<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
(Amendment No. ___)
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [ x ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
FIRSTLINK COMMUNICATIONS, INC.
------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Neuman & Drennen, LLC, 1507 Pine Street, Boulder, Colorado 80302
------------------------------------------------------------------------
(Name of Person Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box)
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-
11.
1) Title of each class of securities to which transaction applies:
Common Stock, no par value; Preferred Stock, no par value
2) Aggregate number of securities to which transaction applies:
3,175,000 shares of Common Stock; 1,480,000 shares of Preferred
Stock
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
a) Common Stock: $4.32 per share, based on the high and low
share price reported on the Nasdaq SmallCap Market on
October 4, 1999
b) Preferred Stock: $25.00 per share, based on the stated value
of the Preferred Stock
4) Proposed maximum aggregate value of transaction: $50,716,000
5) Total fee paid: $10,143.20
[ ] Fee Paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:____________________________________________
2) Form, Schedule or Registration Statement No.: ____________________
3) Filing Party:______________________________________________________
4) Date Filed:________________________________________________________
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FIRSTLINK COMMUNICATIONS, INC.
190 SW Harrison
Portland, Oregon 97201
MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT
To our Shareholders:
You are cordially invited to attend the special meeting of shareholders
of FirstLink Communications, Inc., to be held on ____, 1999 at ____,
Portland, Oregon [address], at [time], local time.
At the shareholder meeting, you will vote on four proposals, three of
which relate to a merger with USOL Holdings, Inc. ("USOL").
__ Approve a Plan of Merger with USOL, in which USOL will merge with and
into FLCI.
__ Approve an amendment to our Articles of Incorporation to increase the
number of shares of common stock and preferred stock FirstLink can issue
__ Approve an amendment to our Articles of Incorporation to change our
name to "USOL Holdings, Inc."
__ Approve an incentive plan (the "Incentive Plan") which provides for the
granting of stock options, restricted shares, and stock appreciation rights
to officers, directors, key employees, and others.
If the merger is completed, FLCI will issue the present shareholders in
USOL, in exchange for their shares of USOL common stock and preferred
stock, a total of 3,175,000 shares of FLCI common stock and 1,480,000
shares of FLCI preferred stock.
The board of directors of FirstLink has determined that the merger is
fair to and in the best interests of FirstLink's shareholders.
Accordingly, the board of directors has unanimously approved the Plan of
Merger, the increase in the number of authorized shares, and the name
change. It has also unanimously adopted the Incentive Plan. The board of
directors recommends that you vote FOR approval of each of the four
proposals at the shareholders' meeting.
The merger cannot occur unless shareholders holding a majority of
FirstLink's outstanding shares of common stock vote to approve it. YOUR
VOTE IS VERY IMPORTANT. Whether or not you plan to attend the shareholder
meeting in person, I urge you to complete, date, sign and promptly return
the enclosed proxy card to ensure that your shares will be represented at
the meeting. A postage-prepaid envelope is enclosed for that purpose. Your
proxy is revocable and will not affect your right to vote in person if you
decide to attend the meeting. Simply attending the meeting, however, will
not revoke your proxy. Returning your proxy card without indicating how
you want to vote will have the same effect as a vote FOR each of the four
proposals. Failure to return a properly executed proxy card or vote in
person at the meeting will have the same effect as a vote AGAINST the
proposal to approve the Plan of Merger, AGAINST the proposal to increase
our authorized shares, and AGAINST the proposal to change our name. This
proxy statement provides you with detailed information about the Plan of
Merger, the proposals to increase our authorized shares and change our
name, and the Incentive Plan. We encourage you to read this entire
document carefully.
By:
------------------------------------
A. Roger Pease
President and Chief Executive Officer
FirstLink Communications, Inc.
Portland, Oregon
____________, 1999
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FIRSTLINK COMMUNICATIONS, INC.
190 SW HARRISON
PORTLAND, OREGON 97201
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be Held on ______________, 1999
To the Shareholders of FirstLink Communications, Inc.:
YOU ARE HEREBY NOTIFIED that a special meeting of shareholders of
FirstLink Communications, Inc. ("FirstLink"), will be held at
________________ , ____ a.m. local time, on _____, 1999, or any adjournment
or postponement thereof, for the purpose of considering and voting on four
proposals:
- Approval of a Plan of Merger with USOL Holdings, Inc. ("USOL") and
the issuance of 1,375,000 shares of common stock and 1,480,000
shares of preferred stock in connection therewith;
- Approval of an amendment to FirstLink's articles of incorporation
to increase the number of shares of stock it is authorized to issue
from 20,000,000 shares of common stock to 50,000,000 shares of
common stock; and from 1,000,000 shares of preferred stock to
5,000,000 shares of preferred stock;
- Approval of an amendment to FirstLink's articles of incorporation
to change the corporate name to "USOL Holdings, Inc."; and
- Approval of the 1999 Incentive Plan .
The Plan of Merger provides that USOL will merge with and into
FirstLink, and each outstanding share of USOL common and preferred stock
will be exchanged for one share of FirstLink common and preferred stock,
respectively. The obligations of the parties to the merger are subject to
the satisfaction or waiver of numerous conditions, including the approval
of the shareholders of FirstLink, prior to the proposed closing date. There
is no assurance that such conditions will be satisfied or waived or that
the merger will be completed.
The board of directors of FirstLink (the "Board") has determined that
the merger is fair to and in the best interests of the shareholders of
FirstLink. Accordingly, the Board has unanimously approved and recommends
that you vote FOR the approval of the Plan of Merger and the issuance of
the shares of stock. The Board has also unanimously approved and
recommends that you vote FOR the proposal to increase FirstLink's
authorized shares and FOR the proposal to change the corporate name. The
Board has also unanimously adopted the Incentive Plan and it recommends
that you vote FOR the approval of the Incentive Plan.
Shareholders may also be asked to consider and vote upon such other
matters which may properly come before the meeting and any adjournments or
postponements thereof.
The Plan of Merger, the amendments to the articles of incorporation,
the terms of the Incentive Plan, and other important matters are described
in the accompanying Proxy Statement, which you are urged to read carefully
and in its entirety. A copy of the Merger Agreement is attached as
Appendix A to the Proxy Statement. A copy of the proposed amendments to
the articles of incorporation are attached as Appendices C and D to the
Proxy Statement, respectively; and a copy of the Incentive Plan is attached
as Appendix E to the Proxy Statement.
The board of directors has fixed the close of business on October 11,
1999, as the record date for the determination of the holders of common
stock entitled to notice of, and to vote at, the meeting or any adjournment
or postponement. A list of such shareholders will be available for review
at the principal executive offices of FirstLink listed below during normal
business hours for a period of 10 days prior to the meeting.
We welcome your attendance at the meeting. Whether or not you expect
to attend the meeting in person, we urge you to complete, date, sign and
return the enclosed proxy card as promptly as possible. A postage-prepaid
envelope is enclosed for that purpose. Your proxy is revocable and will
not affect your right to vote in person if you decide to attend the
meeting. Simply attending the meeting, however, will not revoke your
proxy. For an explanation of the procedures for revoking your proxy, see
the section of the Proxy Statement captioned "The Special Meeting
Proxies." Returning your proxy card without indicating how you want to
vote will have the same effect as a vote FOR the approval of the Plan of
Merger and the issuance of the shares of common and preferred stock
thereunder; FOR the approval of the increase in authorized shares; FOR the
name change; and FOR the approval of the Incentive Plan.. Failure to
return a properly executed proxy card or vote in person at the meeting will
have the same effect as a vote AGAINST the approval and adoption of the
Merger Agreement and the issuance of shares thereunder, AGAINST the
approval of the increase in authorized shares, and AGAINST the name change.
Our principal executive offices are located at 190 SW Harrison,
Portland, Oregon, 97210. Our telephone number is (503) 306-4444.
By Order of the Board of Directors
By:
------------------------------------
Jeffrey S. Sperber, Secretary
Portland, Oregon
_____________, 1999
YOUR VOTE IS IMPORTANT.
TO VOTE YOUR SHARES, PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY
CARD AND MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE.
DO NOT SEND ANY STOCK
CERTIFICATES WITH YOUR PROXY CARD.
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FIRSTLINK COMMUNICATIONS, INC.
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
FirstLink Communications, Inc. ("FirstLink" or the "Company") has agreed
to merge with USOL Holdings, Inc. ("USOL") pursuant to a plan of merger (the
"Plan of Merger") described in an Agreement and Plan of Merger and
Reorganization dated July 21, 1999, between FirstLink and USOL (together with
exhibits and schedules thereto, the "Merger Agreement"). Pursuant to the
Merger Agreement, USOL will be merged with and into FirstLink, with FirstLink
as the surviving corporation (the "Merger"). As a result of the Merger,
shareholders of USOL will become shareholders of FirstLink on the terms
described in this Proxy Statement. Throughout this Proxy Statement, FirstLink
after the Merger, including its subsidiaries, will be referred to as the
"Combined Company." To complete the Merger, FirstLink's shareholders must
first approve the Plan of Merger and certain related events, including
amending FirstLink's articles of incorporation to increase the authorized
number of shares of common stock and preferred stock.
FirstLink's Board of Directors (the "Board") has called a special meeting
of shareholders (the "Meeting") to vote on the Plan of Merger, and on certain
other matters. The Meeting will be held on December __, 1999. The Board is
soliciting proxies to be used at the Meeting through this Proxy Statement.
At the Meeting, FirstLink shareholders will be requested to consider and
vote upon proposals (1) to approve the Plan of Merger with USOL which is
described in the Merger Agreement, including the issuance of shares of common
and preferred stock in the Merger; (2) to approve an amendment to FirstLink's
articles of incorporation ("Articles") to increase the number of shares
FirstLink is authorized to issue from 20,000,000 shares of common stock and
1,000,000 shares of preferred stock to 50,000,000 shares of common stock and
5,000,000 shares of preferred stock (the "Share Amendment"); (3) to approve an
amendment to the Articles to change FirstLink's name to "USOL Holdings, Inc."
(the "Name Change"); and (4) to approve FirstLink's 1999 Incentive Plan (the
"Incentive Plan").
The above matters are discussed in detail in this Proxy Statement. We urge
you to read and consider carefully this entire Proxy Statement.
FirstLink's common stock is presently quoted on the Nasdaq SmallCap
Market. FirstLink intends to apply for inclusion of its securities on the
Nasdaq National Market. The continued listing of FirstLink's common stock on
Nasdaq is a condition precedent to the Merger. On _______________, the last
trading day before the date of this Proxy Statement, the last reported sales
price on the Nasdaq SmallCap Market for FirstLink's common stock was
$________.
A SHAREHOLDER MAY REVOKE ANY PROXY AT ANY TIME BEFORE IT IS VOTED BY
MAILING OR DELIVERING WRITTEN NOTICE OF SUCH REVOCATION TO THE SECRETARY OF
FIRSTLINK; BY PROVIDING A PROXY PROPERLY SIGNED AND DATED SUBSEQUENT TO AN
EARLIER PROXY; OR BY REVOKING A WRITTEN PROXY IN PERSON AT THE MEETING OF
SHAREHOLDERS. IF NOT SO REVOKED, THE SHARES REPRESENTED BY THE PROXY WILL BE
VOTED IN ACCORDANCE WITH THE INSTRUCTIONS ON THE PROXY CARD.
This Proxy Statement, notice of the Meeting, and a proxy card are first
being mailed on or about ________________, 1999, to FirstLink shareholders
eligible to vote at the Meeting.
FirstLink is bearing all costs of soliciting proxies, and expressly
reserves the right to solicit proxies otherwise than by mail. The
solicitation of proxies by mail may be followed by telephone or other personal
solicitations of certain FirstLink shareholders and brokers by one or more of
the directors or by officers or employees of FirstLink. FirstLink may
reimburse banks and brokers or other similar agents or fiduciaries the
expenses incurred by such agents or fiduciaries in mailing the Proxy Statement
to beneficial owners of FirstLink's Common Stock. FirstLink has retained
Mackenzie Partners to assist it in soliciting proxies. FirstLink estimates
that it will pay Mackenzie Partners $4,500 for its services in connection with
such solicitations.
Only FirstLink shareholders of record as of the close of business on
October 29, 1999 (the "Record Date") will be entitled to vote at the Meeting.
Representation of a majority of FirstLink's shares of common stock outstanding
on such date, either in person or by proxy, constitutes a quorum for the
Meeting. As of the Record Date, FirstLink had outstanding shares of common
stock, with each share entitled to one vote. Provided a quorum is present at
the Meeting, in person or by proxy, the proposals concerning the Merger, the
Share Amendment, and the Name Change will require the affirmative vote of [a
majority of the outstanding] shares for approval. Provided a quorum is
present at the meeting, in person or by proxy, the proposal regarding the
Incentive Plan will be approved if the number of votes of shares represented
at the Meeting, in person or by proxy, voting in favor of approval of the
Incentive Plan are greater than the number of shares voting against approval.
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TABLE OF CONTENTS FOR PROXY STATEMENT
QUESTIONS AND ANSWERS ABOUT THE
MERGER AND THE INCENTIVE PLAN 6
WHO CAN HELP ANSWER YOUR QUESTIONS 8
SUMMARY
The Companies 9
The Plan of Merger 10
Background of the Merger 10
Consequences of the Merger to the FirstLink Shareholders 10
Conditions of the Merger 10
Termination of the Merger Agreement 10
Amending or Waiving Terms of the Merger Agreement 11
Regulatory Approvals 11
Financing for the Merger 11
Litigation Related to the Merger 12
Interests of Certain Persons 13
The Share Amendment to the Articles of Incorporation 13
The Name Change 13
Price Range of Common Stock and Warrants 15
WHERE YOU CAN FIND MORE INFORMATION THE MARKET FOR FIRSTLINK'S SECURITIES 16
THE MARKET FOR USOL'S SECURITIES 16
SELECTED FINANCIAL DATA
FirstLink Communications, Inc. 17
USOL Holdings, Inc. 17
FirstLink Communications, Inc. - Pro Forma 18
FIRSTLINK'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General 20
Overview 20
Results of Operations 20
Liquidity and Capital Resources 22
US ONLINE'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview 25
Results of Operations 25
Year 2000 27
THE SPECIAL MEETING
Date, Time and Place of Meeting 28
Matters to be Considered 28
Record Date and Outstanding Shares 28
Quorum 29
Required Vote 29
Proxies 29
Solicitation of Proxies; Expenses 29
PROPOSAL NO. 1: THE PLAN OF MERGER
General 31
Background of the Merger 31
Recommendation of the Board of Directors 32
Closing; Effective Time 34
Structure of the Merger and Conversion of USOL Common Stock and
Preferred Stock 34
Treatment of USOL Stock Options and Warrants 35
Material Federal Income Tax Consequences of the Merger 36
Accounting Treatment of the Merger 36
Regulatory Filings and Approvals Required To Complete the Merger 36
Nasdaq Listing 37
Board Of Directors and Management of FirstLink Following the Merger 37
Operations after the Merger 37
Employment Agreements 37
Appraisal Rights 37
THE MERGER AGREEMENT
The Merger 39
Representations and Warranties 40
Conduct of Business before Completion of the Merger 40
Additional Agreements 41
Conditions To Completion of the Merger 41
Termination of the Merger Agreement; Expenses 42
Extension, Waiver and Amendment of the Merger Agreement 42
Lock-up Agreements 43
Directors and Executive Officers 43
PROPOSAL NO. 2: INCREASE IN AUTHORIZED STOCK
Purpose and Effect of the Share Amendment 44
DESCRIPTION OF FIRSTLINK SECURITIES
Common Stock 45
Preferred Stock 45
PROPOSAL NO. 3: NAME CHANGE 48
PROPOSAL NO. 4: APPROVAL OF THE INCENTIVE PLAN
General 49
Terms Of the Incentive Plan 49
Federal Income Tax Considerations 52
THE BUSINESS OF FIRSTLINK AND USOL
General 55
Industry Overview and Competition 55
Government Regulation 56
The Market 61
Business Strategy 62
Growth Strategy 63
INFORMATION ABOUT FIRSTLINK
Business 64
INFORMATION ABOUT USOL
Business 66
MANAGEMENT OF FIRSTLINK PRIOR TO THE MERGER
Officers and Directors 72
Director Nominee 74
Director Compensation 74
Limitation on Directors' Liability; Indemnification 74
Certain Relationships And Related Transactions 75
COMPENSATION OF MANAGEMENT
Summary Compensation Table 76
Salary Continuation Agreements 76
Stock Incentive Plans 77
MANAGEMENT OF THE COMBINED COMPANY
Officers and Directors 79
Employment Agreements 81
PRINCIPAL SHAREHOLDERS
Common Stock 83
Series A Preferred Stock 84
Series B Preferred Stock 87
INDEPENDENT PUBLIC ACCOUNTANTS 87
INDEX TO FINANCIAL STATEMENTS F-1
APPENDICES APPENDIX NO.
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER A
OREGON DISSENTERS' RIGHTS STATUTE B
AMENDMENT TO THE ARTICLES OF INCORPORATION (INCREASE AUTHORIZED
SHARES) C
AMENDMENT TO THE ARTICLES OF INCORPORATION (CHANGE OF NAME) D
INCENTIVE PLAN E
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QUESTIONS AND ANSWERS ABOUT THE
MERGER AND THE INCENTIVE PLAN
Q: Why am I receiving these materials?
A: FirstLink has entered into an agreement with USOL to merge with USOL
(the "Merger") by exchanging FirstLink common stock and preferred stock for
all of the outstanding common stock and preferred stock, respectively, of USOL
held by USOL's shareholders. FirstLink's and USOL's boards of directors have
approved the Plan of Merger. To accomplish the Merger, FirstLink needs to
amend its Articles to authorize the issuance of additional shares (the "Share
Amendment") and to change our corporate name to USOL Holdings, Inc. (the "Name
Change"). The Plan of Merger and the amendments to the Articles now require
the approval of FirstLink's shareholders. We are sending you these materials
to help you decide whether to approve the Plan of Merger and the amendments.
Additionally, we are requesting approval of the Incentive Plan that has been
adopted by FirstLink's Board.
Q: Why is FirstLink proposing to merge with USOL?
A: Beginning In November 1998, we began a search for an acquisition that
would provide us with an alternate method to provide cable television service
to our customers, and that would enable us to accelerate our growth plans. We
began discussing a possible combination with U.S. Online Communications, Inc.
("US Online") in February 1999 and we signed a letter of intent with US Online
in May 1999 which provided that US Online would sell substantially all of its
assets and some liabilities to a newly formed company, USOL; USOL would be
capitalized with $50,000,000 in new funding; and then USOL would merge with
us. USOL provides cable and other services through direct broadcasting
systems, by-passing cable companies. In addition, USOL has a larger, more
experienced management team, and it provides services to a much larger number
of apartment and condominium complexes than does FirstLink. USOL now has
significantly greater financial resources than does FirstLink.
Q: Does the Board recommend voting in favor of the Merger?
A: Our Board has unanimously determined that the Plan of Merger is fair
to and in the best interests of the shareholders, and unanimously recommends
that shareholders vote FOR the approval of the Plan of Merger, FOR the Share
Amendment, FOR the Name Change, and FOR the approval of the Incentive Plan.
Q: How will the Merger affect my ownership of FirstLink?
A: You will have the same number of shares of FirstLink stock you
presently have, with substantially all of the rights you now hold. However,
your shares will represent a significantly smaller percentage of the total
shares of the Combined Company that will be outstanding after the Merger, as
compared to your current percentage ownership in FirstLink. However the
Combined Company will have significantly more assets and resources than does
FirstLink, including additional, experienced management, substantially more
customers, a more sophisticated customer service department, and additional
capital. [The common stock and warrants of the Combined Company will be
traded on Nasdaq under the symbols "_______" and "______", respectively.]
Q: When do you expect the Merger to be completed?
A: We are working towards completing the Merger as quickly as possible.
In addition to shareholder approvals, we must also obtain certain regulatory
approvals. Although we cannot predict exactly when such regulatory approvals
will be received, we hope to complete the Merger in the fourth quarter of
1999.
Q: Will I owe any federal income tax as a result of the Merger?
A: We expect that the Merger will not be a taxable event for you for
federal income tax purposes.
Q: When and where is the Meeting?
A: The Meeting will be held on ____________, 1999, at _________________
_____________________________________________, [address], at [time] local
time.
Q: Who can vote on the Merger, the Share Amendment, the Name Change, and
the Incentive Plan?
A: Holders of FirstLink common stock at the close of business on October
29, 1999, the Record Date relating to the Meeting, may vote on the Plan of
Merger, the Share Amendment, the Name Change, and the Incentive Plan.
Q: What vote is required?
A: The Plan of Merger, the Share Amendment, and the Name Change must be
approved by the affirmative vote of at least a majority of the outstanding
shares of FirstLink common stock. Certain of our shareholders have provided
USOL with their proxies to vote their shares in favor of the Plan of Merger
and the Share Amendment. These proxies (the "Early Proxies") represent a
total of 735,877 shares, or approximately 20% of the total number of shares of
FirstLink common stock outstanding on the Record Date.
The Incentive Plan must be approved by the affirmative vote of at least a
majority of the shares represented (in person or by proxy) at the Meeting.
The holders of the Early Proxies intend to vote to approve the Incentive Plan.
Q: What do I need to do now?
A: Read this Proxy Statement. Then, if you choose to vote by proxy,
complete your proxy card and indicate how you want to vote. Sign and mail the
proxy card in the enclosed return envelope as soon as possible. You should
complete, sign and return your proxy card even if you currently expect to
attend the Meeting and vote in person. Mailing in a proxy card now will not
prevent you from later canceling or "revoking" your proxy right up to the day
of the Meeting, and you will ensure that your shares get voted if you later
find you are unable to attend. If you sign and send in the proxy card and do
not indicate how you want to vote, your proxy will be voted FOR the approval
of the Plan of Merger; FOR the approval of the Share Amendment; FOR the
approval of the Name Change; and FOR the approval of the Incentive Plan. If
you do not vote by either sending in your proxy card or voting in person at
the Meeting, it will have the same effect as a vote AGAINST the approval of
the Plan of Merger, AGAINST the Share Amendment, and AGAINST the Name Change.
This is why it is very important that you vote and return your proxy card as
soon as possible.
Q: Can I change my vote after I have mailed my signed proxy card?
A: Yes. You can change your vote at any time before the vote is taken at
the Meeting. You can do this in one of three ways. First, you can send a
written notice dated later than your proxy card stating that you would like to
revoke your current proxy. Second, you can complete and submit a new proxy
card dated later than your original proxy card. If you choose either of these
two methods, you must submit your notice of revocation or your new proxy card
to the Secretary of FirstLink at 190 SW Harrison, Portland, Oregon, 97201. We
must receive the notice or new proxy card before the vote is taken at the
Meeting. Third, you can attend the Meeting and vote in person. Simply
attending the Meeting, however, will not revoke your proxy. If you have
instructed a broker to vote your shares, you must follow the directions
received from your broker as to how to change your vote.
Q: If my broker holds my shares in "street name," will my broker vote my
shares for me?
A: Your broker will vote your shares only if you tell the broker how to
vote. To do so, follow the directions your broker provides. Without
instructions, your broker will not vote your shares and the failure to vote
will have the same effect as a vote AGAINST the approval of the Plan of
Merger; AGAINST the approval of the Share Amendment; and AGAINST the Name
Change.
Q: What other matters will be voted on at the Meeting?
A: In addition to the Plan of Merger, the Share Amendment, and the Name
Change, you will be asked to approve and adopt the Incentive Plan which would
allow FirstLink's directors to issue options, restricted stock, or stock
appreciation rights. The Board has initially reserved 3,000,000 shares of
FirstLink common stock for issuance under the Incentive Plan. The proposal to
approve and adopt the Incentive Plan is separate from, and is in no way
conditioned upon the outcome of the vote on, the proposal to approve and adopt
the Plan of Merger, the Share Amendment, or the Name Change. The Board does
not expect to ask FirstLink shareholders to vote on any other matters at the
Meeting.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you have more questions about the Plan of Merger, the Share Amendment,
the Name Change, or the Incentive Plan, you should contact:
FirstLink Communications, Inc.
190 SW Harrison
Portland, Oregon 97201
Attention: Roger Pease
Telephone: (503) 306-4444
Facsimile: (503) 306-4333
If you would like additional copies of this Proxy Statement, or if you
have questions about how to complete and return your proxy card, you should
contact:
Larry Dennedy
Mackenzie Partners
156 Fifth Avenue
New York, New York 10010
Telephone: (212) 929-5239
Facsimile: (212) 929-0061
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SUMMARY
This summary only highlights selected information from this Proxy
Statement and may not contain all of the information that is important to
you. To fully understand the Plan of Merger, the Share Amendment, the Name
Change, and the Incentive Plan, and for a description of the legal terms of
the Plan of Merger, you should read carefully this entire Proxy Statement and
the documents to which we have referred you. See "Where You Can Find More
Information" on page 14.
The Companies
(See Pages 52 through 67)
FirstLink Communications, Inc.
190 SW Harrison
Portland, Oregon 97201
(503) 306-4444.
FirstLink provides cable television and local and long distance telephone
services to residents in multiple-family dwelling units ("MDUs"). FirstLink
markets these services to the residents of the buildings through agreements
with the owners or managers of the MDUs. These right of entry ("ROE")
contracts give FirstLink the exclusive right to market the services to the
residents of the complexes. FirstLink currently has ROE contracts with 16
residential developments in three cities in the United States. As of June 30,
1999, 14 of those properties were online, all in Portland, Oregon,
representing 3,300 cable and 3,300 phone units.
USOL Holdings, Inc
10300 Metric Boulevard
Austin, Texas 78758
(512) 651-3780
USOL is an Austin, Texas based provider of telecommunication and ancillary
services to residents of MDUs. It serves properties in Austin, Dallas, and
San Antonio, Texas, Denver, Colorado, and Washington, D.C., passing
approximately 13,700 cable television ("CATV") units and 6,900 telephone
units. USOL also provides ancillary services to residents of MDUs under
exclusive marketing agreements with owners. USOL was formed in May 1999, and
on July 21, 1999, acquired, through two separate wholly-owned subsidiaries,
substantially all of the assets and certain of the liabilities of US Online,
and certain assets from GMAC Commercial Mortgage Corporation ("GMACCM").
The primary assets purchased from GMACCM were exclusive agreements to
market various products and services to tenants of MDUs. With few exceptions,
the services provided do not presently include cable television. As a result,
these assets represent a separate potential product line.
The Meeting
Date, Time and Place
The Meeting will be held on ______________, 1999, at ________, local time,
at _______________________________________________. See "The Special
Meeting."
Record Date; Voting Power
At the Meeting, you will be entitled to one vote for each share of
FirstLink common stock you hold of record as of the Record Date. The Record
Date is October 29, 1999. As of the Record Date, there were ________ shares
of FirstLink common stock outstanding which are entitled to vote at the
Meeting.
The Plan of Merger and the two amendments to the Articles must be approved
by the affirmative vote of at least a majority of the outstanding shares of
common stock. The Incentive Plan must be approved by a majority of the shares
of common stock represented at the Meeting.
We do not expect to ask shareholders to vote on any other matters at the
Meeting. However, if any other matters are properly presented for
consideration at the Meeting, the persons named by the shareholders to be
their proxies will have discretion to vote on such matters in accordance with
their best judgment. Proxies voting against a specific proposal may not be
used by such persons to vote for adjournment of the Meeting for the purpose of
giving management additional time to solicit votes in favor of such proposal.
The Merger Agreement requires that certain shareholders of FirstLink,
including its officers and directors who are shareholders, vote their shares
in favor of approval of the Plan of Merger and the Share Amendment. Those
persons have delivered USOL their irrevocable proxies to vote for the Plan of
Merger and the Share Amendment. Those Early Proxies represent a total of
735,877 shares, or approximately 20% of the total number of shares of
FirstLink common stock outstanding as of the Record Date.
The Plan of Merger
(See pages 29 through 36)
The Plan of Merger is set forth in the Merger Agreement, which is
described on pages 29 through 36 and attached as Appendix A to this Proxy
Statement. We encourage you to read carefully the Merger Agreement in its
entirety as it is the legal document that governs the Merger.
Background of the Merger
(See Pages 29 through 30)
For a description of the events leading to the approval of the Merger
Agreement by the Board, see "The Merger Proposal-Background of the Merger."
Consequences of the Merger to the FirstLink Shareholders
As a result of the Merger, the shareholders of FirstLink will incur
substantial dilution in their aggregate ownership in the Combined Company as
compared to their aggregate ownership of FirstLink. At the effective time of
the Merger (the "Effective Time"), the shareholders of FirstLink as they exist
immediately before the Effective Time will own approximately 53% of the total
shares of the Combined Company's common stock outstanding immediately after
the Effective Time. Because a substantial number of shares of preferred stock
will also be issued, current shareholders of FirstLink will hold only
approximately 16% of the voting rights of the Combined Company after the
Merger. However, the Combined Company will be substantially larger than
FirstLink is today. The shareholders of FirstLink will not receive any
additional shares or other consideration in connection with the Merger.
Conditions of the Merger
(See Page 39)
The Merger will be completed only if a number of conditions are met or
waived, including the following:
- - - - The required approval of FirstLink's shareholders has been obtained,
- - - - All necessary approvals, including the approval of the Federal
Communications Commission (the "FCC"), have been obtained and remain in
effect,
- - - - No law, injunction, or order restrains or prohibits the completion of the
Merger, and
- - - - The shares of FirstLink common stock to be issued in the Merger shall have
been approved for continued inclusion in the Nasdaq Stock Market.
Termination of the Merger Agreement
(See Page 39)
FirstLink and USOL may agree to terminate the Merger Agreement at any
time. In addition, either party may terminate the Merger Agreement if a court
or other governmental body issues a final order or ruling that restrains or
prohibits the Merger; if FirstLink's shareholders do not approve the Plan of
Merger; if the Merger is not completed by December 31, 1999 (other than
because the terminating party breached the Merger Agreement); if one party
breaches the Merger Agreement and the breach is not cured prior to December
31, 1999, and the non-breaching party chooses to terminate the Merger
Agreement; if the board of directors of either FirstLink or USOL withdraws its
recommendation to approve the Merger; or if either FirstLink or USOL receives
a proposal for a transaction from a third party, or a tender offer from a
third party, and the board of directors of the company receiving such proposal
does not reconfirm its recommendation to approve the Plan of Merger, or such
board of directors recommends the third party acquisition to such company's
shareholders. USOL may also terminate the Merger Agreement if FirstLink does
not call a shareholders meeting to vote on the Merger before December 31,
1999.
USOL may also terminate the Merger Agreement if someone other than
FirstLink proposes to acquire USOL in a transaction that is superior to the
Merger from a financial point of view to USOL's shareholders. Similarly, if
someone other than USOL proposes to acquire or merge with FirstLink in a
transaction that is superior to the Merger from a financial point of view to
FirstLink's shareholders, FirstLink may terminate the Merger Agreement.
FirstLink and USOL have agreed that they will not solicit any such
transaction; and that if they are presented with an offer for such a
transaction, they will use their respective best efforts to cause the
transaction to include the other party.
Termination of the Merger Agreement by either party may be before or after
shareholder approval. Under certain circumstances, FirstLink or USOL will be
required to pay fees and expenses to the other as a result of the termination,
including a fee of $1,000,000. See "The Merger Agreement Termination of the
Merger Agreement; Expenses."
Amending or Waiving Terms of the Merger Agreement
(See Page 40)
FirstLink and USOL may amend the Merger Agreement by mutual consent before
or after FirstLink's shareholders approve the Merger. Also, either the
FirstLink or USOL board of directors may waive conditions that, under the
Merger Agreement, would allow it to terminate the Merger Agreement. Once
FirstLink's shareholders approve the Merger, however, applicable law may
require that certain subsequent amendments or waivers also be approved by the
shareholders, in which case FirstLink intends to re-solicit proxies from its
shareholders. If applicable law does not require such re-solicitation,
FirstLink will not re-solicit proxies.
Regulatory Approvals
(See Page 34)
FirstLink and USOL may not complete the Merger until the FCC approves the
transfer of the FCC licenses held by USOL to USOL, Inc., a wholly-owned
subsidiary of USOL ("USOL Sub") and the subsequent change of ownership of USOL
Sub to the Combined Company. USOL has applied for FCC approval to transfer
those FCC licenses to USOL Sub, and for the change of ownership of USOL Sub,
which will result from the Merger. USOL and FirstLink believe that they will
receive those approvals in November 1999.
In addition, FirstLink and USOL are seeking the approval of the regulatory
authorities of four states to the transfer of state licenses held by them.
Application has been made for such approvals, and the parties believe that the
transfers will be approved.
Financing for the Merger
(See Page 11)
The parties have agreed to pay their own costs of the Merger, which they
expect will total approximately $500,000. This does not include the costs of
USOL's acquisitions of assets from US Online and GMACCM.
Litigation Related to the Merger
As of the date of this Proxy Statement, we are not aware of any lawsuits
that have been filed relating to the Merger.
Appraisal Rights
(See Pages 35 through 36)
FirstLink is a corporation organized under Oregon law. Under Oregon law,
if you do not vote in favor of the Merger and you follow all of the procedures
for demanding your appraisal rights described on pages 35 and 36, and in
Appendix B, you may receive a cash payment for the "fair value" of your shares
of common stock. If you properly exercise and perfect your appraisal rights,
the fair value of your shares will be determined, initially, by FirstLink, and
may be more than, the same as, or less than the market value of your shares.
If you want to exercise your appraisal rights, you are urged to read and
carefully follow the procedures on pages ___ through ___ and in Appendix B.
Failure to take any of the steps required under Oregon law will result in the
loss of your appraisal rights.
Interests of Certain Persons
You should note that the directors and executive officers of FirstLink
have interests in approving the Merger as employees and/or directors that are
different from, or in addition to, the interests of FirstLink's shareholders
generally. For example, three of FirstLink's current directors, including Mr.
Pease, who is also FirstLink's Chief Executive Officer, have been designated
as members of the board of directors of the Combined Company. Mr. Sperber,
FirstLink's Chief Financial Officer, will continue in that capacity with the
Combined Company. Mr. Pease may also continue with the Combined Company in
some capacity beyond his directorship.
Certain officers of FirstLink have employment and stock option agreements
that will provide them with certain benefits if the Merger occurs. For
example, Messrs. Pease and Sperber have employment agreements that entitle
them to compensation if their employment with FirstLink is terminated under
certain specified conditions following a "change of control" transaction. The
Merger constitutes such a transaction. If the Combined Company does not
continue Mr. Pease's employment, it will pay him $150,000, plus some
additional benefits. Mr. Sperber has entered into an agreement with USOL for
his continued employment with the Combined Company.
The Share Amendment to the Articles of Incorporation
(See Page 42)
FirstLink Shareholders will also be asked to vote on the adoption of an
amendment to FirstLink's Articles to increase the number of shares FirstLink
is authorized to issue. The Articles presently authorize the issuance of
20,000,000 shares of no par value common stock and 1,000,000 shares of no par
value preferred stock. The Share Amendment would increase the authorized
number of shares to 50,000,000 shares of common stock and 5,000,000 shares of
preferred stock. This amendment is required in order for FirstLink to issue
the shares of common stock and preferred stock to USOL shareholders in the
Merger. A copy of the proposed amendment is attached as Appendix C to this
Proxy Statement and we encourage you to read the Share Amendment in its
entirety.
The Board recommends that you vote FOR the adoption of the Share
Amendment.
The Name Change
(See Page 46)
FirstLink Shareholders will also be asked to vote on the approval of an
amendment to FirstLink's Articles to change the company's name to "USOL
Holdings, Inc." The Board believes that the name change would more accurately
describe the Combined Company's business, which will generally operate under
the US Online name. A copy of the proposed amendment is attached as Appendix
D to this Proxy Statement and we encourage you to read the amendment relating
to the Name Change in its entirety. This amendment will only be adopted if
the shareholders approve the Plan of Merger.
The Board recommends that you vote FOR the approval of the Name Change.
The Incentive Plan
(See Page 47)
In addition to the proposals to approve the Plan of Merger and the
amendments of the Articles, FirstLink shareholders will be asked to vote on a
separate proposal to approve an Incentive Plan, which provides for the
granting of (1) incentive options to key employees; and (2) non-statutory
options, restricted stock awards, and stock appreciation rights to key
employees and other persons. The proposal to approve and adopt the Incentive
Plan is separate from, and in no way conditioned upon the outcome of, the
proposal to approve and adopt the Merger Agreement. A copy of the Incentive
Plan is attached as Appendix E to this Proxy Statement and we encourage you to
read the Incentive Plan in its entirety. The Incentive Plan provides that,
initially, up to 3,000,000 shares of common stock may be issued under the
Incentive Plan. That number automatically increases to 10% of the number of
shares of common stock issued and outstanding if additional shares are issued.
The Board recommends that you vote FOR the approval and adoption of the
Incentive Plan.
Price Range of Common Stock and Warrants
(See Page 14)
FirstLink's common stock and certain common stock purchase warrants are
quoted on the SmallCap Market tier of the Nasdaq Stock Market. FirstLink
publicly announced its intention to merge with USOL on May 4, 1999. The last
sale price on Nasdaq for the common stock was $6.75, and the last sale price
for the warrants was $1.44 on May 3, 1999, the last day on which trades were
made for such securities prior to that public announcement. The Company
announced the execution of the Merger Agreement on July 26, 1999. On July 23,
1999, the last trading day prior to that announcement, the last sale prices on
Nasdaq for the common stock and the warrants were $6.63 per share and $1.44
per warrant, respectively. On the Record Date, the last sale prices of the
common stock and the warrants were $__ per share and $-- per warrant,
respectively. We urge you to obtain current market quotations.
<PAGE>
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
FirstLink files annual, quarterly and special reports, proxy statements
and other information with the Securities and Exchange Commission. You may
read and copy any document we file at the Commission's Public Reference Rooms
in Washington, D.C., New York, New York, and Chicago, Illinois. Please call
the Commission at 1-800-SEC-0330 for further information on the Public
Reference Rooms. You can also obtain copies of our Commission filings by
going to the Commission's web site at http://www.sec.gov.
THE MARKET FOR FIRSTLINK'S SECURITIES
FirstLink's common stock and certain common stock purchase warrants trade
on the Nasdaq SmallCap Market under the symbols "FLCI" and "FLCIW,"
respectively.
The following table sets forth the high and low sales prices for each
quarter since FirstLink completed its initial public offering on July 27,
1998. There was no public market for FirstLink's stock or warrants prior to
that date.
<TABLE>
<CAPTION>
Common Stock Warrants
------------ ---------------
Quarter Ended High Low High Low
----- ----- ----- ------
<S> <C> <C> <C> <C>
September 30, 1998 $4.50 $ 1.50 $ .56 $.13
December 31, 1998 $2.31 $ 1.13 $ .25 $.06
March 31, 1999 $2.37 $ 1.69 $ .22 $.06
June 30, 1999 $6.75 $ 1.72 $1.88 $.19
September 30, 1999 $5.56 $ 4.13 $1.50 $.81
December 31, 1999 (through
October 7, 1999) $4.44 $ 4.13 $1.00 $1.00
</TABLE>
There were approximately 550 holders of record of FirstLink's common
stock as of the Record Date.
DIVIDEND POLICY
No dividends have been declared or paid by FirstLink, nor does FirstLink
anticipate paying cash dividends on the shares of common stock in the
foreseeable future. The terms of the Series A and Series B Preferred Stock
that will be issued in connection with the Merger will prohibit the payment of
dividends on the common stock until all dividends accrued and unpaid on the
preferred stock have been paid.
THE MARKET FOR USOL'S SECURITIES
There is no market for the USOL's common stock or preferred stock.
No dividends have been declared or paid by USOL, nor does USOL anticipate
paying cash dividends on the shares of common stock in the foreseeable future.
The holders of USOL's Series A and Series B Preferred Stock are entitled to
receive cumulative dividends of 12% per annum, payable quarterly in cash or
stock commencing September 30, 1999. (See "Description of Securities-
Preferred Stock").
SELECTED FINANCIAL DATA
FirstLink Communications, Inc.
Set forth below is selected summary financial information with respect to
FirstLink. Financial information as of and for each of the years in the two
year period ended December 31, 1998, is derived from the financial statements
included elsewhere in this Proxy Statement and is qualified by reference to
such financial statements and the notes related thereto. Financial
information as of June 30, 1999, and for the six month periods ended June 30,
1999, and June 30, 1998, are derived from unaudited financial statements of
FirstLink. The unaudited financial statements have been prepared on the same
basis as the audited financial statements and, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information set forth therein. The
historical results are not necessarily indicative of the operating results to
be expected in the future.
<TABLE>
<CAPTION>
Balance Sheet Data:
- - - ------------------
December 31, 1998 June 30, 1999
----------------- -------------
(Unaudited)
<S> <C> <C>
Cash, cash equivalents, and investment
securities $4,902,077 $3,507,401
Total current assets 5,081,033 4,191,756
Working capital 4,642,961 3,815,441
Property and equipment, net 1,173,668 1,200,489
Total assets 6,263,779 5,470,047
Current liabilities 438,072 376,315
Long term debt, net of current portion 177,279 142,778
Total stockholders' equity 5,648,428 4,950,954
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations Data:
- - - ----------------------------
For the Years Ended For the Six Months Ended
December 31 June 30
------------------------ ----------------------
1997 1998 1998 1999
----------- ----------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues $879,903 $1,246,011 $ 599,484 $676,415
Total expenses 1,351,524 2,843,684 1,187,211 1,480,341
Operating loss (471,621) (1,597,673) (587,727) (803,926)
Other (income) expense, net 106,655 236,301 160,130 (49,738)
Net loss (578,276) (1,833,974) (747,857) (754,188)
</TABLE>
USOL Holdings, Inc.
USOL was formed on May 12, 1999, to acquire substantially all of the
assets and certain of the liabilities of US Online and certain assets of
GMACCM. It had no operations prior to the acquisitions, which occurred on
July 21, 1999. USOL's only activity prior to July 21, 1999, was its initial
capitalization through the issuance of 425,000 shares of common stock to
members of its management in exchange for $425 in cash and the recording of
$849,575 in stock compensation expense related thereto. The recorded stock
compensation expense was based on the difference between the cash paid and the
estimated $2.00 per share fair market value of the shares on the date of
issuance.
US Online Communications, Inc.
Set forth below is selected summary financial information with respect to
US Online. Financial information as of and for each of the years in the two
year period ended December 31, 1998, are derived from the financial statements
included elsewhere in this Proxy Statement and is qualified by reference to
such financial statements and the notes related thereto. Financial
information as of June 30, 1999, and for the six month periods ended June 30,
1999 and 1998 are derived from unaudited financial statements of US Online.
The unaudited financial statements have been prepared on the same basis as the
audited financial statements and, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information set forth therein. The historical
results are not necessarily indicative of the operating results to be expected
in the future.
<TABLE>
<CAPTION>
Balance Sheet Data:
- - - ------------------
December 31, 1998 June 30, 1999
----------------- -------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $1,007,988 $1,212,856
Total current assets 2,287,329 2,047,620
Working capital deficit (20,841,727) (23,589,637)
Property and equipment, net 12,065,217 11,835,192
Total assets 17,635,748 16,744,106
Current liabilities 23,129,056 25,637,257
Long term debt, net of current portion -- ---
Total stockholders' deficit (5,732,135) (9,129,564)
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations Data:
- - - ----------------------------
For the Years Ended For the Six Months Ended
December 31 June 30
-------------------- -----------------------
1997 1998 1998 1999
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues $2,721,293 $5,108,225 $2,344,965 $2,831,079
Total expenses 8,442,036 11,628,800 5,036,216 4,481,844
Loss from operations (5,720,743) (6,520,575) (2,691,251) (1,650,765)
Other expense, net (3,276,039) (4,964,746) (2,600,140) (1,800,641)
Loss before minority
interest (8,996,782) (11,485,321) (5,291,391) (3,451,406)
Minority interest in
(income) loss of
subsidiary (10,463) 37,863 6,139 2,414
Net loss (9,007,245) (11,447,458) (5,285,252) (3,448,992)
</TABLE>
FirstLink Communications, Inc. - Pro Forma
Set forth below is selected pro forma condensed consolidated financial
information, giving effect to (1) the acquisition of substantially all of the
assets and certain liabilities of US Online by USOL on July 21, 1999, (ii) the
purchase of certain assets, primarily contract rights, from GMACCM by USOL on
July 21, 1999, and (iii) the proposed merger of FirstLink and USOL. The
unaudited pro forma consolidated condensed balance sheet as of June 30, 1999,
and the unaudited pro forma consolidated condensed statements of operations
for the year ended December 31, 1998, and the six months ended June 30, 1999,
are based on the individual balance sheets and statements of operations of
USOL Holdings, US Online, and FirstLink appearing elsewhere in this Proxy
Statement, as adjusted by certain pro forma adjustments which are fully
described elsewhere in this Proxy Statement. See page F-49.
<TABLE>
<CAPTION>
Balance Sheet Data
- - - ------------------
June 30, 1999
-------------
(Unaudited)
<S> <C>
Cash and cash equivalents $ 21,575,559
Total current assets 24,674,803
Working capital 21,417,060
Property and equipment, net 13,035,681
Total assets 64,680,425
Current liabilities 3,257,743
Long term debt, net of current portion 1,927,058
Minority interest 236,413
Total stockholders' deficit 59,259,211
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations Data:
- - - ----------------------------
For the Year For the Six
Ended Months Ended
December 31, June 30
1998 1999
-------------- ------------
Unaudited Unaudited
<S> <C> <C>
Revenues $6,354,236 $3,507,494
Total expenses 15,850,221 7,500,628
Operating loss (9,495,985) (3,993,134)
Other expense, net 611,019 47,052
Loss before minority interest (10,107,004) (4,040,186)
Minority interest in (income) loss of subdiary 37,863 (2,414)
Net loss (10,069,141) (4,042,600)
Preferred stock dividends (4,440,000) (2,220,000)
Loss attributable to common shareholders (14,509,141) (6,262,600)
</TABLE>
<PAGE>
<PAGE>
FIRSTLINK'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following discussion of the results of operations and financial
condition of FirstLink should be read in conjunction with the Financial
Statements and the Notes thereto of FirstLink included elsewhere in this Proxy
Statement, and in FirstLink's filings on Forms 10-KSB and 10-QSB.
Overview
FirstLink provides integrated telecommunications and entertainment
services to residents of MDUs. FirstLink's services consist of local and long-
distance telephone, CATV, and high-speed internet access, in a single package
on a single invoice for the resident. FirstLink's first property went online
in September 1994. As of June 30, 1999, FirstLink had contracts permitting it
to offer its services to 3,300 cable and 3,300 phone units in 14 properties,
all in Portland. Of these, FirstLink had 2,082 cable and 1,556 telephone
subscribers, respectively.
Results of Operations
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
-------------------------------------------------------------------------
FirstLink reported a net loss of $754,188 for the six months ended June
30, 1999, compared to a net loss of $747,857 for the same period of the prior
year. The 1999 net loss approximated the 1998 net loss. However, the 1999
operating loss was $216,199 greater than the loss during 1998. This increase
was caused by across the board increases in operating, selling, general and
administrative and depreciation expenses during 1999 compared to the prior
year. The increase in operating loss was offset by an increase in other
income.
Revenue increased by $76,931, or 13%, for the six months ended June 30,
1999 compared to the same period of the prior year. The increase in revenue is
primarily attributable to FirstLink having 14 properties operating as of June
30, 1999 compared to 11 properties as of June 30, 1998.
Operating expenses increased by $73,580, or 16%, for the six months ended
June 30, 1999 compared to the same period of the prior year. The increase in
operating expenses was due to the increase in properties between years.
Operating expenses were 80% of revenue for the six-month period ended June 30,
1999 compared to 77% for the same period of the prior year.
Selling, general and administrative expenses increased by $148,835, or
22%, for the six months ended June 30, 1999 compared to the same period of the
prior year. The increase between periods resulted from increases in payroll
and related costs, travel expenses, rent and insurance expenses. FirstLink
has taken steps to reduce headquarters personnel in anticipation of the
Merger.
Depreciation and amortization expenses increased by $70,715, or 162%, for
the six months ended June 30, 1999 compared to the same period of the prior
year. Depreciation and amortization expense was 17% of revenue for the six-
month period ended June 30, 1999 compared to 7% for the same period of the
prior year.
Other income increased by $209,868 for the six months ended June 30, 1999
compared to the same period of the prior year. The increase between years
resulted from a $105,000 one-time non-cash charge to other expense related to
the induced conversion of certain convertible notes during the first quarter
of 1998 combined with an increase in 1999 interest income due to FirstLink's
initial public offering in July 1998. Other income was 7% of revenue for the
six months ended June 30, 1999 compared to other expense of 27% for the same
period of the prior year.
Year Ended December 31, 1998 Compared to December 31, 1997
----------------------------------------------------------
FirstLink reported a net loss of $1,833,974 for the year ended December
31, 1998 compared to a net loss of $578,276 for the year ended December 31,
1997. The increase in net loss is primarily attributable to increased selling,
general and administrative expenses that were incurred as FirstLink added
management and other personnel for its anticipated growth.
Revenue increased by $366,108, or 42%, for the year ended December 31,
1998, compared to the prior year. The increase in revenue is due to FirstLink
having an average of 2,628 units online during 1998, compared to 1,620 units
during 1997.
Operating expenses increased by $387,918, or 67%, for the year ended
December 31, 1998, compared to the prior year. Operating expenses were 78% of
revenue during 1998, compared to 66% of revenue during 1997. The increase in
operating expenses resulted primarily from the increase in revenue as such
expenses generally vary with revenue. However, FirstLink also experienced a
deterioration in margins, specifically long distance and cable. Long distance
margins were adversely impacted by several factors, including the utilization
of more aggressive pricing plans which reduced the average revenue per minute,
and a change in the mix of calls made which resulted in an increase in
international and calling card calls, both of which have lower margins for
FirstLink. Cable margins decreased due to the bulk agreements signed during
1998 having higher costs per unit than those FirstLink operated under during
1997. FirstLink plans to address its long-distance call mix and pricing
structures in order to improve margins. Additionally, FirstLink plans to
operate as a private cable operator and discontinue purchasing in bulk from
the local MSO in most cases. This should result in improving cable margins
significantly. It is critical that FirstLink improve its operating margins if
it is to achieve positive operating cash flow. Management believes that the
Merger will help improve margins for the Combined Company.
Selling, general and administrative expenses increased by $1,071,049, or
153%, for the year ended December 31, 1998, compared to the prior year.
Selling, general and administrative expenses were 142% of revenue during 1998,
compared to 80% during 1997. Selling, general and administrative expenses
increased as a result of increases in salary and related expenses associated
with the additional personnel hired by FirstLink to manage and execute
FirstLink's planned growth. Additional expenses that increased substantially
between years were insurance, public relations, legal and regulatory, rent,
and travel and entertainment, many of which were directly related to
FirstLink's new public status.
Depreciation and amortization expenses increased by $33,193, or 47%, for
the year ended December 31, 1998, compared to the prior year. Depreciation and
amortization expense was 8% of revenue in both 1998 and 1997. The increase in
depreciation and amortization expense is due to an increase in property and
equipment resulting from an increase in properties online between years.
Other expense increased by $129,646, or 122%, for the year ended December
31, 1998, compared to the prior year. Other expense was 19% of revenue during
1998, compared to 12% during 1997. The increase between years resulted from a
one-time non-cash charge to other expense related to the induced conversion of
certain convertible notes during the first quarter of 1998, and down payments
on certain switching equipment that were forfeited when FirstLink decided not
to purchase the equipment. These charges were partially offset by interest
income earned on FirstLink's investments and cash equivalents.
Liquidity and Capital Resources
At June 30, 1999, FirstLink had cash, cash equivalents and investment
securities of $3,507,401 compared to $4,902,077 at December 31, 1998.
Additionally, FirstLink had a note receivable including accrued interest from
US Online of $510,000 which was repaid subsequent to June 30, 1999. Net cash
of $652,571 was used in operating activities during the six months ended June
30, 1999, which resulted from FirstLink's net loss offset by non-cash charges.
Net cash of $481,935 was provided by investing activities during the six
months ended June 30, 1999, which consisted of maturities of investment
securities of $1,194,370 offset by the loan to US Online of $500,000, capital
expenditures of $141,274, and capitalized legal and travel costs associated
with FirstLink's merger with USOL of $71,161. Capital expenditures consisted
primarily of telephone equipment for new properties.
Net cash of $29,670 was used in financing activities during the six
months ended June 30, 1999, which consisted entirely of principal payments on
capital leases.
FirstLink has agreements with certain cable operators to purchase bulk
cable signals at FirstLink's properties. As of June 30, 1999, FirstLink's
commitment was $32,759 per month for such services. At June 30, 1999,
FirstLink had commitments for certain capital expenditures, described as
follows. FirstLink is currently upgrading its telephony facilities in
Portland in order to improve operating efficiencies and network reliability
and offer additional services such as caller ID. Additionally, FirstLink is
migrating certain properties from resold local telephone service provided by a
CLEC to Company facility-based service. The expected cost of these
improvements, including the cost of a new Portland switch room is $550,000.
FirstLink anticipates completing the projects by the end of October 1999 using
its existing cash and cash equivalents and investment securities as necessary.
FirstLink has net operating loss carry-forwards which are available to
offset future financial reporting and taxable income. Net operating loss
carry-forwards for tax purposes totaled approximately $2,500,000 at December
31, 1998, and expire in 2011 through 2018.
A provision of the Code requires the utilization of net operating losses
be limited when there is a change of more than 50% in ownership of FirstLink.
Such a change occurred in 1996, 1997 and 1998. If FirstLink's agreement with
USOL is approved by FirstLink's shareholders, FirstLink will have incurred
another ownership change under IRC Section 382. These ownership changes would
limit the utilization of any net operating losses incurred prior to the change
in ownership date.
The difference between expected tax benefit, computed by applying the
federal statutory rate of 34% to loss before taxes, and the actual tax benefit
of $0 is primarily due to the increase in the valuation allowance for deferred
taxes.
As more fully described elsewhere in this Proxy Statement, FirstLink has
signed the Merger Agreement with USOL. USOL has recently completed a
financing transaction in which it received $37 million in gross cash proceeds
through a preferred stock sale and has received a senior debt commitment of
$35 million from a bank. The Combined Company anticipates pursuing two
separate businesses: (1) to continue providing cable television, local and
long distance telephony and internet services to residents of MDUs (the
"Telecommunications Business") and (2) to develop an electronic commerce based
business ("TheResidentClub.com") that will target residents of MDUs utilizing
the assets acquired by USOL from GMACCM.
Management believes that the funding received by USOL will be sufficient
to fund the operations and capital requirements of the Combined Company for at
least the next twelve months. However, an integral part of the Combined
Company's business plan is to grow the Telecommunications Business through
acquisitions. Should the Combined Company find acquisition opportunities that
are either larger in magnitude or in number than its plan anticipates, then
additional funding may be required sooner than planned.
USOL's senior debt commitment limits the amount of proceeds from the
preferred stock sale and senior debt commitment that the Combined Company can
use to fund TheResidentClub.com to $1 million. Accordingly,
TheResidentClub.com will require additional funding to pursue its business
plan. TheResidentClub.com is currently looking at various alternatives for
funding its business plan, including, but not limited to, private equity
investments. The amount of funding required to execute TheResidentClub.com
business plan is still being determined, but management expects it to range
from $15 million to $25 million over the next 18 to 24 months. Any delays in
raising the required funding will delay executing TheResidentClub.com business
plan. Because of the funding limitation set forth in the senior debt
commitment, management does not expect TheResidentClub.com to have an
immediately significant impact on the liquidity, capital resources or results
of operations of the Combined Company.
Year 2000 Readiness
The "Year 2000" issue is a general term used to describe the various
problems that may result from the improper processing of dates and date-
sensitive calculations by computers and other machinery as the Year 2000 is
approached and reached. These problems arise from hardware and software unable
to distinguish dates in the "2000's" from dates in the "1900's" and from other
sources such as the use of special codes and conventions in software that make
use of a date field. FirstLink recognizes the need to ensure its operations
will not be adversely affected by Year 2000 hardware and software failures.
FirstLink has performed a comprehensive review of its information and
support systems to determine whether such systems will properly function in
the year 2000 and thereafter. Systems reviewed principally include FirstLink's
switches and network operations systems, billing and financial systems, and
FirstLink's internal communications systems. Although FirstLink relies
primarily on systems developed with current technology that were designed to
be year 2000 compliant, FirstLink will have to replace, upgrade or reprogram
certain systems or equipment. FirstLink has identified its Cortelco switch as
needing to be replaced and a software upgrade as necessary for its DXC switch.
Upon completion of the telephony upgrade described above, management believes
that FirstLink's systems will be year 2000 compliant. FirstLink's due
diligence also included an evaluation of vendor-provided technology and the
implementation of new policies to require vendors to confirm that they have
disclosed and will correct any year 2000 compliance issues.
The costs associated with resolving year 2000 issues have been expensed
as incurred and, in the aggregate, are not expected to have a material impact
on FirstLink's financial condition or results of operations. However, to the
extent that the telephony network upgrades previously described above will
resolve year 2000 deficiencies, such costs will be capitalized as part of the
overall system improvements. While FirstLink believes that its software
applications will be year 2000 compliant, there can be no assurance until the
year 2000 occurs that all systems will then function adequately. As discussed
above, management of FirstLink does not expect the Year 2000 problem to be
material to its business, financial condition or results of operations. During
the months prior to the century change, however FirstLink will continue to
monitor and evaluate any new versions of software and information systems
provided by third parties and any new infrastructure systems that it may
acquire, to determine whether they are Year 2000 compliant. Despite its
current assessment, FirstLink may not identify and correct all significant
Year 2000 problems on a timely basis. If the representations made by its
various vendors regarding Year 2000 compliance are inaccurate, additional Year
2000 compliance efforts may involve significant time and expense and
unresolved problems could harm FirstLink's business. FirstLink currently has
no contingency plans to address the risk.
<PAGE>
US ONLINE'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
US Online marketed and provided CATV and enhanced local and long distance
telecommunications services to MDUs such as apartment complexes and other
concentrated residential sites. It provided its services pursuant to ROE
contracts with property owners and agreements with MDU residents. As of June
30, 1999, US Online had contracts permitting it to offer its services to
13,715 cable and 6,885 phone units in 47 properties in Texas, Colorado and
Washington DC. It had 9,246 cable and 2,564 telephone subscribers,
respectively. In July 1999, US Online sold substantially all of its assets
and certain of its liabilities to USOL Sub. It is US Online's management's
intent to wind up the affairs and liquidate US Online as soon as practicable.
Results of Operations
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
-------------------------------------------------------------------------
US Online reported a net loss of $3,448,992 for the six months ended June
30, 1999 compared to a net loss of $5,285,252 for the same period of the prior
year. The $1,836,260 or 35% decrease in net loss was primarily attributable
to one-time charges incurred in 1998 associated with an initial public
offering ("IPO") that was not completed and the expensing of debt issuance
costs.
Revenue increased $486,114, or 21% for the six months ended June 30, 1999
compared to the same period of the prior year. The increase in revenue was
primarily attributable to US Online having 47 properties operating as of June
30, 1999 compared to 43 properties as of June 30, 1998, as well as the
maturing of existing properties. Additionally, during 1999, US Online entered
into a cross-connect agreement with a local exchange carrier. This agreement
contributed approximately $53,000 to the growth in revenues.
Operating expenses remained constant for the six months ended June 30,
1999 compared to the same period of the prior year. During 1999, US Online
implemented cost containment measures and streamlined its operations. As a
result, operating expense was 74% of revenue for the six months ended June 30,
1999 compared to 90% for the same period of the prior year.
Selling, general and administrative expenses decreased $618,838, or 28%
for the six months ended June 30, 1999 compared to the same period of the
prior year. Selling, general and administrative expenses were 55% of revenue
for the six months ended June 30, 1999 compared to 93% for the same period of
the prior year. In the second quarter of 1998, US Online recognized a one-
time charge of approximately $468,000 for legal and professional fees
associated with its failed public offering.
Depreciation and amortization expenses increased by $67,495, or 9% for
the six months ended June 30, 1999 compared to the same period of the prior
year. Depreciation and amortization expense was 29% of revenue for the six
months ended June 30, 1999 compared to 32% of revenue for the same period of
the prior year.
Interest expense decreased $731,694, or 30% for the six months ended June
30, 1999 compared to the same period of the prior year. Interest expense was
61% of revenue for the six months ended June 30, 1999 compared to 105% for the
same period of the prior year. The six months ended June 30, 1998 included
expensing issuance costs associated with debt that was restructured. Included
in 1999 interest expense is $602,003 of non-cash amortization of deferred
financing costs and discount on notes payable.
Other expense decreased $67,805, or 47% for the six months ended June 30,
1999, compared to the same period of the prior year due to a one-time charge
in 1998 for certain sales taxes of $77,000. Other expense was 3% of revenue
for the six months ended June 30, 1999 compared to 6% for the same period of
the prior year.
Twelve Months Ended December 31, 1998 Compared to Twelve Months Ended
December 31, 1997
-------------------------------------------------------------------------
US Online reported a net loss of $11,447,458 for the twelve months ended
December 31, 1998 compared to a net loss of $9,007,245 for the prior year.
The increase in net loss was primarily attributable to a $1,172,468 write down
of property and equipment, the expensing of deferred financing costs
associated with a debt restructuring, and the expensing of costs related to an
IPO that was not completed, all of which occurred in 1998.
Revenues increased $2,386,932, or 88% for the twelve months ended
December 31, 1998 compared to the prior year. The increase in revenue was
primarily attributable to an increase in the number of active properties in
1998 compared to 1997.
Operating expenses increased $1,184,245, or 36% for the twelve months
ended December 31, 1998 compared to the prior year. This increase was
primarily attributable to increases in long distance charges and programming
costs which were directly the result of the increased subscriber base.
Operating expenses were 88% of revenue for the twelve months ended December
31, 1998 compared to 121% for the same period of the prior year.
Selling, general and administrative expenses increased $334,551, or 8%
for the twelve months ended December 31, 1998 compared to the prior year.
This increase was primarily attributable to increased royalty and commission
expenses which resulted from the increase in revenue between periods.
Selling, general and administrative expenses were 87% of revenue for the
twelve months ended December 31, 1998 compared to 151% for the prior year.
Depreciation and amortization expenses increased by $495,500, or 48% for
the twelve months ended December 31, 1998 compared to the same period of the
prior year. The increase was primarily attributable to plant and equipment
costs associated with the increase in properties on-line between years.
Depreciation and amortization expense was 30% of revenue for the twelve months
ended December 31, 1998 compared to 38% for the prior year.
Interest expense increased $1,584,414, or 50% for the twelve months ended
December 31, 1998 compared to the prior year. The increase was primarily
attributable to the expensing of deferred financing costs associated with a
debt restructuring. Interest expense was 93% of revenue for the twelve months
ended December 31, 1998 compared to 117% for the prior year. Included in 1998
interest expense is $1,889,408 of non-cash amortization of deferred financing
costs and discount on notes payable.
Other expense was 4% of revenue for the twelve months ended December 31,
1998 compared to less than 1% for the prior year.
Year 2000
US Online has performed a comprehensive review of its information and
support systems to determine whether such systems will properly function in
the year 2000 and thereafter. Systems reviewed principally include US
Online's switches and network operations systems, billing and financial
systems, and US Online's internal communications systems. US Online's due
diligence also included an evaluation of vendor-provided technology and the
implementation of new policies to require vendors to confirm that they have
disclosed and will correct any year 2000 compliance issues.
US Online will have to replace certain software utilized for retrieving
call records from US Online's switches. US Online estimates that the required
software upgrades will cost approximately $50,000. US Online expects to make
the upgrades by November 1999.
The costs associated with resolving year 2000 issues have been expensed
as incurred and, in the aggregate, are not expected to have a material impact
on US Online's financial condition or results of operations. While US Online
believes that its software applications will be year 2000 compliant, there can
be no assurance until the year 2000 occurs that all systems will then function
adequately. Further, if the software applications of local exchange carriers,
long-distance carriers, cable providers or others on whose services US Online
depends are not year 2000 compliant, it could have a material adverse effect
on US Online's financial condition and results of operations.
<PAGE>
<PAGE>
THE SPECIAL MEETING
This Proxy Statement and the accompanying proxy are being furnished to
shareholders of FirstLink as part of the solicitation of proxies by the Board
for use at the Meeting. This Proxy Statement and the enclosed form of proxy
are first being mailed to the shareholders of FirstLink on or about __,
1999.
Date, Time and Place of Meeting
The Meeting will be held at
_____________________________________________, _____________, 1999, at
___________.
Matters to be Considered
The purpose of the Meeting is:
(1) To consider and vote upon a proposal to (a) approve the Plan of
Merger, pursuant to which, among other things, at the Effective Time of the
Merger USOL will merge with and into FirstLink, with FirstLink being the
surviving corporation, and each issued and outstanding share of USOL common
stock, Series A Preferred Stock, and Series B Preferred Stock will be
converted into the right to receive one share of FirstLink common stock,
Series A Preferred Stock, and Series B Preferred Stock, respectively, and (b)
approve the issuance of shares of FirstLink common stock and preferred stock
in accordance with the Plan of Merger.
(2) To consider and vote upon a proposal to amend FirstLink's Articles
of Incorporation to increase the number of authorized shares of FirstLink
common stock from 20,000,000 to 50,000,000 shares and FirstLink preferred
stock from 1,000,000 to 5,000,000 shares.
(3) To consider and vote upon a proposal to amend FirstLink's Articles
of Incorporation to change FirstLink's name to "USOL Holdings Inc."
(4) To consider and vote upon a proposal to approve the 1999 Incentive
Plan.
The Board has unanimously approved these proposals and recommends that
shareholders vote FOR the approval of the Plan of Merger and the issuance of
the stock in the Merger; FOR the Share Amendment; FOR the Name Change; and FOR
the approval of the Incentive Plan. If FirstLink shareholders do not approve
the Plan of Merger, the Share Amendment and the Name Change will not be
effected, whether or not FirstLink's shareholders approve these proposals.
Management of FirstLink does not know of any other matter to be brought
before the Meeting other than as referred to in this Proxy Statement. If any
other business should properly come before the Meeting, the persons named in
the proxy will vote upon those matters in their discretion.
Record Date and Outstanding Shares
The Board has fixed the close of business on October 29, 1999, as the
Record Date for determining shareholders entitled to notice of and to vote at
the Meeting. As of the Record Date, there were approximately ___ shareholders
of record of FirstLink common stock and shares of FirstLink common
stock outstanding and entitled to vote, with each share entitled to one vote.
Quorum
The presence in person or by properly executed proxy of holders of a
majority of the votes entitled to be cast at the Meeting is necessary to
constitute a quorum. Abstentions and broker non-votes are counted for purposes
of determining the presence or absence of a quorum for the transaction of
business.
Required Vote
An affirmative vote of the holders of a majority of the outstanding
shares of FirstLink common stock entitled to vote at the Meeting is required
to approve the Plan of Merger and to approve the Share Amendment and the Name
Change. Abstentions and broker non-votes will have the legal effect of a vote
against those proposals.
Certain FirstLink shareholders have provided USOL with their proxies to
vote their shares in favor of the Plan of Merger and in favor of the Share
Amendment. These proxies represented a total of 735,877 shares, or
approximately 20% of the total number of shares of FirstLink common stock
outstanding as of the Record Date.
An affirmative vote of the holders of a majority of the shares of
FirstLink common stock present in person or represented by proxy at the
Meeting and entitled to vote, is required for the approval and adoption of the
Incentive Plan. Abstentions will have the legal effect of a vote against the
Incentive Plan. With respect to a broker non-vote on the Incentive Plan
proposal, such shares will not be considered present at the Meeting, and,
since they will not be counted in the voting with respect to such matter, will
have the practical effect of reducing the number of affirmative votes
necessary to achieve the required majority vote by reducing the total number
of shares from which the majority is calculated.
