially intact,
including its present operations, physical facilities, working conditions and
relationships with lessors, licensees, suppliers, customers, employees and
others having business relationships with it.
9.12. Full Access. The Company shall permit and provide the
-----------
Purchasing Holders and their respective agents, employees, attorneys and
accountants to have full and free access at all reasonable times upon reasonable
notice to all premises, properties, personnel, books, records and documents of
the Company.
9.13. Assets. The Company shall maintain its assets and facilities
------
in a usable and serviceable operating condition, reasonable wear and tear
excepted, on a basis consistent with prior years and with past practices.
9.14. Contracts and Obligations. The Company shall (i) maintain in
-------------------------
full force and effect and perform all of its obligations under all of the
Contracts, licenses, permits, authorizations, and approvals necessary for, or
related to, the conduct of its business, its operations and assets, and (ii)
perform all of its obligations under all debt and similar instruments.
9.15. Termination of Covenants. The covenants of the Company
------------------------
contained in this Article IX (other than the covenants set forth in Section 9.8
hereof) shall terminate, and shall be of no further force and effect, upon the
first to occur of (i) the consummation of an offering of the Common Stock to the
public pursuant to a registration statement filed by the Company with the
Securities and Exchange Commission (other than a registration statement on Form
S-4, S-8 or any successor form) based upon a valuation of the Company of at
least $20 million in which at least $10 million of net proceeds are received by
the Company and as the result of which shares of Common Stock are listed on
either the New York Stock Exchange, the American Stock Exchange or NASDAQ (a
"Public Offering"), (ii) the conversion to Common Stock of all shares of
---------------
Preferred Stock, (iii) the redemption by the Company of, and full payment for,
all of the shares of Preferred Stock and all accrued and unpaid dividends
thereon or (iv) the Purchasing Holders ceasing to own, in the aggregate, at
least five percent (5%) of the sum of the number of issued and outstanding
shares of Common Stock plus the number of shares of Common Stock issuable upon
exercise of the Warrants and upon conversion of the Preferred Stock. The
covenants set forth in Section 9.8 hereof shall terminate, and shall be of no
further force and effect, upon consummation of a Public Offering.
X.
NEGATIVE COVENANTS
The Company hereby covenants and agrees that the Company shall not
undertake any of the following actions without the prior written consent of the
Purchasing Holders, which consent shall not be unreasonably withheld:
26
<PAGE>
10.1. Ordinary Course. Without taking any action or making any
---------------
expenditure outside of the normal and ordinary course of business, the Company
shall (i) carry on its business in substantially the same manner consistent with
past operations, (ii) not enter into any obligation out of the ordinary course
of business requiring the annual payment in an amount in excess of Ten Thousand
Dollars ($10,000) in the aggregate for each such obligation unless such
obligation is undertaken in accordance with the Budget, (iii) not incur or
increase any indebtedness for borrowed money such that the aggregate amount of
such indebtedness outstanding at any time exceeds One Hundred Thousand Dollars
($100,000), unless such indebtedness is undertaken in accordance with the
Budget, (iv) except as contemplated by the Budget, preserve its present business
organization intact, (v) except as contemplated by the Budget, use its best
efforts to keep available the services of present officers, (vi) except in
accordance with the Budget, make no material increase in levels of officer
staffing, (vii) use its best efforts to preserve its present relationships with
persons having business dealings with the Company, and (viii) not increase the
amount of, or prepay, any payment pursuant to any Contract.
10.2. Issuance of Capital Stock or Securities. Except with respect
---------------------------------------
to the exercise of the Warrants, the Company shall not issue any shares of
Capital Stock, nor issue any rights to acquire any shares of Capital Stock nor
issue any securities or other obligations convertible into shares of Capital
Stock, nor redeem any of its shares of Capital Stock other than the shares of
Preferred Stock and other than (i) the issuance of shares of Common Stock upon
conversion of the Preferred Stock, (ii) the issuance of shares of Preferred
Stock as dividends in respect of the Preferred Stock, and (iii) the issuance of
options to purchase up to 4,167,239 shares of Common Stock under the Stock
Option Plan and the issuance of shares of Common Stock upon exercise of such
options.
