<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. 1)
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
FIRST LINK COMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
(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):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
/X/ 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:
-----------------------------------------------------------------------
<PAGE>
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. ("FLCI"), to be held on December 15, 1999, in the
McCall Room of the RiverPlace Hotel, 1510 Southwest Harbor Way, Portland,
Oregon, at 10:00 A.M., 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 FLCI 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 FLCI HAS DETERMINED THAT THE MERGER IS FAIR TO AND
IN THE BEST INTERESTS OF FLCI'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 FLCI'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.
A. Roger Pease
PRESIDENT AND CHIEF EXECUTIVE OFFICER
FIRSTLINK COMMUNICATIONS, INC.
Portland, Oregon
November 8, 1999
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
190 SW HARRISON
PORTLAND, OREGON 97201
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 15, 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 in the McCall Room of the
RiverPlace Hotel, 1510 Southwest Harbor Way, Portland, Oregon, at 10:00 A.M.,
local time, on December 15, 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 3,175,000 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. Copies 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.
<PAGE>
The Board has fixed the close of business on October 29, 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
Jeffrey S. Sperber, SECRETARY
Portland, Oregon
November 8, 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.
<PAGE>
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 15, 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 November 8, 1999, 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 $3.88.
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 November 8, 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
<PAGE>
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 3,706,979 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
1,853,490 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.
2
<PAGE>
TABLE OF CONTENTS FOR PROXY STATEMENT
<TABLE>
<S> <C>
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.......................... 11
Interests of Certain Persons.............................. 12
The Share Amendment to the Articles of Incorporation...... 12
The Name Change........................................... 12
Price Range of Common Stock and Warrants.................. 13
WHERE YOU CAN FIND MORE INFORMATION......................... 14
THE MARKET FOR FIRSTLINK'S SECURITIES....................... 14
THE MARKET FOR USOL'S SECURITIES............................ 14
SELECTED FINANCIAL DATA
FirstLink Communications, Inc............................. 15
USOL Holdings, Inc........................................ 15
FirstLink Communications, Inc.--Pro Forma................. 16
FIRSTLINK'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General................................................... 18
Overview.................................................. 18
Results of Operations..................................... 18
Liquidity and Capital Resources........................... 19
US ONLINE'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview.................................................. 22
Results of Operations..................................... 22
Year 2000................................................. 23
THE SPECIAL MEETING
Date, Time and Place of Meeting........................... 25
Matters to be Considered.................................. 25
Record Date and Outstanding Shares........................ 25
Quorum.................................................... 25
Required Vote............................................. 26
Proxies................................................... 26
Solicitation of Proxies; Expenses......................... 26
PROPOSAL NO. 1: THE PLAN OF MERGER
General................................................... 27
Background of the Merger.................................. 27
Recommendation of the Board of Directors.................. 28
Closing; Effective Time................................... 29
Structure of the Merger and Conversion of USOL Common
Stock and Preferred Stock............................... 30
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Treatment of USOL Stock Options and Warrants.............. 31
Material Federal Income Tax Consequences of the Merger.... 31
Accounting Treatment of the Merger........................ 32
Regulatory Filings and Approvals Required to Complete the
Merger.................................................. 32
Nasdaq Listing............................................ 32
Board of Directors and Management of FirstLink Following
the Merger.............................................. 32
Operations After the Merger............................... 32
Employment Agreements..................................... 33
Appraisal Rights.......................................... 33
THE MERGER AGREEMENT
The Merger................................................ 35
Representations and Warranties............................ 35
Conduct of Business Before Completion of the Merger....... 35
Additional Agreements..................................... 36
Conditions to Completion of the Merger.................... 36
Termination of the Merger Agreement; Expenses............. 37
Extension, Waiver and Amendment of the Merger Agreement... 37
Lock-Up Agreements........................................ 38
Directors and Executive Officers.......................... 38
PROPOSAL NO. 2: INCREASE IN AUTHORIZED STOCK
Purpose and Effect of the Share Amendment................. 39
DESCRIPTION OF FIRSTLINK SECURITIES
Common Stock.............................................. 40
Preferred Stock........................................... 40
PROPOSAL NO. 3: NAME CHANGE................................. 43
PROPOSAL NO. 4: APPROVAL OF THE INCENTIVE PLAN
General................................................... 44
Terms of the Incentive Plan............................... 44
Federal Income Tax Considerations......................... 47
THE BUSINESS OF FIRSTLINK AND USOL
General................................................... 49
Industry Overview and Competition......................... 49
Government Regulation..................................... 50
The Market................................................ 54
Business Strategy......................................... 54
Growth Strategy........................................... 55
INFORMATION ABOUT FIRSTLINK
Business.................................................. 56
INFORMATION ABOUT USOL
Business.................................................. 58
MANAGEMENT OF FIRSTLINK PRIOR TO THE MERGER
Officers and Directors.................................... 64
Director Nominee.......................................... 66
Director Compensation..................................... 66
Limitation on Directors' Liability; Indemnification....... 66
Certain Relationships and Related Transactions............ 66
COMPENSATION OF MANAGEMENT
Summary Compensation Table................................ 68
Salary Continuation Agreements............................ 68
Stock Incentive Plans..................................... 68
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
MANAGEMENT OF THE COMBINED COMPANY
Officers and Directors.................................... 70
Employment Agreements..................................... 72
PRINCIPAL SHAREHOLDERS
Common Stock.............................................. 73
Series A Preferred Stock.................................. 74
Series B Preferred Stock.................................. 75
INDEPENDENT PUBLIC ACCOUNTANTS.............................. 76
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
<TABLE>
<CAPTION>
APPENDICES APPENDIX NO.
- ---------- ------------
<S> <C>
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
</TABLE>
5
<PAGE>
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 "USOL" and "USOLW", 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.
6
<PAGE>
Q: WHEN AND WHERE IS THE MEETING?
A: The Meeting will be held on December 15, 1999, at the RiverPlace Hotel,
McCall Room, 1510 Southwest Harbor Way, Portland, Oregon, at 10:00 A.M.
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
7
<PAGE>
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
8
<PAGE>
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 49 THROUGH 63)
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 December 15, 1999, at 10:00 A.M., local time, in
the McCall Room of the RiverPlace Hotel, 1510 Southwest Harbor Way, Portland,
Oregon 97201. 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 3,706,979 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.
9
<PAGE>
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 27 THROUGH 34)
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 27 THROUGH 28)
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 36)
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 37)
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.
10
<PAGE>
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 37)
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 32)
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 26)
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 33 THROUGH 34)
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 33 and 34, 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
11
<PAGE>
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
(SEE PAGES 39 THROUGH 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 43)
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 operate under the "USOL
Holdings, Inc." name and under the assumed names "US Online" and US Online
Communications." 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 PAGES 44 THROUGH 48)
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,
12
<PAGE>
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 price of the common stock was
$4.06 per share. On October 28, 1999, the last day that the warrants traded
before the Record Date, the last sale price of the warrants was $1.13 per
warrant. WE URGE YOU TO OBTAIN CURRENT MARKET QUOTATIONS.
