<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 25, 1998
REGISTRATION NO. 333-51781
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
U.S. ONLINE COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 4841 74-2874568
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
10300 METRIC BOULEVARD
AUSTIN, TEXAS 78758
(512) 651-3767
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ROBERT G. SOLOMON, CHIEF EXECUTIVE OFFICER
10300 METRIC BOULEVARD
AUSTIN, TEXAS 78758
(512) 651-3767
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
LAURA T. PUCKETT SHARI K. KROUNER
WILLIAM W. BARKER JAMES A. GRAYER
GRAHAM & JAMES LLP/RIDDELL WILLIAMS P.S. KRAMER, LEVIN, NAFTALIS & FRANKEL
1001 FOURTH AVENUE PLAZA, SUITE 4500 919 THIRD AVENUE
SEATTLE, WASHINGTON 98154 NEW YORK, NEW YORK 10022
TEL: (206) 624-3600 TEL: (212) 715-9100
FAX: (206) 389-1708 FAX: (212) 715-8000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box: [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===============================================================================================================================
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TO BE REGISTERED REGISTERED OFFERING PRICE(1) AGGREGATE OFFERING PRICE REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value(2) 5,866,667 $7.50 $44,000,003 $12,980
- -------------------------------------------------------------------------------------------------------------------------------
Representatives' Options(3)(4) 350,000 $9.00 $ 3,150,000 $ 929
- -------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value,
underlying Representatives' Options 350,000 $9.00 $ 0(5) $ 0(5)
- -------------------------------------------------------------------------------------------------------------------------------
Total 6,216,667 $47,150,003 $13,909(5)
===============================================================================================================================
</TABLE>
(1) Estimated pursuant to Rule 457(a) under the Securities Act solely for the
purpose of calculating the registration fee.
(2) Includes 3,500,000 shares of Common Stock offered by the Company; 525,000
shares of Common Stock to cover over-allotment options, if any; 800,000
shares of Common Stock registered for resale by the LLC; 866,667 shares of
Common Stock registered for resale by purchasers in the Interim Financing;
and 175,000 shares of Common Stock issuable on exercise of the Warrants,
none of which shares are presently outstanding.
(3) Represents five-year Representatives' Options to purchase 350,000 shares of
Common Stock at an exercise price equal to 120% of the initial public
offering price.
(4) Pursuant to Rule 416, this Registration Statement also covers an
indeterminate number of shares of Common Stock that may be issued to cover
future anti-dilution adjustments under the terms of the Representatives'
Options.
(5) Pursuant to Rule 457(i) no filing fee is due with respect to the 350,000
shares of Common Stock issuable on exercise of the Representatives' Options.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 25, 1998
PROSPECTUS
3,500,000 SHARES
LOGO
COMMON STOCK
------------------------
U.S. OnLine Communications, Inc. (the "Company") hereby offers 3,500,000
shares of common stock, par value $.001 per share (the "Common Stock"), of the
Company (the "Offering"). Prior to the Offering, there has been no public market
for the Common Stock and there can be no assurance that a market for the Common
Stock will be sustained following the Offering. It is anticipated that the
initial public offering price for the Common Stock will be $7.50 per share. See
"Underwriting" for factors considered in determining the initial public offering
price of the Common Stock. Application has been made for quotation of the Common
Stock on the Nasdaq National Market under the symbol "USOL." The Company has
also registered 1,841,667 shares of Common Stock on behalf of selling
stockholders (the "Selling Stockholders"), none of which shares are presently
being offered and all of which are subject to lock-up agreements with Barington
Capital Group, L.P. ("Barington"). See "Shares Eligible for Future Sale" and
"Underwriting."
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES MATERIAL RISKS AND IMMEDIATE AND
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 9 AND "DILUTION."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
==================================================================================================================
PROCEEDS TO
PRICE TO PUBLIC UNDERWRITING DISCOUNT COMPANY(1)(2)
- ------------------------------------------------------------------------------------------------------------------
Per Share........................... $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3)............................ $ $ $
==================================================================================================================
</TABLE>
(1) Excludes a non-accountable expense allowance payable by the Company to
Barington and Cruttenden Roth Incorporated ("Cruttenden"), the
representatives of the several underwriters (the "Representatives"), in an
amount equal to 3% of the gross proceeds of the Offering, the value of
five-year options (the "Representatives' Options") to purchase 350,000
shares of Common Stock at an exercise price equal to 120% of the initial
public offering price being issued to the Representatives and certain other
compensation payable to the Underwriters. The Company has agreed to
indemnify the Underwriters against certain civil liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated to be
$1,285,000, including the Representatives' non-accountable expense
allowance.
(3) The Company has granted the Underwriters a 45-day option to purchase up to
525,000 additional shares of Common Stock at the Price to the Public less
Underwriting Discount to cover over-allotments, if any. If the Underwriters
exercise this option in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by the Underwriters and
subject to the right to reject any order in whole or in part, and subject to the
conditions set forth in the Underwriting Agreement between the Company and the
Underwriters. It is expected that the delivery of certificates representing the
shares of Common Stock will be made against payment therefor at the offices of
Barington Capital Group, L.P., 888 Seventh Avenue, New York, New York 10019 or
through the facilities of The Depository Trust Company, on or about
, 1998.
------------------------
BARINGTON CAPITAL GROUP CRUTTENDEN ROTH
INCORPORATED
------------------------
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE> 3
[MAP OF STATES INDICATING SERVICE AREAS]
------------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT AND OTHER STABILIZING TRANSACTIONS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
The Company intends to furnish its stockholders annual reports containing
financial statements audited by independent accountants and such other periodic
reports as the Company may deem appropriate or as may be required by law.
<PAGE> 4
Unless otherwise indicated, (i) the information in this Prospectus assumes
that the Underwriters' over-allotment option is not exercised, (ii) the
information in this Prospectus gives effect to the acquisition by the Company of
substantially all of the assets, and the assumption by the Company of certain
liabilities (the "Asset Acquisition"), of U.S. OnLine Communications L.L.C., a
Washington limited liability company formed in 1995 (the "LLC"), which
transaction will be effected prior to consummation of the Offering, and (iii)
the "Company" includes U.S. OnLine Communications, Inc., the LLC, U.S. On-Line
Cable, L.L.C., a Texas limited liability company formed in 1994 ("Cable"), and
subsidiaries. See "Certain Transactions." Refer to the Glossary for industry
terms used in this Prospectus.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements appearing elsewhere in this
Prospectus.
THE COMPANY
GENERAL
The Company markets and provides cable television ("CATV") and enhanced
local and long distance telephone services, collectively referred to as
residential multi-tenant services ("RMTS"), to residents of apartment complexes
and other concentrated residential sites ("multifamily dwelling units" or
"MDUs"). It delivers these services under right of entry contracts ("ROE
Contracts") with MDU property owners and service agreements with MDU residents.
The Company offers property owners two significant incentives to enter into ROE
Contracts with it. First, because the Company enjoys cost benefits available to
it as a private cable operator, the Company is able to offer property owners a
share of the revenue generated by the residents who purchase services from the
Company. Second, the Company believes it offers superior customer service, which
enhances the owner's ability to attract tenants.
The Company currently has ROE Contracts with various property owners
including institutional property owners such as Amli Residential Properties
Trust, Gables Residential Trust, Lincoln Property Company and Equity Residential
Properties Trust. The Company targets demographically favorable MDUs clustered
in geographic regions with growing populations and currently services MDUs
located in Austin, Dallas-Forth Worth, Denver, San Antonio and the Washington,
D.C. metropolitan area (including the Virginia suburbs). After executing a ROE
Contract, the Company builds out "passings" on a property. A "passing" refers to
each service for which an apartment unit is wired, and, therefore, an apartment
unit wired for both CATV and telephony services counts as two passings. Once the
passings are operational, the Company markets its services directly to MDU
residents.
The Company has experienced significant growth in the total number of
properties covered by ROE Contracts, passings and subscribers. From December 31,
1996 to March 31, 1998, the number of properties covered by the Company's ROE
Contracts increased from 28 to 43 (an increase of 54%), the number of passings
increased from approximately 7,600 to approximately 18,000 (an increase of
approximately 135%), and the number of subscribers increased from approximately
3,600 to approximately 10,000 (an increase of approximately 180%).
GROWTH STRATEGY
The Company's primary objective is to become a leading provider of RMTS in
the United States. The Company believes it can achieve this objective by:
- targeting MDUs with favorable demographics,
- capturing the benefits of geographic clustering,
- offering competitive products and superior customer service, and
- utilizing a flexible and reliable technology platform.
3
<PAGE> 5
The key components of the Company's growth strategy include:
- generating additional ROE Contracts in existing markets,
- offering its services in new markets,
- cross-selling additional related products and services to its existing
subscriber base once a market has been developed, and
- pursuing acquisitions of other CATV and telephony service providers.
INDUSTRY AND MARKET OVERVIEW
The Company estimates that the potential market for its services 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 CATV and telephony service, the Company believes that
fewer than 15% are currently serviced by an RMTS provider. Due to consolidation
of ownership of MDUs, there has been downward pressure on cashflow returns to
property owners, creating added incentives on the part of property owners to
find new sources of revenue. In addition, as a result of the competitive nature
of the MDU industry, property owners are looking for more products and services
to distinguish their communities from those of their competitors.
PRODUCTS AND SERVICES
The Company currently provides CATV and telephony services to MDU residents
at competitive rates. The Company's CATV service offers a full range of popular
programming tailored specifically for each MDU or region. The Company obtains
its CATV programming through program access agreements with a number of
suppliers. The Company currently purchases standard and enhanced local and
long-distance telephony services in bulk and resells them over networked central
office telecommunications platforms. In 1996 and 1997, the Company derived 93%
and 69% of its revenues from CATV services, and 7% and 26% from telephony
services, respectively.
In addition to offering CATV and telephony services, in the near future the
Company intends to roll out related services such as paging, intrusion alarm,
Internet access, and high-speed data. The Company is also exploring additional
services including utility metering and financial and insurance products.
MARKETING AND SALES
The Company markets its services to two distinct customer groups. The first
group consists of property owners, some of which are the largest multifamily
property owners and developers in the industry, and the second group consists of
MDU residents. The Company markets its services to property owners to secure ROE
Contracts. Under a ROE Contract, the Company generally becomes the exclusive
provider of CATV services to that MDU and a non-exclusive provider of telephony
and related services. After entering into a ROE Contract, the Company builds out
its passings on the property and provides training and support to the property
owner's on-site leasing agents. Once the passings are operational, the on-site
leasing agents market the Company's services to MDU residents.
The Company believes that its ability to secure ROE Contracts is a key
component of its success and has contributed to its substantial growth to date.
ROE Contracts executed by the Company generally have a term of eight to fifteen
years and provide strong financial incentives to property owners. The Company
believes that its ROE Contracts align its interests with those of the property
owners. The Company also believes that it offers competitively priced CATV and
telephony products and superior customer service, which enhance the amenity
package offered by a property owner. The Company believes that these
enhancements increase occupancy and resident retention in MDUs served by the
Company.