Proxies
All shares of common stock represented at the Meeting either in person or
by properly executed proxies received prior to or at the Meeting and not duly
and timely revoked will be voted at the Meeting in accordance with the
instructions in such proxies. If no such instructions are indicated, such
shares will be voted in favor of all the proposals and, in the discretion of
the proxy holder as to any other matter which may be incidental to the Meeting
as may properly come before such Meeting. FirstLink knows of no other matters
other than as described in the Notice of Special Meeting that are to come
before the Meeting. If any other matter or matters are properly presented for
action at the Meeting, the persons named in the enclosed form of proxy and
acting thereunder will have the discretion to vote on such matters in
accordance with their best judgment, including any adjournment or postponement
of the Meeting, unless such authorization is withheld.
A shareholder who has given a proxy may revoke it at any time prior to
its exercise by: (i) giving written notice thereof to the Secretary of
FirstLink at or prior to the taking of the vote at the Meeting; (ii) signing
and returning to the Secretary of FirstLink a later dated proxy prior to the
taking of the vote; or (iii) voting in person at the Meeting; however, mere
attendance at the Meeting will not itself have the effect of revoking the
proxy.
Solicitation of Proxies; Expenses
The costs of filing and printing this Proxy Statement and the materials
used in this solicitation will be borne equally by FirstLink and USOL. In
addition to solicitation by mail, the directors, officers, and employees of
FirstLink may solicit proxies from shareholders by telephone or in person.
Arrangements will also be made with brokerage houses and other custodians,
nominees and fiduciaries to forward solicitation material to FirstLink
shareholders. FirstLink may reimburse these custodians, nominees and
fiduciaries for their reasonable out-of-pocket expenses incurred. FirstLink
has engaged Mackenzie Partners to represent it in connection with the
solicitation of proxies at a cost of approximately $4,500, plus expenses for
those services. YOU SHOULD NOT SEND STOCK CERTIFICATES WITH YOUR PROXY CARD.
<PAGE>
<PAGE>
PROPOSAL NO. 1: THE PLAN OF MERGER
This section of the Proxy Statement describes material aspects of the
proposed Merger, including the Merger Agreement. While we believe that the
description covers the material terms of the Merger and the related
transactions, this summary may not contain all of the information that is
important to you. You should carefully read this entire document and the other
documents referred to in this Proxy Statement for a more complete
understanding of the Merger.
General
At the Effective Time, USOL will merge with and into FirstLink.
FirstLink will be the surviving corporation in the Merger. Each outstanding
share of USOL common stock and preferred stock will be converted into the
right to receive one share of FirstLink common stock and preferred stock,
respectively. The conversion is more fully described below.
Background of the Merger
From its inception in 1995, FirstLink pursued a business plan of
providing telecommunications and cable services to MDUs. It obtained cable
from cable providers, most notably Tele-Communications, Inc. ("TCI") by
purchasing the service for the entire complex on a bulk basis and reselling
the services to residents in the buildings. In July 1998, FirstLink completed
an IPO. In November 1998, TCI notified FirstLink that TCI may no longer be
willing to provide cable service to MDUs through FirstLink. FirstLink
immediately began seeking alternative methods of providing cable services.
However, it determined that the alternatives were either too costly or
impractical. For example, becoming a private cable company requires large
investments in equipment and other personnel. The Board believed that
FirstLink's small size and lack of access to capital made any capital-
intensive alternative unavailable to it. Without the cable service provided
by TCI or an alternate company, FirstLink's business plan would not work.
FirstLink sought other alternatives, including reviewing possible
combinations with other companies in the telecommunications industry, as well
as with companies in other industries. The Board believed that, without a
means to provide cable service, FirstLink's primary value would be as a public
vehicle for another company. It reviewed several possible combinations,
including, beginning in December 1998, a transaction involving US Online,
which transaction would bring to FirstLink the ability to provide cable service
independently. US Online (and after it acquired US Online's assets, USOL) is
based in Austin, Texas, and provides similar services; however, it generally
does not buy in bulk from traditional cable companies to provide television
signal. Instead, it acts as a private cable operator and delivers CATV
services to residential customers by re-transmitting programming signals via
antenna and other equipment that receive and process signals from satellites.
US Online had obtained agreements with a substantial number of property
owners to supply MDUs with telecommunications services, including telephone
and cable television. In doing so, however, it incurred a substantial amount
of debt. It planned to reduce that debt through an IPO of its common stock in
1998. However, market conditions caused a postponement and the eventual
cancellation of the IPO. FirstLink was interested in pursuing an arrangement
with US Online because of its strong management team, sizable customer base,
in-depth knowledge of private cable operations, and a very good back office
management information system. However, it appeared that a substantial
amount of funding would have to be raised in order to achieve US Online's
business plan. The Board was concerned about obtaining such funding, and, in
December 1998, it decided not to pursue an arrangement with US Online.
In December 1998, Peregrine Holdings, Inc. ("Peregrine") approached
FirstLink with a plan to utilize FirstLink to acquire and merge
telecommunications interconnect companies. Peregrine also committed
to raising the necessary capital to fund such an endeavor. The Board
requested Peregrine to prepare a more detailed business plan, including
information about how Peregrine intended to raise the capital needed, and to
explore the possibility of acquiring rural franchised cable companies and
distressed private cable operators, an avenue which FirstLink believed
feasible based on its prior discussions with US Online.
Peregrine presented a more detailed business plan to the Board on January
28, 1999. Peregrine proposed to combine the existing assets, business, and
attributes of US Online and those of FirstLink. On February 5, 1999,
FirstLink and Peregrine entered into an agreement pursuant to which Peregrine
would acquire US Online or a similar company with contracts with MDUs, and
obtain funding for the combined companies, in exchange for the issuance by
FirstLink of shares of its stock. Peregrine immediately began discussions
with US Online to acquire US Online's assets. It signed a letter of intent
with US Online effective March 11, 1999.
At approximately the same time, Newman & Associates, Inc., a subsidiary
of GMACCM, was discussing with US Online a transaction in which a newly-formed
entity would acquire US Online's assets and certain assets from GMACCM; and
Newman would assist the new entity in obtaining funding for the combined
entities.
All of the parties to these discussions met in April 1999 to negotiate a
combination of the two plans. On May 3, 1999, FirstLink, US Online, GMACCM,
Peregrine, and certain shareholders and creditors of US Online entered into a
letter of intent to (a) form a new company to acquire the assets of US Online;
(b) purchase certain of assets from GMACCM; (c) raise up to $50 million in
cash to fund the companies, through the issuance of preferred stock and debt;
and (d) merge the newly-formed company with and into FirstLink.
On July 21, 1999, USOL, through two wholly-owned first and second tier
subsidiaries, acquired substantially all of the assets and certain liabilities
of US Online and certain of the assets of GMACCM; obtained a total of
$40,675,000 in new funds through the sale of $37,000,000 of preferred stock
for cash and $3,675,000 of common stock under a three year note agreement,
certain of the proceeds of which were issued to fund such acquisition;
obtained a commitment from Banque Paribas for $35,000,000 in debt financing;
and executed the Merger Agreement with FirstLink.
Recommendation of the Board of Directors
At a meeting held on July 21, 1999, the Board unanimously approved the
Merger and determined that the Plan of Merger is fair to and in the best
interests of the FirstLink Shareholders. The Board recommends a vote FOR
approval of the Plan of Merger.
The number of FirstLink shares to be issued to the USOL securities
holders was determined by negotiation between FirstLink and USOL. Inasmuch as
FirstLink did not obtain an opinion of a financial advisor regarding the
fairness of the Merger to the FirstLink shareholders, nor did it engage any
investment banker to undertake an analysis and make financial presentations to
the Board regarding the valuation by FirstLink of USOL, FirstLink is not in a
position to state that the consideration in the Merger is necessarily
reflective or not reflective of the assets or business prospects of either of
the parties to the Merger Agreement. However, two of FirstLink's directors,
Messrs. McChesney and Twaddell, have been involved in investment banking for
over twenty years, and have performed evaluations of transactions similar to
the Merger. The Board, including Messrs. McChesney and Twaddell, believes
that the value of the consideration in the Merger represents the results of
extensive negotiations, and the Board has approved this transaction largely in
recognition of FirstLink's uncertainty over its ability to pursue its business
plan without significant additional financing, as well as the Board's concerns
for FirstLink's long term viability.
The evaluation of the Merger and the decision of the Board to pursue the
Merger were based upon several factors and potential benefits of the Merger
including, but not limited to, the following:
- - - - historical information concerning FirstLink's and USOL's respective
businesses, financial performance and condition, operations, and
management;
- - - - FirstLink management's view of the financial condition, results of
operations and businesses of FirstLink and USOL before and after giving
effect to the Merger and the Board's determination of the Merger's effect
on shareholder value;
- - - - current financial market conditions and historical market prices,
volatility and trading information of FirstLink;
- - - - the management and financial resources that USOL will bring to the
Combined Company in the Merger;
- - - - the belief that the terms of the Merger Agreement are reasonable and were
determined through extensive arm's length negotiations;
- - - - the terms of the Merger Agreement, including the ability of the Board, in
the exercise of its fiduciary duties to its shareholders, to consider
competing proposals;
- - - - FirstLink's other options given the fact that it is no longer able to
exercise its business plan; and
- - - - the ability of the FirstLink shareholders who may not support the Merger
to obtain "fair value" for their shares if they properly perfect and
exercise their appraisal rights under the OBCA.
The Board also identified and considered a number of potentially negative
factors in its deliberations concerning the Merger, including the following:
- - - - the risk that the potential benefits of the Merger may not be realized;
and
- - - - the possibility that the Merger may not be consummated, even if approved
by the shareholders of FirstLink and USOL.
The Board concluded, however, that the potential benefits of the Merger
to FirstLink and its shareholders, outweighed the risks associated with the
Merger. As a result, the Board unanimously approved the Merger and,
accordingly, recommends that FirstLink's shareholders vote for approval of the
Plan of Merger and the issuance of the common and preferred stock pursuant to
the Plan of Merger.
The discussion of the information and factors considered by the Board is
not intended to be exhaustive. In view of the variety of factors considered in
connection with its evaluation of the Merger, the Board did not find it
practicable to, and did not quantify or otherwise assign relative weight to,
the specific factors considered in reaching its determination.
Closing; Effective Time
The closing of the transactions contemplated by the Merger Agreement will
take place as soon as practicable, but not later than two business days after
all conditions to the Merger Agreement have been satisfied or waived. Upon
the satisfaction or waiver of such conditions, a certificate of merger (the
"Certificate of Merger") will be filed with the Secretary of State of Delaware
and articles of merger (the "Articles of Merger") will be filed with the
Secretary of State of Oregon. The "Effective Time" of the Merger will be the
time that the latter of those two documents is filed.
Structure of the Merger and Conversion of USOL Common Stock and Preferred
Stock
In the Merger, USOL will merge with and into FirstLink. As a result of
the Merger, the separate corporate existence of USOL will cease and FirstLink
will survive the Merger. USOL's two subsidiaries, USOL, Inc. and
TheResidentClub.com, Inc., will become wholly-owned subsidiaries of FirstLink.
In the Merger, each outstanding share of USOL common stock and each
outstanding share of USOL Series A Preferred Stock and USOL Series B Preferred
Stock (other than shares held by USOL and its subsidiaries) will be converted
into the right to receive one share of FirstLink common stock, FirstLink
Series A Preferred Stock, and Series B Preferred Stock, respectively. The
Series A Preferred Stock will have 12-1/2 votes per share. All outstanding
options and warrants of USOL will be converted to the right to receive the
same number of options or warrants of FirstLink.
As of the date of this Proxy Statement, USOL has 3,175,000 shares of
common stock issued and outstanding; 1,325,000 shares of Series A Convertible
Preferred Stock ("Series A Preferred Stock") outstanding; and 155,000 shares
of Series B Convertible Preferred Stock ("Series B Preferred Stock")
outstanding. Each share of Series A and Series B Preferred Stock converts
into 12-1/2 shares of common stock. Each share of Series A Preferred Stock has
12-1/2 votes per share. Accordingly, the holders of Series A Preferred Stock,
as a group, have the right to 16,562,500 votes on any matter to come before
shareholders of USOL. The Series B Preferred Stock does not have any voting
rights, except with respect to a merger or consolidation that would adversely
affect the holders of that stock. For a description of the terms of the
Series A and Series B Preferred Stock, see "Description of Securities-
Preferred Stock."
FirstLink will issue to USOL shareholders a FirstLink stock certificate
in the name in which the surrendered stock certificate is registered. If USOL
shareholders wish to have certificates issued in another name, they must
present the exchange agent with all documents required to show and effect the
unrecorded transfer of ownership and show the payment of any applicable stock
transfer taxes.
At the Effective Time of the Merger, the persons who were shareholders of
FirstLink and USOL immediately before the Effective Time will own
approximately the following percentages of common and preferred stock of the
Combined Company, and the following percentages of the combined voting rights
of the Combined Company:
<TABLE>
<CAPTION>
Number of
Shares Percentage
----------- ---------
<S> <C> <C>
Common Stock
Pre-Merger FirstLink Shareholders 3,615,617 53.2%
Former USOL Shareholders 3,175,000 46.8%
----------- ------
Total 6,790,617 100%
Preferred Stock
Pre-Merger FirstLink Shareholders -0- -0-
Former USOL Shareholders 1,480,000 100%
----------- ------
Total 1,480,000 100%
Combined Voting Power
Pre-Merger FirstLink shareholders 3,615,617 15.5%
Former USOL shareholders 19,737,500 84.5%
----------- ------
Total 23,353,117 100%
</TABLE>
The foregoing amounts have been calculated on a primary basis, after
giving effect to the Merger. They do not include any shares that are issuable
upon exercise of warrants and options.
Treatment of USOL Stock Options and Warrants
At the Effective Time, FirstLink will take all action necessary to assume
or reissue substitutes for, all outstanding USOL options and warrants, whether
vested or unbelted.
To the fullest extent permitted under applicable law and the applicable
stock option agreements, stock option plans and warrant agreements, each of
the outstanding options and outstanding warrants shall be exchanged or
substituted automatically (without any action on the part of the option
holders or warrant holders) into an option or warrant to purchase shares of
FirstLink common stock as of the Effective Time.
The terms of the assumed or substituted options and warrants shall be
substantially the same as the USOL options and warrants, including that the
number of shares of FirstLink common stock acquirable under the assumed or
substituted warrant or option shall be the same number of shares of USOL
common stock that the holder would have received if he/she had exercised the
option or warrant immediately before the Effective Time; and that the exercise
price of those options and warrants shall be the same exercise price of the
USOL options and warrants.
Unless the terms of the outstanding options and outstanding warrants
provide otherwise, the assumption and substitution of options and warrants
shall not give the holders of such options and warrants additional benefits or
additional vesting rights which they did not have immediately prior to the
Effective Time, or relieve the option and warrant holders of any obligations
or restrictions to their options and warrants or the shares obtainable upon
exercise of their options and warrants.
As of the Record Date, October 29, 1999, USOL had outstanding options to
purchase an aggregate of 1,910,000 shares of common stock and warrants to
purchase an aggregate of 2,084,000 shares of common stock, which will be
exchanged in the Merger for, respectively, options to purchase an aggregate of
1,910,000 shares of FirstLink common stock and warrants to purchase an
aggregate of 2,084,000 shares of FirstLink common stock.
FirstLink intends to file a registration statement under the Securities
Act with respect to all but 325,000 of the shares of FirstLink common stock
issuable upon exercise of options or rights under the Incentive Plan, and to
use its best efforts to maintain the effectiveness of such registration
statement or registration statements (and maintain the current status of the
prospectus or prospectuses contained therein) for so long as the options and
rights remain outstanding.
Material Federal Income Tax Consequences of the Merger
The following general discussion summarizes certain material federal
income tax consequences of the Merger to FirstLink shareholders. It does not
address any federal income tax consequences of the Merger to USOL
shareholders. This discussion is based on the Code, the related treasury
regulations, existing administrative interpretations and court decisions, all
of which are subject to change, possibly for retroactive effect.
The obligations of the parties to complete the Merger are conditioned on
the delivery of an opinion regarding federal income tax consequences of the
Merger. USOL will obtain an opinion from Jenkens & Gilchrist, a professional
Corporation, to the effect that the Merger will not constitute a taxable event
for federal income tax purposes.
FirstLink understands that the Merger will have the federal income tax
consequences discussed below, but FirstLink's understanding of the material
federal income tax consequences of the Merger to FirstLink and its
shareholders is based upon the advice of USOL's tax advisor. FirstLink cannot
assure you that the Internal Revenue Service or a court will not adopt
contrary positions if the issues are litigated.
FirstLink understands that current shareholders of FirstLink will not
recognize gain or loss for federal income tax purposes as a result of the
Merger; and that FirstLink should not recognize gain or loss for federal
income tax purposes as a result of the Merger.
Accounting Treatment of the Merger
The Merger will be accounted for as a reverse acquisition under the
purchase method of accounting. A reverse acquisition occurs when the legal
acquirer (FirstLink) is deemed not to be the accounting acquirer. In these
cases, the legal form of the transaction is ignored and the target company
(USOL) is treated as the acquiring company for financial reporting purposes.
The excess of purchase price over the fair value of FirstLink's net assets
will be recorded as goodwill.
Regulatory Filings and Approvals Required To Complete the Merger
USOL was required to obtain the consent of the FCC and certain state
public utilities commissions to transfer US Online's licenses to USOL. It has
received the consent of the FCC for transfer of three of four licenses, and
anticipates that it will receive FCC consent for the fourth license in October
1999. The licenses will be further transferred to USOL Sub. FCC approval
will be sought for the transfer of the licenses to USOL Sub and the change in
control of USOL Sub resulting from the Merger of USOL into FirstLink.
FirstLink and USOL are also seeking similar approvals from the appropriate
regulatory authorities in Texas, Colorado, Oregon, and Washington. Those
approvals must be obtained prior to the consummation of the Merger.
FirstLink is not aware of any other material governmental or regulatory
approval required for completion of the Merger, other than compliance with
applicable corporate law of Oregon and Delaware.
Nasdaq Listing
It is a condition to the Merger that the shares of FirstLink common stock
to be issued in connection with the Merger be approved for inclusion in the
Nasdaq Stock Market. FirstLink's common stock and public warrants are
currently included in the Nasdaq Stock Market and are quoted on the Nasdaq
Small Cap Market. Nasdaq rules require that FirstLink obtain shareholder
approval of the Plan of Merger and of the issuance of the shares in the
Merger. In addition, Nasdaq rules require FirstLink to comply with the
initial listing requirements for inclusion in Nasdaq because the Merger will
result in a change of control of FirstLink. Those rules provide that if the
requirements are met, the securities shall be promptly included in Nasdaq.
FirstLink will seek approval of Nasdaq to continue to include its common
stock in the Nasdaq Stock Market, and to have its common stock designated for
the Nasdaq National Market at the Effective Time of the Merger.
Board Of Directors and Management of FirstLink Following the Merger
The Merger Agreement specifies certain persons who shall be directors and
officers of the Combined Company following the Merger. See "Management of the
Combined Company."
Operations after the Merger
Following the Merger, each of USOL's subsidiaries will continue its
operations as wholly-owned first and second tier subsidiaries of FirstLink.
The shareholders of USOL will become shareholders of FirstLink, and their
rights as shareholders will be governed by FirstLink's Articles and by-laws
and the laws of the State of Oregon. It is the intention of the parties that
the management of USOL prior to the Merger will control the corporate
activities of the Combined Company after the Merger. This decision was in
keeping with the Board's rationale behind its decision to proceed with the
Merger, since one of the attractions of USOL was its strong strategic,
corporate, operational and financial management team.
Employment Agreements
FirstLink will assume USOL's employment agreements with Robert Solomon,
USOL's Chief Executive Officer, and Don Barlow, USOL's President. In
addition, all existing employment agreements between USOL or any subsidiary of
USOL and their respective employees shall continue in accordance with their
terms until replaced with new agreements. See "Management of the Combined
Company-Employment Agreements."
Appraisal Rights
If the Merger becomes effective, a holder of FirstLink common stock who
does not vote in favor of the Merger and who follows the procedures prescribed
under the Oregon Business Corporation Act ("OBCA") may require the Combined
Company to pay the "fair value" for the shares held by such shareholder.
"Fair value" means the value of the shares immediately before the Effective
Time, excluding any appreciation or depreciation in anticipation of the
Merger, unless such exclusion would be inequitable. Fair value will be
determined in the manner provided by Oregon law. The following is a summary
of certain features of the relevant sections of the OBCA, the provisions of
which are set forth in full in Appendix B hereto, and such summary is subject
to and qualified in its entirety by reference to such law. In order to
exercise such statutory appraisal rights, strict adherence to the statutory
provisions is required, and each shareholder that may desire to exercise such
rights should carefully review and adhere to such provisions. Any holder of
FirstLink common stock who votes in favor of the Merger, or is deemed to vote
in favor of the Merger (by, for example, returning a signed proxy card without
specifying a vote on the Merger) will waive his or her appraisal rights.
A holder of FirstLink common stock who desires to pursue the appraisal
rights available to such shareholder must: (i) file a written objection to the
Merger with FirstLink pursuant to Section 7-113-202 of the OBCA before the
taking of the shareholders' vote on the Plan of Merger, stating the intention
of such shareholder to demand payment for shares owned by such shareholder if
the Plan of Merger is approved and the Merger is consummated; (ii) refrain
from voting in favor of the Merger; (iii) make written demand (the "Demand")
to FirstLink for payment for said shareholder's shares on or before the time
set within the notice sent by FirstLink to objecting shareholders (which time
must be at least 30 days after the giving of such notice); and (iv) deposit
the shareholder's share certificates with FirstLink. Such written objection
and written demand should be delivered to FirstLink, 190 SW Harrison,
Portland, Oregon 97201, Attention: Jeffrey S. Sperber, Secretary, and it is
recommended that such objection and demand be sent by registered or certified
mail, return receipt requested.
A shareholder who files the required written objection with FirstLink
prior to the shareholder vote need not vote against the Merger, but a vote in
favor of the Merger will constitute a waiver of such shareholder's statutory
appraisal rights. If a shareholder returns a proxy which is signed but on
which no vote is specified as to the proposal on the Merger Agreement, and
thereafter does not revoke such proxy, it will be voted in favor of the
Merger, and the shareholder will be deemed to have waived his or her appraisal
rights. In addition, a vote against the Merger does not, alone, constitute a
written objection.
The "fair value" of the FirstLink common stock will be determined
initially by the Combined Company. Upon the later of the Effective Time and
the date upon which FirstLink receives a valid Demand, FirstLink shall pay a
dissenting shareholder who complies with the above procedures the fair value
of such shareholder's shares, plus accrued interest, if any. Such payment
shall be accompanied by (i) FirstLink's balance sheet as of the end of its
most recent fiscal year, (ii) a statement of FirstLink's estimate of the fair
value of the shares, (iii) an explanation of how interest was calculated, (iv)
a statement of the dissenter's right to demand greater payment if the
dissenter believes that FirstLink's payment does not accurately reflect the
fair value of the shares, and (v) a copy of Article 7 of the OBCA. If the
dissenter believes that FirstLink's payment does not accurately reflect the
fair value of the shares, or if FirstLink fails to make its payment within 60
days of receipt of the Demand, the dissenter may give written notice to
FirstLink of the dissenter's estimate of the fair value of the shares and the
interest thereon, and demand payment of such amount, less any amount
previously received from FirstLink on account of the shares. The dissenter
shall waive any right to propose a fair value for the shares if written notice
is not given to FirstLink within 30 days of the dissenter's receipt of payment
from FirstLink.
If a Demand from a dissenter for greater payment than that offered by
FirstLink remains unresolved, FirstLink may, within 60 days of receiving such
Demand, commence a judicial proceeding to determine the fair value of the
shares. If FirstLink does not commence a judicial proceeding within 60 days
of receiving such Demand, it shall pay the amount demanded by the dissenting
shareholder. Each dissenting shareholder whose demands remain unresolved
shall be made a party to such action. Upon a judicial determination of the
fair value of the shares, each dissenter shall be entitled to the amount, if
any, by which the value found through the judicial proceeding exceeds the
payment made by FirstLink, plus interest. The court costs of such a
proceeding shall be borne by FirstLink, except to the extent that the court
finds that dissenters acted arbitrarily, vexatiously, or not in good faith in
demanding payment beyond that offered by FirstLink. The court may also assess
counsel fees and expenses upon the respective parties, to the extent that the
court finds such assessment fair and equitable.
The "fair value" of the FirstLink common stock could be more than, the
same as or less than, the market value of the shares of FirstLink common stock
the shareholder presently owns.
The enforcement by a shareholder of his or her request to receive payment
for shares of FirstLink common stock as provided under the applicable
statutory provisions shall be an exclusive remedy except that such remedy
shall not exclude the right of a shareholder to bring or maintain an
appropriate proceeding to obtain relief on the ground that said corporate
action will be or is illegal or fraudulent as to said shareholder.
A final judgment by the court or an appraiser appointed by the court
determining the fair value of the FirstLink common stock would be binding on
and enforceable by FirstLink shareholders who have perfected their statutory
appraisal rights, even if such fair value were determined to be less than the
consideration to be received by the FirstLink shareholders in the Merger. A
shareholder who perfects his rights as a dissenting shareholder will not,
after the Effective Time, be entitled to notices of meetings, to vote, or to
receive dividends.
THE MERGER AGREEMENT
The following is a summary of the material terms of the Merger Agreement.
While we believe that the description covers the material terms of the Merger
Agreement, this summary may not contain all of the information that may be
important to you. The following discussion is qualified in its entirety by
reference to the Merger Agreement, which is set forth as Appendix A to this
Proxy Statement and is incorporated herein by reference. You should read this
entire document and the other documents we refer to carefully for a more
complete understanding of the Plan of Merger.
The Merger
The Merger Agreement provides that, following the approval of the Plan of
Merger by the shareholders of FirstLink and the satisfaction or waiver of the
other conditions to the Merger, USOL will merge with and into FirstLink. The
shareholders of USOL will receive one share of FirstLink common stock for each
share of USOL common stock outstanding; one share of FirstLink Series A
Preferred Stock for each share of USOL Series A Preferred Stock outstanding;
and one share of FirstLink Series B Preferred Stock for each share of USOL
Series B Preferred Stock outstanding. The directors of the Combined Company
will be as set forth in the Merger Agreement (see "Management of the Combined
Company"), until their successors are elected or appointed and qualified; and
the officers of the Combined Company will be as described in "Management of
the Combined Company," until their respective successors are duly elected or
appointed and qualified.
If the Plan of Merger is approved by FirstLink's shareholders, and the
other conditions to the Merger are satisfied or waived, the Merger shall be
consummated by and shall be effective at the time of acceptance for filing of
the Articles of Merger to be filed with the Secretary of State of the State of
Oregon; and the Certificate of Merger to be filed with the Secretary of State
of the State of Delaware. The Articles of Merger and the Certificate of
Merger will be filed immediately prior to the Effective Time.
Representations and Warranties
Each party to the Merger Agreement made to the other party a number of
representations and warranties regarding aspects of their respective
businesses, financial conditions, structures, and other facts pertinent to the
Merger. Such representations and warranties include the following made by
each party: (a) the corporate organization and qualification of such party;
(b) as to each party the authorization, execution, delivery and enforceability
of the Merger Agreement and the consummation of the transactions contemplated
thereby and related matters; (c) the absence of conflict with other
obligations of such party; (d) such party's capitalization; (e) the absence of
other obligations concerning capital stock of such party; (f) the status of
the financial statements of such party; (g) the accuracy of the books and
records of such party; (h) such party's title to properties; (i) such party's
encumbrances; (j) such party's condition and sufficiency of assets; (k) such
party's absence of undisclosed liabilities; (l) such party's taxes; (m) such
party's retirement plans, welfare and other employee benefit plans; (n) such
party's compliance with legal requirements; (o) such party's governmental
authorizations; (p) such party's legal proceedings; (q) such party's court and
governmental orders; (r) the absence of changes, amendments, other actions and
events pertaining to such party; (s) such party's material contracts; (t) such
party's compliance and absence of defaults; (u) such party's insurance; (v)
such party's environmental matters; (w) such party's employees; (x) such
party's proprietary rights of others; (y) such party's labor relations; (z)
such party's intellectual property used in business; (aa) such party's absence
of prohibited payments; (bb) such party's relationships with related or
affiliated persons; (cc) such party's brokers or finders; (dd) SEC filings of
FirstLink; and (ee) the disclosure of all material facts about such party in
disclosure schedules.
Conduct of Business before Completion of the Merger
Until completion of the Merger, unless otherwise agreed, FirstLink and
USOL agreed to (a) conduct their respective businesses in the ordinary course;
(b) preserve their respective capitalization structures, voting stock, assets
and agreements; (c) maintain existing employment agreements, benefit plans and
tax or accounting methods; and (d) refrain from the sale or change of stock,
from entering into new debt, from settling any claim, action or proceeding
except in the ordinary course of business, and from taking any action causing
representations and warranties to become untrue or conditions to the Merger to
become unsatisfied.
THE UNDERTAKINGS RELATED TO THE CONDUCT OF THE RESPECTIVE BUSINESSES OF THE
PARTIES SET FORTH IN THE MERGER AGREEMENT ARE COMPLEX AND DIFFICULT TO
SUMMARIZE. ACCORDINGLY, WE URGE YOU TO READ ARTICLE V OF THE MERGER AGREEMENT
ENTITLED "CONDUCT OF BUSINESS PENDING THE MERGER."
Additional Agreements
The parties have agreed to additional undertakings and actions, including
(a) to provide the other party access to their respective properties, books,
contracts and the like, to enable each other party to review the same, and to
keep such information confidential; (b) to do or take all necessary acts or
action with the Securities and Exchange Commission, the FCC, and any third
party or governmental body in order to carry out the intention of the Merger
Agreement and to effect the Merger; (c) to perpetuate existing indemnification
and directors' and officers' liability insurance arrangements for six years
following the Merger; and (d) to obtain consent letters from the independent
auditors and accountants of each of the principal parties for use of the
financial statements in the Proxy Statement.
FirstLink also agreed to call and hold a shareholders' meeting to approve
the transactions contemplated by the Merger Agreement, and to use its
reasonable efforts to file and maintain a registration statement for the
shares underlying options and rights under the Incentive Plan.
Under the terms of the Merger Agreement, the board of directors of the
Combined Company after the Merger will consist of seven persons, three of whom
are present members of FirstLink's Board, and four of whom have been
designated by the holders of USOL's (and, after the Merger, FirstLink's)
preferred stock. After the Merger, the directors will be elected annually, a
majority by the holders of the Combined Company's Series A Preferred Stock and
the rest by the holders of the Combined Company's common stock.
THE UNDERTAKINGS RELATED TO THE FURTHER ACTIONS THE PARTIES WILL TAKE
CONCERNING THE MERGER AGREEMENT ARE COMPLICATED AND NOT EASY TO SUMMARIZE.
ACCORDINGLY, YOU SHOULD READ CAREFULLY ARTICLE VI OF THE MERGER AGREEMENT
ENTITLED "ADDITIONAL AGREEMENTS."
Conditions To Completion of the Merger
The respective obligations of FirstLink and USOL to complete the Merger
and the other transactions contemplated by the Merger Agreement are subject to
the satisfaction, or waiver, of each of the following conditions, among
others, before completion of the Merger: (a) the Plan of Merger or the Merger
Agreement must be approved by the requisite vote of each party's shareholders;
(b) no regulation or order may be in effect which would make the Merger
illegal or which would otherwise prohibit completion of the Merger
substantially on the terms contemplated by the Merger Agreement; (c) each of
the parties must have completed all actions that it undertook to complete
prior to the Merger, and their respective representations and warranties
contained in the Merger Agreement must be correct; (d) the shares of FirstLink
common stock to be issued to the securities holders of USOL upon closing of
the Merger must have been approved for inclusion in the Nasdaq Stock Market;
(e) no material adverse change in the business, financial condition, operating
results, assets or customer base of USOL must have occurred prior to the date
of the Merger; and (f) the parties, and each of them, must have delivered at
Closing the documents referred to in the Merger Agreement.
THE CONDITIONS PRECEDENT TO THE OBLIGATION OF EACH PARTY TO EFFECT THE MERGER
SET FORTH IN ARTICLE VII OF THE MERGER AGREEMENT ARE COMPLICATED AND NOT
EASILY SUMMARIZED. ACCORDINGLY, WE URGE YOU TO READ CAREFULLY ARTICLE VII OF
THE MERGER AGREEMENT ENTITLED "CONDITIONS PRECEDENT."
Termination of the Merger Agreement; Expenses
The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Closing, whether before or after shareholder approval of
the Plan of Merger:
- - - - by FirstLink or USOL if the Merger has not been consummated by December
31, 1999;
- - - - by FirstLink or USOL if the Plan of Merger has not been approved by the
shareholders of FirstLink;
- - - - by FirstLink or USOL if there is any order of a court or governmental
authority permanently prohibiting the Merger and the related
transactions; or
- - - - by either party, if there has been a material breach of any of the
covenants or other material provisions of the Merger Agreement by another
party.
USOL will pay FirstLink a termination fee of $1,000,000 if the Merger
Agreement is terminated by FirstLink because (a) USOL's board of directors
does not recommend to its shareholders that they approve the Plan of Merger;
(b) USOL receives an acquisition proposal from a third party and USOL's board
of directors does not reconfirm its recommendation to its shareholders to
approve the Plan of Merger; (c) USOL's board of directors recommends a
transaction in which 20% or more of USOL's stock or assets would be acquired
by a third party. USOL will also pay FirstLink a termination fee of
$1,000,000 if the board of directors of USOL approves a definitive agreement
for a proposal that is financially superior to USOL's stockholders than the
Merger and for which financing is then committed or which USOL reasonably
believes it is capable of obtaining.
Similarly, FirstLink will pay USOL a termination fee of $1,000,000 if
the Merger Agreement is terminated by USOL because (a) FirstLink's board of
directors does not recommend to its shareholders that they approve the Plan of
Merger; (b) FirstLink receives an acquisition proposal from a third party and
the Board does not reconfirm its recommendation to its shareholders to approve
the Plan of Merger or the Board recommends that its shareholders approve the
alternative transaction; (c) FirstLink's board of directors recommends a
transaction in which 20% or more of its stock or assets would be acquired by a
third party; (d) FirstLink's board of directors does not call a shareholders'
meeting to vote on the Plan of Merger by December 31, 1999; or (e) FirstLink's
shareholders do not approve the Plan of Merger because one of the individuals
who signed the shareholder support agreement breaches that agreement by not
voting for the Merger. FirstLink will also pay USOL a termination fee of
$1,000,000 if FirstLink's board of directors approves a definitive agreement
for a proposal that is financially superior to FirstLink's shareholders than
the Merger, and for which financing is then committed or which FirstLink
reasonably believes it is capable of obtaining.
Extension, Waiver and Amendment of the Merger Agreement
The parties may amend the Merger Agreement prior to closing of the
Merger, provided that they comply with applicable state laws in so doing.
One party may extend the other party's time for the performance of any
obligation or other act under the Merger Agreement, may waive inaccuracies in
such other party's representations and warranties and may waive compliance
with any of the agreements or conditions contained in the Merger Agreement.
Any amendment of the Merger Agreement following approval by the
shareholders of the parties may not be made without further approval of such
shareholders if any such amendment changes the amount or the form of the
consideration to be delivered to them.
Lock-up Agreements
The preferred shareholders of USOL have agreed not to sell, pledge,
encumber, or otherwise transfer or dispose of any of their shares for a period
which expires the earlier of one year after the Effective Time or January 21,
2001. All common shareholders of USOL and holders of USOL warrants also
agreed that they will not transfer any of the shares of FirstLink common stock
that they will receive in the Merger or that they will receive upon exercise
of warrants received in the Merger, for a period which terminates the earlier
of six months after the Effective Time and April 21, 2000. Transfers may be
made to a Qualified Institutional Buyer as defined under Securities Exchange
Commission Rule 144A. Messrs. Barlow and Solomon have agreed not to transfer
any shares of common stock they will receive in the Merger for a period ending
the earlier of one year after the Effective Time or January 21, 2001.
Directors and Executive Officers
Immediately after the Effective Time, the Directors and Executive
Officers of the Combined Company shall be the persons set forth herein under
the section "Management of the Combined Company."
<PAGE>
<PAGE>
PROPOSAL NO. 2: INCREASE IN AUTHORIZED STOCK
You are asked to consider and approve an amendment to FirstLink's
Articles to increase the number of shares of authorized common and preferred
stock (together referred to as "Capital Stock"). The Articles currently
authorize 20,000,000 shares of common stock no par value, and 1,000,000 shares
of preferred stock, no par value. If the Plan of Merger is not approved at the
Special Meeting, this proposal will not be effected.
The proposed amendment to the Articles would increase the number of
shares of common stock which FirstLink is authorized to issue to 50,000,000;
and increase the number of shares of preferred stock which FirstLink is
authorized to issue to 5,000,000. You are urged to read the full text of the
proposed Share Amendment carefully, a copy of which is attached as Appendix C.
In the event the Share Amendment is approved, FirstLink will file the Share
Amendment with the Secretary of State of the State of Oregon.
At the Record Date, FirstLink had _________ shares of common stock issued
and outstanding. If the Plan of Merger is approved, FirstLink would issue
3,175,000 shares of common stock to USOL common stock holders in exchange for
USOL common stock; an additional 18,500,000 shares of common stock would be
reserved for issuance upon conversion of the Series A and Series B Preferred
Stock; 3,994,000 shares of common stock would be reserved for issuance under
USOL warrants and options that are outstanding, all of which will be exchanged
for FirstLink warrants and options; and 1,090,000 additional shares would be
reserved for issuance under the Incentive Plan. If the proposal regarding the
Incentive Plan is approved, there will be a total of 25,553,919 shares of
common stock reserved for issuance upon conversion of the Preferred Stock and
under incentive plans and outstanding warrants. If the Share Amendment is
approved, FirstLink would be able to issue an additional 17,655,464 shares of
common stock.
FirstLink has not issued any shares of preferred stock. The Board is
authorized to designate the rights and preferences of each series of preferred
stock. In order to consummate the Merger, the Board will designate two series
of preferred stock as the "Series A Convertible Preferred Stock" and the
"Series B Convertible Preferred Stock." As a result of the Merger, 1,325,000
shares of Series A Preferred Stock and 155,000 shares of Series B Preferred
Stock will be issued to USOL Preferred Shareholders. See "Description of
Securities Preferred Stock."
Purpose and Effect of the Share Amendment
FirstLink does not have a sufficient number of shares of preferred stock
and common stock available for issuance in the Merger. Accordingly,
FirstLink's Articles must be amended to provide the authorization to issue
those shares. In addition, the Board of Directors believes that it is
desirable to have additional authorized shares of Capital Stock available for
possible future acquisition and financing transactions, stock dividends or
splits, and other corporate purposes. Having authorized shares available for
issuance in the future would give FirstLink greater flexibility and allow
shares of Capital Stock to be issued without the expense and delay of a
special shareholders meeting. The shares of Capital Stock would be available
for issuance without any further action by the shareholders unless such action
is required by applicable law or the rules of any stock exchange on which
FirstLink's securities may be listed. The business plan of the Combined
Company anticipates that additional shares of common and/or preferred stock
may be issued to acquire companies or assets in the future.
The additional shares of common stock for which authorization is sought
would be part of the existing class of common stock and, if and when issued,
would have the same rights and privileges as the shares of common stock
presently outstanding. Such additional shares would not (and the shares of
common stock presently outstanding do not) entitle the holders thereof to
preemptive rights.
The Board has the right to designate the rights and preferences of and
series of preferred stock under the current Articles. The authorization of
additional shares will not change that right. See "Description of Securities
Preferred Stock."
Although authorization is not being sought in response to any indication
or proposal that FirstLink is a target for take-over activity, you should
consider the fact that the increase in the authorized Capital Stock of the
Company, coupled with the power of the Board to authorize the issuance of the
shares and the ability of the Board to set the terms of the preferred stock,
means that the Board could in the future act to cause the issuance of shares
in a manner or on terms which might thwart or complicate efforts of a third
party to attempt to gain control of the Company.
The Board has unanimously approved the amendment contained in this
Proposal No. 2, and recommends that you vote FOR the Share Amendment.
DESCRIPTION OF FIRSTLINK SECURITIES
Common Stock
Holders of common stock are entitled to receive dividends when and as
declared by the Board out of any funds lawfully available therefor and, in the
event of liquidation or distribution of assets, are entitled to participate
ratably in the distribution of such assets remaining after payments of
liabilities, in each case subject to any preferential rights granted to any
series of preferred stock that may then be outstanding. The common stock does
not have any preemptive rights or redemption, conversion or sinking fund
provisions. All of the issued and outstanding shares of common stock are, and
all shares of common stock to be outstanding upon completion of the Merger
will be, validly issued, fully paid and nonassessable. Holders of common
stock are entitled to one vote per share on all matters to be voted upon by
the shareholders. Holders of common stock do not have cumulative voting
rights in the election of directors, which means that the holders of more than
50% of the shares voting can elect all directors.
Preferred Stock
The Articles permit the Board, without further shareholder authorization,
to issue preferred stock in one or more series and to fix the terms and
provisions of each series, including dividend rights and preferences,
conversion rights, voting rights, redemption rights and rights on liquidation,
including preferences over common stock. The issuance of any series of
preferred stock under certain circumstances could adversely affect the voting
power or other rights of the holders of common stock, and, under certain
circumstances, be used as a means of discouraging, delaying, or preventing a
change in control of the Company. No preferred stock is outstanding.
However, prior to the effectiveness of the Merger, the Board will designate
two series of preferred stock, described below, and will issue shares of each
series in the Merger. The Company will not offer preferred stock to officers,
directors, or substantial shareholders of the Company except on the same terms
as are offered to all shareholders as a group, or to new investors.
Series A Preferred Stock
------------------------
The Board will designate two series of preferred stock prior to the
Merger. The first series will be designated the "Series A Convertible
Preferred Stock," and 1,700,000 shares of no par value Series A Preferred
Stock will be authorized to be issued. Under the terms of the Merger
Agreement, FirstLink will initially issue a total of 1,325,000 shares of
Series A Preferred Stock.
The stated value of each share of Series A Preferred Stock is $25.00.
Each share of Series A Preferred Stock has 12-1/2 votes per share on any matter
on which holders of common stock are entitled to vote, except for the election
of directors. Four of the entities that will be issued Series A Preferred
Stock will each have the right to nominate one of the seven directors of
FirstLink, and those directors will be elected by the holders of the Series A
Preferred Stock, voting as a class and separately from all other classes and
series. If the number of directors is increased or decreased, those four
entities shall have the right to nominate and elect a majority of such number.
Holders of Series A Preferred Stock are entitled to receive, out of funds
legally available for such purpose, cumulative dividends from the date of
issuance at the rate of 12% per year of the liquidation preference of $25.00
per share (the "Liquidation Preference"), payable quarterly in arrears on the
last day of December, March, June, and September, commencing September 30,
1999. FirstLink has the option of paying the dividend in cash or in shares of
its common stock. No dividends on common stock shall be paid unless all due
and unpaid dividends on the Series A and Series B Preferred Stock have been
declared and paid in cash.
The holders of Series A Preferred Stock will have the following
conversion rights:
(1) Beginning July 21, 2001, each share of Series A Preferred Stock
shall convert into common stock on the earliest to occur of (a) the closing of
a firm commitment public offering pursuant to which FirstLink offers its
equity securities for gross proceeds to FirstLink of $40,000,000 or more; (b)
the day that the closing sales price of the common stock on Nasdaq or a
national securities exchange is $10 per share or more for 15 consecutive
trading days; or (c) if the common stock is trading at more than $2.00 per
share on July 21, 2006.
(2) Holders of Series A Preferred Stock may also elect to convert
their Series A Preferred Stock, in whole or in part, into common stock at any
time.
(3) The conversion price shall initially be $2.00 per share. The number
of shares of common stock issuable upon conversion is the Liquidation
Preference divided by the conversion price. The conversion price shall be
reduced if FirstLink sells shares of common stock or options, warrants, or
other convertible securities for a consideration (or exercise or conversion
price per share) less than the "Fair Value" of the common stock, defined as
the average daily closing price for the preceding twenty trading days before
the date in question. The conversion price will also be adjusted if FirstLink
subdivides its outstanding shares of common stock into a greater number of
shares or if it issues a greater number of shares of common stock in a pro
rata exchange for all of its outstanding shares of common stock.
Upon the voluntary or involuntary liquidation, dissolution, or winding up
of FirstLink, the holders of Series A Preferred Stock shall be entitled to
receive, equally with respect to their rights on liquidation, before payment
or distribution of assets are made on common stock or on any other series or
class of stock ranking junior to the Series A and Series B Preferred Stock,
the Liquidation Preference, plus a sum equal to all dividends accrued on such
shares and unpaid on the date fixed for liquidation, dissolution, or winding
up. After payment of such Liquidation Preference the holders of the Series A
Preferred Stock shall have no further claim or right to any of the remaining
assets of FirstLink.
FirstLink may redeem the Series A and Series B Preferred Stock beginning
on the earlier to occur of July 21, 2009, or the date on which fewer than 25%
of the aggregate of the shares of Series A and Series B Preferred Stock remain
outstanding. The redemption would be made by paying the greater of "Fair
Value" as defined in the Certificate of Rights and Preferences for the Series
A and Series B Preferred Stock, or the Liquidation Preference, plus a sum
equal to all dividends accrued on such shares and unpaid.
Series B Preferred Stock
------------------------
The Board will designate the Series B Convertible Preferred Stock, and
authorize a total of 300,000 shares of such series to be issued. At the
closing of the Merger, a total of 155,000 shares of Series B Preferred Stock
will be issued. The Series B Preferred Stock has identical rights and
preferences as the Series A Preferred Stock, except that holders of Series B
Preferred Stock will not have the right to vote on any matter, except for a
proposal to merge or consolidate with or into another entity or entities, or
any recapitalization or reorganization in which they would be adversely
affected. The holders of Series B Preferred Stock may also convert their
shares into shares of Series A Preferred Stock at any time.
<PAGE>
PROPOSAL NO. 3: NAME CHANGE
Under FirstLink's current Articles of Incorporation, the name of the
Company is "FirstLink Communications, Inc." The Board of Directors of
FirstLink recommends to the shareholders an amendment to those Articles that
would change the Company's name to "USOL Holdings, Inc." If the Plan of
Merger is not approved, the name will not be changed. The Board has
unanimously approved the amendment contained in this Proposal No. 3, and
recommends that you vote FOR the approval of this amendment.
The Board considers this Proposal to be in the best interests of
FirstLink and its shareholders. After the Merger, the Combined Company will
operate under the name USOL Holdings, Inc., and under the assumed names US
Online and US Online Communications. The Company may continue to market
certain of its services under the FirstLink name, as well.
If this Name Change is adopted, you will not be required to surrender
your stock certificate in exchange for certificates containing the new name.
However, stock certificates containing the name USOL Holdings, Inc., will be
issued to a shareholder upon any purchase, sale or other disposition of our
Capital Stock by such shareholder after the effective date of the Name Change.
The trading symbol on Nasdaq will be "________"
<PAGE>
<PAGE>
PROPOSAL NO. 4: Approval of the Incentive Plan
General
The Incentive Plan was adopted by the Board of Directors of FirstLink on
September 23, 1999. The shareholders of FirstLink are being asked to approve
the Incentive Plan. No options have been issued under the Incentive Plan. On
consummation of the Merger, new options will be issued under the Incentive
Plan to substitute for options issued under USOL's incentive plan.
The Incentive Plan provides a means by which selected officers and
employees of and consultants to FirstLink and its affiliates could be given an
opportunity to purchase stock in FirstLink, to assist in retaining the
services of employees holding key positions, to secure and retain the services
of persons capable of filling such positions and to provide incentives for
such persons to exert maximum efforts for the success of FirstLink.
The Board has unanimously adopted the Incentive Plan, and recommends that
you vote FOR the approval of the Incentive Plan.
Terms Of the Incentive Plan
The Incentive Plan provides for the grant of (1) both incentive stock
options ("ISO's) and non-statutory stock options ("NSO's"), (2) restricted
stock awards, and (3) stock appreciation rights ("SAR's") (collectively, (1)
(3), "Stock Awards"). ISO's are intended to qualify as "incentive stock
options" within the meaning of Section 422 of the Code. NSO's granted under
the Incentive Plan are intended not to qualify as incentive stock options
under the Code. See "Federal Income Tax Information" for a discussion of the
tax treatment of Stock Awards.
The Incentive Plan is administered by the Board of Directors of
FirstLink. The Board has the power to construe and interpret the Incentive
Plan and, subject to the provisions of the Incentive Plan, to determine the
persons to whom and the dates on which Stock Awards will be granted; whether a
Stock Award will be an ISO, an NSO, a restricted stock award, an SAR or a
combination of the foregoing; the provisions of each Stock Award granted
(which need not be identical), including the time or times when a person shall
be permitted to receive stock pursuant to a Stock Award; whether a person
shall be permitted to receive stock upon exercise of an SAR; and the number of
shares with respect to which a Stock Award shall be granted to each such
person. The Board is authorized to delegate administration of the Incentive
Plan to a committee composed of not fewer than two members of the Board. The
Board has not delegated that authority. Upon completion of the Merger, the
Board may delegate administration of the Incentive Plan to a committee. As
used herein with respect to the Incentive Plan, the "Board" refers to the
Board of Directors as well as to any committee to whom administration is
delegated.
Eligibility. ISO's and SAR's related to ISO's may be granted under the
Incentive Plan only to employees (including officers and directors who are
employees) of FirstLink and its affiliates. Selected employees, non-employee
directors and consultants are eligible to receive Stock Awards other than
ISO's and such SAR's under the Incentive Plan. No ISO may be granted under
the Incentive Plan to any person who, at the time of the grant, owns (or is
deemed to own) stock possessing more than 10% of the total combined voting
power of FirstLink or any affiliate of FirstLink, unless the ISO exercise
price is at least 110% of the fair market value of the stock subject to the
ISO on the date of grant, and the term of the option does not exceed five
years from the date of grant. For ISO's granted under the Incentive Plan, the
aggregate fair market value, determined at the time of grant, of the shares of
common stock with respect to which such options are exercisable for the first
time by an optionee during any calendar year (under all such plans of
FirstLink and its affiliates) may not exceed $100,000. Non-employee directors
are eligible only for NSO's.
Shares Reserved. The aggregate number of shares of common stock that,
initially, can be issued under the Incentive Plan is 3,000,000; provided,
however, that such number of shares shall increase automatically if the
Combined Company issues additional shares of common stock, so that the maximum
number of shares of common stock that may be issued or transferred pursuant to
awards under the Incentive Plan would equal 10% of the total number of issued
and outstanding shares of common stock at that time.
Exercise Price; Payment. The exercise price of ISO's under the Incentive
Plan may not be less than the fair market value of the common stock subject to
the option on the date of the option grant, and in some cases (see
"Eligibility" above), may not be less than 110% of such fair market value. If
options are granted with exercise prices below fair market value, deductions
for compensation attributable to the exercise of such options could be limited
by Section 162(m) of the Code. See "Federal Income Tax Information." In the
event of a decline in the value of FirstLink's common stock, the Board has the
authority to offer employees the opportunity to replace outstanding higher
priced options, whether incentive or non-statutory, with new lower priced
options. To the extent required by the Code, an option re-priced under the
Incentive Plan is deemed to be canceled and a new option granted. The
exercise price of options granted under the Incentive Plan must be paid
either: (a) in cash at the time the option is exercised; or (b) at the
discretion of the Board, by delivery of other common stock of FirstLink.
Option Exercise. Options granted under the Incentive Plan may become
exercisable ("vest") in cumulative increments as determined by the Board. The
Board has the power to accelerate the time during which an option may be
exercised. To the extent provided by the terms of an option, an optionee may
satisfy any federal, state or local tax withholding obligation relating to the
exercise of such option by a cash payment upon exercise, by authorizing
FirstLink to withhold a portion of the stock otherwise issuable to the
optionee, by delivering shares of FirstLink stock already owned stock by the
optionee, or by a combination of these means.
Term. The maximum term of options under the Incentive Plan is 10 years.
Options under the Incentive Plan terminate three months after termination of
the optionee's employment or relationship as a consultant or director of
FirstLink or any affiliate of FirstLink, unless (a) such termination is due to
such person's permanent and total disability (as defined in the Code), in
which case the option may, but need not, provide that it may be exercised at
any time not exceeding 90 days following such termination; (b) the optionee
dies while employed by or serving as a consultant or director of FirstLink or
any affiliate of FirstLink, in which case any restriction on exercise shall
terminate and the option may be exercised within 90 days of the optionee's
death by the person or persons to whom the rights to such option pass by will
or by the laws of descent and distribution; or (c) the option award agreement
by its terms specifically provides otherwise. Individual options by their
terms may provide for exercise within a longer period of time following
termination of employment or the consulting relationship. The option term may
also be extended in the event that exercise of the option within these periods
is prohibited for specified reasons.
Transferability. An ISO may not be transferred by the optionee otherwise
than by will or by the laws of descent and distribution and during the
lifetime of the optionee, may be exercised only by the optionee. An NSO may
not be transferred except by will or by the laws of descent and distribution
unless otherwise specified in the option agreement, in which case the NSO may
be transferred upon such terms and conditions as set forth in the option,
including pursuant to a domestic relations order. In any case, the optionee
may designate in writing a third party that may exercise the option in the
event of the optionee's death.
Vesting. Shares of stock awarded under the Incentive Plan may, but need
not, be subject to a vesting schedule to be determined by the Board.
Stock Appreciation Rights. Two types of SAR's are authorized for
issuance under the Incentive Plan: Tandem SAR's and Independent SAR's.
Tandem SAR's may be granted pursuant to an option, and are generally subject
to the same terms and conditions applicable to the particular option grant to
which they pertain. Tandem SAR's require the holder to elect between the
exercise of the underlying option for shares of stock and the surrender, in
whole or in part, of such option for an appreciation distribution.
Independent SAR's may be granted independently of any option. The terms
of an independent SAR, including the number of shares, vesting periods, if
any, and expiration date, is determined by the Board when the SAR is awarded.
An SAR entitles the Holder, upon exercise, to receive payment of an
amount determined by multiplying (a) the difference between the fair market
value of a share of stock on the date of grant of the SAR and the fair market
value of share of common stock on the date of exercise of that SAR; by (b) the
number of shares as to which the SAR has been exercised. However, the Board
may limit the amount payable upon exercise of an SAR when the SAR is awarded.
The appreciation distribution payable on the exercised SAR may be made, in the
discretion of the Board, in cash, in shares of common stock based on the fair
market value on the date of the exercise of the SAR, or in a combination of
cash and stock.
Adjustments. If there is any change in the stock subject to the
Incentive Plan or subject to any Stock Award granted under the Incentive Plan
(through merger, consolidation, reorganization, recapitalization, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or otherwise), the Incentive Plan and Stock Awards outstanding
thereunder will be appropriately adjusted as to the class and the maximum
number of shares subject to such plan, and the class, number of shares and
price per share of stock subject to such outstanding options.
Any award agreement may provide that, in the event of a dissolution or
liquidation of FirstLink, a specified type of merger or other corporate
reorganization (a "Change-in-Control"), to the extent permitted by law, any
surviving corporation will be required to either assume Stock Awards
outstanding under the Incentive Plan or substitute similar options for those
outstanding under such plan; or such outstanding options will continue in full
force and effect. The restrictive period of a Restricted Stock Award may be
accelerated and the restrictions shall expire. The acceleration of a Stock
Award in the event of a Change-in-Control may be viewed as an anti-takeover
provision, which may have the effect of discouraging a proposal to acquire or
otherwise obtain control of FirstLink.
The Board may suspend or terminate the Incentive Plan without shareholder
approval or ratification at any time or from time to time. Unless sooner
terminated, the Incentive Plan will terminate on September 23, 2009. The
Board may also amend the Incentive Plan at any time or from time to time.
However, no amendment will be effective unless approved by the shareholders of
FirstLink if the amendment would: (a) increase the number of shares reserved
for issuance upon exercise of options; (b) increase materially the benefits
accruing to individuals eligible to receive Stock Awards; or (c) modify the
requirements as to eligibility for participation. The Board may submit any
other amendment to the Incentive Plan for shareholder approval.
Restricted Stock Awards. The Board shall set the restrictions on stock
granted under the Incentive Plan. The conditions to removal of the
restrictions may include continuing employment or service as a director or
officer, or achievement of performance objectives described in the award
agreement. The Board may also determine what rights, if any, the Holder of
the restricted stock award may have, including the right to vote the shares
and receive dividends and other distributions paid or made with respect to the
shares.
To the extent provided by the terms of a restricted stock award, the
Holder of the award may satisfy any federal, state or local tax withholding
obligation relating to the award, by cash payment upon grant, by authorizing
FirstLink to withhold a portion of the stock otherwise issuable pursuant to
the grant, by delivering already-owned stock of FirstLink, or by a combination
of these means.
Federal Income Tax Considerations
Incentive Stock Options. ISO's under the Incentive Plan are intended to
be eligible for the favorable federal income tax treatment accorded "incentive
stock options" under the Code. There generally are no federal income tax
consequences to the optionee or FirstLink by reason of the grant or exercise
of an ISO. However, the exercise of an ISO may increase the optionee's
alternative minimum tax liability, if any. If an optionee holds stock
acquired through exercise of an ISO for at least two years from the date on
which the option is granted and at least one year from the date on which the
shares are transferred to the optionee upon exercise of the option, any gain
or loss on a disposition of such stock will be long-term capital gain or loss.
Generally, if the optionee disposes of the stock before the expiration of
either of these holding periods (a "disqualifying disposition"), at the time
of disposition, the optionee will realize taxable ordinary income equal to the
lesser of (a) the excess of the stock's fair market value on the date of
exercise over the exercise price, or (b) the optionee's actual gain, if any,
on the purchase and sale. The optionee's additional gain, or any loss, upon
the disqualifying disposition will be a capital gain or loss, which will be
long-term or short-term depending on how long the stock was held. Slightly
different rules may apply to optionees who acquire stock subject to certain
repurchase options or who are subject to Section 16(b) of the Exchange Act.
To the extent the optionee recognizes ordinary income by reason of a
disqualifying disposition, FirstLink will generally be entitled (subject to
the requirement of reasonableness, the provisions of Section 162(m) of the
Code and the satisfaction of a tax reporting obligation) to a corresponding
business expense deduction in the tax year in which the disqualifying
disposition occurs.
Nonstatutory Stock Options. There are no tax consequences to the
optionee or FirstLink by reason of the grant of an NSO. Upon exercise of an
NSO, the optionee normally will recognize taxable ordinary income equal to the
excess of the stock's fair market value on the date of exercise over the
option exercise price. Generally, with respect to employees, FirstLink is
required to withhold from regular wages or supplemental wage payments an
amount based on the ordinary income recognized. Subject to the requirement of
reasonableness, the provisions of Section 162(m) of the Code and the
satisfaction of a tax reporting obligation, FirstLink will generally be
entitled to a business expense deduction equal to the taxable ordinary income
realized by the optionee. Upon disposition of the stock, the optionee will
recognize a capital gain or loss equal to the difference between the selling
price and the sum of the amount paid for such stock plus any amount recognized
as ordinary income upon exercise of the option. Such gain or loss will be
long or short-term depending on how long the stock was held. Slightly
different rules may apply to optionees who acquire stock subject to certain
repurchase options or who are subject to Section 16(b) of the Exchange Act.
Restricted Stock Awards. Upon acquisition of stock under a restricted
stock award, the recipient normally will recognize taxable ordinary income
equal to the excess of the stock's fair market value over the purchase price,
if any. However, to the extent the stock is subject to certain types of
vesting restrictions, the taxable event will be delayed until the vesting
restrictions lapse unless the recipient elects to be taxed on receipt of the
stock. Generally, with respect to employees, FirstLink is required to
withhold from regular wages or supplemental wage payments an amount based on
the ordinary income recognized. Subject to the requirement of reasonableness,
Section 162(m) of the Code and the satisfaction of a tax reporting obligation,
FirstLink will generally be entitled to a business expense deduction equal to
the taxable ordinary income realized by the recipient. Upon disposition of
the stock, the recipient will recognize a capital gain or loss equal to the
difference between the selling price and the sum of the amount paid for such
stock, if any, plus any amount recognized as ordinary income upon acquisition
(or vesting) of the stock. Such gain or loss will be long or short-term
depending on how long the stock was held from the date ordinary income is
measured. Slightly different rules may apply to persons who acquire stock
subject to forfeiture.
Stock Appreciation Rights. No taxable income is realized upon the
receipt of an SAR, but upon exercise of the SAR, the fair market value of the
shares (or cash in lieu of shares) received must be treated as compensation
taxable as ordinary income to the recipient in the year of such exercise.
Generally, with respect to employees, FirstLink is required to withhold from
the payment made on exercise of the SAR or from regular wages or supplemental
wage payments an amount based on the ordinary income recognized. Subject to
the requirement of reasonableness, Section 162(m) of the Code and the
satisfaction of a reporting obligation, FirstLink will be entitled to a
business expense deduction equal to the taxable ordinary income recognized by
the recipient.
Potential Limitation on Company Deductions. The Code denies a deduction
to any publicly held corporation for compensation paid to certain employees in
a taxable year to the extent that compensation exceeds $1 million for a
covered employee. It is possible that compensation attributable to awards
under the Incentive Plan, when combined with all other types of compensation
received by a covered employee from FirstLink may cause this limitation to be
exceeded in any particular year. Certain kinds of compensation, including
qualified "performance-based compensation," are disregarded for purposes of
the deduction limitation. Compensation attributable to stock options will
qualify as performance-based compensation, provided that: (i) the stock award
plan contains a per-employee limitation on the number of shares for which
stock options and SAR's maybe granted during a specified period; (ii) the per-
employee limitation is approved by the shareholders; (iii) the award is
granted by a compensation committee comprised solely of "outside directors";
and (iv) the exercise price of the award is no less than the fair market value
of the stock on the date of grant. Compensation attributable to restricted
stock will qualify as performance-based compensation, provided that: (i) the
award is granted by a compensation committee comprised solely of "outside
directors"; and (ii) the purchase price of the award is no less than the fair
market value of the stock on the date of grant.
<PAGE>
<PAGE>
THE BUSINESS OF FIRSTLINK AND USOL
General
FirstLink and USOL provide CATV and local and long distance telephone
services to residents in MDUs, mainly apartment and condominium complexes.
They market these services to the residents of the buildings through
agreements with the owners or managers of the complexes. These ROE contracts
give them the exclusive right to market the services to the residents of the
complexes. Both companies offer property owners significant incentives to
enter into ROE contracts with them. They offer property owners a share of the
revenue generated by the residents who purchase services from them. FirstLink
and USOL believe they offer superior customer service, which enhances the
owner's ability to attract tenants.
The Combined Company will target demographically appealing MDUs clustered
in geographic regions with growing populations. FirstLink currently has ROE
contracts with 16 residential developments in three cities in the United
States. As of June 30, 1999, 14 of those properties were online, all in
Portland, Oregon, representing 3,300 apartment units. As of June 30, 1999,
FirstLink had 2,082 and 1,556 CATV and telephone customers, respectively.
USOL currently services MDUs located in Austin, Dallas-Fort Worth, Denver, San
Antonio, and the Washington, D.C. metropolitan area (including the Virginia
suburbs). As of June 30, 1999, it had an installed base of over 11,800
subscribers, consisting of 9,246 CATV and 2,564 telephone customers.
Industry Overview and Competition
The telecommunications industry in the United States is large, and it is
changing quickly. Technological and regulatory changes have enabled smaller
companies to compete more effectively in telephone markets, which have been
dominated by a few large companies. Improved technology has also enabled
companies to compete with CATV companies by bypassing the need for building
plants throughout the city. This "wireless cable" uses broadcast technology
to deliver audio, visual, and data signals from centralized locations to the
end user, either an individual residence or a building. These signals can be
delivered by satellite directly to the user, or through Satellite Master
Antenna Television ("SMATV") distribution systems.
The regulatory environment in the telecommunications industry has changed
dramatically over the past few years. In 1990, the FCC mandated that states
act to shift the ownership of telephone wiring in customer premises from
regional bell operating companies ("RBOCs") to property owners. This decision
relieved regulated local telephone companies of the burden of wire maintenance
and allowed property owners to decide how to use existing wiring. This
regulatory development created the opportunity for private telecommunications
operators to serve MDUs as resellers of local telephone network services. In
the past, however, the cost of switching equipment and tariffs in local and
long-distance exchange markets prevented private telecommunications operators
from taking advantage of this opportunity.
Recent changes in the telecommunications industry have enabled private
telephone operators to package and resell all types of telecommunications
services to MDU residents at competitive prices. These changes include (i)
the development of highly reliable, efficient, low-cost private branch
exchange and switching equipment, (ii) the proliferation of fiber optic
transmission capacity, and (iii) the gradual decrease in barriers to entry
into local markets. While these changes have created opportunities for
private telephone operators, they have also created pricing pressures, which
may depress profit margins for such private telephone operators in the future.
Traditionally, different companies have provided residents in apartment
and condominium complexes with local telephone, long distance telephone, cable
television and, more recently, internet services. Consumers typically have
had to contract with four different companies to receive these services; pay
four separate bills, and contact four different companies to correct service
problems. Federal and local regulations prohibited the traditional providers
of local telephone service from offering long distance service. Technological
and financial limitations inhibited cable television companies from offering
telephone and internet services; and also prevented local telephone providers
from offering cable television services. That environment is changing
rapidly, as regulatory prohibitions have lessened and technology has advanced.
Many companies are seeking ways to deliver one or more of these services as
one package. Many states began to allow companies to purchase dial tone from
the local telephone company on a wholesale basis and resell the dial tone to
the tenant from common telecommunications facilities. Other services are
added to the package, such as long distance and cable television. These
bundled services are referred to in the industry as Residential Multi-Tenant
Services, or RMTS.
The technological and regulatory changes have enabled smaller companies
to enter the CATV, telephone and internet markets. Some of those new
companies have concentrated their marketing efforts on MDUs. The potential
market for RMTS remains largely undeveloped, creating significant
opportunities for companies with the technological, operational and
administrative ability to manage growth effectively. First, there are few
competitors relative to the size of the potential market, which is estimated
to be approximately 6 million units across the United States located in MDUs
of 200 units or more. Second, RMTS providers can offer their services
selectively and at rates below those offered by traditional CATV and
telecommunications companies. Due to their lower cost structure, reduced
regulatory oversight, and economies of scale realized from an increased range
of products and services offered, RMTS providers can generally offer revenue-
sharing agreements to property owners to induce them to enter into long-term
contracts.
The market for CATV and telephony services is highly competitive.
FirstLink and USOL compete for ROE contracts with franchised cable operators
("MSOs") and other private cable operators as well as the RBOC's. Under the
terms of its ROE contracts, FirstLink and USOL generally are required to
provide products and services that are competitive with those offered by other
cable and telecommunications providers. FirstLink and USOL compete for
customers on the basis of price, services offered, and customer service. MSOs
and RBOCs, represent FirstLink's and USOL's principal competition. These
competitors are typically very large companies with significantly greater
resources than those the Combined Company will have. FirstLink and USOL
compete directly for ROE contracts with these companies. The
Telecommunications Act of 1996 (the "1996 Act") allows RBOCs to enter the
cable business as well. The principal RMTS competitors of FirstLink and USOL
are GE/RESCOM, OpTel, Inc., and OnePoint Communications, L.L.C.
Government Regulation
FirstLink and USOL are subject to regulations under both state and
federal telecommunications laws, which are fluid and rapidly changing. On the
state level, rules and policies are set by each state's Public Utility
Commission or Public Service Commission ("PUC" or "PSC"). On a federal level,
the FCC, among other agencies, dictates the rules and policies that govern
interstate communications providers. The FCC is also the main agency in
charge of creating rules and regulations to implement the 1996 Act.
Regulation of the Activities of Private Cable Operators
-------------------------------------------------------
Franchise cable operators are subject to a wide range of FCC regulations
regarding such matters as the rates charged for certain services, transmission
of local television broadcast signals, customer service standards/procedures,
performance standards and system testing requirements. In addition, the
operator's franchise, which can be issued at the municipal, county or state
level, typically imposes additional requirements for operation. These relate
to such matters as system design and construction, provision of channel
capacity and production facilities for public educational and government use,
and the payment of franchise fees and the provision of other "in kind"
benefits to the city.
The operator of a video distribution system that serves subscribers
without using any public right-of-way, referred to generally as a private
cable operator, is exempt from the majority of FCC regulations applicable to
franchised systems which do use public rights-of-way. Moreover, a state or
local government cannot impose a franchise requirement on such operators.