13
<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 November 5, 1999)................ $4.44 $3.75 $1.38 $ .88
</TABLE>
There were approximately 1400 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 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").
14
<PAGE>
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.
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
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>
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
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.
15
<PAGE>
U.S. 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.
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
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>
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
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 (i) the acquisition of substantially all of the
assets and certain liabilities of US Online by USOL Sub on July 21, 1999,
(ii) the purchase of certain assets, primarily contract rights, from GMACCM by
TheResidentClub.com, Inc., a wholly - owned subsidiary of USOL Sub, 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, US Online,
and FirstLink
16
<PAGE>
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-48.
BALANCE SHEET DATA
<TABLE>
<CAPTION>
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>
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS
DECEMBER 31, 1998 JUNE 30, 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 subsidiary........... 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>
17
<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.
18
<PAGE>
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
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
19
<PAGE>
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 Code 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. USOL is seeking to increase that
limit to $3,000,000. Accordingly, TheResidentClub.com
20
<PAGE>
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.
21
<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.
22
<PAGE>
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.
23
<PAGE>
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.
24
<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 November 10,
1999.
DATE, TIME AND PLACE OF MEETING
The Meeting will be held in the McCall Room of the RiverPlace Hotel, 1510
Southwest Harbor Way, Portland, Oregon, on December 15, 1999, at 10:00 A.M.
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 1,400 shareholders of
record of FirstLink common stock and 3,706,979 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.
25
<PAGE>
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.
26
<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 initial public
offering ("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 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
27
<PAGE>
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 (USOL Sub and TheResidentClub.com, Inc.), 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.
28
<PAGE>
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.
29
<PAGE>
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 Sub 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......................... 3,706,979 53.9%
Former USOL Shareholders.................................. 3,175,000 46.8%
---------- ----
Total................................................... 6,881,979 100%
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......................... 3,706,979 15.8%
Former USOL shareholders.................................. 19,737,500 84.2%
---------- ----
Total................................................... 23,444,479 100%
</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.
30
<PAGE>
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 unvested.
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 common stock of the
Combined Company 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 common stock of the Combined Company 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.
31
<PAGE>
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 is seeking approval of Nasdaq to continue to include its common
stock in the Nasdaq Stock Market.
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 the Combined
Company. The shareholders of USOL will become shareholders of the Combined
Company, and their rights as shareholders will be governed by the Combined
Company's articles of incorporation 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
32
<PAGE>
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
The Combined Company 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 the
Combined Company for payment for said shareholder's shares on or before the time
set within the notice sent by the Combined Company 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 the Combined Company.
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 the Combined Company receives a valid Demand, the Combined Company 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) the Combined Company's balance sheet as of the end
of its most
33
<PAGE>
recent fiscal year, (ii) a statement of the Combined Company'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 the Combined Company '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 the Combined Company 's payment does not
accurately reflect the fair value of the shares, or if the Combined Company
fails to make its payment within 60 days of receipt of the Demand, the dissenter
may give written notice to the Combined Company 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 the Combined Company 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 the Combined Company
within 30 days of the dissenter's receipt of payment from the Combined Company.
If a Demand from a dissenter for greater payment than that offered by the
Combined Company remains unresolved, the Combined Company may, within 60 days of
receiving such Demand, commence a judicial proceeding to determine the fair
value of the shares. If the Combined Company 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 the Combined Company, plus interest. The court costs
of such a proceeding shall be borne by the Combined Company, 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 the Combined
Company. 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 common stock of the Combined Company 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.
34
<PAGE>
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 pary; (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.
35
<PAGE>
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, the Combined Company'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."
36
<PAGE>
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.
37
<PAGE>
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 the Combined Company 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 before the expiration of this lock-up period, however, 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."
38
<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 3,706,979 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 25,443,952 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 17,674,069 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 FirstLink
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.
39
<PAGE>
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 FirstLink
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 shares of FirstLink 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
FirstLink 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 shares of FirstLink 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, the Combined Company 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
40
<PAGE>
Stock will each have the right to nominate one of the seven directors of the
Combined Company, 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 the first of these dates
to occur after the Effective Time. The Combined Company 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 the Combined Company offers its
equity securities for gross proceeds to the Combined Company 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 the
Combined Company 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 the Combined Company
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
the Combined Company, 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 the
Combined Company.
The Combined Company 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
41
<PAGE>
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.
42
<PAGE>
PROPOSAL NO. 3: NAME CHANGE
Under FirstLink's current Articles of Incorporation, the name of the Company
is "FirstLink Communications, Inc." The Board 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 Combined 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 "USOL."
43
<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. 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
44
<PAGE>
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.
45
<PAGE>
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.
46
<PAGE>
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
47
<PAGE>
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 directorsf"; and (ii) the
purchase price of the award is no less than the fair market value of the stock
on the date of grant.
48
<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
49
<PAGE>
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 RBOCs. 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,
50
<PAGE>
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
51
<PAGE>
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 the Combined Company
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
52
<PAGE>
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
53
<PAGE>
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.
54
<PAGE>
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, 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.
55
<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-TM-, Cinemax-TM-,
Showtime-TM-, and The Disney Channel-TM- 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.
56
<PAGE>
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.
57
<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-TM-, Cinemax-TM-, Showtime-TM-, and The Disney Channel-TM-, 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
58
<PAGE>
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.
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. USOL is seeking to increase that
limit to $3,000,000. 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.
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
59
<PAGE>
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
------------------------------- -------------------------------
OPERATIONAL MARKET CATV TELEPHONE TOTAL CATV TELEPHONE TOTAL
- ------------------ -------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
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.
60
<PAGE>
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.
61
<PAGE>
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.
62
<PAGE>
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.
63
<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, where he became Chief Financial Officer
of its manufacturing and processing
64
<PAGE>
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.
65
<PAGE>
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,
66
<PAGE>
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.
67
<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.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
-------------------------
ANNUAL COMPENSATION SECURITIES
------------------------------ OTHER ANNUAL UNDERLYING
FISCAL COMPENSA- OPTIONS
NAME YEAR SALARY BONUS TION(1)(2) (SARS)
- ---- -------- -------- -------- ------------ ----------
<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.
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. Mr. Sperber has entered into an employment agreement with USOL. See
"Management of the Combined Company--Employment Agreements." 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
$60,000, respectively, pay for their medical insurance for a year, and provide
them other benefits.
STOCK INCENTIVE PLANS
FirstLink has established two stock option plans for officers, directors,
and employees. The 1997 Restated Combined Incentive Stock and Nonqualified Stock
Option Plan (the "1997 Plan") was approved by the shareholders in
February 1998. Options issued under the 1997 Plan shall not be priced at less
than fair market value and expire no later than ten years from the date of
grant. The vesting
68
<PAGE>
periods are at the discretion of the Board. FirstLink has made available 533,333
shares for grant under the 1997 Plan. As of December 31, 1998, FirstLink had
issued options to purchase 505,000 shares of common stock with varying
three-year vesting terms under the 1997 Plan.