OPERATING BENEFITS
The Company is considered to be a private cable operator and therefore is
subject to less regulatory oversight than traditional franchise cable operators.
The principal benefit of this regulatory status is that,
4
<PAGE> 6
unlike a traditional cable operator, the Company is not required to provide
universal access by building a network throughout its designated franchise area.
Instead, the Company constructs facilities only in those MDUs where it has
entered into a ROE Contract with the property owner. This situation allows the
Company to keep infrastructure development and maintenance costs at a minimum,
thereby enabling the Company to offer revenue-sharing arrangements that induce
property owners to enter into ROE Contracts with the Company. The Company also
benefits from the fact that it is not subject to uniform pricing restrictions
and, as a result, can create custom pricing packages and tiers for individual
properties, for groups of commonly owned properties and for particular
geographic markets.
HISTORY
The Company was incorporated in Delaware in March 1998 in anticipation of
the Offering. Prior to the Asset Acquisition, which will be consummated prior to
the Offering, the business operations of the Company were conducted through its
predecessors, the LLC, Cable and Cable's 50%-owned subsidiary U.S.-Austin Cable
Associates I, Ltd. ("USAC"). The Company's principal executive offices are
located at 10300 Metric Boulevard, Austin, Texas 78758, and its telephone number
is (512) 651-3767. The Company's Web site address is www.usolcomm.com.
Information accessed on or through the Company's Web site does not constitute a
part of this Prospectus.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.................. 3,500,000 shares
Common Stock outstanding:
Before the Offering(1)............................. 2,166,667 shares
After the Offering................................. 5,666,667 shares
Risk Factors......................................... The Common Stock offered hereby involves material
risks. Prospective investors should carefully
consider the risks described in "Risk Factors."
Use of Proceeds...................................... The net proceeds of the Offering will be used by the
Company for expansion of facilities and services,
enhancement to management information and billing
systems, repayment of indebtedness and general
corporate purposes. See "Use of Proceeds."
Proposed Nasdaq National Market symbol............... USOL
</TABLE>
- ---------------
(1) Includes 800,000 shares of Common Stock issued to the LLC in the Asset
Acquisition, 866,667 shares of Common Stock purchased by investors in
conjunction with an interim financing completed prior to the Offering, and
500,000 shares of Common Stock issued to key employees pursuant to the
Company's 1998 Restricted Stock Award Plan (the "1998 Restricted Stock
Plan"). Excludes shares of Common Stock issuable upon exercise of the
following warrants and options: (i) 175,000 shares of Common Stock issuable
upon exercise of two outstanding warrants to Aspen OnLine Investments, LLC
(100,000 shares) and Silicon Valley Bank (75,000 shares), respectively (the
"Warrants"); (ii) 1,000,000 shares of Common Stock reserved for issuance
under the Company's 1998 Non-Qualified Stock Option and Incentive Stock
Option Plan ("1998 Stock Option Plan"), of which options for 495,000 shares
have been granted as of the date of this Prospectus; and (iii) 350,000
shares of Common Stock issuable upon exercise of the Representatives'
Options. See "Certain Transactions," "Management--Benefit Plans,"
"Description of Capital Stock" and "Underwriting."
5
<PAGE> 7
SUMMARY FINANCIAL DATA
The pro forma financial data and the selected financial data of the LLC and
U.S. OnLine Communications, Inc. below should be read in conjunction with the
financial statements, Notes to Financial Statements, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and other
financial information included elsewhere in this Prospectus. The selected
financial data for the fiscal years ended December 31, 1996 and December 31,
1997 are derived from historical financial statements of the LLC. The LLC owned
a 50% interest in Cable during the year ended December 31, 1996 and, in the year
ended December 31, 1997, acquired the remaining interest in Cable. Therefore,
the unaudited pro forma statement of operations data for the LLC for the year
ended December 31, 1996 gives effect to the acquisition of the remaining 50% of
Cable as if that transaction had occurred on January 1, 1996. (See Note 2 of the
Notes to Financial Statements of the LLC.) The selected financial data for the
three months ended March 31, 1997 and March 31, 1998 are derived from the
unaudited financial statements of the LLC. The unaudited pro forma statement of
operations data for the LLC for the three months ended March 31, 1997 gives
effect to the acquisition of Cable as if that transaction had occurred on
January 1, 1997. The unaudited pro forma statement of operations data for the
Company for the year ended December 31, 1997 and for the three months ended
March 31, 1998 gives effect to the Interim Financing and the Asset Acquisition
(as defined below) as if those transactions had occurred on January 1, 1997 and
January 1, 1998, respectively.
<TABLE>
<CAPTION>
U.S. ONLINE COMMUNICATIONS L.L.C.
------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
---------------------------------------- -----------------------------------------
1998 1997 1997 1997 1996 1996
ACTUAL PRO FORMA(1) ACTUAL ACTUAL PRO FORMA(2) ACTUAL
----------- ------------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue................... $ 1,109,071 $ 385,000 $ 67,657 $ 2,721,293 $ 836,876 $ 58,407
Gross profit.................... 673,601 266,846 32,663 1,763,209 523,841 17,658
Loss from operations............ (1,608,023) (1,353,674) (776,081) (6,230,763) (4,118,677) (2,703,698)
Net loss........................ (2,283,804) (1,821,092) (1,381,603) (8,446,349) (5,107,494) (4,243,083)
OPERATING DATA(3):
CATV:
Operational Passings(i)......... 12,352 11,888(iii) 6,394
Basic Subscribers(ii)........... 8,261 7,592(iii) 3,333
Basic Penetration(iv)........... 67% 64% 52%
Premium Channel Subscriptions... 4,439 4,376 2,088
Premium-to-Basic Ratio(v)....... 54% 58% 63%
Average Monthly Revenue Per
Basic Subscriber(vi).......... $ 27.14 $ 25.81 $ N/A(xii)
TELEPHONY:
Operational Passing(vii)........ 5,217 4,985 1,190
Subscribers..................... 2,239 1,939 327
Subscriber Penetration.......... 43% 39% 27%
Average Monthly Revenue Per
Subscriber(viii):
Local Telephony Services.... $ 25.08 $ 24.39 N/A(xii)
Long-distance Telephony
Services.................. $ 32.54 $ 31.24 N/A(xii)
Lines(ix)....................... 2,804 2,392 409
Line Penetration(x)............. 54% 48% 34%
Average Monthly Revenue Per
Line(xi)...................... $ 46.01 $ 45.09 $ N/A(xii)
</TABLE>
6
<PAGE> 8
<TABLE>
<CAPTION>
U.S. ONLINE COMMUNICATIONS, INC.
PRO FORMA FOR THE
COMPLETED TRANSACTIONS(4)
--------------------------------
MARCH 31, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue............................................... $ 1,109,071 $ 2,721,293
Gross profit................................................ 673,601 1,763,209
Loss from operations........................................ (1,673,966) (6,490,373)
Net loss.................................................... (2,130,692) (7,870,853)
Net loss per share:
Basic..................................................... $ (0.98) $ (3.63)
----------- -----------
Diluted................................................... $ (0.75) $ (2.77)
=========== ===========
Weighted average shares used for computing net loss per
share:
Basic..................................................... 2,166,667 2,166,667
=========== ===========
Diluted................................................... 2,836,667 2,836,667
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
U.S. ONLINE COMMUNICATIONS, INC.
-------------------------------------------------
MARCH 31, 1998
-------------------------------------------------
PRO FORMA,
ACTUAL PRO FORMA(5) AS ADJUSTED(5)(6)
------------ ------------ -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 5,648,500 $ 7,374,622 $26,179,622
Working capital (deficit)................................... 2,765,134 (6,298,110) 16,756,890
Total assets................................................ 6,518,796 26,150,325 44,457,687
Long-term obligations, net of current maturities............ 1,500,000 5,566,529 5,566,529
Stockholders' equity........................................ 2,135,430 5,922,613 28,479,975
</TABLE>
- ---------------
(1) Pro forma summary financial data gives effect to the LLC's acquisition of
Cable as if it had occurred on January 1, 1997.
(2) Pro forma summary financial data gives effect to the LLC's acquisition of
100% of Cable as if it had occurred on January 1, 1996.
(3) Operating data is included for purposes of additional analysis and is not
derived from the historical financial statements of the LLC.
(4) Pro forma summary financial data gives effect to: (i) the sale of 65 units
for the year ended December 31, 1997 and 18.3 units for the three months
ended March 31, 1998, each unit consisting of a 15% senior subordinated
promissory note in the principal amount of $50,000 (the "Interim Notes") and
13,333.33 shares of Common Stock, and the issuance of the 14% subordinated
promissory note (the "Aspen Note") (together, the "Interim Financing"); (ii)
the Asset Acquisition, including the 10% promissory note (the "Asset
Acquisition Note") and 800,000 shares of Common Stock issued in the Asset
Acquisition; and (iii) the merger of Cable into the LLC.
(5) Pro forma summary balance sheet data gives effect to the following as if
they occurred on March 31, 1998: (i) the proceeds from the issuance of the
remaining 18.3 units in the Interim Financing; and (ii) the acquisition of
substantially all of the assets, and the assumption of certain liabilities,
of the LLC and the issuance of the Asset Acquisition Note and 800,000 shares
of Common Stock in the Asset Acquisition.
(6) Pro forma summary balance sheet data gives effect to the following as if
they occurred on March 31, 1998: (i) the proceeds from the issuance of
3,500,000 shares of Common Stock from the Offering (at the initial public
offering price of $7.50 per share), resulting in additions to stockholders'
equity of $26,250,000 reduced by estimated issuance costs of $3,195,000; and
(ii) payments by the Company of $3,250,000 to retire the Interim Notes (and
a related charge of $497,638 to expense related issuance costs) and
$1,000,000 to pay the first installment due under the Asset Acquisition
Note.
(i) Operational passings represents the number of MDU units with respect
to which the Company has connected its CATV services.
(ii) Includes the number of basic subscribers and premium subscribers at
such date.
7
<PAGE> 9
(iii) Excludes passings and subscribers in Atlanta, Georgia, which were
sold on March 6, 1998 pursuant to a purchase agreement with a third
party.
(iv) Basic penetration is calculated by dividing the total number of basic
subscribers at such date by the total number of operational passings.
(v) Premium-to-Basic Ratio is calculated by dividing the total number of
premium subscribers by the total number of basic subscribers.
(vi) Represents average monthly revenue from monthly service fees and
installation charges per the average number of basic subscribers for
the periods ended as of the date shown.
(vii) Represents the number of MDU units with respect to which the Company
has connected its telephony services.
(viii) Represents average monthly revenue from local and long-distance
service fees per the average number of subscribers for the periods
ended as of the date shown.