To remain exempt from extensive FCC regulation and local franchising
requirements, the Combined Company will confine its video distribution
facilities to contiguous private property, and obtain programming primarily
via SMATV facilities. The Combined Company intends to rely on 18 gigahertz
("GHz") microwave links to cross public rights-of-way where necessary and
technically feasible. The use of microwave frequencies to transmit video
signals across a public right-of-way is not considered a "use" of the right-
of-way sufficient to trigger a local franchising requirement or FCC regulation
applicable to franchised operators. The Combined Company intends to be a
private cable operator in all of the markets that it serves. However,
TheResidentClub.com may choose not to be a private cable operator in markets
it may serve.
Even if the Combined Company structures its operations in the foregoing
manner, it will have to comply with various FCC rules, including
- - - - the FCC's signal leakage rules, which require monitoring and testing of
its facilities,
- - - - various Equal Employment Opportunity Commission requirements (including
annual reports and implementation of a nondiscrimination policy and a
positive program to encourage equal opportunity),
- - - - requirements that the Combined Company obtain the consent of commercial
broadcast stations for transmission of the stations' signals, and
- - - - rules requiring the closed captioning of programming.
In addition, the use of 18 GHz microwave links nationwide could be
affected generally by two ongoing proceedings at the FCC. In the first
proceeding, the FCC is considering whether to provide for routine "blanket"
licensing of large numbers of small antenna earth stations in a range of
frequency bands including the 18 GHz band. If such operations are allowed, it
is possible that the Combined Company would be required to use more
sophisticated and more expensive equipment to maintain signal quality in its
point-to-point 18 GHz microwave links. It is also possible that the proposed
operations would cause interference with these links that could not be
remedied entirely. In the second proceeding, initiated on April 1, 1998, the
FCC has been asked to authorize the use of the 12 GHz band for transmission of
video programming. Such action would expand the general availability of
microwave links. More importantly, a 12 GHz link can cover approximately
twice the distance of an 18 GHz link and consequently would allow the Combined
Company to integrate systems over a larger area.
Regulations That Affect the Right to Access Properties
------------------------------------------------------
Federal law provides MSOs access to public rights-of-way and certain
private easements. These provisions generally have been limited by the courts
to apply only to external easements, and MSOs have not been able to use these
rights to access the interior of MDUs without owner consent. In some
jurisdictions, MSOs have been able to use state or local access laws to gain
access to a property over the owner's objection and in derogation of a
competing provider's exclusive contractual right to serve the property. These
statutes, referred to as "mandatory access" provisions, typically empower only
MSOs to force access to an MDU to provide service to the residents regardless
of whether the owner objects or has entered into a contract with an
alternative provider of video services such as the Combined Company. Thus, in
jurisdictions where a mandatory access provision has been enacted, an MSO
would be able to access an MDU and provide service in competition with the
Combined Company regardless of whether it has an exclusive ROE contract with
the owner. The ability of MSOs to force access to an MDU and take a portion
of the subscriber base could negatively effect the Combined Company's
operating margin at a particular property.
An ongoing FCC proceeding raises the possibility that direct broadcast
satellite ("DBS") and multi-channel, multi-point distribution service ("MMDS")
operators will be granted rights on a national basis similar to the mandatory
access provided to MSOs in some state and local jurisdictions. The FCC
recently adopted rules prohibiting homeowners associations, manufactured
housing parks and state and local governments from imposing any restriction on
a property owner that impairs the owner's DBS systems and MMDS antennas one
meter or less in diameter or diagonal measurement. The FCC has sought comment
on the possibility of adopting rules that would prohibit MDU owners from
imposing such restrictions on residents of their rental properties. If the
FCC were to adopt such rules, DBS and MMDS operators, through tenant choice,
presumably would be able to gain access to serve some individual residential
units within MDUs without the owner's consent.
Rules which Govern the Disposition of Wiring Inside MDUs
--------------------------------------------------------
In 1998 the FCC issued new rules governing the disposition of inside
wiring by incumbent operators in MDUs upon termination of service when the
incumbent operator owns the wiring. As do other new providers, in some
instances, the Combined Company will face difficulty in taking over a property
because the ownership of the wiring is uncertain or contested and the property
owner is hesitant to allow installation of additional wiring. The new rules
address this issue and facilitate competition from new providers by requiring
the incumbent operator to choose between sale, removal or abandonment of the
wiring within certain time constraints and by allowing installation of wiring
within an incumbent's molding in certain instances. The rules are currently
the subject of petitions for reconsideration at the FCC and at least one
judicial challenge in the Eighth Circuit Court of Appeals.
In conjunction with the issuance of the inside wiring rules, the FCC
sought comment on a number of related issues which it will address in new
rules. It is considering, among other things, whether to:
- - - - adopt a cap on the duration of exclusive contracts equal to the amount of
time reasonably necessary to recover capital costs (the FCC has proposed
a cap of seven years);
- - - - limit the ability of multi-channel video programming distributors with
market power (typically the local franchisee) to enter into exclusive
contracts;
- - - - take action to address the anti-competitive effects of perpetual
exclusive contracts (those continuing though all future renewals of the
franchise), such as by allowing MDU owners to void these contracts
pursuant to a "fresh look" mechanism;
- - - - require competing providers to share a single system of wiring;
- - - - extend existing rules on cable home wiring (that wiring within
residential units up to twelve inches outside each unit) to all video
programming distributors and not just franchise operators; and/or
- - - - extend rights of subscribers to install their own cable wiring within
MDUs.
The comments filed in this proceeding are divided on many of the key
issues regarding treatment of exclusive and perpetual contracts.
Given the limited subscriber base at MDUs, it is important for the
Combined Company to be able to rely upon exclusive contracts as a means of
maximizing revenue at a particular property. Thus, if in implementing rules
to address the foregoing issues, the FCC imposes too short a cap on exclusive
contracts or otherwise unduly limits their use, it could have a material
adverse effect on the Combined Company's business, financial condition, and
results of operations. In addition, the perpetual contracts often utilized by
franchise operators inhibit competition from alternative providers such as the
Combined Company or stifle it altogether if such contracts are exclusive. If
the FCC does not grant MDU owners broad enough powers to extricate themselves
from perpetual contracts with franchise operators, the perpetual contracts
would limit the number of MDUs at which the Combined Company could compete,
which could have a material adverse effect on its business.
The Regulation of Direct Broadcast Signal Providers
---------------------------------------------------
Congress is considering legislation that, if enacted, could make it
easier for the Combined Company to use DBS as a source of programming while at
the same time making it easier for DBS providers to compete. The proposals
would greatly expand the areas in which DBS providers can distribute signals
of local TV stations national networks and would reduce the license fees that
DBS providers must pay for carrying broadcast signals. Finally, proposed FCC
regulations could limit the ability of MDU owners to deny tenants the right to
subscribe to DBS service.
FCC Regulation of Franchise Cable Television Rates
--------------------------------------------------
The FCC regulates the rates that franchise cable systems charge for basic
monthly service and certain customer premises equipment. As an exception to
the general uniform rate requirement, the regulations allow certain "bulk"
discounts to MDU customers, enabling franchise cable systems to be more
competitive with private operators such as the Combined Company. In addition,
rate regulation does not apply if the franchise operator is subject to
"effective competition" as defined by the FCC or if the operator qualified for
the "small operator" exemption. The FCC is currently considering revisions to
the uniform rate regulations and the foregoing exemptions which may affect the
level of protection the regulations afford private operators. More generally,
the regulations do not prohibit discriminatory pricing for services other than
rate-regulated services and associated installation and equipment costs.
Actions by the FCC that expand the freedom of MSOs to set rates or the
termination of rate regulation altogether could allow franchise operators to
subsidize competition at MDUs through their citywide operations. This could
have a material adverse effect on the Combined Company's business.
Payment for the Use of Copyrighted Material
-------------------------------------------
The broadcast programming to be distributed by the Combined Company
contains copyrighted material. Accordingly, the Combined Company will have to
pay copyright fees for its use of that material (copyright liability for
satellite-delivered programming is typically assumed by the supplier). The
U.S. Copyright Office recently ruled that private systems located in
"contiguous communities" (or operating from one headend) will be treated as
one system and that the revenue for such systems must be combined in the
calculation of copyright fees. If the combined revenue figure is high enough,
it results in more complicated fee calculations and higher fees. The Combined
Company intends to structure its programming to minimize the revenue
associated with retransmission of television and radio broadcasts in an effort
to maintain a simplified filing status and to reduce its copyright liability
in the event it must file under the more complicated formula.
The Regulation of Telephone Services
------------------------------------
The Combined Company will operate as either a shared tenant service
provider, a competitive local exchange carrier, or an interchange connection
carrier to provide telephone services to its customers. Fewer than a dozen
states impose certification and/or tariffing requirements on shared tenant
service providers, while virtually all states do so with respect to
competitive local exchange carriers. While the FCC and a majority of states
impose certification and/or tariffing requirements on interchange connection
carriers, federal and state regulation of those has been relaxed substantially
over the past few years. Competitive local exchange carriers remain subject
to a wide array of regulatory constraints and obligations. By contrast,
regulation of shared tenant providers is minimal. FirstLink is certified as a
competitive local exchange carrier in the states of Colorado, Oregon,
Washington, and Texas, and the Combined Company intends to seek similar
authority when its enters other states. FirstLink also has authority to
operate as an interchange connection carrier in the same states and will seek
authority to do so to the extent such authority is required when the Combined
Company enters new states.
The 1996 Act opened the local telecommunications markets to competition
by mandating the elimination of legal, regulatory, economic and operational
barriers to competitive entry. These changes provided FirstLink and USOL with
new opportunities to provide local telephone services on a more cost-effective
basis. The 1996 Act, however, also provides the RBOCs with a means to enter
the long-distance market, which introduced a number of substantial new
competitors in that market. On balance, management believes that the Combined
Company will benefit significantly from the market-opening provisions of the
1996 Act.
The Market
The potential market for RMTS in the United States consists of
approximately 10 million apartment units located in MDU communities of 50 or
more units. While all of these units are currently served by some form of
telephony or CATV service, FirstLink believes that fewer than 15% are
currently served by an RMTS provider. FirstLink and USOL believe that they
can increase their penetration of this market by virtue of the revenue-sharing
provisions in their ROE contracts, their ability to cross-market multiple
products and services at competitive prices, their point-of-sale marketing
arrangements with property owners, and by offering competitive products and
superior customer service. FirstLink and USOL believe that it is important to
enter target markets as quickly as practicable to establish an early market
presence and to gain critical operating mass in advance of competitors. Prior
to signing new ROE contracts, it has been the practice of FirstLink and USOL
to conduct a thorough review of each property, including engineering and cost
analyses, to determine if the facilities can be installed on a cost-effective
basis. Once a property has been selected, the construction process is closely
monitored so that the appropriate infrastructure is installed on a timely
basis and within budget.
Business Strategy
The Combined Company's primary objective is to become a leading provider
of RMTS in the United States. It plans to accomplish this objective by
growing both through acquisitions and through internal sales and marketing.
USOL is seeking to acquire private and wireless cable operators and their
ROE contracts at attractive prices in strategic geographical clusters. The
Combined Company will continue to do so. FirstLink and USOL believe that the
Combined Company will be able to improve the penetration rates in the acquired
properties by offering improved channel line-ups, better customer service and
additional services such as telephony and internet. Once the Combined Company
has established a presence in a market through acquisition, it should be able
to maximize the benefits of clustering by marketing directly to property
owners and managers in that market.
In order to facilitate the Combined Company's growth strategy, it intends
to provide CATV services as a private cable operator. As a private cable
operator, it will acquire programming through program access agreements and
distribute the product through a network on the MDU premises. It will use the
expertise of USOL, which currently operates as a private cable operator.
FirstLink and USOL have concluded that this CATV fulfillment methodology is
necessary for the following reasons.
First, FirstLink and USOL believe that it will become increasingly more
difficult, if at all possible, to negotiate favorable bulk CATV resell
agreements with the local MSOs. FirstLink experienced this in its
negotiations with TCI. FirstLink and USOL believe that as TCI and AT&T begin
to provide bundled phone and video products, they may view the Combined
Company as a competitor as opposed to a partner. Second, although more
capital intensive, by operating as a private cable operator, FirstLink and
USOL expect to significantly improve the Combined Company's CATV operating
margins than those of a reseller, thus reducing the time necessary to reach
positive operating cash flow. Third, because FirstLink acquired signal from
the local MSO, the MSO often required the property owner to enter into an ROE
contract with the MSO in addition to the property owner's ROE agreement with
FirstLink. As a result, if FirstLink chose to stop purchasing signal from the
MSO, the MSO could have the right to compete with FirstLink at the property.
FirstLink and USOL have concluded that such joint CATV ROE contracts may
diminish the value of the subscriber base. However, the Combined Company will
continue to honor FirstLink's commitments under existing bulk CATV agreements.
The Combined Company will also explore other ways to provide enhanced
local dial tone, such as reselling services of competitive local exchange
carriers. Traditionally, FirstLink and USOL have provided local phone service
by utilizing purchased switching hardware and software in combination with
leased networks from the incumbent local exchange carrier.
The Combined Company plans to grow as rapidly as its infrastructure and
financing will allow, while maintaining its commitment to quality customer
service. The Combined Company believes that the back office infrastructure of
USOL, including its customer service call center, billing system and
management information systems provide a scaleable platform to support the
Combined Company's growth and strategy. It is the Combined Company's
intention to operate the business from Austin, Texas, utilizing the USOL
facilities.
Growth Strategy
The Combined Company's primary objective is to become a leading RMTS
provider in the United States. It plans to meet this objective by:
- - - - targeting MDUs with favorable demographics;
- - - - capturing the benefits of geographic clustering;
- - - - offering competitive products and superior customer service; and
- - - - using a flexible and reliable technology platform.
The Combined Company plans to pursue the following strategies:
- - - - generate additional ROE contracts in existing markets;
- - - - offer products in new markets;
- - - - cross-sell additional related products and services to its existing
subscriber base once a market has been developed;
- - - - pursue acquisition of other CATV and telephony service providers.
An important part of this growth strategy is to acquire companies that
provide CATV and telephone services in specific targeted areas. However,
neither FirstLink nor USOL have any current agreements or understandings with
respect to any specific acquisition.
<PAGE>
<PAGE>
INFORMATION ABOUT FIRSTLINK
Business
Products And Services
---------------------
FirstLink offers standard and enhanced local and long-distance
telecommunications and CATV services to residents of MDUs. It has
historically provided CATV services by acquiring and reselling signal from the
local franchised MSO. It has provided enhanced local phone service by
purchasing switching hardware and software and leasing networks from the
incumbent local exchange carrier. FirstLink has provided long-distance
telephone service by reselling services purchased from inter-exchange
carriers.
FirstLink offers its subscribers a full range of popular CATV programming
at competitive prices. Its basic MDU programming package is generally priced
competitively with the rate charged by incumbent MSOs. It offers premium
television services, including uninterrupted full-length motion pictures,
regional sports channels, sporting events, concerts, and other entertainment
programming. It also offers premium channels, including HBO(-trademark-),
Cinemax(-trademark-), Showtime(-trademark-), and The Disney Channel(-
trademark-) individually or in discounted packages with basic or other
services. It also offers movies, sporting events, concerts and other special
events on a pay-per-view basis.
FirstLink introduced high-speed internet access to certain properties
during 1999, utilizing the network of a national provider. It believes that
its customers can experience data transmission speeds of up to 1 Mb per
second, which is approximately 27 times faster than the 56K per second speed
provided by dial-up modems for use over existing telephone lines.
Installed Base
--------------
FirstLink currently has ROE contracts with 16 residential developments in
three cities in the United States, including properties owned or managed by
Equity Residential Properties Trust, Trammell Crow Residential, Harsh
Investment Corp., and an affiliate of Prudential Insurance Company of
America. Fourteen of those properties were online as of June 30, 1999,
representing 3,300 units. Contract terms range from five to 20 years with an
average remaining term of 7.9 years.
<TABLE>
<CAPTION>
Property Location Units Under Contract Units Online
----------------- -------------------- ------------
<S> <C> <C>
Portland, OR 3,500 3,300
Seattle, WA 351 ---
Denver, CO 315 ---
----- -----
4,166 3,300
===== =====
</TABLE>
FirstLink had ceased marketing to additional properties during the recent
period of time when it was evaluating different business alternatives. It is
anticipated that marketing efforts will commence again prior to the Merger.
Suppliers
---------
FirstLink currently leases transmission facilities from US WEST
Communications, Inc. ("USWC"), MCI Worldcom, and Frontier Communications. It
acquires cable television signal from TCI Cablevision of Oregon, Inc. and KBL
Cablesystems of the Southwest, a Time Warner company. It uses switching
hardware manufactured by Digital Telecommunications Inc. FirstLink uses
Transport Logic to provide internet services. FirstLink believes that
alternative sources are available for all critical equipment and services that
it uses except for cable television signals, and that such equipment and
services can be obtained at prices comparable to those it presently pays.
Properties
----------
FirstLink leases 2,100 square feet of office space at 190 SW Harrison
Street in Portland, Oregon under a five-year lease expiring on October 31,
2001. In addition, it has leased 4,500 square feet of office space at 117 SW
Taylor Street in Portland, Oregon under an eight-year agreement with an option
to terminate at any time after five years. FirstLink had intended to relocate
its headquarters to the Taylor Street location. However, since the Combined
Company will manage operations from the USOL facility in Austin, the Taylor
Street location will no longer be necessary. The Combined Company plans to
remain in the Harrison Street location, utilizing the space for the Portland
field office, and sublease the office space at Taylor Street. FirstLink has
subleased the Taylor Street property effective January 1, 2000, at a rate that
covers its costs for the space. The management of FirstLink and USOL believe
that the Combined Company's office space will be sufficient for the next
several years. FirstLink also maintains equipment, primarily switches, at
various locations to provide local dial tone for its customers.
Employees
---------
FirstLink employs 10 persons on a full-time basis in its Portland offices
and 2 employees are working in USOL's Austin, Texas, offices. Of these
employees, 5 are administrative or management and 7 are in the areas of
customer service, billing, and operations. It believes that its relationship
with employees, none of whom are union members, is good. All of its non-
executive employees are at will.
Legal Proceedings
-----------------
FirstLink is not a party to any material legal proceedings.
<PAGE>
<PAGE>
INFORMATION ABOUT USOL
Business
Background
----------
USOL currently provides CATV and telephony services to MDU residents at
competitive rates. Its CATV service offers a full range of popular
programming tailored specifically for each MDU or region. It obtains its CATV
programming through program access agreements with suppliers. It currently
provides standard and enhanced local and long-distance telephony services over
networked central office telecommunications platforms.
Since inception, USOL has experienced significant growth in the total
number of passings, subscribers, and properties covered by ROE contracts.
"Passings" are the number of units to which USOL is capable of delivering one
or more services. From December 31, 1996 to June 30, 1999, the number of
passings increased from approximately 7,600 to approximately 20,600 (an
increase of approximately 271%), and the number of subscribers increased from
approximately 3,600 to approximately 11,000 (an increase of approximately
306%).
Products and Services
---------------------
USOL offers standard and enhanced local and long distance
telecommunications and/or CATV services to MDU residents. In addition, USOL
has begun to offer high speed internet access to some of the existing
properties. Although USOL's products and services are similar to the
telephone and CATV services that apartment residents already purchase in large
numbers, USOL believes it offers comparable features at competitive prices
with superior customer service.
CATV Services. USOL typically delivers its CATV services by re-
transmitting programming signals via antenna and principal headend electronic
equipment that receive and process signals from satellites, via both analog
and digital transmissions. USOL obtains its programming through program
access agreements with suppliers of programming. USOL's private cable systems
also process and distribute off-air transmission signals from local network
affiliates and independent television stations. USOL's cable system
architecture generally eliminates the need for set-top converter boxes when it
is connected to cable-ready television sets, and enables USOL to activate
service for subscribers without entering into an apartment. Many of USOL's
systems currently use 18 GHz microwave relays to link more than one apartment
community to a single headend, enabling USOL to realize greater economies of
scale. In the future, management plans to employ the technology that provides
the most attractive return on invested capital without compromising its
service. In some instances, USOL may simply resell the services of the local
franchise cable operator. USOL is also currently analyzing and/or beta
testing other technologies including fiber optics, digital overlays, and
interdiction (automated work order processing) to provide expanded and
enhanced services.
USOL offers its subscribers a full range of popular CATV programming at
competitive prices. Its basic MDU programming package is generally priced
below the rate charged by incumbent franchise CATV operators, and it offers
uninterrupted full-length motion pictures, regional sports channels, sporting
events, concerts, and other entertainment programming. Premium channels,
including HBO(-trademark-), Cinemax(-trademark-), Showtime(-trademark-), and
The Disney Channel(-trademark-), are generally offered individually or in
discounted packages with basic or other services. USOL also offers sporting
events, concerts, and other special events on a pay-per-view basis, dependent
on necessary subscription volume. In addition, USOL offers each property its
own dedicated channel, called "Community Link," that provides on-site
management with the ability to communicate electronically with residents.
Telephony Services. USOL currently purchases standard and enhanced local
and dedicated long-distance telephony services in bulk via T1-based
connectivity from local exchange carriers, competitive local exchange
carriers, and interexchange carriers. USOL offers local and long-distance
telephony services to customers through their networked, central office
telecommunications platforms. Telephony services offered by USOL include call
waiting, call forwarding, caller ID and voice mail. USOL does not permit its
customers to place 900-number calls and related type services, in part to
limit the potential credit risk associated with such calls, and in part
because of the additional expense associated with tracking such calls. USOL's
switching systems are software-driven and capable of feature enhancement and
efficient, remote servicing through software interfaces.
Other Services. In addition to offering CATV and telephony services,
USOL has begun to offer high-speed internet access services. The internet
product will utilize existing outside plant infrastructure of the properties,
specifically the copper wire and coaxial cable servicing the apartment units.
USOL is also exploring additional services including paging and utility
metering.
TheResidentClub.com. Through its second tier wholly-owned subsidiary,
TheResidentClub.com, Inc., USOL acquired certain assets from GMACCM, including
marketing agreements with MDU owners and vendors to sell various types of
services to residents of the MDUs. The contracts are generally short-term.
Currently, the marketing agreements are being used to sign up residents for
local phone service on behalf of certain RBOCs. In return, the RBOCs pay one-
time commissions, which in the aggregate are generating approximately $20,000
of revenue per month. It is USOL's plan to maintain the current activities
until the new business plan can be implemented. Under the new plan, USOL will
develop an entirely new business utilizing the internet. All residents of the
properties under the marketing agreements will have automatic membership in
"TheResidentClub.com." "TheResidentClub.com" membership will entitle a
resident to free or discounted Internet service and the ability to acquire
other products and services at discounted prices. "TheResidentClub.com" will
attempt to derive revenues from its membership base. Such revenues may
include, but are not limited to, one time commissions from the sales of
products or services; recurring monthly commissions derived from selling
products and services; national, regional and local advertising; membership
fees; and sponsorship fees for providing vendors with exclusive rights to
market directly to the members through "TheResidentClub.com" membership web
site.
Markets and Installed Base
--------------------------
USOL currently provides CATV and telecommunications services in Austin,
Dallas-Fort Worth, Denver, San Antonio and the Washington, D.C. metropolitan
area (including the Virginia suburbs). USOL plans to expand the
telecommunications component of its business by increasing the number of MDUs
to which it provides telecommunications services and by expanding the number
of telecommunications services it provides.
As of June 30, 1999, the installed base of USOL included 20,600
operational passings, of which approximately 33% were telephony and
approximately 67% were CATV. The installed base includes over 11,800
subscribers, which represents a total penetration rate of 57% of all units and
a penetration rate of 65% of occupied units. Since several of USOL's
operational passings are located in newly constructed properties in the
initial lease-up phase, or recently activated properties, the penetration rate
for all units is expected to increase as units are occupied and residents move
in and out of the units over the following years.
The table below summarizes the operational passings and subscriber base
of USOL as of June 30, 1999.
<TABLE>
<CAPTION>
Passings Subscribers
--------------------------- ------------------------------
CATV Telephone Total CATV Telephone Total
------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONAL MARKET
Austin 3,730 2,043 5,773 2,278 597 2,875
Dallas - Fort Worth 2,824 2,598 5,422 2,280 1,260 3,540
Denver 968 496 1,464 718 164 882
San Antonio 5,569 1,124 6,693 3,436 285 3,721
Washington, DC Area 624 624 1,248 534 258 792
TOTALS 13,715 6,885 20,600 9,246 2,564 11,810
</TABLE>
Marketing and Sales
-------------------
While revenue-sharing arrangements encourage property owners to enter
into service agreements with USOL, management believes that delivery of
competitive products and superior customer service is the key to acquiring ROE
contracts. USOL uses a two-tier strategy. First, it concentrates on entering
into ROE contracts with the large national owners of high quality multi-family
housing. These property owners are generally partnerships, real estate
investment trusts, insurance companies and other specialized forms of owners
that control 20,000 or more units. Second, USOL markets its services to
smaller owners whose properties typically lie within a single geographic
market.
ROE contracts with USOL offer property owners an attractive additional
revenue source in the form of fees and commissions. Under USOL's revenue
sharing arrangements, property owners generally are paid a percentage of gross
monthly receipts collected for services delivered by USOL to subscribers on a
property. The percentage paid to property owners under this arrangement
varies depending upon the total number of subscribers to USOL's services in
relation to the total number of dwelling units. USOL negotiates long-term ROE
contracts with owners of large MDU portfolios because it believes that
strategic relationships with these owners are critical to its market
penetration and long-term success. These ROE contracts generally provide for
a term of eight to fifteen years and give USOL the right to be the exclusive
provider of CATV services and a non-exclusive provider of telephony and
related services. The property owner typically agrees to market and promote
USOL's telephony and related services exclusively.
Once USOL has obtained the ROE contract and has activated services on the
property, it utilizes the on site leasing personnel to market its services to
the residents, which typically takes place at the time the residents sign
their leases. USOL packages its services at competitive prices, and usually
discounts the installation prices compared to the competition. For the
resident, this easy sign up process eliminates the need for them to contact
several different service providers, and saves them money and time. In
addition, USOL usually schedules service installations and assigns phone
numbers prior to the move in date of the resident. This eliminates the
inconvenience for the resident of having to meet the installation technicians,
as is the case with the competition. All of the services are billed on a
single invoice, and the resident only has one company to contact for any
questions or concerns. USOL believes that the combination of convenience,
savings, and quality service presented to the resident at the time of move in
is a very powerful marketing advantage. Additionally, the leasing agents are
given an incentive to sell USOL's services, since USOL pays them commissions
(directly or through the property owner's management company) for signing up
existing residents and new residents. The leasing agents are trained by USOL
and are provided with marketing and other support literature to facilitate
sales of USOL's products and services.
Efficiencies obtained through regulatory advantages and carefully
selected technology deployments enable USOL to compete on a cost-effective
basis and, therefore, to share revenues with property owners. Due to
increasing competition in the MDU market, property owners are facing pressure
to find new ways to generate profits. As a result, revenue sharing with the
property owner based on subscriber penetration and gross revenues for the
owner's property has become the standard in the RMTS market. USOL benefits
from the fact that it is generally not subject to the regulations that impose
substantial additional costs on typical franchise CATV operators. These
additional costs result from universal access requirements, universal pricing
requirements, and "must carry" regulations and franchise fees. In addition,
USOL builds out only the MDUs that it serves, and implements the most
efficient delivery systems appropriate for a particular geographic area.
Accordingly, USOL faces significantly lower capital expenditures than
traditional cable operators and local exchange carriers. USOL uses a
scaleable telephone switch that enables it to provide telephony service
economically to smaller MDU properties.
In addition, competition in the multi-family housing market has forced
property owners to find new ways to differentiate their properties to attract
new residents and retain residents. USOL believes that its competitive
products and superior customer service provide MDU owners with an amenity
package that helps distinguish their properties from the competition.
A significant number of MDUs to which USOL provides CATV and telephony
services are "retrofits," or existing units where hard-wiring is already in
place. Retrofits can save USOL a substantial part of the initial cost of
building out passings, and generally have higher occupancy rates at the
commencement of the ROE contract. USOL's objective is to pre-subscribe the
existing resident base to its service prior to the system cut-over and
activation, allowing USOL to reach penetration goals quickly. This is
achieved through various pre-activation marketing campaigns, with continued
post-activation efforts to meet penetration objectives. USOL considers that
the number of subscribers in a property remains fairly constant after 12
months following activation of its services.
Owner Relationships
-------------------
USOL constructs passings on MDU properties, which are owned by various
institutional property owners, including Amli Residential Properties Trust,
Gables Residential Trust, Lincoln Property Combined Company, and Equity
Residential Properties Trust.
Customer Service
----------------
Superior customer service is a significant element of USOL's marketing
strategy, and USOL believes that its customer service typically exceeds
expectations. USOL's representatives answer calls 24 hours a day, 365 days a
year. Customers call a single toll-free number for all customer service
issues. Service personnel can typically deliver desired service at a time
that is convenient for the customer. USOL's customer service bureau utilizes
account tracking and management software developed by USOL. USOL's in-house
telephone switch and associated software packages provide a complete
complement of call handling, routing, monitoring, and tracking features.
USOL believes that it offers a competitively priced range of products and
a level of customer service that is superior to that of its competitors. Its
networks and support systems ensure reliable, high-quality delivery of a range
of CATV and telecommunications services, and they have the capacity to offer a
broader scope of value-added telecommunications services over time. With
increases in USOL's subscriber base, management believes that the customer
service bureau will be able to achieve greater economies of scale while
providing reliable and attentive customer service and support.
Technology Platform
-------------------
USOL has installed a broad infrastructure in preparation for pursuing its
growth strategy. It has selected and installed network technology that
enables it to deliver competitive CATV and telephony services to customers on
a cost-effective basis. USOL currently uses a scaleable central office
telephone switch that provides efficient telephony service to smaller MDU
communities. In addition, USOL is exploring alternative means of delivering
telephony services to MDU residents on a cost-effective and competitive basis,
which may include strategic interconnect, resale, and agent agreements with
local exchange carriers and competitive local exchange carriers. USOL
provides its cable services using a variety of established delivery methods
that allow USOL the flexibility to deploy the most efficient and cost-
effective CATV system to a particular MDU without sacrificing features,
quality, or reliability of service. These include a combination of SMATV
headends, 18 GHz analog broadcast microwave systems, DBS systems, and selected
resale agreements with cable operators.
CATV Services. USOL's standard cable lineup offers a wide selection of
programming, including the traditional local affiliate network channels,
property information, gate channels, and a mix of popular basic and premium
satellite channels. The channel lineup generally offers between 50 and 75
channels, depending upon market demographics, deployment technology and
customer demand.
A SMATV headend operates by receiving programming signals, either locally
or via satellite, and re-transmitting the signal throughout the cable system.
Satellite dishes, located at each headend, receive signals, via analog or
digital transmission, from several specific satellites. These signals are
processed by electronic equipment and then modulated to a designated channel
frequency. An antenna network is also located at each headend to receive off-
air VHF/UHF signals from the local broadcast networks. With the use of 18 GHz
microwave systems, USOL has been able to transmit this headend signal to
multiple MDUs to link the network and achieve greater economies of scale.
USOL is currently focusing on digital-based delivery methods, and the
associated benefits they offer. USOL uses local franchise cable programming
to deliver cable services to MDUs in strategic locations where headend
facilities are not feasible or accessible. Resale delivery enables USOL to
defer capital expense costs until these costs can be allocated among more
passings.
All CATV services are provided at each property through an underground,
coaxial cable distribution system. The CATV signals are controlled at a
pedestal or wall-mounted junction box outside of each building, which enables
USOL to activate, modify and monitor service for its subscribers without
having to enter an apartment.
Telephone Services. USOL provides its telephone subscribers with bundled
local and long distance dial tone, as well as various additional features such
as call waiting, call forwarding, caller ID, voice mail, three-way calling,
emergency 911, and a variety of other services. All services provided by USOL
are comparable to, and priced competitively with, those offered by the
respective local exchange carrier, although USOL does not permit its customers
to place 900-number calls or related type services.
USOL's telephone facilities equipment is engineered in a "hub and spoke"
based network. The central office is strategically located around the
geographic area of the properties, which it will serve. Line interface
modules and "end office" type access nodes, are deployed on-site at each
surrounding MDU serviced by the respective central office. All calls placed
by USOL's customers are processed by the on-site line interface module, and
then hauled back to the central office via a local loop. The central office
processes all inbound and outbound traffic and connects the calls via primary
rate interface T1's to the local exchange or long distance provider, depending
on the call type. USOL believes this structure provides a cost-effective and
competitive solution for delivering facilities-based telecommunications
services to its MDU residents.
Suppliers
---------
USOL is not materially dependent upon any suppliers of goods or services.
Properties
----------
The corporate headquarters and national customer services bureau of USOL
are currently located at 10300 Metric Boulevard in Austin, Texas, in
approximately 25,000 square feet of commercial office space under a long-term
lease. USOL also maintains leased facilities in Farmer's Branch and San
Antonio, Texas, and McLean, Virginia.
Employees
---------
At September 30, 1999, USOL had 68 full-time employees. Of these
employees 11 are administrative or management, 19 are in the areas of customer
service and billing, 34 are in operations, and 4 are in sales and marketing.
USOL believes that its relations with its employees are good.
Legal Proceedings
-----------------
USOL is not a party to any material legal proceedings.
<PAGE>
<PAGE>
MANAGEMENT OF FIRSTLINK PRIOR TO THE MERGER
Officers and Directors
The following table sets forth the names and positions of the directors
and executive officers of FirstLink prior to the Merger, and their ages as of
the Record Date.
<TABLE>
<CAPTION>
Name Age Position
- - - ---- --- --------
<S> <C> <C>
A. Roger Pease (2)(3) 52 Chairman of the Board,
President, Chief Executive
Officer
Thomas E. McChesney (1)(2)(3) 51 Director
Robert F. Olsen (1)(3) 49 Director
Jeffrey S. Sperber 35 Chief Financial Officer and Secretary
James F. Twaddell (1)(2) 60 Director
</TABLE>
- - - ------------------------
(1) Independent directors. Following the Merger the Combined Company will
maintain at least two (2) independent directors on its Board of
Directors.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
A. Roger Pease was appointed President and Chief Executive Officer of
FirstLink in January 1996. From June 1994 through 1995, Mr. Pease served as
Chief Executive Officer, President, or Manager of FirstLink's predecessor.
Mr. Pease was President and Chief Executive Officer of Payline Systems, Inc.
from 1987 to June 1994. From 1983 to 1987, he was employed by Lattice
Semiconductor Corporation as Vice President of Finance, Vice President of
Strategic Planning and Administration, and as a consultant. From 1979 to
1983, Mr. Pease was a Partner with the Portland office of the accounting firm
of Touche, Ross & Co., where he served as Director of Management Consulting
Operations. Mr. Pease, a certified public accountant, holds a Masters of
Business Administration degree from Northwestern University and a Bachelor of
Arts degree in Finance from the University of Illinois.
Thomas E. McChesney was appointed a director in January 1996. He is a
registered representative of Blackwell Donaldson & Co., a securities broker-
dealer. From January 1996 to October 1996, Mr. McChesney was associated with
Bathgate McColley Capital Group, LLC. Previously, Mr. McChesney was an
officer and director of Paulson Investment Co. and Paulson Capital Corporation
from March 1977 to June 1995. Mr. McChesney also serves on the boards of
Labor Ready, Inc., a company listed on the New York Stock Exchange; T. Angell
& Co., Inc.; and Nation's Express, Inc.
Robert F. Olsen was appointed a director in January 1996. Mr. Olsen
previously served as Director of Payline Systems from May 1992 until May 1995.
Mr. Olsen is the Chairman and Chief Executive Officer of J.R. Roberts
Corporation, which he co-founded in 1980. J.R. Roberts Corporation is the
largest construction company in Sacramento, California, specializing in
commercial, industrial and multi-family housing projects. J.R. Roberts
Corporation has offices in Sacramento, Seattle, Portland, and Orange County.
From 1971 to 1980, he served as Manager of Marketing and Director of East
Coast Construction and Special Projects for Continental Heller, a large
national construction company based in California. Mr. Olsen holds two
degrees from Oregon State University: a Bachelor of Science degree in Civil
Engineering and a Bachelor of Arts degree in Business Administration.
Jeffrey S. Sperber was appointed Chief Financial Officer in October 1997
and Secretary in March 1999. From August 1995 to September 1997, Mr. Sperber
was the Controller of TCI Wireline, Inc., a business unit of TCI, engaged in
providing local telephone service. From August 1991 to August 1995, he was
employed by Concord Services, Inc., a privately held international
conglomerate based in Denver, Colorado, where he was responsible for the
accounting and finance of both public and privately held entities, finally ,
as Chief Financial Officer of its manufacturing and processing business unit.
From September 1986 to August 1991, he was employed by Arthur Andersen & Co.
in Denver, Colorado, as a senior auditor. Mr. Sperber received his Bachelor
of Science degree in Accounting from Colorado State University. Mr. Sperber
is also acting as the Chief Financial Officer of USOL.
James F. Twaddell was elected a director in February 1998. He is a
member of the investment banking group of Schnieder Securities, Inc., located
in Providence, Rhode Island. From 1974 through 1995, Mr. Twaddell served as
Chairman of Barclay Investments, Inc., a member firm of the National
Association of Securities Dealers, Inc. (the "NASD"). Mr. Twaddell also
served as Chairman of Regional Investment Brokers, Inc., a 125-member
cooperative association of regional investment bankers and broker/dealers
conducting business throughout the United States. For the 1993 to 1995 term,
he was elected to serve on both the NASD District 11 Committee and the
District Business Conduct Committee. He has served as Chairman of the Board
of First Mutual Fund; a 30-year-old publicly traded mutual fund, since 1979.
He has also served as a Trust Manager of Grove Property Trust, a public REIT
that is engaged in the acquisition, repositioning, management and operation of
mid-priced, multi-family communities in the Northeastern United States, since
1994. Mr. Twaddell received his Bachelor of Arts degree from Brown
University.
There are no family relationships among directors, nor any arrangements
or understandings between any director and any other person pursuant to which
any director was elected as such. Each director is elected to serve for a
term of one year until the next annual meeting of shareholders or until a
successor is duly elected and qualified. The present term of office of each
director will expire at the next annual meeting of shareholders.
FirstLink's executive officers are elected annually at the first meeting
of the Board held after the annual meeting of shareholders. Each executive
officer will hold office until his successor is duly elected and qualified,
until his resignation, or until he is removed in the manner provided by the
by-laws.
During 1998, the Board formed Audit and Compensation Committees. The
Audit Committee is chaired by Mr. McChesney, and the Compensation Committee is
chaired by Mr. Olsen. Those committees consist of three members each,
including two outside directors. No member of those committees will receive
any additional compensation for his service as a member of that committee.
The Audit Committee is responsible for providing assurance that financial
disclosures made by FirstLink's management reasonably portray FirstLink's
financial condition, results of operations, plans, and long-term commitments.
To accomplish this, the Audit Committee:
- - - - oversees the external audit coverage, including the annual nomination of
the independent public accountants,
- - - - reviews accounting policies and policy decisions,
- - - - reviews the financial statements, including interim financial statements
and annual financial statements, together with auditor's opinions,
- - - - inquires about the existence and substance of any significant accounting
accruals, reserves or estimates made by management,
- - - - reviews with management the Management's Discussion and Analysis section
of the Annual Report,
- - - - reviews the letter of management representations given to the independent
public accountants,
- - - - meets privately with the independent public accountants to discuss all
pertinent matters, and
- - - - reports regularly to the Board of Directors regarding its activities.
Director Nominee
At the Effective Time of the Merger, the holders of Series A and Series B
Preferred Stock will have the right to designate a majority of the Combined
Company's directors. See "Management of the Combined Company."
Director Compensation
FirstLink does not pay additional compensation to directors who are also
executive officers for their services as directors. It does pay directors who
are not executive officers a $500 fee for each board meeting they attend. In
addition, it reimburses directors for their expenses associated with
attendance at meetings or which they otherwise incur in discharging their
duties as directors. FirstLink has also granted directors stock options under
its option plans. It has granted a total of 80,000 common stock options to
outside directors.
Limitation on Directors' Liability; Indemnification
FirstLink's articles of incorporation limit the liability of a director
for monetary damages for his conduct as a director, except for:
- - - - Any breach of the duty of loyalty to FirstLink or its shareholders
- - - - Acts or omissions not in good faith or that involved intentional
misconduct or a knowing violation of law
- - - - Dividends or other distributions of corporate assets from which the
director derives an improper personal benefit
- - - - Liability under federal securities law.
The effect of these provisions is to eliminate FirstLink's right and the
right of its shareholders (through shareholder's derivative suits on its
behalf) to recover monetary damages against a director for breach of his
fiduciary duty of care as a director, except for the acts described above.
These provisions do not limit or eliminate FirstLink's right or the right of
a shareholder to seek non-monetary relief, such as an injunction or
rescission, in the event of a breach of a director's duty of care.
FirstLink's by-laws provide that if Oregon law is amended, in the case of
alleged occurrences of actions or omissions preceding any such amendment, the
amended indemnification provisions shall apply only to the extent that the
amendment permits it to provide broader indemnification rights than the law
permitted prior to such amendment.
FirstLink's Articles and by-laws also provide that FirstLink shall
indemnify, to the fullest extent permitted by Oregon law, any of its
directors, officers, employees or agents who are made, or threatened to be
made, a party to a proceeding by reason of the fact that he or she is or was
one of our directors, officers, employees or agents. The indemnification is
against judgments, penalties, and fines, settlements and reasonable expenses
incurred by the person in connection with the proceeding if certain standards
are met. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to its directors, officers and
controlling persons in accordance with these provisions, or otherwise,
FirstLink has been advised that, in the opinion of the SEC, indemnification
for liabilities arising under the Securities Act of 1933 is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
Certain Relationships And Related Transactions
Steve Bathgate and Eugene McColley, who are significant shareholders of
FirstLink, are principals of Bathgate McColley Capital Group, LLC ("BMCG"),
which acted as FirstLink's Placement Agent in three private offerings of
FirstLink's securities in 1997 and 1998. In connection with such offerings,
FirstLink paid BMCG commissions aggregating $135,852 in 1997 and $38,000 in
1998, and issued persons affiliated with BMCG warrants to purchase a total of
157,000 shares of FirstLink common stock.
Each of the above transactions were approved or ratified by a majority of
the disinterested directors. The Board has determined that any future
transactions with officers, directors, or principal shareholders must be
approved by the disinterested directors and will be on terms no less favorable
than could be obtained from an unaffiliated third party. The Board may obtain
independent counsel or other independent advice to assist in that
determination.
<PAGE>
<PAGE>
COMPENSATION OF MANAGEMENT
The following table summarizes the compensation FirstLink paid to Mr.
Pease, FirstLink's President and Chief Executive Officer and to Mr. Sperber,
its Chief Financial Officer for the services they rendered in all capacities
to FirstLink in the last three years. Mr. Pease and Mr. Sperber were the only
officers compensated in excess of $100,000 a year.
<PAGE>
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term Compensation
Annual Compensation Awards
-------------------------- ------------------------------------
Other
Annual Securities
Name and Compen- Underlying
Principal Fiscal Salary Bonus sation Options
Position Year ($) ($) ($)(1)(2) (SAR's)
- - - --------------- ------- -------- ----- --------- ----------
<S> <C> <C> <C> <C> <C>
A. Roger Pease, President
and CEO 1998 $96,908 $10,000 $30,000 $100,000
1997 $ -- $ -- $96,000 $160,000
1996 $ -- $ -- $96,000 $ --
Jeffrey S. Sperber, CFO 1998 $88,321 $10,000 $10,809 $33,333
1997 $ -- $ -- $13,500 $66,667
1996 $ -- $ -- $ -- $
</TABLE>
- - - ------------------------------
(1) FirstLink paid Mr. Pease $8,000 per month during 1997 pursuant to an oral
management agreement with him. It paid him $10,000 per month in January
through March 1998 under the same oral agreement. Beginning in April
1998, the oral agreement was terminated and Mr. Pease became an
employee. His current salary is $150,000 per year.
(2) FirstLink paid Mr. Sperber as a contractor from October 1997 through
February 15, 1998. He became an employee effective February 16, 1998.
His current salary is $120,000 per year.
<PAGE>
<PAGE>
Salary Continuation Agreements
FirstLink has entered into salary continuation agreements with Messrs.
Pease and Sperber, and another employee (the "Salary Agreements"). Under the
terms of the Salary Agreements, which are substantially similar, FirstLink
would pay each of these individuals one year's salary as severance if it
involuntarily terminates them, as defined in the Salary Agreements.
Additionally, if it involuntarily terminates them, all stock options they own
which have vested would not have to be exercised until one year after the
shares underlying the options have been registered. If the option plans have
not been registered by January 30, 2000, then these individuals would have
cashless exercise rights, as defined in the Salary Agreements. As defined by
the Salary Agreements, the Merger would result in the involuntary termination
of these employees unless the Combined Company reaches an agreement with the
employees to continue their employment. Although Mr.. Pease and the other
employee are discussing continuing their employment with the Combined Company,
no agreements have been reached. If no agreement is reached, the Company would
pay Mr. Pease and the other employee lump sums of $150,000 and $60,000,
respectively, pay for their medical insurance for a year, and provide them
other benefits.
Stock Incentive Plans
FirstLink has established two stock option plans for officers, directors,
and employees. The 1997 Restated Combined Incentive Stock and Nonqualified
Stock Option Plan (the "1997 Plan") was approved by the shareholders in
February 1998. Options issued under the 1997 Plan shall not be priced at less
than fair market value and expire no later than ten years from the date of
grant. The vesting periods are at the discretion of the Board. FirstLink has
made available 533,333 shares for grant under the 1997 Plan. As of December
31, 1998, FirstLink had issued options to purchase 505,000 shares of common
stock with varying three-year vesting terms under the 1997 Plan.
In August 1998, the Board established the FirstLink Communications, Inc.
1998-1999 Combined Incentive and Nonqualified Stock Option Plan (the "1998
Plan"). The exercise price of options issued under the 1998 Plan will not be
at less than the fair market value of its stock at the time the options are
granted. Options issued under the 1998 plan expire no later than ten years
from the date of grant. The Board has the discretion to determine vesting
periods of options granted. All options issued under the 1998 Plan will be
nonqualified options. FirstLink has reserved 500,000 shares of common stock
for grant under the 1998 Plan. It has issued under the 1998 Plan options to
purchase 199,999 shares of common stock. The options vest over a three-year
period.
The following tables set forth information as of December 31, 1998, about
nonqualified stock options granted to and exercised by the named executive
officer and the fiscal year end value of unexercised options on an aggregated
basis.
<PAGE>
<TABLE>
Option/SAR Grants for Last
Fiscal Year - Individual Grants
<CAPTION>
Number of % of Total
Securities Options/
Underlying Grants to Exercise
Options/SARs Employees in or Base Expiration
Name/Fiscal Year Granted (#) Fiscal Year Price ($/Sh) Date
- - - ---------------------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
A. Roger Pease, President
and CEO 1998 100,000 29% $2.31 August 2008
1997 160,000 38% $1.13 February 2007
Jeffrey S. Sperber, CFO
1998 33,333 10% $2.31 August 2008
1997 66,667 16% $1.13 October 2007
- - - ---------------------
</TABLE>
<TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
----------------------------------------------------
<CAPTION>
Value of
Unexercised
In-the-Money
Options/SARs
at FY-End ($) (2)
Shares Acquired
Name on Exercise (#)
- - - ---------------- --------------- -----------------
<S> <C> <C>
A. Roger Pease, Exercisable 80,000 Exercisable $4,800
President and CEO UnExercisable 180,000 Unexercisable $4,800
Jeffrey S. Sperber, Exercisable 33,333 Exercisable $2,000
CEO Unexercisable 66,667 Unexercisable $2,000
</TABLE>
- - - ------------------------------
(1) Value realized is determined by calculating the difference between the
aggregate exercise price of the options and the aggregate fair market
value of the common stock on the date the options are exercised.
(2) The value of unexercised options is determined by calculating the
difference between the fair market value of the securities underlying the
options at fiscal year end and the exercise price of the options. The
fair market value of the securities underlying the options, based on the
closing bid price on December 31, 1998, was $1.19 per share.
<PAGE>
<PAGE>
MANAGEMENT OF THE COMBINED COMPANY
Officers and Directors
The management of the Combined Company will be primarily drawn from USOL.
However, Mr. Sperber, FirstLink's Chief Financial Officer, will continue in
that capacity after the Merger. Mr. Pease, FirstLink's President and Chief
Executive Officer, may continue in some capacity with the Combined Company.
In accordance with the terms of the Merger Agreement, the directors of
the Combined Company will consist of seven persons, four of whom will be
designated by USOL and three of whom will be designated by FirstLink. Prior
to the Effective Time, one of the current FirstLink directors will resign. Four
holders of USOL's Preferred Stock each have the right to designate one of those
four directors. The following table sets forth the officers, directors, and
key employees of the Combined Company. For the biographical information for
Messrs. McChesney, Olsen, Pease, Twaddell, and Sperber, see "Management of
FirstLink Prior to the Merger."
<TABLE>
<CAPTION>
NAME AGE POSITION
- - - ---- --- --------
<S> <C> <C>
Robert G. Solomon 37 Chief Executive Officer
Donald E. Barlow 52 President, Chief Operating
Officer, and Secretary
David Agnew(1) 51 Director
Robert Feller(2) 37 Director
Thomas McChesney 53 Director
Robert F. Olsen 51 Director
A. Roger Pease 52 Director
Ronald L. Piasecki(3) 60 Director
Roy Rose(4) 42 Director
James F. Twaddell 60 Director
Jeffrey S. Sperber 35 Chief Financial Officer
Robert J. Walentynowicz, Jr. 37 Vice President of Operations
</TABLE>
(1) Designated by AGL Investments No. 8 Limited Partnership.
(2) Designated by GMAC Commercial Mortgage Corporation.
(3) Designated by Aspen Foxtrot Investments, LLC
(4) Designated by Peregrine Capital, Inc.
Set forth below is information regarding the business experience during
the last five years for each of the above-named persons.
Robert G. Solomon has served as the Chief Executive Officer of USOL since
July 22, 1999. He served as President and Secretary of USOL from May 1999 to
July 22, 1999. From February 1995 until July 1999 he was President, and
beginning March 1998, Chairman, of US Online. Since 1987, Mr. Solomon has been
a Senior Vice President and principal shareholder of CS Management, Inc., a
firm that develops and manages apartment communities and commercial properties
throughout the South and Central Texas. Although Mr. Solomon remains a
shareholder and officer of CS Management, Inc., he is not active in its day-to-
day operations. Mr. Solomon serves on the Executive Board of the Independent
Cable and Telecommunications Association, the leading industry trade
association and lobby coalition. Mr. Solomon received his B.B.A. in Business
Administration from the University of Texas in 1984.
Donald E. Barlow has served as President, Chief Operating Officer, and
Secretary of USOL since July 22, 1999. He served as Chief Financial Officer of
US Online from 1996 and as President of US Online from March 1998. From 1973
to 1978, Mr. Barlow served as a commercial manager with Southwestern Bell
Telephone Combined Company. Mr. Barlow served as Senior Vice President and
General Counsel (1978-1980) and as Senior Vice President of Business
Development (1982-1983) for Perry Gas Companies, and from 1980 to 1982, he
served as President and Chief Operating Officer for Perry Gas Processors. From
1983 to 1994, he served as Chief Financial Officer, General Counsel and Chief
Operating Officer for Capitan Enterprises, Inc. From 1994 through 1996 Mr.
Barlow was in the private practice of law as an attorney-mediator, acting as
general counsel and negotiations consultant for early stage technology
companies and a professional mediator specializing in civil disputes involving
business, financial, and technology subject matters. He also provided
business and financial consulting services to startup and early stage
technology companies through a separate consulting practice. During the period
1994 through 1996 he served as Chairman of the Corporation and Tax Section of
the Travis County Bar Association, Vice Chairman of the Alternative Dispute
Resolution Section of the Travis County Bar Association, and a member of the
Board of the Travis County Chapter of the Association of Attorney Mediators;
and he was an adjunct instructor of mediation and negotiations at the
University of Texas School of Law. Mr. Barlow received both his B.A. and J.D.
degrees from the University of Texas, in 1969 and 1972, respectively, and his
M.B.A. from Southern Methodist University in 1973. Mr. Barlow is a Certified
Public Accountant.
David B. Agnew has served as a Director of USOL since July 22, 1999. Mr.
Agnew has been the Chief Executive Officer and General Partner of Amstar Group,
Ltd., since 1984. Amstar is a privately owned real estate investment and
development company which conducts business nationwide. He received his B.A.
degree from St. Olaf College, and his J.D. degree from Washington University.
Robert D. Feller has served as a Director of USOL since July 22, 1999.
Mr. Feller has served in a variety of executive positions with General Motors
Corporation and its affiliates since 1984. He has been the Chief Operating
Officer and Executive Vice President of GMAC Commercial Mortgage Corporation,
where he is also a member of the Executive Committee, since May 1999. From
January 1997 to May 1999 he was Group Vice President Finance and Managing
Director of GMAC Mortgage Group. Prior to joining GMAC Mortgage Group, Mr.
Feller was Manager of Venture Development for GM's Delphi Chassis Systems
division, from October 1994, and Manager, Business Development in GM's
Treasurer's Office. Mr. Feller received a B.S. Degree in general management
from Purdue University and an M.B.A. from Harvard Business School. Mr. Feller
is a CPA.
Roy Rose has served as a Director of USOL since July 22, 1999. Mr. Rose
founded and has served as the president and chief executive officer of
Peregrine Holdings (Oregon), Ltd. since 1991 and Peregrine Capital, Inc. since
1997. These entities are involved in making investments in various businesses.
From 1985 to 1990 Mr. Rose was the Chief Executive Officer, President and a
director of Northern Capital Corporation.
Ronald L. Piasecki is the Executive Vice President of Aspen Enterprises,
Ltd., which he co-founded in 1973. From 1993 through January 1997 Mr. Piasecki
served as Director of Horizon Group, Inc., a real estate investment trust
company involved in factory outlet shopping centers. Horizon Group's
securities are listed on the New York Stock Exchange. In February, 1997 he
became Vice Chairman of the Board and served as President and Chief Executive
Officer of Horizon until June, 1997. Mr. Piasecki continued serving as Vice
Chairman of the Board until June, 1998 when the company was merged with Prime
Retail. In May, 1996 Sun Communities, Inc. acquired the manufactured housing
portion of Aspen Enterprises, Ltd., which was one of the largest privately held
developers, owners, and operators of manufactured housing communities in the
United States. Mr. Piasecki currently serves on the board of Sun Communities,
Inc. He also serves as Chairman of the Board of Directors of Kurdziel
Industries, Inc., the world's largest producer of counter weights for the
material handling industry. Mr. Piasecki obtained his Juris Doctor degree, cum
laude, from Wayne State University Law School and has a B.A. degree from the
University of Michigan.
Robert J. Walentynowicz, Jr. is Vice President of Operations of USOL and
has served in that capacity since July 22,1999. Mr. Walentynowicz joined US
Online in April 1997. He will be responsible for the development and
operations of the Combined Company's field operations and customer service
bureau. Prior to joining US Online, Mr. Walentynowicz worked for Electronic
Data Systems, Inc. ("EDS") for twelve years as an account manager, purchasing
manager, project manager, and security manager. Mr. Walentynowicz also served
as the director of service operations for Premisys Corporation, a wholly owned
subsidiary of EDS. He graduated cum laude with a B.S. in Business
Administration from Strayer College and is a Certified Protection Professional
with the American Society of Industrial Security.
Employment Agreements
Effective at the closing of the Merger, the Combined Company will assume
USOL's employment agreements with Messrs. Solomon and Barlow. Those agreements
are substantially similar. They provide that the employees will work full time
for the Combined Company, and they will have such authority and duties as may
from time to time be assigned to them by the Board of Directors, including
assisting with acquisition and merger opportunities; assisting in streamlining
and strengthening the Combined Company's systems and procedures; assisting in
identifying and procuring sources of capital and credit; assisting in hiring,
managing, training and developing general managers for the Combined Company and
its subsidiaries and affiliates; assisting in various aspects of sales and
marketing; and assisting in improving operations. Mr. Solomon is employed as
USOL's Chairman of the Board and CEO; he will serve as the Combined Company's
CEO. Mr. Barlow is employed as USOL's President, a position he will hold with
the Combined Company.
The employment agreements are for terms of five years. They may be
terminated by USOL/the Combined Company for cause or other than for cause. If
Mr. Solomon or Mr. Barlow is terminated other than for cause (including if he
is terminated within 120 days of a change in control of USOL/the Combined
Company), he will be paid severance compensation equivalent to his base salary
for 18 months. Mr. Solomon's base salary is $175,000 per year. Mr. Barlow's
base salary is $150,000 per year.
Mr. Sperber has entered a 3-year employment agreement with USOL which
will be effective upon closing of the Merger. He will be paid $120,000 per
year and he will be issued options to acquire 100,000 shares of the Combined
Company's common stock, exercisable at $2 per share. 20% of the options will
vest immediately; the rest will vest over three years.
<PAGE>
<PAGE>
PRINCIPAL SHAREHOLDERS
Common Stock
The following table sets forth certain information regarding beneficial
ownership of FirstLink's common stock as of June 30, 1999, by (i) each person
who owns beneficially more than 5% of FirstLink's common stock; (ii) each of
FirstLink's directors and executive officers; and (iii) all directors and
executive officers of FirstLink as a group. Each named beneficial owner has
sole voting and investment power with respect to the shares held, unless
otherwise stated.
<TABLE>
<CAPTION>
Number of Shares Percentage of Shares
Name and Address of Owner Beneficially Owned (1) Beneficially Owned (2)
- - - ------------------------- ---------------------- ----------------------
<S> <C> <C>
A. Roger Pease (3)
190 SW Harrison Street
Portland, OR 97201 366,666 9.5%
Thomas E. McChesney (4)
200 SW Market Street
Portland, OR 97201
156,369 4.3%
Robert F. Olsen (5)
7745 Greenback Lane
Citrus Heights, CA 95610 132,013 3.6%
James F. Twaddell
Two Charles Street
Providence, RI 02904 28,667 < 1%
Jeffrey S. Sperber (6)
190 SW Harrison Street
Portland, OR 97201 100,000 2.7%
Steven M. Bathgate (7)(8)
5350 S. Roslyn Way, #380
Englewood, CO 80111 308,496 8.4%
Eugene C. McColley (7)(9)
5350 S. Roslyn Way, #380
Englewood, CO 80111 279,296 7.6%
All Executive Officers and
Directors as a Group
(5 persons) 537,547 14.0%
</TABLE>
- - - -----------------
1 Except as set forth in the footnotes to this table, the persons named in
this table have sole voting and investment power with respect to all
shares. Shares not outstanding but deemed beneficially owned by virtue
of the individual's right to acquire them as of June 30, 1999, or within
sixty (60) days of such date, are treated as outstanding when determining
the percent of the class owned by such person and when determining the
percent owned by a group.
2 Applicable percentage is based on 3,615,617 shares of common stock
outstanding on June 30, 1999.
3 103,334 shares are owned by Mr. Pease in his individual retirement
account. Also includes 3,333 shares owned by Mr. Pease's wife, of which
he disclaims beneficial ownership; and presently exercisable stock
options by Mr. Pease to purchase 120,000 shares of common stock at $1.13
per share.
4 Includes 7,779 shares of common stock owned by Mr. McChesney's wife, of
which he disclaims beneficial ownership. Also includes 28,580 shares of
common stock and 20,000 shares of common stock underlying presently
exercisable warrants and vested options, respectively.
5 Includes 96,654 shares beneficially owned by J.R. Roberts Corporation, of
which Mr. Olsen is the Chairman and Chief Executive Officer, and options
exercisable to purchase 20,000 shares of common stock at $1.13 per share.
6 Consists of presently exercisable options to purchase shares of common
stock.
7 Includes 152,720 shares and warrants to purchase 14,445 shares owned by
Caribou Bridge Fund, LLC. Messrs. Bathgate and McColley own the
Administrator of Caribou. They disclaim beneficial ownership of such
shares. Also includes 29,161 shares of common stock and 4,445 shares of
common stock underlying presently exercisable warrants owned by Kiawah
Capital Partners, an entity that Messrs. Bathgate and McColley own
equally. Fifty percent of those shares and warrants are attributable to
each Mr. Bathgate and McColley.
8 Includes 18,667 shares owned by Bathgate Family Partnership II, of which
Mr. Bathgate is a general partner.
9 Includes 48,000 shares of common stock underlying presently exercisable
warrants.
Series A Preferred Stock
There are no shares of FirstLink Series A Preferred Stock presently
authorized, issued, or outstanding. The following table sets forth certain
information regarding beneficial ownership of the Series A Preferred Stock that
will be issued in the Merger by each person who will own beneficially more than
5% of the Combined Company's Series A Preferred Stock, assuming that no change
is made in such beneficial ownership prior to the Merger. Each named beneficial
owner will have sole voting and investment power with respect to the shares
held, unless otherwise stated. Each share of Series A Preferred Stock will be
convertible into 12 1/2 shares of common stock. The table also reflects the
shares of common stock the person would own, assuming the Merger is consummated
and he converts all of his Series A Preferred Stock. Except for Mr. Rose, who
may beneficially own the shares owned of record by Peregrine Capital, no
director or executive officer will own any shares of Series A Preferred Stock.
<TABLE>
<CAPTION>
SHARES OF % OF
SERIES A SERIES A SHARES OF % OF
PREFERRED PREFERRED COMMON COMMON
STOCK STOCK STOCK STOCK
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
OWNED (1) OWNED (2) OWNED (1) OWNED
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
GMAC Commercial
Mortgage
Corporation(3) 398,900 30.0% 5,311,250 43.9%
AGL Investment No.
8 Limited
Partnership(4) 398,900 30.0% 5,245,250 43.6%
Aspen Foxtrot
Investments, LLC(5) 180,000 13.6% 4,187,500 33.8%
Peregrine Capital,
Inc.(6) 200,000 15.1% 3,520,000 39.7%
German American
Capital Corp. (7) 65,000 4.9% 1,750,000 4.9%
</TABLE>
- - - -------------------
(1) Shares not outstanding but deemed beneficially owned by virtue of the
individual's right to acquire them as of July 21, 1999, or within sixty
(60) days of such date, are treated as outstanding when determining the
percent of the class owned by such person. Although the shares of Series
A Preferred Stock are not convertible into shares of Common Stock until
July 2000, for the purpose of this table, the shareholder is deemed to
have the right to convert those shares of Series A Preferred Stock within
60 days.
(2) Based on 1,325,000 shares of Series A Preferred Stock that will be issued
in connection with the Merger.
(3) Common stock includes 325,000 shares underlying common stock purchase
warrants, and 4,985,250 shares underlying the 398,000 shares of Series A
Preferred Stock, that will be issued to GMACCM in connection with the
Merger.
(4) Owned by AGL Investment No. 8 LP, which is controlled by Amstar Group,
Ltd. Common stock includes shares of common stock underlying 259,000
common stock purchase warrants, and 4,985,250 shares underlying the
398,900 shares of Series A Preferred Stock, that will be issued to Amstar
in connection with the Merger.
(5) Common stock includes 1,312,500 shares that will be issued to Aspen
Online Investments, LLC, an affiliate of Aspen Foxtrot Investments, LLC.,
in connection with the Merger. Common stock also includes 625,000
shares underlying common stock purchase warrants, and 2,250,000 shares
underlying the 200,000 shares of Series A Preferred Stock, that will be
issued to Aspen Foxtrot in connection with the Merger.
(6) Owned by 10 limited liability companies controlled by Peregrine Capital.
Common stock includes 20,000 shares owned at June 30, 1999; 1,000,000
shares of common stock that will be issued to Peregrine Capital in
connection with the Merger; and 2,500,000 shares underlying the 200,000
shares of Series A Preferred Stock that will be issued in connection with
the Merger.
(7) Common Stock represents 937,500 shares underlying the 75,000 shares of
Series B Preferred Stock and 812,500 shares underlying the 65,000 shares
of Series A Stock that will be issued in connection with the Merger.
However, under the terms of the Series A and Series B Preferred Stock,
German American may not convert shares of non-voting Series B Preferred
Stock into voting Series A Preferred Stock or common stock in amounts
that would cause its percentage of voting stock in the Combined Company
to be above 5%.
Series B Preferred Stock
The following table sets forth certain information regarding beneficial
ownership of the Combined Company's Series B Preferred Stock following the
Merger, by each person who will own beneficially more than 5% of FirstLink's
Series B Preferred Stock. Each share of Series B Preferred Stock is
convertible into 12-1/2 shares of Common Stock. The table also reflects the
shares of Common Stock the person would own, assuming he converts all of his
Series A Preferred Stock, and including shares of Common Stock he owned at July
21, 1999. No directors or executive officers will own any shares of Series B
Preferred Stock.
<TABLE>
<CAPTION>
SHARES OF % OF
SERIES A SERIES A SHARES OF % OF
PREFERRED PREFERRED COMMON COMMON
STOCK STOCK STOCK STOCK
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
OWNED (1) OWNED (2) OWNED (1) OWNED
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
German American
Capital Corporation(3) 75,000 48.4% 1,750,000 4.9%
Paribas North
America, Inc. 80,000 51.6% 1,000,000 4.9%
</TABLE>
- - - --------------
(1) Shares not outstanding but deemed beneficially owned by virtue of the
individual's right to acquire them as of July 21, 1999, or within sixty
(60) days of such date, are treated as outstanding when determining the
percent of the class owned by such person. Although the shares of Series
B Preferred Stock are not convertible into shares of Common Stock until
July 2000, for the purpose of this table, the shareholder is deemed to
have the right to convert those shares of Series B Preferred Stock within
60 days. However, under the terms of the Series A and Series B Preferred
Stock, German American and Paribas may not convert shares of non-voting
Series B Preferred Stock into shares of voting Series A Preferred Stock
or common stock in amounts that would cause its percentage of voting
stock in the Combined Company to be above 5%.
(2) Based on 155,000 shares of Series B Preferred Stock that will be issued
in connection with the Merger.
(3) Common stock includes 937,500 shares underlying the 75,000 shares of
Series B Preferred Stock and 65,000 shares underlying 65,000 shares of
Series A Preferred Stock that will be issued in connection with the
Merger.
Independent Public Accountants
The Board of Directors has selected Arthur Andersen LLP ("Andersen") to
serve as the Combined Company's independent public accountants following the
Merger. Representatives of Andersen will be available at the Meeting.
Prior to the Merger, FirstLink had engaged KPMG LLP ("KPMG") as its
independent public accountant while USOL Holdings had engaged Andersen. In
anticipation of the Merger, a process was initiated to select the independent
public accountant for the Combined Company. Selection of Andersen as the
independent public accountant was approved by the Board of Directors, and KPMG
was notified that the firm would no longer be engaged as independent public
accountant, effective as of the Effective Time of the Merger.
The KPMG audit reports on the financial statements of FirstLink for the
year ended December 31, 1998, did not contain an adverse opinion or disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope,
or accounting principles. Its audit reports on the financial statements of
FirstLink for the year ended December 31, 1997, contained a qualification
concerning FirstLink's ability to continue as a going concern. During the last
two fiscal years ended December 31, 1998, and the interim periods preceding the
change of independent accountants, there were no disagreements between
FirstLink and KPMG on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements, if not resolved to the satisfaction of KPMG, would have caused
it to make reference to the subject matter of the disagreement in connection
with its report. Further, KPMG did not advise FirstLink of any reportable
events during the aforementioned time period. Representatives of KPMG will not
be available at the Meeting.
<PAGE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
FIRSTLINK COMMUNICATIONS, INC.
Page
- - - ----
Independent Auditors' Report F-2
Balance Sheets F-3
Statements of Operations F-5
Statements of Stockholders' Equity F-6
Statements of Cash Flows F-8
Notes to Financial Statements F-11
USOL HOLDINGS, INC.
Report of Independent Public Accountants F-26
Balance Sheets F-27
Statement of Operations F-28
Statement of Stockholders' Equity F-29
Statement of Cash Flows F-30
Notes to the Financial Statements F-31
US ONLINE COMMUNICATIONS, INC.