In August 1998, the Board established the FirstLink Communications, Inc.
1998-1999 Combined Incentive and Nonqualified Stock Option Plan (the "1998
Plan"). The exercise price of options issued under the 1998 Plan will not be at
less than the fair market value of its stock at the time the options are
granted. Options issued under the 1998 plan expire no later than ten years from
the date of grant. The Board has the discretion to determine vesting periods of
options granted. All options issued under the 1998 Plan will be nonqualified
options. FirstLink has reserved 500,000 shares of common stock for grant under
the 1998 Plan. It has issued under the 1998 Plan options to purchase 199,999
shares of common stock. The options vest over a three-year period.
The following tables set forth information as of December 31, 1998, about
nonqualified stock options granted to and exercised by the named executive
officer and the fiscal year end value of unexercised options on an aggregated
basis.
OPTIONS/GRANTS
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/
UNDERLYING GRANTS TO
FISCAL OPTIONS/ EMPLOYEES IN EXERCISE PRICE
NAME YEAR GRANTS FISCAL YEAR ($/SHARE) EXPIRATION DATE
- ---- -------- ---------- ------------ -------------- ------------------
<S> <C> <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>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS/SARS AT FISCAL MONEY OPTIONS/SARS AT
NAME YEAREND FISCAL YEAR END(2)
- ---- ------------------------ ----------------------------
<S> <C> <C> <C> <C>
A. Roger Pease, President and CEO............. Exercisable 80,000 Exercisable $4,800
Unexercisable 180,000 Unexercisable $4,800
Jeffrey S. Sperber, CFO....................... Exercisable 33,333 Exercisable $2,000
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.
69
<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, Mr. Twaddell 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,
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
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
70
<PAGE>
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.
71
<PAGE>
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.
72
<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) ..................................... 366,666 9.5%
190 SW Harrison Street
Portland, OR 97201
Thomas E. McChesney(4) ................................ 156,369 4.3%
200 SW Market Street
Portland, OR 97201
Robert F. Olsen(5) .................................... 132,013 3.6%
7745 Greenback Lane
Citrus Heights, CA 95610
James F. Twaddell ..................................... 28,667 less than1%
Two Charles Street
Providence, RI 02904
Jeffrey S. Sperber(6) ................................. 100,000 2.7%
190 SW Harrison Street
Portland, OR 97201
Steven M. Bathgate(7)(8) .............................. 308,496 8.4%
5350 S. Roslyn Way, #380
Englewood, CO 80111
Eugene C. McColley(7)(9) .............................. 279,296 7.6%
5350 S. Roslyn Way, #380
Englewood, CO 80111
All Executive Officers and Directors as a Group ....... 537,547 14.0%
(5 persons)
</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.
73
<PAGE>
(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
initially 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 be deemed to beneficially own the shares owned of record by
Peregrine Capital, and Mr. Agnew, who may be deemed to beneficially own the
shares owned of record by AGL Investment No. 8 Limited Partnership and shares
which may be issued upon the exercise of warrants to purchase the common stock
held by AGL Capital Investments, LLC, no director or executive officer will
beneficially own any shares of Series A Preferred Stock.
<TABLE>
<CAPTION>
SHARES OF
SERIES A % OF SERIES A SHARES OF % OF
PREFERRED PREFERRED COMMON COMMON
STOCK STOCK STOCK STOCK
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
NAME OWNED(1) OWNED(2) OWNED(1) OWNED(3)
- ---- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
GMAC Commercial Mortgage Corporation(4).......... 398,900 30.0% 5,311,250 43.9%
AGL Investment No. 8 Limited Partnership(5)...... 398,900 30.0% 4,985,250 42.0%
Aspen Foxtrot Investments, LLC(6)................ 180,000 13.6% 4,187,500 33.8%
Peregrine Capital, Inc.(7)....................... 200,000 15.1% 3,520,000 39.7%
German American Capital Corp.(8)................. 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.
74
<PAGE>
(2) Based on 1,325,000 shares of Series A Preferred Stock that will be issued in
connection with the Merger.
(3) The percentage of common stock that each investor is deemed to own is
calculated by dividing the total number of shares of common stock
beneficially owned by such investor (including shares that may be received
upon exercise of warrants or converstion of preferred stock), by the sum of
(a) the total number of shares of common stock that will be outstanding upon
completion of the Merger (that is, 6,881,979 shares) and (b) the shares of
common stock that may be received by such investor upon exercise of warrants
or conversion of preferred stock.
(4) 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.
(5) Owned by AGL Investment No. 8 Limited Partnership, whose ultimate general
partner is AGLPGP No. 8, Inc. ("AGLP Inc."). David B. Agnew is the sole
director and shareholder of AGLP, Inc., and, accordingly, may be deemed to
be the beneficial owner of common stock held by ABL Investment No. 8 Limited
Partnership. Mr. Agnew is also a manager of AGL Capital Investments LLC and,
accordingly, may be deemed to share voting and dispositive power with
respect to 82,000 shares of common stock issuable upon the exercise of
warrants held by AGL Capital Investments LLC with the other manager thereof.
Consists of 4,985,250 shares underlying the 399,900 shares of Series A
Preferred Stock that will be issued to AGL Investment No. 8 Limited
Partnership in connection with the Merger. David B. Agnew disclaims
beneficial ownership of common stock held of record by AGL Investment No. 8
Limited Partnership and shares issuable upon the exercise of warrants to
purchase common stock held by AGL Investments, LLC.
(6) 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 180,000 shares of Series A Preferred Stock, that will be issued to Aspen
Foxtrot in connection with the Merger.
(7) 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.
(8) 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
75
<PAGE>
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
SERIES B % OF SERIES B SHARES OF % OF
PREFERRED PREFERRED COMMON COMMON
STOCK STOCK STOCK STOCK
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
NAME OWNED(1) OWNED(2) OWNED OWNED(1)
- ---- ------------ ------------- ------------ ------------
<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.
76
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
FIRSTLINK COMMUNICATIONS, INC.
Independent Auditors' Report.............................. F-2
Balance Sheets............................................ F-3
Statements of Operations.................................. F-4
Statements of Stockholders' Equity........................ F-5
Statements of Cash Flows.................................. F-6
Notes to Financial Statements............................. F-7
USOL HOLDINGS, INC.
Report of Independent Public Accountants.................. F-20
Balance Sheets............................................ F-21
Statement of Operations................................... F-22
Statement of Stockholders' Equity......................... F-23
Statement of Cash Flows................................... F-24
Notes to the Financial Statements......................... F-25
US ONLINE COMMUNICATIONS, INC.
Report of Independent Public Accountants.................. F-29
Consolidated Balance Sheets............................... F-30
Consolidated Statements of Operations..................... F-31
Consolidated Statements of Cash Flows..................... F-32
Notes to Consolidated Financial Statements................ F-34
FIRSTLINK COMMUNICATIONS, INC. (PRO-FORMA)
Unaudited Pro Forma Condensed Consolidated Financial
Information............................................. F-48
Pro Forma Balance Sheet................................... F-49
Pro Forma Consolidated Statements of Operations........... F-51
Notes to the Unaudited Pro Forma Condensed Consolidated
Financial Information................................... F-53
</TABLE>
F-1
<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)
F-2
<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.