10.3. Extraordinary Actions. The Company shall not negotiate or
---------------------
enter into any merger, consolidation or other combination with or into, or
purchase any other business entity or the assets constituting a principal
portion of another business, or liquidate or dissolve, or amend its charter or
bylaws, or alter its corporate structure, purchase an equity interest in any
entity, or establish any partly or wholly owned subsidiaries or joint ventures,
change the location or nature of its business, or invest in any endeavor not
related to its business and the property for its business.
10.4. Sale of Assets. Except with the prior approval of the Board of
--------------
Directors, the Company shall not negotiate or enter into, or consummate, any
agreement with respect to the sale, transfer or other disposition of any of its
assets outside the normal and ordinary course of its business consistent with
its past practices.
10.5. Encumbrances. Except with the prior approval of the Board of
------------
Directors, the Company shall not pledge, sell, lease, transfer, dispose or
otherwise encumber any of its assets, or permit the creation or existence of any
lien or encumbrance on any of its assets, other than liens for indebtedness
existing, on the date hereof, liens for indebtedness in
27
<PAGE>
accordance with the Budget, liens with respect to permitted capital improvements
pursuant to the provisions of Section 10.7 hereof and liens arising by operation
of law in the ordinary course of business and not resulting from any default by
the Company.
10.6. Distributions. The Company, shall not declare or pay any
-------------
dividends, or make any distributions in cash, securities, Capital Stock or
otherwise, on its shares of Capital Stock (other than dividends payable with
respect to shares of Preferred Stock), or in any other manner whatsoever
advance, transfer or distribute cash or cash equivalents to the Management
Stockholders or other holders of Common Stock, or its directors or other
personnel (except for salaries, bonuses, benefits and other compensation in
accordance with the Budget), or repurchase any outstanding shares of its Capital
Stock (other than the Preferred Stock).
10.7. Capital Improvements. The Company shall not expend in excess
--------------------
of $500,000 in the aggregate in any fiscal year for capital improvements or
similar corporate purposes except in accordance with the Budget.
10.8. Transactions with Related Persons. Except with the prior
---------------------------------
approval of the Board of Directors, the Company shall not enter into any
Contract or other obligation with any person or affiliate of any person who
directly or indirectly owns any shares of its Capital Stock, or any officer,
director or other management personnel or employee (except for salaries,
bonuses, benefits and other compensation in accordance with the Budget), or
affiliate, on terms and conditions any less favorable than would be received
from any independent third party in the ordinary course of business. For
purposes of this Section 10.8, if the Company enters into any Contract or other
obligation with a Management Stockholder or an affiliate of a Management
Stockholder, whether said Contract or other obligation is on terms and
conditions no less favorable than would be received from an independent third
party in the ordinary course of business shall be determined by the members of
the Board of Directors designated by the Purchasing Holders. If the Company
enters into any Contract or other obligation with a Purchasing Holder or any
person directly or indirectly controlled by a Purchasing Holder and which person
owns any shares of its Capital Stock, whether said Contract or other obligation
is on terms and conditions no less favorable than would be received from an
independent third party in the ordinary course of business shall be determined
by the members of the Board of Directors other than the members designated by
the Purchasing Holders.
10.9 Use of Proceeds. The Company shall not use the proceeds of
---------------
the Stock Purchase Transaction for any purpose other than to (i) pay the
expenses incurred in connection with the transactions contemplated hereby and
(ii) fund the Company's anticipated cash requirements through August, 1996.
10.10. Termination of Covenants. The covenants contained in this
------------------------
Article X shall terminate and shall be of no further force and effect upon the
first to occur of (i) a Public Offering, (ii) the conversion to Common Stock of
all shares of Preferred Stock, (iii) the redemption by, the Company of, and full
payment for, all of the shares of Preferred Stock and all accrued and unpaid
dividends thereon, or (iv) the Purchasing Holders ceasing, to own, in
28
<PAGE>
the aggregate, at least five percent (5%) of the sum of the number of issued and
outstanding shares of Common Stock plus the number of shares of Common Stock
issuable upon exercise of the Warrants and upon conversion of the Preferred
Stock.