Report of Independent Public Accountants F-36
Consolidated Balance Sheets F-37
Consolidated Statements of Operations F-39
Consolidated Statements of Cash Flows F-41
Notes to Consolidated Financial Statements F-44
FIRSTLINK COMMUNICATIONS, INC. (PRO-FORMA)
Unaudited Pro Forma Condensed Consolidated Financial Information F-63
Pro Forma Balance Sheet F-65
Pro Forma Consolidated Statements of Operations F-70
Notes to the Unaudited Pro Forma Condensed Consolidated
Financial Information F-75
<PAGE>
<PAGE>
Independent Auditors' Report
The Board of Directors
FirstLink Communications, Inc.
We have audited the accompanying balance sheet of FirstLink Communications,
Inc. as of December 31, 1998, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the two-year
period ended December 31, 1998. 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 FirstLink
Communications, Inc. as of December 31, 1998, and the results of its
operations and its cash flows for each of the years in the two-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Portland, Oregon
January 29, 1999 (except for note 1 which is at March 11, 1999)
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 1,617,582 $ 1,417,276
Investments 3,284,495 2,090,125
Accounts receivable, net of allowance for
doubtful accounts of $25,240 and $36,331
at December 31, 1998 and June 30, 1999,
respectively 87,131 119,297
Note receivable from U.S. Online
Communications including accrued interest - 510,000
Other receivables 55,872 7,425
Prepaid and other current assets 35,953 47,633
------------ ------------
Total current assets 5,081,033 4,191,756
------------ ------------
Property and equipment, net of accumulated
depreciation 1,173,668 1,200,489
Other assets 9,078 77,802
------------ ------------
Total assets $ 6,263,779 $ 5,470,047
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 206,916 $ 131,633
Accrued liabilities 169,105 177,800
Current portion of capital lease obligations 62,051 66,882
------------ ------------
Total current liabilities 438,072 376,315
------------ ------------
Capital lease obligations, less current portion 177,279
142,778
Commitments and contingencies (note 9)
Stockholders' equity:
Preferred stock, no par value; 1,000,000
shares authorized; no shares issued or
outstanding - -
Common stock, no par value; 20,000,000 shares
authorized; 3,593,550 and 3,615,617 shares
issued and outstanding at December 31, 1998
and June 30, 1999, respectively 8,458,495 8,515,209
Retained deficit (2,810,067) (3,564,255)
------------ ------------
Total stockholders' equity 5,648,428 4,950,954
------------ ------------
Total liabilities and stockholders' equity $6,263,779
$ 5,470,047
============ ============
</TABLE>
See accompanying notes to financial statements
<PAGE>
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30,
------------------------- --------------------------
1998 1997 1999 1998
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Revenue $ 1,246,011 $ 879,903 $ 676,415 $ 599,484
Expenses:
Operating 968,115 580,197 538,075 464,495
Selling, general and
administrative 1,772,421 701,372 827,813 678,978
Depreciation and
amortization 103,148 69,955 114,453 43,738
----------- ----------- ----------- -----------
Total expenses 2,843,684 1,351,524 1,480,341 1,187,211
----------- ----------- ----------- -----------
Operating loss (1,597,673) (471,621) (803,926) (587,727)
----------- ----------- ----------- -----------
Other (income) expense:
Interest, net 96,998 107,305 (55,724) 49,409
Other 139,303 (650) 5,986 110,721
----------- ----------- ----------- -----------
236,301 106,655 (49,738) 160,130
----------- ----------- ----------- -----------
Net loss $ (1,833,974) $ (578,276) $ (754,188) $ (747,857)
=========== =========== =========== ===========
Net loss per share,
basic and diluted $ (.68) $ (.50) $ (.21) $ (.37)
=========== =========== =========== ===========
Weighted average
common shares,
basic and diluted 2,716,867 1,162,397 3,599,102 2,042,650
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
<PAGE>
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998 and 1997 and
the Six Months Ended June 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Total
Common Stock Stockholders'
------------------------- Retained Equity
Shares Amount Deficit (deficit)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December
31, 1996 766,400 $ 234,702 $ (397,817) $ (163,115)
Common stock issued
pursuant to Promissory
Notes 52,800 17,424 - 17,424
Common stock issued in
payment of Promissory
Note interest 3,879 4,364 - 4,364
Conversion of Promissory
Notes into common stock 217,780 245,000 - 245,000
Sale of common stock,
net of stock offering
costs 728,888 721,449 - 721,449
Common stock issued
pursuant to guarantor
agreements 16,961 17,163 - 17,163
Net loss - - (578,276) (578,276)
----------- ----------- ----------- -----------
Balance at December
31, 1997 1,786,708 1,240,102 (976,093) 264,009
Conversion of
Convertible Notes
into common stock,
net of offering costs 186,667 304,552 - 304,552
Common stock purchased
under stock option
agreements 833 937 - 937
Noncash stock
compensation - 48,000 - 48,000
Sale of common stock,
net of stock offering
costs 1,613,889 6,854,323 - 6,854,323
Common stock issued
pursuant to guarantor
agreements 5,453 10,581 - 10,581
Net loss - - (1,833,974) (1,833,974)
----------- ----------- ----------- -----------
Balance at December
31, 1998 3,593,550 8,458,495 (2,810,067) 5,648,428
Common stock issued
pursuant to guarantor
agreements (unaudited) 5,400 14,814 - 14,814
Common stock purchased
under stock option
agreements (unaudited) 6,667 7,500 - 7,500
Common stock grants
(unaudited) 10,000 34,400 - 34,400
Net loss (unaudited) - - (754,188) (754,188)
----------- ----------- ----------- -----------
Balance at June 30,
1999 (unaudited) 3,615,617 $ 8,515,209 $ (3,564,255) $ 4,950,954
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
<PAGE>
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31 Six Months Ended June 30
------------------------- -------------------------
1998 1997 1999 1998
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss $ (1,833,974) $ (578,276) $ (754,188) $ (747,857)
Adjustments to
reconcile net loss
to net cash used in
operating activities:
Depreciation and
amortization 125,395 130,262 139,204 62,835
Provision for
losses on accounts
receivable 51,574 43,250 43,510 19,015
Noncash charge for
stock grants - - 34,400 -
Noncash charge for
stock options 48,000 - - -
Noncash charge for
debt conversions
to equity 105,000 - - 105,000
Changes in assets
and liabilities:
Accounts
receivable (119,088) (39,196) (75,676) (34,309)
Prepaid and other
current assets (25,948) (59,563) 26,767 9,160
Accounts payable
and accrued
liabilities 134,311 17,408 (66,588) 176,423
Other current
liabilities (126,188) (50,233) - (114,004)
----------- ----------- ----------- -----------
Net cash used
in operating
activities (1,640,918) (536,348) (652,571) (523,737)
----------- ----------- ----------- -----------
Cash flows from
investing activities:
Capital expenditures (652,328) (70,090) (141,274) (77,994)
Purchase of investment
securities (3,284,495) - - -
Capitalized acquisition
costs - - (71,161) -
Maturities of investment
securities - - 1,194,370 -
U.S. Online
Communications
note receivable - - (500,000) -
----------- ----------- ----------- -----------
Net cash provided
by (used in)
investing
activities (3,936,823) (70,090) 481,935 (77,994)
----------- ----------- ----------- -----------
Cash flows from
financing activities:
Net proceeds from
sales of common
stock 6,855,260 738,873 - 490,391
Proceeds from
Promissory Notes - 102,576 - -
Repayments of
Promissory Notes - (5,000) - -
Proceeds from
Convertible Notes - 172,077 - -
Capitalized public
offering costs - - - (167,157)
Principal payments
under capital leases (49,352) (27,792) (29,670) (22,154)
----------- ----------- ----------- -----------
Net cash provided by
(used in) financing
activities 6,805,908 980,734 (29,670) 301,080
----------- ----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents 1,228,167 374,296 (200,306) (300,651)
Cash and cash
equivalents,
beginning of year 389,415 15,119 1,617,582 389,415
----------- ----------- ----------- -----------
Cash and cash
equivalents, end
of year $ 1,617,582 $ 389,415 $ 1,417,276 $ 88,764
=========== =========== =========== ===========
Supplemental disclosure
of cash flow information:
Cash paid for interest $77,929 $ 51,791 $ 28,605 $ 38,391
Cash paid for income
taxes - - - -
Supplemental cash flow
information of noncash
investing and financing
activities:
Assets acquired under
capital leases $ 81,435 $ 73,694 $ - $ 77,994
Conversion of
Convertible Notes
to equity 199,552 - - -
Conversion of
Promissory Notes
to equity - 245,000 - 199,552
Other 33,781 15,024 24,751 37,781
</TABLE>
See accompanying notes to financial statements
<PAGE>
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
and June 30, 1999
(Information as of June 30, 1999 and for the six months
ended June 30, 1999 and 1998 is unaudited)
(1) Business and Organization
FirstLink Communications, Inc. ("FirstLink" or the "Company"), an
Oregon corporation, is an integrated telecommunications service company
providing local telephone, long distance telephone, enhanced calling
features and cable television services to residents of multi-family
apartment and condominium complexes. The services are provided to the
tenants in accordance with long-term operating agreements between the
Company and the property owners under which the property owners share in
the telecommunication revenues generated from their properties. The
agreements provide the tenants with the option to use either FirstLink or
the local telephone company and long distance carriers for telephone
services. Tenants desiring to subscribe to cable television must utilize
FirstLink.
On February 9, 1999, the Company signed a letter of intent (the "LOI")
with Peregrine Capital, Inc., a Portland based investment company. The LOI
contemplated Peregrine purchasing shares of the Company's common stock in
exchange for cash, a note payable and arrangement of financing. On March
11, 1999, a wholly owned subsidiary of Peregrine signed a letter of intent
to acquire the assets and assume certain liabilities of U.S. Online
Communications, Inc. ("U.S. Online"), an Austin, Texas based provider of
telecommunication services to residents of multi-family apartments and
condominiums.
As discussed in footnote 11, the Company signed a merger agreement
with USOL Holdings, Inc., which supersedes the Company's LOI with Peregrine
and Peregrine's letter of intent with U.S. Online.
The Company intends on raising financing to grow its subscriber base
by acquiring subscribers and right of entry agreements from private and
wireless cable operators. This represents a change in the Company's
business strategy, which previously relied on directly marketing to
property owners and managers, solely to grow its base.
Additionally, the Company plans to provide cable television signal to
its properties by acting as a private cable operator ("PCO"). As a PCO, the
Company will acquire programming through program access agreements and
distribute the product through network located on the property premises.
This approach marks a change from the Company's previous cable fulfillment
method, which was to buy in bulk from the incumbent franchised cable
operator and resell it to its customers.
(2) Summary of Significant Accounting Policies
Unaudited Quarterly Information
The financial statements and related notes as of June 30, 1999 and for
the six months ended June 30, 1999 and 1998 are unaudited but, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, which are necessary for a fair presentation of the
financial condition, results of operations and cash flows of the Company.
The operating results for the six months ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1999.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with
original maturities of three months or less to be cash equivalents.
Investments
The Company's investment securities are comprised of U.S. Treasury
securities and have been classified as held to maturity in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting
for Certain Investments in Debt and Equity Securities, at December 31,
1998. Such securities, which mature between two and nine months, are
recorded at amortized cost which approximates fair value.
Property and Equipment
Property and equipment is stated at cost, including installation cost.
The Company provides for depreciation using the straight-line method over
estimated useful lives of three to five years on computer and office
equipment and ten years on network equipment. Property and equipment held
under capital leases are amortized straight-line over the shorter of the
lease term or estimated useful life of the asset. Repairs and maintenance
are expensed as incurred.
Revenue Recognition
Revenue is recognized when services are provided.
Financial Instruments
The carrying amount of cash equivalents, investments, trade accounts
receivable, accounts payable and accrued liabilities approximate fair value
because of the short-term nature of these instruments. The fair value of
capital lease obligations were estimated by discounting the future cash
flows using market interest rates and does not differ significantly from
that reflected in the financial statements. Fair value estimates are made
at a specific point in time, based on relevant market information about the
financial instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
Use of Estimates
The preparation of the 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.
Reverse Stock Split
In connection with the Company's initial public offering, the
Company's Board of Directors authorized a 1 for 1.5 reverse stock split,
effective July 27, 1998. All share and per share amounts in the financial
statements reflect the reverse stock split as if it had occurred on January
1, 1997. Unit amounts have not been restated.
Common Stock and Loss Per Share
The Company adopted SFAS No. 128, Earnings per Share. Under SFAS No.
128, basic earnings per share excludes dilution for common stock
equivalents and is computed by dividing income or loss available to common
stockholders by the weighted average number of common shares outstanding
during the period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised
or converted into common stock resulted in the issuance of common stock.
In accordance with SFAS No. 128, the calculation of basic and diluted
EPS does not assume the conversion, exercise or contingent issuance of
securities that would have an anti-dilutive effect on earnings per share.
Common stock equivalents related to stock options and warrants totaling
128,828 and 646 are anti-dilutive during 1998 and 1997, respectively, and
were not included in the diluted net loss per share calculation.
Stock-Based Compensation
The Company accounts for its stock-based employee compensation plan
using the intrinsic value based method prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretation ("APB No. 25"). The Company has provided pro forma
disclosures as if the fair value based method of accounting for these
plans, as prescribed by SFAS No. 123, Accounting for Stock-Based
Compensation, had been applied.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
assets exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell.
Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of SFAS
No. 130, Reporting Comprehensive Income. The objective of SFAS No. 130 is
to report all changes in equity that result from transactions and economic
events other than transactions with owners. There is no difference between
net loss and comprehensive loss.
Income Taxes
The Company accounts for income taxes under the provisions of SFAS
No. 109, Accounting for Income Taxes. Under the asset and liability method
of SFAS No. 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Under SFAS No. 109, the effect on deferred tax assets and liabilities of a
change in tax rate is recognized in income in the period that includes the
enactment date.
(3) Property and Equipment
Property and equipment, including assets owned under capital leases of
$324,693 at December 31, 1998 is comprised of the following:
<TABLE>
<CAPTION>
<S> <C>
Network equipment $ 840,674
Computers and office equipment 306,611
Leasehold improvements 237,365
------------
1,384,650
Less accumulated depreciation,
including $53,906 applicable to
assets under capital leases as of
December 31, 1998 (210,982)
------------
Net property and equipment $ 1,173,668
============
</TABLE>
(4) Accrued Liabilities
Accrued liabilities consist of the following at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Excise tax $ 92,154
Commissions 43,337
Audit 31,000
Other 2,614
$ 169,105
-------------
Net property and equipment $ 1,173,668
============
</TABLE>
(5) Income Taxes
The difference between expected tax benefit, computed by applying the
federal statutory rate of 34% to loss before taxes, and the actual tax
benefit of $-0- is primarily due to the increase in the valuation allowance
for deferred taxes.
The Company's deferred tax assets are comprised of the following
components at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Net operating loss carryforwards $ 983,000
Other 49,000
------------
Total gross deferred tax assets 1,032,000
Less valuation allowance (1,032,000)
------------
Net deferred tax assets $ -
============
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1999,
1998 and 1997 was $1,032,000, $373,000 and $152,000, respectively. The net
change in the total valuation allowance for the years ended December 31,
1998 and 1997 was an increase of $659,000 and $221,000, respectively. The
Company has established a valuation allowance due to the uncertainty that
the full amount of the operating loss carryforwards will be utilized.
Although management expects future results of operations to be profitable,
it emphasized past performance rather than growth projections when
determining the valuation allowance. Any subsequent adjustments to the
valuation allowance, if deemed appropriate due to changed circumstances,
will be recognized as a separate component of the provision for income
taxes.
The Company has net operating loss carryforwards which are available
to offset future financial reporting and taxable income. Net operating loss
carryforwards for tax purposes totaled approximately $2,500,000 at
December 31, 1998 and expire in 2011 through 2018.
A provision of the Internal Revenue Code requires the utilization of
net operating losses be limited when there is a change of more than 50% in
ownership of the Company. Such a change occurred in 1996, 1997 and 1998. If
the Company's agreement discussed in Note 11 is approved by the Company's
shareholders, the Company will have incurred another ownership change under
IRC Section 382. These ownership changes would limit the utilization of any
net operating losses incurred prior to the change in ownership date.
(6) Debt
Promissory Notes
During 1997 and 1996, the Company issued unsecured promissory notes
(the "Promissory Notes") aggregating $250,000. The Promissory Notes bore
interest at 8% per annum with both principal and interest payable on or
before March 31, 1997. As an additional inducement, the holders of the
Promissory Notes received 440 shares of the Company's common stock for each
$1,000 of principal. The Promissory Notes were originally recorded at
$213,700, which represents the $250,000 in proceeds less a discount of
$36,300 assigned to the common stock. The fair value of the common stock
was based on other recent equity transactions with third parties. The
discount was accreted to the debt over the life of the Promissory Notes as
a financing cost. The accretion of the value assigned to the common stock
is included in interest expense in the accompanying financial statements.
In 1997, $245,000 of the Promissory Notes, plus accrued interest, were
converted into 221,659 shares of the Company's common stock. The remaining
$5,000 and accrued interest was paid in full during 1997.
Convertible Notes
During 1997, the Company issued unsecured convertible notes (the
"Convertible Notes") with a face value of $420,000 and 560,000 shares of
common stock pursuant to a private placement memorandum (the "Private
Placement"). Total proceeds from the Private Placement was $840,000. The
Convertible Notes bore interest at 6% per annum, payable semiannually
commencing June 30, 1998, matured three years from the date of issuance and
were convertible into shares of the Company's common stock at $3.00 per
share. The Convertible Notes were originally recorded at $210,000, which
represents the face value of $420,000 less a discount of $210,000 which was
assigned to the common stock. The 560,000 shares of common stock were
recorded at the estimated fair market value of such shares which was
$630,000 less stock offering costs of $37,301, resulting in net proceeds of
$592,699. The fair market value of the common stock was based on other
recent equity transactions with third parties. The discount was accreted to
the debt using the interest method over three years. The accretion value
assigned to the common stock is included in interest expense in the
accompanying financial statements.
During 1998, the Company asked the holders of the Convertible Notes to
convert the Convertible Notes into shares of common stock. As an
inducement to convert, the Company reduced the conversion price to $2.25
per share from the $3.00 conversion price stated on the Convertible Notes
for those holders converting on or before March 9, 1998. All of the Notes
were converted into 186,667 shares of common stock. The induced conversion
resulted in a $105,000 charge to operations, classified as other expense in
the accompanying financial statements.
(7) Stockholders' Equity
Initial Public Offering
On July 27, 1998, the Company completed its initial public offering
("IPO") of its common stock to the public. The Company sold 1,400,000
units (the "Units"), with each Unit consisting of one detachable share of
common stock and one detachable common stock purchase warrant (the
"Warrants"). Two Warrants entitle the holder to purchase one share of the
Company's common stock at a price of $8.10 per share during the three-year
period commencing July 27, 1998. As a result of the IPO, the Company
received net proceeds of $6,363,932.
Private Placements
During February and March 1998, the Company sold 283,333 units with
each unit consisting of one share of common stock and one common stock
purchase warrant pursuant to a private placement memorandum. Subsequent to
the IPO, the warrants sold pursuant to this private placement were
exchanged for the Warrants. The net proceeds from the offering were
$390,391.
In May 1998, the Company sold 25,000 shares of common stock for
$100,000 in a private transaction. In connection with the sale, the
Company issued three-year warrants to purchase an additional 12,500 shares
of the Company's common stock at $8.10 per share.
During 1997, the Company issued 290,000 units, with each unit
consisting of two shares of common stock and one common stock purchase
warrant pursuant to a private placement memorandum. The Company sold
126,667 units (the Private Units) resulting in 168,888 shares for $190,000
with the remaining 163,333 Private Units being issued to the holders of the
Promissory Notes in exchange for converting $245,000 of the Promissory
Notes plus accrued interest into 221,659 shares of common stock (see note 6
above). Stock offering cost associated with the sale of the Private Units
was $61,250.
Stock Option Plans
In August 1998, the Company established the FirstLink Communications,
Inc. 1998-1999 Combined Incentive and Non-Qualified Stock Option Plan (the
"1998 Plan"). Options issued under the 1998 Plan shall not be priced at
less than fair market value and expire no later than ten years from the
date of grant. The vesting periods are at the discretion of the Company's
Board of Directors. The 1998 Plan is subject to ratification by the
majority vote of the holders of the Company's common stock within one year
from the effective date of adoption for any incentive options granted under
the 1998 Plan. Until ratified, all options issued under the 1998 Plan will
be non-qualified as the Board of Directors has the authority to issue non-
qualified options. The Company has made available 500,000 shares for grant
under the 1998 Plan. During 1998, the Company issued options to purchase
199,999 shares of common stock with vesting terms of 33% on each
anniversary date over a three-year period. In February 1997, the Company's
Board of Directors adopted the 1997 Restated Combined Incentive Stock and
Non-Qualified Stock Option Plan (the 1997 Plan) which was ratified by the
shareholders in February 1998. Options issued under the 1997 Plan shall
not be priced at less than fair market value and expire no later than ten
years from the date of grant. The vesting periods are at the discretion of
the Company's Board of Directors. The Company has made available 533,333
shares for grant under the 1997 Plan. As of December 31, 1998, the Company
had issued options to purchase 505,000 shares of common stock with varying
three-year vesting terms.
The following table provides additional information concerning options
granted under the 1998 and 1997 Plans:
<TABLE>
<CAPTION>
Weighted
Number Average
of Exercise
Shares Price
---------- ----------
<S> <C> <C>
Outstanding, January 1, 1997 - $ -
Granted 416,667 1.13
Exercised - -
Forfeited - -
---------- ----------
Outstanding, January 1, 1998 416,667 1.13
Granted 344,998 2.30
Exercised (833) 1.13
Forfeited (55,833) 1.13
---------- ----------
Outstanding, December 31, 1998 704,999 $ 1.71
========== ==========
</TABLE>
A total of 181,667 options were exercisable at December 31, 1998 at a
weighted average exercise price of $1.13. The weighted average remaining
contractual life of options outstanding at December 31, 1998 is 8.8 years.
Additionally, in October 1998, the Company entered into a consulting
agreement with a financial public relations firm which provides for the
Company to issue stock options to purchase up to 60,000 shares of the
Company's common stock at prices ranging from $2.00 to $7.00 per share.
This agreement is cancelable upon 10 days written notice. As of
December 31, 1998, the Company had issued options to purchase 15,000 shares
of the Company's stock at $2.00 per share. All of the issued options are
vested as of December 31, 1998. The agreement expires on March 31, 2000.
The Company has elected to account for its stock-based compensation
plans under APB 25; however, the Company has computed the fair value of
options granted using the Black-Scholes option pricing model during 1998,
and the minimum value option pricing model during 1997. The per share
weighted average fair value of stock options granted during 1998 and 1997
is $1.56 and $0.30, respectively, on the date of grant using the following
weighted average assumptions:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Risk-free interest 5.00% 6.25%
Expected dividend yield - -
Expected lives 5 years 5 years
Expected volatility 81% -
</TABLE>
Had the Company determined compensation cost based on the fair value
at the grant date for its stock options under SFAS No. 123, the Company's
net loss and loss per common share would have increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
---------- -----------
<S> <C> <C>
Net loss:
As reported $(1,833,974) $(578,276)
Pro forma (2,065,306) (609,276)
Net loss per common share, basic
and diluted:
As reported (.68) (.50)
Pro forma (.76) (.52)
</TABLE>
Warrants
The Company has issued various stock purchase warrants in connection
with its financing activities to investors and placement agents. The
following table provides additional information related to stock purchase
warrants.
<TABLE>
<CAPTION>
Number of
Shares Range of Range of
Underlying Exercise Expiration
Description Warrants Prices Dates
- - - ----------- ------------ ------------ ------------
<S> <C> <C> <C>
1997:
Private Placement Warrant 193,320 $ 2.25 5/05/00
Placement Agent Warrants 157,003 .75 - 4/30/02 -
3.00 11/30/02
Other 6,667 1.13 12/1/00
1998:
Private Placement Warrants 106,938 $ 8.10 5/22/01 -
7/28/01
Public Offering Warrants 700,000 8.10 7/27/01
Underwriter Share Warrants 140,000 7.70 7/27/03
Underwriter Warrant Warrants 70,000 5.50 7/27/03
</TABLE>
(8) Related Party Transactions
During 1998 and 1997, the Company had a management agreement with an
officer and director of the Company whereby from time to time a management
fee was paid for his services. Amounts paid under this arrangement totaled
$30,000 and $96,000 in 1998 and 1997, respectively. This agreement was
terminated in March 1998 at which time this individual became an employee.
(9) Commitments and Contingencies
Lease Commitments
The Company leases certain switching equipment under capital leases.
In addition, the Company leases office space under two non-cancelable
operating leases expiring on October 31, 2001 and August 31, 2003,
respectively. Operating lease payments for the years ended December 31,
1998 and 1997 totaled $53,610 and $29,160, respectively. At December 31,
1998, future minimum lease payments under capital and non-cancelable
operating leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------- -----------
<S> <C> <C>
Year ending:
1999 $ 98,914 $ 104,910
2000 96,820 99,660
2001 82,315 96,300
2002 31,984 72,000
2003 1,293 48,000
---------- -----------
Total minimum lease payments 311,326 $ 420,870
===========
Less amount representing interest (71,996)
----------
Net minimum lease payments 239,330
Less current portion of capital less
obligations 62,051
----------
Capital lease obligations, less
current portion $ 177,279
==========
</TABLE>
In connection with entering into certain of the capital lease
agreements, certain stockholders, including directors of the Company (the
Guarantors), entered into personal guaranty arrangements with the lessor on
behalf of the Company. The Company, in turn, agreed to issue common stock
to each of the Guarantors upon execution of and throughout the duration of
the leases. 5,453 and 16,961 shares of common stock were issued to the
Guarantors during 1998 and 1997, respectively.
The common stock was assigned values of $10,581 and $17,163 for the
shares issued during 1998 and 1997, respectively, based on the public
market price of the stock, or recent equity transactions with third parties
for stock issuances prior to the stock being publicly traded. The value
assigned to the common stock is being amortized using the interest method
over the lives of the leases. The accretion value is included in interest
expense in the accompanying financial statements.
Master Lease Agreement
The Company has available a $2 million Master Lease Agreement (the
"Facility"). The Facility provides for 100% financing for purchases of
telecommunications equipment (including switches), computers and office
equipment. Under terms of the Facility, payments are made over a 60-month
period with a bargain purchase option at the end of the lease.
Additionally, there is a 1% commitment fee which the Company paid during
1998. At December 31, 1998, the Company had the ability to draw $500,000
under the Facility. The remaining $1.5 million is subject to minimum
performance requirements. At December 31, 1998 there were no borrowings
under the Facility.
Web Service Company
In August 1998, the Company entered into an exclusive marketing
agreement with Web Service Company, Inc. (WEB or the WEB Agreement), one of
the largest operators of coin operated laundry equipment in apartment and
condominium complexes in the United States.
Under terms of the WEB Agreement, WEB will exclusively market the
Company's services to properties with which WEB has an existing
relationship that have more than 150 units in Dallas, Denver, Seattle and
the San Francisco Bay Area (the "Exclusive Territories"). Based on
information provided by WEB, the Company believes that WEB provides
ancillary services to approximately 590 apartment complexes of that size
passing approximately 150,000 units in the Exclusive Territories. As
compensation for WEB's sales of the Company's services, the Company has
granted WEB a warrant to purchase 2,000,000 shares of its common stock,
subject to vesting requirements requiring WEB to deliver one customer for
each 25 shares. In other words, in order to earn the 2,000,000 warrants,
WEB must, by May 22, 2004, deliver 80,000 phone and cable customers who
subscribe to the Company's services. If WEB is unable to deliver a certain
number of subscribers each year (which number increases over the life of
the contract), a portion of the unvested warrants expire. The maximum
number of vested shares that can be exercised by WEB cannot exceed 20% of
the issued and outstanding common stock of the Company regardless of the
number of shares vested. The warrants are exercisable at $5.40 per share
for five years after they are issued, but no later than May 22, 2012. The
Company may record marketing expense to the extent that value is associated
with the warrants as determined under the Black-Scholes method as
prescribed under FASB 123. As of December 31, 1998, no warrants had vested
under the WEB Agreement.
The Company will also pay WEB a commission of 1.75% on collected
revenues for WEB customers (2.25% for customers in any property in which
the Company has achieved a penetration rate in excess of 60%). The
commission is paid for the life of the Company's contract with the
property.
The Company and WEB have mutually agreed to delay commencing marketing
activities under the WEB Agreement. The Company and WEB are currently
evaluating what role, if any, WEB can and should play in its future
business activities.
Commitment with Cable Providers
The Company has agreements with TCI Cablevision of Oregon, Inc.
("TCI") and Paragon Cable ("Paragon") to purchase bulk cable signals at the
Company's properties. The agreements provide for the Company to pay fixed
monthly amounts regardless of the number of customers the Company has at
the properties. As of December 31, 1998, the Company's monthly commitment
was $32,759 per month. The TCI agreements provide for annual rate increases
not to exceed 5%. The agreements all have five-year terms and expire during
July 1999 through September 2003.
Salary Continuation Agreements
The Company has salary continuation agreements with certain key
employees that provide for one-year severance in the event of involuntary
termination, as defined in the agreements. The total obligation under these
agreements in the event of involuntary termination is $315,000.
Litigation
From time to time, the Company is involved in various litigation in
the normal course of business. Management believes that the outcomes will
not have a material impact to the Company's financial statements.
(10) Segment Disclosure
The Company operates in a single industry segment, telecommunications.
The Company provides integrated telephony and video services to residents
of multi-family apartment and condominium complexes in Portland, Oregon.
The Company's management team monitors the Company's products and services
according to the following categories:
- - - - Local telephone - local dial tone with enhanced calling features that
provide incoming and outgoing calls over the public switched network.
- - - - Long distance telephone - services include all originating minutes for
calls placed outside the local calling area, including those generated
from calling cards.
- - - - Video - basic, expanded basic and premium cable television services.
The revenues generated by these products and services were as follows:
<TABLE>
<CAPTION>
Years Ended Six Months Ended
----------------------- -----------------------
December December June 30 June 30
1998 1997 1999 1998
----------- ----------- ----------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Local telephone $ 351,706 $ 255,298 $ 182,721 $ 176,841
Long distance telephone 343,485 308,388 151,957 151,611
Video 511,822 295,907 304,501 239,483
Other 38,998 20,310 37,236 31,549
----------- ----------- ----------- ----------
$ 1,246,011 $ 879,903 $ 676,415 $ 599,484
=========== =========== =========== ==========
</TABLE>
The direct costs included in operating expense associated with these
products and services were as follows:
<TABLE>
<CAPTION>
Years Ended Six Months Ended
----------------------- -----------------------
December December June 30 June 30
1998 1997 1999 1998
----------- ----------- ----------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Local telephone $ 263,652 $ 187,426 $ 147,457 $ 128,940
Long distance telephone 251,457 175,866 135,785 123,976
Video 324,895 160,147 185,873 154,452
----------- ----------- ----------- ----------
$ 840,004 $ 523,439 $ 469,115 $ 407,368
=========== =========== =========== ==========
</TABLE>
There are a number of shared expenses incurred related to managing the
different revenue streams. Management believes that any allocation of
these expenses would be impractical and arbitrary, and management does not
currently make such allocations internally.
(11) Recent Developments (unaudited)
On March 12, 1999, the Company's board of directors authorized
lowering the exercise price of the public warrants and the 1998 private
placement warrants to $5.50 per share from $8.10 per share.
In July 1999, the Company signed a definitive merger agreement with
USOL Holdings, Inc. ("USOL"), to merge USOL into FirstLink. USOL has
acquired certain assets and liabilities of U.S. Online Communications,
Inc., an Austin, Texas based provider of integrated telecommunication
services to residents of apartments and condominiums passing approximately
13,715 cable and 6,885 telephone units, and certain assets from GMAC
Commercial Mortgage Corporation ("GMACCM"). The assets acquired from GMACCM
will allow the Company to provide ancillary services to residents of multi-
dwelling units ("MDUs") under exclusive marketing agreements with property
owners. According to GMACCM, it currently has marketing agreements with
MDUs passing in excess of 450,000 residential units.
Upon receiving shareholder approval, the Company will merge with USOL
in a stock-for-stock transaction in which the Company will issue $37
million of Company preferred stock (convertible at $2.00 per share) and
3,175,000 shares of the Company's common stock of which 2,000,000 shares
are subject to a three-year, $3,674,000 note. Further, the Company will
issue shareholders of USOL 2,084,000 warrants to purchase common stock
(1,500,000 at $5.50 per share, 86,000 at $4.00 per share, 86,000 at $6.00
per share, and 412,000 at $2.00 per share).
Additionally, the Company will assume USOL's $35 million senior credit
facility and any borrowings thereunder at the time the transaction closes.
The definitive merger agreement supersedes the Company's previously
announced financing and acquisition transaction with Peregrine Capital,
Inc.
<PAGE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
USOL Holdings, Inc.:
We have audited the accompanying balance sheet of USOL Holdings, Inc. (a
Delaware corporation), as of June 30, 1999, and the related statements of
operations, stockholders' equity and cash flows for the period from
inception, May 12, 1999, through June 30, 1999. 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 audit.
We conducted our audit 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 audit
provides 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 the Company as of
June 30, 1999, and the results of its operations and its cash flows for the
period from inception, May 12, 1999, through June 30, 1999, in conformity
with generally accepted accounting principles.
Arthur Andersen, LLP
Austin, Texas
July 21, 1999
<PAGE>
<PAGE>
USOL HOLDINGS, INC.
BALANCE SHEET - - JUNE 30, 1999
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash $ 425
-----------
Total assets $ 425
===========
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 2,000,000 shares
authorized; 425,000 shares issued and outstanding $ 425
Additional paid-in capital 849,575
Retained deficit (849,575)
-----------
Total stockholders' equity $ 425
===========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
<PAGE>
USOL HOLDINGS, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION, MAY 12, 1999
THROUGH JUNE 30, 1999
<TABLE>
<CAPTION>
<S> <C>
REVENUE $ -
STOCK COMPENSATION EXPENSE (849,575)
-----------
NET LOSS $ (849,575)
===========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
<PAGE>
USOL HOLDINGS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION, MAY 12, 1999
THROUGH JUNE 30, 1999
<TABLE>
<CAPTION>
Addi- Total
Common Stock tional Stock-
--------------- Paid-in Retained holders'
Shares Amount Capital Deficit Equity
-------- ------ -------- --------- --------
<S> <C> <C> <C> <C> <C>
INITIAL CAPITAL CONTRIBUTION 425,000 $ 425 $ - $ - $ 425
STOCK COMPENSATION ON INITIAL
CAPITAL CONTRIBUTION - - 849,575 (849,575) -
-------- ------ -------- --------- --------
BALANCE, June 30, 1999 425,000 $ 425 $ 849,575 $(849,575) $ 425
======== ====== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
<PAGE>
USOL HOLDINGS, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION, MAY 12, 1999
THROUGH JUNE 30, 1999
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (849,575)
Adjustment to reconcile net loss to net cash flows
from operating activities-
Stock compensation expense 849,575
------------
Net cash flows from operating activities -
------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash flows from investing activities -
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 425
------------
Net cash flows from financing activities 425
------------
NET INCREASE IN CASH 425
CASH, beginning of period -
------------
CASH, end of period $ 425
============
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
<PAGE>
USOL HOLDINGS, INC.
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 1999
1. FORMATION AND BUSINESS DESCRIPTION:
USOL Holdings, Inc. (USOL or Company), a Delaware corporation, was
formed on May 12, 1999, for the purpose of acquiring entities providing
telecommunications, cable television, internet and other services to
residents of multifamily apartment complexes and condominiums. See Note 4.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
financial statements. Actual results could differ from those estimates.
Income Taxes
The Company follows the liability method of accounting for income
taxes in accordance with SFAS No. 109, "Accounting for Income Taxes."
Under this method, deferred assets and liabilities are recorded for future
tax consequences of temporary differences between the 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 underlying assets or
liabilities are recovered or settled.
For the period from inception, May 12, 1999, through June 30, 1999,
the Company has not generated revenues and the stock compensation expense
recorded represents a permanent difference that is not deductible for
federal income tax purposes. As a result, the Company has not been subject
to and has not recorded any amounts related to federal income taxes.
3. CAPITAL STOCK:
USOL's original articles of incorporation provide for the
authorization of 2,000,000 shares of $.001 par value common stock. Upon
its formation, USOL issued 425,000 shares of common stock to members of
management in exchange for $425 in cash. USOL recorded $849,575 of stock
compensation expense related to the issuance of these shares based on the
difference between the cash paid and the estimated $2 per share fair market
value of the shares on the date of issuance.
4. SUBSEQUENT EVENTS:
Capital Transactions
On July 19, 1999, USOL adopted the 1999 Incentive Plan (the Incentive
Plan) to provide incentives to attract and retain key employees and
directors. Under the Incentive Plan, USOL can issue up to 3,000,000 shares
of common stock to individuals designated by the board of directors, with
the number of shares authorized for issuance automatically increasing when
additional shares of stock of USOL are issued so that the number of shares
available equals 10 percent of the total number of issued and outstanding
shares at such time.
On July 21, 1999, USOL granted options to certain employees to
purchase 325,000 shares of USOL's common stock at $1 per share. These
options have a life of 10 years and vest over 3 years, with 25 percent
vested on the date of grant. USOL recorded deferred compensation of
$243,750 and recognized stock compensation expense of $81,250 as the
estimated fair value of USOL's common stock was $2 per share on the date
the options were granted. Also on July 21, 1999, USOL granted options
under the Incentive Plan to certain employees for the purchase of 1,585,000
shares of USOL's common stock with exercise prices ranging from $2 to $5.50
per share. These options have a life of 10 years and vest over 3 years,
with certain options vesting 25 percent on the date of grant.
On July 21, 1999, USOL amended its articles of incorporation to
increase the authorized capital stock to 32,000,000 shares, of which
30,000,000 shares were designated as $.001 par value common stock and
2,000,000 shares were designated as $.001 par value preferred stock.
Shares of preferred stock may be issued in one or more classes or series
and will have voting powers, dividend privileges and others rights as
designated by the board of directors of USOL prior to issuance.
On July 21, 1999, USOL issued 2,000,000 shares of common stock, a
warrant to purchase 259,000 shares of common stock, and 1,480,000 shares of
12% cumulative convertible preferred stock to various third-party
investors. The 2,000,000 shares of common stock were issued in exchange
for notes receivable totaling $3,674,000 and $1,000 in cash. The shares
were sold for $2 per share, however, one party purchased 1,000,000 shares
at $1.675 per share in recognition of their services for identifying the
investors. The notes accrue interest at 5 percent per year and are due
July 21, 2002. The Company valued the warrant using the Black-Scholes
pricing model at approximately $146,200. The Black-Scholes valuation was
based on the warrant terms using the Company's current stock value of $2
per share and a volatility percentage representative of a public company
operating in this industry. The sale of preferred stock consisted of
1,325,000 shares of Series A preferred stock and 155,000 shares of Series B
preferred stock. The 1,480,000 shares of preferred stock were issued in
exchange for $37,000,000 cash.
Series A and B preferred stock is convertible into common stock at the
option of the holder on a 12.5 for 1 basis subject to anti-dilution
adjustments. Beginning July 21, 2001, conversion is automatic on the
earliest of (a) the closing of a public offering of the Company's equity
securities in an amount greater than or equal to $40,000,000, (b) the day
the common stock is traded on a public market at a price greater than or
equal to $10 per share for 15 consecutive days or (c) the seventh
anniversary of the original issuance of the preferred stock provided the
common stock is trading at more than $2 per share at that date.
In the event of a liquidation, Series A and B preferred shareholders
are entitled to receive $25 per share and all unpaid cumulative dividends,
prior to, and in preference to any distribution to the holders of common
stock. If undistributed assets remain after satisfying the preferred
shareholders, such assets shall be distributed ratably among the holders of
common stock, and holders of preferred stock have no further right or claim
to any of the remaining assets.
The holders of Series A preferred stock have voting rights equal to
the voting rights of the common shareholders on an as-if-converted basis.
Holders of Series B preferred stock may only vote on matters that will
change or affect their rights or privileges.
Asset Purchase
On July 13, 1999, USOL incorporated a wholly owned subsidiary,
TheResidentClub.com, Inc. (TheResidentClub). On July 21, 1999,
TheResidentClub purchased certain assets and contract rights from GMAC
Commercial Mortgage Corporation. Pursuant to the asset purchase agreement,
the purchase price of $2,843,800 consisted of $2,500,000 cash and a warrant
to purchase 325,000 shares of USOL's common stock at an exercise price of
$2 per share. The Company valued this warrant using the Black-Scholes
pricing model at approximately $343,800. The Black-Scholes valuation was
based on the warrant terms using the Company's then current stock value of
$2 per share and a volatility percentage representative of a public company
operating in this industry.
Acquisition
On July 19, 1999, USOL incorporated a wholly owned subsidiary, USOL,
Inc. On July 21, 1999, USOL, Inc. purchased substantially all of the
assets and certain liabilities of U.S. OnLine Communications, Inc. (US
Online). US Online provides integrated telecommunications services
including enhanced local telephone, long-distance telephone and cable
television to residents of multifamily apartment complexes and condominiums
in Texas, Virginia and Colorado. Pursuant to the asset purchase agreement,
the purchase price of approximately $19,681,800 consisted of 750,000 shares
of USOL's common stock valued at $2 per share, warrants to purchase
1,500,000 shares of USOL's common stock at an exercise price of $5.50 per
share, approximately $845,000 in cash and the assumption of approximately
$16,012,000 of liabilities. The Company valued the warrants using the
Black-Scholes pricing model at approximately $1,324,800. The Black-Scholes
valuation was based on the warrant terms using the Company's then current
stock value of $2 per share and a volatility percentage representative of a
public company operating in this industry. The acquisition will be
accounted for under the purchase method of accounting
Employment Agreements
On July 21, 1999, the Company entered into employment agreements with
its Chief Executive Officer and its President. The agreements are for
terms of five years, and may be terminated by the Company for cause or
other than cause. If either agreement is terminated for other than cause,
including termination within 120 days of a change of control of the
Company, the Company must pay severance compensation equivalent to 18
months of the then base salary of the terminated officer.
Senior Secured Financing
On July 19, 1999, the Company received a formal commitment from a bank
providing for a $35,000,000 revolving credit facility. The facility will
be subject to certain borrowing base limitations and will be in effect for
18 months at which time it will convert to a six year term note. The
facility will be secured by substantially all the assets of the Company,
USOL, Inc., and TheResidentClub.com, Inc.
Merger
On July 21, 1999, the Company entered into an Agreement and Plan of
Merger and Reorganization (the Merger Agreement) with FirstLink
Communications, Inc. (FirstLink), a publicly traded Oregon corporation.
FirstLink provides integrated telecommunications and entertainment services
to residents of multifamily apartment and condominium complexes. Services
provided include cable television and enhanced local and long-distance
telephone services. In certain properties, FirstLink also provides high-
speed internet services.
Pursuant to the Merger Agreement, all capital stock, options and
warrants to purchase capital stock of USOL will be canceled and converted
into equal shares, options and warrants to purchase shares of FirstLink
capital stock on a one-for-one basis, such that stockholders of USOL will
own 3,175,000 shares of FirstLink common stock, 1,325,000 shares of
FirstLink Series A preferred stock, 155,000 shares of FirstLink Series B
preferred stock, options to purchase 1,910,000 shares of FirstLink common
stock, and warrants to purchase 2,084,000 shares of FirstLink common stock.
The rights and privileges of each security will remain unchanged upon
conversion.
The issuance of the shares will result in the former stockholders of
the Company controlling the majority of the then outstanding voting shares
of FirstLink. Also as part of the Merger Agreement, the members of the
Company's board of directors will hold the controlling number of seats on
FirstLink's board of directors' and the officers of the Company will retain
their positions. As the controlling interest in the surviving company
remains with the stockholders and officers of the Company, this transaction
will be accounted for as a reverse acquisition under the purchase method of
accounting, with USOL accounted for as the acquirer.
Termination of the Merger Agreement by either party may be before or
after shareholder approval. Under certain circumstances, FirstLink or the
Company will be required to pay fees and expenses to the other as a result
of termination, including a fee of $1,000,000.
<PAGE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
U.S. OnLine Communications, Inc.:
We have audited the accompanying consolidated balance sheet of U.S. OnLine
Communications, Inc. (a Delaware corporation), and subsidiary as of
December 31, 1998, and the related consolidated statements of operations
and cash flows for the years ended December 31, 1997 and 1998. These
financial statements are the responsibility of USOL'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 U.S. OnLine
Communications, Inc., and subsidiary as of December 31, 1998, and the
results of their operations and their cash flows for the years ended
December 31, 1997 and 1998, in conformity with generally accepted
accounting principles.
On July 21, 1999, the Company sold substantially all of its assets and
certain liabilities to a subsidiary of USOL Holdings, Inc. (USOL), for
USOL common stock, warrants to purchase USOL common stock and cash. It is
management's intent to wind up affairs and liquidate the Company as soon as
practical. These matters are further described in Note 1 to the
accompanying financial statements.
Arthur Andersen, LLP
Austin, Texas
July 21, 1999
<PAGE>
<PAGE>
U.S. ONLINE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(Notes 1 and 2)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,007,988 $ 1,212,856
Restricted cash 496,566 144,495
Accounts receivable, net 454,130 289,545
Supply inventory 253,715 292,932
Other current assets 74,930 107,792
------------ ------------
Total current assets 2,287,329 2,047,620
PROPERTY AND EQUIPMENT, net 12,065,217 11,835,192
GOODWILL, net 2,335,501 2,184,722
DEFERRED LOAN COSTS, net 486,607 227,328
OTHER ASSETS 461,094 449,244
------------ ------------
Total assets $17,635,748 $16,744,106
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt, net
of discount $12,770,337 $12,682,343
Current portion of long-term debt, related
parties, net of discount 5,979,166 6,250,000
Short-term notes payable - 1,475,000
Accounts payable and accrued expenses 3,344,102 3,056,496
Accrued interest 271,585 1,040,935
Accrued interest, related parties 380,417 775,000
Deferred revenue 383,449 357,483
------------ ------------
Total liabilities 23,129,056 25,637,257
COMMITMENTS AND CONTINGENCIES (Note 6)
MINORITY INTEREST 238,827 236,413
------------ ------------
STOCKHOLDERS' DEFICIT:
Preferred stock, $.001 par, 1,000,000
shares authorized, none outstanding - -
Common stock, $.001 par value, 20,000,000
shares authorized, 2,166,667 shares
outstanding at December 31, 1998, and
June 30, 1999 (unaudited) 2,167 2,167
Additional paid-in capital 1,697,115 1,697,115
Deferred compensation (541,406) (489,843)
Accumulated deficit (6,890,011) (10,339,003)
------------ ------------
Total stockholders' deficit (5,732,135) (9,129,564)
------------ ------------
Total liabilities and
stockholders' deficit $17,635,748 $16,744,106
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
<PAGE>
<PAGE>
U.S. ONLINE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Notes 1 and 2)
<TABLE>
<CAPTION>
For the Years Ended For the Six Months
December 31, Ended June 30,
----------------------- -----------------------
1997 1998 1998 1999
----------- ----------- ----------- ----------
(unaudited)
<S> <C> <C> <C> <C>
REVENUES $ 2,721,293 $5,108,225 $ 2,344,965 $2,831,079
----------- ----------- ----------- ----------
EXPENSES:
Operating 3,285,634 4,469,879 2,103,768 2,100,739
Selling, general and
administrative 4,119,551 4,454,102 2,173,645 1,554,807
Depreciation and
amortization 1,036,851 1,532,351 758,803 826,298
Write down of property
and equipment - 1,172,468 - -
----------- ----------- ----------- ----------
Total expenses 8,442,036 11,628,800 5,036,216 4,481,844
----------- ----------- ----------- ----------
LOSS FROM OPERATIONS (5,720,743) (6,520,575) (2,691,251) (1,650,765)
----------- ----------- ----------- ----------
OTHER:
Interest expense (3,188,482) (4,772,896) (2,454,636) (1,722,942)
(Loss) gain on
disposition of
property and
equipment, net (86,464) 26,378 - -
Other expense, net (1,093) (218,228) (145,504) (77,699)
----------- ----------- ----------- ----------
Total other (3,276,039) (4,964,746) (2,600,140) (1,800,641)
----------- ----------- ----------- ----------
LOSS BEFORE MINORITY
INTEREST (8,996,782) (11,485,321) (5,291,391) (3,451,406)
MINORITY INTEREST IN
(INCOME) LOSS OF
SUBSIDIARY (10,463) 37,863 6,139 2,414
----------- ----------- ----------- ----------
Net loss $(9,007,245) $(11,447,458) $(5,285,252) $(3,448,992)
============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
<PAGE>
<PAGE>
U.S. ONLINE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Notes 1 and 2)
<TABLE>
<CAPTION>
For the Years Ended For the Six Months
December 31, Ended June 30,
----------------------- -----------------------
1997 1998 1998 1999
----------- ----------- ----------- ----------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(9,007,245) $(11,447,458) $(5,285,252) $(3,448,992)
Adjustments to reconcile
net loss to net cash
used in operating
activities-
Loss on disposition
and write down of
property and
equipment 82,968 1,146,090 - -
Depreciation and
amortization 1,036,851 3,421,758 1,552,835 1,411,538
Minority interest 10,463 (37,863) (6,139) (2,414)
Interest expense on
related-party debt
of the LLC not
acquired - 1,111,423 - -
Accretion of deferred
compensation - 64,844 39,063 51,563
Changes in operating
assets and liabilities-
Restricted cash - (496,566) - 352,071
Accounts receivable,
net (250,502) (48,509) (106,858) 164,585
Other current asset (142,421) (18,011) (18,568) (60,229)
Accounts payable and
accrued expenses 3,700,370 1,846,913 1,290,079 876,327
Deferred revenue 199,312 104,470 77,978 (25,966)
----------- ----------- ----------- ----------
Net cash used in
operating activities (4,370,204) (4,352,909) (2,456,862) (681,517)
----------- ----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of
property and equipment 34,458 457,947 421,587 -
Purchases of property
and equipment (4,029,125) (1,754,988) (626,838) (443,515)
----------- ----------- ----------- ----------
Net cash used in
investing activities (3,994,667) (1,297,041) (205,251) (443,515)
----------- ----------- ----------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from long-term
debt, related parties 1,103,577 3,250,000 3,250,000 -
Payments on long-term
debt, related parties (253,052) - - -
Proceeds from long-term
debt 8,947,854 1,500,000 1,500,000 -
Payments on long-term
debt (242,170) - - (145,100)
Proceeds from short-term
notes payable - - - 1,475,000
Payments on capital lease
obligations (528,678) (998,669) (668,577) -
Payment of deferred
financing costs - (832,046) (832,046) -
Proceeds from sale of
common stock - 3,250,500 3,250,500 -
Payments of stock
issuance costs - (461,321) (386,181) -
----------- ----------- ----------- ----------
Net cash provided by
financing activitie 9,027,531 5,708,464 6,113,696 1,329,900
----------- ----------- ----------- ----------
INCREASE IN CASH AND CASH
EQUIVALENTS 662,660 58,514 3,451,583 204,868
CASH AND CASH EQUIVALENTS,
beginning of period 286,814 949,474 949,474 1,007,988
----------- ----------- ----------- ----------
CASH AND CASH EQUIVALENTS,
end of period $ 949,474 $1,007,988 $ 4,401,057 $1,212,856
============ ============ =========== ===========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid for interest $ 695,686 $1,378,931 $ 651,750 $ -
Acquisition of Cable 1,167,034 - - -
Acquisition of certain
assets and liabilities
of the LLC - 3,818,951 - -
Deferred compensation,
net of forfeitures - 606,250 606,250 -
Issuance of warrants in
connection with debt
obligations - 719,000 719,000 -
Recognition of original
issue discount - 1,083,000 1,083,000 -
Issuance of warrants
for payment of loan costs - 320,000 320,000 -
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
<PAGE>
<PAGE>
U.S. ONLINE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND GOING CONCERN:
U.S. OnLine Communications, Inc. (US Online), and its 50 percent owned
subsidiary, U.S.-Austin Cable Associates I, Ltd. (USAC) (collectively
referred to herein as the Company), provide integrated telecommunications
services including local telephone, long distance telephone, enhanced
calling features and cable television to residents of multifamily apartment
complexes and condominiums in Texas, Virginia and Colorado. The services
are provided to the tenants in accordance with long-term operating
agreements between the Company and the property owners under which the
property owners share in the telecommunication revenues generated from
their properties. The agreements provide the tenants with the option to
use either the Company or the local telephone and long distance carriers
for telephone services. Tenants desiring to subscribe to cable television
must utilize the Company.
On July 21, 1999, the Company sold substantially all its assets and
certain liabilities to USOL, Inc., a subsidiary of USOL Holdings, Inc.
(USOL). Pursuant to the asset purchase agreement, the purchase price of
approximately $19,681,800 consisted of 750,000 shares of USOL common stock
valued at $2 per share, 1,500,000 warrants to purchase USOL common stock at
an exercise price of $5.50 per share, approximately $845,000 in cash, and
the assumption of approximately $16,012,000 of liabilities. The warrants
were valued using the Black-Scholes pricing model at approximately
$1,324,800. The Black-Scholes valuation was based on the warrant terms
using the then USOL common stock value of $2 per share and a volatility
percentage representative of a public company operating in this industry.
Liabilities not assumed by USOL were satisfied by the Company from the
cash, stock, and warrant proceeds received in the transaction. It is
management's intent to wind up the affairs and liquidate the Company as
soon as practical.
Simultaneously with the transaction described above, USOL and
FirstLink Communications, Inc. (FirstLink) entered into an agreement
whereby FirstLink common stock will be exchanged for USOL common stock, and
USOL will be merged with and into FirstLink, subject to the approval of
FirstLink shareholders.
2. ORGANIZATION AND BASIS OF PRESENTATION:
US Online was incorporated March 5, 1998, by the management of U.S.
OnLine Communications L.L.C. (the LLC) for the purpose of acquiring
substantially all of the assets and certain of the liabilities of the LLC.
This transaction was consummated on July 21, 1998. US Online issued
800,000 shares of its common stock and a $3 million note to acquire certain
assets and liabilities of approximately $17,166,000 and $17,985,000,
respectively, of the LLC. The assets acquired included the 50 percent
interest held by the LLC in USAC. In accordance with generally accepted
accounting principles, US Online recorded the purchased assets and
liabilities at the LLC's historical cost since the US Online and the LLC
are entities under common control.
In February 1996, the LLC acquired a 50 percent membership interest in
U.S. Online Cable L.L.C. (Cable), a provider of cable television to
residents of multifamily apartment complexes and condominiums for
approximately $2,060,000 in cash. The LLC acquired the remaining
50 percent interest in September 1997 by forgiving notes receivable of
approximately $1,167,000 and obtaining a 13 percent membership interest in
the LLC. These acquisitions were accounted for by the purchase method of
accounting and, accordingly, the LLC consolidated the financial statements
of Cable since February 1996 to reflect the exercise of control by the LLC.
Cable was merged with and into the LLC in 1997. Total goodwill recorded as
a result of these transactions was approximately $3,015,000.
The accompanying consolidated balance sheet is that of the Company at
December 31, 1998. The accompanying consolidated statement of operations
and consolidated statement of cash flows for the year ended December 31,
1997, reflect the consolidated results of operations and cash flows of the
LLC. The minority interest in the income of USAC is deducted from the
consolidated loss. For the year ended December 31, 1998, the accompanying
consolidated statement of operations and consolidated statement of cash
flows reflect the consolidated results of operations and cash flows of (i)
the LLC from January 1, 1998, through July 21, 1998, and (ii) the Company
from inception (March 5, 1998) through December 31, 1998. The minority
interest in the income of USAC is deducted from the consolidated loss. All
intercompany balances and transactions have been eliminated in
consolidation. Following is certain selected operating data for the year
ended December 31, 1998:
<TABLE>
<CAPTION>
The Company
LLC From From Inception
Jan 1, 1998 (Mar 5, 1998)
through Through
Jul 21, 1998 Dec 31, 1998 Total
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 2,631,917 $ 2,476,308 $ 5,108,225
Loss from operations (2,443,207) (4,077,368) (6,520,575)
Loss before minority
interest (4,532,843) (6,952,478) (11,485,321)
Net loss (4,557,447) (6,890,011) (11,447,458)
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The accompanying interim financial statements as of June 30, 1999, and
for the six months ended June 30, 1998 and 1999, are unaudited and have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles
for complete financial statements. In the opinion of the Company's
management, the unaudited interim financial statements contain all
adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation. The results of operations for the
interim periods are not necessarily indicative of the results that may be
expected for the entire year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and
assumptions by management in determining the reported amounts of assets and
liabilities, disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Restricted Cash
In connection with a note payable to a bank, the Company is required
to maintain a cash account with that bank. The Company must obtain
approval from the bank before the cash can be used. As such, the cash
balance at this bank is reflected as restricted cash in the accompanying
balance sheet.
Supply Inventory
Supply inventory consists of various service and maintenance items
related to the Company's transmission systems and are stated at the lower
of cost or market using the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is
computed using the straight-line method over the estimated useful lives of
the assets. Depreciation expense for the years ended December 31, 1997 and
1998, was approximately $786,000 and $1,230,000, respectively.
The Company follows the provisions of Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of." Accordingly,
in the event that facts and circumstances indicate that property and
equipment or other assets may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if an impairment of such property is
necessary. The effect of any impairment would be to expense the difference
between the fair value of such property and its carrying value. During the
year ended December 31, 1998, the Company determined that the value of
certain property under capital lease was impaired and recorded a write-down
of approximately $1,172,000 in the accompanying statement of operations.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend
the useful lives of existing equipment, are capitalized and depreciated.
Upon retirement or disposition of property and equipment, the cost and
related accumulated depreciation are removed from the accounts and any
resulting gain or loss is recognized in the statement of operations.
The Company leases certain equipment under agreements accounted for as
capital leases. The assets under capital leases are recorded at the lesser
of the present value of aggregate future minimum lease payments or the fair
value of the assets under lease. Assets under capital lease are
depreciated over their estimated useful lives as it is management's intent
to exercise the bargain purchase options available under the agreements.
Goodwill
Goodwill is related to the purchase of Cable as described in Note 2
and is being amortized on the straight-line method over 10 years.
Amortization expense of approximately $224,000 and $302,000 is reflected as
a component of depreciation and amortization for the years ended
December 31, 1997 and 1998, respectively.
Deferred Loan Costs
Deferred loan costs consist of costs incurred in connection with
obtaining debt in 1998. These costs are being amortized using the
effective interest method over the term of the related debt. Amortization
expense of approximately $666,000 is reflected as a component of interest
expense for the year ended December 31, 1998.
Revenue Recognition
Revenue from subscribers is recognized in the period that service is
provided. Amounts billed prior to providing services are reflected as
deferred revenue. Installation fees are recognized as revenue upon
origination of service to subscribers. Costs incurred to obtain
subscribers are expensed as incurred.
Income Taxes
The Company follows the liability method of accounting for income
taxes in accordance with SFAS No. 109, "Accounting for Income Taxes."
Under this method, deferred assets and liabilities are recorded for future
tax consequences of temporary differences between the 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 underlying assets or
liabilities are recovered or settled.
The LLC was organized as a limited liability company and was
classified as a partnership for federal, state and local income tax
purposes. The members were responsible for their respective tax
liabilities, if any, related to their share of the income and expenses of
the LLC.
Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of SFAS
No. 130, "Reporting Comprehensive Income." The objective of SFAS No. 130
is to report all changes in equity that result from transactions and
economic events other than transactions with owners. There is no
difference between net loss and comprehensive loss for the years ended
December 31, 1997 and 1998.
Credit Risk and Significant Customers
The Company's accounts receivable subject the Company to credit risk,
as collateral is generally not required. The Company's risk of loss is
limited due to advance billings to certain customers for services and the
ability to terminate access on delinquent accounts. The large number of
customers comprising the customer base mitigates the concentration of
credit risk. For the years ended December 31, 1997 and 1998, no customer
represented more than 10 percent of the Company's consolidated revenues.
Financial Instruments
The carrying amounts of cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximate fair value because of
the short-term nature of these instruments. The fair value of all long-
term debt was estimated by discounting the future cash flows using market
interest rates and does not differ significantly from that reflected in the
financial statements.
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts Receivable
Accounts receivable consist of the following at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Accounts receivable $ 577,932
Less- Allowance for doubtful accounts (123,802)
--------------
Accounts receivable, net $ 454,130
==============
</TABLE>
Activity in the Company's allowance for doubtful accounts consists of
the following:
<TABLE>
<CAPTION>
For the Year Ended December 31
------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Balance, beginning of year $ 26,871 $ 81,362
Provision for bad debts 196,503 296,370
Deductions for uncollectible
receivables written off, net
of recoveries (142,012) (253,930)
------------ ------------
Balance, end of year $ 81,362 $ 123,802
============ ============
</TABLE>
Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
Estimated
Useful Lives
December 31, 1998
-----------------------------------------------
<S> <C> <C>
Cable systems 5 10 $ 7,977,516
Telephone switch equipment 10 4,425,359
Furniture, fixtures and
office equipment 5 10 1,144,567
Construction in progress 1,095,950
------------
14,643,392
Less- Accumulated depreciation (2,578,175)
------------
Property and equipment, net $12,065,217
============
</TABLE>
Capital leases with a net book value of approximately $3,037,000 are
included in property and equipment at December 31, 1998.
Goodwill
Goodwill consists of the following at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Goodwill $ 3,014,513
Less-Accumulated amortization (679,012)
------------
Goodwill, net $ 2,335,501
============
</TABLE>
Deferred Loan Costs
Deferred loan costs consist of the following at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Deferred loan costs $ 1,152,848
Less- Accumulated amortization (666,241)
------------
Deferred loan costs, net $ 486,607
============
</TABLE>
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following at
December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Accounts payable, trade $ 2,772,969
Accrued wages and other 571,133
------------
Accounts payable and accrued expenses $ 3,344,102
============
</TABLE>
5. DEBT:
Debt consists of the following at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Note payable to a bank, principal
due October 1998, interest at the
bank's prime rate plus 1 percent per
annum payable quarterly, secured by
all assets of the Company, guaranteed
by a stockholder of the Company $7,126,830
Note payable to a corporation,
principal due March 2001, interest
at 14 percent per annum payable
quarterly, unsecured 1,500,000
------------
8,626,830
Less- Unamortized discount on the
above debt (308,000)
------------
8,318,830
Capital lease obligations, principal
due monthly through 2003, interest
ranging from 10.1 percent to 10.6
percent per annum payable monthly,
secured by related equipment with a
net book value of $3,037,000 4,451,507
------------
Total long-term debt $12,770,337
============
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Note payable to the LLC in connection
with the acquisition of the assets
and liabilities of the LLC, principal
due the earlier of the Company's
initial public offering or in three
equal annual installments due March
1999, 2000 and 2001, respectively,
interest at 10 percent per annum
payable annually, unsecured $ 3,000,000
Bridge notes payable to stockholders,
principal due March 1999, interest
at 15 percent per annum payable
quarterly, unsecured 3,250,000
------------
6,250,000
Less- Unamortized discount on the
above debt (270,834)
------------
Total long-term debt, related parties $ 5,979,166
============
</TABLE>
Each of the note agreements contains warranties and covenants.
Default on any warranty or covenant could accelerate the maturity of any
borrowings outstanding under the agreements. At December 31, 1998, the
Company was in default on each note agreement and the capital lease
obligations due to nonpayment of required principal and/or interest. The
Company, however, has continued to accrue interest at the stated rate, and
such accrued interest is reflected in the accompanying consolidated balance
sheet. The notes and accrued interest payable to the bank were paid by
USOL upon USOL's acquisition of the Company, and the notes and accrued
interest payable to the LLC, the corporation and the stockholders were
forgiven immediately before the effectiveness of the acquisition. Since
the Company was in default of each note agreement, the related debt has
been classified as a current liability in the accompanying consolidated
balance sheet; the accompanying consolidated financial statements reflect
no other adjustments relating to the default under the note agreements or
capital lease obligations.
In connection with renegotiating the note payable to a bank during
1998, the Company issued a warrant to the bank for the purchase of
75,000 shares of the Company's common stock at $3.75 per share. The
warrant was immediately exercisable and has a term of five years. The
Company valued this warrant using the Black-Scholes pricing model at
$308,000 and reflected it as a discount to the related debt. The entire
discount was amortized as interest expense through October 1998, the
maturity date of the related debt.
In connection with the issuance of the note to a corporation in 1998,
the Company also issued a warrant to the corporation for the purchase of
100,000 shares of the Company's common stock at $3.75 per share. The
warrant was immediately exercisable and has a term of five years. The
Company valued this warrant using the Black-Scholes pricing model at
approximately $411,000 and reflected it as a discount to the related debt.
This discount is being amortized as interest expense over the term of the
related debt. Interest expense recognized for the year ended December 31,
1998, was approximately $103,000.
In 1998, the Company sold 866,667 shares of its common stock for
$3,250,000, or $3.75 per share, and issued $3,250,000 in bridge notes to
its bridge investors. The estimated fair market value of the common stock
on the date of sale was $5.00. Therefore, the Company reflected a discount
on the related debt of approximately $1,083,000 for the difference of
$1.25 per share between the fair value of the common stock and the price at
which it was sold. This discount is being amortized as interest expense
over the term of the related debt. Interest expense recognized for the
year ended December 31, 1998, was approximately $812,000.
Following is a detail of the debt discounts:
<TABLE>
<CAPTION>
<S> <C>
Balance, December 31, 1997 -
Recognition of discounts 1,802,000
Amortization to interest expense (1,223,166)
-------------
Balance, December 31, 1998 $ 578,834
=============
</TABLE>
6. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company has entered into various operating lease agreements for
office and warehouse space. Future minimum rental commitments under all
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
December 31,
1999 $ 217,486
2000 169,380
2001 156,502
2002 55,904
2003 3,720
Thereafter 12,400
-------------
$ 615,392
=============
</TABLE>
Rental expense incurred in connection with these leases approximated
$170,000 and $154,000 for the years ended December 31, 1997 and 1998,
respectively.
Service Agreements
The Company maintains various cancelable and noncancelable service
agreements for telecommunications services with several competitive local
exchange carriers (CLEC) and one interexchange carrier (IXC) that commit
the Company to the CLECs' and IXC's services. These agreements require
minimum monthly charges ranging from $400 to $25,000 per month and have
terms ranging from one year to five years. Future minimum amounts due
under all noncancelable agreements are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year Ending December 31,
1999 $ 461,474
2000 444,150
2001 210,936
2002 35,271
2003 30,591
Thereafter 9,004
-------------
$ 1,191,426
=============
</TABLE>
Regulatory Matters
Franchise cable operators are subject to a wide range of FCC
regulations regarding such matters as the rates charged for certain
services, transmission of local television broadcast signals, customer
service standards/procedures, performance standards and system testing
requirements. In addition, the operator's franchise, which can be issued
at the municipal, county or state level, typically imposes additional
requirements for operation. These relate to such matters as system design
and construction, provision of channel capacity and production facilities
for public educational and government use and the payment of franchise fees
and the provision of other "in kind" benefits to the city.
The operator of a video distribution system that serves subscribers
without using any public right-of-way, referred to generally as a private
cable operator, is exempt from the majority of FCC regulations applicable
to franchised systems which do use public rights-of-way. Moreover, a state
or local government cannot impose a franchise requirement on such
operators.
To remain exempt from extensive FCC regulation and local franchising
requirements, the Company intends to confine its video distribution
facilities to contiguous private property and obtain programming primarily
via satellite master antenna television facilities. The Company intends to
rely on 18 GHz microwave links to cross public rights-of-way where
necessary and technically feasible. The use of microwave frequencies to
transmit video signals across a public right-of-way is not considered a
"use" of the right-of-way sufficient to trigger a local franchising
requirement or FCC regulation applicable to franchised operators. The
Company is considered a private cable operator in all of the markets that
it serves.