F-3
<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.
F-4
<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>
COMMON STOCK TOTAL
---------------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT DEFICIT EQUITY (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.
F-5
<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.
F-6
<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. ("Peregrine"), 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.
F-7
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
F-8
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
F-9
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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>
<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>
<S> <C>
Excise tax.................................................. $ 92,154
Commissions................................................. 43,337
Audit....................................................... 31,000
Other....................................................... 2,614
-----------
$ 169,105
===========
</TABLE>
F-10
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.)
(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>
<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.
F-11
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.)
(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
F-12
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.)
(7) STOCKHOLDERS' EQUITY (CONTINUED)
"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.
F-13
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.)
(7) STOCKHOLDERS' EQUITY (CONTINUED)
The following table provides additional information concerning options
granted under the 1998 and 1997 Plans:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE 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>
F-14
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.)
(7) STOCKHOLDERS' EQUITY (CONTINUED)
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
UNDERLYING EXERCISE RANGE OF
DESCRIPTION WARRANTS PRICES EXPIRATION DATES
- ----------- ---------- ----------- ------------------
<S> <C> <C> <C>
1997:
Private Placement Warrants........................ 193,320 $ 2.25 5/05/00
Placement Agent Warrants.......................... 157,003 .75-3.00 4/30/02-11/30/02
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.
F-15
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.)
(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
F-16
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.)
(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
$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.
F-17
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.)
(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 31, DECEMBER 31, 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>
F-18
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.)
(10) SEGMENT DISCLOSURE (CONTINUED)
The direct costs included in operating expense associated with these
products and services were as follows:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
----------------------------- ---------------------
DECEMBER 31, DECEMBER 31, 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.
F-19
<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
F-20
<PAGE>
USOL HOLDINGS, INC.
BALANCE SHEET--JUNE 30, 1999
<TABLE>
<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.
F-21
<PAGE>
USOL HOLDINGS, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION, MAY 12, 1999
THROUGH JUNE 30, 1999
<TABLE>
<S> <C>
REVENUE..................................................... $ --
STOCK COMPENSATION EXPENSE.................................. (849,575)
---------
NET LOSS.................................................... $(849,575)
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
USOL HOLDINGS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION, MAY 12, 1999
THROUGH JUNE 30, 1999
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN RETAINED STOCKHOLDERS'
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.
F-23
<PAGE>
USOL HOLDINGS, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION, MAY 12, 1999
THROUGH JUNE 30, 1999
<TABLE>
<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.
F-24
<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
F-25
<PAGE>
USOL HOLDINGS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
4. SUBSEQUENT EVENTS: (CONTINUED)
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
F-26
<PAGE>
USOL HOLDINGS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
4. SUBSEQUENT EVENTS: (CONTINUED)
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.
F-27
<PAGE>
USOL HOLDINGS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
4. SUBSEQUENT EVENTS: (CONTINUED)
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 acquiror.
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.
F-28
<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
F-29
<PAGE>
U.S. ONLINE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(NOTES 1 AND 2)
<TABLE>
<CAPTION>
DECEMBER 31,
1998 JUNE 30, 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.
F-30
<PAGE>
U.S. ONLINE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(NOTES 1 AND 2)
<TABLE>
<CAPTION>
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
----------- ------------ ----------- -----------
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.
F-31
<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 ENDED
DECEMBER 31 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 assets................ (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
activities.......................... 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
=========== ============ =========== ===========
</TABLE>
F-32
<PAGE>
U.S. ONLINE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(NOTES 1 AND 2)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31 JUNE 30
----------------------- -------------------------
1997 1998 1998 1999
---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
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.
F-33
<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.
Simultaneous 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.
F-34
<PAGE>
U.S. ONLINE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ORGANIZATION AND BASIS OF PRESENTATION: (CONTINUED)
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>
LLC FROM JANUARY 1, THE COMPANY FROM
1998, THROUGH INCEPTION (MARCH 5, 1998)
JULY 21, 1998 THROUGH DECEMBER 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.
F-35
<PAGE>
U.S. ONLINE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
F-36
<PAGE>
U.S. ONLINE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
F-37
<PAGE>
U.S. ONLINE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31, 1998:
<TABLE>
<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>
<S> <C>
Goodwill.................................................... $3,014,513
Less--Accumulated amortization............................ (679,012)
----------
Goodwill, net............................................... $2,335,501
==========
</TABLE>
F-38
<PAGE>
U.S. ONLINE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS: (CONTINUED)
DEFERRED LOAN COSTS
Deferred loan costs consist of the following at December 31, 1998:
<TABLE>
<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>
<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>
<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)
-----------
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
===========
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>
F-39
<PAGE>
U.S. ONLINE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DEBT: (CONTINUED)
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>
F-40
<PAGE>
U.S. ONLINE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 non-cancelable
operating leases are as follows:
<TABLE>
<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>
<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.
F-41
<PAGE>
U.S. ONLINE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
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:
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
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>
F-42
<PAGE>
U.S. ONLINE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. CAPITAL STOCK: (CONTINUED)
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
F-43
<PAGE>
U.S. ONLINE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. CAPITAL STOCK: (CONTINUED)
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>
<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>
<S> <C>
Dividend yield....................... --%
Expected volatility.................. 95.00%
Risk-free interest rate.............. 5.10%
Expected life........................ 6.75 years
</TABLE>
F-44
<PAGE>
U.S. ONLINE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. CAPITAL STOCK: (CONTINUED)
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.
F-45
<PAGE>
U.S. ONLINE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
F-46
<PAGE>
U.S. ONLINE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SEGMENT DISCLOSURE: (CONTINUED)
The revenues generated by these products and services were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31 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 YEAR ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31 JUNE 30
----------------------- -------------------------
1997 1998 1998 1999
---------- ---------- ----------- -----------
(UNAUDITED)
<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.
F-47
<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
F-48
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
PRO FORMA BALANCE SHEET
AS OF JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
USOL U.S. ONLINE PRO FORMA PRO FORMA
HOLDINGS COMMUNICATIONS ADJUSTMENTS(1) PRE-MERGER FIRSTLINK
-------- --------------- -------------- ----------- ----------
<S> <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
(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 --
Investment securities............................... -- -- -- -- 2,090,125
Accounts receivable................................. -- 289,545 -- 289,545 119,297
Note receivable from U.S. Online Communications..... -- -- -- -- 510,000
Other receivables................................... 7,425
Supply inventory.................................... 292,932 292,932
Prepaids and other current assets................... 107,792 107,792 47,633
---- ----------- ----------- ----------- ----------
Total current assets.............................. 425 2,047,620 18,435,002 20,483,047 4,191,756
---- ----------- ----------- ----------- ----------
PROPERTY AND EQUIPMENT, NET......................... 11,835,192 11,835,192 1,200,489
OTHER ASSETS........................................ -- 2,861,294 1,284,449 B 10,163,907 77,802
(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
==== =========== =========== =========== ==========
<CAPTION>
PRO FORMA
ADJUSTMENTS(2) PRO FORMA
-------------- -----------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents......................... $ 510,000 K $21,575,559
Restricted cash..................................... -- 144,495
Investment securities............................... 2,090,125
Accounts receivable................................. 408,842
Note receivable from U.S. Online Communications..... (510,000) K --
Other receivables................................... 7,425
Supply inventory.................................... 292,932
Prepaids and other current assets................... 155,425
----------- -----------
Total current assets.............................. -- 24,674,803
----------- -----------
PROPERTY AND EQUIPMENT, NET......................... 13,035,681
OTHER ASSETS........................................ 16,728,232 O 26,969,941
----------- -----------
Total assets...................................... $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.