(ix) Lines represent the number of telephone lines currently being
provided to telephony service subscribers. A telephony service
subscriber can subscribe for more than one line.
(x) Line penetration is calculated by dividing the total number of
telephony lines at such date by the total number of units passed.
(xi) Represents average monthly revenue per the average number of lines
for the periods ended as of the date shown.
(xii) Information not available.
8
<PAGE> 10
RISK FACTORS
An investment in Common Stock involves material risks. Investors should
consider the following risks in addition to the other information in this
Prospectus.
This Prospectus contains certain forward-looking statements that involve
substantial risks and uncertainties. The words "anticipate," "believe,"
"estimate," "expect" and similar terms as they relate to the Company or its
management are intended to identify these forward-looking statements. The
Company's actual results and performance could differ materially from the
results and performance expressed in or implied by these forward-looking
statements. Factors that could cause or contribute to material differences
include those discussed in "Risk Factors," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business."
UNCERTAIN FUTURE PROFITABILITY; GOING CONCERN OPINION OF AUDITORS. The LLC
has incurred substantial net losses since its inception. The LLC reported a net
loss of $4,243,083 for the year ended December 31, 1996, and a net loss of
$8,446,349 for the year ended December 31, 1997. From inception through December
31, 1997, the LLC recorded an accumulated deficit of $14,909,214. Management
expects that the Company will continue to incur losses for the foreseeable
future, and there can be no assurance that the Company will achieve or sustain
profitability in the future. Coopers & Lybrand L.L.P., independent auditors of
the Company, the LLC and Cable, included an explanatory paragraph in their
reports on the financial statements of U.S. OnLine Communications, Inc., the LLC
and Cable, included in this Prospectus, expressing substantial doubt as to the
ability of U.S. OnLine Communications, Inc., the LLC and Cable to continue as
going concerns based on accumulated losses from operations, negative working
capital and negative cash flows. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 1 of Notes to the
respective financial statements.
SUBSTANTIAL LEVERAGE; RESTRICTIONS IN CONNECTION WITH INDEBTEDNESS. To
date, the Company has financed its operations primarily through loans from
equity owners, the Interim Financing, equipment lease financing and borrowings
under its $7,200,000 secured credit facility with Silicon Valley Bank, which
expires on October 15, 1998. The Silicon Valley Bank credit facility, the Aspen
Note and the Asset Acquisition Note contain covenants which, among other things,
restrict the Company's ability to dispose of assets or merge, incur debt, pay
distributions or take certain other corporate actions. By October 15, 1998, the
Company will be required to renew the Silicon Valley Bank credit facility or
obtain financing from another lender. There can be no assurance that such
financing will be obtainable on favorable terms, or at all. The inability to
obtain financing when required would have a material adverse effect on the
Company and the implementation of its growth strategy. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RISKS ASSOCIATED WITH RIGHT OF ENTRY CONTRACTS. The Company's strategy
relies in large part on its continuing ability to enter into long-term ROE
Contracts on satisfactory terms with owners of demographically favorable MDUs.
In addition, the Company depends upon third-party lenders to finance the
build-out of properties covered by ROE Contracts. The Company may not be able to
implement its growth plan as currently contemplated if the demographics or
occupancy rates of the MDUs served by the Company change, if in the future the
Company is unable to procure suitable ROE Contracts or finance the build-out of
properties covered by ROE Contracts, or if the cost of acquiring ROE Contracts
increases substantially as a result of increased competition or otherwise. The
ability of the Company to implement its growth plan could also be materially
adversely affected if lenders are unwilling to accept ROE Contracts as
collateral for debt financing. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company's ROE Contracts typically grant the Company the exclusive right
to provide CATV services, which the Company believes provides it with a
competitive advantage. Some states have adopted "mandatory access laws," which
could prevent alternative video providers, such as private cable operators, and
property owners from enforcing exclusivity provisions such as those included in
many of the Company's ROE Contracts. None of the states in which the Company
currently operates or plans to operate in the foreseeable future have mandatory
access laws. There can be no assurance that mandatory access laws will not be
adopted in states where the Company does business, or that the Company will not
expand its operations into states that
9
<PAGE> 11
have mandatory access laws. In addition, the Federal Communications Commission
("FCC") is reviewing the rights of various video programming service providers
to access private property, including MDUs, and is considering various
restrictions on the duration of contracts that grant exclusive access rights.
Thus, there can be no assurance that exclusive rights contained in the Company's
ROE Contracts will not be limited or abrogated, in whole or in part, by the
passage of mandatory access laws or regulatory action that may have a similar
effect. The inability to enforce the exclusivity provisions of ROE Contracts, in
whole or in part, could have a material adverse effect on the Company and its
ability to implement its current strategy. Moreover, even if the exclusivity
provisions of ROE Contracts remain fully enforceable, emerging technologies or
changing regulations may enable competitors of the Company to bypass property
owners entirely and market their products and services directly to MDU residents
via satellite broadcast, wireless transmission, telephone lines or otherwise,
which could reduce the competitive advantage provided by the Company's exclusive
ROE Contracts. See "Business--Government Regulation--CATV Regulatory Issues."
RISKS ASSOCIATED WITH MANAGEMENT INFORMATION AND BILLING SYSTEMS. The
Company's business requires a management information system ("MIS") and billing
system that can accurately and quickly process large amounts of data. Each
month, the Company processes over 150,000 individual phone calls and thousands
of other individual account transactions. Each of these must be properly billed
to the appropriate customer. On occasion, the Company experiences difficulties
with the ability of the MIS and billing system to track some types of billable
calls, in part due to technology limitations and in part due to the fact that
the current MIS and billing system is limited in the number of calls that it can
accurately process at one time. Errors and delays in processing customer calls
may undermine customer confidence and may result in customers switching their
telephone service to another company. While to date these difficulties and
limitations have not been material, the Company estimates that approximately
$750,000 will be required over the next twelve months to upgrade its MIS and
billing system to accurately handle the substantial additional transactions that
will be generated if the Company meets its business goals. The actual cost of
implementing such an upgrade may materially exceed management's estimates. The
Company has recently engaged a national management information system consulting
firm to assist it in its efforts to enhance its MIS and billing system.
Nonetheless, there can be no assurance that the Company will not encounter
material unforeseen difficulties and delays in upgrading its MIS and billing
system. Any such difficulties or delays could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company does not believe that the cost of implementing year 2000
compliant software and systems will have a material effect on the Company's
financial condition and results of operations; however, there can be no
assurance that the Company will not be impacted by year 2000 issues faced by
major distributors, suppliers and financial service organizations with which the
Company interacts.
COMPETITION. Both the CATV and telecommunications industries are highly
competitive and characterized by constant innovation. Competitors include major
domestic and international private cable, telephone and franchise cable
companies and their affiliates, many of which have resources that are
substantially greater than those of the Company. Many of such companies also
have names that are more recognizable by consumers than that of the Company,
which may provide such competitors with significant competitive advantages.
Entities with financial resources greater than those of the Company may be able
to offer greater incentives to property owners, and the amount of the payments
demanded by property owners may increase, impairing the Company's ability to
operate on a profitable basis. Some of the Company's competitors include private
cable and phone companies, local exchange carriers ("LECs"), competitive local
exchange carriers ("CLECs"), franchise cable companies, franchise cable company
joint ventures and LEC affiliates. The regulatory environment in which the
Company operates continues to undergo fundamental changes that may also lead to
increased competition. The trend in the telecommunications industry has been the
convergence of traditional telephone and data services with broadcast video
services. As part of this trend, service providers are attempting to converge
network components: cable television distribution equipment is being considered
for telephone services and vice versa, and wireless distribution equipment is
being considered for both broadcast video and telephone services. In broader
terms, the telephone, cable, wireless and computer industries are evolving to
provide fully integrated multimedia services to end-users. The opportunities
offered by such convergence will present risks for the Company due to enhanced
competition from competitors in
10
<PAGE> 12
various industries with much greater financial, technical, marketing and other
resources. Should rates decrease, the Company may be forced to lower its prices
or offer additional services or features to remain competitive. Wireless cable
and telephone services may also allow competitors to bypass property owners
altogether and market their services directly to residents of MDUs. To remain
competitive with other providers, the Company may be required to adopt new
technologies, which are likely to entail significant capital expenditures. See
"Business--Competition," "--Government Regulation--CATV Regulatory Issues" and
"--Government Regulation--Telephony Regulatory Issues."
RISKS ASSOCIATED WITH GROWTH STRATEGY. The expansion of the Company's
operations will depend to some extent on matters outside of the Company's
control including the ability of the Company to enter into ROE Contracts on
favorable terms, make attractive acquisitions, and obtain required governmental
permits in a timely manner, at reasonable costs and on satisfactory terms and
conditions. The Company intends to incur substantial additional indebtedness to
continue to upgrade its existing systems and to build new systems that will
enable the Company to offer its customers enhanced products and services.
Construction of new systems requires the Company to obtain qualified
subcontractors and may subject the Company to the risk of cost overruns and
delays. Delays also can be caused by weather, design changes, or material or
equipment shortages, as well as the need to obtain governmental approvals.
Failure to complete construction of new systems on a timely basis could impair
the ability of the Company to compete effectively in a particular area.
RAPID TECHNOLOGICAL CHANGES; EVOLVING MARKET. The cable and
telecommunications industries are subject to rapid and significant technological
changes and service innovations. The effect of these changes and innovations,
including those relating to emerging hardwire and wireless transmission and
switching technologies, cannot be predicted. The Company has formulated its
business plans and strategies based on management estimates regarding the market
size, the Company's anticipated share of the market, the estimated price and
acceptance of the Company's services, and a variety of other factors. There can
be no assurance that these estimates will prove to be correct. In addition, the
Company relies on its reputation for providing superior customer service to
attract customers. The failure to continue to provide this level of service may
impair the Company's growth strategy and may result in the loss of customers.
CONCENTRATION OF REVENUES. Approximately 83% of the Company's revenues are
derived in the Austin, Dallas and San Antonio, Texas geographic areas. A
sustained economic downturn or significant increases in competition in that
region could effect revenues.
DEPENDENCE ON KEY PERSONNEL. The Company is dependent upon its senior
management, particularly Mr. Robert G. Solomon, its Chairman and Chief Executive
Officer, and Mr. Donald E. Barlow, its President and Chief Financial Officer.
The loss or unavailability of Mr. Solomon or Mr. Barlow could have a material
adverse effect on the business, prospects and viability of the Company. There
can be no assurance that the Company will be successful in retaining its
existing key personnel or in attracting and retaining additional key personnel.
The Company does not maintain key man life insurance on either Mr. Solomon or
Mr. Barlow. The loss of the services of one or more of the Company's key
personnel or the inability to add key personnel could have a material adverse
effect on the Company. See "Management--Executive Employment Agreements."