ARTICLE XI
INDEMNIFICATION
11.1. Company Indemnification. In addition to any and all
-----------------------
obligations of the Company to indemnify the Purchasing Holders hereunder, and to
any and all rights and remedies granted hereunder or under any Ancillary
Documents, the Company shall, without limitation as to time, indemnify and hold
harmless the Purchasing Holders and their officers, directors, agents and
affiliates, to the fullest extent lawful, from and against any and all losses,
claims, damages, liabilities, costs (including the costs of preparation and
reasonable attorneys' fees) and expenses (collectively, "Losses") that arise out
------
of (i) any breach of, or inaccuracy in, any representation or warranty of the
Company contained in this Agreement, any Ancillary Documents or any instrument
or other document delivered pursuant hereto or thereto or in connection herewith
or therewith, and (ii) any breach of any covenant or agreement of the Company
contained in this Agreement, whether or not such Purchasing Holder is made a
party to any proceeding involving said Loss.
11.2. Indemnification by Purchasing Holders. The Purchasing Holders
-------------------------------------
shall, without limitation as to time, severally indemnify and hold harmless the
Company and its officers, directors, agents and affiliates, to the fullest
extent lawful, from and against any and all Losses that arise out of (i) any
breach of, or inaccuracy in, any representation or warranty of such Purchasing
Holder contained in this Agreement and (ii) any breach of any covenant,
undertaking or agreement of such Purchasing Holder contained in this Agreement
or any Ancillary Document whether or not the Company is made a party to any
proceeding involving such Loss.
ARTICLE XII
ADDITIONAL AGREEMENTS
---------------------
12.1 Stockholders Agreement. The Company, each Purchasing Holder,
----------------------
and the Managing Stockholders hereby agree that the Stockholders Agreement (the
"Stockholders Agreement") dated as of March 24, 1995 among the Company, certain
----------------------
Purchasing Holders, and the Managing Stockholders is hereby amended to provide
that (i) all Purchasing Holders shall constitute "Preferred Stockholders" within
the meaning of the Stockholders Agreement and shall be entitled to all rights
and benefits of, and be subject to all obligations of, Preferred Stockholders
under the terms of the Stockholders Agreement, (ii) the term "Preferred Stock"
as used in the Stockholders Agreement shall refer to all shares of Series A
Preferred Stock and
29
<PAGE>
all shares of Series B Preferred Stock, and (iii) the term "Warrants" as used in
the Stockholders Agreement shall refer to the Subject Warrants.
12.2 Unlocking.
---------
(a) If, at any time after three (3) years from the date
hereof, the Company or the Management Stockholders, as the case may be, receive
a bona fide offer to purchase all or substantially all of the Company's assets
or Capital Stock, whether such offer is the result of solicitation by or of the
Purchasing Holders, the Management Stockholders, the officers of the Company or
otherwise, the Company and the Management Stockholders shall provide written
notice to the Purchasing Holders within ten (10) days of its or their receipt of
said offer, setting forth all of the relevant terms and conditions thereof. If
the Purchasing Holders holding Sixty-Three Percent (63%) or more of the
Preferred Votes, or, if no shares of Preferred Stock are then outstanding, the
Purchasing Holders holding Sixty-Three Percent (63%) or more of the Registrable
Securities, desire for such offer to be accepted, they shall provide written
notice to the Company and/or the Management Stockholders within thirty (30) days
thereafter to that effect.
(b) If such Purchasing Holders provide the written notice
to the Company and/or the Management Stockholders as set forth in Section
12.2(a) hereof, the Company and/or the Management Stockholders, as the case may
be, shall thereafter either accept the offer or, no later than ninety (90) days
after receipt of such notice, the Company shall (i) acquire all of the Subject
Warrants, Registrable Securities and shares of Series B Preferred Stock held by
the Purchasing Holders on the same terms and conditions as the proposed offer,
and (ii) redeem all of the outstanding shares of Series A Preferred Stock, and
pay all accrued but unpaid dividends thereon, as of the closing of the sale of
the assets or Capital Stock, as the case may be, as a condition of such closing.
Notwithstanding the foregoing, if the Company is unable to fully pay for all of
such Subject Warrants, Registrable Securities, Series B Preferred Stock and
shares of Series A Preferred Stock and all accrued but unpaid dividends thereon
in cash by the end of such ninety (90) day period, such offer must be accepted
by the Company or the Management Stockholders, as the case may be, and closing
with respect thereto shall occur as soon as possible.