7. CAPITAL STOCK:
Stockholders' deficit consists of the following:
<PAGE>
<TABLE>
<CAPTION> Total
Common Stock Additional Stock-
----------------------- Paid-in Deferred Accumulated holders'
Shares Amount Capital Compensation Deficit Deficit
---------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Initial capitalization,
restricted stock grant 500,000 $ 500 $ - $ - $ - $ 500
Issuance of stock options - - 618,750 (618,750) - -
Accretion of deferred
compensation - - - 64,844 - 64,844
Stock options forfeited - - (12,500) 12,500 - -
Sale of common stock, net
of issuance costs of
$461,321 866,667 867 2,787,812 - - 2,788,679
Original issue discount
on issuance of bridge
notes - - 1,083,335 - - 1,083,335
Issuance of warrants - - 1,039,469 - - 1,039,469
Acquisition of certain
assets and liabilities
of the LLC 800,000 800 (3,819,751) - - (3,818,951)
Net loss of the Company
from inception
(March 5, 1998) through
December 31, 1998 - - - - (6,890,011) (6,890,011)
---------- ---------- ---------- ----------- ----------- ----------
Balance, December 31, 1998 2,166,667 2,167 1,697,115 (541,406) (6,890,011) (5,732,135)
Accretion of deferred
compensation (unaudited) - - - 51,563 - 51,563
Net loss (unaudited) - - - - (3,448,992) (3,448,992)
---------- ---------- ---------- ----------- ----------- ----------
Balance, June 30, 1999
(unaudited) 2,166,667 $ 2,167 $1,697,115 $(489,843) $(10,339,003) $(9,129,564)
========== ========== ========== =========== =========== ===========
</TABLE>
<PAGE>
Preferred Stock
The Company has one million shares of $.001 par value preferred stock
authorized, none of which is issued and outstanding. The board of
directors has the authority to issue the preferred stock in series and
designate the rights and preferences of each series.
Common Stock
The Company has 20 million shares of $.001 par value common stock
authorized. Holders of common stock are entitled to receive dividends when
declared by the board of directors. Upon liquidation, holders are entitled
to share pro rata in any distribution to such holders following payment to
creditors. Holders have one vote per share and have no cumulative voting
or preemptive rights.
Restricted Stock Awards
The Company adopted the 1998 Restricted Stock Award Plan (the Stock
Plan) in March 1998, to provide incentives to attract and retain highly
competent persons as officers and key employees. Under the Stock Plan, the
Company can issue up to 500,000 shares of common stock to key employees
designated by the board of directors, with the Company generally having a
right to repurchase nonvested (restricted) shares at a price of $.001 per
share upon termination of the employee. Restricted shares may not be sold,
exchanged, transferred, pledged, hypothecated or otherwise disposed of,
unless they have been offered to the Company for repurchase.
The Company awarded all 500,000 shares issuable under the Stock Plan
in March 1998, of which 120,000 were fully vested and are no longer subject
to repurchase by the Company. The remaining shares are subject to a three-
year vesting period based on the anniversary of the date of grant. At
December 31, 1998, 120,000 shares were fully vested.
Also, in March 1998, each employee who received an award, entered into
a shareholder agreement with the majority member of the LLC which provided
the majority member the right to purchase the shares at $.001 per share, if
the Company failed to complete an initial public offering on or before
September 30, 1998. In addition, each employee gave his voting right to
the majority member until such time as the shareholder agreement is
terminated or amended.
Due to the shareholder agreement, there is no certainty as to the
number of shares the employees will ultimately receive and, as such, the
Company has treated the award of 500,000 shares as a variable award under
the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25). The Company will record a charge
when the number of shares the employees will receive is known. In
connection with the USOL transaction described in Note 1, management
believes that these awards have no value.
Stock Options
The Company adopted the 1998 Non-Qualified Stock Option and Incentive
Stock Option Plan (the Option Plan) in March 1998. The Option Plan allows
up to one million options to be granted to eligible participants for the
purchase of common stock. Options granted are either incentive stock
options or nonstatutory stock options and are exercisable within the times
or upon the events determined by the board of directors as specified in
each option agreement. Incentive stock options granted under the Option
Plan are not to have exercise prices less than the fair value of the
Company's common stock on the date of grant. Nonstatutory options can have
exercise prices not less than 85 percent of the fair value of the Company's
common stock on the date of grant. Incentive stock options granted to a
10 percent stockholder shall not be less than 110 percent of the fair
market value of the Company's common stock on the date of grant. Options
granted have a life of ten years and generally vest over a period of six
years. The vesting can be subject to acceleration upon the occurrence of
specified performance criteria and are immediately exercisable upon the
occurrence of certain events including a merger, acquisition or change in
control. The Company has reserved one million shares of common stock for
issuance under the Option Plan.
The Company applies APB 25 and related interpretations in accounting
for the Option Plan. Accordingly, no compensation cost is recognized for
grants of options with exercise prices equal to or above the fair value of
the Company's common stock on the date of grant. Compensation cost is
recognized for grants of options with exercise prices less than the fair
value and is computed as the difference between the fair value on the date
of grant and the exercise price. During 1998, the Company granted options
for the purchase of 495,000 shares of the Company's common stock at
$3.75 per share. These shares vest in 2004, but vesting can be accelerated
if certain performance criteria are met. Such criteria were not met during
1998. On the date of grant, the fair value of the common stock was
estimated to be $5.00 per share, therefore, the Company recorded deferred
compensation of approximately $619,000 and is amortizing this amount to
selling, general and administrative expense over the vesting period. The
Company reflected approximately $67,000 in compensation expense related to
these options for the year ended December 31, 1998.
Had compensation cost for the stock option grant been determined based
on their fair value at the grant date consistent with the method prescribed
by SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's
net loss for the year ended December 31, 1998, would have been increased to
the pro forma amount indicated below:
<TABLE>
<CAPTION>
<S> <C>
Net loss-
As reported $ (11,447,458)
Pro forma (13,428,737)
</TABLE>
As of December 31, 1998, the fair value of each option grant was
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used:
<TABLE>
<CAPTION>
<S> <C>
Dividend yield - %
Expected volatility 95.00%
Risk-free interest rate 5.10%
Expected life 6.75 years
</TABLE>
A summary of the status of the Company's stock option plan is
presented below as of and for the year ended December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
-------- ----------
<S> <C> <C>
Outstanding, beginning of year - $ -
Granted 495,000 3.75
Exercised - -
Forfeited (10,000) 3.75
---------
Outstanding, end of year 485,000 3.75
=========
Options exercisable at year-end
Weighted average fair value of
options granted during the year $ 4.22
Weighted average remaining
contractual life 9.25 years
</TABLE>
As a result of the USOL transaction discussed in Note 1, management
believes that these awards have no value.
Warrants
As discussed in Note 5, the Company issued warrants in 1998 in
connection with two debt obligations to purchase 175,000 shares of the
Company's common stock at $3.75 per share.
The Company also issued a warrant in 1998 to purchase 78,054 shares of
common stock at $3.75 per share to a corporation for professional services
rendered in connection with obtaining the bridge notes. The Company valued
this warrant using the Black-Scholes pricing model at approximately
$320,000 and reflected it as a component of deferred loan costs.
Each of these warrants is currently exercisable and has a term of five
years. As a result of the USOL transaction discussed in Note 1, management
believes that these awards have no value.
8. INCOME TAXES:
As discussed in Note 3, the LLC was organized as a limited liability
company and was classified as a partnership for federal, state and local
income tax purposes. The members were responsible for their respective tax
liabilities, if any, related to their share of the income and expenses of
the LLC. As such, no tax provision is reflected in the accompanying
statement of operations for the year ended December 31, 1997, nor for the
LLC's results of operations from January 1, 1998, through July 21, 1998.
See Note 2.
For the period from inception (March 5, 1998) through December 31,
1998, the Company has generated losses and, therefore, has not been subject
to federal income taxes. The Company's deferred tax asset at December 31,
1998, of approximately $2,404,000 consists primarily of its net operating
loss carryforward which expires in 2018. Since there is no assurance of
future taxable income, a valuation allowance has been established to fully
offset the deferred tax asset at December 31, 1998.
9. RELATED-PARTY TRANSACTIONS:
During 1997 and prior years, the LLC entered into various note
agreements with one of its members to provide operating capital. Interest
was payable at prime, plus 2 percent compounded annually. For the years
ended December 31, 1997 and 1998, the accompanying statements of operations
reflect interest expense of approximately $1,650,000 and $968,000,
respectively, related to these note obligations of the LLC. The notes and
related accrued interest were not acquired by the Company. See Note 2.
During 1998, the Company entered into note agreements with the LLC and its
bridge investors. See Note 5.
The LLC entered into a guaranty and subordination agreement with one
of its members whereby the member guaranteed the note payable to a bank and
agreed that amounts due him were subordinate to the note payable to the
bank. Under the terms of the agreement, the LLC was charged a fee of
.125 percent of the average daily outstanding balance of the note payable
to a bank and 6 percent of the total of the principal and interest due to
the member under the note agreements discussed above. For the years ended
December 31, 1997 and 1998, the accompanying statements of operations
reflect interest expense of approximately $858,000 and $63,000,
respectively, related to this agreement. The unpaid guarantee and
subordination fees were not acquired by the Company, however, the guarantee
and related fee remain in effect.
A company controlled by the majority member of the LLC provided
management, administrative and consulting services to the LLC. For the
years ended December 31, 1997 and 1998, the Company was charged
approximately $200,000 and $111,000, respectively, for these services. The
Company no longer received these services subsequent to March 31, 1998.
An officer of the Company has a beneficial ownership interest in two
apartment complexes served by the Company. The properties are owned by
separate limited partnerships in which the officer is the general partner
of one and a limited partner in the other. Both properties are managed by
a company, which is partially owned by the officer. For the years ended
December 31, 1997 and 1998, revenues from these two properties were
approximately $64,000 and $74,000, respectively.
During 1997 and part of 1998, the Company leased its corporate office
space from a limited partnership in which an officer of the Company was
both the general partner and a limited partner. The Company subleased a
portion of the space to another entity partially owned by the officer. For
the years ended December 31, 1997 and 1998, net lease expense reflected in
the accompanying statements of operations was approximately $49,000 and
$18,000, respectively.
10. SEGMENT DISCLOSURE:
The Company operates in a single industry segment, telecommunications.
The Company provides integrated telephony and cable services to residents
of multifamily apartments and condominiums. The Company's management team
monitors the Company's products and services according to the following
categories:
- - - - Local telephone - Local dial tone with enhanced calling features that
provide incoming and outgoing calls over the public switched network.
- - - - Long distance telephone - Services include all originating minutes for
calls placed outside the local calling area, including those generated
from calling cards.
- - - - Video - Basic, expanded basic and premium cable television services.
The revenues generated by these products and services were as follows:
<TABLE>
<CAPTION>
For the Year Ended For the Six Months
December 31 Ended June 30
------------------------ -----------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Local telephone $ 347,053 $ 766,490 $ 349,618 $ 460,626
Long distance telephone 358,140 1,041,496 484,725 541,013
Video 1,888,279 3,081,756 1,421,643 1,677,411
Other 127,821 218,483 88,979 152,029
----------- ----------- ----------- -----------
$ 2,721,293 $5,108,225 $ 2,344,965 $2,831,079
=========== =========== =========== ===========
</TABLE>
The direct costs included in operating expense associated with these
products and services were as follows:
<TABLE>
<CAPTION>
For the Six Months
For the Year Ended Ended June 30
December 31 (Unaudited)
1997 1998 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Local telephone $ 761,747 $ 716,248 $ 378,917 $ 364,894
Long distance telephone 178,456 793,936 360,680 367,702
Video 605,288 1,034,364 478,533 613,208
----------- ----------- ----------- -----------
$ 1,545,491 $2,544,548 $ 1,218,130 $1,345,804
=========== =========== =========== ===========
</TABLE>
There are a number of shared expenses incurred related to managing the
different revenue streams. Management believes that any allocation of
these expenses would be impractical and arbitrary, and management does not
currently make such allocations internally.
<PAGE>
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial
information is presented to give effect to (i) the acquisition of
substantially all of the assets and certain liabilities of U.S. OnLine
Communications, Inc. ("US Online") by USOL Holdings, Inc. ("USOL") on July
21, 1999, (ii) the purchase of certain assets, primarily contract rights,
from GMAC Commercial Mortgage Corporation ("GMACCM"), and (iii) the
proposed merger of FirstLink Communications, Inc. ("FirstLink") and USOL.
The unaudited pro forma consolidated condensed balance sheet as of June 30,
1999, and the unaudited pro forma consolidated condensed statements of
operations for the year ended December 31, 1998, and the six months ended
June 30, 1999, are based on the individual balance sheets and statements of
operations of USOL, US Online and FirstLink appearing elsewhere in this
Proxy Statement.
On July 21, 1999, USOL acquired the assets and certain liabilities of
US Online in exchange for 750,000 shares of USOL common stock, warrants to
purchase 1,500,000 shares of USOL common stock at $5.50 per share and
approximately $845,000 in cash. The acquisition was accounted for under
the purchase method of accounting.
In connection with the proposed merger, FirstLink will exchange
3,175,000 shares of its common stock and 1,480,000 shares of preferred
stock for an equal number of shares of USOL common and preferred stock.
FirstLink will also assume the three-year, $3,674,000 note underlying
2,000,000 shares of USOL common stock. Additionally, FirstLink will issue
USOL shareholders 2,084,000 warrants to purchase common stock (1,500,000 at
$5.50 per share, 86,000 at $4.00 per share, 86,000 at $6.00 per share, and
412,000 at $2.00 per share) and will exchange stock options to acquire
1,910,000 shares of the Company's common stock at prices ranging from $1 to
$5.50 per share for identical USOL stock options.
The issuance of the shares will result in the USOL shareholders owning
approximately 84% of the voting securities of FirstLink. Also, USOL will
nominate a controlling number of seats on FirstLink's board of directors
and the officers of USOL will retain their positions after the merger. As
the stockholders, directors and officers of USOL will hold the controlling
interest in FirstLink, this merger will be accounted for as a reverse
acquisition under the purchase method of accounting. A reverse acquisition
occurs when the legal acquirer (FirstLink) is deemed not to be the
accounting acquirer. In these cases, the legal form of the transaction is
ignored, and the target company (USOL) is treated as the acquiring company
for financial reporting purposes.
The pro forma financial information is provided for comparative
purposes only and does not purport to be indicative of the results that
actually would have been obtained if the events set forth above had been
effected on the dates indicated or of the results that may be obtained in
the future. The pro forma financial statements are based on preliminary
estimates of values and transaction costs. The actual recording of the
transactions will be based on the final appraisals, values and transaction
costs. Accordingly, the actual recording of the transactions can be
expected to differ from these pro forma financial statements.
The unaudited pro forma condensed consolidated balance sheet assumes
that the merger was consummated on June 30, 1999. The unaudited pro forma
condensed statements of operations reflect the consolidation of the results
of operations of FirstLink and USOL for the year ended December 31, 1998,
and the six months ended June 30, 1999, as if the merger had been
consummated on January 1, 1998.
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
PRO FORMA BALANCE SHEET
As of June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
U.S.
ONLINE PRO FORMA PRO FORMA
USOL COMMUNI- ADJUST- PRO FORMA ADJUST-
HOLDINGS CATIONS MENTS (1) PRE-MERGER FIRSTLINK MENTS (2) PRO FORMA
----------- ----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash
equivalents $ 425 $1,212,856 $37,000,000 A $19,648,283 $1,417,276 $510,000 K $21,575,559
(3,874,449) B
(9,830,106) D
(1,516,443) E
(845,000) F
1,000 H
(2,500,000) I
Restricted cash - 144,495 - 144,495 - - 144,495
Investment
securities - - - - 2,090,125 2,090,125
Accounts receivable - 289,545 - 289,545 119,297 408,842
Note receivable
from U.S. Online
Communications - - - - 510,000 (510,000) K -
Other receivables - - - - 7,425 - 7,425
Supply inventory - 292,932 - 292,932 - - 292,932
Prepaids and other
current assets - 107,792 - 107,792 47,633 - 155,425
Total current
assets 425 2,047,620 18,435,002 20,483,047 4,191,756 - 24,674,803
Property and Equip-
ment, Net - 11,835,192 - 11,835,192 1,200,489 - 13,035,681
Other Assets - 2,861,294 1,284,449 B 10,163,907 77,802 16,728,232 O 26,969,941
(2,861,294) C
2,365,858 C
845,000 F
2,824,800 G
2,843,800 I
Total assets $425 $16,744,106 $25,737,615 $42,482,146 $5,470,047 $16,728,232 $64,680,425
</TABLE>
(1) Pro Forma adjustments related to the financing of USOL Holdings, Inc. on
July 21, 1999, and the acquisition of the assets and certain
liabilities of U.S. Online Communications, Inc.
(2) Pro Forma adjustments related to the merger of FirstLink and USOL.
See accompanying notes to the unaudited pro forma condensed
financial information
<PAGE>
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
PRO FORMA BALANCE SHEET
As of June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
U.S.
ONLINE PRO FORMA PRO FORMA
USOL COMMUNI- ADJUST- PRO FORMA ADJUST-
HOLDINGS CATIONS MENTS (1) PRE-MERGER FIRSTLINK MENTS (2) PRO FORMA
----------- ----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT LIABIL-
ITIES
Accounts
payable and
accrued
expenses $ - $4,872,431 $(1,875,000) C $1,915,053 $309,433 $ - $2,224,486
(1,040,935) D
(41,443) E
Current portion
of capital lease
obligations 608,892 J 608,892 66,882 675,774
Current portion
of long term
debt 12,682,343 (8,789,171) D
(1,500,000) C
(2,393,172) J
Current portion
of long-term
debt, related
parties 6,250,000 (6,250,000) C
Short term notes
payable 1,475,000 (1,475,000) E
Deferred revenue 357,483 357,483 357,483
----------- ----------- ----------- ------------ ----------- ----------- -----------
Total current
liabilities 25,637,257 (22,755,829) 2,881,428 376,315 3,257,743
----------- ----------- ----------- ------------ ----------- ----------- -----------
LONG TERM DEBT
Capital lease
obligations, less
current portion 1,784,280 J 1,784,280 142,778 1,927,058
----------- ----------- ----------- ------------ ----------- ----------- -----------
Total long
term debt 1,784,280 1,784,280 142,778 1,927,058
----------- ----------- ----------- ------------ ----------- ----------- -----------
MINORITY INTEREST 236,413 236,413 236,413
STOCKHOLDERS' EQUITY
Preferred stock 37,000,000 A 34,410,000 34,410,000 L 34,410,000
(2,590,000) B (34,410,000) L
Common stock 425 2,167 (2,167) C 3,175 8,515,209 (3,175) N 29,372,786
750 G 7,690,425 P
2,000 H 3,175 N
16,728,232 O
(3,564,255) M
Additional
paid in
capital 849,575 1,697,115 (1,697,115) C 7,690,425 (7,690,425) P
2,824,050 G
3,998,000 H
(325,000) H
343,800 I
Stock subscrip-
tion receivable (3,674,000) H (3,674,000) (3,674,000)
Deferred compen-
sation (489,843) 489,843 C
Retained
deficit (849,575) (10,339,003) 10,339,003 C (849,575) (3,564,255) 3,564,255 M (849,575)
----------- ----------- ----------- ------------ ----------- ----------- -----------
Total stock-
holders
equity 425 (9,129,564) 46,709,164 37,580,025 4,950,954 16,728,232 59,259,211
----------- ----------- ----------- ------------ ----------- ----------- -----------
Total lia-
bilities and
stockholders
equity $ 425 $16,744,106 $25,737,615 $42,482,146 $5,470,047 $16,728,232 $64,680,425
=========== =========== =========== ============ =========== =========== ============
</TABLE>
(1) Pro Forma adjustments related to the financing of USOL Holdings, Inc. on
July 21, 1999, and the acquisition of the assets and certain
liabilities of U.S. Online Communications, Inc.
(2) Pro Forma adjustments related to the merger of FirstLink and USOL.
See accompanying notes to the unaudited pro forma condensed
financial information
<PAGE>
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
U.S.
ONLINE PRO FORMA PRO FORMA
USOL COMMUNI- ADJUST- PRO FORMA ADJUST-
HOLDINGS CATIONS MENTS (1) PRE-MERGER FIRSTLINK MENTS (2) PRO FORMA
----------- ----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE $ $5,108,225 $ $5,108,225 $1,246,011 $ $6,354,236
----------- ----------- ----------- ------------ ----------- ----------- -----------
EXPENSES:
Operating 4,469,879 4,469,879 968,115 5,437,994
Selling,
General and
Administrative 4,454,102 29,240 W 4,483,342 1,772,421 6,255,763
Depreciation and
amortization 1,532,351 1,050,771 Q 2,583,122 103,148 297,726 Q 2,983,996
Write down of
property and
equipment 1,172,468 1,172,468 1,172,468
----------- ----------- ----------- ------------ ----------- ----------- -----------
Total Expenses 11,628,800 1,080,011 12,708,811 2,843,684 297,726 15,850,221
----------- ----------- ----------- ------------ ----------- ----------- -----------
Operating loss (6,520,575) (1,080,011) (7,600,586) (1,597,673) (297,726) (9,495,985)
----------- ----------- ----------- ------------ ----------- ----------- -----------
OTHER (INCOME)
EXPENSE:
Interest, net 4,772,896 (4,406,328) S 182,868 96,998 279,866
(183,700) V
Gain on disposition
of property and
equipment, net (26,378) (26,378) (26,378)
Other 218,228 218,228 139,303 357,531
----------- ----------- ----------- ------------ ----------- ----------- -----------
4,964,746 (4,590,028) 374,718 236,301 611,019
----------- ----------- ----------- ------------ ----------- ----------- -----------
LOSS BEFORE
MINORITY
INTEREST (11,485,321) 3,510,017 (7,975,304) (1,833,974) (297,726) (10,107,004)
MINORITY
INTEREST IN
LOSS OF
SUBSIDIARY 37,863 37,863 37,863
----------- ----------- ----------- ------------ ----------- ----------- ---------
Net loss (11,447,458) 3,510,017 (7,937,441) (1,833,974) (297,726) (10,069,141)
PREFERRED STOCK
DIVIDENDS (4,440,000) R (4,440,000) 4,440,000 T (4,440,000)
(4,440,000) T
Loss attributable
to common
shareholders $ $(11,447,458) $(929,983) $(12,377,441) $(1,833,974) $(297,726) $(14,509,141)
=========== =========== =========== ============ =========== =========== ============
PER SHARE AMOUNTS:
Basic and diluted
loss per common
share $ (0.68) $ (2.46)
=========== ===========
Basic and diluted
weighted average
common shares 2,716,867 3,175,000 U 5,891,867
=========== =========== ===========
</TABLE>
(1) Pro Forma adjustments related to the financing of USOL Holdings, Inc. on
July 21, 1999, and the acquisition of the assets and certain
liabilities of U.S. Online Communications, Inc.
(2) Pro Forma adjustments related to the merger of FirstLink and USOL.
See accompanying notes to the unaudited pro forma condensed
financial information
<PAGE>
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
U.S.
ONLINE PRO FORMA PRO FORMA
USOL COMMUNI- ADJUST- PRO FORMA ADJUST-
HOLDINGS CATIONS MENTS (1) PRE-MERGER FIRSTLINK MENTS (2) PRO FORMA
----------- ----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE $ $2,831,079 $ $2,831,079 $676,415 $ $3,507,494
----------- ----------- ----------- ------------ ----------- ----------- -----------
EXPENSES:
Operating 2,100,739 2,100,739 538,075 2,638,814
Selling,
General and
Administrative 1,554,807 14,620 W 1,569,427 827,813 2,397,240
Depreciation
and amortization 826,298 525,385 Q 1,351,683 114,453 148,863 Q 1,614,999
Stock compensation
expense 849,575 849,575 849,575
----------- ----------- ----------- ------------ ----------- ----------- -----------
Total
Expenses 849,575 4,481,844 540,005 5,871,424 1,480,341 148,863 7,500,628
----------- ----------- ----------- ------------ ----------- ----------- -----------
Operating
loss (849,575) (1,650,765) (540,005) (3,040,345) (803,926) (148,863) (3,993,134)
----------- ----------- ----------- ------------ ----------- ----------- -----------
OTHER (INCOME) EXPENSE:
Interest, net 1,722,942 (1,607,173) S 23,919 (55,724) (31,805)
Gain on
disposition
of property
and equipment,
net (91,850) V
Other 72,871 72,871 5,986 78,857
----------- ----------- ----------- ------------ ----------- ----------- -----------
1,795,813 (1,699,023) 96,790 (49,738) 47,052
----------- ----------- ----------- ------------ ----------- ----------- -----------
LOSS BEFORE
MINORITY
INTEREST (849,575) (3,446,578) 1,159,018 (3,137,135) (754,188) (148,863) (4,040,186)
MINORITY
INTEREST
IN LOSS OF
SUBSIDIARY (2,414) (2,414) (2,414)
----------- ----------- ----------- ------------ ----------- ----------- -----------
Net loss (849,575) (3,448,992) 1,159,018 (3,139,549) (754,188) (148,863) (4,042,600)
PREFERRED STOCK
DIVIDENDS (2,220,000) R (2,220,000) 2,220,000 T (2,220,000)
(2,220,000) T
Loss attributable
to common
shareholders $(849,575) $(3,448,992) (1,060,982) $(5,359,549) $(754,188) $(148,863) $(6,262,600)
=========== =========== =========== ============ =========== =========== ============
PER SHARE
AMOUNTS:
Basic and
diluted loss
per common
share $ (0.21) $ (0.92)
=========== ===========
Basic and diluted
average common
shares 3,599,102 3,175,000 U 6,774,10
=========== ===========
</TABLE>
(1) Pro Forma adjustments related to the financing of USOL Holdings, Inc. on
July 21, 1999, and the acquisition of the assets and certain
liabilities of U.S. Online Communications, Inc.
(2) Pro Forma adjustments related to the merger of FirstLink and USOL.
See accompanying notes to the unaudited pro forma condensed
financial information
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
The unaudited pro forma condensed consolidated financial information
is based on the following adjustments and related assumptions. The actual
purchase accounting adjustments will be made on the basis of appraisal and
evaluation as of the date of consummation of the merger and, therefore,
will differ from those reflected in the unaudited pro forma condensed
financial information. The Company believes that the actual adjustments,
in the aggregate, will not be materially different from those herein.
On July 21, 1999, USOL issued 1,480,000 shares of its preferred stock
for $37 million ($25 per share) in cash to various parties, convertible
into common stock on a 12-1/2 to 1 basis at $2 per share. Further, USOL
issued 2 million shares of common stock in exchange for notes receivable
totaling $3,674,000 and $1,000 in cash. USOL also issued a warrant to
acquire 259,000 shares of common stock at $2 to $6 per share as advance
compensation for services to be rendered. On July 21, 1999, USOL acquired
substantially all of the assets and certain liabilities of US Online.
Pursuant to the transaction, USOL issued 750,000 shares of common stock
with a fair market value of $2 per share, issued warrants to acquire
1,500,000 shares of common stock at $5.50 per share, paid $845,000 in cash
and assumed certain liabilities. Additionally, on July 21, 1999, USOL
purchased certain assets, primarily contract rights, from GMAC Commercial
Mortgage Corporation ("GMACCM"). All adjustments necessary to reflect the
acquisition of US Online and the certain assets acquired from GMACCM by
USOL have been made as if that transaction had occurred by the dates
previously described in the introduction to the unaudited pro forma
condensed consolidated financial information
PRO FORMA ADJUSTMENTS
A. To reflect the sale by USOL of 1,480,000 shares of preferred stock for
$37 million.
B. To reflect the closing costs of $2,590,000 and $1,284,449 paid by USOL
associated with the preferred stock and acquisition transactions,
respectively.
- - - - To eliminate the US Online equity accounts as well as the assets and
liabilities not assumed by USOL as follows:
<TABLE>
<CAPTION>
<S> <C>
- Assets not purchased
Goodwill, deferred loan costs
and other intangibles $2,861,294
- Liabilities not assumed:
Accounts payable and accrued
expenses (1,875,000)
Current portion of long-term debt (1,500,000)
Current portion of long-term debt,
related parties (6,250,000)
- Elimination of stockholders' equity
Common stock (2,167)
Additional paid in capital (1,697,115)
Deferred compensation 489,843
Retained deficit 10,339,003
-----------
$2,365,858
===========
</TABLE>
D. To reflect the payments made by USOL of certain long-term debt and
accrued interest thereon concurrent with their assumption from US
Online.
E. To reflect the payments made by USOL of the short term notes payable
and accrued interest thereon concurrent with their assumption from US
Online.
F. To reflect the payment of approximately $845,000 to US Online by USOL.
G. To record the issuance of 750,000 shares of $.001 par value common
stock by USOL to US Online with an estimated fair market value of
$1,500,000, and to record the value of the warrants to acquire
1,500,000 shares of common stock at $5.50 per share, as determined by
using the Black Scholes pricing model, of $1,324,800.
H. To reflect the 2 million shares of $.001 par value common stock issued
by USOL under a $3,674,000 note receivable and $1,000 in cash. As the
fair market value of the common stock was $4 million, the $325,000
difference has been reflected as a stock offering cost. The note
receivable is reflected as a reduction in paid in capital.
I. To reflect the $2.5 million paid by USOL to GMACCM for the acquisition
of certain assets, and to record the value of the warrants to acquire
325,000 shares of common stock at $2.00 per share, using the Black
Scholes pricing model, of $343,800.
J. To reclassify US Online's capital leases to current and long-term
status after being brought current with the payment in adjustment "D"
above.
11 To reflect the payment of FirstLink's short-term note receivable from
US Online in adjustment "E" above.
12 To reflect the issuance by FirstLink of 1,480,000 shares of preferred
stock in exchange for the outstanding preferred stock of USOL.
13 To eliminate the retained deficit of FirstLink.
14 To reflect the issuance by FirstLink of 3,175,000 shares of no par
common stock in exchange for the common stock of USOL.
15 To record the step-up of FirstLink assets to estimated fair market
value. FirstLink determined fair market value by using the average
price of FirstLink's publicly traded common stock (estimated to be
$5.25 per share) at the transaction date:
<TABLE>
<CAPTION>
<S> <C>
FirstLink Common Stock $18,981,989
FirstLink Stock Options 1,017,704
FirstLink Stock Purchase Warrants 1,679,493
------------
21,679,186
Less FirstLink net Assets (4,950,954)
------------
$16,728,232
============
</TABLE>
16 To eliminate the pre-merger pro forma additional paid in capital of
USOL.
17 To record amortization of goodwill and other assets over ten and five
years, respectively.
18 To record dividends on the preferred shares at the stated rate of 12%
per annum.
19 To eliminate interest expense on debt instruments that were either
paid concurrent with the acquisition or not assumed by USOL in
connection with the acquisition of US Online.
20 To record dividends on the FirstLink preferred shares and eliminate
the dividends on the USOL preferred shares.
21 To reflect the shares of common stock issued by FirstLink in
connection with the merger. Conversion of the preferred shares, stock
options and warrants issued in connection with the merger is not
assumed, as the impact is anti-dilutive to loss per common share.
22 To record the interest income on the $3,674,000 note described in
adjustment "H" above.
23 To record the estimated compensation expense associated with the
services to be provided by the holder of the warrant to acquire
259,000 shares of common stock at prices ranging from $2 to $6 per
share. Using the Black-Scholes pricing model, deferred stock
compensation expense of $146,200 will be recorded. The compensation
will be amortized over five years, as this approximates the period
over which the services will be provided.
<PAGE>
<PAGE>
PLEASE MARK, SIGN, DATE AND RETURN Votes MUST be indicated
THE PROXY CARD PROMPTLY USING THE (X) in Black or Blue Ink ( )
ENCLOSED ENVELOPE
- - - ---------------------------------------------------------------------------
Form of Proxy for Common Stock
of FirstLink Communications, Inc.
- - - ---------------------------------------------------------------------------
FIRSTLINK COMMUNICATIONS, INC.
Post Office Box ______
Portland, Oregon ____
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints A. Roger Pease and Jeffrey S. Sperber
as Proxies, each with full power to act without the other and each with the
power to appoint his substitute, and hereby authorizes them to represent
and to vote, as designated on the reverse side hereof, all shares of Common
Stock of FirstLink Communications, Inc. ("FirstLink") held of record by the
undersigned on October 11, 1999, at the Special Meeting of shareholders to
be held on December __, 1999 or any adjournment thereof, hereby revoking
all proxies heretofore given with respect to such stock, upon the proposals
identified below and more fully described in the Notice of Special Meeting
of Shareholders and Proxy Statement relating to the Special Meeting,
receipt of each of which is hereby acknowledged.
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned shareholder.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE PROPOSALS
DESCRIBED ON THE REVERSE SIDE. IF ANY OTHER MATTERS ARE PRESENTED TO THE
HOLDERS OF COMMON STOCK FOR A VOTE AT THE SPECIAL MEETING, THIS PROXY WILL
BE VOTED IN ACCORDANCE WITH THE BEST JUDGMENT OF THE PERSONS APPOINTED AS
PROXIES.
(Continued, and to be signed and dated on reverse side)
- - - ---------------------------------------------------------------------------
<PAGE>
<PAGE>
1. PROPOSAL TO APPROVE the Plan of Merger described in the Agreement and
Plan of Merger and Reorganization dated as of July 21, 1999 (together with
the exhibits and schedules thereto, the "Merger Agreement"), between
FirstLink Communications, Inc., an Oregon corporation ( FirstLink") and
USOL Holdings, Inc., a Delaware corporation ( USOL ); and the issuance of
1,375,000 shares of FirstLink common stock and 1,480,000 shares of
FirstLink preferred stock in accordance with the Plan of Merger. Pursuant
to the Plan of Merger, (a) USOL will be merged with and into FirstLink,
with FirstLink as the surviving corporation (the "Merger") and, (b) each
share of Common Stock of USOL outstanding immediately prior to the
Effective Time (as defined in the Merger Agreement) (other than any such
shares held by USOL in its treasury or owned of record by FirstLink or any
subsidiary of FirstLink) will be converted into the right to receive one
share of FirstLink Common Stock, (c) each share of Series A Preferred Stock
of USOL outstanding immediately prior to the Effective Time will be
converted into the right to receive one share of FirstLink Series A
Preferred Stock, and (d) each share of Series B Preferred Stock of USOL
outstanding immediately prior to the Effective Time will be converted into
the right to receive one share of FirstLink Series B Preferred Stock. The
terms of the Merger Agreement are described in detail in the accompanying
Proxy Statement, and the full text of the Merger Agreement (exclusive of
exhibits and schedules) is included as Appendix A thereto.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
IF PROPOSAL 1 IS NOT APPROVED, NO ACTION
WILL BE TAKEN ON PROPOSALS 2 AND 3.
2. Proposal to approve an amendment to the articles of incorporation of
FirstLink to increase the authorized number of shares to 50,000,000 shares
of common stock and 5,000,000 shares of preferred stock.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. Proposal to approve an amendment to the articles of incorporation of
FirstLink to change the corporation s name to USOL Holdings, Inc.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. Proposal to approve the 1999 Incentive Plan.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
In their discretion, the Proxies are authorized to vote upon such
other matters as may properly come before the Special Meeting.
Address Change and/or
Comments Mark Here [ ]
Please sign exactly as name appears hereon. When shares are held by
joint tenants, both should sign. When signing as attorney, as executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other
authorized officer. If a partnership, please sign in partnership name by
authorized person.
Dated: _____________, 1999
______________________________
Signature
______________________________
Signature if held jointly
PLEASE MARK, SIGN, DATE AND Votes MUST be Indicated
RETURN THE PROXY CARD PROMPTLY (X) In Black or Blue ink. [ ]
USING THE ENCLOSED ENVELOPE
- - - ---------------------------------------------------------------------------
<PAGE>
<PAGE>
APPENDIX A
===========================================================================
AGREEMENT AND PLAN OF MERGER
AND REORGANIZATION
Dated as of July 21, 1999
By and Between
FIRSTLINK COMMUNICATIONS, INC.
and
USOL HOLDINGS, INC.
===========================================================================
<PAGE>
<PAGE>
TABLE OF CONTENTS
------------------
Article/Section Heading
Page
- - - --------------- -------
----
ARTICLE I DEFINITIONS 2
1.1 Definitions. 2
ARTICLE II THE MERGER 10
2.1 Merger; Effective Time. 10
2.2 Closing. 10
2.3 Effect of the Merger. 10
2.4 Articles of Incorporation; By-laws. 10
2.5 Directors and Officers. 11
2.6 Effect on Capital Stock. 11
2.7 Exchange of Certificates. 12
2.8 Stock Transfer Books. 13
2.9 Dissenting Shares. 14
2.10 No Further Ownership Rights in USOL Stock. 14
2.11 Lost, Stolen or Destroyed Certificates. 14
2.12 Tax and Accounting Consequences. 14
2.13 Adjustments. 15
ARTICLE III REPRESENTATIONS AND WARRANTIES OF FLCI 15
3.1 Organization. 15
3.2 Capitalization. 15
3.3 SEC Filings. 16
3.4 Qualification in Foreign Jurisdictions. 16
3.5 Authority Relative to this Agreement. 16
3.6 No Conflict; Required Filings and Consents. 17
3.7 Compliance with Laws; Permits. 17
3.8 Financial Statements. 18
3.9 Absence of Certain Changes or Events. 18
3.10 Material Contracts. 19
3.11 Accounts Receivable. 19
3.12 No Undisclosed Liabilities. 20
3.13 Absence of Litigation. 20
3.14 Employee Matters. 20
3.15 Labor Matters. 21
3.16 Restrictions on Business Activities. 21
3.17 Real Property. 21
3.18 Equipment and Vehicles. 22
3.19 Inventories. 22
3.20 Taxes. 22
3.21 Environmental Matters. 24
3.22 Brokers. 24
3.23 Interested Party Transactions. 24
3.24 Insurance Policies. 24
3.25 Vote Required. 24
3.26 Other Negotiations. 25
3.27 Full Disclosure. 25
3.28 Anti-takeover Law. 25
3.29 Intellectual Property. 25
3.30 Absence of Certain Business Practices. 27
3.31 Territorial Restrictions. 27
3.32 Year 2000 Compliance. 27
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF USOL 27
4.1 Organization. 27
4.2 Capitalization. 28
4.3 Qualification in Foreign Jurisdictions. 28
4.4 Authority Relative to this Agreement. 29
4.5 No Conflict; Required Filings and Consents. 29
4.6 Brokers. 30
4.7 Other Negotiations. 30
4.8 Full Disclosure. 30
4.9 Lockup Agreement. 30
4.10 Incorporation of Representations and Warranties By Reference. 31
ARTICLE V CONDUCT OF BUSINESS PENDING THE MERGER 32
5.1 Conduct of Business by USOL and FLCI Pending the Merger. 32
5.2 No Solicitation by USOL or FLCI. 34
ARTICLE VI ADDITIONAL AGREEMENTS 35
6.1 Proxy Statement. 35
6.2 FLCI Stockholders' Meeting. 36
6.3 Access to Information; Confidentiality. 36
6.4 Consents, Approvals. 36
6.5 Stock Options. 37
6.6 Warrants. 38
6.7 Notification of Certain Matters. 38
6.8 Public Announcements. 38
6.9 Application For Nasdaq Approval. 38
6.10 Delivery of Additional Filings. 39
6.11 Accountant's Comfort Letters. 39
6.12 Indemnification; Directors' and Officers' Insurance. 39
6.13 Employee Benefits 39
6.14 Stockholder Litigation. 40
6.15 Accredited Investors. 40
ARTICLE VII CONDITIONS TO THE MERGER 41
7.1 Conditions to Obligation of Each Party to Effect the Merger. 41
7.2 Additional Conditions to Obligations of FLCI. 42
7.3 Additional Conditions to Obligation of USOL. 43
ARTICLE VIII TERMINATION 43
8.1 Termination. 43
8.2 Certain Actions Prior to Termination. 46
8.3 Effect of Termination. 47
8.4 Fees and Expenses. 47
ARTICLE IX ARBITRATION; CONSENT TO JURISDICTION 49
9.1 Submission to Jurisdiction. 49
9.2 Waiver of Immunity and Inconvenient Forum. 49
9.3 Arbitration Procedures. 49
9.4 Final Arbitration Decisions. 49
9.5 Claims for Unpaid Balance. 50
ARTICLE X GENERAL PROVISIONS 50
10.1 Attorney's Fees. 50
10.2 Effectiveness of Representations, Warranties and Agreements;
Knowledge, Etc. 50
10.3 Notices. 50
10.4 Amendment. 52
10.5 Waiver. 52
10.6 Severability. 53
10.7 Assignment. 53
10.8 Parties in Interest. 53
10.9 Failure or Indulgence Not Waiver; Remedies Cumulative. 53
10.10Governing Law. 54
10.11Counterparts. 54
10.12Captions. 54
10.13Time. 54
Attachments to Agreement and Plan of Merger and Reorganization
- - - --------------------------------------------------------------
Schedules:
---------
Schedule 1.1 -- USOL Permitted Liens
Schedule 2.5(a) -- Directors of Surviving Corporation
Schedule 3.1 -- FLCI Investments and Extensions of Credit
Schedule 3.2 -- FLCI Stock Options, Warrants, and
Registration Rights
Schedule 3.4 -- FLCI Qualification in Foreign Jurisdictions
Schedule 3.5 -- FLCI Stockholder Consents
Schedule 3.6(a) -- FLCI Conflicts, Required Filings and
Consents
Schedule 3.6(b) -- Requirements of State Government
Authorities
Schedule 3.7 -- Permits of FLCI
Schedule 3.10(a) -- FLCI Material Contracts
Schedule 3.12 -- Material Liabilities not on FLCI Financial
Statements
Schedule 3.14(a) -- FLCI Employee Benefit Plans
Schedule 3.14(b) -- Certain Employment Agreements
Schedule 3.14(c) -- Outstanding Options and Option Holders
Schedule 3.17(a) -- Legal Descriptions of FLCI Leased Real
Property
Schedule 3.18-1 -- FLCI Equipment
Schedule 3.18-2 -- FLCI Personal Property Leases
Schedule 3.20(a) -- Certain Tax Matters
Schedule 3.23 -- FLCI Interested Party Transactions
Schedule 3.29(a) -- All FLCI Intellectual Property Assets
Schedule 3.29(b) -- Intellectual Property Infringements by
Third Parties
Schedule 3.29(c) -- FLCI Intellectual Property Licensing
Agreements
Schedule 3.29(d) -- Intellectual Property Litigation
Schedule 3.29(e) -- Filing Offices Where FLCI Intellectual
Property Assets are Registered
Schedule 4.1(b) -- USOL Subsidiaries
Schedule 4.2(a) -- USOL Stock Options, Warrants
Schedule 4.2(b) -- Terms of Senior Note Commitment
Schedule 4.2(c) -- USOL Debt Obligations
Schedule 4.3 -- USOL Qualification in Foreign Jurisdictions
Schedule 4.5(b) -- USOL Required Consents, Approvals and
Permits
Schedule 4.6 -- USOL Brokers
Schedule 4.9 -- Permitted Transfers
Schedule 5.1(g) -- Normal Salary/Wage Increases
Exhibits:
--------
Exhibit 1.1(a) -- Form of TSD Asset Purchase Agreement
Exhibit 1.1(b) -- Form of USOC Asset Purchase Agreement
Exhibit 2.6(b)-1 -- Form of Certificate of Designations of
Preferences, Limitations and Relative
Rights of USOL Series A Convertible
Preferred Stock
Exhibit 2.6(b)-2 -- Form of Certificate of Designations of
Preferences, Limitations and Relative
Rights of USOL Series B Convertible
Preferred Stock
Exhibit 2.6(c)-1 -- Form of USOL Other Warrants
Exhibit 2.6(c)-2 -- Form of USOL TSD Warrants
Exhibit 7.2(f) -- Opinion of Jenkens & Gilchrist
Exhibit 7.3(f) -- Opinion of Neuman Drennen & Stone, LLC
<PAGE>
<PAGE>
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
Agreement and Plan of Merger and Reorganization, dated as of July
21, 1999 (this "Agreement"), is by and between FirstLink Communications, Inc.,
an Oregon corporation ("FLCI"), and USOL Holdings, Inc., a Delaware
corporation ("USOL").
W I T N E S S E T H:
--------------------
WHEREAS, each of the Boards of Directors of FLCI and USOL has
determined that it is advisable and in the best interests of the respective
stockholders for FLCI and USOL to enter into a strategic business
combination upon the terms and subject to the conditions set forth herein;
and
WHEREAS, USOL, Inc., a Delaware corporation and a wholly-owned
subsidiary of USOL ("USOL Sub"), has acquired substantially all of the
assets and assumed substantially all of the remaining liabilities of US
Online Communications, Inc., a Delaware corporation ("USOC"), and
TheResidentClub.com,Inc., a Delaware corporation and a wholly-owned
subsidiary of USOL Sub ("TRC"), has acquired certain of the assets of the
Tenant Services Division ("TSD") of GMAC Commercial Mortgage Corporation, a
California corporation ("GMAC-CM"); and
WHEREAS, in furtherance of such combination, each of the Boards of
Directors of FLCI and USOL has approved the merger of USOL with and into
FLCI (the "Merger") in accordance with the applicable provisions of the
Oregon Law (as defined herein) and the Delaware Law (as defined herein) and
upon the terms and subject to the conditions set forth herein; and
WHEREAS, concurrently with the execution and delivery of this
Agreement and as a condition and inducement to each of USOL's and FLCI's
willingness to enter into this Agreement, certain stockholders of FLCI have
entered into agreements with USOL, dated as of the date of this Agreement
("Stockholder Support Agreements"), pursuant to which such stockholders
have agreed, among other things, to vote all voting securities of FLCI
beneficially owned by them in favor of adoption of the Merger; and
WHEREAS, FLCI and USOL intend this Agreement to be a plan of
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), and the regulations thereunder;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein contained, FLCI and USOL hereby agree as
follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. As used in this Agreement, the following terms
have the following meanings:
"Acquisition Proposal" has the meaning set forth in Section 5.2(a).
"Action" has the meaning set forth in Section 7.2(d).
"Affiliate" means, with respect to a Person, a Person that directly
or indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with, the first mentioned Person; including,
without limitation, any partnership or joint venture in which such Person
(either alone, or through or together with any other subsidiary) has,
directly or indirectly, an interest of ten percent or more.
"Agreement" means this Agreement and includes exhibits and schedules
delivered pursuant to the terms of this Agreement.
"Arbitration Notice" has the meaning set forth in Section 9.3(b).
"Arbitration Panel" has the meaning set forth in Section 9.3(a).
"Articles of Merger" means the articles of merger filed in
connection with the Merger with the Secretary of State of the State of Oregon
pursuant to Section 60.494 of the Oregon Law.
"Balance Sheet Date" means May 31, 1999.
"Beneficial owner" means, with respect to any shares of stock, a
Person who shall be deemed to be the beneficial owner of such shares (i)
which such Person or any of its Affiliates or associates (as such term is
defined in Rule 12b-2 of the Exchange Act) beneficially owns, directly or
indirectly, (ii) which such Person or any of its Affiliates or associates
has, directly or indirectly, (A) the right to acquire (whether such right
is exercisable immediately or subject only to the passage of time),
pursuant to any agreement, arrangement or understanding or upon the
exercise of consideration rights, exchange rights, warrants or options, or
otherwise, or (B) the right to vote pursuant to any agreement, arrangement
or understanding or (iii) which are beneficially owned, directly or
indirectly, by any other Persons with whom such Person or any of its
Affiliates or associates has any agreement, arrangement or understanding
for the purpose of acquiring, holding, voting or disposing of any shares.
"Business Day" means any day of the year (other than any Saturday or
Sunday) on which the Federal Reserve Bank is open for business in Los
Angeles, California.
"Cancelled Shares" has the meaning set forth in Section 2.6(d).
"Cash" means all cash, certificates of deposits, bank deposits and
other cash equivalents, together with all accrued but unpaid interest
thereon.
"Certificate of Merger" means the certificate of merger filed in
connection with the Merger with the Secretary of State of the State of
Delaware in accordance with Section 252 of the Delaware Law.
"Closing" has the meaning set forth in Section 2.2.
"Code" has the meaning set forth in the Recitals.
"Company" means (a) USOL at all times prior to the Effective Time,
and (b) FLCI upon the Effective Time and at all times thereafter.
"Company Common Stock" means (a) USOL Common Stock at all times
prior to the Effective Time, and (b) FLCI Common Stock upon the Effective Time
and at all times thereafter.
"Company Other Warrants" means (a) USOL Other Warrants at all times
prior to the Effective Time, and (b) FLCI Other Warrants upon the Effective
Time and at all times thereafter.
"Company Preferred Stock" means (a) USOL Preferred Stock at all
times prior to the Effective Time, and (b) FLCI Preferred Stock upon the
Effective Time and at all times thereafter.
"Company Warrants" means (a) USOL Warrants at all times prior to the
Effective Time, and (b) FLCI Warrants upon the Effective Time and at all
times thereafter.
"Contract" means any contract, lease, commitment, sales order,
purchase order, agreement, indenture, mortgage, note, bond, instrument,
plan, permit or license.
"Control" (including the terms "controlled by" and "under common
control with") means the possession, directly or indirectly or as trustee
or executor, of the power to direct or cause the direction of the
management or policies of a Person, whether through the ownership of stock,
as trustee or executor, by contract or credit arrangement or otherwise.
"Delaware Law" means the Delaware General Corporation Law, Chapter 1
of Title 8, Section 101 et seq.
Dissenting Shares" has the meaning set forth in Section 2.9(a).
"Effective Time" has the meaning set forth in Section 2.1.
"Environmental Law" means any Law which relates to or otherwise
imposes liability or standards of conduct concerning discharges, releases
or threatened releases of noises, odors or any pollutants, contaminants or
hazardous or toxic wastes, substances or materials, whether as matter or
energy, into ambient air, water or land, or otherwise relating to the
manufacture, processing, generation, distribution, use, treatment, storage,
disposal, cleanup, transport or handling of pollutants, contaminants or
hazardous or toxic wastes, substances or materials, including the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, the Superfund Amendments and Reauthorization Act of 1986,
as amended, the Resource Conservation and Recovery Act of 1976, as amended,
the Toxic Substances Control Act of 1976, as amended, the Federal Water
Pollution Control Act Amendments of 1972, the Clean Water Act of 1977, as
amended, any so-called "Superfund" or "Superlien" Law (including those
already referenced in this definition) and any other Law of any
Governmental Authority having a similar subject matter.
"Environmental Permit" means any Permit required by or pursuant to
any applicable Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exchange Agent" has the meaning set forth in Section 2.7(a).
"FCC" means the Federal Communications Commission or any successor
agency thereto.
"FLCI Accounts Receivable" has the meaning set forth in Section
3.11.
"FLCI" has the meaning set forth in the Recitals.
"FLCI Balance Sheets" has the meaning set forth in Section 3.8.
"FLCI Certificates" has the meaning set forth in Section 2.7(b).
"FLCI Common Stock" means the common stock, par value $.001 per
share,
of FLCI.
"FLCI Employee Plans" has the meaning set forth in Section 3.14(a).
"FLCI Equipment" has the meaning set forth in Section 3.18.
"FLCI FCC Permits" has the meaning set forth in Section 3.7.
"FLCI Financial Statements" has the meaning set forth in Section
3.8.
"FLCI Intellectual Property Assets" has the meaning set forth in
Section 3.29(a).
"FLCI Material Contracts" has the meaning set forth in Section
3.10(a).
"FLCI Preferred Stock" means, collectively, the FLCI Series A
Preferred Stock and the FLCI Series B Preferred Stock.
"FLCI Real Property Leases" has the meaning set forth in Section
3.17(a).
"FLCI SEC Reports" has the meaning set forth in Section 3.3.
"FLCI Series A Preferred Stock" means the Series A Convertible
Preferred Stock, par value $.001 per share, of FLCI, with the identical
rights, preferences and privileges as the USOL Series A Preferred Stock.
"FLCI Series B Preferred Stock" means the Series B Convertible
Preferred Stock, par value $.001 per share, of FLCI, with the identical
rights, preferences and privileges as the USOL Series B Preferred Stock.
"FLCI Stock" means the shares of FLCI Common Stock and FLCI
Preferred
Stock, collectively.
"FLCI Stock Option Plan" means FLCI's 1998-1999 Combined Incentive
Stock Option and Nonqualified Stock Option Plan.
"FLCI Stockholders Meeting" has the meaning set forth in Section
3.27(b).
"FLCI TSD Warrants" means the separate warrants to be issued in the
Merger in exchange for the USOL TSD Warrants.
"FLCI Unaudited Balance Sheets" has the meaning set forth in Section
3.8.
"FLCI Unaudited Financial Statements" has the meaning set forth in
Section 3.8.
"FLCI Warrants" means, collectively, the FLCI Other Warrants and the
FLCI TSD Warrants.
"GAAP" means U.S. generally accepted accounting principles at the
time
in effect.
"GMAC-CM" has the meaning set forth in the Recitals.
"Governmental Approval" means any consent of any Governmental
Authority.
"Governmental Authority" means any nation or government, any state
or other political subdivision thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or
pertaining to government, including, without limitation, any multilateral
authority or any government authority, agency, department, board,
commission or instrumentality of the United States, any State of the United
States or any political subdivision thereof, and any tribunal or
arbitrator(s) of competent jurisdiction, and any self-regulatory
organization.
"Group Health Plan" has the meaning set forth in Section 6.13(c).
"Hazardous Substances" means any natural or artificial substance,
preparation or article which if generated, transported, stored, treated,
used or disposed of (alone or combined with any other substance,
preparation or article) is harmful to water, air or land or any living
organism.
"Intellectual Property" means any and all United States and foreign:
(a) patents (including design patents, industrial designs and utility
models) and patent applications (including docketed patent disclosures
awaiting filing, reissues, divisions, continuations-in-part and
extensions), patent disclosures awaiting filing determination, inventions
and improvements thereto; (b) trademarks, service marks, trade names, trade
dress, logos, business and product names, slogans, and registrations and
applications for registration thereof; (c) copyrights (including software)
and registrations thereof; (d) inventions, processes, designs, formulae,
trade secrets, know-how, industrial models, confidential and technical
information, manufacturing, engineering and technical drawings, product
specifications and confidential business information; (e) intellectual
property rights similar to any of the foregoing; and (f) copies and
tangible embodiments thereof (in whatever form or medium, including
electronic media).
"IRS" means the Internal Revenue Service.
"ISO" means an incentive stock option within the meaning of Section
422(b) of the Code.
"Law" means any law, statute, regulation, ordinance, rule, order,
decree, judgment, consent decree, settlement agreement or governmental
requirement enacted, promulgated, entered into, agreed or imposed by any
Governmental Authority.
"Lien" shall mean any encumbrance, lien, charge, hypothecation,
pledge, mortgage, title retention agreement, security interest of any
nature, adverse claim, exception, reservation, easement, right of
occupation, any matter capable of registration against title, option,
right-of-preemption, privilege or any agreement, indenture, contract,
lease, deed of trust, license, option, instrument or other commitment to
create any of the foregoing.
"Lockup Period" has the meaning set forth in Section 4.9(b).
"Losses" means any and all costs, demands, claims, liabilities,
fines, penalties, assessments, damages and expenses (including the burden and
expense of defending against all of the foregoing even if the assertions
therein are groundless, false or fraudulent), or amounts paid in settlement
thereof, and court costs (including court-awarded interest) and reasonable
attorneys' fees and disbursements of counsel (including legal or other
expenses reasonably incurred in connection with investigating or defending
the same); provided, that the term "Losses" shall not include costs,
demands, claims, liabilities, fines, penalties, assessments, damages and
expenses which are indirect or consequential in nature.
"Lost USOL Certificate" has the meaning set forth in Section 2.11.
"Merger" has the meaning set forth in the Recitals.
"Merger Consideration" has the meaning set forth in Section 2.7(b).
"Nasdaq" means the Nasdaq Stock Market, Inc.
"Notice" has the meaning set forth in Section 10.3.
"Oregon Law" means the Oregon Business Corporation Act, Oregon
Revised Statutes, 60.001 et seq.
"Other Lockup Period" has the meaning set forth in Section 4.9(c).
"Outside Date" means December 31, 1999.
"Permit" means a permit, license, consent, certificate, approval,
franchise, right, waiver, exemption, order or other authorization of a
Governmental Authority.
"Permitted Liens" means
(i) liens for Taxes, assessments and governmental charges due and
being contested in good faith and diligently by appropriate proceedings
(and for the payment of which adequate provision has been made);
(ii) servitudes, easements, restrictions, rights-of-way and other
similar rights in real property or any interest therein; provided the same
are not of such nature as to materially adversely affect the use of the
property subject thereto;
(iii) liens for Taxes either not due and payable or due but for
which notice of assessment has not been given;
(iv) undetermined or inchoate liens, charges and privileges
incidental to current construction or current operations and statutory liens,
charges, adverse claims, security interests or encumbrances of any nature
whatsoever claimed or held by any governmental authority that have not at the
time been filed or registered against the title to the asset or served upon the
Seller pursuant to law or that relate to obligations not due or delinquent;
(v) liens or rights reserved in any lease for rent or for
compliance with the terms of such lease;
(vi) security given in the ordinary course of the Business to any
public utility, municipality or government or to any statutory or public
authority in connection with the operations of the Business, other than
security for borrowed money;
(vii) statutory liens in favor of a seller of personal property,
mechanic's liens or other statutory liens in favor of a provider of a
service; provided, that obligations to a secured party are not overdue or
delinquent; and
(viii) the liens described in Schedule 1.1 (with respect to
USOL).
"Person" means any individual, corporation, trust, estate,
partnership, joint venture, company, association, governmental bureau or
other entity of whatsoever kind or nature (including as defined in Section
13(d)(3) of the Exchange Act).
"Predecessor Entities" means, collectively, USOC and TSD.
"Proxy Statement" has the meaning set forth in Section 3.27(b).
"Re-incorporation" means the re-incorporation in the State of
Delaware of the Surviving Corporation.
"Rules of Arbitration" has the meaning set forth in Section 9.3(a).
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Notes" has the meaning set forth in Section 4.2(b).
"Stockholder Support Agreements" has the meaning set forth in the
Recitals.
"Subsidiary" or "subsidiaries" means, with respect to a Person, any
corporation, partnership, joint venture or other legal entity of such
Person (either alone or through or together with any other subsidiary of
such Person) which owns, directly or indirectly, more than 50% of the stock
or other equity interests the holders of which are generally entitled to
vote for the election of the board of directors or other governing body of
such corporation or other legal entity.
"Superior Offer" has the meaning set forth in Section 8.2(c).
"Surviving Corporation" has the meaning set forth in Section 2.1.
"Tax" or "Taxes" means any federal, state, local, foreign or other
tax, levy, impost, fee, assessment, imposition or other charge of any kind
whatsoever, including without limitation net income, gross income,
estimated income, gross receipts, business, occupation, value added, real
property, payroll, personal property, sales, transfer, stamp, use,
employment, commercial rent, occupancy, franchise, withholding, profits,
windfall profits, deemed profits, license, registration, lease, severance,
capital stock, production, corporation, ad valorem, social security (or
similar), unemployment, disability, alternative, add-on minimum, premium or
customs duties, including without limitation any interest, penalty, or
addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for
refund, information return, statement or other document required to be filed in
respect of Taxes, including without limitation Tax Returns for estimated
Taxes, any schedule or attachment thereto, and any amendment to any of the
above.
"Transfer" has the meaning set forth in Section 4.9.
"TRC" has the meaning set forth in the Recitals.
"TSD" has the meaning set forth in the Recitals.
"TSD Asset Purchase Agreement" means the Asset Purchase Agreement,
dated as of the date hereof, by and among USOL, TRC and GMAC-CM, in the
form attached hereto as Exhibit 1.1(a).
"USOC" has the meaning set forth in the Recitals.
"USOC Asset Purchase Agreement" means the Asset Purchase Agreement,
dated as of the date hereof, by and among USOL Sub, USOL, USOC and certain
selling shareholders, in the form attached hereto as Exhibit 1.1(b).
"USOL" has the meaning set forth in the Recitals.
"USOL Certificate" or "USOL Certificates" has the meaning set forth
in Section 2.7(b).
"USOL Common Stock" means the Common Stock, $.001 par value per
share, of USOL.
"USOL Material Contracts" means those Contracts of USOL set forth in
Section 5.11 of the Disclosure Memorandum to the USOC Asset Purchase
Agreement.
"USOL Other Warrants" means the separate warrants, dated the date
hereof, issued by USOL, in the form attached hereto as Exhibit 2.6(c)-1.
"USOL Preferred Stock" means, collectively, the USOL Series A
Preferred Stock and the USOL Series B Preferred Stock.
"USOL Series A Preferred Stock" means the Series A Convertible
Preferred Stock, $0.001 par value, of USOL, with the rights, preferences
and privileges set forth in Exhibit 2.6(b)-1 hereto.
"USOL Series B Preferred Stock" means the Series B Convertible
Preferred Stock, $0.001 par value, of USOL, with the rights, preferences
and privileges set forth in Exhibit 2.6(b)-2 hereto.
"USOL Stock" means the USOL Common Stock and USOL Preferred Stock,
collectively.
"USOL Stock Option Plan" means the 1999 USOL Holdings, Inc.
Incentive Plan.
"USOL Stockholders Meeting" has the meaning set forth in Section
3.27(b).
"USOL Sub" has the meaning set forth in the Recitals.
"USOL TSD Warrants" means the separate warrants issued under by USOL
to GMAC-CM, in the form attached hereto as Exhibit 2.6(c)-2.
"USOL Unaudited Balance Sheet" means the unaudited balance sheet of
USOC as of May 31, 1999.
"USOL Warrants" means, collectively, the USOL Other Warrants and the
USOL TSD Warrants.
ARTICLE II
THE MERGER
2.1 Merger; Effective Time.
At the Effective Time (as defined below), and subject to and upon
the terms and conditions of this Agreement, the Delaware Law and the Oregon
Law, USOL shall be merged with and into FLCI and FLCI shall continue as the
surviving corporation. FLCI as the surviving corporation after the Merger
is hereinafter sometimes referred to as the "Surviving Corporation." At
the Effective Time, the identity and separate existence of USOL shall
cease. As promptly as practicable after the satisfaction or waiver, as the
case may be, of the conditions set forth in Article VII, USOL and FLCI
shall cause the Merger to be consummated by filing the Certificate of
Merger and the Articles of Merger, together with any required related
instruments, with the Secretaries of State of the States of Delaware and
Oregon, respectively, and USOL and FLCI shall take such other actions as
may be required by Law to make the Merger effective. The time the Merger
becomes effective in accordance with applicable Law is referred to herein
as the "Effective Time".
2.2 Closing.
Unless this Agreement shall have been terminated and the trans-
actions herein contemplated shall have been abandoned pursuant to Section
8.1, and subject to the satisfaction or waiver of all the conditions set
forth in Article VII, the consummation of the Merger (the "Closing") shall
take place as promptly as practicable (and in any event within two business
days) after satisfaction or waiver of the conditions set forth in Article
VII, at the offices of USOL, 10300 Metric Boulevard, Austin, Texas 78758,
unless another time or place is agreed to in writing by USOL and FLCI.
2.3 Effect of the Merger.
At the Effective Time, the effect of the Merger shall be as provided
in this Agreement, the Certificate of Merger, the applicable provisions of
the Delaware Law, the Articles of Merger and the applicable provisions of
the Oregon Law. Without limiting the generality of the foregoing, and
subject thereto, at the Effective Time all the property, rights,
privileges, powers and franchises of USOL shall vest in the Surviving
Corporation, and all debts, liabilities and duties of USOL shall become the
debts, liabilities and duties of the Surviving Corporation.
2.4 Articles of Incorporation; By-laws.
(a) The Articles of Incorporation of FLCI, as in effect
immediately prior to the Effective Time, shall be the Articles of
Incorporation of the Surviving Corporation until thereafter amended in
accordance with the Oregon Law and said Articles of Incorporation except
that said Articles of Incorporation shall be amended as of the Effective
Time to the form mutually agreed upon by the parties.
(b) The By-laws of FLCI, as in effect immediately prior to the
Effective Time, shall be the By-laws of the Surviving Corporation until
thereafter amended in accordance with the Oregon Law, the Articles of
Incorporation of the Surviving Corporation and said By-laws except that
said By-laws shall be amended as of the Effective Time to the form mutually
agreed upon by the parties.
2.5 Directors and Officers.
(a) The seven individuals listed in Schedule 2.5(a) shall
comprise the full Board of Directors of the Surviving Corporation as of the
Effective Time.
(b) The officers of USOL immediately prior to the Effective
Time shall comprise the officers of the Surviving Corporation as of the
Effective Time.
2.6 Effect on Capital Stock.
At the Effective Time, by virtue of the Merger and without any
action on the part of FLCI or USOL or the holders of any securities issued by
either of them:
(a) Each share of USOL Common Stock issued and outstanding
immediately prior to the Effective Time shall be cancelled and converted,
subject to Sections 2.6(e), 2.7(f) and 2.13, into the right to receive one
(1) share of validly issued, fully paid and nonassessable FLCI Common
Stock.
(b) Each share of USOL Series A Preferred Stock and USOL
Series B Preferred Stock issued and outstanding immediately prior to the
Effective Time shall be cancelled and converted, subject to Sections 2.6(e),
2.7(f) and 2.13, into the right to receive one (1) share of validly issued,
fully paid and nonassessable FLCI Series A Preferred Stock or FLCI Series B
Preferred Stock, respectively. The terms of the FLCI Preferred Stock that
will be issued hereunder will be identical to the terms of the USOL
Preferred Stock. Exhibits 2.6(b)-1 and 2.6(b)-2 set forth the forms of the
Certificates of Designations of Preferences, Limitations and Relative
Rights with respect to the USOL Series A Preferred Stock and the USOL
Series B Preferred Stock, respectively.
(c) Each USOL Other Warrant issued and outstanding immediately
prior to the Effective Time shall be cancelled and converted, subject to
Sections 2.6(e), 2.7(f) and 2.13, into the right to receive one (1) FLCI
Other Warrant to purchase the same number of shares as the USOL Other
Warrant; and each USOL TSD Warrant issued and outstanding immediately prior
to the Effective Time shall be converted into the right to receive one (1)
FLCI TSD Warrant to purchase the same number of shares as the USOL TSD
Warrant. The FLCI Other Warrants which will be issued hereunder shall be
identical to the terms of the USOL Other Warrants. Exhibits 2.6(c)-1 and
2.6(c)-2 set forth the form of the USOL Other Warrants and the USOL TSD
Warrants, respectively.
(d) Each share of USOL Stock held in the treasury of USOL and
each share of USOL Stock owned by any direct or indirect subsidiary of USOL
immediately prior to the Effective Time (the "Cancelled Shares") shall, by
virtue of the Merger and without any action on the part of the holder
thereof, cease to be outstanding and be cancelled and retired without
payment of any consideration therefor.
(e) No fraction of a share of FLCI Stock shall be issued, but
in lieu thereof, each holder of USOL Stock who would otherwise be entitled to
a fraction of a share of FLCI Stock (after aggregating all fractional
shares of FLCI Stock to be received by such holder and providing for any
shares to be withheld pursuant to Section 2.7(f), it being the intention of
the parties that no holder of USOL Stock will receive cash in an amount
equal to or greater than the value of one full share of FLCI Stock), shall
receive from FLCI an amount of cash (rounded to the nearest cent), without
interest, equal to the product of (i) such fraction, multiplied by (ii)
$2.00, subject to Section 2.13.
(f) Each USOL Stock Option issued and outstanding immediately
prior to the Effective Time shall be cancelled and converted, pursuant to
the provisions of Section 6.5, into an option to acquire, on the same terms
and conditions as were applicable under such USOL Stock Option prior to the
Effective Time, the whole number of shares of FLCI Common Stock as the
holder of such USOL Stock Option would have been entitled to receive
pursuant to the Merger had such holder exercised such option in full
immediately prior to the Effective Time (not taking into account whether or
not such option was in fact exercisable).
2.7 Exchange of Certificates.
(a) As of the Effective Time, FLCI shall supply, or cause to
be supplied, to or for the account of a bank or trust company to be designated
by FLCI (the "Exchange Agent"), in trust for the benefit of the holders of
USOL Stock (other than the Cancelled Shares), for exchange in accordance
with this Section 2.7, certificates evidencing the FLCI Stock issuable
pursuant to Sections 2.6(a) and 2.6(b) in exchange for outstanding USOL
Stock and all cash required to be paid pursuant to Sections 2.6(e) and
2.7(c).