GOVERNMENT REGULATION. The business of the Company is subject to extensive
and changing laws and regulations, including those of the FCC, the Federal
Aviation Administration ("FAA") and state and local regulatory bodies such as
public utility commissions ("PUC"). Many of the operations of the Company are
subject to licensing requirements of federal, state and local law, including the
necessity to obtain FCC and PUC approvals for the Company's licenses. The United
States Congress, the FCC, the FAA and state and local regulatory bodies in the
past have adopted, and may in the future adopt, new laws, regulations and
policies regarding a wide variety of matters, including rule-making by the FCC
with respect to exclusive contractual rights to provide CATV service to a
property, that could affect the operations of the Company's business and its
ability to borrow money and pledge certain assets. No assurance can be given
that changes in current or future regulations adopted by the United States
Congress, the FCC, the FAA or state or local regulatory bodies or legislative
initiatives would not have a material adverse effect on the Company. See
"Business--Government Regulation--CATV Regulatory Issues" and "--Government
Regulation--Telephony Regulatory Issues."
11
<PAGE> 13
DILUTION. Purchasers of Common Stock in the Offering will experience
immediate and substantial dilution in the net tangible book value of their
shares of Common Stock. At the initial public offering price of $7.50 per share,
dilution to new investors will be $3.94 per share of Common Stock. Additional
dilution will occur to the extent that outstanding warrants and options are
exercised. See "Dilution."
EFFECT OF FUTURE SALES OF COMMON STOCK. The Company will have 5,666,667
shares of Common Stock outstanding after consummation of the Offering. Shares of
Common Stock sold in the Offering to persons who are not "affiliates" of the
Company, as defined in Rule 144 under the Securities Act, are freely resalable
without restriction. Of the 5,666,667 shares of Common Stock outstanding after
consummation of the Offering, 500,000 shares will be "restricted securities," as
defined in Rule 144, that may be resold only after registration, through an
available exemption, or through compliance with Rule 144 beginning one year
after the shares were purchased. In addition, all of the shares of Common Stock
outstanding prior to the consummation of the Offering, and all of the shares of
Common Stock issuable upon exercise of the Warrants, are subject to a two-year
lock-up agreement with Barington, except any stockholder subject to such
agreement may sell shares of Common Stock commencing 12 months after the
completion of the Offering in the event the last trading price for the Common
Stock has been at least 200% of the price in the Offering for a period of 20
consecutive trading days ending within five days of the date of such sale, and
such sale is completed at a price in excess of 200% of the price in the
Offering. 2,191,667 shares of Common Stock (including 175,000 shares issuable
upon exercise of the Warrants and 350,000 shares issuable upon exercise of the
Representatives' Options) are being registered for sale under the Registration
Statement, which would permit the holders to sell these shares prior to the
expiration of the Rule 144 holding period if Barington were to release the lock-
up agreements. The lock-up agreements may be released by Barington on a
case-by-case basis. The Company has been advised by Barington that it has no
general policy with respect to granting releases from lock-up agreements, but it
has no plans, intentions or understandings to modify, shorten or waive the
lock-up agreements. There is, however, no assurance that the lock-up agreements
will not be released. Sales of substantial amounts of Common Stock after
consummation of the Offering could have a material adverse effect on the market
price for the Common Stock. See "Shares Eligible for Future Sale."
NASDAQ ELIGIBILITY REQUIREMENTS; LOW PRICED STOCKS. Continued quotation of
the Common Stock on the Nasdaq National Market is conditioned upon the Company
continuing to meet its eligibility requirements. In addition, if the trading
price of the Common Stock drops below $5.00 per share, sales of Common Stock
would be subject to Rule 15g-9 under the Securities Exchange Act of 1934 (the
"Exchange Act"), applicable to "low price stocks," which imposes additional
sales practice requirements on broker-dealers making sales of low-priced stock
to the public. For transactions covered by this rule, a broker-dealer must make
a special suitability determination respecting each purchaser and have received
each purchaser's written consent to the transaction prior to sale. If the
Company fails to meet the Nasdaq's eligibility requirements or the trading price
drops below $5.00 per share, the ability of holders to sell their Common Stock
in the secondary market could be adversely affected.
12
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,500,000 shares of
Common Stock offered hereby, at the initial public offering price of $7.50 per
share, after deducting underwriting discounts and the estimated expenses of the
Offering payable by the Company, including the Representatives' non-accountable
expense allowance, are estimated to be approximately $22,865,000 ($26,369,375,
if the Underwriters' over-allotment option is exercised in full). The Company
intends to use the net proceeds of the Offering as follows:
<TABLE>
<CAPTION>
APPROXIMATE
AMOUNT PERCENT
------------ -------
<S> <C> <C>
Systems build-out........................................... $ 14,675,000 64.2%
Repayment of indebtedness................................... 4,380,000 19.1
Upgrades and enhancements to MIS and billing system......... 750,000 3.3
Sales and marketing......................................... 500,000 2.2
General corporate purposes and working capital.............. 2,560,000 11.2
------------ -----
Total............................................. $ 22,865,000 100.0%
============ =====
</TABLE>
The Company intends to use approximately $14,675,000 of the net proceeds of
the Offering in building out systems to deliver products to new MDUs and to
develop new product offerings, such as paging, intrusion alarm, Internet access
and high-speed data services. In building out new systems, the Company will
expend funds to purchase and install CATV headend equipment, telephony switching
equipment and wiring. In conjunction with these installation costs, the Company
will incur related customer service, licensing and administrative expenses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The Company intends to use approximately $3,380,000 of the net proceeds of
the Offering to retire the Interim Notes, which bear interest at 15% per annum
and are due on the day following consummation of the Offering, and approximately
$1,000,000 of the proceeds of the Offering to pay the first installment due
under the Asset Acquisition Note, which bears interest at 10% and is due on the
day following consummation of the Offering. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Certain
Transactions."
The Company intends to use approximately $750,000 of the net proceeds of
the Offering to upgrade its MIS and billing system to enable such systems to
process the increase in the quantity of telephone calls and other customer
transactions which the Company expects to result from the buildout of new CATV
and telephony facilities.
The Company intends to use approximately $500,000 of the net proceeds of
the Offering to market its services to MDU property owners and to promote its
products to MDU residents by hiring additional sales personnel, increasing
advertising, participating in trade shows and pursuing direct marketing and
public relations efforts.
The Company intends to use the remaining approximately $2,560,000
($6,064,375, if the Underwriters' over-allotment option is exercised in full) of
net proceeds of the Offering for general corporate purposes and working capital.
The foregoing is an estimate of the Company's intended uses of net proceeds
of the Offering and is subject to readjustment due to changes in the Company's
plans, government regulations and industry conditions. Pending such uses, the
Company intends to invest the net proceeds of the Offering in short-term,
investment grade, interest-bearing securities.
DIVIDEND POLICY
The Company has not paid any dividends since its inception and does not
anticipate paying any dividends in the foreseeable future. The Silicon Valley
Bank credit facility, the Aspen Note and the Asset Acquisition Note prohibit the
payment of dividends.
13
<PAGE> 15
DILUTION
Net tangible book value per share is determined by dividing the tangible
net worth (tangible assets less liabilities) of the Company by the total number
of shares of Common Stock outstanding. As of March 31, 1998, after giving pro
forma effect to (i) the issuance of the Interim Notes, 866,667 shares of Common
Stock and the Aspen Note in connection with the Interim Financing, which was
completed on April 15, 1998, and (ii) the sale of substantially all of the
assets of the LLC to the Company, the assumption by the Company of certain
liabilities of the LLC and the issuance of the Asset Acquisition Note and
800,000 shares of Common Stock in the Asset Acquisition, which will be completed
prior to consummation of the Offering, and (iii) the issuance of 500,000 shares
of Common Stock under the 1998 Restricted Stock Plan, the Company had a pro
forma net tangible book value (deficit) of approximately $(2,856,000) or $(1.32)
per share of Common Stock. After giving effect to the sale by the Company of the
3,500,000 shares of Common Stock offered hereby at the initial public offering
price of $7.50 per share and receipt of the net proceeds therefrom, and the
application of the net proceeds of the Offering as set forth under "Use of
Proceeds," the Company's pro forma net tangible book value, as adjusted at March
31, 1998, would have been approximately $20,199,000 or $3.56 per share. This
represents an immediate increase in the pro forma net tangible book value of
$4.88 per share of Common Stock to present stockholders and an immediate
dilution of $3.94 per share of Common Stock to new investors. The following
table illustrates this dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $7.50
Pro forma net tangible book value (deficit) per share at
March 31, 1998(1)...................................... $(1.32)
Increase per share attributable to new investors.......... 4.88
------
Pro forma net tangible book value per share after the
Offering.................................................. 3.56
-----
Dilution per share to new investors......................... $3.94
=====
</TABLE>
- ---------------
(1) As of March 31, 1998, the LLC's actual net tangible book value (deficit) was
$(20,398,625).
The following table summarizes, at March 31, 1998, after giving pro forma effect
to (i) the issuance of the Interim Notes, 866,667 shares of Common Stock and the
Aspen Note in connection with the Interim Financing, which was completed on
April 15, 1998, and (ii) the sale of substantially all of the assets of the LLC
to the Company, the assumption by the Company of certain liabilities of the LLC
and the issuance of the Asset Acquisition Note and 800,000 shares of Common
Stock in the Asset Acquisition, and (iii) the issuance of 500,000 shares of
Common Stock under the 1998 Restricted Stock Plan, the differences between
existing stockholders and investors in the Offering with respect to the number
and percentage of shares of Common Stock purchased from the Company, the amount
and percentage of cash consideration paid, and the average price per share of
Common Stock, before deduction of expenses of the Offering and underwriting
discounts:
<TABLE>
<CAPTION>
SHARES OWNED CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders(1).............. 2,166,667 38.2% $ 5,922,613 18.4% $2.73
----------- ------ -----
New investors......................... 3,500,000 61.8 26,250,000 81.6 $7.50
--------- ----- ----------- ------
Total(1).................... 5,666,667 100.0% $32,172,613 100.0%
========= ===== =========== ======
</TABLE>
- ---------------
(1) Excludes 175,000 shares of Common Stock issuable upon exercise of the
Warrants, 1,000,000 shares of Common Stock reserved for issuance under the
1998 Stock Option Plan, and 350,000 shares of Common Stock issuable upon
exercise of the Representatives' Options. See "Summary--The Offering,"
"Certain Transactions," "Management--Benefit Plans," "Description of Capital
Stock" and "Underwriting."
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
March 31, 1998; (ii) as of March 31, 1998, on a pro forma basis, to reflect (a)
the Interim Financing completed in April 1998, and (b) the Asset Acquisition,
which will be completed prior to consummation of the Offering; and (iii) as of
March 31, 1998, on a pro forma, as adjusted basis, to reflect (a) the sale by
the Company of the 3,500,000 shares of Common Stock offered hereby at the
initial public offering price of $7.50 per share, and (b) the application of the
net proceeds of the Offering as set forth under "Use of Proceeds." This table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Notes to Financial
Statements appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
U.S. ONLINE COMMUNICATIONS, INC.