(c) If the holders of Sixty-Three Percent (63%) or more of
the Preferred Votes, or, if no shares of Preferred Stock are then outstanding,
the Purchasing Holders holding Sixty-Three Percent (63%) or more of the
Registrable Securities, do not accept such offer, then the Company or the
Management Stockholders who received such offer, as the case may be, shall
reject such offer. If such Purchasing Holders fail to communicate approval or
disapproval of such offer within such thirty (30) day period, such failure shall
be deemed to be a rejection of the offer.
(d) This Section 12.2 supersedes Section 10.01 of the
Securities Agreement and shall terminate upon consummation of an underwritten
public offering of the Common Stock.
30
<PAGE>
ARTICLE XIII
MISCELLANEOUS
-------------
13.1 Expenses; Fees. Each party hereto will pay its own expenses in
--------------
connection with the transactions contemplated hereby; provided that the Company
hereby agrees to (i) reimburse Grotech, for the reasonable fees and
disbursements of not more than one counsel incurred in connection with the
transactions contemplated hereby, (ii) reimburse Venrock, Venrock II and
Southern for the reasonable fees and disbursements of not more than one counsel
incurred in connection with the transactions contemplated hereby and (iii)
reimburse Blue Chip and Crisler for the reasonable fees and expenses of not more
than one counsel incurred in connection with the transactions contemplated
hereby.
13.2 Survival of Representations, Warranties. All representations
---------------------------------------
and warranties made herein shall survive the execution and delivery of this
Agreement and the issuance, sale and delivery of the shares of Series B
Preferred Stock contemplated hereby.
13.3 Notices. All notices, requests, consents and other
-------
communications hereunder shall be in writing and shall be delivered personally
or mailed by first class registered or certified mail or by Federal Express or
other reliable courier service, postage prepaid, in either case addressed as
follows:
(a) if to the Company:
Digital Express Group, Inc.
6800 Virginia Manor Road
Beltsville, MD 20705
Attn: William A. Pendley
with a copy to:
Latham & Watkins
1001 Pennsylvania Avenue, N.W.
Suite 1300
Washington, D.C. 20004
Attn: James F. Rogers, Esq.
31
<PAGE>
(b) if to Grotech:
Grotech Partners IV, L.P.
9690 Deereco Road
Timonium, MD 21093
Attn: Frank A. Adams
with a copy to:
Venable, Baetjer & Howard, LLP
1800 Two Hopkins Plaza
Baltimore, MD 21201
Attn: Robert J. Bolger, Esq.
(c) If to Venrock or Venrock II:
Venrock Associates II, L.P.
30 Rockefeller Plaza
Suite 5508
New York, NY 10112
Attn: Ray A. Rothrock
(d) If to Southern:
Southern Venture Fund II, L.P.
310 25th Avenue, North
Suite 103
Nashville, TN 37203
Attn: William F. Earthman, III
and in the case of any notice to an addressee listed in (c) or (d) above, with a
copy to:
Dewey Ballantine
1301 Avenue of the Americas
New York, New York 10019-6092
Attn: Bernard E. Kury, Esq.
(e) If to Blue Chip:
Blue Chip Capital Fund Limited Partnership
2000 PNC Center
201 East Fifth Street
32
<PAGE>
Cincinnati, Ohio 45202
Attn: John H. Wyant, President
(f) If to Crisler:
Crisler Capital Company, Limited Partnership
Suite 3900
441 Vine Street
Cincinnati, Ohio 45202
Attn: R. Dean Meiszer, President and Managing Director
and, in the case of any notice to an addressee listed in (e) or (f), with a copy
to:
Taft, Stettinius & Hollister
1800 Star Bank Center
425 Walnut Street
Cincinnati, Ohio 45202
Attn: Gerald S. Greenberg, Esq.
or, in any such case, at such other address or addressees as shall have been
furnished in writing by such party to the others. Any such communication shall
be deemed given when delivered personally against written receipt or if mailed,
upon the earlier to occur of the date of actual receipt or 48 hours after the
date of mailing to the address indicated.
13.4 Amendment, Etc. Neither this Agreement nor any term,
---------------
condition, representation, warranty, covenant or agreement contained herein may
be changed, waived, or amended other than by an instrument in writing signed by
the party against whom such change, waiver, discharge or termination is sought.
13.5 Governing Law. This Agreement and all transactions contemplated
-------------
herein shall be deemed to be made under, and shall be governed by, and construed
in accordance with, the laws of the State of Maryland, without regard to
principles of conflict of laws.