F-49
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
PRO FORMA BALANCE SHEET
AS OF JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
USOL U.S. ONLINE PRO FORMA PRO FORMA
HOLDINGS COMMUNICATIONS ADJUSTMENTS(1) PRE-MERGER FIRSTLINK
--------- --------------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued
expenses....................... $ -- $ 4,872,431 $ (1,875,000) C $1,915,053 $ 309,433
(1,040,935) D
(41,443) E
Current portion of capital lease
obligations.................... 608,892 J 608,892 66,882
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
--------- ------------ ------------ ----------- -----------
Total current liabilities...... 25,637,257 (22,755,829) 2,881,428 376,315
--------- ------------ ------------ ----------- -----------
LONG TERM DEBT
Capital lease obligations, less
current portion................ 1,784,280 J 1,784,280 142,778
--------- ------------ ------------ ----------- -----------
Total long term debt........... 1,784,280 1,784,280 142,778
--------- ------------ ------------ ----------- -----------
MINORITY INTEREST.................. 236,413 236,413
STOCKHOLDERS' EQUITY
Preferred stock.................... 37,000,000 A 34,410,000
(2,590,000) B
Common stock....................... 425 2,167 (2,167) C 3,175 8,515,209
750 G
2,000 H
Additional paid in capital....... 849,575 1,697,115 (1,697,115) C 7,690,425
2,824,050 G
3,998,000 H
(325,000) H
343,800 I
Stock subscription receivable...... (3,674,000) H (3,674,000)
Deferred compensation.............. (489,843) 489,843 C
Retained deficit................... (849,575) (10,339,003) 10,339,003 C (849,575) (3,564,255)
--------- ------------ ------------ ----------- -----------
Total stockholders equity...... 425 (9,129,564) 46,709,164 37,580,025 4,950,954
--------- ------------ ------------ ----------- -----------
Total liabilities and
stockholders equity.......... $ 425 $ 16,744,106 $ 25,737,615 $42,482,146 $ 5,470,047
========= ============ ============ =========== ===========
<CAPTION>
PRO FORMA
ADJUSTMENTS(2) PRO FORMA
-------------- -----------
<S> <C> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued
expenses....................... $ -- $ 2,224,486
Current portion of capital lease
obligations.................... 675,774
Current portion of long term
debt...........................
Current portion of long-term
debt, related parties..........
Short term notes payable.........
Deferred revenue................. 357,483
------------ -----------
Total current liabilities...... 3,257,743
------------ -----------
LONG TERM DEBT
Capital lease obligations, less
current portion................ 1,927,058
------------ -----------
Total long term debt........... 1,927,058
------------ -----------
MINORITY INTEREST.................. 236,413
STOCKHOLDERS' EQUITY
Preferred stock.................... 34,410,000 L 34,410,000
(34,410,000) L
Common stock....................... (3,175) N 29,372,786
7,690,425 P
3,175 N
16,728,232 O
(3,564,255) M
Additional paid in capital....... (7,690,425) P
Stock subscription receivable...... (3,674,000)
Deferred compensation..............
Retained deficit................... 3,564,255 M (849,575)
------------ -----------
Total stockholders equity...... 16,728,232 59,259,211
------------ -----------
Total liabilities and
stockholders equity.......... $ 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.
F-50
<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 HOLDINGS COMMUNICATIONS ADJUSTMENTS(1) PRE-MERGER
-------------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
REVENUE.............................................. $ $ 5,108,225 $ $ 5,108,225
-------- ------------ ----------- ------------
EXPENSES:
Operating............................................ 4,469,879 4,469,879
Selling, General and Administrative.................. 4,454,102 29,240W 4,483,342
Depreciation and amortization........................ 1,532,351 1,050,771Q 2,583,122
Write down of property and equipment................. 1,172,468 1,172,468
-------- ------------ ----------- ------------
Total Expenses....................................... 11,628,800 1,080,011 12,708,811
-------- ------------ ----------- ------------
Operating loss....................................... (6,520,575) (1,080,011) (7,600,586)
-------- ------------ ----------- ------------
OTHER (INCOME) EXPENSE:
Interest, net........................................ 4,772,896 (4,406,328)S 182,868
(183,700)V
Gain on disposition of property and equipment, net... (26,378) (26,378)
Other................................................ 218,228 218,228
-------- ------------ ----------- ------------
4,964,746 (4,590,028) 374,718
-------- ------------ ----------- ------------
LOSS BEFORE MINORITY INTEREST........................ (11,485,321) 3,510,017 (7,975,304)
MINORITY INTEREST IN LOSS OF SUBSIDIARY.............. 37,863 37,863
-------- ------------ ----------- ------------
Net loss............................................. (11,447,458) 3,510,017 (7,937,441)
PREFERRED STOCK DIVIDENDS............................ (4,440,000)R (4,440,000)
-------- ------------ ----------- ------------
Loss attributable to common shareholders............. $ $(11,447,458) $ (929,983) $(12,377,441)
======== ============ =========== ============
PER SHARE AMOUNTS:
Basic and diluted loss per common share..............
Basic and diluted weighted average common shares.....
<CAPTION>
PRO FORMA
FIRSTLINK ADJUSTMENTS(2) PRO FORMA
----------- -------------- ------------
<S> <C> <C> <C>
REVENUE.............................................. $ 1,246,011 $ $ 6,354,236
----------- ---------- ------------
EXPENSES:
Operating............................................ 968,115 5,437,994
Selling, General and Administrative.................. 1,772,421 6,255,763
Depreciation and amortization........................ 103,148 297,726Q 2,983,996
Write down of property and equipment................. 1,172,468
----------- ---------- ------------
Total Expenses....................................... 2,843,684 297,726 15,850,221
----------- ---------- ------------
Operating loss....................................... (1,597,673) (297,726) (9,495,985)
----------- ---------- ------------
OTHER (INCOME) EXPENSE:
Interest, net........................................ 96,998 279,866
Gain on disposition of property and equipment, net... (26,378)
Other................................................ 139,303 357,531
----------- ---------- ------------
236,301 611,019
----------- ---------- ------------
LOSS BEFORE MINORITY INTEREST........................ (1,833,974) (297,726) (10,107,004)
MINORITY INTEREST IN LOSS OF SUBSIDIARY.............. 37,863
----------- ---------- ------------
Net loss............................................. (1,833,974) (297,726) (10,069,141)
PREFERRED STOCK DIVIDENDS............................ 4,440,000T (4,440,000)
(4,440,000)T
----------- ---------- ------------
Loss attributable to common shareholders............. $(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 3,175,000U 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.