-------------------------------------------------
MARCH 31, 1998 PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
---------- ----------------- --------------
<S> <C> <C> <C>
Short-term debt:
Interim Notes....................................... $2,335,000 $ 3,250,000 $ --
Silicon Valley Bank credit facility................. -- 7,126,830 7,126,830
Asset Acquisition Note.............................. -- 1,000,000 --
---------- ----------- -----------
Total short-term debt............................... $2,335,000 $11,376,830 $ 7,126,830
========== =========== ===========
Long-term debt:
Other long-term indebtedness........................ $ -- $ 2,066,529 $ 2,066,529
Asset Acquisition Note.............................. -- 2,000,000 2,000,000
Aspen Note.......................................... 1,500,000 1,500,000 1,500,000
---------- ----------- -----------
Total long-term debt................................ 1,500,000 5,566,529 5,566,529
---------- ----------- -----------
Stockholders' equity:
Preferred Stock, $.001 par value, 1,000,000 shares
authorized; none issued and outstanding.......... -- -- --
Common Stock, $.001 par value, 20,000,000 shares
authorized; 1,121,333 shares issued and
outstanding, actual; 2,166,667 shares issued and
outstanding, pro forma; and 5,666,667 shares
issued and outstanding pro forma, as
adjusted(3)...................................... 1,123 2,167 5,667
Additional paid-in capital............................ 2,134,307 5,920,446 32,721,446
Deferred compensation................................. (3,749,500)
Accumulated deficit................................... (497,638)
---------- ----------- -----------
Stockholders' equity................................ 2,135,430 5,922,613 28,479,975
---------- ----------- -----------
Total capitalization........................ $3,635,430 $11,489,142 $34,046,504
========== =========== ===========
</TABLE>
- ---------------
(1) Pro forma to give effect to the second and third closings of the Interim
Financing (18.3 units), which was completed in April 1998, and to the
issuance of 800,000 shares of Common Stock and the Asset Acquisition Note in
the Asset Acquisition. In the Interim Financing, the Company issued 65
units, each unit consisting of an Interim Note in the principal amount of
$50,000 and 13,333.33 shares of Common Stock. The Interim Notes are due and
payable on the day following consummation of the Offering and, accordingly,
have been recorded as short-term debt on a pro forma basis as each has a
term of the shorter of 12 months or the consummation of the Offering.
(2) Pro forma, as adjusted, to give effect to (i) the sale by the Company of the
3,500,000 shares of Common Stock offered hereby at the initial public
offering price of $7.50 per share and the receipt of the net proceeds
therefrom; and (ii) the application of the net proceeds as set forth under
"Use of Proceeds," and the write-off of the deferred debt issuance costs
related to the Interim Notes.
(3) Excludes shares of Common Stock issuable on exercise of the following
warrants and options: (i) 175,000 shares of Common Stock issuable upon
exercise of the Warrants; (ii) 1,000,000 shares of Common Stock reserved for
issuance under the 1998 Stock Option Plan, of which options for 495,000
shares have been granted as of the date of this Prospectus; and (iii)
350,000 shares of Common Stock issuable upon exercise of the
Representatives' Options. See "Summary--The Offering," "Certain
Transactions," "Management--Benefit Plans," "Description of Capital Stock"
and "Underwriting."
15
<PAGE> 17
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information (the "Pro Forma
Financial Information") is based on the audited December 31, 1997 and unaudited
March 31, 1998 historical financial statements of the LLC, the audited
historical balance sheet of U.S. OnLine Communications, Inc. as of March 31,
1998 and, in each case, the related notes included elsewhere in this Prospectus.
The unaudited pro forma balance sheet as of March 31, 1998 has been
prepared to give effect to the Asset Acquisition and Interim Financing
("Completed Transactions") and the Offering. The unaudited pro forma statement
of operations for the year ended December 31, 1997 has been prepared to
illustrate the effects of the Completed Transactions and the Offering as if each
had occurred on January 1, 1997. The unaudited pro forma statement of operations
for the three months ended March 31, 1998 has been prepared to illustrate the
effects of the Completed Transactions and the Offering as if each had occurred
at the beginning of the period presented. The unaudited pro forma adjustments
are based upon available information and certain assumptions that the Company
believes are reasonable. The Pro Forma Financial Information and accompanying
notes should be read in conjunction with the financial statements and other
financial information included elsewhere herein pertaining to the Company and
the LLC, including "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Pro Forma Financial
Information is not necessarily indicative of either future results of operations
or the results that might have been achieved if such transactions had been
consummated on the indicated dates.
The Asset Acquisition given effect in the Pro Forma Financial Information
is accounted for using the purchase method of accounting. The aggregate purchase
price is allocated to the tangible and intangible assets acquired and
liabilities assumed based upon an estimate of their respective fair values at
March 31, 1998.
16
<PAGE> 18
U. S. ONLINE COMMUNICATIONS, INC.
UNAUDITED PRO FORMA BALANCE SHEET
AS OF MARCH 31, 1998
The pro forma balance sheet below gives effect to the following as if they
occurred as of March 31, 1998: (i) issuance by U.S. On Line Communications, Inc.
of 18.3 units and the Aspen Note in the Interim Financing; (ii) acquisition of
substantially all of the LLC's assets and assumption of certain liabilities of
the LLC and issuance of the Asset Acquisition Note and 800,000 shares of Common
Stock in the Asset Acquisition; (iii) issuance of 3,500,000 shares of Common
Stock and resulting issue costs from the Offering; (iv) payments by the Company
to retire the Interim Notes and a charge to expense related issue costs; and (v)
payment of the first installment due under the Asset Acquisition Note.
<TABLE>
<CAPTION>
U.S. ONLINE PRO FORMA
COMMUNICATIONS, FOR THE ADJUSTMENTS
INC. AS OF COMPLETED COMPLETED FOR THE PRO FORMA,
MARCH 31, 1998 TRANSACTIONS TRANSACTIONS OFFERING AS ADJUSTED
----------------- ------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents......... $5,648,500 $ 1,647,000(a) $ 7,374,622 $23,055,000(c) $26,179,622
79,122(b) (4,250,000)(d)
Subscriber receivables, net....... -- 458,221(b) 458,221 458,221
Supply inventory.................. -- 211,794(b) 211,794 211,794
Other current assets.............. -- 62,992(b) 62,992 62,992
---------- ----------- ----------- ----------- -----------
Total current assets....... 5,648,500 2,459,129 8,107,629 18,805,000 26,912,629
Property and equipment, net....... -- 8,823,382(b) 8,823,382 8,823,382
Excess of cost over fair value of
net assets acquired, net........ -- 6,972,748(b) 6,972,748 6,972,748
Deferred loan costs............... 870,296 127,817(a) 1,806,041 (497,638)(d) 1,308,403
807,928(b)
Other assets...................... -- 440,525(b) 440,525 440,525
---------- ----------- ----------- ----------- -----------
Total assets............... $6,518,796 $19,631,529 $26,150,325 $18,307,362 $44,457,687
========== =========== =========== =========== ===========
LIABILITIES:
Current liabilities:
Current portion of notes
payable......................... $ -- $ 1,000,000(b) $ 8,126,830 $(1,000,000)(d) $ 7,126,830
7,126,830(b)
Accounts payable.................. 292,641 1,928,434(b) 2,221,075 2,221,075
Accrued expenses.................. 255,725 72,634(a) 481,167 481,167
152,808(b)
Deferred revenues................. -- 326,667(b) 326,667 326,667
Interim Notes..................... 2,335,000 915,000(a) 3,250,000 (3,250,000)(d) --
---------- ----------- ----------- ----------- -----------
Total current
liabilities.............. 2,883,366 11,522,373 14,405,739 (4,250,000) 10,155,739
Aspen Note.......................... 1,500,000 1,500,000 1,500,000
Asset Acquisition Note.............. -- 2,000,000(b) 2,000,000 2,000,000
Other liabilities................... -- 2,066,529(b) 2,066,529 2,066,529
---------- ----------- ----------- ----------- -----------
Total liabilities.......... 4,383,366 15,588,902 19,972,268 (4,250,000) 15,722,268
---------- ----------- ----------- ----------- -----------
Minority interest -- USAC........... -- 255,444(b) 255,444 255,444
STOCKHOLDERS' EQUITY:
Common Stock...................... 1,123 244(a) 2,167 3,500(c) 5,667
800(b)
Additional paid-in capital........ 2,134,307 914,756(a) 5,920,446 26,246,500(c) 32,721,446
(127,817)(a) (3,195,000)(c)
2,999,200(b) 3,749,500(e)
Deferred compensation expense..... (3,749,500)(e) (3,749,500)
Accumulated deficit............... (497,638)(d) (497,638)
---------- ----------- ----------- ----------- -----------
Total stockholders'
equity................... 2,135,430 3,787,183 5,922,613 22,557,362 28,479,975
---------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity..... $6,518,796 $19,631,529 $26,150,325 $18,307,362 $44,457,687
========== =========== =========== =========== ===========
</TABLE>
17
<PAGE> 19
U.S. ONLINE COMMUNICATIONS, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
U.S. ONLINE
COMMUNICATIONS,
INC.