13.6 Further Assurances. The parties hereto agree that they will,
------------------
from time to time, execute and deliver, or cause to be executed and delivered,
such supplements hereto and such further instruments as may reasonably be
required for carrying out the intention of the parties to, or facilitating the
performance of, this Agreement.
13.7 Severability. The invalidity or unenforceability of any
------------
provision of this Agreement shall not effect or limit the validity and
enforceability of the other provisions hereof.
33
<PAGE>
13.8 Assignment. This Agreement shall be binding upon and inure to
----------
the benefit of the parties hereto and their respective successors and assigns.
13.9 Entire Agreement. This Agreement constitutes the entire
----------------
agreement of the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings relating to the Conversion,
the Exchange Transaction and the Securities Purchase Transaction.
13.10 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
34
<PAGE>
IN WITNESS WHEREOF, the undersigned parties have caused this Agreement
to be duly executed as of the day and year first above written.
DIGITAL EXPRESS GROUP, INC.
By: SIGNATURE APPEARS HERE
------------------------------
Name:
----------------------------
Title:
----------------------------
GROTECH PARTNERS IV, L.P.
By: GROTECH CAPITAL GROUP IV, INC.
General Partner
By: SIGNATURE APPEARS HERE
------------------------------
Name:
----------------------------
Title:
----------------------------
GROTECH PARTNERS III, L.P.
By: SIGNATURE APPEARS HERE
------------------------------
General Partner
By: SIGNATURE APPEARS HERE
------------------------------
Name:
----------------------------
Title:
----------------------------
35
<PAGE>
GROTECH III COMPANION FUND, L.P.
By: Signature appears here
------------------------------
General Partner
By: Signature appears here
------------------------------
Name:
----------------------------
Title:
----------------------------
GROTECH III PENNSYLVANIA FUND, L.P.
By: Signature appears here
------------------------------
General Partner
By: Signature appears here
------------------------------
Name:
----------------------------
Title:
----------------------------
VENROCK ASSOCIATES
By: Signature appears here
------------------------------
Name:
----------------------------
Title:
----------------------------
VENROCK ASSOCIATES II, L.P.
By: Signature appears here
------------------------------
Name:
----------------------------
Title:
----------------------------
36
<PAGE>
SOUTHERN VENTURE FUND II, L.P.
By: Signature appears here
------------------------------
Name:
----------------------------
Title:
----------------------------
BLUE CHIP CAPITAL FUND LIMITED
PARTNERSHIP
By: BLUE CHIP VENTURE COMPANY
its General Partner
By: Signature appears here
------------------------------
Name:
----------------------------
Title:
----------------------------
CRISLER CAPITAL COMPANY,
LIMITED PARTNERSHIP
By: MAK Ventures, Inc.,
its General Partner
By: Signature appears here
------------------------------
Name:
----------------------------
Title:
----------------------------
DOUGLAS E. HUMPHREY
________________________
37
<PAGE>
MICHAEL T. DOUGHNEY
________________________
SCHEDULE 1
----------
OTHER HOLDERS
-------------
Douglas E. Humphrey
Michael T. Doughney
38
<PAGE>
SCHEDULE 2
----------
HOLDERS OF OUTSTANDING CAPITAL STOCK
------------------------------------
Holders of Common Stock:
- -----------------------
Douglas E. Humphrey 2,426,861 shares
Michael T. Doughney 1,617,907 shares
----------------
Total: 4,044,768 shares
Holders of Convertible Preferred Stock:
- --------------------------------------
Grotech 18,181.82 shares
Venrock 10,984.24 shares
Venrock II 4,924.85 shares
Southern 11,363.63 shares
----------------
Total: 45,454.54 shares
<PAGE>
SCHEDULE 3
----------
NOTES
-----
<TABLE>
<CAPTION>
Name of Purchasing Holder Principal Amount of Notes Held
- ------------------------- ------------------------------
<S> <C>
Grotech $1,200,000
Venrock $ 724,960
Venrock II $ 325,040
Southern $ 750,000
----------
Total $3,000,000
</TABLE>
<TABLE>
<CAPTION>
Name of Purchasing Holder Amount of Accrued Interest On Notes*
- ------------------------- -----------------------------------
<S> <C>
Grotech $ 50,555.60
Venrock $ 30,542.32
Venrock II $ 13,693.83
Southern $ 31,597.25
-----------
Total: $126,389.00
</TABLE>
__________________________
* Through May 24, 1996.