F-51
<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 HOLDINGS COMMUNICATIONS ADJUSTMENTS(1) PRE-MERGER
-------------- --------------- -------------- -----------
<S> <C> <C> <C> <C>
REVENUE................................................. $ $ 2,831,079 $ $2,831,079
--------- ----------- ----------- -----------
EXPENSES:
Operating............................................... 2,100,739 2,100,739
Selling, General and Administrative..................... 1,554,807 14,620W 1,569,427
Depreciation and amortization........................... 826,298 525,385Q 1,351,683
Stock compensation expense.............................. 849,575 849,575
--------- ----------- ----------- -----------
Total Expenses.......................................... 849,575 4,481,844 540,005 5,871,424
--------- ----------- ----------- -----------
Operating loss.......................................... (849,575) (1,650,765) (540,005) (3,040,345)
--------- ----------- ----------- -----------
OTHER (INCOME) EXPENSE:
Interest, net........................................... 1,722,942 (1,607,173)S 23,919
Gain on disposition of property and equipment, net...... (91,850)V
Other................................................... 72,871 72,871
--------- ----------- ----------- -----------
1,795,813 (1,699,023) 96,790
--------- ----------- ----------- -----------
LOSS BEFORE MINORITY INTEREST........................... (849,575) (3,446,578) 1,159,018 (3,137,135)
MINORITY INTEREST IN LOSS OF SUBSIDIARY................. (2,414) (2,414)
--------- ----------- ----------- -----------
Net loss................................................ (849,575) (3,448,992) 1,159,018 (3,139,549)
PREFERRED STOCK DIVIDENDS............................... (2,220,000)R (2,220,000)
--------- ----------- ----------- -----------
Loss attributable to common shareholders................ $(849,575) $(3,448,992) $(1,060,982) $(5,359,549)
========= =========== =========== ===========
PER SHARE AMOUNTS:
Basic and diluted loss per common share.................
Basic and diluted weighted average common shares........
<CAPTION>
PRO FORMA
FIRSTLINK ADJUSTMENTS(2) PRO FORMA
---------- -------------- -----------
<S> <C> <C> <C>
REVENUE................................................. $ 676,415 $ $ 3,507,494
---------- ----------- -----------
EXPENSES:
Operating............................................... 538,075 2,638,814
Selling, General and Administrative..................... 827,813 2,397,240
Depreciation and amortization........................... 114,453 148,863Q 1,614,999
Stock compensation expense.............................. 849,575
---------- ----------- -----------
Total Expenses.......................................... 1,480,341 148,863 7,500,628
---------- ----------- -----------
Operating loss.......................................... (803,926) (148,863) (3,993,134)
---------- ----------- -----------
OTHER (INCOME) EXPENSE:
Interest, net........................................... (55,724) (31,805)
Gain on disposition of property and equipment, net......
Other................................................... 5,986 78,857
---------- ----------- -----------
(49,738) 47,052
---------- ----------- -----------
LOSS BEFORE MINORITY INTEREST........................... (754,188) (148,863) (4,040,186)
MINORITY INTEREST IN LOSS OF SUBSIDIARY................. (2,414)
---------- ----------- -----------
Net loss................................................ (754,188) (148,863) (4,042,600)
PREFERRED STOCK DIVIDENDS............................... 2,220,000T (2,220,000)
(2,220,000)T
---------- ----------- -----------
Loss attributable to common shareholders................ $ (754,188) $ (148,863) $(6,262,600)
========== =========== ===========
PER SHARE AMOUNTS:
Basic and diluted loss per common share................. $ (0.21) $ (0.92)
========== ===========
Basic and diluted weighted average common shares........ 3,599,102 3,175,000U 6,774,102
========== ===========
</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.
F-52
<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.
C. To eliminate the US Online equity accounts as well as the assets and
liabilities not assumed by USOL as follows:
<TABLE>
<CAPTION>
<S> <C> <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.
F-53
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION (CONTINUED)
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.
K. To reflect the payment of FirstLink's short-term note receivable from US
Online in adjustment "E" above.
L. To reflect the issuance by FirstLink of 1,480,000 shares of preferred stock
in exchange for the outstanding preferred stock of USOL.
M. To eliminate the retained deficit of FirstLink.
N. To reflect the issuance by FirstLink of 3,175,000 shares of no par common
stock in exchange for the common stock of USOL.
O. 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>
<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>
P. To eliminate the pre-merger pro forma additional paid in capital of USOL.
Q. To record amortization of goodwill and other assets over ten and five years,
respectively.
R. To record dividends on the preferred shares at the stated rate of 12% per
annum.
S. 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.
F-54
<PAGE>
FIRSTLINK COMMUNICATIONS, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION (CONTINUED)
T. To record dividends on the FirstLink preferred shares and eliminate the
dividends on the USOL preferred shares.
U. 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.
V. To record the interest income on the $3,674,000 note described in adjustment
"H" above.