(b) As soon as reasonably practicable after the Effective
Time, FLCI shall instruct the Exchange Agent to mail to each holder of record
of a certificate or certificates (the "USOL Certificates") which immediately
prior to the Effective Time evidenced outstanding shares of USOL Stock,
other than Cancelled Shares, (i) a letter of transmittal, which letter
shall specify, among other conditions, that delivery shall be effected, and
risk of loss and title to the USOL Certificates shall pass, only upon
proper delivery of the USOL Certificates to the Exchange Agent, and (ii)
instructions to effect the surrender of the USOL Certificates in exchange
for the certificates evidencing shares of FLCI Stock (the "FLCI
Certificates") and, in lieu of any fractional shares thereof, cash. Upon
surrender of a USOL Certificate for cancellation to the Exchange Agent ,
together with such letter of transmittal, duly executed, and such other
customary documents as may be reasonably required by FLCI or the Exchange
Agent, the holder of such USOL Certificate shall be entitled to receive in
exchange therefor (A) FLCI Certificates evidencing that whole number of
shares of FLCI Stock which such holder has the right to receive in respect
of the shares of USOL Stock formerly evidenced by such USOL Certificate in
accordance with applicable provisions hereof; (B) any dividends or other
distributions to which such holder is entitled pursuant to Section 2.7(c);
and (C) cash in lieu of a fractional share of FLCI Stock to which such
holder is entitled pursuant to Section 2.6(e) (such FLCI Stock, rights,
dividends, distributions and cash in lieu of fractional shares together
with any amounts to be withheld pursuant to Section 2.7(f) being
collectively referred to as the "Merger Consideration"), and the USOL
Certificate so surrendered shall forthwith be cancelled. In the event of a
transfer of ownership of shares of USOL Stock which is not registered in
the transfer records of USOL as of the Effective Time, FLCI Stock and cash
may be issued and paid in accordance with this Article II to a transferee
if the applicable certificate is presented to the Exchange Agent,
accompanied by all documents required by law to evidence and effect such
transfer pursuant to this Section 2.7(b) and by evidence that any
applicable stock transfer taxes have been paid. Until so surrendered, each
outstanding USOL Certificate which represented shares of USOL Stock, shall
be deemed from and after the Effective Time, for all corporate purposes
other than the payment of dividends, to evidence the ownership of the
number of full shares of FLCI Stock into which such shares of USOL Stock
may be exchanged in accordance herewith and the right to receive an amount
in cash in lieu of the issuance of any fractional shares in accordance with
Section 2.6(e).
(c) No dividends or other distributions with respect to FLCI
Stock with a record date after the Effective Time shall be paid to the
holder of any unsurrendered USOL Certificate with respect to the FLCI Stock
such holder is entitled to receive until such holder shall surrender such
USOL Certificate. Subject to applicable law, following the surrender of
any such USOL Certificate, there shall be paid to the record holder of the
FLCI Certificates issued in exchange therefor, without interest, at the
time of such surrender, the amount of dividends or other distributions with
a record date after the Effective Time theretofore paid with respect to
such whole shares of FLCI Stock.
(d) If any FLCI Certificate is to be issued in a name other
than that in which the USOL Certificate surrendered in exchange therefor is
registered, it shall be a condition of the issuance thereof that the USOL
Certificate so surrendered shall be properly endorsed and otherwise in
proper form for transfer and that the Person requesting such exchange shall
have paid to FLCI, or any agent designated by FLCI, any transfer or other
taxes required by reason of the issuance of an FLCI Certificate in any name
other than that of the registered holder of the USOL Certificate
surrendered.
(e) FLCI and USOL shall have no liability to any holder of
USOL Stock for any Merger Consideration (or dividends or distributions with
respect thereto) which are delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
(f) FLCI or the Exchange Agent shall be entitled to deduct and
withhold from the Merger Consideration otherwise payable to any holder of
USOL Stock such amounts as FLCI or the Exchange Agent may be required to
deduct and withhold with respect to any provision of Federal, state, local
or foreign Tax laws. To the extent that amounts are so withheld by FLCI or
the Exchange Agent, such withheld amounts shall be treated for all purposes
of this Agreement as having been paid to the holder of the shares in
respect of which such deduction and withholding was made by FLCI or the
Exchange Agent.
2.8 Stock Transfer Books.
At the Effective Time, the stock transfer books of USOL shall be
closed, and there shall be no further registration of transfers of USOL
Stock on the records of USOL.
2.9 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the
contrary, any shares of FLCI Common Stock held by a holder who has
exercised appraisal rights for such shares in accordance with the
applicable provisions of the Oregon Law and who, as of the Effective Time,
has not effectively withdrawn or lost such appraisal rights (the
"Dissenting Shares"), shall not be converted into, or represent a right to
receive, the Merger Consideration pursuant to Section 2.7(b), but the
holder thereof shall be entitled only to such rights as are granted by the
Oregon Law with respect to such Dissenting Shares.
(b) FLCI shall give USOL prompt written notice of any demands
received by FLCI to require FLCI to purchase Dissenting Shares, the
withdrawal of any such demands, and any other notices or instruments served
pursuant to the Oregon Law and received by FLCI. FLCI shall not, except
with the prior written consent of USOL, voluntarily make any payment with
respect to any Dissenting Shares or offer to settle, or settle, any such
demands with respect thereto.
2.10 No Further Ownership Rights in USOL Stock.
The Merger Consideration delivered upon the surrender of USOL
Certificates in accordance with the terms hereof shall be deemed to have
been delivered in full satisfaction of all rights pertaining to such USOL
Certificates, and there shall be no further registration of transfers on
the records of the Surviving Corporation of shares of USOL Stock which were
outstanding immediately prior to the Effective Time. If, after the
Effective Time, USOL Certificates are presented to the Surviving
Corporation for any reason, they shall be cancelled and converted as
provided in this Article II.
2.11 Lost, Stolen or Destroyed Certificates.
In the event any USOL Certificate shall have been lost, stolen or
destroyed (a "Lost USOL Certificate"), the Exchange Agent shall, upon the
making of an affidavit of that fact by the registered owner thereof,
deliver to the registered owner thereof such Merger Consideration as may be
required pursuant to Sections 2.6 and 2.7; provided, however, that FLCI
may, in its sole discretion and as a condition precedent to the delivery of
such Merger Consideration, require the registered owner of such Lost USOL
Certificate to deliver a bond in such sum as it may reasonably direct as
indemnity against any claim that may be made against FLCI or the Exchange
Agent with respect to the Lost USOL Certificate.
2.12 Tax and Accounting Consequences.
It is intended by FLCI and USOL that the Merger shall constitute a
reorganization within the meaning of Section 368(a) of the Code. FLCI and
USOL hereby adopt this Agreement as a "plan of reorganization" within the
meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury
Regulations.
2.13 Adjustments.
If, between the date of this Agreement and the Effective Time, the
outstanding shares of FLCI Common Stock shall be changed into a different
number of shares or a different class by reason of any reclassification,
recapitalization, split-up, combination, exchange of shares or
readjustment, or a stock dividend thereon shall be declared with a record
date prior to the Effective Time, the amount of consideration to be
received pursuant to this Article II in exchange for each outstanding share
of USOL Stock or USOL Warrant shall be correspondingly adjusted.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF FLCI
FLCI hereby represents and warrants to USOL that each of the
following is true, correct and complete as of the date hereof:
3.1 Organization.
(a) FLCI is a corporation duly organized, validly existing and
in good standing under the laws of Oregon. FLCI has full corporate power
and authority to own, lease and operate its properties and to carry on its
business as such business is now conducted and proposed to be conducted.
The copies of the Articles of Incorporation of FLCI, certified by the
Secretary of State of Oregon, and the By-laws of FLCI, each of which have
been delivered to USOL by FLCI, are true and complete copies thereof, and
are in full force and effect. FLCI is not in violation of its Articles of
Incorporation or By-laws.
(b) FLCI has no subsidiaries and does not, directly or
indirectly, own or have the contractual right or obligation to acquire any
equity interest in any other corporation, partnership, joint venture, trust
or other business organization. Except as disclosed in Schedule 3.1, FLCI
has not made any investment in, loan to, or advance of cash or other
extension of credit to any Person other than in the ordinary course of its
business.
3.2 Capitalization.
The authorized capital stock of FLCI consists of 20,000,000 shares
of common stock, no par value per share, of which 3,615,617 shares are
currently issued and outstanding, and 1,000,000 shares of preferred stock,
no par value per share, none of which shares are currently issued or
outstanding, and no designation of any series of preferred stock has been
made. All of the outstanding shares of FLCI's capital stock have been duly
authorized, are validly issued, fully paid and non-assessable, and the
holders thereof are not entitled to cumulative voting rights or preemptive
rights. There are no obligations, contingent or otherwise, of FLCI to
repurchase, redeem or otherwise acquire any shares of FLCI's capital stock
or to provide funds to or make any investment (in the form of a loan,
capital contribution or otherwise) in any entity. Except as set forth in
Schedule 3.2 or 3.14(c), there are no outstanding options to purchase,
registration rights, or warrants, privileges or rights to subscribe to or
purchase, any shares of FLCI's capital stock or securities issued by FLCI
convertible into or exchangeable for shares of FLCI's capital stock or
other securities of FLCI or commitments, understandings or intentions to
issue any additional shares or options, warrants, privileges or rights to
subscribe for shares of FLCI's capital stock. At the Effective Time, the
authorized capital stock of FLCI will consist of 50,000,000 shares of FLCI
Common Stock and 5,000,000 shares of FLCI Preferred Stock, 1,700,000 shares
of which shall be designated as the "FLCI Series A Preferred Stock" and
300,000 shares of which shall be designated as the "FLCI Series B Preferred
Stock."
3.3 SEC Filings.
FLCI has filed all forms, reports and documents required to be filed
with the SEC under the Securities Act and the Exchange Act since the date
FLCI first registered the FLCI Common Stock under the Exchange Act and has
delivered to USOL true and complete copies of (i) its Annual Report on Form
10-K for the fiscal year ended December 31, 1998, (ii) its Quarterly
Reports on Form 10-Q for the periods ended September 30, 1998, and March
31, 1999, (iii) Amendment No. 3 to its Registration Statement on Form SB-2
filed with the SEC on May 14, 1998, (iv) all other reports or registration
statements filed by FLCI with the SEC since it first registered the FLCI
Common Stock under the Exchange Act, and (v) all amendments, supplements
and exhibits (including, without duplication, exhibits incorporated by
reference) to all such reports and registration statements (the reports
referred to in subsections (i) (v), collectively, the "FLCI SEC
Reports"). The FLCI SEC Reports (i) were prepared in accordance with the
requirements of the Securities Act or the Exchange Act, as applicable, and
(ii) did not at the time they were filed (or if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such
filing) contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading.
3.4 Qualification in Foreign Jurisdictions.
FLCI is duly qualified or licensed and in good standing as a foreign
corporation duly authorized to do business in each jurisdiction in which
the character of the properties owned or leased or the nature of the
activities conducted by it makes such qualification or licensing necessary,
except for any jurisdiction(s) in which the failure to so qualify would not
have a material adverse effect upon FLCI. Schedule 3.4 lists the
jurisdictions in which FLCI is qualified to do business as a foreign
corporation.
3.5 Authority Relative to this Agreement.
FLCI has all necessary corporate power and authority to execute and
deliver this Agreement and to perform its obligations hereunder and to
consummate the transactions contemplated hereby. The execution and delivery
of this Agreement by FLCI and the consummation by FLCI of the transactions
contemplated hereby have been duly and validly authorized by all necessary
corporate action and no other corporate proceedings on the part of the
Board of Directors of FLCI are necessary to authorize this Agreement or to
consummate the transactions so contemplated. FLCI has obtained, and has
delivered to USOL, separate Stockholder Support Agreements executed by, and
has obtained the proxy of, the holders of the outstanding shares of FLCI
Stock listed in Schedule 3.5 in favor of the approval and adoption of the
Merger. The Board of Directors of FLCI has determined that it is advisable
and in the best interest of FLCI's stockholders for FLCI to enter into the
Merger with USOL upon the terms and subject to the conditions of this
Agreement. This Agreement has been duly and validly executed and delivered
by FLCI and, assuming the due authorization, execution and delivery by
USOL, constitutes a legal, valid and binding obligation of FLCI enforceable
in accordance with its terms, except as such enforceability may be limited
by applicable bankruptcy, insolvency, moratorium, reorganization and
similar laws from time to time in effect that affect creditors' rights
generally, and by legal and equitable limitations on the availability of
specific remedies.
3.6 No Conflict; Required Filings and Consents.
(a) Except as set forth in Schedule 3.6(a), the execution and
delivery of this Agreement by FLCI does not, and the performance of this
Agreement by FLCI will not, (i) conflict with or violate the Articles of
Incorporation or By-laws of FLCI, (ii) conflict with or violate any Law
applicable to FLCI or by which any of its properties is bound or affected,
(iii) result in any breach of or constitute a default (or an event that
with notice or lapse of time or both would constitute a default), or impair
FLCI's rights or alter the rights or obligations of any third party under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, any FLCI Material Contract, (iv) result in the termination
of, or accelerate the payment or performance required by, or result in the
creation of a Lien on any of the properties or assets of FLCI pursuant to
any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which FLCI is a
party or by which FLCI, or any of its properties, is bound or affected, or
(v) give any Person the right to require FLCI to purchase assets from or
sell assets to such Person or trigger a "change of control" provision in
any Contract to which FLCI is a party; except in the case of clause (ii)
for such violations or conflicts that would not, individually or in the
aggregate, have a material adverse effect on FLCI.
(b) The execution and delivery of this Agreement by FLCI does
not, and the performance of this Agreement and the transactions
contemplated hereby by FLCI will not, require any consent, approval,
authorization or permit of, or filing with or notification to, any
Governmental Authority, except (i) for applicable requirements of any state
Governmental Authorities as set forth in Schedule 3.6(b), the Securities
Act, the Exchange Act, state securities laws, Nasdaq, and the filing and
recordation of appropriate merger or other documents as required by the
Oregon Law and the Delaware Law, and (ii) where the failure to obtain such
consents, approvals, authorizations or permits, or to make such filings or
notifications, would not prevent or delay consummation of the Merger, or
otherwise prevent or delay FLCI from performing its obligations under this
Agreement, or would not otherwise have a material adverse effect upon FLCI.
3.7 Compliance with Laws; Permits.
To FLCI's knowledge, the operation of its business has been and is
being conducted in accordance with all Laws applicable thereto. No
investigation by any Governmental Authority or alleged violation of or
noncompliance with such Laws is pending or, to the best knowledge of FLCI,
threatened. FLCI holds all of the Permits listed in Schedule 3.7, and no
other Permits are currently necessary for the lawful operation of FLCI's
business, except where the failure to possess the same would not have a
material adverse effect on the financial condition, results of operations
or business of FLCI. All Permits listed are in full force and effect. No
violation of any Permit has occurred which is continuing, and no proceeding
is pending or threatened to revoke or limit any Permit. FLCI holds all
Permits of the FCC necessary for the lawful conduct of its business (the
"FLCI FCC Permits"), except where failure to possess the same would not
have a material adverse effect on the financial condition, results of
operations or business of FLCI. FLCI is in compliance with the terms of
all FLCI FCC Permits and the applicable rules and regulations of the FCC in
all material respects.
3.8 Financial Statements.
FLCI has delivered to USOL FLCI's audited balance sheets as at
December 31, 1997 and December 31, 1998 (the "FLCI Balance Sheets"), and
FLCI's audited statements of income and changes in financial position for
the years then ended (collectively, with the FLCI Balance Sheets, the "FLCI
Financial Statements"). The FLCI Financial Statements have been audited by
the independent public accounting firm of KPMG Peat Marwick, LLP. FLCI has
also delivered to USOL FLCI's unaudited balance sheets as at March 31,
1998, March 31, 1999 and May 31, 1999 (the "FLCI Unaudited Balance
Sheets"), and FLCI's unaudited statements of income and changes in
financial position for the three month period ended March 31, 1999
(collectively, with the FLCI Unaudited Balance Sheets, the "FLCI Unaudited
Financial Statements"). The FLCI Financial Statements and the FLCI
Unaudited Financial Statements were prepared in accordance with SEC
requirements and such financial statements (including the notes thereto)
were prepared in accordance with GAAP applied on a consistent basis
throughout the periods involved (except for the absence of footnote
disclosures in the FLCI Unaudited Financial Statements, and except as may
be indicated in the notes thereto) and each fairly presented in all
material respects the financial position of FLCI as at the date thereof and
the results of its operations and cash flows for the periods indicated,
except that the FLCI Unaudited Financial Statements were or are subject to
normal and recurring year-end adjustments which are not in the aggregate
material in amount.
3.9 Absence of Certain Changes or Events.
Except as reflected in the FLCI Financial Statements, since December
31, 1998, FLCI has conducted its business in the ordinary course and there
has not occurred: (i) any amendments or changes in the Articles of
Incorporation or By-laws of FLCI; (ii) any damage to, destruction or loss
of any assets of FLCI (whether or not covered by insurance) that could have
a material adverse effect upon FLCI; (iii) any change by FLCI in its
accounting methods, principles or practices; (iv) any revaluation by FLCI
of any of its assets, including, without limitation, the writing down of
the value of capitalized software or inventory or the writing off of
promissory notes or accounts receivable other than in the ordinary course
of business in amounts that would not individually or in the aggregate have
a material adverse effect on FLCI; (v) any sale of a material amount of
property or assets of FLCI; or (vi) any other action or event that would
have required the consent of USOL pursuant to Section 5.1 had such action
or event occurred after the date of this Agreement. Since December 31,
1998, there has been no material adverse change in the financial condition,
results of operations or business of FLCI.
3.10 Material Contracts.
(a) Schedule 3.10(a) sets forth a true and complete list of
(i) (A) each Contract with respect to which FLCI has any liability or
obligation, contingent or otherwise, involving more than $25,000; or which
places any material limitations on the method of conducting, or scope of,
FLCI's business; (B) all Contracts of FLCI pursuant to which benefits
accrue to the other parties to such Contracts as a result of the Merger;
(C) all Contracts of FLCI with its directors, officers, employees, agents
or consultants, or its Affiliates; (D) all Contracts to which FLCI is a
party relating to the borrowing of money, or the guaranty of any obligation
for the borrowing of money; (E) all Contracts relating to any securities of
FLCI or rights in connection therewith, and (ii) all Contracts which, as of
the date hereof, would be required to be filed by FLCI with the SEC as
"material contracts" pursuant to applicable securities laws ((i) and (ii)
being collectively referred to as the "FLCI Material Contracts"). FLCI is
not a party to any oral Contract, agreement or other arrangement which, if
reduced to written form, would be required to be listed in Schedule
3.10(a).
(b) The FLCI Material Contracts set forth the entire
arrangement and understanding between FLCI and the respective third parties
with respect to the subject matter thereof, and there have been no material
amendments or side or supplemental arrangements to or in respect of any
FLCI Material Contract. FLCI has made available for review by USOL and its
representatives true and correct copies of all FLCI Material Contracts as
currently in effect, and will furnish any further information that USOL may
reasonably request in connection therewith. Each FLCI Material Contract is
valid and in full force and effect and FLCI has performed all material
obligations required to be performed thereunder. FLCI is not in default
under or in breach or violation of any material term of any FLCI Material
Contract and, to the knowledge of FLCI, no third party is in default under
any material provision of any FLCI Material Contract, except, in each such
case, for such defaults, breaches or violations which would not,
individually or in the aggregate, have a material adverse effect on FLCI.
Each FLCI Material Contract is enforceable against FLCI in accordance with
its terms and, to the knowledge of FLCI, is enforceable against the other
party thereto.
3.11 Accounts Receivable.
Each account receivable of FLCI summarized on the FLCI Financial
Statements and the FLCI Unaudited Financial Statements (collectively, the
"FLCI Accounts Receivable") represented, at the date of the applicable
financial statement, (a) a sale made in the ordinary course of business and
which arose pursuant to an enforceable contract for an undisputed, bona
fide sale of goods or for services performed, and FLCI had performed all of
its obligations to produce the goods or perform the services to which such
FLCI Accounts Receivable relates; (b) except as adequately reserved against
in the FLCI Balance Sheets and the FLCI Unaudited Balance Sheets, and
except for any amounts the failure of which to collect would not have,
individually or in the aggregate, a material adverse effect on FLCI,
amounts owed which were not more than 30 days past due as of the applicable
date, and which were not subject to any claim or reduction, counterclaim,
set-off, recoupment or other claim for credit, allowances or adjustments by
the Person owing such amount; and (c) except as reserved against on such
balance sheets, to FLCI's knowledge, the FLCI Accounts Receivable were
collectible in full within 60 days from the date of the applicable
financial statement, in at least the amount at which they are carried on
the books of FLCI. FLCI has not sold, assigned, or otherwise encumbered
the FLCI Accounts Receivable.
3.12 No Undisclosed Liabilities.
Except as set forth on Schedule 3.12, FLCI has no liabilities
(absolute, accrued, contingent or otherwise) which are, in the aggregate,
material to the business, operations or financial condition of FLCI, taken
as a whole, except (a) liabilities adequately provided for in the FLCI
Financial Statements, (b) contractual liabilities incurred in the ordinary
course of business and not required under GAAP to be reflected on the FLCI
Financial Statements, (c) liabilities incurred in connection with this
Agreement, or (d) other liabilities reflected on the FLCI Unaudited Balance
Sheets or incurred since the Balance Sheet Date in the ordinary course of
business which are not, in the aggregate, material to the business
operations or financial condition of FLCI.
3.13 Absence of Litigation.
There are no claims, actions, suits, proceedings or investigations
pending or, to the knowledge of FLCI, threatened against FLCI, or any
properties or rights of FLCI before any court, arbitrator or administrative
or Governmental Authority or body, domestic or foreign, that, individually
or in the aggregate, could have a material adverse effect upon FLCI.
3.14 Employee Matters.
(a) Except as specifically described in Schedule 3.14(a), FLCI
has no employee benefit plans (including, but not limited to, pension plans
and health or welfare plans), arrangements or understandings, whether
formal or informal ("FLCI Employee Plans"). FLCI does not now and has
never contributed to a "multi-employer plan" as defined in Section
400(a)(3) of ERISA. FLCI has complied with all applicable provisions of
ERISA and all rules and regulations promulgated thereunder, and neither
FLCI nor any trustee, administrator, fiduciary, agent or employee thereof
has at any time been involved in a transaction that would constitute a
"prohibited transaction" within the meaning of Section 406 of ERISA as to
any covered plan of FLCI. FLCI is not a party to any collective bargaining
or other labor union agreement. FLCI has not, within the past five (5)
years had, or been threatened with, any labor union activities, work
stoppages or other labor trouble with respect to its employees.
(b) FLCI has made available for review by USOL and its
representatives and Schedule 3.14(b) sets forth (i) a list of true and
complete copies of all employment agreements with officers and directors of
FLCI; (ii) a list of true and complete copies of all agreements with
consultants where FLCI has obligations to make annual cash payments in an
amount exceeding $25,000; (iii) a schedule listing all officers of FLCI who
have executed a non-competition agreement with FLCI; (iv) a list of true
and complete copies of all severance agreements, programs and policies of
FLCI with or relating to its employees, excluding programs and policies
required to be maintained by law; and (v) a list of true and complete
copies of all plans, programs, agreements and other arrangements of FLCI
with or relating to its employees which contain change-in-control
provisions.
(c) Schedule 3.14(c) sets forth a true and complete list of
each outstanding option to purchase FLCI Stock as of the date hereof,
together with the identity of the holder of such option, the number of shares
of FLCI Stock subject to such option, the date of grant of such option, the
extent to which such option is or will become vested, the option price of
such option (to the extent determined as of the date hereof), whether such
option is intended to qualify as an ISO, and the expiration date of such
option. Schedule 3.14(c) also sets forth the total number of such ISOs and
any nonqualified options.
3.15 Labor Matters.
FLCI has been and currently is conducting its business in full
compliance with all Laws relating to employment and employment practices,
terms and conditions of employment, wages and hours and nondiscrimination
in employment. FLCI's relationship with its employees is good, and there
is no labor strike, dispute, slow-down or work stoppage actually pending or
threatened against or involving FLCI which might affect in any material way
its business. None of the employees of FLCI is covered by any collective
bargaining agreement, no collective bargaining agreement is currently being
negotiated, and, to the best knowledge or FLCI, no attempt is currently
being made to organize any employees of FLCI to form or enter a labor union
or similar organization. FLCI has not experienced any work stoppage or
other material labor difficulty in the last five years.
3.16 Restrictions on Business Activities.
Except for this Agreement, there is no material agreement, judgment,
injunction, order or decree binding upon FLCI which has or could reasonably
be expected to have the effect of prohibiting or impairing any material
business practice of FLCI, the acquisition of property by FLCI or the
conduct of business by FLCI as currently conducted or as proposed to be
conducted by FLCI following the Merger.
3.17 Real Property.
(a) FLCI does not own any real property. Schedule 3.17(a)
lists all leases pursuant to which FLCI holds any real property ("FLCI Real
Property Leases") and includes complete, accurate and insurable legal
descriptions of such leased real property. No parcel of land subject to an
FLCI Real Property Lease relies on or regularly makes use of access to the
nearest public road or right-of-way over land owned by others, except where
such access is by means of one or more valid recorded easements not subject
to divestiture, the terms of which have been disclosed to USOL prior to the
date hereof. FLCI has delivered to USOL true and complete copies of all
FLCI Real Property Leases, together with copies of all reports of any
engineers, environmental consultants or other consultants in its possession
relating to any of the property subject to an FLCI Real Property Lease.
All of the FLCI Real Property Leases are valid, enforceable and effective
in accordance with their terms; all rentals, royalties and other monetary
obligations thereunder payable have been fully paid; there is not under any
FLCI Real Property Lease any existing or claimed default by FLCI or any
other party thereto; there is not under any FLCI Real Property Lease any
event or condition, which with or without notice or the passage of time, or
both, would constitute a default by FLCI; and FLCI enjoys peaceable and
undisturbed possession under all FLCI Real Property Leases. None of the
FLCI Real Property Leases are encumbered by any Liens, other than Permitted
Liens.
(b) Each separate parcel of real estate subject to an FLCI
Real Property Lease has adequate water supply, storm and sanitary sewer
facilities, access to telephone, gas and electrical connections, fire
protection, drainage and other public utilities, and has parking facilities
that meet all requirements imposed by applicable Laws.
(c) There is no pending or, to the best knowledge of FLCI,
threatened or proposed proceeding or governmental action to modify the
zoning classification of, or to condemn or take by the power of eminent
domain (or to purchase in lieu thereof), or to classify as a landmark, or
to impose special assessments on, or otherwise to take or restrict in any
way the right to use, develop or alter, all or any part of the real
property subject to the FLCI Real Property Leases.
3.18 Equipment and Vehicles.
Schedule 3.18-1 sets forth a true and complete list of all equipment
owned by FLCI ("FLCI Equipment"), other than items acquired by FLCI in the
ordinary course of business from the date hereof through the Closing (and
FLCI will identify in writing to USOL, prior to the Closing, each item so
acquired which has a book value of $10,000 or more). Schedule 3.18-2 lists
all leases by FLCI of any item of personal property used in connection with
the Business ("FLCI Personal Property Leases"). All of the FLCI Equipment
and all of the other personal property leased by FLCI under the FLCI
Personal Property Leases are presently utilized by FLCI in the ordinary
course of its business. FLCI has delivered to USOL true and complete
copies of all FLCI Personal Property Leases.
3.19 Inventories.
FLCI does not maintain inventories.
3.20 Taxes.
(a) Except as set forth in Schedule 3.20(a), FLCI has com-
pleted and timely filed with the appropriate taxing authority all Tax Returns
required to be filed by it through the date hereof and will timely file any
Tax Returns required to be filed on or prior to the Closing. FLCI has paid
and discharged all Taxes due in connection with or with respect to all Tax
Returns and has paid all other Taxes when due, and there are no other Taxes
that would be due if asserted by a taxing authority, except such as are
being contested in good faith by appropriate proceedings (to the extent
that any such proceedings are required) and with respect to which FLCI is
maintaining reserves to the extent currently required in all respects
adequate for their payment. As of the time of filing, all Tax Returns were
(and, as to Tax Returns not filed as of the date hereof, will be) complete
and correct in all material respects. FLCI has complied in all material
respects with all applicable Laws relating to the payment and withholding
of Taxes and has timely withheld from employee wages or other payments to
creditors or independent contractors or stockholders and paid over to the
proper taxing authority all amounts required to be so withheld and paid
over. Except as set forth in Schedule 3.20(a), no claim has ever been made
by a taxing authority in a jurisdiction where FLCI does not file Tax
Returns that it is or may be subject to Taxes in that jurisdiction. FLCI
has disclosed to the relevant taxing authority any position taken where the
failure to make such disclosure would enable the taxing authority to
subject a taxpayer to penalties or additions to tax that would have a
material adverse effect upon FLCI. No taxing authority or agency is now
asserting or, to FLCI's knowledge, is threatening to assert against FLCI
any deficiency or claim for additional Taxes other than additional Taxes
with respect to which an adequate reserve (in conformity with GAAP) has
been established, as set forth in the most recently filed FLCI SEC Report.
FLCI is not currently being audited by any taxing authority. There are no
Tax liens on any assets of FLCI. No extension or waiver of a statute of
limitations with respect to Taxes or Tax Returns is currently in effect for
FLCI. The accruals and reserves for Taxes are in all material respects
adequate to cover all Taxes accruable and unpaid through the Closing Date
(including interest and penalties, if any, thereon and Taxes being
contested) in accordance with GAAP, consistently applied with past
practice. No material issue has been raised by a taxing authority on audit
that is of a recurring nature and that would have a material adverse effect
upon the Taxes of FLCI. FLCI has delivered to USOL for inspection all Tax
Returns of, and all examination reports and statements of deficiency
assessed against or agreed to by, FLCI for which the applicable statute of
limitations has not expired. All material elections with respect to Taxes
affecting FLCI as of the date hereof are set forth in Schedule 3.20(a).
FLCI has not entered into any transaction already recharacterized or which
could be recharacterized with respect to Taxes on the grounds of tax
avoidance, bad faith, or tax fraud.
(b) FLCI has not made any payments, is not obligated to make
any payments and is not a party to any agreement, contract or arrangement,
including this Agreement, that may result, separately or in the aggregate,
in the payment of any "excess parachute payment" within the meaning of
Section 280G of the Code or any payment that will not be deductible under
Section 162(m) of the Code. FLCI does not own stock in a passive foreign
investment company within the meaning of Section 1296 of the Code. FLCI has
not filed a consent pursuant to Section 341(f) of the Code or agreed to
have Section 341(f)(2) of the Code apply to any disposition of any asset
owned by FLCI. No property used by FLCI is property that FLCI is or will
be required to treat as being owned by another Person pursuant to the
provisions of Section 168(f)(8) of the Internal Revenue Code of 1954 as it
existed prior to the enactment of the Tax Reform Act of 1986 or is "tax-
exempt use property" within the meaning of Section 168(h) of the Code.
FLCI has not entered into any inter-company transaction within the meaning
of Section 1.1502-13(b)(1) of the United States Treasury Regulations as to
which deferred gains or losses have not been restored. FLCI does not have
and has not had a branch in any foreign country. FLCI is not a party to
any tax allocation or tax sharing agreements or documentation of similar
arrangements. FLCI has not been and is not a member of an affiliated group
(within the meaning of Section 1504(a) of the Code or a similar group
defined under a similar provision of state, local, or foreign law, filing a
consolidated tax return, and FLCI is not liable for the Taxes of any other
Person or entity under United States Treasury Regulation Section 1.1502-6
(or any similar provision of state, foreign or local law), or as a
transferee or successor, or by contract, or otherwise. FLCI operates at
least one significant historic business line, or owns at least a
significant portion of its historic business assets, in each case within
the meaning of Section 1.368-1(d) of the United States Treasury
Regulations. FLCI is not an "investment company" as defined in Section
368(a)(2)(F) of the Code.
3.21 Environmental Matters.
FLCI (i) has obtained all required Environmental Permits; (ii) is in
substantial compliance with all material terms and conditions of such
required Environmental Permits, and also is in substantial compliance with
all other limitations, restrictions, conditions, standards, prohibitions,
requirements, obligations, schedules and timetables contained in the
Environmental Laws or contained in any regulation, code, plan, order,
decree, judgment, notice or demand letter issued, entered, promulgated or
approved thereunder; (iii) as of the date hereof, is not aware of and has
not received notice of any event, condition, circumstance, activity,
practice, incident, action or plan which would interfere with or prevent
continued compliance with or which would give rise to any material common
law or statutory liability, or otherwise form the basis of any claim,
action, suit or proceeding, based on or resulting from FLCI's (or any of
its agent's) manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling, or the emission, discharge or
release into the environment, of any pollutant, contaminant or hazardous or
toxic material or waste, and (iv) has taken all actions necessary under
applicable requirements of Laws, including the Environmental Laws, to
register any products or materials required to be registered by FLCI (or
any of its agents) thereunder.
3.22 Brokers.
No investment bank, broker or finder is entitled to any fee or
commission in connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of FLCI.
3.23 Interested Party Transactions.
Except as set forth in Schedule 3.23, since the effective date of
FLCI's Registration Statement and Prospectus dated July 28, 1998, no event
has occurred that would be required to be reported as a Certain
Relationship or Related Transaction, pursuant to Item 404 of Regulation S-K
promulgated by the SEC.
3.24 Insurance Policies.
There are no disputes with underwriters of FLCI's insurance policies
or bonds, and all premiums due and payable with respect thereto have been
paid. There are no pending or, to the best knowledge of FLCI, threatened
terminations or premium increases with respect to any of such insurance
policies or bonds and, to the best knowledge of FLCI, there is no condition
or circumstance applicable to FLCI's business which is likely to result in
such termination or increase. FLCI's business and the assets insured by
such insurance policies are in compliance with all material conditions
contained in such insurance policies or bonds; and such insurance policies
are valid and in full force.
3.25 Vote Required.
The affirmative vote of the holders of a majority of the outstanding
shares of FLCI Common Stock is the only vote of the holders of any class or
series of FLCI's capital stock necessary under its Articles of
Incorporation, By-laws, applicable law and the rules of the National
Association of Securities Dealers, Inc., or Nasdaq to approve the Merger
and the other transactions contemplated hereby.
3.26 Other Negotiations.
FLCI is not engaged in discussions or negotiations with any Person
or Persons with respect to, and has not solicited or furnished any information
to any Person or Persons who, to FLCI's knowledge, is or are currently
contemplating negotiations or an offer regarding, a consolidation or merger
or other business combination, recapitalization, liquidation, or similar
transaction, or any other transaction which could be conditioned upon, or
otherwise require, the termination of this Agreement.
3.27 Full Disclosure.
(a) No statement contained in this Agreement or in any
certificate or schedule furnished or to be furnished by or on behalf of
FLCI to USOL pursuant to this Agreement, when taken together with all other
statements contained herein or in other certificates and schedules
furnished pursuant to this Agreement, contains any untrue statement of a
material fact or omits to state any material fact necessary, in the light
of the circumstances under which it was made, in order to make the
statements herein or therein not misleading.
(b) The information supplied by FLCI for inclusion or
incorporation by reference in the proxy statement to be sent to the
stockholders of FLCI in connection with the meeting of the stockholders of
FLCI to consider the Merger and related matters (the "FLCI Stockholders'
Meeting") and relating to the FLCI Stock to be issued in connection with
the Merger (such proxy statement as amended or supplemented being
hereinafter referred to as the "Proxy Statement") shall not (i) at the time
the Proxy Statement (or any amendment thereof or supplement thereto) is
first mailed to holders of FLCI Stock, (ii) at the time of the FLCI
Stockholders' Meeting, and (iii) at the Effective Time, contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they are made, not misleading. If at any
time prior to the Effective Time any event or circumstance relating to FLCI
or any of its Affiliates or its or their respective officers or directors
should be discovered by FLCI which should be set forth in an amendment or a
supplement to the Proxy Statement, FLCI shall promptly inform USOL of such
event or circumstance.
3.28 Anti-takeover Law.
Neither the entering into this Agreement nor the consummation by
FLCI of the transactions contemplated hereby will result in the prohibition of
any business combination pursuant to Sections 60.801 60.845 of the Oregon
Law.
3.29 Intellectual Property.
(a) Title. Schedule 3.29(a) sets forth a true and complete
list of all of the Intellectual Property that is owned by FLCI and primarily
related to, currently used in, held for current use in connection with, or
currently necessary for the conduct of, or otherwise material to its
business (the "FLCI Intellectual Property Assets") other than Intellectual
Property that is both not registered or subject to application or
registration and not material to its business as currently conducted. The
FLCI Intellectual Property Assets comprise all of the Intellectual Property
necessary for FLCI to conduct and operate its business as it is now being
conducted by FLCI.
(b) No Infringement. The conduct of FLCI's business does not
infringe or otherwise conflict with any rights of any Person in respect of
any Intellectual Property. Except as set forth in Schedule 3.29(b), to the
best knowledge of FLCI, none of the FLCI Intellectual Property Assets is
being infringed or otherwise used or available for use by any other Person.
(c) Licensing Arrangements. Schedule 3.29(c) sets forth all
agreements or arrangements currently in effect (i) pursuant to which FLCI
has licensed FLCI Intellectual Property Assets to, or the use of FLCI
Intellectual Property Assets has been otherwise permitted (through
settlement or similar agreements) by, any other Person and (ii) pursuant to
which FLCI has had Intellectual Property licensed to it or has otherwise
been permitted to use Intellectual Property (through settlement or similar
agreements). All of the agreements or arrangements set forth in Schedule
3.29(c): (x) are in full force and effect in accordance with their terms
and no default exists thereunder by FLCI, or to the best knowledge of FLCI,
by any other party thereto, (y) are free and clear of all Liens, other than
Permitted Liens and (z) do not contain any change-in-control or other terms
or conditions that will become applicable or inapplicable as a result of
the transactions contemplated by the Agreement. FLCI has delivered to USOL
true and complete copies of all licenses and arrangements (including
amendments) set forth in the Schedule 3.29(c).
(d) No Intellectual Property Litigation. No claim or demand
of any Person has been made nor is there any proceeding that is pending or, to
the best knowledge of FLCI, threatened, which (i) challenges the rights of
FLCI in respect of any FLCI Intellectual Property Assets, (ii) asserts that
FLCI is infringing or otherwise in conflict with, or is, required to pay
any royalty, license fee, charge or other amount with regard to any
Intellectual Property, or (iii) claims that any default exists under any
agreement or arrangement listed in Schedule 3.29(c). None of the FLCI
Intellectual Property Assets is subject to any outstanding order, ruling,
decree, judgment or stipulation by or with any court, arbitrator, or
administrative agency, or any Governmental Authority, or has been the
subject of any litigation, whether or not resolved in favor of FLCI.
(e) Due Registration, Etc. Schedule 3.29(e) sets forth the
filing offices, domestic or foreign, where the FLCI Intellectual Property
Assets have been registered, issued or filed. FLCI has taken such other
actions that FLCI considers reasonably necessary to ensure full protection
under any applicable laws or regulations, and such registrations, filings,
issuances and other actions remain in full force and effect, in each case
to the extent material to its business.
(f) Use of Name and Mark. There are, and immediately after
the Closing will be, no contractual restriction or limitations pursuant to
any orders, decisions, injunctions, judgments, awards or decrees of any
Governmental Authority on FLCI's right to use the name and mark "FIRSTLINK"
in the conduct of its business as presently carried on.
3.30 Absence of Certain Business Practices.
To the best knowledge of FLCI, neither FLCI nor any officer,
employee or agent of FLCI, nor any other Person acting on their behalf, has,
directly or indirectly, since January 1, 1998 given or agreed to give any
gift or similar benefit to any customer, supplier, governmental employee or
other Person who is or may be in a position to help or hinder FLCI's
business (or assist FLCI in connection with any actual or proposed
transaction relating to its business) (i) which subjected FLCI to any
damage or penalty in any civil, criminal or governmental litigation or
proceeding, (ii) which if not given in the past, might have a material
adverse effect, (iii) which if not continued in the future, might have a
material adverse effect or subject FLCI to suit or penalty in any private
or governmental proceeding, or (iv) for the purpose of establishing or
maintaining any concealed fund or concealed bank account.
3.31 Territorial Restrictions.
FLCI is not a party to any agreement or understanding, whether
written or oral, with any other Person which restricts it from carrying on
its business anywhere in the world.
3.32 Year 2000 Compliance.
All of the computer hardware, software and information systems,
including without limitation the financial, operational and manufacturing
systems, owned or used by FLCI (i) are prior to, during and after calendar
year 2000 A.D. capable of operating in all material respects without errors
relating to date data, including errors relating to date data which
represents or references different calendar centuries or more than one
century, and of providing all date related functionalities, interfaces and
data fields, including the indication of century; (ii) are able to
accurately manage and process data and date-related data (including, but
not limited to, calculating, comparing, sequencing and sorting) from, into
and between the 20th and 21st centuries, including single and multiple
centuries and leap years; and (iii) shall not abnormally terminate or
provide invalid or incorrect results due to date or date-related data,
specifically including date data which represents or references different
centuries or more than one century.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF USOL
USOL hereby represents and warrants to FLCI that each of the
following is true, correct, and complete as of the date hereof:
4.1 Organization.
(a) USOL is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware. USOL has full
corporate power and authority to own, lease and operate its properties and
to carry on its business as such business is now conducted and proposed to
be conducted. The copies of the Certificate of Incorporation of USOL,
certified by the Secretary of State of the State of Delaware, and the By-
laws of USOL, each of which have been delivered to FLCI by USOL, are true
and complete copies thereof, and are in full force and effect. USOL is not
in violation of its Certificate of Incorporation or its By-laws.
(b) Except as set forth in Schedule 4.1(b), USOL has no subsidiaries and
does not, directly or indirectly, own or have the contractual right or
obligation to acquire any equity interest in any other corporation,
partnership, joint venture, trust or other business organization. USOL is
the record and beneficial owner of all of the capital stock of each of the
corporations listed in Schedule 4.1(b). Except as disclosed in Schedule
4.1(b), USOL has not made any investment in, loan to, or advance of cash or
other extension of credit to any Person, other than in the ordinary course
of its business.
4.2 Capitalization.
(a) The authorized capital stock of USOL consists of (i)
30,000,000 shares of common stock, $.001 par value per share, of which
3,175,000 shares are currently issued and outstanding, and (ii) 2,000,000
shares of Preferred Stock, $.001 par value per share, 1,700,000 shares of
which have been designated as the "Series A Convertible Preferred Stock,"
of which 1,262,000 shares are currently issued and outstanding and 300,000
shares of which have been designated as the "Series B Convertible Preferred
Stock," of which 218,000 shares are currently issued and outstanding.
Exhibits 2.6(b)-1 and 2.6(b)-2 set forth the Certificate of Designations of
the USOL Series A Preferred Stock and the USOL Series B Preferred Stock,
respectively. All of the outstanding shares of capital stock of USOL have
been duly authorized, are validly issued, fully paid and non-assessable,
and the holders thereof are not entitled to cumulative voting rights or
preemptive rights. There are no obligations, contingent or otherwise, of
USOL or any of its Subsidiaries to repurchase, redeem or otherwise acquire
any shares of USOL Common Stock or the capital stock of any Subsidiary or
to provide funds to or make any investment (in the form of a loan, capital
contribution or otherwise) in any such subsidiary or any other entity other
than guarantees of bank obligations of Subsidiaries entered into in the
ordinary course of business. Except as set forth in Schedule 4.2(a), there
are no outstanding options to purchase or warrants, privileges or rights to
subscribe to or purchase any shares of USOL's capital stock or securities
issued by USOL convertible into or exchangeable for shares of USOL's
capital stock or other securities of USOL or commitments, understandings or
intentions to issue any additional shares or options, warrants, privileges
or rights to subscribe for shares of USOL's capital stock.
(b) USOL has obtained a commitment for $35 million of senior
notes (the "Senior Notes") on the terms and conditions described in
Schedule 4.2(b).
(c) USOL has no short-term or long-term debt obligations,
except as set forth in Schedule 4.2(c), and except for obligations incurred
in the ordinary course of business in individual amounts not greater than
$25,000.
4.3 Qualification in Foreign Jurisdictions.
USOL is duly qualified or licensed and in good standing as a foreign
corporation duly authorized to do business in each jurisdiction in which
the character of the properties owned or leased or the nature of the
activities conducted by it makes such qualification or licensing necessary,
except for any jurisdiction(s) in which the failure to so qualify would not
have a material adverse effect upon USOL. Schedule 4.3 sets forth each
state in which USOL is qualified to do business as a foreign corporation.
4.4 Authority Relative to this Agreement.
USOL has all necessary corporate power and authority to execute and
deliver this Agreement and to perform its obligations hereunder and to
consummate the transactions contemplated hereby. The execution and delivery
of this Agreement by USOL and the consummation by USOL of the transactions
contemplated hereby have been duly and validly authorized by all necessary
corporate action and no other corporate proceedings on the part of USOL are
necessary to authorize this Agreement or to consummate the transactions so
contemplated. The Board of Directors of USOL has determined that it is
advisable and in the best interest of USOL's stockholders for USOL to enter
into the Merger with FLCI upon the terms and subject to the conditions of
this Agreement. This Agreement has been duly and validly executed and
delivered by USOL and, assuming the due authorization, execution and
delivery by FLCI, constitutes a legal, valid and binding obligation of
USOL, enforceable in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
moratorium, reorganization and similar laws from time to time in effect
that affect creditors' rights generally, and by legal and equitable
limitations on the availability of specific remedies.
4.5 No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by USOL does
not, and the performance of this Agreement by USOL will not, (i) conflict
with or violate the Certificate of Incorporation or By-laws of USOL; (ii)
conflict with or violate any Law applicable to USOL or any of its
subsidiaries or by which any of their respective properties is bound or
affected; (iii) result in any breach of or constitute a default (or an
event that with notice or lapse of time or both would become a default), or
impair USOL's or any of its Subsidiaries' rights or alter the rights or
obligations of any third party under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any USOL Material
Contract; or (iv) result in the creation of a Lien on any of the properties
or assets of USOL or any of its Subsidiaries pursuant to, any note, bond
mortgage, indenture, contract, agreement, lease, license, permit, franchise
or other instrument or obligation to which USOL or any of its Subsidiaries
is a party or by which USOL or any of its Subsidiaries, or any of their
respective properties, is bound or affected, except in the case of clauses
(ii), (iii) and (iv) for such breaches, defaults or other occurrences that
would not, individually or in the aggregate, have a material adverse effect
upon USOL.
(b) The execution and delivery of this Agreement by USOL does
not, and the performance of this Agreement and the transactions
contemplated hereby by USOL will not, require any consent, approval,
authorization or permit of, or filing with or notification to, any
Governmental Authority, except (i) the consents, approvals or Permits set
forth in Schedule 4.5(b), (ii) for applicable requirements, if any, of the
Securities Act, the Exchange Act, state securities laws, and the filing and
recordation of appropriate merger or other documents as required by the
Delaware Law and the Oregon Law, and (iii) where the failure to obtain such
consents, approvals, authorizations or permits, or to make such filings or
notifications, would not prevent or delay consummation of the Merger, or
otherwise prevent or delay USOL from performing its obligations under this
Agreement, or would not otherwise have a material adverse effect on USOL.
4.6 Brokers.
Except as set forth in Schedule 4.6, no investment bank, broker or
finder is entitled to any fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by
or on behalf of USOL. USOL has heretofore furnished to FLCI true and
complete copies of all agreements between USOL and any other Person,
pursuant to which such other firm would be entitled to any payment relating
to the transactions contemplated hereunder.
4.7 Other Negotiations.
USOL is not engaged in discussions or negotiations with any Person
or Persons with respect to, and has not solicited or furnished any information
to any Person or Persons who, to USOL's knowledge, is or are currently
contemplating negotiations or an offer regarding, a consolidation or merger
or other business combination, recapitalization, liquidation, or similar
transaction, or any other transaction which could be conditioned upon, or
otherwise require, the termination of this Agreement.
4.8 Full Disclosure.
(a) No statement contained in this Agreement or in any
certificate or schedule furnished or to be furnished by or on behalf of
USOL to FLCI pursuant to this Agreement, when taken together with all other
statements contained herein or in other certificates and schedules
furnished pursuant to this Agreement, contains any untrue statement of a
material fact or omits to state any material fact necessary, in the light
of the circumstances under which it was made, in order to make the
statements herein or therein not misleading.
(b) Any information supplied by USOL for inclusion or
incorporation by reference in the Proxy Statement shall not (i) at the time
the Proxy Statement (or any amendment thereof or supplement thereto) is
first mailed to holders of FLCI Stock, (ii) at the time of the FLCI
Stockholders' Meeting, or (iii) at the Effective Time, contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they are made, not misleading. If at any
time prior to the Effective Time any event or circumstance relating to USOL
or its officers or directors should be discovered by USOL which should be
set forth in a supplement to the Proxy Statement, USOL shall promptly
inform FLCI of such event or circumstance.
4.9 Lockup Agreement.
(a) USOL has obtained, and has delivered to FLCI, the
agreement of each holder of any share of USOL Preferred Stock that such
holder, except as provided in Schedule 4.9, for a period of one (1) year
after the Effective Time, but in no event later than eighteen (18) months
from the date hereof, shall not sell, pledge, encumber or otherwise transfer
or dispose of, and shall not permit to be sold, encumbered, attached or
otherwise disposed of or transferred in any manner, either voluntarily or
by operation of law ("Transfer"), all or any portion of the shares of
Company Preferred Stock that such holder owns or hereafter acquires.
(b) USOL has obtained, through execution and delivery of the
Common Stockholder and Warrant Holder Registration Rights Agreement dated
as of the date hereof, the agreement of each holder of USOL Common Stock
and each holder of a USOL Warrant that such holder, for a period of six
months after the Effective Time, but in no event later than nine (9) months
from the date hereof (the "Lockup Period"), shall not Transfer, and shall
not permit to be Transferred, all or any portion of the shares of Company
Common Stock or of the Company Warrants that such holder owns or hereafter
acquires; provided, however, that during the Lockup Period, each such
holder may make Transfers to Qualified Institutional Buyers (as such term
is defined in Rule 144A under the Securities Act); and provided further,
that each such holder may (i) transfer all or any part of such holder's
USOL Common Stock and/or USOL Warrants to one or more Affiliates which, for
purposes of this Section 4.9(b), shall include members of any holder which
is a limited liability company, employees or directors of each such holder;
(ii) Transfer such holder's USOL Common Stock and/or USOL Warrants in
connection with any exchange, reclassification or other conversion of
shares into any cash, securities or other property pursuant to a merger or
consolidation of the Company or any of its subsidiaries with, or any sale
or transfer by the Company or any of its subsidiaries of all or
substantially all its assets to, any Person; and (iii) Transfer such
holder's USOL Common Stock and/or USOL Warrants in connection with any
statutory share exchange or any recapitalization of the Company or any of
its subsidiaries; and provided further, that if the conditions precedent
for USOL to exercise the call option under Section 8 of the USOL Other
Warrants exist, then the Lockup Period with respect to the Company Other
Warrants shall terminate.
(c) USOL has obtained, through execution and delivery by Don
Barlow and Robert Solomon (for the purposes of this paragraph only, the
"holders") of the Officers Indemnification Agreement dated as of the date
hereof, and has delivered to FLCI, the agreement of each such holder with
respect to the Company Common Stock that such holder, for a period of one
year after the Effective Time, but in no event later than eighteen (18)
months from the date hereof (the "Other Lockup Period"), shall not
Transfer, and shall not permit to be Transferred, all or any portion of the
shares of Company Common Stock that such holder owns or hereafter acquires.
4.10 Incorporation of Representations and Warranties By Reference.
The representations and warranties and related schedules and
disclosure memoranda of (a) USOC set forth in the USOC Asset Purchase
Agreement and (b) GMAC-CM set forth in the TSD Asset Purchase Agreement are
hereby incorporated by reference as though made by USOL and fully set forth
herein.
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER
5.1 Conduct of Business by USOL and FLCI Pending the Merger.
During the period from the date of this Agreement and continuing
until the earlier of the termination of this Agreement or the Effective Time,
unless the other party shall otherwise agree in writing, and except as to
USOL, the actions permitted to be taken by USOL Sub pursuant to the USOC
Asset Purchase Agreement and the transactions contemplated thereby, each of
USOL and FLCI shall conduct its respective business and shall cause the
businesses of its subsidiaries to be conducted only in, and each of USOL
and FLCI and its subsidiaries shall not take any action except in, the
ordinary course of business and in a manner consistent with past practice;
and each of USOL and FLCI shall use reasonable efforts to preserve the
business organization of itself and its subsidiaries, to keep available the
services of the present officers, key employees and consultants of itself
and its subsidiaries and to preserve the present relationships of itself
and its subsidiaries with customers, suppliers and other Persons with which
it or any of its subsidiaries has significant business relations. By way of
amplification and not limitation, except as contemplated by this Agreement,
neither USOL nor FLCI, nor any of their respective subsidiaries shall,
during the period from the date of this Agreement and continuing until the
earlier of the termination of this Agreement or the Effective Time do, or
propose to do, any of the following without the prior written consent of
the other party:
(a) propose to or amend or otherwise change its Articles or
Certificate of Incorporation or By-laws;
(b) issue, sell, pledge, dispose of or encumber, or authorize
the issuance, sale, pledge, disposition or encumbrance of, any shares of
capital stock of any class (other than the sale or issuance of common stock
upon the exercise of outstanding options listed in Schedule 3.2 or Schedule
3.14(c) hereto (with respect to FLCI); or in Schedule 4.2(a) hereto (with
respect to USOL), or any options, warrants, convertible securities or other
rights of any kind to acquire any shares of capital stock, or any other
ownership interest (including, without limitation, any phantom interest) of
FLCI or USOL, as the case may be, or any of their respective subsidiaries
(provided that consent for grants of employee stock options to newly hired
employees pursuant to existing stock option plans consistent with past
practice shall not be unreasonably withheld);
(c) sell, pledge, mortgage, dispose of or encumber any of its
assets or any assets of its subsidiaries, except for (i) sales of products
(or licenses thereto) and services in the ordinary course of business
consistent with past practice, (ii) dispositions of obsolete or worthless
assets, and (iii) sales of immaterial assets not in excess of $10,000 in
the aggregate;
(d) except as is contemplated by Section 6.5, alter the price
or accelerate, amend or change the period (or permit any acceleration,
amendment or change) of exercisability of options or restricted stock
granted under the Employee Plans (including stock option plans) or
authorize cash payments in exchange for any options granted under any of
such plans;
(e) (i) declare, set aside, make or pay any dividend or other
distribution (whether in cash, stock or property or any combination
thereof) in respect of any of its capital stock, except for the declaration
and payment of any required dividend by USOL on the USOL Preferred Stock,
(ii) split, combine or reclassify any of its capital stock or issue or
authorize or propose the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock, or (iii) amend
the terms of, repurchase, redeem or otherwise acquire, or permit any
subsidiary to repurchase, redeem or otherwise acquire, any of its
securities or any securities of its subsidiaries, or propose to do any of
the foregoing;
(f) (i) acquire (by merger, consolidation, or acquisition of
stock or assets) any corporation, partnership or other business
organization or division thereof; (ii) incur any indebtedness for borrowed
money (except for the issuance of the Senior Notes), or issue any debt
securities or assume, guarantee (other than guarantees of bank debt of such
party's subsidiaries entered into in the ordinary course of business) or
endorse or otherwise as an accommodation become responsible for, the
obligations of any Person, or make any loans or advances, except in each
case in the ordinary course of business consistent with past practice;
(iii) enter into or amend any USOL Material Contract or FLCI Material
Contract, as the case may be, other than in the ordinary course of business
consistent with past practice; (iv) authorize any capital expenditures or
purchase of fixed assets which are, in the aggregate, in excess of $25,000
for such party and its subsidiaries taken as a whole; or (v) enter into or
amend any contract, agreement, commitment or arrangement to effect any of
the matters prohibited by this Section 5.1;
(g) except, as to FLCI, for increases consistent with past
practice and disclosed on Schedule 5.1(g) in salary or wages of employees
of FLCI or its subsidiaries who are not officers and except, as to USOL,
for Persons other than Robert Solomon and Donald Barlow, increase the
compensation payable or to become payable to its officers or employees, or
grant any severance or termination pay to, or enter into any employment or
severance agreement with any director, officer or other employee of such
party or any of its subsidiaries, or establish, adopt, enter into or amend
any collective bargaining, bonus, profit sharing, thrift, compensation,
stock option, restricted stock, stock purchase, pension, retirement,
deferred compensation, employment, termination, severance or other plan,
agreement, trust, fund, policy or arrangement for the benefit of any
current or former directors, officers or employees, except, in each case,
as may be required by law, and except for ministerial updating of plans and
trusts which does not affect the benefits thereunder;
(h) take any action to change accounting policies or
procedures (including, without limitation, procedures with respect to revenue
recognition, payments of accounts payable, and collection of accounts
receivable);
(i) make any material tax election inconsistent with past
practices or settle or compromise any material Federal, state, local or
foreign tax liability or agree to an extension of a statute of limitations
except to the extent the amount of any such settlement has been reserved
for on the USOL Unaudited Balance Sheet or the FLCI Unaudited Balance
Sheet, each as on the Balance Sheet Date, as the case may be;
(j) pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the
ordinary course of business and consistent with past practice of
liabilities reflected or reserved against in the financial statements of
such party or incurred in the ordinary course of business and consistent
with past practice;
(k) take any action which would make any of the representa-
tions or warranties of such party contained in this Agreement materially
untrue or incorrect or prevent such party from performing in all material
respects or cause such party not to perform in all material respects its
covenants hereunder;
(l) cancel or waive any claim or right of substantial value or
settle any material pending litigation;
(m) pay, discharge, or satisfy any material claim or liability
before it becomes due or fail to pay accounts payable in accordance with
their terms;
(n) knowingly take or allow to be taken or fail to take any
action which act or omission would jeopardize qualification of any of the
Merger as a "reorganization" within the meaning of Section 368(a) of the
Code; or
(o) agree to do any of the foregoing.
5.2 No Solicitation by USOL or FLCI.
(a) During the period from the date of this Agreement and
continuing until the earlier of the termination of this Agreement or the
Effective Time, neither USOL nor FLCI shall, directly or indirectly,
through any officer, director, employee, representative or agent of USOL or
FLCI, including, without limitation, any investment banker, attorney, or
accountant retained by FLCI or USOL, as the case may be, or any of its
subsidiaries, (i) initiate, solicit, or encourage any inquiries or
proposals that constitute, or could reasonably be expected to lead to, a
proposal or offer for a merger, consolidation, business combination, sale
of assets representing a substantial portion of the assets of either USOL
or FLCI, as applicable, including a sale of shares representing 20% or more
of the outstanding USOL Stock or FLCI Stock, including, without limitation,
by way of tender offer or exchange offer other than the Merger and the
other transactions relating to this Agreement (any of the foregoing
inquiries or proposals being referred to in this Agreement as an
"Acquisition Proposal"); or, subject to the applicable fiduciary duties of
the respective directors of USOL and FLCI, as determined by such directors
in good faith after consultation with and based upon the advice of legal
counsel, (ii) engage in negotiations or discussions concerning, or provide
to any Person or entity non-public information or data regarding FLCI or
USOL or any of their respective subsidiaries, as applicable, for the
purpose of, or otherwise cooperate with or assist or participate in,
facilitate or encourage, any inquiries regarding the making of an
Acquisition Proposal, (iii) agree to, approve, or recommend any Acquisition
Proposal or (iv) take any other action inconsistent with the obligations of
USOL or FLCI, as applicable; provided, however, that any conversations,
solicitations or negotiations conducted by either party or their respective
representatives regarding an acquisition proposal solely with respect to
the Surviving Corporation shall not be deemed to violate any of the
foregoing provisions of this Section 5.2(a).
(b) Either party shall immediately notify the other party
after receipt of any Acquisition Proposal or any request for nonpublic
information relating to such party or any of its subsidiaries in connection
with an Acquisition Proposal or for access to the properties, books or
records of such party or any subsidiary by any Person that informs the
Board of Directors or officers of such party or such subsidiary that it
intends to make, or has made, an Acquisition Proposal. Such notice to the
other party shall be made orally and in writing and shall indicate in
reasonable detail the identity of the offeror and the terms and conditions
of such proposal, inquiry or contact.
(c) Both parties shall use reasonable efforts to ensure that
the officers and directors of USOL and FLCI and their respective subsidiaries
and any investment banker or other advisor or representative retained by
such party are aware of, and comply with, the restrictions described in
this Section 5.2.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Proxy Statement.
(a) As promptly as practicable after the execution of this
Agreement, FLCI shall prepare and file with the SEC the Proxy Statement,
which shall be in form and substance satisfactory to USOL. FLCI shall
cause the Proxy Statement to comply in all material respects with the
Securities Act, the Exchange Act and the regulations thereunder. FLCI
shall use reasonable efforts to have or cause the Proxy Statement to be
cleared as promptly as practicable, and shall take all actions required
under any applicable federal or state securities laws or the rules and
regulations of Nasdaq in connection with the issuance of shares of FLCI
Stock pursuant to the Merger. Without limiting the generality of the
foregoing, FLCI agrees to use all reasonable efforts, after consulting with
USOL, to respond promptly to any comments made by the SEC with respect to
the Proxy Statement (including each preliminary version thereof).
(b) Each of USOL and FLCI shall, and shall cause its
respective representatives to, fully cooperate with the other party and its
respective representatives in the preparation of the Proxy Statement, and
shall, upon request, furnish the other party with all information concerning
it and its Affiliates, directors, officers and stockholders as the other may
reasonably request in connection with the preparation of the Proxy
Statement.
(c) As promptly as practicable after the Proxy Statement has
been cleared by the SEC, FLCI shall cause the Proxy Statement to be mailed
to its stockholders. Thereafter, USOL and FLCI shall each notify the other
as promptly as practicable upon becoming aware of any event or circumstance
which should be described in an amendment of, or a supplement to, the Proxy
Statement. FLCI shall notify USOL as promptly as practicable after the
receipt by it of any written or oral comments of the SEC on, or of any
written or oral request by the SEC for amendments or supplements to, the
Proxy Statement, and FLCI shall promptly supply USOL with copies of all
correspondence between it or any of its representatives and the SEC with
respect to any of the foregoing filings.
6.2 FLCI Stockholders' Meeting.
FLCI shall, in accordance with its charter documents, call and hold
(i) the FLCI Stockholders' Meeting as promptly as practicable for the
purpose of voting upon the approval of the Merger and this Agreement, (ii)
the approval of the Re-incorporation, and (iii) the approval of the
increase in authorized capital stock required to consummate the Merger, and
FLCI shall use its best efforts to hold the FLCI Stockholders' Meeting as
soon as permitted by the proxy rules under the Exchange Act. FLCI shall
use its best efforts to obtain from the stockholders owning more than 50%
of the FLCI Stock, proxies in favor of the approval of (i) the Merger and
this Agreement, (ii) the Re-incorporation, and (iii) the increase in
authorized capital stock required to consummate the Merger. Subject to the
applicable fiduciary duties of FLCI's directors, as determined by such
directors in good faith after consultation with and based upon the written
advice of legal counsel, FLCI shall take all other action necessary or
advisable to secure the vote or consent of stockholders required by the
applicable Law to obtain such approvals, including, without limitation, the
inclusion in the Proxy Statement of the recommendation of its Board of
Directors that its shareholders vote in favor of the approval and adoption
of this Agreement and the transactions related hereto.
6.3 Access to Information; Confidentiality.
Upon reasonable notice and subject to restrictions contained in
confidentiality agreements to which USOL or FLCI may be subject (from which
USOL and FLCI shall each use reasonable efforts to be released), USOL and
FLCI shall each (and USOL shall cause each of its subsidiaries to) afford
to the officers, employees, accountants, counsel and other representatives
of the other, reasonable access, during the period from the date of this
Agreement to the Effective Time, to all its properties, books, contracts,
commitments and records and, during such period, USOL and FLCI shall each
furnish promptly to the other all information concerning its business,
properties and personnel as such other party may reasonably request, and
USOL and FLCI shall each make available to the other the appropriate
individuals (including attorneys, accountants and other professionals) for
discussion of the other's business, properties and personnel as either FLCI
or USOL may reasonably request. Each party shall keep such information
confidential in accordance with the terms of the Confidentiality and
Standstill Agreement, dated May, 1999, entered into between FLCI and USOL.
6.4 Consents, Approvals.
USOL and FLCI shall each use its reasonable best efforts to obtain
all consents, waivers, approvals, authorizations or orders (including, without
limitation, all Governmental Approvals), and USOL and FLCI shall make all
filings (including, without limitation, all filings with Governmental
Authorities or regulatory agencies) required in connection with the
authorization, execution and delivery of this Agreement by USOL and FLCI
and the consummation by them of the transactions contemplated hereby. USOL
and FLCI shall furnish all information required to be included in the Proxy
Statement, or for any application or other filing to be made pursuant to
the rules and regulations of any Governmental Authority in connection with
the transactions contemplated by this Agreement. Upon the terms and subject
to the conditions hereof, each of the parties hereto shall use reasonable
efforts to take, or cause to be taken, all actions and to do, or cause to
be done, all other things necessary, proper or advisable to consummate and
make effective as promptly as practicable the transactions contemplated by
this Agreement, to obtain in a timely manner all necessary waivers,
consents and approvals and to effect all necessary registrations and
filings, and to otherwise satisfy or cause to be satisfied all conditions
precedent to its obligations under this Agreement. FLCI and USOL shall each
use reasonable efforts to cause the Merger to qualify, and will not (either
before or after consummation of the Merger) take any actions which could
prevent the Merger from qualifying, as a reorganization within the meaning
of Section 368(a)(1)(A) of the Code.
6.5 Stock Options.
(a) At the Effective Time, the obligation to issue shares
under each then outstanding option to purchase USOL Common Stock (each a "USOL
Stock Option") granted under USOL's Stock Option Plan, as amended, shall be
assumed by FLCI and each such option shall be converted into an option to
acquire, on the same terms and conditions as were applicable under such
USOL Stock Option prior to the Effective Time, the whole number of shares
of FLCI Common Stock as the holder of such USOL Stock Option would have
been entitled to receive pursuant to the Merger had such holder exercised
such option in full immediately prior to the Effective Time (not taking
into account whether or not such option was in fact exercisable). The
exercise price of the options shall be a price per share equal to the
exercise price for shares of USOL Common Stock otherwise purchasable
pursuant to such USOL Stock Option; provided, however, that the
exercisability or the other vesting of the assumed options and the
underlying stock shall continue to be determined by reference to stock
option agreements executed pursuant to USOL's Stock Option Plan; and
provided further, that references in any USOL Stock Option to USOL, the
Board of Directors of USOL or any committee thereof, and any USOL Stock
Option Plan, shall, commencing at the Effective Time, unless inconsistent
with the context, be to FLCI, the board of directors of FLCI or a committee
thereof, and FLCI's 1998-1999 Combined Incentive Stock Option and
Nonqualified Stock Option Plan, respectively.
(b) As soon as practicable after the Effective Time, FLCI
shall deliver to each holder of an outstanding USOL Stock Option an appropriate
notice setting forth such holder's rights pursuant thereto and such USOL
Stock Option shall continue in effect on the same terms and conditions.
FLCI shall comply with the terms of all such USOL Stock Options and ensure,
to the extent required by, and subject to the provisions of, any USOL Stock
Plan, that USOL Stock Options which qualified for special tax treatment
prior to the Effective Time continue to so qualify after the Effective
Time. FLCI shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of FLCI Common Stock for delivery
pursuant to the terms set forth in this Section 6.5.
(c) FLCI shall use its reasonable best efforts after the
Effective Time to file and maintain the effectiveness of a registration
statement under the Securities Act with respect to the issuance by FLCI of
shares of FLCI Common Stock which may be issued pursuant to the USOL Stock
Options as provided for above in this Section 6.5.