FOR THE PERIOD PRO FORMA
ENDED FOR THE ADJUSTMENTS
MARCH 31, COMPLETED COMPLETED FOR THE PRO FORMA,
1998 TRANSACTIONS TRANSACTIONS OFFERING AS ADJUSTED
--------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Service revenues
Telephony Revenue............ $ 386,287(f) $ 386,287 $ 386,287
Cable Revenue................ 686,933(f) 686,933 686,933
Other Income................. 35,851(f) 35,851 35,851
--------- ----------- ----------- ----------- -----------
Total revenue............. 1,109,071 1,109,071 1,109,071
Cost of Service
Telephony.................... 231,603(f) 231,603 231,603
Cable........................ 203,867(f) 203,867 203,867
--------- ----------- ----------- ----------- -----------
Total cost of service..... 435,470 435,470 435,470
--------- ----------- ----------- ----------- -----------
Gross profit................... 673,601 673,601 673,601
Operating expenses:
Customer support............. 130,579(f) 130,579 130,579
Other operating expenses..... 889,398(f) 889,398 889,398
Sales and marketing.......... 204,130(f) 204,130 204,130
General and administrative... 602,202(f) 602,202 602,202
Depreciation and
amortization.............. 455,315(f) 521,258 521,258
65,943(c)
--------- ----------- ----------- ----------- -----------
Total operating
expenses................ 2,347,567 2,347,567 2,347,567
--------- ----------- ----------- ----------- -----------
Loss from operations........... (1,673,966) (1,673,966) (1,673,966)
Other income (expense):
Interest income.............. 13,805(f) 13,805 13,805
Interest expense............. (644,601)(f) (425,006) $ 143,126(h) (281,880)
219,055(f)
Other income (expense)....... (32,582)(f) (32,582) (32,582)
--------- ----------- ----------- ----------- -----------
Total other income
(expense)............... (443,783) (443,783) 143,126 (300,657)
--------- ----------- ----------- ----------- -----------
Loss before minority
interest..................... (2,117,749) (2,117,749) 143,126 (1,974,623)
Minority interest in income of
USAC......................... (12,943)(f) (12,943) (12,943)
--------- ----------- ----------- ----------- -----------
Net loss.................. $ -- $(2,130,692) $(2,130,692) $ 143,126 $(1,987,566)
========= =========== =========== =========== ===========
Net Loss Per Share(i):
Basic........................ $ (0.98) $ (0.73)
=========== ===========
Diluted...................... $ (0.75) $ (0.58)
=========== ===========
Weighted average shares used
for computing net loss per
share:
Basic........................ 2,166,667 2,733,334
=========== ===========
Diluted...................... 2,836,667 3,403,334
=========== ===========
</TABLE>
18
<PAGE> 20
U.S. ONLINE COMMUNICATIONS, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PREDECESSOR
(LLC)
FOR THE YEAR PRO FORMA
ENDED FOR THE ADJUSTMENTS
DECEMBER 31, COMPLETED COMPLETED FOR THE PRO FORMA,
1997 TRANSACTIONS TRANSACTIONS OFFERING AS ADJUSTED
------------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Telephony revenue........... $ 705,193 $ 705,193 $ 705,193
Cable revenue............... 1,888,280 1,888,280 1,888,280
Other revenue............... 127,820 127,820 127,820
----------- ---------- ----------- ----------- ------------
Total revenue............. 2,721,293 2,721,293 2,721,293
Cost of
service -- telephony...... 365,362 365,362 365,362
Cost of service -- cable.... 592,722 592,722 592,722
----------- ---------- ----------- ----------- ------------
Total cost of service..... 958,084 958,084 958,084
----------- ---------- ----------- ----------- ------------
Gross profit................ 1,763,209 1,763,209 1,763,209
Operating expenses:
Customer support.......... 426,471 426,471 426,471
Other operating
expenses............... 2,519,825 2,519,825 2,519,825
Sales and marketing....... 838,525 838,525 838,525
General and
administrative......... 2,865,608 2,865,608 2,865,608
Depreciation and
amortization........... 1,343,543 $ 259,610(g) 1,603,153 1,603,153
----------- ---------- ----------- ----------- ------------
Total operating
expenses............. 7,993,972 259,610 8,253,582 8,253,582
----------- ---------- ----------- ----------- ------------
Loss from operations........ (6,230,763) (259,610) (6,490,373) (6,490,373)
Other income (expense):
Interest income........... 133,177 133,177 133,177
Interest expense.......... (3,104,809) 1,746,301(g) (1,358,508) $ 572,500(h) (786,008)
Other income (expense).... (111,712) (111,712) (111,712)
----------- ---------- ----------- ----------- ------------
Total other income
(expense)............ (3,083,344) 1,746,301 (1,337,043) 572,500 (764,543)
----------- ---------- ----------- ----------- ------------
Loss before minority
interest.................. (9,314,107) 1,486,691 (7,827,416) 572,500 (7,254,916)
Equity in losses of Cable... 911,195 (911,195)(g) -- --
Minority interest in income
of USAC................... (43,437) (43,437) (43,437)
----------- ---------- ----------- ----------- ------------
Net loss............... $(8,446,349) $ 575,496 $(7,870,853) $ 572,500 $ (7,298,353)
=========== ========== =========== =========== ============
Net loss per share(i):
Basic..................... $ (3.63) $ (2.67)
=========== ============
Diluted................... $ (2.77) $ (2.14)
=========== ============
Weighted average shares used
for computing net loss per
share:
Basic..................... 2,166,667 2,733,334
=========== ============
Diluted................... 2,836,667 3,403,334
=========== ============
</TABLE>
19
<PAGE> 21
U.S. ONLINE COMMUNICATIONS, INC.
NOTE TO THE UNAUDITED PRO FORMA FINANCIAL STATEMENT
PRO FORMA ADJUSTMENTS
BALANCE SHEET
(a) Gives effect to the sale of 244,000 shares of Common Stock at
$3.75 per share and the placement of $915,000 of the Interim Notes (18.3
units), reduced by issuance costs of $255,634.
(b) Gives effect to the acquisition of substantially all of the assets
and the assumption of certain liabilities of the LLC by U.S. OnLine
Communications, Inc. in the Asset Acquisition in exchange for 800,000
shares of Common Stock valued at $3.75 per share and the issuance of the
$3,000,000 Asset Acquisition Note, resulting in goodwill of $6,972,748,
calculated as follows:
<TABLE>
<S> <C>
Total assets of the LLC at March 31, 1998.... $ 14,942,000
Less assets not acquired................... (3,850,000)
------------
Total assets acquired................... 11,092,000
------------
Total liabilities of the LLC at March 31,
1998....................................... 30,683,000
Minority interest in USAC.................... 255,000
Less liabilities not assumed............... (18,873,000)
------------
Total liabilities assumed............... 12,065,000
------------
Net assets acquired................ (973,000)
Purchase price............................... 6,000,000
------------
Excess of cost over fair value of
net assets acquired.............. $ 6,973,000
============
</TABLE>
The payable to related parties of $18,873,000 at March 31, 1998 has been
excluded from liabilities assumed in the Asset Acquisition. U.S. OnLine
Communications, Inc. will not be contingently liable to the LLC or any related
party for any portion of this payable.
Assets not acquired is comprised of goodwill of $3,805,000 and
organizational costs of $45,000. Liabilities not assumed is comprised of amounts
payable to related party as discussed above.
(c) Gives effect to the issuance of 3,500,000 shares of Common Stock
at the initial public offering price of $7.50 per share by the Company in
connection with the Offering, resulting in additions to stockholders'
equity of $26,250,000 reduced by related estimated issuance costs of
$3,195,000.
(d) Gives effect to payments by the Company of $3,250,000 to retire
the Interim Notes along with a charge of $497,638 to expense related
issuance costs and $1,000,000 to pay the first installment due under the
Asset Acquisition Note.
(e) Gives effect to the issuance of 500,000 shares of Common Stock
under the 1998 Restricted Stock Plan at a purchase price of $0.001 per
share and an assumed market value at the effective date of the Offering of
$7.50 per share. The 1998 Restricted Stock Plan is treated as a variable
plan under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." Because a measurement date had not occurred on
the date of the award, the Company will record a charge for $3,749,500 at
the effective date of the Offering, if applicable.
STATEMENT OF OPERATIONS
(f) Gives effect to the Interim Financing and Asset Acquisition,
resulting in the addition of LLC's revenues and expenses for the three
months ended March 31, 1998 with an increase in amortization expense of
$63,943 based on the addition of goodwill (using a ten year life), and a
reduction in interest expense of $219,055 for the net effect of the
elimination of $18,873,000 of payable to related parties and the addition
of the Interim Notes, the Acquisition Note and the Aspen Note.
(g) Gives effect to the Interim Financing and Asset Acquisition,
resulting in an increase in amortization expense of $259,610 based on the
addition of goodwill (using a ten year life), a reduction in
20
<PAGE> 22
interest expense of $1,746,301 for the net effect of the elimination of
$18.423 million of payable to related parties and the addition of the
Interim Notes, the Acquisition Note and the Aspen Note and elimination of
the equity in losses of Cable.
(h) Gives effect to the Offering, resulting in a reduction in interest
expense from the payment of the Interim Notes totaling $3,250,000 with a
reduction in interest expense of $121,876 and $487,500 for the three months
ended March 31, 1998 and the year ended December 31, 1997, respectively,
and the first installment of the Asset Acquisition Note totaling $1,000,000
with a reduction of interest expense of $21,250 and $85,000 for the three
months ended March 31, 1998 and the year ended December 31, 1997,
respectively.
(i) Pro Forma Net Loss Per Common Share.
Statement of Financial Accounting Standard No. 128, issued in February
1997, establishes new standards for computing and presenting earnings per
share ("EPS") on a basis that is more comparable to international standards
and provides for the presentation of basic and diluted EPS. Basic EPS is
computed by dividing net income by the weighted average number of shares
outstanding during the period. Diluted EPS is computed using the weighted
average number of shares outstanding plus all dilutive potential common
shares outstanding.
The following is the reconciliation of basic and diluted pro forma net
loss per share computations for the year ended December 31, 1997 and the
three months ended March 31, 1998:
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------
PRO FORMA
FOR THE PRO FORMA,
COMPLETED AS
TRANSACTIONS ADJUSTED
------------ ------------
<S> <C> <C>
Basic pro forma net loss per share:
Net loss.................................................. $(2,130,692) $ (1,987,566)
=========== ============
Basic weighted average common shares outstanding.......... 2,166,667 2,733,334
=========== ============
Basic pro forma net loss per share........................ $ (0.98) $ (0.73)
=========== ============
Diluted pro forma net loss per share:
Net loss.................................................. $(2,130,692) $ (1,987,566)
=========== ============
Basic weighted average common shares outstanding.......... 2,166,667 2,733,334
Effect of dilutive securities:
Options and warrants................................... 670,000 670,000
----------- ------------
Diluted weighted average common shares outstanding........ 2,836,667 3,403,334
=========== ============
Diluted pro forma net loss per share...................... $ (0.75) $ (0.58)
=========== ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------
PRO FORMA
FOR THE PRO FORMA,
COMPLETED AS
TRANSACTIONS ADJUSTED
------------ ------------
<S> <C> <C>
Basic pro forma net loss per share:
Net loss.................................................. $(7,870,853) $ (7,298,353)
=========== ============
Basic weighted average common shares outstanding.......... 2,166,667 2,733,334
=========== ============
Basic pro forma net loss per share........................ $ (3.63) $ (2.67)
=========== ============
Diluted pro forma net loss per share:
Net loss.................................................. $(7,870,853) $ (7,298,353)
=========== ============
Basic weighted average common shares outstanding.......... 2,166,667 2,733,334
Effect of dilutive securities:
Options and warrants................................... 670,000 670,000
----------- ------------
Diluted weighted average common shares outstanding........ 2,836,667 3,403,334
=========== ============
Diluted pro forma net loss per share...................... $ (2.77) $ (2.14)
=========== ============
</TABLE>
21
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA
The pro forma financial data of the LLC and the Company and the selected
financial data of the LLC below should be read in conjunction with the financial
statements, Notes to Financial Statements, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and other financial
information included elsewhere in this Prospectus. The selected financial data
for the fiscal years ended December 31, 1996 and December 31, 1997 are derived
from historical financial statements of the LLC. The LLC owned a 50% interest in
Cable during the year ended December 31, 1996 and, in the year ended December
31, 1997, acquired the remaining interest in Cable. Therefore, the unaudited pro
forma statement of operations data for the LLC for the year ended December 31,
1996 gives effect to the acquisition of Cable as if that transaction had
occurred January 1, 1996. (See Note 2 of the Notes to Financial Statements of
the LLC.) The selected financial data for the three months ended March 31, 1997
and March 31, 1998 are derived from the unaudited financial statements of the
LLC. The unaudited pro forma statement of operations data for the LLC for the
period ended March 31, 1997 gives effect to the acquisition of Cable as if that
transaction had occurred January 1, 1997. The unaudited pro forma statement of
operations data for the Company for the year ended December 31, 1997 and for the
three months ended March 31, 1998, gives effect to the Interim Financing and the
Asset Acquisition as if those transactions had occurred on January 1, 1997 and
January 1, 1998 respectively.