W. 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.
F-55
<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>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE/SECTION HEADING PAGE
- --------------- ------- --------
<C> <S> <C>
ARTICLE I DEFINITIONS ................................................... 1
1.1 Definitions................................................. 1
ARTICLE II THE MERGER ................................................... 7
2.1 Merger; Effective Time...................................... 7
2.2 Closing..................................................... 7
2.3 Effect of the Merger........................................ 8
2.4 Articles of Incorporation; By-laws.......................... 8
2.5 Directors and Officers...................................... 8
2.6 Effect on Capital Stock..................................... 8
2.7 Exchange of Certificates.................................... 9
2.8 Stock Transfer Books........................................ 10
2.9 Dissenting Shares........................................... 10
2.10 No Further Ownership Rights in USOL Stock................... 11
2.11 Lost, Stolen or Destroyed Certificates...................... 11
2.12 Tax and Accounting Consequences............................. 11
2.13 Adjustments................................................. 11
ARTICLE III REPRESENTATIONS AND WARRANTIES OF FLCI ...................... 11
3.1 Organization................................................ 11
3.2 Capitalization.............................................. 12
3.3 SEC Filings................................................. 12
3.4 Qualification in Foreign Jurisdictions...................... 12
3.5 Authority Relative to this Agreement........................ 13
3.6 No Conflict; Required Filings and Consents.................. 13
3.7 Compliance with Laws; Permits............................... 13
3.8 Financial Statements........................................ 14
3.9 Absence of Certain Changes or Events........................ 14
3.10 Material Contracts.......................................... 14
3.11 Accounts Receivable......................................... 15
3.12 No Undisclosed Liabilities.................................. 15
3.13 Absence of Litigation....................................... 15
3.14 Employee Matters............................................ 16
3.15 Labor Matters............................................... 16
3.16 Restrictions on Business Activities......................... 16
3.17 Real Property............................................... 16
3.18 Equipment and Vehicles...................................... 17
3.19 Inventories................................................. 17
3.20 Taxes....................................................... 17
3.21 Environmental Matters....................................... 18
3.22 Brokers..................................................... 19
3.23 Interested Party Transactions............................... 19
3.24 Insurance Policies.......................................... 19
3.25 Vote Required............................................... 19
3.26 Other Negotiations.......................................... 19
3.27 Full Disclosure............................................. 19
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
ARTICLE/SECTION HEADING PAGE
- --------------- ------- --------
<C> <S> <C>
3.28 Anti-takeover Law........................................... 20
3.29 Intellectual Property....................................... 20
3.30 Absence of Certain Business Practices....................... 21
3.31 Territorial Restrictions.................................... 21
3.32 Year 2000 Compliance........................................ 21
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF USOL ....................... 22
4.1 Organization................................................ 22
4.2 Capitalization.............................................. 22
4.3 Qualification in Foreign Jurisdictions...................... 22
4.4 Authority Relative to this Agreement........................ 23
4.5 No Conflict; Required Filings and Consents.................. 23
4.6 Brokers..................................................... 23
4.7 Other Negotiations.......................................... 24
4.8 Full Disclosure............................................. 24
4.9 Lockup Agreement............................................ 24
Incorporation of Representations and Warranties By
4.10 Reference................................................... 25
ARTICLE V CONDUCT OF BUSINESS PENDING THE MERGER ........................ 25
5.1 Conduct of Business by USOL and FLCI Pending the Merger..... 25
5.2 No Solicitation by USOL or FLCI............................. 27
ARTICLE VI ADDITIONAL AGREEMENTS ........................................ 28
6.1 Proxy Statement............................................. 28
6.2 FLCI Stockholders' Meeting.................................. 28
6.3 Access to Information; Confidentiality...................... 29
6.4 Consents, Approvals......................................... 29
6.5 Stock Options............................................... 29
6.6 Warrants.................................................... 30
6.7 Notification of Certain Matters............................. 30
6.8 Public Announcements........................................ 30
6.9 Application For Nasdaq Approval............................. 30
6.10 Delivery of Additional Filings.............................. 31
6.11 Accountant's Comfort Letters................................ 31
6.12 Indemnification; Directors' and Officers' Insurance......... 31
6.13 Employee Benefits........................................... 31
6.14 Stockholder Litigation...................................... 32
6.15 Accredited Investors........................................ 32
ARTICLE VII CONDITIONS TO THE MERGER .................................... 32
Conditions to Obligation of Each Party to Effect the
7.1 Merger...................................................... 32
7.2 Additional Conditions to Obligations of FLCI................ 33
7.3 Additional Conditions to Obligation of USOL................. 34
ARTICLE VIII TERMINATION ................................................ 34
8.1 Termination................................................. 34
8.2 Certain Actions Prior to Termination........................ 36
8.3 Effect of Termination....................................... 37
8.4 Fees and Expenses........................................... 37
ARTICLE IX ARBITRATION; CONSENT TO JURISDICTION ......................... 38
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
ARTICLE/SECTION HEADING PAGE
- --------------- ------- --------
<C> <S> <C>
9.1 Submission to Jurisdiction.................................. 38
9.2 Waiver of Immunity and Inconvenient Forum................... 38
9.3 Arbitration Procedures...................................... 39
9.4 Final Arbitration Decisions................................. 39
9.5 Claims for Unpaid Balance................................... 39
ARTICLE X GENERAL PROVISIONS ............................................ 39
10.1 Attorney's Fees............................................. 39
Effectiveness of Representations, Warranties and Agreements;
10.2 Knowledge, Etc.............................................. 39
10.3 Notices..................................................... 40
10.4 Amendment................................................... 41
10.5 Waiver...................................................... 41
10.6 Severability................................................ 41
10.7 Assignment.................................................. 41
10.8 Parties in Interest......................................... 42
10.9 Failure or Indulgence Not Waiver; Remedies Cumulative....... 42
10.10 Governing Law............................................... 42
10.11 Counterparts................................................ 42
10.12 Captions.................................................... 42
10.13 Time........................................................ 42
</TABLE>
ATTACHMENTS TO AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
SCHEDULES:
<TABLE>
<S> <C> <C>
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
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C> <C>
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
</TABLE>
iv
<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).
<PAGE>
"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.
2
<PAGE>
"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.
3
<PAGE>
"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).
4
<PAGE>
"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).
5
<PAGE>
"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.
6
<PAGE>
"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 transactions 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
7
<PAGE>
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
8
<PAGE>
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
9
<PAGE>
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.
10
<PAGE>
(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.
11
<PAGE>
(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.
12
<PAGE>
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
13
<PAGE>
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
14
<PAGE>
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.
15
<PAGE>
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
16
<PAGE>
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 completed 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
17
<PAGE>
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
18
<PAGE>
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.
19
<PAGE>
(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
20
<PAGE>
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.
21
<PAGE>
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
22
<PAGE>
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
23
<PAGE>
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
24
<PAGE>
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);
25
<PAGE>
(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;
26
<PAGE>
(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 representations 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.
27
<PAGE>
(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.
28
<PAGE>
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.
29
<PAGE>
(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
30
<PAGE>
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
31
<PAGE>
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 receive 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 opportunity 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.
32
<PAGE>
(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.
33
<PAGE>
(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
34
<PAGE>
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
35
<PAGE>
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 intention 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 intention 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
36
<PAGE>
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
37
<PAGE>
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.
38
<PAGE>
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 proceedings 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
39
<PAGE>
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.
40
<PAGE>
(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 performance 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
41
<PAGE>
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 any
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.
42
<PAGE>
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.
<TABLE>
<S> <C> <C>
FIRSTLINK COMMUNICATIONS, INC.
By:
-----------------------------------------
Name: A. Roger Pease
Title: President and Chief Executive
Officer
USOL HOLDINGS, INC.
By:
-----------------------------------------
Name: Rob Solomon
Title: President
</TABLE>
43
<PAGE>
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.
<PAGE>
(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
<PAGE>
(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.
3
<PAGE>
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.
4
<PAGE>
(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.
5
<PAGE>
APPENDIX 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.
<PAGE>
APPENDIX 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.
<PAGE>
APPENDIX E
FIRSTLINK COMMUNICATIONS, INC.