6.6 Warrants.
At the Effective Time, FLCI shall assume in writing all obligations
under the USOL Other Warrants and the USOL TSD Warrants, and the holders of
the USOL Other Warrants and the USOL TSD Warrants thereafter shall have the
right to acquire, on the same pricing and payment terms and conditions as
are currently applicable under the USOL Other Warrants and the USOL TSD
Warrants, as applicable, the same number of shares of FLCI Common Stock as
the holders of such warrants would have been entitled to receive in the
Merger had such holder exercised such warrants in full immediately prior to
the Effective Time.
6.7 Notification of Certain Matters.
USOL shall give prompt notice to FLCI, and FLCI shall give prompt
notice to USOL, of (i) the occurrence or non-occurrence of any event which
would cause any representation or warranty made by the respective parties
in this Agreement to be materially untrue or inaccurate, and (ii) any
failure of USOL or FLCI, as the case may be, to materially comply with or
satisfy any covenant, condition or agreement to be complied with or
satisfied by it hereunder; provided, however, that the delivery of any
notice pursuant to this Section 6.7 shall not limit or otherwise affect the
remedies available hereunder to the party receiving such notice, and
provided further, that failure to give such notice shall not be treated as
a breach of covenant for the purposes of Sections 7.2(b) or 7.3(b) unless
the failure to give such notice results in material prejudice to the other
party.
6.8 Public Announcements.
FLCI and USOL shall consult with each other before issuing any press
release or other public statement with respect to the Merger or this
Agreement, and any such press release shall state that it is being made by
both FLCI and USOL. FLCI and USOL shall not issue any such press release or
make any such public statement without the prior consent of the other
party, which shall not be unreasonably withheld; provided, however, that a
party may, without the prior consent of the other party, issue such press
release or make such public statement as may upon the written advice of
counsel be required by law if it has used reasonable efforts to consult
first with the other party, and has provided the other party with at least
24 hours notice of such release.
6.9 Application For Nasdaq Approval.
FLCI agrees to use its best efforts to prepare and file with Nasdaq
such applications, notices, reports and other information as may be
reasonably required to obtain the approval by Nasdaq of the continued
listing of FLCI's common stock outstanding prior to the consummation of the
Merger and the FLCI Common Stock, and FLCI's warrants outstanding prior to
the Effective Time and the FLCI Warrants that are currently listed on
Nasdaq following consummation of the transactions provided for herein.
USOL agrees to provide FLCI with such documents, information and other
materials as FLCI may reasonably request in connection with effecting such
application and to otherwise cooperate with FLCI in its efforts to obtain
such Nasdaq approval. FLCI and USOL shall cooperate with each other in
applying for a new listing of the FLCI Common Stock and the FLCI Warrants
on the Nasdaq National Market and having the FLCI Common Stock and the FLCI
Warrants designated as national market system securities.
6.10 Delivery of Additional Filings.
Following the execution of this Agreement and until the Closing,
FLCI shall provide USOL with copies of any and all reports, filings, notices or
other information which FLCI may prepare and file with or receive from the
SEC, Nasdaq or any other Governmental Authority (and shall give USOL an
opportunity to review and comment on any such filings).
6.11 Accountant's Comfort Letters.
USOL and FLCI shall each use reasonable efforts to cause their
respective independent public accountants to deliver to the other party a
letter covering such matters as may be requested by such other party, with
respect to such matters as are customarily addressed in certified public
accountant's "comfort" letters with respect to the type of transactions
contemplated by this Agreement.
6.12 Indemnification; Directors' and Officers' Insurance.
All rights to indemnification now existing in favor of the present
or former directors or officers of USOL as provided in USOL's Certificate of
Incorporation or By-laws, which rights are in effect as of the date hereof,
shall, with respect to matters occurring prior to the Effective Time,
survive the Merger and continue in full force and effect after the
Effective Time. All rights to indemnification in respect of any such claim
or claims shall continue until disposition of such claim or claims. FLCI
and USOL further agree that all rights to indemnification now existing in
favor of the present or former directors or officers of USOL in any
indemnification agreement between such Person and USOL shall survive the
Merger and continue in full force and effect in accordance with the terms
of such agreement. Until the sixth anniversary of the Effective Time, FLCI
shall maintain in effect with respect to matters occurring prior to the
Effective Time, to the extent available, the policy of directors' and
officers' liability insurance currently maintained by USOL on behalf of its
officers and directors; provided, however, that FLCI may substitute
therefor a policy containing coverage, terms and conditions which are no
less advantageous to such present or former directors and officers of USOL.
Notwithstanding anything to the contrary contained in this Agreement, the
provisions of this Section 6.12 shall survive the Effective Time and are
intended to be for the benefit of, and shall be enforceable by, each
present and former director and officer of USOL and shall be binding on all
successors and assigns of the Surviving Corporation. In the event the
Surviving Corporation or any of its successors or assigns (i) consolidates
with or merges into any other Person and shall not be the continuing or
surviving corporation or entity of such consolidation or merger, or (ii)
transfers all or substantially all of its properties and assets to any
Person, then, and in each such case, proper provision shall be made so that
the successors and assigns of the Surviving Corporation assume the
obligations set forth in this Section 6.12.
6.13 Employee Benefits
(a) FLCI will maintain without change for a period of twelve
months after the Effective Time each severance program and policy of USOL
listed in Section 5.14 of the Disclosure Memorandum attached to the USOC
Asset Purchase Agreement (including any such plan, program or policy that
is subject to the approval of the Board of Directors of USOL as of the date
of this Agreement) with respect to each FLCI employee who was employed by
USOL immediately prior to the Effective Time and for purposes of any such
severance program or policy and any severance program and policy which USOL
was required to maintain by law. FLCI will give full credit to each such
FLCI employee for all service performed for USOL by such employee. FLCI
will honor all severance and retention agreements of USOL in effect as of
the Effective Time.
(b) With respect to each FLCI Employee Plan, each FLCI
employee employed by USOL immediately prior to the Effective Time shall re-
ceive credit for all service performed for USOL; such service credit shall
apply for all purposes, including but not limited to any vacation, sick time,
insurance or other benefits and any eligibility or vesting requirements
under any FLCI Employee Plan.
(c) As of the Effective Time, each FLCI employee who was
employed by USOL immediately prior to the Effective Time shall be enrolled
in the Person Choice Account group health benefit plan for employees of
FLCI, or any successor plan thereto ("Group Health Plan") and shall be
entitled to participate in the Group Health Plan without limitation or
exclusion for any preexisting conditions applicable to any such employee or
his or her enrolled dependents, except to the extent that any such
preexisting condition limitation or exclusion applied to such individual
under the group health plan provided by USOL prior to the Effective Time.
For purposes of participation in the Group Health Plan, each FLCI employee
employed by USOL immediately prior to the Effective Time shall also receive
credit for all payments made toward deductible, co-payment and out-of-
pocket limits under the group health plan of USOL in which such employee
was a participant immediately prior to the Effective Time for the plan year
which includes the Effective Time as if such payments had been made for
similar purposes for such period under the Group Health Plan by an employee
employed by FLCI immediately prior to the Effective Time.
6.14 Stockholder Litigation.
Each of FLCI and USOL shall give the other the reasonable oppor-
tunity to participate in the defense of any stockholder litigation arising in
connection with the transactions contemplated hereby against FLCI or USOL,
as applicable, and their respective directors.
6.15 Accredited Investors.
Prior to the Effective Time, USOL shall deliver to FLCI evidence
reasonably satisfactory to FLCI that each holder of USOL Stock is an
"Accredited Investor" as such term is defined in Regulation D of the
Securities Act.
ARTICLE VII
CONDITIONS TO THE MERGER
7.1 Conditions to Obligation of Each Party to Effect the Merger.
Unless waived, in whole or in part, by the applicable party, the respective
obligations of each party to effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(a) No proceeding in respect of the Proxy Statement shall have
been initiated or threatened by the SEC.
(b) This Agreement, the Merger, the increase in the authorized
capital stock of FLCI required to consummate the Merger, and the
Re-incorporation shall have been approved by the requisite vote of the
stockholders of FLCI.
(c) No statute, rule, regulation, order, decree or injunction
shall have been enacted, entered, promulgated or enforced by any court or
Governmental Authority of competent jurisdiction which restrains, enjoins
or otherwise prohibits the consummation of the Merger; provided, however,
that USOL and FLCI shall use their reasonable best efforts to have any such
order, decree or injunction vacated.
(d) FLCI and USOL shall have received the written opinion of
Jenkens & Gilchrist, in form and substance reasonably satisfactory to each
of them to the effect that the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code.
(e) The shares of FLCI Common Stock to be issued in the Merger
shall have been approved for quotation on Nasdaq, subject to official
notice of issuance.
(f) All corporate and other proceedings and actions taken in
connection with this Agreement and all certificates, opinions, agreements,
instruments, and documents mentioned in this Agreement or incident to any
such transactions shall have been delivered to the appropriate party or
third party, and be reasonably satisfactory in form and substance to USOL,
FLCI, and their respective counsel.
(g) There shall not have occurred and be continuing at any
time within 30 days prior to the proposed Effective Time (i) any suspension
in trading on Nasdaq, any fixing of minimum or maximum prices for trading on
Nasdaq by the NASD or SEC or any other Governmental Authority, (ii) the
declaration of a banking moratorium by federal, Oregon, Colorado or Texas
Governmental Authorities; (ii) an outbreak or major escalation of
hostilities between the United States and any foreign power or other
insurrection or armed conflict involving the United States.
7.2 Additional Conditions to Obligations of FLCI.
Unless waived, in whole or in part, in writing by FLCI, the
obligations of FLCI to effect the Merger are also subject to the
fulfillment prior to or at the Effective Time, of each of the following
conditions:
(a) The representations and warranties of USOL contained in
this Agreement shall be true and correct in all material respects on and as of
the Effective Time, except for (i) changes contemplated or permitted by
this Agreement, (ii) those representations and warranties which address
matters only as of a specified date (which shall remain true and correct as
of such date), and (iii) where the failure to be true and correct would not
have a material adverse effect upon USOL.
(b) USOL shall have performed or complied in all material
respects with all agreements and covenants required by this Agreement to be
performed or complied with by USOL on or prior to the Effective Time.
(c) No material adverse change in the business, property,
prospects, results of operations or conditions (financial or otherwise) of
USOL shall have occurred between the date of this Agreement and the
Effective Time.
(d) No action or proceeding by any Governmental Authority or
other Person (an "Action") shall have been instituted or threatened which
(i) might have a material adverse effect on USOL; (ii) would enjoin,
restrain, or prohibit, or might result in substantial damages in respect
of, this Agreement or the complete consummation of the Merger; or (iii)
seeks to prohibit or limit the Surviving Corporation from exercising all
material rights and privileges pertaining to its ownership of all or a
material portion of the business or assets of USOL and the Predecessor
Entities, and which would, in the reasonable judgment of FLCI make it
inadvisable to consummate such transactions; provided, however, that if an
Action has been instituted, or an order issued pursuant to an Action, that
FLCI and USOL shall use their reasonable best efforts to have any such
order or Action dismissed or vacated.
(e) USOL shall have delivered to FLCI a certificate signed by
USOL's President and Chief Financial Officer, dated the date of the
Closing, certifying that the conditions specified in Sections 7.2(a),
7.2(b), 7.2(c) and 7.2(d) of this Agreement have been satisfied.
(f) FLCI shall have received the opinion of Jenkens &
Gilchrist, counsel to USOL, dated the date of the Closing, containing the
opinion set forth in Exhibit 7.2(f) attached hereto.
(g) All corporate and other proceedings and actions taken in
connection with this Agreement and all certificates, opinions, agreements,
instruments, and documents mentioned in this Agreement or incident to any
such transactions shall be reasonably satisfactory in form and substance to
FLCI and its counsel.
7.3 Additional Conditions to Obligation of USOL.
Unless waived, in whole or in part, in writing by USOL, the
obligations of USOL to effect the Merger are also subject to the
fulfillment prior to or at the Effective Time of each of the following
conditions:
(a) The representations and warranties of FLCI contained in
this Agreement shall be true and correct in all material respects on and as of
the Effective Time, except for (i) changes contemplated or permitted by
this Agreement, (ii) those representations and warranties which address
matters only as of a specified date (which shall remain true and correct as
of such date), and (iii) where the failure to be true and correct would not
have a material adverse effect upon FLCI.
(b) FLCI shall have performed or complied in all material
respects with all agreements and covenants required by this Agreement to be
performed or complied with by FLCI on or prior to the Effective Time.
(c) No material adverse change in the business, property,
prospects, results of operations or conditions (financial or otherwise) of
FLCI shall have occurred between the date of this Agreement and the
Effective Time.
(d) No Action shall have been instituted or threatened which
(i) might have a material adverse effect on FLCI; (ii) would enjoin, restrain,
or prohibit, or might result in substantial damages in respect of, this
Agreement or the complete consummation of the Merger; or (iii) seeks to
prohibit or limit the Surviving Corporation from exercising all material
rights and privileges pertaining to its ownership of all or a material
portion of the business or assets of FLCI, and which would, in the
reasonable judgment of USOL make it inadvisable to consummate such
transactions; provided, however, that if an Action has been instituted, or
an order issued pursuant to an Action, that FLCI and USOL shall use their
reasonable best efforts to have any such order or Action dismissed or
vacated.
(e) FLCI shall have delivered to USOL a certificate signed by
FLCI's President and Chief Financial Officer, dated the date of the
Closing, certifying that the conditions specified in Sections 7.3(a),
7.3(b), 7.3(c), and 7.3(d) of this Agreement have been satisfied.
(f) USOL shall have received the opinion of Neuman Drennen & Stone, LLC,
counsel to FLCI, dated the date of the Closing, containing the opinion set
forth in Exhibit 7.3(f) attached hereto.
ARTICLE VIII
TERMINATION
8.1 Termination.
(a) This Agreement may be terminated at any time prior to the
Effective Time, notwithstanding approval thereof by the stockholders of
either USOL or FLCI:
(i) by mutual written consent of the parties hereto duly
authorized by the Boards of Directors of FLCI and
USOL; or
(ii) by either FLCI or USOL if the Merger shall not have
been consummated by the Outside Date, provided that
the right to terminate this Agreement under this
Section 8.1(a)(ii) shall not be available to any
party whose willful failure to fulfill any
obligation under this Agreement has been the cause
of or resulted in the failure of the Merger to occur
on or before such date; or
(iii) by either FLCI or USOL if a court of competent
jurisdiction or Governmental Authority shall have
issued a non-appealable final order, decree or ruling
or taken any other action, in each case having the
effect of permanently restraining, enjoining or
otherwise prohibiting the Merger, except if the party
relying on such order, decree or ruling or other
action has not complied with its obligations under
Section 6.4; or
(iv) by either FLCI or USOL, if, at the FLCI Stockholders'
Meeting (including any adjournment or postponement
thereof), the requisite vote of the stockholders of
FLCI shall not have been obtained; or
(v) by FLCI, upon a breach of any representation,
warranty, covenant or agreement on the part of USOL
set forth in this Agreement such that the
conditions set forth in Section 7.3(a) or 7.3(b)
would not be satisfied, or by USOL, upon a breach
of any representation, warranty, covenant or
agreement on the part of FLCI set forth in this
Agreement such that the conditions set forth in
Section 7.2(a) or 7.2(b), would not be satisfied (any
of such breaches by either party, a "Terminating
Breach"); provided, however, that if such Terminating
Breach is curable prior to the Outside Date, by FLCI
or USOL, as the case may be, through the exercise of
its reasonable efforts and for so long as FLCI or
USOL, as the case may be, continues to exercise such
reasonable efforts, neither USOL nor the FLCI,
respectively, may terminate this Agreement under
this Section 8.1(a)(v); or
(vi) by FLCI, if (A) the Board of Directors of USOL shall
fail to recommend the Merger or shall withdraw,
modify or change its recommendation of the Merger in
a manner adverse to FLCI or shall have resolved to
do any of the foregoing; (B) after the receipt by
USOL of an Acquisition Proposal, FLCI requests in
writing that the Board of Directors of USOL
reconfirm its recommendation of this Agreement and
the Merger to the stockholders of USOL and the
Board of Directors of USOL fails to do so within
10 business days after its receipt of FLCI's
request; (C) the Board of Directors of USOL shall
have recommended to the stockholders of USOL an
Alternative Transaction (as defined in Section
8.4(e)); or (D) a tender offer or exchange offer
for 20% or more of the outstanding shares of USOL
Stock is commenced (other than by FLCI or an
Affiliate of FLCI) and the Board of Directors of
USOL recommends that the stockholders
of USOL tender their shares in such tender or
exchange offer; or
(vii) by USOL, if (A) the Board of Directors of FLCI shall
fail to recommend the Merger or shall withdraw,
modify or change its recommendation of the Merger in
a manner adverse to USOL or shall have resolved to
do any of the foregoing; (B) after the receipt by
FLCI of an Acquisition Proposal, USOL requests in
writing that the Board of Directors of FLCI reconfirm
its recommendation of this Agreement and the Merger
to the stockholders of USOL and the Board of Directors
of FLCI fails to do so within 10 business days after
its receipt of USOL's request; (C) the Board of
Directors of FLCI shall have recommended to the
stockholders of FLCI an Alternative Transaction;
(D) a tender offer or exchange offer for 20% or more
of the outstanding shares of FLCI Common Stock is
commenced (other than by USOL or an Affiliate of
USOL) and the Board of Directors of FLCI recommends
that the stockholders of FLCI tender their shares in
such tender or exchange offer; or (E) for any reason
FLCI fails to call and hold the FLCI Stockholders'
Meeting by the Outside Date (provided that USOL's
right to terminate this Agreement under this
clause (E) shall not be available if at such time
FLCI would be entitled to terminate this Agreement
under Section 8.1(a)(v) without giving effect to the
cure period); or
(viii) by USOL, subject to Section 8.2(a), if the Board of
Directors of USOL shall concurrently approve, and
USOL shall concurrently enter into, a definitive
agreement providing for the implementation of a
Superior Offer (as hereinafter defined); provided,
however, that (A) USOL is not then in breach of
Section 5.2, (B) the Board of Directors of USOL
shall have complied with Section 8.2(a) in
connection with such Superior Offer, and (C)
USOL shall simultaneously make the payment
required by Section 8.4(b); and provided further,
that USOL agrees to use its commercially
reasonable efforts to have such Superior Offer
include the Surviving Corporation and to consummate
the Merger.
(b) This Agreement may be terminated by FLCI at any time
prior to the approval thereof by the stockholders of FLCI, subject to Section
8.2(b), if the Board of Directors of FLCI shall concurrently approve, and
FLCI shall concurrently enter into, a definitive agreement providing for
the implementation of a Superior Offer; provided, however, that (i) FLCI is
not then in breach of Section 5.2, (ii) the Board of Directors of FLCI
shall have complied with Section 8.2(b) in connection with such Superior
Offer, and (iii) FLCI shall simultaneously make the payment required by
Section 8.4(c); and provided further, that FLCI agrees to use its
commercially reasonable efforts to have such Superior Offer include the
Surviving Corporation and to consummate the Merger.
8.2 Certain Actions Prior to Termination.
(a) USOL shall provide to FLCI written notice of its inten-
tion to terminate this Agreement pursuant to Section 8.1(a)(viii) advising
FLCI (i) that the Board of Directors of USOL has determined, by action of a
majority of the members of the Board of Directors of USOL who are not
affiliated with either FLCI or the Person making such Acquisition Proposal
or their respective affiliates, that such Acquisition Proposal is a
Superior Offer and that, in the exercise of its good faith judgment as to
fiduciary duties to stockholders under applicable law, after consultation
with USOL's outside legal counsel, failure by the Board of Directors to
terminate this Agreement could reasonably be expected to result in a breach
of such duties and (ii) as to the material terms of any such Acquisition
Proposal. At any time after the fifth business day following receipt of
such notice by FLCI, USOL may terminate this Agreement as provided in
Section 8.1(a)(viii) only if the Board of Directors of USOL who are not
affiliated with either FLCI or the Person making such Acquisition Proposal
or their respective affiliates, determines that failure by the Board of
Directors to terminate this Agreement continues to be reasonably expected
to result in a breach of its fiduciary duties to stockholders under
applicable law (which determination shall be made in light of any revised
proposal made by FLCI prior to the expiration of such five business day
period) and concurrently enters into a definitive agreement providing for
the implementation of such Acquisition Proposal.
(b) FLCI shall provide to USOL written notice of its inten-
tion to terminate this Agreement pursuant to Section 8.1(b) advising USOL (i)
that the Board of Directors of FLCI has determined, by action of a majority
of the members of the Board of Directors of FLCI who are not affiliated
with either USOL or the Person making such Acquisition Proposal or their
respective affiliates, that such Acquisition Proposal is a Superior Offer
and that, in the exercise of its good faith judgment as to fiduciary duties
to stockholders under applicable law, after consultation with FLCI's
outside legal counsel, failure by the Board of Directors to terminate this
Agreement could reasonably be expected to result in a breach of such duties
and (ii) as to the material terms of any such Acquisition Proposal. At any
time after the fifth business day following receipt of such notice by USOL,
FLCI may terminate this Agreement as provided in Section 8.1(b) only if the
Board of Directors of FLCI who are not affiliated with either USOL or the
Person making such Acquisition Proposal or their respective affiliates,
determines that failure by the Board of Directors to terminate this
Agreement continues to be reasonably expected to result in a breach of its
fiduciary duties to stockholders under applicable law (which determination
shall be made in light of any revised proposal made by USOL prior to the
expiration of such five business day period) and concurrently enters into a
definitive agreement providing for the implementation of such Acquisition
Proposal.
(c) For purposes of this Agreement, "Superior Offer" means
an Acquisition Proposal which is superior from a financial point of view to
(i) FLCI's stockholders (other than any stockholders affiliated with USOL)
or (ii) USOL's stockholders (other than any stockholders affiliated with
FLCI), as applicable, to the Merger and for which financing, to the extent
required, is then committed or which, in the good faith judgment of FCLI's
or USOL's board of directors, as applicable, after consultation with FLCI's
or USOL's financial advisors is reasonably capable of being obtained.
8.3 Effect of Termination.
In the event of the termination of this Agreement pursuant to
Section 8.1, this Agreement shall immediately become void and there shall be
no liability on the part of any party hereto or any of its Affiliates,
directors, officers or stockholders, except as provided in Section 8.4;
provided, however, that termination of this Agreement shall not in any way
terminate, limit or restrict the rights and remedies of any party hereto
against any other party resulting from any breach of this Agreement.
8.4 Fees and Expenses.
(a) Except as set forth in this Section 8.4, all fees and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses if
the Merger is not consummated and by the Surviving Corporation if the
Merger is consummated, to the extent such expenses are solely and directly
related to such Merger in accordance with the guidelines established in
Revenue Ruling 73-54, 1973-1 C.B. 187; provided, however, that, if the
Merger is not consummated, FLCI and USOL shall share equally all fees and
expenses, other than attorneys' fees, incurred in relation to the printing
of the Proxy Statement (including any preliminary materials related
thereto) and any amendments or supplements thereto.
(b) USOL shall pay FLCI a termination fee of $1,000,000 upon
the earlier to occur of the following events:
(i) the termination of this Agreement by FLCI pursuant
to Section 8.1(a)(vi); or
(ii) the termination of this Agreement by USOL pursuant
to Section 8.1(a)(viii).
USOL's payment of a termination fee pursuant to this subsection
shall be the sole and exclusive remedy of FLCI against USOL and its directors,
officers, employees, agents, advisors, and other representatives with
respect to the occurrences giving rise to such payment; provided that this
limitation shall not apply in the event of a willful breach of this
Agreement by USOL.
(c) FLCI shall pay USOL a termination fee of $1,000,000
upon the earliest to occur of the following events:
(i) the termination of this Agreement by either FLCI or
USOL pursuant to Section 8.1(a)(iv) if (A) the
requisite votes of the stockholders of FLCI to
approve the Merger shall not have been obtained,
(B) a proposal for an Alternative Transaction (as
defined below) involving FLCI shall have been
publicly announced prior to the FLCI Stockholders'
Meeting, and (C) either a definitive agreement for
an Alternative Transaction involving FLCI is entered
into, or an Alternative Transaction involving FLCI
is consummated, within eighteen months of such
termination;
(ii) the termination of this Agreement by either FLCI or
USOL pursuant to Section 8.1(a)(iv) if (A) the
requisite vote of the stockholders of FLCI to
approve the Merger shall not have been obtained
because one or more of the stockholders party to
the Stockholder Support Agreements failed to
approve the Merger in breach of such agreement, and
(B) if such stockholder had voted for the Merger or
not otherwise breached, the Merger would have been
approved by the FLCI stockholders;
(iii) the termination of this Agreement by USOL pursuant
to Section 8.1(a)(vii); or
(iv) the termination of this Agreement by FLCI pursuant
to Section 8.1(b).
FLCI's payment of a termination fee pursuant to this subsection
shall be the sole and exclusive remedy of USOL against FLCI and any of its
subsidiaries and their respective directors, officers, employees, agents,
advisors or other representatives with respect to the occurrences giving
rise to such payment; provided that this limitation shall not apply in the
event of a willful breach of this Agreement by FLCI.
(d) The fees payable pursuant to Section 8.4(b) or 8.4(c)
shall be paid concurrently with the first to occur of the events described in
Section 8.4(b)(i) or (ii) or 8.4(c)(i), (ii), (iii) or (iv), respectively.
(e) As used in this Agreement, "Alternative Transaction"
means either (i) a transaction pursuant to which any third party acquires more
than 20% of the outstanding shares of USOL Stock or FLCI Stock, as the case
may be, pursuant to a stock purchase, tender offer or exchange offer or
otherwise, (ii) a merger or other business combination involving USOL or
FLCI pursuant to which any third party (or the stockholders of a third
party) acquires more than 20% of the outstanding shares of USOL Stock or
FLCI Stock, as the case may be, or the entity surviving such merger or
business combination, (iii) any other transaction pursuant to which any
third party acquires control of assets (including for this purpose the
outstanding equity securities of subsidiaries of USOL, and the entity
surviving any merger or business combination including any of them) of USOL
or FLCI having a fair market value (as determined by the Board of Directors
of USOL or FLCI, as the case may be, in good faith) equal to more than 20%
of the fair market value of all the assets of USOL or FLCI, as the case may
be, and their respective subsidiaries, taken as a whole, immediately prior
to such transaction.
ARTICLE IX
ARBITRATION; CONSENT TO JURISDICTION
9.1 Submission to Jurisdiction.
FLCI and USOL each hereby agree that any and all disputes, legal
actions, suits, or proceedings arising out of or relating to this Agreement
or the transactions contemplated hereby may be brought in any state or
federal court located in Portland, Oregon. By their signature to this
Agreement, FLCI and USOL each irrevocably submit to the jurisdiction of the
courts located in Portland, Oregon, in any dispute, legal action, suit, or
proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby.
9.2 Waiver of Immunity and Inconvenient Forum.
FLCI and USOL each hereby irrevocably waives all immunity from
jurisdiction, attachment and execution, whether on the basis of sovereignty
or otherwise, to which it might otherwise be entitled in any legal action
or proceeding brought in any state or federal court located in Portland,
Oregon, and further irrevocably waives, to the fullest extent permitted by
law, any objection which it may now or hereafter have to any dispute, legal
action, suit, or proceeding arising out of or relating to this Agreement or
the transactions contemplated hereby being brought in any federal or state
court located in Portland, Oregon, and hereby further irrevocably waives
any claim that any such dispute, legal action, suit, or proceeding brought
in any such court has been brought in an inconvenient forum.
9.3 Arbitration Procedures.
(a) All disputes arising in connection with this Agreement
or any contract of sale hereunder shall be finally settled by arbitration in
Portland, Oregon, in accordance with the International Arbitration Rules of
the American Arbitration Association (the "Rules of Arbitration").
Judgment on the award rendered by the arbitration panel (the "Arbitration
Panel") may be entered in any court of competent jurisdiction.
(b) Any party which desires to initiate arbitration pro-
ceedings may do so by delivering written notice to the other party (the
"Arbitration Notice") specifying (x) the nature of the dispute or controversy
to be arbitrated; (y) the name and address of the arbitrator appointed by the
party initiating such arbitration; and (z) such other matters as may be
required by the Rules of Arbitration. The party who receives an
Arbitration Notice shall appoint an arbitrator and notify the initiating
party of such arbitrator's name and address within 30 days after delivery
of the Arbitration Notice; otherwise, a second arbitrator shall be
appointed by the American Arbitration Association at the request of the
party who delivered the Arbitration Notice. The two arbitrators so
appointed shall appoint a third arbitrator who shall be chairman of the
Arbitration Panel and the "neutral arbitrator" for purposes of the Rules of
Arbitration.
9.4 Final Arbitration Decisions.
All decisions of the Arbitration Panel shall be final, conclusive
and binding on all parties and shall not be subject to judicial review. The
parties expressly waive the provisions of any state statute or regulation
that permits a party to an arbitration in which an award has been made to
petition a court of competent jurisdiction to vacate an arbitration award.
9.5 Claims for Unpaid Balance.
Notwithstanding anything to the contrary contained in this
Article IX, any claim by either party for a "provisional remedy" as defined
in Section 1281.8 of the Rules of Arbitration, may be brought in any court
of competent jurisdiction, and any judgment, order or decree relating thereto
shall have precedence over any arbitral award or proceeding.
ARTICLE X
GENERAL PROVISIONS
10.1 Attorney's Fees.
In any action at law or in equity or in any arbitration proceeding,
for declaratory relief or to enforce any of the provisions or rights or
obligations under this Agreement, the unsuccessful party to such
proceeding, shall pay the successful party or parties all statutorily
recoverable costs, expenses and reasonable attorneys' fees incurred by the
successful party or parties including without limitation costs, expenses,
and fees on any appeals and the enforcement of any award, judgment or
settlement obtained, such costs, expenses and attorneys' fees shall be
included as part of the judgment. The successful party shall be that party
who obtained substantially the relief or remedy sought, whether by
judgment, compromise, settlement or otherwise.
10.2 Effectiveness of Representations, Warranties and Agreements;
Knowledge, Etc.
Except as otherwise provided in this Section 10.2, the
representations, warranties and agreements of each party hereto shall
remain operative and in full force and effect regardless of any
investigation made by or on behalf of the other party hereto, any Person
controlling any such party or any of their respective officers or
directors, whether prior to or after the execution of this Agreement. The
representations, warranties and agreements in this Agreement shall
terminate at the Effective Time, except that the agreements set forth in
Sections 6.4, 6.5, 6.6, 6.8, 6.12, 6.13, 6.14 and 8.4 shall survive the
Effective Time. The Confidentiality/Standstill Agreement shall survive
termination of this Agreement as therein provided.
10.3 Notices.
(a) Any notice, communication, offer, acceptance, request,
consent, reply, or advice (herein severally and collectively, for
convenience, called "Notice"), in this Agreement provided or permitted to
be given, served, made, or accepted by any party or Person to any other
party or parties, Person or Persons, hereunder must be in writing,
addressed to the party to be notified at the address set forth below, or
such other address as to which one party notifies the other in writing
pursuant to the terms of this Section, and must be served by (1) telefax or
other similar electronic method, or (2) depositing the same in the United
States mail, certified, return receipt requested and postage paid to the
party or parties, Person or Persons to be notified or entitled to receive
same, or (3) delivering the same in Person to such party. Any party
receiving a facsimile transmission shall be entitled to rely upon a
facsimile transmission to the same extent as if it were the original.
(b) All notices and other communications given or made
pursuant hereto shall be deemed to have been given immediately when sent by
telefax and confirmed received or other electronic method or when personally
delivered in the manner hereinabove described, and seventy-two hours after
being deposited in the United States mail. Notice provided in any manner
not specified above shall be effective only if and when received by the
party or parties, person or persons to be, or provided to be notified.
(c) All notices, requests, demands, and other communications
required or permitted under this Agreement shall be addressed as set forth
below:
(i) If to FLCI:
FirstLink Communications, Inc.
190 SW Harrison
Portland, Oregon 97201
Telecopier No. (503) 306-4442
Attn: A. Roger Pease, President
With a copy to:
Neuman Drennen & Stone, LLC
5445 DTC Boulevard, PH-4
Englewood, CO 80111
Telecopier No. (303) 488-3454
Attention: David H. Drennen, Esq.
(ii) If to USOL:
USOL Holdings, Inc.
10300 Metric Boulevard
Austin, Texas 78758
Telecopier No. (512) 651-3768
Attn: Rob Solomon, Chief Executive Officer
With a copy to:
Jenkens & Gilchrist
600 Congress Avenue
Suite 2200
Austin, Texas 78701
Telecopier No. (512) 404-3520
Attention: J. Rowland Cook, Esq.
(iii) Copies to:
GMAC Commercial Mortgage Corporation
650 Drescher Road
Horsham, PA 19044
Attention: Dave E. Creamer
Foley & Lardner
One IBM Plaza
330 North Wabash Avenue
Suite 3300
Chicago, IL 60611-3608
Attention: Edwin D. Mason
Troop Steuber Pasich Reddick & Tobey, LLP
2029 Century Park East, 24th Floor
Los Angeles, CA 90067
Attention: Linda Giunta Michaelson
10.4 Amendment.
This Agreement may be amended by the parties hereto by action taken
by or on behalf of their respective Boards of Directors at any time prior to
the Effective Time; provided, however, that after approval of the Merger by
the stockholders of USOL and FLCI, no amendment may be made which by law
requires further approval by such stockholders without such further
approval. This Agreement may not be amended except by an instrument in
writing signed by USOL and FLCI.
10.5 Waiver.
At any time prior to the Effective Time, any party hereto may,
with respect to any other party hereto, (a) extend the time for the per-
formance of any of the obligations or other acts, (b) waive any inaccuracies
in the representations and warranties of the other party contained herein or
in any document delivered pursuant hereto, and (c) waive compliance by the
other party with any of the agreements or conditions contained herein. Any
such extension or waiver shall be valid only if set forth in an instrument
in writing signed by the party or parties to be bound thereby.
10.6 Severability.
If any term or other provision of this Agreement is held by a court
of competent jurisdiction to be invalid, illegal or incapable of being
enforced by any rule of law, or public policy, all other conditions and
provisions of this Agreement shall nevertheless remain in full force and
effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner adverse to any party.
Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate
in good faith to modify this Agreement so as to effect the original intent
of the parties as closely as possible in an acceptable manner to the end
that transactions contemplated hereby are fulfilled to the extent possible.
10.7 Assignment.
Neither party may directly or indirectly assign or delegate, by
operation of law or otherwise, all or any portion of its rights,
obligations or liabilities under this Agreement without the prior written
consent of the other party, which consent may be withheld at the other
party's sole and absolute discretion. Any purported assignment or
delegation without such consent shall be null and void.
For purposes of this Section, the term "Agreement" shall include
this Agreement and the exhibits, schedules, and other documents attached hereto
or described in this Section 10.7. This Agreement, and other documents
delivered pursuant to this Agreement, contain all of the terms and
conditions agreed upon by the parties relating to the subject matter of
this Agreement and supersede all prior and contemporaneous agreements,
letters of intent, representations, warranties, disclosures, negotiations,
correspondence, undertakings and communications of the parties, oral or
written, respecting that subject matter, including, without limitation, the
letter of intent dated May 3, 1999, among USOC, FLCI, and others, as
amended prior to the date hereof.
10.8 Parties in Interest.
This Agreement shall be binding upon and inure solely to the
benefit of each party hereto, and nothing in this Agreement (other than
Sections 6.5, 6.6 and 6.13), express or implied, is intended to or shall
confer upon any other person any right, benefit or remedy of any nature
whatsoever under or by reason of this Agreement.
10.9 Failure or Indulgence Not Waiver; Remedies Cumulative.
No failure or delay on the part of any party hereto in the
exercise of ny right hereunder shall impair such right or be construed to be a
waiver of, or acquiescence in, any breach by the other party of any
representation, warranty or agreement herein, nor shall any single or
partial exercise of any such right preclude other or further exercise
thereof or of any other right. All rights and remedies existing under this
Agreement are cumulative and in addition to, and not exclusive of, any
rights or remedies otherwise available.
10.10 Governing Law.
THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE INTERNAL LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO THE CHOICE OF
LAW PROVISIONS THEREOF.
10.11 Counterparts.
This Agreement may be executed in one or more counterparts, and by
the different parties hereto in separate counterparts, each of which when
executed shall be deemed to be an original but all of which taken together
shall constitute one and the same agreement. This Agreement shall become
binding when all counterparts taken together shall have been executed and
delivered by the parties. A telecopied facsimile of an executed
counterpart of this Agreement shall be sufficient to evidence the binding
agreement of each party to the terms hereof. However, each party agrees to
return to the other parties an originally executed counterpart of this
Agreement promptly after delivery of a telecopied facsimile thereof.
10.12 Captions.
The caption and heading of various sections and paragraphs of this
Agreement are for convenience only and are not to be construed as defining
or limiting, in any way, the scope or intent of the provisions hereof.
10.13 Time.
Time is of the essence with respect to this Agreement and each of
its provisions.
IN WITNESS WHEREOF, FLCI and USOL have caused this Agreement to be
executed as of the date first written above by their respective officers
thereunto duly authorized.
FirstLink Communications, Inc.
By:
---------------------------------
Name: A. Roger Pease
Title: President and Chief Executive
Officer
USOL Holdings, Inc.
By:
---------------------------------
Name: Rob Solomon
Title: President
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APPENDIX B
OREGON BUSINESS CORPORATION ACT
DISSENTERS' RIGHTS
(Right to Dissent and Obtain Payment for Shares)
60.551 Definitions for 60.551 to 60.594. As used in ORS 60.551 to 60.594:
(1) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(2) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger
or share exchange of that issuer.
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under ORS 60.554 and who exercises that right when and in
the manner required by ORS 60.561 to 60.587.
(4) "Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(5) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair
and equitable under all the circumstances.
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of
shares to the extent of the rights granted by a nominee certificate on file
with a corporation.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
60.554 Right to dissent. (1) Subject to subsection (2) of this section, a
shareholder is entitled to dissent from, and obtain payment of the fair
value of the shareholder's shares in the event of, any of the following
corporate acts:
(a) Consummation of a plan of merger to which the corporation is a party if
shareholder approval is required for the merger by ORS 60.487 or the
articles of incorporation and the shareholder is entitled to vote on the
merger or if the corporation is a subsidiary that is merged with its parent
under ORS 60.491;
(b) Consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired, if the shareholder
is entitled to vote on the plan;
(c) Consummation of a sale or exchange of all or substantially all of the
property of the corporation other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially
all of the net proceeds of the sale will be distributed to the shareholders
within one year after the date of sale;
(d) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
(A) Alters or abolishes a preemptive right of the holder of the shares to
acquire shares or other securities; or
(B) Reduces the number of shares owned by the shareholder to a fraction of
a share if the fractional share so created is to be acquired for cash under
ORS 60.141; or
(e) Any corporate action taken pursuant to a shareholder vote to the extent
the articles of incorporation, bylaws or a resolution of the board of
directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
(2) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under ORS 60.551 to 60.594 may not challenge the
corporate action creating the shareholder's entitlement unless the action
is unlawful or fraudulent with respect to the shareholder or the
corporation.
(3) Dissenters' rights shall not apply to the holders of shares of any
class or series if the shares of the class or series were registered on a
national securities exchange or quoted on the National Association of
Securities Dealers, Inc. Automated Quotation System as a National Market
System issue on the record date for the meeting of shareholders at which
the corporate action described in subsection (1) of this section is to be
approved or on the date a copy or summary of the plan of merger is mailed
to shareholders under ORS 60.491, unless the articles of incorporation
otherwise provide.
60.557 Dissent by nominees and beneficial owners. (1) A record shareholder
may assert dissenters' rights as to fewer than all the shares registered in
the shareholder's name only if the shareholder dissents with respect to all
shares beneficially owned by any one person and notifies the corporation in
writing of the name and address of each person on whose behalf the
shareholder asserts dissenters' rights. The rights of a partial dissenter
under this subsection are determined as if the shares regarding which the
shareholder dissents and the shareholder's other shares were registered in
the names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares
held on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder does so with respect to all shares of which
such shareholder is the beneficial shareholder or over which such
shareholder has power to direct the vote.
(Procedure for Exercise of Rights)
60.561 Notice of dissenters' rights. (1) If proposed corporate action
creating dissenters' rights under ORS 60.554 is submitted to a vote at a
shareholders' meeting, the meeting notice must state that shareholders are
or may be entitled to assert dissenters' rights under ORS 60.551 to 60.594
and be accompanied by a copy of ORS 60.551 to 60.594.
(2) If corporate action creating dissenters' rights under ORS 60.554 is
taken without a vote of shareholders, the corporation shall notify in
writing all shareholders entitled to assert dissenters' rights that the
action was taken and send the shareholders entitled to assert dissenters'
rights the dissenters' notice described in ORS 60.567.
60.564 Notice of intent to demand payment. (1) If proposed corporate action
creating dissenters' rights under ORS 60.554 is submitted to a vote at a
shareholders' meeting, a shareholder who wishes to assert dissenters'
rights shall deliver to the corporation before the vote is taken written
notice of the shareholder's intent to demand payment for the shareholder's
shares if the proposed action is effectuated and shall not vote such shares
in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection (1)
of this section is not entitled to payment for the shareholder's shares
under this chapter.
60.567 Dissenters' notice. (1) If proposed corporate action creating
dissenters' rights under ORS 60.554 is authorized at a shareholders'
meeting, the corporation shall deliver a written dissenters' notice to all
shareholders who satisfied the requirements of ORS 60.564.
(2) The dissenters' notice shall be sent no later than 10 days after the
corporate action was taken, and shall:
(a) State where the payment demand shall be sent and where and when
certificates for certificated shares shall be deposited;
(b) Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
(c) Supply a form for demanding payment that includes the date of the first
announcement of the terms of the proposed corporate action to news media or
to shareholders and requires that the person asserting dissenters' rights
certify whether or not the person acquired beneficial ownership of the
shares before that date;
(d) Set a date by which the corporation must receive the payment demand.
This date may not be fewer than 30 nor more than 60 days after the date the
subsection (1) of this section notice is delivered; and
(e) Be accompanied by a copy of ORS 60.551 to 60.594.
60.571 Duty to demand payment. (1) A shareholder sent a dissenters' notice
described in ORS 60.567 must demand payment, certify whether the
shareholder acquired beneficial ownership of the shares before the date
required to be set forth in the dissenters' notice pursuant to ORS
60.567(2)(c), and deposit the shareholder's certificates in accordance with
the terms of the notice.
(2) The shareholder who demands payment and deposits the shareholder's
shares under subsection (1) of this section retains all other rights of a
shareholder until these rights are canceled or modified by the taking of
the proposed corporate action.
(3) A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
chapter.
60.574 Share restrictions. (1) The corporation may restrict the transfer of
uncertificated shares from the date the demand for their payment is
received until the proposed corporate action is taken or the restrictions
released under ORS 60.581.
(2) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate
action.
60.577 Payment. (1) Except as provided in ORS 60.584, as soon as the
proposed corporate action is taken, or upon receipt of a payment demand,
the corporation shall pay each dissenter who complied with ORS 60.571, the
amount the corporation estimates to be the fair value of the shareholder's
shares, plus accrued interest.
(2) The payment must be accompanied by:
(a) The corporation's balance sheet as of the end of a fiscal year ending
not more than 16 months before the date of payment, an income statement for
that year and the latest available interim financial statements, if any;
(b) A statement of the corporation's estimate of the fair value of the
shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment under ORS
60.587; and
(e) A copy of ORS 60.551 to 60.594.
60.581 Failure to take action. (1) If the corporation does not take the
proposed action within 60 days after the date set for demanding payment and
depositing share certificates, the corporation shall return the deposited
certificates and release the transfer restrictions imposed on
uncertificated shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under ORS 60.567 and repeat the payment demand
procedure.
60.584 After-acquired shares. (1) A corporation may elect to withhold
payment required by ORS 60.577 from a dissenter unless the dissenter was
the beneficial owner of the shares before the date set forth in the
dissenters' notice as the date of the first announcement to news media or
to shareholders of the terms of the proposed corporate action.
(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed corporate action,
it shall estimate the fair value of the shares plus accrued interest and
shall pay this amount to each dissenter who agrees to accept it in full
satisfaction of such demand. The corporation shall send with its offer a
statement of its estimate of the fair value of the shares an explanation of
how the interest was calculated and a statement of the dissenter's right to
demand payment under ORS 60.587.
60.587 Procedure if shareholder dissatisfied with payment or offer. (1) A
dissenter may notify the corporation in writing of the dissenter's own
estimate of the fair value of the dissenter's shares and amount of interest
due, and demand payment of the dissenter's estimate, less any payment under
ORS 60.577 or reject the corporation's offer under ORS 60.584 and demand
payment of the dissenter's estimate of the fair value of the dissenter's
shares and interest due, if:
(a) The dissenter believes that the amount paid under ORS 60.577 or offered
under ORS 60.584 is less than the fair value of the dissenter's shares or
that the interest due is incorrectly calculated;
(b) The corporation fails to make payment under ORS 60.577 within 60 days
after the date set for demanding payment; or
(c) The corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within 60 days after the date set for
demanding payment.
(2) A dissenter waives the right to demand payment under this section
unless the dissenter notifies the corporation of the dissenter's demand in
writing under subsection (1) of this section within 30 days after the
corporation made or offered payment for the dissenter's shares.
(Judicial Appraisal of Shares)
60.591 Court action. (1) If a demand for payment under ORS 60.587 remains
unsettled, the corporation shall commence a proceeding within 60 days after
receiving the payment demand under ORS 60.587 and petition the court under
subsection (2) of this section to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding
within the 60-day period, it shall pay each dissenter whose demand remains
unsettled the amount demanded.
(2) The corporation shall commence the proceeding in the circuit court of
the county where a corporation's principal office is located, or if the
principal office is not in this state, where the corporation's registered
office is located. If the corporation is a foreign corporation without a
registered office in this state, it shall commence the proceeding in the
county in this state where the registered office of the domestic
corporation merged with or whose shares were acquired by the foreign
corporation was located.
(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled parties to the proceeding as in
an action against their shares. All parties must be served with a copy of
the petition. Nonresidents may be served by registered or certified mail or
by publication as provided by law.
(4) The jurisdiction of the circuit court in which the proceeding is
commenced under subsection (2) of this section is plenary and exclusive.
The court may appoint one or more persons as appraisers to receive evidence
and recommend decision on the question of fair value. The appraisers have
the powers described in the court order appointing them, or in any
amendment to the order. The dissenters are entitled to the same discovery
rights as parties in other civil proceedings.
(5) Each dissenter made a party to the proceeding is entitled to judgment
for:
(a) The amount, if any, by which the court finds the fair value of the
dissenter's shares, plus interest, exceeds the amount paid by the
corporation; or
(b) The fair value, plus accrued interest, of the dissenter's after-
acquired shares for which the corporation elected to withhold payment under
ORS 60.584.
60.594 Court costs and counsel fees. (1) The court in an appraisal
proceeding commenced under ORS 60.591 shall determine all costs of the
proceeding, including the reasonable compensation and expenses of
appraisers appointed by the court. The court shall assess the costs against
the corporation, except that the court may assess costs against all or some
of the dissenters, in amounts the court finds equitable, to the extent the
court finds the dissenters acted arbitrarily, vexatiously, or not in good
faith in demanding payment under ORS 60.587.
(2) The court may also assess the fees and expenses of counsel and experts
of the respective parties in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the
requirements of ORS 60.561 to 60.587; or
(b) Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses
are assessed acted arbitrarily, vexatiously or not in good faith with
respect to the rights provided by this chapter.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to counsel reasonable fees to be paid out of the amount
awarded the dissenters who were benefited.
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EXHIBIT C
AMENDMENT TO ARTICLES OF INCORPORATION
OF
FIRSTLINK COMMUNICATIONS, INC.
Article II of the Articles of Incorporation of the Corporation shall
be amended to read as follows:
ARTICLE II
2.1 The aggregate number of shares which the Corporation shall have
the authority to issue is Fifty-five Million (55,000,000) Shares. Of such
55,000,000 Shares, Fifty Million (50,000,000) shall be classified as common
stock, no par value ("Common Stock"), and Five Million (5,000,000) shall be
classified as preferred stock, no par value ("Preferred Stock"). All
shares of Common Stock and Preferred Stock when issued shall be
nonassessable and fully paid.
2.2. Shares of Preferred Stock may be issued from time to time in one
or more series as the Board of Directors of the Corporation may determine.
The Board of Directors is hereby authorized, by resolution or resolutions,
to provide from time to time, out of the unissued shares of Preferred Stock
not then allocated by any series of Preferred Stock, for one or more series
of the Preferred Stock. Before any shares of any such series of Preferred
Stock are issued, the Board of Directors shall fix and determine, by
resolution or resolutions, the number of shares in the series, and the
designations, preferences and relative, participating, optional or other
special rights, and the qualifications, limitations and restrictions
thereof. The Board of Directors may, at any time and from time to time, by
resolution or resolutions, increase or decrease the number of shares of any
series of Preferred Stock, to the extent permitted by law.
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EXHIBIT D
AMENDMENT TO ARTICLES OF INCORPORATION
OF
FIRSTLINK COMMUNICATIONS, INC.
Article I of the Articles of Incorporation of the Corporation
shall be amended to read in full as follows:
ARTICLE I
The name of the corporation is USOL Holdings, Inc.
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APPENDIX E
FIRSTLINK COMMUNICATIONS, Inc.
------------------------------
1999 INCENTIVE PLAN
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September 23, 1999
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TABLE OF CONTENTS
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Page
SECTION 1. DEFINITIONS 1
SECTION 2. SHARES OF STOCK SUBJECT TO THE PLAN 8
2.1 Maximum Number of Shares 8
2.2 Limitation of Shares 8
2.3 Description of Shares 9
2.4 Registration and Listing of Shares 9
SECTION 3. ADMINISTRATION OF THE PLAN 9
3.1 Committee 9
3.2 Duration, Removal, Etc. 10
3.3 Meetings and Actions of Committee 10
3.4 Committee's Powers 11
SECTION 4. ELIGIBILITY AND PARTICIPATION 11
4.1 Eligible Individuals 11
4.2 Grant of Awards 11
4.3 Date of Grant 11
4.4 Award Agreements 12
4.5 Limitation for Incentive Options 12
4.6 No Right to Award 12
SECTION 5. TERMS AND CONDITIONS OF OPTIONS 12
5.1 Number of Shares 12
5.2 Vesting 13
5.3 Expiration of Options 13
5.4 Exercise Price 13
5.5 Method of Exercise 13
5.6 Incentive Option Exercises 13
5.7 Medium and Time of Payment 13
5.8 Payment with Sale Proceeds 14
5.9 Payment of Taxes 14
5.10 Limitation on Aggregate Value of Shares That May Become
First Exercisable During Any Calendar Year Under an
Incentive Option 15
5.11 No Fractional Shares 15
5.12 Modification, Extension, and Renewal of
Options 15
5.13 Other Agreement Provisions 16
SECTION 6. STOCK APPRECIATION RIGHTS 16
6.1 Form of Right 16
6.2 Rights Related to Options 16
(a) Exercise and Transfer 16
(b) Value of Right 16
6.3 Right Without Option 17
(a) Number of Shares 17
(b) Vesting 17
(c) Expiration of Rights 17
(d) Value of Right 17
6.4 Limitations on Rights 17
6.5 Payment of Rights 17
6.6 Payment of Taxes 18
6.7 Other Agreement Provisions 18
SECTION 7. RESTRICTED STOCK AWARDS 18
7.1 Restrictions 19
(a) Transferability 19
(b) Conditions to Removal of Restrictions 19
(c) Legend 19
(d) Possession 19
(e) Other Conditions 19
7.2 Expiration of Restrictions 19
7.3 Rights as Shareholder 19
7.4 Payment of Taxes 20
7.5 Other Agreement Provisions 20
SECTION 8. AWARDS TO NON-EMPLOYEE DIRECTORS 20
8.1 Awards to Committee Members 20
8.2 Eligibility for Awards 20
SECTION 9. ADJUSTMENT PROVISIONS 20
9.1 Adjustment of Awards and Authorized Stock 20
9.2 Changes in Control 21
9.3 Restructuring Without Change in Control 22
9.4 Notice of Restructuring 24
SECTION 10. ADDITIONAL PROVISIONS 24
10.1 Termination of Employment 24
10.2 Other Loss of Eligibility - Non-Employees 25
10.3 Death 25
10.4 Disability 25
10.5 Leave of Absence 26
10.6 Transferability of Awards 26
10.7 Forfeiture and Restrictions on Transfer 26
10.8 Delivery of Certificates of Stock 27
10.9 Conditions to Delivery of Stock 27
10.10 Certain Directors and Officers 27
10.11 Securities Act Legend 28
10.12 Legend for Restrictions on Transfer 28
10.13 Rights as a Shareholder 29
10.14 Furnish Information 29
10.15 Obligation to Exercise 29
10.16 Adjustments to Awards 29
10.17 Remedies 29
10.18 Information Confidential 30
10.19 Consideration 30
SECTION 11. DURATION AND AMENDMENT OF PLAN 30
11.1 Duration 30
11.2 Amendment 30
SECTION 12. GENERAL 31
12.1 Application of Funds 31
12.2 Right of the Corporation and Subsidiaries to Terminate
Employment 31
12.3 No Liability for Good Faith Determinations 31
12.4 Other Benefits 31
12.5 Exclusion From Pension and Profit-Sharing
Compensation 31
12.6 Execution of Receipts and Releases 32
12.7 Unfunded Plan 32
12.8 No Guarantee of Interests 32
12.9 Payment of Expenses 32
12.10 Corporation Records 32
12.11 Information 33
12.12 No Liability of Corporation 33
12.13 Corporation Action 33
12.14 Severability 33
12.15 Notices 34
12.16 Successors 34
12.17 Headings 34
12.18 Governing Law 34
12.19 Word Usage 34
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FIRSTLINK COMMUNICATIONS, INC.
1999 INCENTIVE PLAN
SCOPE AND PURPOSE OF PLAN
FirstLink Communications, Inc., an Oregon corporation (the
"Corporation"), has adopted this 1999 Incentive Plan (the "Plan") to
provide for the granting of:
(a) Incentive Options (hereafter defined) to certain Key Employees
(hereafter defined);
(b) Nonstatutory Options (hereafter defined) to certain Key
Employees, Non-Employee Directors (hereafter defined) and other
Persons;
(c) Restricted Stock Awards (hereafter defined) to certain Key
Employees and other Persons; and
(d) Stock Appreciation Rights (hereafter defined) to certain Key
Employees and other Persons.
The purpose of the Plan is to provide an incentive for Key Employees
and directors of the Corporation or its Subsidiaries (hereafter defined) to
aid the Corporation in attracting able Persons to enter the service of the
Corporation and its Subsidiaries, to extend to them the opportunity to
acquire a proprietary interest in the Corporation so that they will apply
their best efforts for the benefit of the Corporation, and to remain in the
service of the Corporation or its Subsidiaries. This Plan has been adopted
by the Board of Directors and shareholders of the Corporation prior to the
registration of any securities of the Corporation under the Exchange Act
(hereafter defined) and accordingly amounts paid under the Plan are exempt
from the provisions of Section 162(m) of the Code (hereafter defined).
SECTION 1. DEFINITIONS
1.1 "Acquiring Person" means any Person other than the Corporation,
any Subsidiary of the Corporation, any employee benefit plan of the
Corporation or of a Subsidiary of the Corporation or of a corporation owned
directly or indirectly by the shareholders of the Corporation in
substantially the same proportions as their ownership of Stock of the
Corporation, or any trustee or other fiduciary holding securities under an
employee benefit plan of the Corporation or of a Subsidiary of the
Corporation or of a corporation owned directly or indirectly by the
shareholders of the Corporation in substantially the same proportions as
their ownership of Stock of the Corporation.
1.2 "Affiliate" means (a) any Person who is directly or indirectly
the beneficial owner of at least 10% of the voting power of the Voting
Securities or (b) any Person controlling, controlled by, or under common
control with the Company or any Person contemplated in clause (a) of this
Section 1.2.
1.3 "Award" means the grant of any form of Option, Restricted Stock
Award, or Stock Appreciation Right under the Plan, whether granted
individually, in combination, or in tandem, to a Holder pursuant to the
terms, conditions, and limitations that the Committee may establish in
order to fulfill the objectives of the Plan.
1.4 "Award Agreement" means the written agreement between the
Corporation and a Holder evidencing the terms, conditions, and limitations
of the Award granted to that Holder.
1.5 "Board of Directors" means the board of directors of the
Corporation.
1.6 "Business Day" means any day other than a Saturday, a Sunday,
or a day on which banking institutions in the State of Oregon are authorized
or obligated by law or executive order to close.
1.7 "Change in Control" means the event that is deemed to have
occurred if:
(a) any Acquiring Person is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Corporation representing fifty
percent or more of the combined voting power of the then outstanding
Voting Securities of the Corporation; or
(b) members of the Incumbent Board cease for any reason to
constitute at least a majority of the Board of Directors; or
(c) a public announcement is made of a tender or exchange
offer by any Acquiring Person for fifty percent or more of the
outstanding Voting Securities of the Corporation, and the Board
of Directors approves or fails to oppose that tender or exchange
offer in its statements in Schedule 14D-9 under the Exchange Act;
or
(d) the shareholders of the Corporation approve a merger or
consolidation of the Corporation with any other corporation or
partnership (or, if no such approval is required, the consumma-
tion of such a merger or consolidation of the Corporation), other
than a merger or consolidation that would result in the Voting
Securities of the Corporation outstanding immediately before the
consummation thereof continuing to represent (either by remaining
outstanding or by being converted into Voting Securities of the
surviving entity or of a parent of the surviving entity) a
majority of the combined voting power of the Voting Securities of
the surviving entity (or its parent) outstanding immediately
after that merger or consolidation; or
(e) the shareholders of the Corporation approve a plan of
complete liquidation of the Corporation or an agreement for the
sale or disposition by the Corporation of all or substantially
all the Corporation's assets (or, if no such approval is re-
quired, the consummation of such a liquidation, sale, or disposi-
tion in one transaction or series of related transactions) other
than a liquidation, sale, or disposition of all or substantially
all the Corporation's assets in one transaction or a series of
related transactions to a corporation owned directly or in-
directly by the shareholders of the Corporation in substantially
the same proportions as their ownership of Stock of the Corpora-
tion.
1.8 "Code" means the Internal Revenue Code of 1986, as amended.
1.9 "Committee" means the Committee, which Committee shall
administer this Plan and is further described under Section 3.
1.10 "Convertible Securities" means evidences of indebtedness,
shares of capital stock, or other securities that are convertible into or
exchangeable for shares of Stock, either immediately or upon the arrival of
a specified date or the happening of a specified event.
1.11 "Corporation" has the meaning given to it in the first
paragraph under "Scope and Purpose of Plan."
1.12 "Date of Grant" has the meaning given it in Section 4.3.
1.13 "Disability" has the meaning given it in Section 10.4.
1.14 "Effective Date" means September 23, 1999.
1.15 "Eligible Individuals" means (a) Key Employees, (b) Non-
Employee Directors only for purposes of Nonstatutory Options pursuant to
Section 8, (c) any other Person that the Committee designates as eligible for
an Award (other than for Incentive Options) because the Person performs, or
has performed, valuable services for the Corporation or any of its Subsi-
diaries (other than services in connection with the offer or sale of
securities in a capital-raising transaction) and the Committee determines
that the Person has a direct and significant effect on the financial
development of the Corporation or any of its Subsidiaries, and (d) any
transferee of an Award if the Award Agreement provides for transfer of the
Award and the Award is transferred in accordance with the terms of the Award
Agreement. Notwithstanding the foregoing provisions of this Section 1.15, to
ensure that the requirements of the fourth sentence of Section 3.1 are
satisfied, the Board of Directors may from time to time specify individuals
who shall not be eligible for the grant of Awards or equity securities under
any plan of the Corporation or its Affiliates. Nevertheless, the Board of
Directors may at any time determine that an individual who has been so
excluded from eligibility shall become eligible for grants of Awards and
grants of such other equity securities under any plans of the Corporation or
its Affiliates so long as that eligibility will not impair the Plan's
satisfaction of the conditions of Rule 16b-3.
1.16 "Employee" means any employee of the Corporation or of any of
its Subsidiaries, including officers and directors of the Corporation who are
also employees of the Corporation or of any of its Subsidiaries.
1.17 "Exchange Act" means the Securities Exchange Act of 1934 and
the rules and regulations promulgated thereunder, or any successor law, as it
may be amended from time to time.
1.18 "Exercise Notice" has the meaning given it in Section 5.5.
1.19 "Exercise Price" has the meaning given it in Section 5.4.
1.20 "Fair Market Value" means, for a particular day:
(a) If shares of Stock of the same class are listed or
admitted to unlisted trading privileges on any national or
regional securities exchange at the date of determining the Fair
Market Value, then the last reported sale price, regular way, on
the composite tape of that exchange on the last Business Day
before the date in question or, if no such sale takes place on
that Business Day, the average of the closing bid and asked
prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect
to securities listed or admitted to unlisted trading
privileges on that securities exchange; or
(b) If shares of Stock of the same class are not listed or
admitted to unlisted trading privileges as provided in Section
1.20(a) and sales prices for shares of Stock of the same class in
the over-the-counter market are reported by the National Associa-
tion of Securities Dealers, Inc. Automated Quotations, Inc.
("NASDAQ") National Market System (or such other system then in
use) at the date of determining the Fair Market Value, then the
last reported sales price so reported on the last Business Day
before the date in question or, if no such sale takes place on
that Business Day, the average of the high bid and low asked
prices so reported; or
(c) If shares of Stock of the same class are not listed or
admitted to unlisted trading privileges as provided in Section
1.20(a) and sales prices for shares of Stock of the same class
are not reported by the NASDAQ National Market System (or a
similar system then in use) as provided in Section 1.20(b), and
if bid and asked prices for shares of Stock of the same class in
the over-the-counter market are reported by NASDAQ (or, if not so
reported, by the National Quotation Bureau Incorporated) at the
date of determining the Fair Market Value, then the average of the
high bid and low asked prices on the last Business Day before the
date in question; or
(d) If shares of Stock of the same class are not listed or
admitted to unlisted trading privileges as provided in Section 1.20(a)
and sales prices or bid and asked prices therefor are not reported by
NASDAQ (or the National Quotation Bureau Incorporated) as provided in
Section 1.20(b) or Section 1.20(c) at the date of determining the Fair
Market Value, then the value determined in good faith by the
Committee, which determination shall be conclusive for all purposes;
or
(e) If shares of Stock of the same class are listed or admitted
to unlisted trading privileges as provided in Section 1.20(a) or sales
prices or bid and asked prices therefor are reported by NASDAQ (or the
National Quotation Bureau Incorporated) as provided in Section 1.20(b)
or Section 1.20(c) at the date of determining the Fair Market Value,
but the volume of trading is so low that the Board of Directors
determines in good faith that such prices are not indicative of the
fair value of the Stock, then the value determined in good faith by
the Committee, which determination shall be conclusive for all
purposes notwithstanding the provisions of Sections 1.20(a), (b), or
(c).
For purposes of valuing Incentive Options, the Fair Market Value of Stock
shall be determined without regard to any restriction other than one that,
by its terms, will never lapse. For purposes of the redemption provided
for in Section 9.3(d)(v), Fair Market Value shall have the meaning and
shall be determined as set forth above; provided, however, that the
Committee, with respect to any such redemption, shall have the right to
determine that the Fair Market Value for purposes of the redemption should
be an amount measured by the value of the shares of Stock, other
securities, cash, or property otherwise being received by holders of shares
of Stock in connection with the Restructuring and upon that determination
the Committee shall have the power and authority to determine Fair Market
Value for purposes of the redemption based upon the value of such shares of
stock, other securities, cash, or property. Any such determination by the
Committee, as evidenced by a resolution of the Committee, shall be
conclusive for all purposes.
1.21 "Fiscal Year" means the fiscal year of the Corporation ending on
December of each year.
1.22 "Holder" means an Eligible Individual to whom an outstanding
Award has been granted, or, pursuant to the terms of the Award Agreement,
the permitted transferee of a Holder.
1.23 "Incumbent Board" means the individuals who, as of the Effective
Date, constitute the Board of Directors and any other individual who
becomes a director of the Corporation after that date and whose election or
appointment by the Board of Directors or nomination for election by the
Corporation's shareholders was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board.
1.24 "Incentive Option" means an incentive stock option as defined
under Section 422 of the Code and regulations thereunder.
1.25 "Key Employee" means any Employee whom the Committee identifies
as having a direct and significant effect on the performance of the
Corporation or any of its Subsidiaries.
1.26 "Non-Employee Director" means a director of the Corporation who
while a director is not an Employee.
1.27 "Nonstatutory Option" means a stock option that does not satisfy
the requirements of Section 422 of the Code or that is designated at the
Date of Grant or in the applicable Award Agreement to be an option other
than an Incentive Option.
1.28 "Non-Surviving Event" means an event of Restructuring as
described in either Section 1.35(b) or Section 1.35(c).
1.29 "Normal Retirement" means the separation of the Holder from
employment with the Corporation and its Subsidiaries with the right to
receive an immediate benefit under a retirement plan approved by the
Corporation. If no such plan exists, Normal Retirement shall mean
separation of the Holder from employment with the Corporation and its
Subsidiaries at age 62 or later.
1.30 "Option" means either an Incentive Option or a Nonstatutory
Option, or both.
1.31 "Person" means any person or entity of any nature whatsoever,
specifically including (but not limited to) an individual, a firm, a
company, a corporation, a partnership, a trust, or other entity. A Person,
together with that Person's affiliates and associates (as "affiliate" and
"associate" are defined in Rule 12b-2 under the Exchange Act for purposes
of this definition only), and any Persons acting as a partnership, limited
partnership, joint venture, association, syndicate, or other group (whether
or not formally organized), or otherwise acting jointly or in concert or in
a coordinated or consciously parallel manner (whether or not pursuant to
any express agreement), for the purpose of acquiring, holding, voting, or
disposing of securities of the Corporation with that Person, shall be
deemed a single "Person."
1.32 "Plan" means the Corporation's 1999 Incentive Plan, as it may be
amended or restated from time to time.
1.33 "Restricted Stock" means Stock that is nontransferable or subject
to substantial risk of forfeiture until specific conditions are met.
1.34 "Restricted Stock Award" means the grant or purchase, on the
terms and conditions of Section 7 or that the Committee otherwise
determines, of Restricted Stock.
1.35 "Restructuring" means the occurrence of any one or more of the
following:
(a) The merger or consolidation of the Corporation with any
Person, whether effected as a single transaction or a series of
related transactions, with the Corporation remaining the continuing or
surviving entity of that merger or consolidation and the Stock
remaining outstanding and not changed into or exchanged for stock or
other securities of any other Person or of the Corporation, cash, or
other property;
(b) The merger or consolidation of the Corporation with any
Person, whether effected as a single transaction or a series of
related transactions, with (i) the Corporation not being the
continuing or surviving entity of that merger or consolidation or (ii)
the Corporation remaining the continuing or surviving entity of that
merger or consolidation but all or a part of the outstanding shares of
Stock are changed into or exchanged for stock or other securities of
any other Person or the Corporation, cash, or other property; or
(c) The transfer, directly or indirectly, of all or
substantially all of the assets of the Corporation (whether by sale,
merger, consolidation, liquidation, or otherwise) to any Person,
whether effected as a single transaction or a series of related
transactions.
1.36 "Rule 16b-3" means Rule 16b-3 under Section 16(b) of the Exchange
Act as adopted in Exchange Act Release No. 34-37260 (May 31, 1996), or any
successor rule, as it may be amended from time to time.
1.37 "Securities Act" means the Securities Act of 1933 and the rules
and regulations promulgated thereunder, or any successor law, as it may be
amended from time to time.
1.38 "Stock" means the common stock, $0.001 par value per share, of
the Corporation, or any other securities that are substituted for the Stock
as provided in Section 9.
1.39 "Stock Appreciation Right" means the right to receive an amount
equal to the excess of the Fair Market Value of a share of Stock (as
determined on the date of exercise) over, as appropriate, the Exercise
Price of a related Option or the Fair Market Value of the Stock on the Date
of Grant of the Stock Appreciation Right.