<PAGE>
SCHEDULE 4
----------
LIST OF WARRANT HOLDERS
-----------------------
<TABLE>
<CAPTION>
Number of Shares of Common
Stock Issuable Upon Per Share
Name Exercise of Warrants Exercise Price
- ---- -------------------------- --------------
<S> <C> <C>
Grotech 1,120,000 $0.01
466,324 $0.076
Venrock 676,629 $0.01
281,722 $0.076
Venrock II 303,371 $0.01
126,312 $0.076
Southern 700,000 $0.01
291,453 $0.076
George S. Rich 159,063 $0.63
76,006 $1.05
Jack S. Griswold 79,531 $0.63
11,400 $1.05
Gordon L. Smith 79,531 $0.63
13,300 $1.05
Michael Davey 39,766 $0.63
Anne Gayhardt 39,766 $0.63
15,200 $1.05
Robert Stewart 39,766 $0.63
58,913 $1.05
S. Bonsal White 39,766 $0.63
2,850 $1.05
Frank S. Bonsal 9,500 $1.05
Gregory Bernhill 2,850 $1.05
Thomas McKiernan 38,001 $1.05
</TABLE>
<PAGE>
SCHEDULE 5
----------
<TABLE>
<CAPTION>
Number of Shares of Series
B Preferred Stock to be
Name of Purchasing Holder Issued in Exchange for Notes
- ------------------------- ----------------------------
<S> <C>
Grotech 12,505.56 shares
Venrock 7,555.02 shares
Venrock II 3,387.34 shares
Southern 7,815.97 shares
----------------
Total 31,263.89 shares
</TABLE>
<PAGE>
SCHEDULE 6
----------
<TABLE>
<CAPTION>
Principal Amount of
Name of Purchasing Holder Convertible Notes Held/**/
------------------------- ----------------------
<S> <C>
Grotech $ 400,000
Venrock $ 217,000
Venrock II $ 133,000
Southern $ 250,000
----------
$1,000,000
</TABLE>
_______________________
/**/Excludes any accrued and unpaid interest.
<PAGE>
SCHEDULE 7
----------
<TABLE>
<CAPTION>
Numbers of Shares of
Series B Preferred
Stock To Be Issued Upon
Conversion of Convertible
Name of Purchasing Holder Notes
------------------------- -------------------------
<S> <C>
Grotech 4,000 shares
Venrock 2,170 shares
Venrock II 1,330 shares
Southern 2,500 shares
------ ------
TOTAL 10,000 shares
</TABLE>
<PAGE>
SCHEDULE 8
----------
<TABLE>
<CAPTION>
Name of Number of Shares of Series B Aggregate
Purchasing Holder Preferred Stock to Be Purchased Purchase Price
- ----------------- ------------------------------- --------------
<S> <C> <C>
Grotech 6,000 Shares $ 600,000.00
Grotech III 8,537 Shares $ 853,700.00
Grotech Companion 930 Shares $ 93,000.00
Grotech Pennsylvania 533 Shares $ 53,300.00
Venrock 1,446.66 Shares $ 144,666.67
Venrock II 886.67 Shares $ 88,666.67
Southern 1,666.67 Shares $ 166,666.67
Blue Chip 16,000 Shares $1,600,000.00
Crisler 4,000 Shares $ 400,000.00
--------------------------------------------
TOTAL 40,000 Shares $ 4,000,000
</TABLE>
<PAGE>
SCHEDULE 9
----------
<TABLE>
<CAPTION>
Number of Shares of Common
Stock Issuable as of
Shares of Capital the Date Hereof Assuming
Stock and Other Conversion or Exercise
Securities Held as of Convertible Preferred
Name of Holder of the Date Hereof Stock, Options And Warrants
- -------------- ------------------ ---------------------------
<S> <C> <C>
Grotech - 18,181.82 shares of 3,595,902 shares
Series A Preferred
Stock
- 22,505.56 shares of
Series B Preferred
Stock
- Warrants to Purchase
1,586,324 shares of
Common Stock
Grotech III - 8,537 shares of 572,626 shares
Series B Preferred
Stock
Grotech Companion - 930 shares of 62,380 shares
Series B Preferred
Stock
Grotech Pennsylvania - 533 shares of 35,751 shares
Series B Preferred
Stock
Venrock - 10,984.24 shares of 2,009,768 shares
Series A Preferred
Stock
- 11,171.68 shares of
Series B Preferred
Stock
- Warrants to Purchase
958,351 of
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Common Stock
Venrock II - 4,924.85 shares 941,009 shares
of Series A Preferred
Stock
- 5,604.01 shares of
Series B Preferred
Stock
- Warrants to Purchase
429,683 shares of
Common Stock