1999 INCENTIVE PLAN
SEPTEMBER 23, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
SECTION 1. DEFINITIONS.............................................. 1
SECTION 2. SHARES OF STOCK SUBJECT TO THE PLAN...................... 5
2.1 Maximum Number of Shares.................................... 5
2.2 Limitation of Shares........................................ 6
2.3 Description of Shares....................................... 6
2.4 Registration and Listing of Shares.......................... 7
SECTION 3. ADMINISTRATION OF THE PLAN............................... 7
3.1 Committee................................................... 7
3.2 Duration, Removal, Etc...................................... 7
3.3 Meetings and Actions of Committee........................... 7
3.4 Committee's Powers.......................................... 8
SECTION 4. ELIGIBILITY AND PARTICIPATION............................ 8
4.1 Eligible Individuals........................................ 8
4.2 Grant of Awards............................................. 8
4.3 Date of Grant............................................... 8
4.4 Award Agreements............................................ 9
4.5 Limitation for Incentive Options............................ 9
4.6 No Right to Award........................................... 9
SECTION 5. TERMS AND CONDITIONS OF OPTIONS.......................... 9
5.1 Number of Shares............................................ 9
5.2 Vesting..................................................... 9
5.3 Expiration of Options....................................... 9
5.4 Exercise Price.............................................. 9
5.5 Method of Exercise.......................................... 9
5.6 Incentive Option Exercises.................................. 10
5.7 Medium and Time of Payment.................................. 10
5.8 Payment with Sale Proceeds.................................. 10
5.9 Payment of Taxes............................................ 10
5.10 Limitation on Aggregate Value of Shares That May Become
First Exercisable During Any Calendar Year Under an
Incentive Option.......................................... 11
5.11 No Fractional Shares........................................ 11
5.12 Modification, Extension, and Renewal of Options............. 11
5.13 Other Agreement Provisions.................................. 11
SECTION 6. STOCK APPRECIATION RIGHTS................................ 12
6.1 Form of Right............................................... 12
6.2 Rights Related to Options................................... 12
(a) Exercise and Transfer....................................... 12
(b) Value of Right.............................................. 12
6.3 Right Without Option........................................ 12
(a) Number of Shares............................................ 12
(b) Vesting 12
(c) Expiration of Rights........................................ 13
(d) Value of Right.............................................. 13
6.4 Limitations on Rights....................................... 13
6.5 Payment of Rights........................................... 13
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
6.6 Payment of Taxes............................................ 13
6.7 Other Agreement Provisions.................................. 13
SECTION 7. RESTRICTED STOCK AWARDS.................................. 13
7.1 Restrictions................................................ 13
(a) Transferability............................................. 13
(b) Conditions to Removal of Restrictions....................... 13
(c) Legend...................................................... 13
(d) Possession.................................................. 13
(e) Other Conditions............................................ 13
7.2 Expiration of Restrictions.................................. 14
7.3 Rights as Shareholder....................................... 14
7.4 Payment of Taxes............................................ 14
7.5 Other Agreement Provisions.................................. 26
SECTION 8. AWARDS TO NON-EMPLOYEE DIRECTORS......................... 15
8.1 Awards to Committee Members................................. 15
8.2 Eligibility for Awards...................................... 15
SECTION 9. ADJUSTMENT PROVISIONS.................................... 15
9.1 Adjustment of Awards and Authorized Stock................... 15
9.2 Changes in Control.......................................... 16
9.3 Restructuring Without Change in Control..................... 16
9.4 Notice of Restructuring..................................... 18
SECTION 10. ADDITIONAL PROVISIONS................................... 18
10.1 Termination of Employment................................... 18
10.2 Other Loss of Eligibility--Non-Employees.................... 18
10.3 Death....................................................... 18
10.4 Disability.................................................. 19
10.5 Leave of Absence............................................ 19
10.6 Transferability of Awards................................... 19
10.7 Forfeiture and Restrictions on Transfer..................... 19
10.8 Delivery of Certificates of Stock........................... 20
10.9 Conditions to Delivery of Stock............................. 20
10.10 Certain Directors and Officers.............................. 20
10.11 Securities Act Legend....................................... 21
10.12 Legend for Restrictions on Transfer......................... 21
10.13 Rights as a Shareholder..................................... 21
10.14 Furnish Information......................................... 21
10.15 Obligation to Exercise...................................... 21
10.16 Adjustments to Awards....................................... 21
10.17 Remedies.................................................... 22
10.18 Information Confidential.................................... 22
10.19 Consideration............................................... 22
SECTION 11. DURATION AND AMENDMENT OF PLAN.......................... 22
11.1 Duration.................................................... 22
11.2 Amendment................................................... 22
SECTION 12. GENERAL................................................. 23
12.1 Application of Funds........................................ 23
12.2 Right of the Corporation and Subsidiaries to Terminate
Employment................................................ 23
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
12.3 No Liability for Good Faith Determinations.................. 23
12.4 Other Benefits.............................................. 23
12.5 Exclusion From Pension and Profit-Sharing Compensation...... 23
12.6 Execution of Receipts and Releases.......................... 23
12.7 Unfunded Plan............................................... 23
12.8 No Guarantee of Interests................................... 24
12.9 Payment of Expenses......................................... 24
12.10 Corporation Records......................................... 24
12.11 Information................................................. 24
12.12 No Liability of Corporation................................. 24
12.13 Corporation Action.......................................... 24
12.14 Severability................................................ 24
12.15 Notices..................................................... 25
12.16 Successors.................................................. 25
12.17 Headings.................................................... 25
12.18 Governing Law............................................... 25
12.19 Word Usage.................................................. 25
</TABLE>
iii
<PAGE>
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
<PAGE>
(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 consummation 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 required, the consummation of such a liquidation,
sale, or disposition 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 indirectly by the
shareholders of the Corporation in substantially the same proportions as
their ownership of Stock of the Corporation.
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 Subsidiaries
(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
2
<PAGE>
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 Association 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
3
<PAGE>
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,
4
<PAGE>
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
5
<PAGE>
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
6
<PAGE>
(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
7
<PAGE>
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.
8
<PAGE>
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
9
<PAGE>
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
10
<PAGE>
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
11
<PAGE>
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.
12
<PAGE>
(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.
13
<PAGE>
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
14
<PAGE>
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
15
<PAGE>
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;
16
<PAGE>
(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
17
<PAGE>
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
18
<PAGE>
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.
19
<PAGE>
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.
20
<PAGE>
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
21
<PAGE>
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.
22
<PAGE>
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
23
<PAGE>
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
24
<PAGE>
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.
<TABLE>
<S> <C> <C>
FLCI, INC.,
An Oregon corporation
By:
-----------------------------------------
A. Roger Pease, PRESIDENT
</TABLE>
25
<PAGE>
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY Votes MUST be Indicated
CARD PROMPTLY USING THE ENCLOSED ENVELOPE (X) In Black or Blue ink. [ ]
- --------------------------------------------------------------------------------
FORM OF PROXY FOR COMMON STOCK OF FIRSTLINK COMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
FIRSTLINK COMMUNICATIONS, INC.
C/O AMERICAN SECURITIES TRANSFER & TRUST, INC.
POST OFFICE BOX 1596
DENVER COLORADO 80201
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 29, 1999, at the Special Meeting of shareholders to be held on
December 15, 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.
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 3,175,000 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.
(Continued, and to be signed and dated on reverse side)
<PAGE>
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 [ ]
Dated _________________________, 1999
_____________________________________
Signature
_____________________________________
Signature if held jointly
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.