1.40 "Subsidiary" means, with respect to any Person, any corporation,
or other entity of which a majority of the Voting Securities is owned,
directly or indirectly, by that Person.
1.41 "Total Shares" has the meaning given it in Section 9.2.
1.42 "Voting Securities" means any securities that are entitled to
vote generally in the election of directors, in the admission of general
partners or in the selection of any other similar governing body.
SECTION 2. SHARES OF STOCK SUBJECT TO THE PLAN
2.1 Maximum Number of Shares. Subject to the provisions of Section
2.2 and Section 9, the aggregate number of shares of Stock that may be
issued or transferred pursuant to Awards under the Plan shall be 3,000,000;
provided, however, such number of shares shall be increased automatically
upon the Company's issuance of additional shares of Stock so that the
number of shares of Stock that may be issued or transferred pursuant to
Awards under the Plan equals 10% of the total number of issued and
outstanding shares of Stock as of such time.
2.2 Limitation of Shares. For purposes of the limitations specified
in Section 2.1, the following principles shall apply:
(a) the following shall count against and decrease the number of
shares of Stock that may be issued for purposes of Section 2.1: (i)
shares of Stock subject to outstanding Options, outstanding shares of
Restricted Stock, and shares subject to outstanding Stock Appreciation
Rights granted independent of Options (based on a good faith estimate
by the Corporation or the Committee of the maximum number of shares
for which the Stock Appreciation Right may be settled (assuming
payment in full in shares of Stock)), and (ii) in the case of Options
granted in tandem with Stock Appreciation Rights, the greater of the
number of shares of Stock that would be counted if one or the other
alone was outstanding (determined as described in clause (i) above);
(b) the following shall be added back to the number of shares of
Stock that may be issued for purposes of Section 2.1: (i) shares of
Stock with respect to which Options, Stock Appreciation Rights granted
independent of Options, or Restricted Stock Awards expire, are
cancelled, or otherwise terminate without being exercised, converted,
or vested, as applicable, and (ii) in the case of Options granted in
tandem with Stock Appreciation Rights, shares of Stock as to which an
Option has been surrendered in connection with the exercise of a
related ("tandem") Stock Appreciation Right, to the extent the number
surrendered exceeds the number issued upon exercise of the Stock
Appreciation Right; provided that, in any case, the holder of such
Awards did not receive any dividends or other benefits of ownership
with respect to the underlying shares being added back, other than
voting rights and the accumulation (but not payment) of dividends of
Stock;
(c) shares of Stock subject to Stock Appreciation Rights granted
independent of Options (calculated as provided in clause (a) above)
that are exercised and paid in cash shall be added back to the number
of shares of Stock that may be issued for purposes of Section 2.1,
provided that the Holder of such Stock Appreciation Right did not
receive any dividends or other benefits of ownership, other than
voting rights and the accumulation (but not payment) of dividends, of
the shares of Stock subject to the Stock Appreciation Right;
(d) shares of Stock that are transferred by a Holder of an Award
(or withheld by the Corporation) as full or partial payment to the
Corporation of the purchase price of shares of Stock subject to an
Option or the Corporation's or any Subsidiary's tax withholding
obligations shall not be added back to the number of shares of Stock
that may be issued for purposes of Section 2.1 and shall not again be
subject to Awards; and
(e) if the number of shares of Stock counted against the number
of shares that may be issued for purposes of Section 2.1 is based upon
an estimate made by the Corporation or the Committee as provided in
clause (a) above and the actual number of shares of Stock issued
pursuant to the applicable Award is greater or less than the estimated
number, then, upon such issuance, the number of shares of Stock that
may be issued pursuant to Section 2.1 shall be further reduced by the
excess issuance or increased by the shortfall, as applicable.
Notwithstanding the provisions of this Section 2.2, no Stock shall be
treated as issuable under the Plan to Eligible Individuals subject to
Section 16 of the Exchange Act if otherwise prohibited from issuance under
Rule 16b-3.
2.3 Description of Shares. The shares to be delivered under the Plan
shall be made available from (a) authorized but unissued shares of Stock,
(b) Stock held in the treasury of the Corporation, or (c) previously issued
shares of Stock reacquired by the Corporation, including shares purchased
on the open market, in each situation as the Board of Directors or the
Committee may determine from time to time at its sole option.
2.4 Registration and Listing of Shares. From time to time, the Board
of Directors and appropriate officers of the Corporation shall and are
authorized to take whatever actions are necessary to file required
documents with governmental authorities, stock exchanges, and other
appropriate Persons to make shares of Stock available for issuance pursuant
to the exercise of Awards.
SECTION 3. ADMINISTRATION OF THE PLAN
3.1 Committee. The Committee shall administer the Plan with respect
to all Eligible Individuals who are subject to Section 16(b) of the
Exchange Act (other than members of the Committee), but shall not have the
power to appoint members of the Committee or to terminate, modify, or amend
the Plan. The full Board of Directors shall administer the Plan with
respect to all members of the Committee. Except for references in Sections
3.1, 3.2 and 3.3, and unless the context otherwise requires, references
herein to the Committee shall also refer to the Board of Directors as
administrator of the Plan for members of the Committee. The Committee shall
be constituted so that, as long as Stock is registered under Section 12 of
the Exchange Act, each member of the Committee shall be a Non-Employee
Director and so that the Plan in all other applicable respects will qualify
transactions related to the Plan for the exemptions from Section 16(b) of
the Exchange Act provided by Rule 16b-3, to the extent exemptions
thereunder may be available. The number of Persons that shall constitute
the Committee shall be determined from time to time by a majority of all
the members of the Board of Directors and, unless that majority of the
Board of Directors determines otherwise or Rule 16b-3 is amended to require
otherwise, shall be no less than two Persons. The Board of Directors may
designate the Compensation Committee of the Board of Directors to serve as
the Committee hereunder. To the extent that Rule 16b-3 promulgated under
the Exchange Act requires a system of administration that is different from
this Section 3.1, this Section 3.1 shall automatically be deemed amended to
the extent necessary to cause it to be in compliance with Rule 16b-3.
3.2 Duration, Removal, Etc. The members of the Committee shall serve
at the discretion of the Board of Directors, which shall have the power, at
any time and from time to time, to remove members from or add members to
the Committee. Removal from the Committee may be with or without cause.
Any individual serving as a member of the Committee shall have the right to
resign from membership in the Committee by at least three days' written
notice to the Board of Directors. The Board of Directors, and not the
remaining members of the Committee, shall have the power and authority to
fill all vacancies on the Committee. The Board of Directors shall promptly
fill any vacancy that causes the number of members of the Committee to be
below two or any other number that Rule 16b-3 may require from time to
time.
3.3 Meetings and Actions of Committee. The Board of Directors shall
designate which of the Committee members shall be the chairman of the
Committee. If the Board of Directors fails to designate a Committee
chairman, the members of the Committee shall elect one of the Committee
members as chairman, who shall act as chairman until he ceases to be a
member of the Committee or until the Board of Directors elects a new
chairman. The Committee shall hold its meetings at those times and places
as the chairman of the Committee may determine. At all meetings of the
Committee, a quorum for the transaction of business shall be required and a
quorum shall be deemed present if at least a majority of the members of the
Committee are present. At any meeting of the Committee, each member shall
have one vote. All decisions and determinations of the Committee shall be
made by the majority vote or majority decision of all of its members
present at a meeting at which a quorum is present; provided, however, that
any decision or determination reduced to writing and signed by all of the
members of the Committee shall be as fully effective as if it had been made
at a meeting that was duly called and held. The Committee may make any
rules and regulations for the conduct of its business that are not
inconsistent with the provisions of the Plan, the Articles or Certificate
of Incorporation of the Corporation, the bylaws of the Corporation, and
Rule 16b-3 so long as it is applicable, as the Committee may deem
advisable.
3.4 Committee's Powers. Subject to the express provisions of the Plan
and Rule 16b-3, the Committee shall have the authority, in its sole and
absolute discretion, to (a) adopt, amend, and rescind administrative and
interpretive rules and regulations relating to the Plan; (b) determine the
Eligible Individuals to whom, and the time or times at which, Awards shall
be granted; (c) determine the amount of cash and the number of shares of
Stock, Stock Appreciation Rights, or Restricted Stock Awards, or any
combination thereof, that shall be the subject of each Award; (d) determine
the terms and provisions of each Award Agreement (which need not be
identical), including provisions defining or otherwise relating to (i) the
term and the period or periods and extent of exercisability of the Options,
(ii) the extent to which the transferability of shares of Stock issued or
transferred pursuant to any Award is restricted, (iii) the effect of
termination of employment of the Holder on the Award, and (iv) the effect
of approved leaves of absence (consistent with any applicable regulations
of the Internal Revenue Service); (e) accelerate, pursuant to Section 9,
the time of exercisability of any Option that has been granted; (f)
construe the respective Award Agreements and the Plan; (g) make
determinations of the Fair Market Value of the Stock pursuant to the Plan;
(h) delegate its duties under the Plan to such agents as it may appoint
from time to time, provided that the Committee may not delegate its duties
with respect to making Awards to, or otherwise with respect to Awards
granted to, Eligible Individuals who are subject to Section 16(b) of the
Exchange Act; and (i) make all other determinations, perform all other
acts, and exercise all other powers and authority necessary or advisable
for administering the Plan, including the delegation of those ministerial
acts and responsibilities as the Committee deems appropriate. Subject to
Rule 16b-3, the Committee may correct any defect, supply any omission, or
reconcile any inconsistency in the Plan, in any Award, or in any Award
Agreement in the manner and to the extent it deems necessary or desirable
to carry the Plan into effect, and the Committee shall be the sole and
final judge of that necessity or desirability. The determinations of the
Committee on the matters referred to in this Section 3.4 shall be final and
conclusive.
SECTION 4. ELIGIBILITY AND PARTICIPATION
4.1 Eligible Individuals. Awards may be granted pursuant to the Plan
only to Persons who are Eligible Individuals at the time of the grant
thereof.
4.2 Grant of Awards. Subject to the express provisions of the Plan,
the Committee shall determine which Eligible Individuals shall be granted
Awards from time to time. In making grants, the Committee shall take into
consideration the contribution the potential Holder has made or may make to
the success of the Corporation or its Subsidiaries and such other
considerations as the Board of Directors may from time to time specify.
The Committee shall also determine the number of shares subject to each of
the Awards and shall authorize and cause the Corporation to grant Awards in
accordance with those determinations.
4.3 Date of Grant. The date on which the Committee completes all
action resolving to offer an Award to an individual, including the
specification of the number of shares of Stock to be subject to the Award,
shall be the date on which the Award covered by an Award Agreement is
granted (the "Date of Grant"), even though certain terms of the Award
Agreement may not be determined at that time and even though the Award
Agreement may not be executed until a later time. In no event shall a
Holder gain any rights in addition to those specified by the Committee in
its grant, regardless of the time that may pass between the grant of the
Award and the actual execution of the Award Agreement by the Corporation
and the Holder.
4.4 Award Agreements. Each Award granted under the Plan shall be
evidenced by an Award Agreement that is executed by the Corporation and the
Eligible Individual to whom the Award is granted and incorporating those
terms that the Committee shall deem necessary or desirable. More than one
Award may be granted under the Plan to the same Eligible Individual and be
outstanding concurrently. In the event an Eligible Individual is granted
both one or more Incentive Options and one or more Nonstatutory Options,
those grants shall be evidenced by separate Award Agreements, one for each
of the Incentive Option grants and one for each of the Nonstatutory Option
grants.
4.5 Limitation for Incentive Options. Notwithstanding any provision
contained herein to the contrary, (a) a Person shall not be eligible to
receive an Incentive Option unless he is an Employee of the Corporation or
a corporate Subsidiary (but not a partnership Subsidiary) and (b) a Person
shall not be eligible to receive an Incentive Option if, immediately before
the time the Option is granted, that Person owns (within the meaning of
Sections 422 and 424(d) of the Code) stock possessing more than ten percent
of the total combined voting power or value of all classes of outstanding
stock of the Corporation or a Subsidiary. Nevertheless, Section 4.5(b)
shall not apply if, at the time the Incentive Option is granted, the
Exercise Price of the Incentive Option is at least one hundred ten percent
of Fair Market Value and the Incentive Option is not, by its terms,
exercisable after the expiration of five years from the Date of Grant.
4.6 No Right to Award. The adoption of the Plan shall not be deemed
to give any Person a right to be granted an Award.
SECTION 5. TERMS AND CONDITIONS OF OPTIONS
All Options granted under the Plan shall comply with, and the related
Award Agreements shall be deemed to include and be subject to, the terms
and conditions set forth in this Section 5 (to the extent each term and
condition applies to the form of Option) and also to the terms and
conditions set forth in Sections 9 and 10; provided, however, that the
Committee may authorize an Award Agreement that expressly contains terms
and provisions that differ from the terms and provisions set forth in
Sections 9.2, 9.3, and 9.4 and any of the terms and provisions of Section
10 (other than Sections 10.9 and 10.10).
5.1 Number of Shares. Each Award Agreement shall state the total
number of shares of Stock to which it relates.
5.2 Vesting. Each Award Agreement shall state the time or periods in
which, or the conditions upon satisfaction of which, the right to exercise
the Option or a portion thereof shall vest and the number of shares of
Stock for which the right to exercise the Option shall vest at each such
time, period, or fulfillment of condition.
5.3 Expiration of Options. No Option shall be exercised after the
expiration of a period of ten years commencing on the Date of Grant of the
Option; provided, however, that any portion of a Nonstatutory Option that
pursuant to the terms of the Award Agreement under which such Nonstatutory
Option is granted shall not become exercisable until the date which is the
tenth anniversary of the Date of Grant of such Nonstatutory Option may be
exercisable for a period of 30 days following the date on which such
portion becomes exercisable.
5.4 Exercise Price. Each Award Agreement shall state the exercise
price per share of Stock (the "Exercise Price"); provided, however, that
the exercise price per share of Stock subject to an Incentive Option shall
not be less than the greater of (a) the par value per share of the Stock or
(b) 100% of the Fair Market Value per share of the Stock on the Date of
Grant of the Option.
5.5 Method of Exercise. The Option shall be exercisable only by
written notice of exercise (the "Exercise Notice") delivered to the
Corporation during the term of the Option, which notice shall (a) state the
number of shares of Stock with respect to which the Option is being
exercised, (b) be signed by the Holder of the Option or, if the Holder is
dead or becomes affected by a Disability, by the Person authorized to
exercise the Option pursuant to Sections 10.3 and 10.4, (c) be accompanied
by the Exercise Price for all shares of Stock for which the Option is being
exercised, and (d) include such other information, instruments, and
documents as may be required to satisfy any other condition to exercise
contained in the Award Agreement. The Option shall not be deemed to have
been exercised unless all of the requirements of the preceding provisions
of this Section 5.5 have been satisfied.
5.6 Incentive Option Exercises. Except as otherwise provided in
Section 10.4 or in the Award Agreement, during the Holder's lifetime, only
the Holder may exercise an Incentive Option.
5.7 Medium and Time of Payment. The Exercise Price of an Option shall
be payable in full upon the exercise of the Option (a) in cash or by an
equivalent means acceptable to the Committee, (b) on the Committee's prior
consent, with shares of Stock owned by the Holder (including shares
received upon exercise of the Option or restricted shares already held by
the Holder) and having a Fair Market Value at least equal to the aggregate
Exercise Price payable in connection with such exercise, or (c) by any
combination of clauses (a) and (b). If the Committee elects to accept
shares of Stock in payment of all or any portion of the Exercise Price,
then (for purposes of payment of the Exercise Price) those shares of Stock
shall be deemed to have a cash value equal to their aggregate Fair Market
Value determined as of the date the certificate for such shares is
delivered to the Corporation. If the Committee elects to accept shares of
restricted Stock in payment of all or any portion of the Exercise Price,
then an equal number of shares issued pursuant to the exercise shall be
restricted on the same terms and for the restriction period remaining on
the shares used for payment.
5.8 Payment with Sale Proceeds. In addition, at the request of the
Holder and to the extent permitted by applicable law, the Committee may
(but shall not be required to) approve arrangements with a brokerage firm
under which that brokerage firm, on behalf of the Holder, shall pay to the
Corporation the Exercise Price of the Option being exercised and the
Corporation shall promptly deliver the exercised shares of Stock to the
brokerage firm. To accomplish this transaction, the Holder must deliver to
the Corporation an Exercise Notice containing irrevocable instructions from
the Holder to the Corporation to deliver the Stock certificates
representing the shares of Stock directly to the broker. Upon receiving a
copy of the Exercise Notice acknowledged by the Corporation, the broker
shall sell that number of shares of Stock or loan the Holder an amount
sufficient to pay the Exercise Price and any withholding obligations due.
The broker then shall deliver to the Corporation that portion of the sale
or loan proceeds necessary to cover the Exercise Price and any withholding
obligations due. The Committee shall not approve any transaction of this
nature if the Committee believes that the transaction would give rise to
the Holder's liability for short-swing profits under Section 16(b) of the
Exchange Act.
5.9 Payment of Taxes. The Committee may, in its discretion, require a
Holder to pay to the Corporation (or the Corporation's Subsidiary if the
Holder is an employee of a Subsidiary of the Corporation), at the time of
the exercise of an Option or thereafter, the amount that the Committee
deems necessary to satisfy the Corporation's or its Subsidiary's current or
future obligation to withhold federal, state, or local income or other
taxes that the Holder incurs by exercising an Option. In connection with
the exercise of an Option requiring tax withholding, a Holder may (a)
direct the Corporation to withhold from the shares of Stock to be issued to
the Holder the number of shares necessary to satisfy the Corporation's
obligation to withhold taxes, that determination to be based on the shares'
Fair Market Value as of the date of exercise; (b) deliver to the
Corporation sufficient shares of Stock (based upon the Fair Market Value as
of the date of such delivery) to satisfy the Corporation's tax withholding
obligations, which tax withholding obligation is based on the shares' Fair
Market Value as of the later of the date of exercise or the date as of
which the shares of Stock issued in connection with such exercise become
includible in the income of the Holder; or (c) deliver sufficient cash to
the Corporation to satisfy its tax withholding obligations. Holders who
elect to use such a Stock withholding feature must make the election at the
time and in the manner that the Committee prescribes. The Committee may,
at its sole option, deny any Holder's request to satisfy withholding
obligations through Stock instead of cash. In the event the Committee
subsequently determines that the aggregate Fair Market Value (as determined
above) of any shares of Stock withheld or delivered as payment of any tax
withholding obligation is insufficient to discharge that tax withholding
obligation, then the Holder shall pay to the Corporation, immediately upon
the Committee's request, the amount of that deficiency in the form of
payment requested by the Committee.
5.10 Limitation on Aggregate Value of Shares That May Become First
Exercisable During Any Calendar Year Under an Incentive Option. Except as
is otherwise provided in Section 9.3, with respect to any Incentive Option
granted under this Plan, the aggregate Fair Market Value of shares of Stock
subject to an Incentive Option and the aggregate Fair Market Value of
shares of Stock or stock of any Subsidiary (or a predecessor of the
Corporation or a Subsidiary) subject to any other incentive stock option
(within the meaning of Section 422 of the Code) of the Corporation or its
Subsidiaries (or a predecessor corporation of any such corporation) that
first become purchasable by a Holder in any calendar year may not (with
respect to that Holder) exceed $100,000, or such other amount as may be
prescribed under Section 422 of the Code or applicable regulations or
rulings from time to time. As used in the previous sentence, Fair Market
Value shall be determined as of the Date of Grant of the Incentive Option.
For purposes of this Section 5.10, "predecessor corporation" means (a) a
corporation that was a party to a transaction described in Section 424(a)
of the Code (or which would be so described if a substitution or assumption
under that Section had been effected) with the Corporation, (b) a
corporation which, at the time the new incentive stock option (within the
meaning of Section 422 of the Code) is granted, is a Subsidiary of the
Corporation or a predecessor corporation of any such corporations, or (c) a
predecessor corporation of any such corporations. Failure to comply with
this provision shall not impair the enforceability or exercisability of any
Option, but shall cause the excess amount of shares to be reclassified in
accordance with the Code.
5.11 No Fractional Shares. The Corporation shall not in any case be
required to sell, issue, or deliver a fractional share with respect to any
Option. In lieu of the issuance of any fractional share of Stock, the
Corporation shall pay to the Holder an amount in cash equal to the same
fraction (as the fractional Stock) of the Fair Market Value of a share of
Stock determined as of the date of the applicable Exercise Notice.
5.12 Modification, Extension, and Renewal of Options. Subject to the
terms and conditions of and within the limitations of the Plan, Rule 16b-3,
and any consent required by the last sentence of this Section 5.12, the
Committee may (a) modify, extend, or renew outstanding Options granted
under the Plan, (b) accept the surrender of Options outstanding hereunder
(to the extent not previously exercised) and authorize the granting of new
Options in substitution for outstanding Options (to the extent not
previously exercised), and (c) amend the terms of an Incentive Option at
any time to include provisions that have the effect of changing the
Incentive Option to a Nonstatutory Option. Nevertheless, without the
consent of the Holder, the Committee may not modify any outstanding Options
so as to specify a higher or lower Exercise Price or accept the surrender
of outstanding Incentive Options and authorize the granting of new Options
in substitution therefor specifying a higher or lower Exercise Price. In
addition, no modification of an Option granted hereunder shall, without the
consent of the Holder, alter or impair any rights or obligations under any
Option theretofore granted to such Holder under the Plan except, with
respect to Incentive Options, as may be necessary to satisfy the
requirements of Section 422 of the Code or as permitted in clause (c) of
this Section 5.12.
5.13 Other Agreement Provisions. The Award Agreements relating to
Options shall contain such provisions in addition to those required by the
Plan (including without limitation restrictions or the removal of
restrictions upon the exercise of the Option and the retention or transfer
of shares thereby acquired) as the Committee may deem advisable. Each
Award Agreement shall identify the Option evidenced thereby as an Incentive
Option or Nonstatutory Option, as the case may be, and no Award Agreement
shall cover both an Incentive Option and a Nonstatutory Option. Each Award
Agreement relating to an Incentive Option granted hereunder shall contain
such limitations and restrictions upon the exercise of the Incentive Option
to which it relates as shall be necessary for the Incentive Option to which
such Award Agreement relates to constitute an incentive stock option, as
defined in Section 422 of the Code.
SECTION 6. STOCK APPRECIATION RIGHTS
All Stock Appreciation Rights granted under the Plan shall comply
with, and the related Award Agreements shall be deemed to include and be
subject to, the terms and conditions set forth in this Section 6 (to the
extent each term and condition applies to the form of Stock Appreciation
Right) and also the terms and conditions set forth in Sections 9 and 10;
provided, however, that the Committee may authorize an Award Agreement
related to a Stock Appreciation Right that expressly contains terms and
provisions that differ from the terms and provisions set forth in Sections
9.2, 9.3, and 9.4 and any of the terms and provisions of Section 10 (other
than Sections 10.9 and 10.10).
6.1 Form of Right. A Stock Appreciation Right may be granted to an
Eligible Individual (a) in connection with an Option, either at the time of
grant or at any time during the term of the Option, or (b) independent of
an Option.
6.2 Rights Related to Options. A Stock Appreciation Right granted
pursuant to an Option shall entitle the Holder, upon exercise, to surrender
that Option or any portion thereof, to the extent unexercised, and to
receive payment of an amount computed pursuant to Section 6.2(b). That
Option shall then cease to be exercisable to the extent surrendered. Stock
Appreciation Rights granted in connection with an Option shall be subject
to the terms of the Award Agreement governing the Option, which shall
comply with the following provisions in addition to those applicable to
Options:
(a) Exercise and Transfer. Subject to Section 10.9, a Stock
Appreciation Right granted in connection with an Option shall be
exercisable only at such time or times and only to the extent that the
related Option is exercisable and shall not be transferable except to
the extent that the related Option is transferable.
(b) Value of Right. Upon the exercise of a Stock Appreciation
Right related to an Option, the Holder shall be entitled to receive
payment from the Corporation of an amount determined by multiplying:
i) The difference obtained by subtracting the Exercise
Price of a share of Stock specified in the related Option from
the Fair Market Value of a share of Stock on the date of exercise
of the Stock Appreciation Right, by
ii) The number of shares as to which that Stock
Appreciation Right has been exercised.
6.3 Right Without Option. A Stock Appreciation Right granted
independent of an Option shall be exercisable as determined by the
Committee and set forth in the Award Agreement governing the Stock
Appreciation Right, which Award Agreement shall comply with the following
provisions:
(a) Number of Shares. Each Award Agreement shall state the total
number of shares of Stock to which the Stock Appreciation Right
relates.
(b) Vesting. Each Award Agreement shall state the time or
periods in which the right to exercise the Stock Appreciation Right or
a portion thereof shall vest and the number of shares of Stock for
which the right to exercise the Stock Appreciation Right shall vest at
each such time or period.
(c) Expiration of Rights. Each Award Agreement shall state the
date at which the Stock Appreciation Rights shall expire if not
previously exercised.
(d) Value of Right. Each Stock Appreciation Right shall entitle
the Holder, upon exercise thereof, to receive payment of an amount
determined by multiplying:
i) The difference obtained by subtracting the Fair Market
Value of a share of Stock on the Date of Grant of the Stock
Appreciation Right from the Fair Market Value of a share of Stock
on the date of exercise of that Stock Appreciation Right, by
ii) The number of shares as to which the Stock Appreciation
Right has been exercised.
6.4 Limitations on Rights. Notwithstanding Sections 6.2(b) and
6.3(d), the Committee may limit the amount payable upon exercise of a Stock
Appreciation Right. Any such limitation must be determined as of the Date
of Grant and be noted on the Award Agreement evidencing the Holder's Stock
Appreciation Right.
6.5 Payment of Rights. Payment of the amount determined under Section
6.2(b) or 6.3(d) and Section 6.4 may be made, in the sole discretion of the
Committee unless specifically provided otherwise in the Award Agreement,
solely in whole shares of Stock valued at Fair Market Value on the date of
exercise of the Stock Appreciation Right, solely in cash, or in a
combination of cash and whole shares of Stock. If the Committee decides to
make full payment in shares of Stock and the amount payable results in a
fractional share, payment for the fractional share shall be made in cash.
6.6 Payment of Taxes. The Committee may, in its discretion, require a
Holder to pay to the Corporation (or the Corporation's Subsidiary if the
Holder is an employee of a Subsidiary of the Corporation), at the time of
the exercise of a Stock Appreciation Right or thereafter, the amount that
the Committee deems necessary to satisfy the Corporation's or its
Subsidiary's current or future obligation to withhold federal, state, or
local income or other taxes that the Holder incurs by exercising a Stock
Appreciation Right. In connection with the exercise of a Stock
Appreciation Right requiring tax withholding, a Holder may (a) direct the
Corporation to withhold from the shares of Stock to be issued to the Holder
the number of shares necessary to satisfy the Corporation's obligation to
withhold taxes, that determination to be based on the shares' Fair Market
Value as of the date of exercise; (b) deliver to the Corporation sufficient
shares of Stock (based upon the Fair Market Value as of the date of such
delivery) to satisfy the Corporation's tax withholding obligations, which
tax withholding obligation is based on the shares' Fair Market Value as of
the later of the date of exercise or the date as of which the shares of
Stock issued in connection with such exercise become includible in the
income of the Holder; or (c) deliver sufficient cash to the Corporation to
satisfy its tax withholding obligations. Holders who elect to have Stock
withheld pursuant to (a) or (b) above must make the election at the time
and in the manner that the Committee prescribes. The Committee may, in its
sole discretion, deny any Holder's request to satisfy withholding
obligations through Stock instead of cash. In the event the Committee
subsequently determines that the aggregate Fair Market Value (as determined
above) of any shares of Stock withheld or delivered as payment of any tax
withholding obligation is insufficient to discharge that tax withholding
obligation, then the Holder shall pay to the Corporation, immediately upon
the Committee's request, the amount of that deficiency in the form of
payment requested by the Commission.
6.7 Other Agreement Provisions. The Award Agreements relating to
Stock Appreciation Rights shall contain such provisions in addition to
those required by the Plan (including without limitation restrictions or
the removal of restrictions upon the exercise of the Stock Appreciation
Right and the retention or transfer of shares thereby acquired) as the
Committee may deem advisable.
SECTION 7. RESTRICTED STOCK AWARDS
All Restricted Stock Awards granted under the Plan shall comply with
and be subject to, and the related Award Agreements shall be deemed to
include, the terms and conditions set forth in this Section 7 and also to
the terms and conditions set forth in Sections 9 and 10; provided, however,
that the Committee may authorize an Award Agreement related to a Restricted
Stock Award that expressly contains terms and provisions that differ from
the terms and provisions set forth in Sections 9.2, 9.3, and 9.4 and the
terms and provisions set forth in Section 10 (other than Sections 10.9 and
10.10).
7.1 Restrictions. All shares of Restricted Stock Awards granted or
sold pursuant to the Plan shall be subject to the following conditions:
(a) Transferability. The shares may not be sold, transferred, or
otherwise alienated or hypothecated until the restrictions are removed
or expire.
(b) Conditions to Removal of Restrictions. Conditions to removal
or expiration of the restrictions may include, but are not required to
be limited to, continuing employment or service as a director,
officer, or Key Employee or achievement of performance objectives
described in the Award Agreement.
(c) Legend. Each certificate representing Restricted Stock
Awards granted pursuant to the Plan shall bear a legend making
appropriate reference to the restrictions imposed.
(d) Possession. The Committee may require the Corporation to
retain physical custody of the certificates representing Restricted
Stock Awards during the restriction period and may require the Holder
of the Award to execute stock powers in blank for those certificates
and deliver those stock powers to the Corporation, or the Committee
may require the Holder to enter into an escrow agreement providing
that the certificates representing Restricted Stock Awards granted or
sold pursuant to the Plan shall remain in the physical custody of an
escrow holder until all restrictions are removed or expire.
(e) Other Conditions. The Committee may impose other conditions
on any shares granted or sold as Restricted Stock Awards pursuant to
the Plan as it may deem advisable, including without limitation (i)
restrictions under the Securities Act or Exchange Act, (ii) the
requirements of any securities exchange upon which the shares or
shares of the same class are then listed, and (iii) any state
securities law applicable to the shares.
7.2 Expiration of Restrictions. The restrictions imposed in Section
7.1 on Restricted Stock Awards shall lapse as determined by the Committee
and set forth in the applicable Award Agreement, and the Corporation shall
promptly deliver to the Holder of the Restricted Stock Award a certificate
representing the number of shares for which restrictions have lapsed, free
of any restrictive legend relating to the lapsed restrictions. Each
Restricted Stock Award may have a different restriction period as
determined by the Committee in its sole discretion. The Committee may, in
its discretion, prospectively reduce the restriction period applicable to a
particular Restricted Stock Award.
7.3 Rights as Shareholder. Subject to the provisions of Sections 7.1
and 10.10, the Committee may, in its discretion, determine what rights, if
any, the Holder shall have with respect to the Restricted Stock Awards
granted or sold, including the right to vote the shares and receive all
dividends and other distributions paid or made with respect thereto.
7.4 Payment of Taxes. The Committee may, in its discretion, require a
Holder to pay to the Corporation (or the Corporation's Subsidiary if the
Holder is an employee of a Subsidiary of the Corporation) the amount that
the Committee deems necessary to satisfy the Corporation's or its
Subsidiary's current or future obligation to withhold federal, state, or
local income or other taxes that the Holder incurs by reason of the
Restricted Stock Award. The Holder may (a) direct the Corporation to
withhold from the shares of Stock to be issued to the Holder the number of
shares necessary to satisfy the Corporation's obligation to withhold taxes,
that determination to be based on the shares' Fair Market Value as of the
date on which tax withholding is to be made; (b) deliver to the Corporation
sufficient shares of Stock (based upon the Fair Market Value as of the date
of such delivery) to satisfy the Corporation's tax withholding obligations,
which tax withholding obligation is based on the shares' Fair Market Value
as of the later of the date of issuance or the date as of which the shares
of Stock issued become includible in the income of the Holder; or (c)
deliver sufficient cash to the Corporation to satisfy its tax withholding
obligations. Holders who elect to have Stock withheld pursuant to (a) or
(b) above must make the election at the time and in the manner that the
Committee prescribes. The Committee may, in its sole discretion, deny any
Holder's request to satisfy withholding obligations through Stock instead
of cash. In the event the Committee subsequently determines that the
aggregate Fair Market Value (as determined above) of any shares of Stock
withheld or delivered as payment of any tax withholding obligation is
insufficient to discharge that tax withholding obligation, then the Holder
shall pay to the Corporation, immediately upon the Committee's request, the
amount of that deficiency.
7.5 Other Agreement Provisions. The Award Agreements relating to
Restricted Stock Awards shall contain such provisions in addition to those
required by the Plan as the Committee may deem advisable.
SECTION 8. AWARDS TO NON-EMPLOYEE DIRECTORS
8.1 Awards to Committee Members. The full Board of Directors shall
determine the number of Awards to be granted to members of the Committee,
the Exercise Price and the vesting schedule thereof.
8.2 Eligibility for Awards. Non-Employee Directors shall be eligible
to receive any Awards under the Plan other than an Award of an Incentive
Option.
SECTION 9. ADJUSTMENT PROVISIONS
9.1 Adjustment of Awards and Authorized Stock. The terms of an Award
and the number of shares of Stock authorized pursuant to Section 2.1 and
Section 8 for issuance under the Plan shall be subject to adjustment from
time to time, in accordance with the following provisions:
(a) If at any time, or from time to time, the Corporation shall
subdivide as a whole (by reclassification, by a Stock split, by the
issuance of a distribution on Stock payable in Stock, or otherwise)
the number of shares of Stock then outstanding into a greater number
of shares of Stock, then (i) the maximum number of shares of Stock
available for the Plan as provided in Section 2.1 shall be increased
proportionately, and the kind of shares or other securities available
for the Plan shall be appropriately adjusted, (ii) the number of
shares of Stock (or other kind of shares or securities) that may be
acquired under any Award shall be increased proportionately, and
(iii) the price (including Exercise Price) for each share of Stock (or
other kind of shares or securities) subject to then outstanding Awards
shall be reduced proportionately, without changing the aggregate
purchase price or value as to which outstanding Awards remain
exercisable or subject to restrictions.
(b) If at any time, or from time to time, the Corporation shall
consolidate as a whole (by reclassification, reverse Stock split, or
otherwise) the number of shares of Stock then outstanding into a
lesser number of shares of Stock, then (i) the maximum number of
shares of Stock available for the Plan as provided in Section 2.1
shall be decreased proportionately, and the kind of shares or other
securities available for the Plan shall be appropriately adjusted,
(ii) the number of shares of Stock (or other kind of shares or
securities) that may be acquired under any Award shall be decreased
proportionately, and (iii) the price (including Exercise Price) for
each share of Stock (or other kind of shares or securities) subject to
then outstanding Awards shall be increased proportionately, without
changing the aggregate purchase price or value as to which outstanding
Awards remain exercisable or subject to restrictions.
(c) Whenever the number of shares of Stock subject to
outstanding Awards and the price for each share of Stock subject to
outstanding Awards are required to be adjusted as provided in this
Section 9.1, the Committee shall promptly prepare a notice setting
forth, in reasonable detail, the event requiring adjustment, the
amount of the adjustment, the method by which such adjustment was
calculated, and the change in price and the number of shares of Stock,
other securities, cash, or property purchasable subject to each Award
after giving effect to the adjustments. The Committee shall promptly
give each Holder such a notice.
(d) Adjustments under Sections 9(a) and (b) shall be made by the
Committee, and its determination as to what adjustments shall be made
and the extent thereof shall be final, binding, and conclusive. No
fractional interest shall be issued under the Plan on account of any
such adjustments.
9.2 Changes in Control. Any Award Agreement may provide that, upon
the occurrence of a Change in Control, one or more of the following apply:
(a) each Holder of an Option shall immediately be granted corresponding
Stock Appreciation Rights; (b) all outstanding Stock Appreciation Rights
and Options shall immediately become fully vested and exercisable in full,
including that portion of any Stock Appreciation Right or Option that
pursuant to the terms and provisions of the applicable Award Agreement had
not yet become exercisable (the total number of shares of Stock as to which
a Stock Appreciation Right or Option is exercisable upon the occurrence of
a Change in Control is referred to herein as the "Total Shares"); and (c)
the restriction period of any Restricted Stock Award shall immediately be
accelerated and the restrictions shall expire. An Award Agreement does not
have to provide for any of the foregoing. If a Change in Control involves
a Restructuring or occurs in connection with a series of related
transactions involving a Restructuring and if such Restructuring is in the
form of a Non-Surviving Event and as a part of such Restructuring shares of
stock, other securities, cash, or property shall be issuable or deliverable
in exchange for Stock, then the Holder of an Award shall be entitled to
purchase or receive (in lieu of the Total Shares that the Holder would
otherwise be entitled to purchase or receive), as appropriate for the form
of Award, the number of shares of Stock, other securities, cash, or
property to which that number of Total Shares would have been entitled in
connection with such Restructuring (and, for Options, at an aggregate
exercise price equal to the Exercise Price that would have been payable if
that number of Total Shares had been purchased on the exercise of the
Option immediately before the consummation of the Restructuring). Nothing
in this Section 9.2 shall impose on a Holder the obligation to exercise any
Award immediately before or upon the Change in Control, or cause a Holder
to forfeit the right to exercise the Award during the remainder of the
original term of the Award because of a Change in Control; provided,
however, in connection with any Non-Surviving Event, the relevant merger
agreement, purchase agreement or similar agreement pursuant to which such
transaction occurs may contain provisions by which all outstanding Awards
may, without the consent of the Holders thereof, be converted into the
right to receive, in cash, an amount that would fairly reflect the value of
such Award giving due consideration to (i) the Exercise Price of any Award
in the form of an Option or the value to be given by the Holder with
respect to any other Award and (ii) the consideration payable pursuant to
the transaction with respect to a share of outstanding Stock.
9.3 Restructuring Without Change in Control. In the event a
Restructuring shall occur at any time while there is any outstanding Award
hereunder and the Restructuring does not occur in connection with a Change
in Control or a series of related transactions involving a Change in
Control, then:
(a) no outstanding Option or Stock Appreciation Right shall
immediately become fully vested and exercisable in full merely because
of the occurrence of the Restructuring;
(b) no Holder of an Option shall automatically be granted
corresponding Stock Appreciation Rights;
(c) the restriction period of any Restricted Stock Award shall
not immediately be accelerated and the restrictions expire merely
because of the occurrence of the Restructuring; and
(d) at the option of the Committee, the Committee may (but shall
not be required to) cause the Corporation to take any one or more of
the following actions:
i) accelerate in whole or in part the time of the vesting
and exercisability of any one or more of the outstanding Stock
Appreciation Rights and Options so as to provide that those Stock
Appreciation Rights and Options shall be exercisable before,
upon, or after the consummation of the Restructuring;
ii) grant each Holder of an Option corresponding Stock
Appreciation Rights;
iii) accelerate in whole or in part the expiration of some
or all of the restrictions on any Restricted Stock Award;
iv) if the Restructuring is in the form of a Non-Surviving
Event, cause the surviving entity to assume in whole or in part
any one or more of the outstanding Awards upon such terms and
provisions as the Committee deems desirable; or
v) redeem in whole or in part any one or more of the
outstanding Awards (whether or not then exercisable) in
consideration of a cash payment, as such payment may be reduced
for tax withholding obligations as contemplated in Sections 5.9,
6.6, or 7.4, as applicable, in an amount equal to:
(A) for Options and Stock Appreciation Rights granted
in connection with Options, the excess of (1) the Fair
Market Value, determined as of the date immediately
preceding the consummation of the Restructuring, of the
aggregate number of shares of Stock subject to the Award and
as to which the Award is being redeemed over (2) the
Exercise Price for that number of shares of Stock;
(B) for Stock Appreciation Rights not granted in
connection with an Option, the excess of (1) the Fair Market
Value, determined as of the date immediately preceding the
consummation of the Restructuring, of the aggregate number
of shares of Stock subject to the Award and as to which the
Award is being redeemed over (2) the Fair Market Value of
that number of shares of Stock on the Date of Grant; and
(C) for Restricted Stock Awards, the Fair Market
Value, determined as of the date immediately preceding the
consummation of the Restructuring, of the aggregate number
of shares of Stock subject to the Award and as to which the
Award is being redeemed.
The Corporation shall promptly notify each Holder of any election or action
taken by the Corporation under this Section 9.3. In the event of any
election or action taken by the Corporation pursuant to this Section 9.3
that requires the amendment or cancellation of any Award Agreement as may
be specified in any notice to the Holder thereof, that Holder shall
promptly deliver that Award Agreement to the Corporation in order for that
amendment or cancellation to be implemented by the Corporation and the
Committee. The failure of the Holder to deliver any such Award Agreement
to the Corporation as provided in the preceding sentence shall not in any
manner affect the validity or enforceability of any action taken by the
Corporation and the Committee under this Section 9.3, including without
limitation any redemption of an Award as of the consummation of a
Restructuring. Any cash payment to be made by the Corporation pursuant to
this Section 9.3 in connection with the redemption of any outstanding
Awards shall be paid to the Holder thereof currently with the delivery to
the Corporation of the Award Agreement evidencing that Award; provided,
however, that any such redemption shall be effective upon the consummation
of the Restructuring notwithstanding that the payment of the redemption
price may occur subsequent to the consummation. If all or any portion of an
outstanding Award is to be exercised or accelerated upon or after the
consummation of a Restructuring that does not occur in connection with a
Change in Control and is in the form of a Non-Surviving Event, and as a
part of that Restructuring shares of stock, other securities, cash, or
property shall be issuable or deliverable in exchange for Stock, then the
Holder of the Award shall thereafter be entitled to purchase or receive (in
lieu of the number of shares of Stock that the Holder would otherwise be
entitled to purchase or receive) the number of shares of Stock, other
securities, cash, or property to which such number of shares of Stock would
have been entitled in connection with the Restructuring (and, for Options,
upon payment of the aggregate exercise price equal to the Exercise Price
that would have been payable if that number of Total Shares had been
purchased on the exercise of the Option immediately before the consummation
of the Restructuring) and such Award shall be subject to adjustments that
shall be as nearly equivalent as may be practical to the adjustments
provided for in this Section 9.
9.4 Notice of Restructuring. The Corporation shall attempt to keep
all Holders informed with respect to any Restructuring or of any potential
Restructuring to the same extent that the Corporation's shareholders are
informed by the Corporation of any such event or potential event.
SECTION 10. ADDITIONAL PROVISIONS
10.1 Termination of Employment. If a Holder is an Eligible Individual
because the Holder is an Employee and if that employment relationship is
terminated for any reason other than (a) that Holder's death or (b) that
Holder's Disability (hereafter defined), then any and all Awards held by
such Holder in such Holder's capacity as an Employee as of the date of the
termination that are not yet exercisable (or for which restrictions have
not lapsed) shall become null and void as of the date of such termination;
provided, however, that the portion, if any, of such Awards that are
exercisable as of the date of termination shall be exercisable for a period
of the lesser of (a) the remainder of the term of the Award or (b) the date
which is 30 days following the date of termination. Any portion of an
Award not exercised upon the expiration of the lesser of the periods
specified above shall be null and void unless the Holder dies during such
period, in which case the provisions of Section 10.3 shall govern.
10.2 Other Loss of Eligibility - Non-Employees. If a Holder is an
Eligible Individual because the Holder is serving in a capacity other than
as an Employee and if that capacity is terminated for any reason other than
the Holder's death or Disability, then that portion, if any, of any and all
Awards held by the Holder that were granted because of that capacity which
are not yet exercisable (or for which restrictions have not lapsed) as of
the date of the termination shall become null and void as of the date of
the termination; provided, however, that the portion, if any, of any and
all Awards held by the Holder that are then exercisable as of the date of
the termination shall be exercisable for a period of the lesser of (a) the
remainder of the term of the Award or (b) 30 days following the date such
capacity is terminated. If a Holder is an Eligible Individual because the
Holder is serving in a capacity other than as an Employee and if that
capacity is terminated by reason of the Holder's death or Disability, then
the portion, if any, of any and all Awards held by the Holder that are not
yet exercisable (or for which restrictions have not lapsed) as of the date
of termination for death or Disability shall become exercisable (and the
restrictions thereon, if any, shall lapse) and all such Awards held by that
Holder as of the date of termination that are exercisable (either as a
result of this sentence or otherwise) shall be exercisable for a period of
the lesser of (a) the remainder of the term of the Award or (b) the date
which is 30 days following the date of termination. Any portion of an
Award not exercised upon the expiration of the periods specified in (a) or
(b) of the preceding two sentences shall be null and void upon the
expiration of such period, as applicable.
10.3 Death. Upon the death of a Holder, any and all Awards held by the
Holder that are not then exercisable (or for which restrictions have not
lapsed) shall become immediately exercisable (and any restrictions shall
immediately lapse) and such Awards shall be exercisable by that Holder's
legal representatives, heirs, legatees, or distributees for a period of 90
days following the date of the Holder's death unless the Award Agreement
specifies a longer period of time. Any portion of an Award not exercised
upon the expiration of such period shall be null and void. Except as
expressly provided in this Section 10.3, no Award held by a Holder shall be
exercisable after the death of that Holder.
10.4 Disability. If a Holder is an Eligible Individual because the
Holder is an Employee and if that employment relationship is terminated by
reason of the Holder's Disability, then the portion, if any, of any and all
Awards held by the Holder that are not then exercisable (or for which
restrictions have not lapsed) shall become immediately exercisable (and any
restrictions shall immediately lapse) and such Awards shall be exercisable
by the Holder, his guardian or his legal representative for a period of 90
days following the date of such termination except as otherwise provided
below. Any portion of an Award not exercised upon the expiration of such
period shall be null and void unless the Holder dies during such period, in
which event the provisions of Section 10.3 shall govern. "Disability" shall
have the meaning given it in the employment agreement of the Holder;
provided, however, that if the Holder has no employment agreement defining
such term, "Disability" shall mean, as determined by the Board of Directors
in the sole discretion exercised in good faith of the Board of Directors, a
physical or mental impairment of sufficient severity that either the Holder
is unable to continue performing the duties he performed before such
impairment or the Holder's condition entitles him to disability benefits
under any insurance or employee benefit plan of the Corporation or its
Subsidiaries and that impairment or condition is cited by the Corporation
as the reason for termination of the Holder's employment. Notwithstanding
the foregoing, in the event the Holder is permanently and totally disabled
so that he is unable to engage in any substantial gainful activity by
reason of any medically determinable physical or mental impairment which
can be expected to result in death or which has lasted or can be expected
to last for a continuous period of not less than 12 months, and the Holder
furnishes proof of the existence thereof in such form and manner, and at
such time, as the Internal Revenue Service may require, then the Holder
shall have one year from the date of termination within which to exercise
such Awards.
10.5 Leave of Absence. With respect to an Award, the Committee may, in
its sole discretion, determine that any Holder who is on leave of absence
for any reason will be considered to still be in the employ of the
Corporation or any of its Subsidiaries, as applicable, for any or all
purposes of the Plan and the Award Agreement of such Holder.
10.6 Transferability of Awards. In addition to such other terms and
conditions as may be included in a particular Award Agreement, an Award
requiring exercise shall be exercisable during a Holder's lifetime only by
that Holder or by that Holder's guardian or legal representative. An Award
requiring exercise shall not be transferable other than (i) by will or the
laws of descent and distribution, or (ii) in accordance with the terms of
the Award Agreement.
10.7 Forfeiture and Restrictions on Transfer. Each Award Agreement may
contain or otherwise provide for conditions giving rise to the forfeiture
of the Stock acquired pursuant to an Award or otherwise and may also
provide for those restrictions on the transferability of shares of the
Stock acquired pursuant to an Award or otherwise that the Committee in its
sole and absolute discretion may deem proper or advisable. The conditions
giving rise to forfeiture may include, but need not be limited to, the
requirement that the Holder render substantial services to the Corporation
or its Subsidiaries for a specified period of time. The restrictions on
transferability may include, but need not be limited to, options and rights
of first refusal in favor of the Corporation and shareholders of the
Corporation other than the Holder of such shares of Stock who is a party to
the particular Award Agreement or a subsequent Holder of the shares of
Stock who is bound by that Award Agreement.
10.8 Delivery of Certificates of Stock. Subject to Section 10.9, the
Corporation shall promptly issue and deliver a certificate representing the
number of shares of Stock as to which (a) an Option has been exercised
after the Corporation receives an Exercise Notice and upon receipt by the
Corporation of the Exercise Price and any tax withholding as may be
requested, (b) a Stock Appreciation Right has been exercised (to the extent
the Committee determines to pay such Stock Appreciation Right in shares of
Stock pursuant to Section 6.5) and upon receipt by the Corporation of any
tax withholding as may be requested, and (c) restrictions have lapsed with
respect to a Restricted Stock Award and upon receipt by the Corporation of
any tax withholding as may be requested. The value of the shares of Stock
or cash transferable because of an Award under the Plan shall not bear any
interest owing to the passage of time, except as may be otherwise provided
in an Award Agreement. If a Holder is entitled to receive certificates
representing Stock received for more than one form of Award under the Plan,
separate Stock certificates shall be issued with respect to Incentive
Options and Nonstatutory Options.
10.9 Conditions to Delivery of Stock. Nothing herein or in any Award
granted hereunder or any Award Agreement shall require the Corporation to
issue any shares with respect to any Award if that issuance would, in the
opinion of counsel for the Corporation, constitute a violation of the
Securities Act or any similar or superseding statute or statutes, any other
applicable statute or regulation, or the rules of any applicable securities
exchange or securities association, as then in effect. At the time of any
exercise of an Option or Stock Appreciation Right, or at the time of any
grant of a Restricted Stock Award, the Corporation may, as a condition
precedent to the exercise of such Option or Stock Appreciation Right or
vesting of any Restricted Stock Award, require from the Holder of the Award
(or in the event of his death, his legal representatives, heirs, legatees,
or distributees) such written representations, if any, concerning the
Holder's intentions with regard to the retention or disposition of the
shares of Stock being acquired pursuant to the Award and such written
covenants and agreements, if any, as to the manner of disposal of such
shares as, in the opinion of counsel to the Corporation, may be necessary
to ensure that any disposition by that Holder (or in the event of the
Holder's death, his legal representatives, heirs, legatees, or
distributees) will not involve a violation of the Securities Act or any
similar or superseding statute or statutes, any other applicable state or
federal statute or regulation, or any rule of any applicable securities
exchange or securities association, as then in effect.
10.10 Certain Directors and Officers. With respect to Holders who
are directors or officers of the Corporation or any of its Subsidiaries and
who are subject to Section 16(b) of the Exchange Act, Awards and all rights
under the Plan shall be exercisable during the Holder's lifetime only by
the Holder or the Holder's guardian or legal representative, but not for at
least six months after grant, unless (a) the Board of Directors expressly
authorizes that an Award shall be exercisable before the expiration of the
six-month period or (b) the death or Disability of the Holder occurs before
the expiration of the six-month period. In addition, no such officer or
director shall exercise any Stock Appreciation Right or have shares of
Stock withheld to pay tax withholding obligations within the first six
months of the term of an Award. Any election by any such officer or
director to have tax withholding obligations satisfied by the withholding
of shares of Stock shall be irrevocable and shall be communicated to the
Committee during the period beginning on the third day following the date
of release of quarterly or annual summary statements of sales and earnings
and ending on the twelfth business day following such date (the "Window
Period") or by an irrevocable election communicated to the Committee at
least six months before the date of exercise of the Award for which such
withholding is desired. Any election by an officer or director to receive
cash in full or partial settlement of a Stock Appreciation Right, as well
as any exercise by such individual of a Stock Appreciation Right for cash,
in either case to the extent permitted under the applicable Award Agreement
or otherwise permitted by the Committee, shall be made during the Window
Period or within any other periods that the Committee shall specify from
time to time.
10.11 Securities Act Legend. Certificates for shares of Stock,
when issued, may have the following legend, or statements of other
applicable restrictions (including, without limitation, restrictions
required under any federal, state or foreign law), endorsed thereon and may
not be immediately transferable:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
STATE SECURITIES LAWS. THE SHARES MAY NOT BE OFFERED FOR SALE,
SOLD, PLEDGED, TRANSFERRED, OR OTHERWISE DISPOSED OF UNTIL THE
HOLDER HEREOF PROVIDES EVIDENCE SATISFACTORY TO THE ISSUER
(WHICH, IN THE DISCRETION OF THE ISSUER, MAY INCLUDE AN OPINION
OF COUNSEL SATISFACTORY TO THE ISSUER) THAT SUCH OFFER, SALE,
PLEDGE, TRANSFER, OR OTHER DISPOSITION WILL NOT VIOLATE
APPLICABLE FEDERAL OR STATE LAWS.
This legend shall not be required for shares of Stock issued pursuant to an
effective registration statement under the Securities Act.
10.12 Legend for Restrictions on Transfer. Each certificate
representing shares issued to a Holder pursuant to an Award granted under
the Plan shall, if such shares are subject to any transfer restriction,
including a right of first refusal, provided for under this Plan or an
Award Agreement, bear a legend that complies with applicable law with
respect to the restrictions on transferability contained in this Section
10.12, such as:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO RESTRICTIONS ON TRANSFERABILITY IMPOSED BY THAT CERTAIN
INSTRUMENT ENTITLED "FIRSTLINK COMMUNICATIONS, INC. 1999
INCENTIVE PLAN" AS ADOPTED BY THE CORPORATION, AND AN AGREEMENT
THEREUNDER BETWEEN THE CORPORATION AND THE INITIAL HOLDER THEREOF
DATED ________________, 199__, AND MAY NOT BE TRANSFERRED, SOLD,
OR OTHERWISE DISPOSED OF EXCEPT AS THEREIN PROVIDED. THE
CORPORATION WILL FURNISH A COPY OF SUCH INSTRUMENT AND AGREEMENT
TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE ON
REQUEST TO THE CORPORATION AT ITS PRINCIPAL PLACE OF BUSINESS OR
REGISTERED OFFICE.
10.13 Rights as a Shareholder. A Holder shall have no right
as a shareholder with respect to any shares covered by his Award until
a certificate representing those shares is issued in his name. No
adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash or other property) or distributions or other rights
for which the record date is before the date that certificate is
issued, except as contemplated by Section 9 hereof. Nevertheless,
dividends, dividend equivalent rights and voting rights may be
extended to and made part of any Award denominated in Stock or units
of Stock, subject to such terms, conditions and restrictions as the
Committee may establish. The Committee may also establish rules and
procedures for the crediting of interest on deferred cash payments and
dividend equivalents for deferred payment denominated in Stock or
units of Stock.
10.14 Furnish Information. Each Holder shall furnish to the
Corporation all information requested by the Corporation to enable it
to comply with any reporting or other requirement imposed upon the
Corporation by or under any applicable statute or regulation.
10.15 Obligation to Exercise. The granting of an Award
hereunder shall impose no obligation upon the Holder to exercise the
same or any part thereof.
10.16 Adjustments to Awards. Subject to the general
limitations set forth in Sections 5, 6, and 9, the Committee may make
any adjustment in the Exercise Price of, the number of shares subject
to, or the terms of a Nonstatutory Option or Stock Appreciation Right
by canceling an outstanding Nonstatutory Option or Stock Appreciation
Right and regranting a Nonstatutory Option or Stock Appreciation
Right. Such adjustment shall be made by amending, substituting, or
regranting an outstanding Nonstatutory Option or Stock Appreciation
Right. Such amendment, substitution, or regrant may result in terms
and conditions that differ from the terms and conditions of the
original Nonstatutory Option or Stock Appreciation Right. The
Committee may not, however, impair the rights of any Holder of
previously granted Nonstatutory Options or Stock Appreciation Rights
without that Holder's consent. If such action is effected by
amendment, such amendment shall be deemed effective as of the Date of
Grant of the amended Award.
10.17 Remedies. The Corporation shall be entitled to recover
from a Holder reasonable attorneys' fees incurred in connection with
the enforcement of the terms and provisions of the Plan and any Award
Agreement whether by an action to enforce specific performance or for
damages for its breach or otherwise.
10.18 Information Confidential. As partial consideration for
the granting of each Award hereunder, the Holder shall agree with the
Corporation that he will keep confidential all information and
knowledge that he has relating to the manner and amount of his
participation in the Plan; provided, however, that such information
may be disclosed as required by law and may be given in confidence to
the Holder's spouse, tax or financial advisors, or to a financial
institution to the extent that such information is necessary to secure
a loan. In the event any breach of this promise comes to the
attention of the Committee, it shall take into consideration that
breach in determining whether to recommend the grant of any future
Award to that Holder, as a factor mitigating against the advisability
of granting any such future Award to that Person.
10.19 Consideration. No Option or Stock Appreciation Right
shall be exercisable and no restriction on any Restricted Stock Award
shall lapse with respect to a Holder unless and until the Holder
thereof shall have paid cash or property to, or performed services
for, the Corporation or any of its Subsidiaries that the Committee
believes is equal to or greater in value than the par value of the
Stock subject to such Award.
SECTION 11. DURATION AND AMENDMENT OF PLAN
11.11 Duration. No Awards may be granted hereunder after the
date that is ten years from the earlier of (a) the date the Plan is
adopted by the Board of Directors or (b) the date the Plan is approved
by the shareholders of the Corporation.
11.12 Amendment. The Board of Directors may, insofar as
permitted by law, with respect to any shares which, at the time, are
not subject to Awards, suspend or discontinue the Plan or revise or
amend it in any respect whatsoever and may amend any provision of the
Plan or any Award Agreement to make the Plan or the Award Agreement,
or both, comply with Section 16(b) of the Exchange Act and the
exemptions from that Section in the regulations thereunder. The Board
of Directors may also amend, modify, suspend, or terminate the Plan
for the purpose of meeting or addressing any changes in other legal
requirements applicable to the Corporation or the Plan or for any
other purpose permitted by law. The Plan may not be amended without
the consent of the holders of a majority of the shares of Stock then
outstanding to (a) increase materially the aggregate number of shares
of Stock that may be issued under the Plan (except for adjustments
pursuant to Section 9 hereof), (b) increase materially the benefits
accruing to Eligible Individuals under the Plan, or (c) modify
materially the requirements about eligibility for participation in the
Plan; provided, however, that such amendments may be made without the
consent of shareholders of the Corporation if changes occur in law or
other legal requirements (including Rule 16b-3) that would permit such
changes. In connection with any amendment of the Plan, the Board of
Directors shall be authorized to incorporate such provisions as shall
be necessary for amounts paid under the Plan to be exempt from Section
162(m) of the Code.
SECTION 12. GENERAL
12.1 Application of Funds. The proceeds received by the
Corporation from the sale of shares pursuant to Awards may be used for
any general corporate purpose.
12.2 Right of the Corporation and Subsidiaries to Terminate
Employment. Nothing contained in the Plan or in any Award Agreement
shall confer upon any Holder the right to continue in the employ of
the Corporation or any Subsidiary or interfere in any way with the
rights of the Corporation or any Subsidiary to terminate the Holder's
employment at any time.
12.3 No Liability for Good Faith Determinations. Neither the
members of the Board of Directors nor any member of the Committee
shall be liable for any act, omission or determination taken or made
in good faith with respect to the Plan or any Award granted under it;
and members of the Board of Directors and the Committee shall be
entitled to indemnification and reimbursement by the Corporation in
respect of any claim, loss, damage, or expense (including attorneys'
fees, the costs of settling any suit, provided such settlement is
approved by independent legal counsel selected by the Corporation, and
amounts paid in satisfaction of a judgment, except a judgment based on
a finding of bad faith) arising therefrom to the full extent permitted
by law and under any directors' and officers' liability or similar
insurance coverage that may from time to time be in effect. This
right to indemnification shall be in addition to, and not a limitation
on, any other indemnification rights any member of the Board of
Directors or the Committee may have.
12.4 Other Benefits. Participation in the Plan shall not preclude
the Holder from eligibility in any other stock or stock option plan of
the Corporation or any Subsidiary or any old age benefit, insurance,
pension, profit sharing retirement, bonus, or other extra compensation
plans that the Corporation or any Subsidiary has adopted, or may, at
any time, adopt for the benefit of its Employees. Neither the
adoption of the Plan by the Board of Directors nor the submission of
the Plan to the shareholders of the Corporation for approval shall be
construed as creating any limitations on the power of the Board of
Directors to adopt such other incentive arrangements as it may deem
desirable, including, without limitation, the granting of stock
options and the awarding of Stock and cash otherwise than under the
Plan and such arrangements may be either generally applicable or
applicable only in specific cases.
12.5 Exclusion From Pension and Profit-Sharing Compensation. By
acceptance of an Award (regardless of form), as applicable, each
Holder shall be deemed to have agreed that the Award is special
incentive compensation that will not be taken into account in any
manner as salary, compensation, or bonus in determining the amount of
any payment under any pension, retirement, or other employee benefit
plan of the Corporation or any Subsidiary, unless any pension,
retirement, or other employee benefit plan of the Corporation or
Subsidiary expressly provides that such Award shall be so considered
for purposes of determining the amount of any payment under any such
plan. In addition, each beneficiary of a deceased Holder shall be
deemed to have agreed that the Award will not affect the amount of any
life insurance coverage, if any, provided by the Corporation or a
Subsidiary on the life of the Holder that is payable to the
beneficiary under any life insurance plan covering Employees of the
Corporation or any Subsidiary.
12.6 Execution of Receipts and Releases. Any payment of cash or
any issuance or transfer of shares of Stock to the Holder, or to his
legal representative, heir, legatee, or distributee, in accordance
with the provisions hereof, shall, to the extent thereof, be in full
satisfaction of all claims of such Persons hereunder. The Committee
may require any Holder, legal representative, heir, legatee, or
distributee, as a condition precedent to such payment, to execute a
release and receipt therefor in such form as it shall determine.
12.7 Unfunded Plan. Insofar as it provides for Awards of cash and
Stock, the Plan shall be unfunded. Although bookkeeping accounts may
be established with respect to Holders who are entitled to cash,
Stock, or rights thereto under the Plan, any such accounts shall be
used merely as a bookkeeping convenience. The Corporation shall not
be required to segregate any assets that may at any time be
represented by cash, Stock, or rights thereto, nor shall the Plan be
construed as providing for such segregation, nor shall the Corporation
nor the Board of Directors nor the Committee be deemed to be a trustee
of any cash, Stock, or rights thereto to be granted under the Plan.
Any liability of the Corporation to any Holder with respect to a grant
of cash, Stock, or rights thereto under the Plan shall be based solely
upon any contractual obligations that may be created by the Plan and
any Award Agreement; no such obligation of the Corporation shall be
deemed to be secured by any pledge or other encumbrance on any
property of the Corporation. Neither the Corporation nor the Board of
Directors nor the Committee shall be required to give any security or
bond for the performance of any obligation that may be created by the
Plan.
12.8 No Guarantee of Interests. Neither the Committee nor the
Corporation guarantees the Stock of the Corporation from loss or
depreciation.
12.9 Payment of Expenses. All expenses incident to the
administration, termination, or protection of the Plan, including, but
not limited to, legal and accounting fees, shall be paid by the
Corporation or its Subsidiaries; provided, however, the Corporation or
a Subsidiary may recover any and all damages, fees, expenses, and
costs arising out of any actions taken by the Corporation to enforce
its right to purchase Stock under this Plan.
12.10 Corporation Records. Records of the Corporation or its
Subsidiaries regarding the Holder's period of employment, termination
of employment and the reason therefor, leaves of absence, re-
employment, and other matters shall be conclusive for all purposes
hereunder, unless determined by the Committee to be incorrect.
12.11 Information. The Corporation and its Subsidiaries shall,
upon request or as may be specifically required hereunder, furnish or
cause to be furnished all of the information or documentation which is
necessary or required by the Committee to perform its duties and
functions under the Plan.
12.12 No Liability of Corporation. The Corporation assumes no
obligation or responsibility to the Holder or his legal
representatives, heirs, legatees, or distributees for any act of, or
failure to act on the part of, the Committee.
12.13 Corporation Action. Any action required of the Corporation
shall be by resolution of its Board of Directors or by a Person
authorized to act by resolution of the Board of Directors.
12.14 Severability. In the event that any provision of this Plan,
or the application hereof to any Person or circumstance, is held by a
court of competent jurisdiction to be invalid, illegal, or
unenforceable in any respect under present or future laws effective
during the effective term of any such provision, such invalid,
illegal, or unenforceable provision shall be fully severable; and this
Plan shall then be construed and enforced as if such invalid, illegal,
or unenforceable provision had not been contained in this Plan; and
the remaining provisions of this Plan shall remain in full force and
effect and shall not be affected by the illegal, invalid, or
unenforceable provision or by its severance from this Plan.
Furthermore, in lieu of each such illegal, invalid, or unenforceable
provision, there shall be added automatically as part of this Plan a
provision as similar in terms to such illegal, invalid, or
unenforceable provision as may be possible and be legal, valid, and
enforceable. If any of the terms or provisions of this Plan conflict
with the requirements of Rule 16b-3 (as those terms or provisions are
applied to Eligible Individuals who are subject to Section 16(b) of
the Exchange Act), then those conflicting terms or provisions shall be
deemed inoperative to the extent they so conflict with the
requirements of Rule 16b-3 and, in lieu of such conflicting provision,
there shall be added automatically as part of this Plan a provision as
similar in terms to such conflicting provision as may be possible and
not conflict with the requirements of Rule 16b-3. If any of the terms
or provisions of this Plan conflict with the requirements of Section
422 of the Code (with respect to Incentive Options), then those
conflicting terms or provisions shall be deemed inoperative to the
extent they so conflict with the requirements of Section 422 of the
Code and, in lieu of such conflicting provision, there shall be added
automatically as part of this Plan a provision as similar in terms to
such conflicting provision as may be possible and not conflict with
the requirements of Section 422 of the Code. With respect to
Incentive Options, if this Plan does not contain any provision
required to be included herein under Section 422 of the Code, that
provision shall be deemed to be incorporated herein with the same
force and effect as if that provision had been set out at length
herein; provided, however, that, to the extent any Option that is
intended to qualify as an Incentive Option cannot so qualify, that
Option (to that extent) shall be deemed a Nonstatutory Option for all
purposes of the Plan.
12.15 Notices. Whenever any notice is required or permitted
hereunder, such notice must be in writing and personally delivered or
sent by mail. Any notice required or permitted to be delivered
hereunder shall be deemed to be delivered on the date on which it is
actually received by the Corporation addressed to the attention of the
Corporate Secretary at the Corporation's office as specified in the
applicable Award Agreement. The Corporation or a Holder may change,
at any time and from time to time, by written notice to the other, the
address which it or he had previously specified for receiving notices.
Until changed in accordance herewith, the Corporation and each Holder
shall specify as its and his address for receiving notices the address
set forth in the Award Agreement pertaining to the shares to which
such notice relates. Any Person entitled to notice hereunder may
waive such notice.
12.16 Successors. The Plan shall be binding upon the Holder, his
legal representatives, heirs, legatees, and distributees, upon the
Corporation, its successors and assigns and upon the Committee and its
successors.
12.17 Headings. The titles and headings of Sections are included
for convenience of reference only and are not to be considered in
construction of the provisions hereof.
12.18 Governing Law. All questions arising with respect to the
provisions of the Plan shall be determined by application of the laws
of the State of Texas, without giving effect to any conflict of law
provisions thereof, except to the extent Texas law is preempted by
federal law. Questions arising with respect to the provisions of an
Award Agreement that are matters of contract law shall be governed by
the laws of the state specified in the Award Agreement, except to the
extent that Texas corporate law subconflicts with the contract law of
such state, in which event Texas corporate law shall govern
irrespective of any conflict of law laws. The obligation of the
Corporation to sell and deliver Stock hereunder is subject to
applicable federal, state and foreign laws and to the approval of any
governmental authority required in connection with the authorization,
issuance, sale, or delivery of such Stock.
12.19 Word Usage. Words used in the masculine shall apply to the
feminine where applicable, and wherever the context of this Plan
dictates, the plural shall be read as the singular and the singular as
the plural.
IN WITNESS WHEREOF, the Corporation, acting by and through its
officers hereunto duly authorized, has executed this 1999 Incentive
Plan, to be effective as of September 23, 1999.
FLCI, INC.,
An Oregon corporation
By:
-------------------------------
A. Roger Pease, President