Southern - 11,363.63 shares of 2,107,698 shares
Series A Preferred
Stock
- 11,982.64 shares of
Series B Preferred
Stock
- Warrants to Purchase
991,453 shares of
Common Stock
Blue Chip - 16,000 shares of 1,073,213 shares
Series B Preferred Stock
Crisler - 4,000 shares of 268,303 shares
Series B Preferred Stock
Douglas E. Humphrey 2,426,861 shares 2,426,861 shares
of Common Stock
Michael T. Doughney 1,617,907 shares 1,617,907 shares
of Common Stock
George S. Rich Warrants to Purchase 235,069 shares
235,069 shares
of Common Stock
Jack S. Griswold Warrants to Purchase 90,931 shares
90,931 shares
of Common Stock
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Gordon L. Smith Warrants to Purchase 92,831 shares
92,831 shares
of Common Stock
Michael Davey Warrants to Purchase 39,766 shares
39,766 shares of
Common Stock
Anne Gayhardt Warrants to Purchase 54,966 shares
54,966 shares of
Common Stock
Robert Stewart Warrants to Purchase 98,679 shares
98,679 shares of
Common Stock
S. Bonsal White Warrants to Purchase 42,616 shares
42,616 shares of
Common Stock
Gregory Bernhill Warrants to Purchase 2,850 shares
2,850 shares of
Common Stock
Frank S. Bonsal Warrants to Purchase 9,500 shares
9,500 shares of Common
Stock
Thomas McKiernan Warrants to Purchase 38,001 shares
38,001 shares of
Common Stock
Options Issuable 4,167,239 shares
Under Option Plan -------------
19,583,866 shares
</TABLE>
<PAGE>
SCHEDULE 5.9
------------
Reimbursement obligations with respect to a letter of credit issued in
favor of MCI Communications with a face value of $500,000.
Indebtedness of $716,000 with respect to that certain Loan and
Security Agreement dated as of April 11, 1996 by and between Silicon Valley Bank
and the Company.
<PAGE>
SCHEDULE 7.1
------------
ANTIDILUTION ADJUSTMENTS TO SUBJECT WARRANTS
--------------------------------------------
(i) For the purpose of determining the antidilution adjustments to
the Subject Warrants, each Subject Warrant shall be deemed to be assigned a
conversion price (the "Deemed Conversion Price"), which shall initially be $0.99
-----------------------
and which shall be adjusted as provided in Section B.4 of Article Fourth of the
Amended Articles.
(ii) Upon the occurrence of any event resulting in an adjustment to
the Conversion Price of the Preferred Stock as provided in the Amended Articles
(an "Adjustment Event"), the number of shares issuable upon exercise of any
----------------
Subject Warrant shall be adjusted to equal (x) the product of number of shares
issuable upon exercise of such Subject Warrant immediately prior to such
Adjustment Event and the Deemed Conversion Price of such Subject Warrant in
effect immediately prior to such Adjustment Event, divided by (y) the Deemed
----------
Conversion Price of such Subject Warrant in effect immediately following such
Adjustment Event.
(iii) Upon any such adjustment, the exercise price of each Subject
Warrant shall be proportionately adjusted so that the aggregate exercise price
payable upon exercise of all Subject Warrants held by each Purchasing Holder
immediately after such adjustment shall equal that payable immediately prior to
such adjustment.
Each Subject Warrant shall be amended to provide for the exercise of
such Subject Warrants in a manner that will permit surrender of a portion of the
shares of Common Stock issuable upon the exercise thereof in lieu of the payment
of the cash exercise price therefor.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated June 10, 1996, in the Registration Statement (Form SB-2
No. 333- ) and related Prospectus of DIGEX, Incorporated dated June 12,
1996.
ERNST & YOUNG LLP
Baltimore, Maryland
June 10, 1996