<TABLE>
<CAPTION>
U.S. ONLINE COMMUNICATIONS L.L.C.
-------------------------------------------------------------------------------------
MARCH 31, MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1997 1996 1996
ACTUAL PRO FORMA(1) ACTUAL ACTUAL PRO FORMA(2) ACTUAL
----------- ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Telephony revenue....................... $ 386,287 $ 67,498 $ 67,498 $ 705,193 $ 57,010 $ 57,010
Cable revenue........................... 686,933 300,809 -- 1,888,280 777,490 --
Other revenue........................... 35,851 16,693 159 127,820 2,376 1,397
----------- ----------- ----------- ----------- ----------- -----------
Total revenue.................. 1,109,071 385,000 67,657 2,721,293 836,876 58,407
Cost of service
Telephony............................... 203,867 34,994 34,994 365,362 40,749 40,749
Cable................................... 231,603 83,160 -- 592,722 272,286 --
----------- ----------- ----------- ----------- ----------- -----------
Total cost of service.......... 435,470 118,154 34,994 958,084 313,035 40,749
----------- ----------- ----------- ----------- ----------- -----------
Gross profit................... 673,601 266,846 32,663 1,763,209 523,841 17,658
Operating expenses:
Customer support...................... 130,579 64,293 11,218 426,471 319,254 53,331
Other operating expenses.............. 889,398 249,933 117,723 2,519,825 464,734 292,564
Sales and marketing................... 204,130 204,363 72,112 838,525 503,719 181,888
General and administrative............ 602,202 700,330 432,739 2,865,608 2,684,079 1,983,862
Depreciation and amortization......... 455,315 401,601 174,952 1,343,543 670,732 209,711
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses....... 2,281,624 1,620,520 808,744 7,993,972 4,642,518 2,721,356
Loss from operations.................... (1,608,023) (1,353,674) (776,081) (6,230,763) (4,118,677) (2,703,698)
Other income (expense):
Interest income....................... 13,805 32,099 177,096 133,177 183,233 355,365
Interest expense...................... (644,061) (485,305) (481,990) (3,104,809) (1,133,936) (1,111,156)
Other income (expense)................ (32,582) (2,330) (1,329) (111,712) -- --
----------- ----------- ----------- ----------- ----------- -----------
Total other income (expense)... (622,838) (455,536) (306,223) (3,083,344) (950,703) (755,791)
----------- ----------- ----------- ----------- ----------- -----------
Loss before minority interest........... (2,270,861) (1,809,210) (1,082,304) (9,314,107) (5,069,380) (3,459,489)
Equity in losses of Cable............... -- (299,299) -- -- (783,594)
Minority interest in loss of Cable...... -- -- -- 911,195 -- --
Minority interest in income of
partnership........................... (12,943) (11,882) -- (43,437) (38,114) --
----------- ----------- ----------- ----------- ----------- -----------
Net loss....................... $(2,283,804) $(1,821,092) $(1,381,603) $(8,446,349) $(5,107,494) $(4,243,083)
=========== =========== =========== =========== =========== ===========
</TABLE>
22
<PAGE> 24
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA(3):
CATV:
Operational Passings(i)............... 12,352 11,888(iii) 6,394
Basic Subscribers(ii)................. 8,261 7,592(iii) 3,333
Basic Penetration(iv)................. 67% 64% 52%
Premium Channel Subscriptions......... 4,439 4,376 2,088
Premium-to-Basic Ratio(v)............. 54% 58% 63%
Average Monthly Revenue Per Basic
Subscriber(vi)...................... $ 27.14 $ 25.81 $ N/A(xii)
TELEPHONY:
Operational Passing(vii).............. 5,217 4,985 1,190
Subscribers........................... 2,239 1,939 327
Subscriber Penetration................ 43% 39% 27%
Average Monthly Revenue Per
Subscriber(viii)
Local Telephony Services............ $ 25.08 $ 34.39 N/A(xii)
Long-distance Telephony Services.... $ 32.54 $ 37.24 N/A(xii)
Lines(ix)............................. 2,804 2,392 409
Line Penetration(x)................... 54% 48% 34%
Average Monthly Revenue per
Line(xi)............................ $ 46.01 $ 45.09 $ N/A(xii)
</TABLE>
<TABLE>
<CAPTION>
U.S. ONLINE COMMUNICATIONS, INC.
--------------------------------
PRO FORMA FOR THE
COMPLETED TRANSACTIONS(4)
--------------------------------
MARCH 31, DECEMBER 31,
1998 1997
------------- --------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Telephony revenue........................................... 386,287 $ 705,193
Cable revenue............................................... 686,933 1,888,280
Other revenue............................................... 35,851 127,820
----------- -----------
Total revenue....................................... 1,109,071 2,721,293
Cost of service
Telephony................................................... 203,867 365,362
Cable....................................................... 231,603 592,722
----------- -----------
Total cost of service............................... 435,470 958,084
----------- -----------
Gross profit........................................ 673,601 1,763,209
Operating expenses:
Customer support.......................................... 130,579 426,471
Other operating expenses.................................. 889,398 2,519,825
Sales and marketing....................................... 204,130 838,525
General and administrative................................ 602,202 2,865,608
Depreciation and amortization............................. 521,258 1,603,153
----------- -----------
Total operating expenses............................ 2,347,567 8,253,582
Loss from operations........................................ (1,673,966) (6,490,373)
Other income (expense):
Interest income........................................... 13,805 133,177
Interest expense.......................................... (425,006) (1,358,508)
Other income (expense).................................... (32,582) (111,712)
----------- -----------
Total other income (expense)........................ (443,783) (1,337,043)
Loss before minority interest............................... (2,117,749) (7,827,416)
Equity in losses of Cable................................... -- --
Minority interest in loss of Cable.......................... -- --
Minority interest in income of partnership.................. (12,943) (43,437)
----------- -----------
Net loss............................................ $(2,130,692) $(7,870,853)
=========== ===========
Net loss per share:
Basic..................................................... $ (0.98) $ (3.63)
=========== ===========
Diluted................................................... $ (0.75) $ (2.77)
=========== ===========
Weighted average shares used for computing net loss per
share:
Basic:.................................................... 2,166,667 2,166,667
=========== ===========
Diluted:.................................................. 2,836,667 2,836,667
=========== ===========
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
U.S. ONLINE COMMUNICATIONS, INC.
-----------------------------------------------
MARCH 31, 1998
-----------------------------------------------
PRO FORMA,
AUDITED PRO FORMA(5) AS ADJUSTED(5)(6)
---------- ------------ -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $5,648,500 $ 7,374,622 $26,179,622
Working capital (deficit)................................... 2,765,134 (6,298,110) 16,756,890
Total assets................................................ 6,518,796 26,150,325 44,457,687
Long-term obligations, net of current maturities............ 1,500,000 5,566,529 5,566,529
Stockholders' equity........................................ 2,135,430 5,922,613 28,479,975
</TABLE>
- ---------------
(1) Pro forma summary financial data gives effect to the LLC's acquisition of
Cable as if it had occurred on January 1, 1997.
(2) Pro forma summary financial data gives effect to the LLC's acquisition of
100% of Cable as if it had occurred on January 1, 1996.
(3) Operating data is included for purposes of additional analysis and is not
derived from the historical financial statements of the LLC.
(4) Pro forma summary financial data gives effect to (i) the sale of 65 units
for the year ended December 31, 1997 and 18.3 units for the three months
ended March 31, 1998, each unit consisting of an Interim Note and 13,333.33
shares of Common Stock, and the Aspen Note; (ii) the Asset Acquisition,
including the issuance of the Asset Acquisition Note and 800,000 shares of
Common Stock issued in the Asset Acquisition; and (iii) the merger of Cable
into the LLC.
(5) Pro forma summary balance sheet data gives effect to the following as if
they occurred on December 31, 1997: (i) the proceeds from the issuance of 65
units in the Interim Financing, resulting in additions to stockholders'
equity of $915,000, issue costs of $183,000, Interim Notes of $915,000 and
issue costs of $255,634; (ii) the acquisition of substantially all of the
assets, and the assumption of certain liabilities, of the LLC and the
issuance of the Asset Acquisition Note and 800,000 shares of Common Stock in
the Asset Acquisition and the issuance of 500,000 shares of Common Stock
under the 1998 Restricted Stock Plan.
(6) Pro forma summary balance sheet data gives effect to the following as if
they occurred on December 31, 1997: (i) the proceeds from the issuance of
3,500,000 shares of Common Stock in the Offering (at the initial public
offering price of $7.50 per share), resulting in additions to stockholders'
equity of $26,250,000 and issue costs of $3,195,000; and (ii) payments by
the Company of $3,250,000 to retire the Interim Notes and a related charge
of $497,638 to expense related issue costs, and $1,000,000 to pay the first
installment due under the Asset Acquisition Note.
(i) Operational passings represents the number of MDU units with respect
to which the Company has connected its CATV services.
(ii) Includes the number of basic subscribers and premium subscribers at
such date.
(iii) Excludes passings and subscribers in Atlanta, Georgia, which were
sold on March 6, 1998 pursuant to a purchase agreement with a third
party.
(iv) Basic penetration is calculated by dividing the total number of basic
subscribers at such date by the total number of operational passings.
(v) Premium-to-basic ratio is calculated by dividing the total number of
premium subscribers by the total number of basic subscribers.
(vi) Represents average monthly revenue from monthly service fees and
installation charges per the average number of basic subscribers for
the periods ended as of the date shown.
(vii) Represents the number of MDU units with respect to which the Company
has connected its telephony services.
(viii) Represents average monthly revenue from local and long-distance
service fees per the average number of subscribers for the periods
ended as of the date shown.
(ix) Lines represent the number of telephone lines currently being provided
to telephony service subscribers. A telephony service subscriber can
subscribe for more than one line.
(x) Line penetration is calculated by dividing the total number of
telephony lines at such date by the total number of units passed.
(xi) Represents average monthly revenue per the average number of lines for
the periods ended as of the date shown.
(xii) Information not available.
24
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
Selected Financial Data and the historical financial statements of the Company,
the LLC and Cable, and the Notes to Financial Statements thereto appearing
elsewhere in this Prospectus.
OVERVIEW
The Company markets and provides CATV and enhanced local and long distance
telecommunications services to MDUs such as apartment complexes and other
concentrated residential sites. The Company provides its services pursuant to
ROE Contracts with property owners and agreements with MDU residents.
The Company has experienced significant growth in the total number of
executed ROE Contracts, passings and subscribers. From December 31, 1996 to
March 31, 1998, the number of properties covered by ROE Contracts increased from
28 to 43 (an increase of 54%), the number of operational passings increased from
approximately 7,600 to approximately 18,000 (an increase of approximately 135%),
and the number of subscribers increased from approximately 3,600 to
approximately 10,000 (an increase of approximately 180%).
The Company derives revenues from delivering CATV and telephony services to
MDU residents and generally does not charge property owners for installing
passings on properties. The Company derived 93% and 69% of its revenues from
CATV services, and 7% and 26% from telephony services, in 1996 and 1997,
respectively. The Company intends to offer related services such as paging,
intrusion alarm and Internet access, although revenues attributable to these new
services are not expected to be material in the near future.
Revenue from subscribers is recognized in the month that service is
provided. The Company also recognizes installation fees from subscribers as
revenue upon the origination of service to a subscriber. Costs incurred in
obtaining subscribers are expensed as incurred.
The LLC has incurred substantial losses since its inception. At March 31,
1998, the LLC had a working capital deficit of $8,722,610 and an accumulated
deficit of $17,193,018. Management expects that the Company will continue to
incur losses for the foreseeable future. The audit opinions on the financial
statements of U.S. OnLine Communications, Inc., the LLC and Cable express
substantial doubt as to the ability of these companies to continue as going
concerns due to the accumulated losses from operations, negative working capital
and negative cash flows. The Company's operations to date have been funded
primarily through borrowings under its Silicon Valley Bank credit facility,
equipment lease financing, loans from affiliates and private financings.
RESULTS OF OPERATIONS
The results of operations described below are based upon two different
presentations: (i) comparison of the historical results of operations of the LLC
for each of the two years ended December 31, 1996 and 1997 and for the three
months ended March 31, 1998 and 1997, and (ii) comparison of the unaudited pro
forma statement of operations for the LLC for the year ended December 31, 1996
and the three months ended March 31, 1997 to the historical results of
operations of the LLC for the year ended December 31, 1997 and the three months
ended March 31, 1998. Cable was an unconsolidated subsidiary of the LLC during
1996, and in 1997 the LLC acquired the remaining interest in Cable. The pro
forma financial statements for the year ended December 31, 1996 and the three
months ended March 31, 1997 give effect to the LLC's acquisition of 100% of
Cable as if it had occurred on January 1, 1996 and January 1, 1997,
respectively. This pro forma presentation is intended to provide a meaningful
comparison in analyzing the Company's results of operations.
25
<PAGE> 27
MARCH 31, 1998 (HISTORICAL) COMPARED TO MARCH 31, 1997 (HISTORICAL)
QUARTER ENDED MARCH 31, 1998 (HISTORICAL) COMPARED TO QUARTER ENDED MARCH 31,
1997 (HISTORICAL)
Revenues. Revenues increased from $67,657 in the first quarter of 1997 to
$1,109,071 in the first quarter of 1998, resulting from the increase of
subscribers in six telephony properties in the first quarter of 1997 and the
addition of 37 new CATV and telephony properties through the first quarter of
1998. CATV service revenues of $300,809 were not included in the first quarter
of 1997 since the LLC was using the equity method of accounting during that
period. CATV service revenues for the first quarter of 1998 were $686,933.
Telephony service revenues increased from $67,498 in the first quarter of 1997
to $386,287 in the first quarter of 1998, primarily due to growth in operational
passings of approximately 153% (from 2,059 to 5,217) coupled with an increase in
subscribers of approximately 352% (from 504 to 2,276).
Gross Profit. Gross profit increased from $32,663 in the first quarter of
1997 to $673,601 in the first quarter of 1998, primarily due to the substantial
increase in revenues and the addition of higher margin CATV services into the
service mix. Gross margin in the first quarter 1998 was 61% of revenues compared
to 48% of revenues in the first quarter 1997. The increase in gross margin was
primarily attributable to the addition of CATV services into the product mix.
$217,649 of CATV gross profit in the first quarter of 1997 was not reflected in
the LLC's financial statements since the equity method of accounting was used in
1997. Gross profit for telephony services increased from $32,504 in the first
quarter of 1997 to $182,420 in the first quarter of 1998. Gross profit for CATV
services was $455,330 for the first quarter of 1998. Gross margin for telephony
services in the first quarter of 1998 was 47% of revenues compared to 48% of
revenues in the first quarter of 1997. Gross margin for CATV services was 66% of
revenues for the first quarter of 1998.
Customer Support Expenses. Customer support expenses increased from $11,218
in the first quarter of 1997 to $130,579 in the first quarter of 1998. Since the
LLC employed the equity method of accounting for Cable in the first quarter of
1997, $53,076 of the increase in customer support expense is attributable to the
fact that customer support, general and administrative expenses incurred by
Cable were not included in 1997. The increase was also attributable to the
increase in customer support for a greater number of passings (17,500 passings
at March 31, 1998 compared to 10,562 passings at March 31, 1997). Customer
support expenses consist primarily of the national customer call center
expenses, operating and maintenance expense and engineering expenses.
Other Operating Expenses. Other operating expenses increased from $117,723
for the first quarter in 1997 to $889,398 for the same period in 1998. The
increase was principally attributable to lease expense of $472,468 in connection
with operating lease arrangements for equipment and an increase in fixed
telephony delivery costs, specifically, T-1 cost in the amount of $57,209
associated with increased facilities based telephony service in 1998. $132,000
of the increase is attributable to other operating expense associated with CATV
not being included in the LLC's financial statements in 1997 due to the use of
the equity method of accounting in 1997. The remaining increase in the
approximate amount of $110,000 included maintenance, contract labor, mileage,
billing and other operating expenses.
Sales and Marketing Expenses. Sales and marketing expenses increased from
$72,112 in the first quarter of 1997 to $204,130 in the first quarter of 1998.
Approximately $132,000 of this increase was attributable to sales and marketing
expenses related to Cable's operations. Since the LLC employed the equity method
of accounting for Cable in 1997, sales and marketing expenses were not included
in the LLC's financial statements in 1997. The remaining portion of the increase
is attributable to growth in passings and subscriber base.
General and Administrative Expenses. General and administrative expenses
increased from $432,739 in the first quarter of 1997 to $602,202 in the first
quarter of 1998. This increase was primarily attributable to increases in
accounting and finance expenses, corporate management and other administrative
expenses related to the LLC's growth and marketing activities. General and
administrative expenses related to CATV operations were not included in the
LLC's financial statements due to the use of the equity method of accounting in
the first quarter of 1997.
26
<PAGE> 28
Depreciation and Amortization. Depreciation and amortization expense
increased from $174,952 in the first quarter of 1997 to $455,315 in the first
quarter of 1998. Approximately $165,000 of this increase was attributable to the
depreciation expense incurred by Cable in the first quarter of 1997. Since the
LLC employed the equity method of accounting for Cable in 1997, depreciation and
amortization expense were not included in the LLC's financial statements in
1997. An additional $62,160 of the increase is attributable to amortization of
goodwill recognized in the first quarter of 1998. The remaining $53,000 of the
increase was attributable to capitalized project costs associated with the
increased number of executed ROE contracts and the plant and equipment
associated with the delivery of the telephony and CATV services in the first
quarter of 1998.
Interest Income. Interest income decreased from $177,096 in the first
quarter of 1997 to $13,805 in the first quarter of 1998. This decrease is a
result of interest income associated with CATV operations not being included in
the LLC's financial statements in the first quarter of 1997 due to the use of
the equity method of accounting during that period.
Interest Expense. Interest expense increased from $481,990 in the first
quarter of 1997 to $644,060 in the first quarter of 1998. The increase in
interest expense was primarily due to an increase in borrowings from the Silicon
Valley Bank credit facility and other lenders to support expansion activities
during 1997.
Other Expenses. Other expenses for the first quarter of 1998 were $32,582,
whereas the LLC incurred nominal expenses in the first quarter of 1997. These
expenses for 1998 resulted primarily from losses on the disposal of equipment.
Net Loss. As a result of the foregoing factors, the Company's net loss
increased from $1,381,603 in the first quarter of 1997 to $2,281,804 in the
first quarter of 1998. $598,598 of the increase in net loss was attributable to
the LLC's use of the equity method of accounting for Cable in the first quarter
of 1997.
QUARTER ENDED MARCH 31, 1998 (HISTORICAL) COMPARED TO QUARTER ENDED MARCH 31,
1997 (PRO FORMA)
Revenues. Revenues increased by 188% from $385,000 in the first quarter of
1997 to $1,109,071 in the first quarter of 1998. The increase in revenues was
primarily attributable to the continuing increase in subscribers resulting from
the addition of 6 new properties in the first quarter of 1997 and an additional
13 new properties through the first quarter of 1998. CATV service revenues
increased 128% from $300,809 in the first quarter of 1997 to $686,933 in the
first quarter of 1998. Telephony service revenues increased 472%, from $67,498
in the first quarter of 1997 to $386,287 in the first quarter of 1998.
Gross Profit. Gross profit increased by 152% from $266,846 to $673,601 in
the first quarter of 1997 and 1998, respectively. This increase was primarily
due to the increase in the number of passings in the same period. Telephony
gross profit increased 461% from $32,504 in the first quarter of 1997 to
$182,420 in the first quarter of 1998. The increase in gross profit is primarily
attributable to a 472% growth in revenues due to the addition of more telephony
passings. Gross profit for CATV services grew 109% from $217,649 in the first
quarter of 1997 to $455,330 in the first quarter of 1998. This increase is
primarily attributable to a 128% growth in CATV revenues in the same period.
Gross margin in the first quarter of 1997 was 69% of revenues compared to 61% of
revenues in the first quarter of 1998. This decrease in gross margin was
primarily due to the increase in telephony revenues as a percentage of all
revenues. Gross margin for CATV services in the first quarter of 1997 was 70% of
revenues compared to 66% of revenues in the first quarter of 1998. This decrease
in gross margin for CATV services was primarily due to the increase in
programming costs in the first quarter of 1998.
Customer Support Expenses. Customer support expenses increased by 103% from
$64,293 in the first quarter of 1997 to $130,579 in the first quarter of 1998.
This increase is primarily attributable to the increased cost of servicing the
higher number of passings, which grew from 10,562 in the first quarter of 1997
to 17,569 in the first quarter of 1998.
Other Operating Expenses. Other operating expenses increased by 256% from
$249,933 for the first quarter of 1997 to $889,398 in the first quarter of 1998.
The increase was principally attributable to lease
27
<PAGE> 29
expense of $472,468 in connection with operating lease arrangements for
equipment and an increase in fixed telephony delivery costs, specifically T-1
cost in the amount of $57,209 associated with increased facilities-based
telephony services in 1998. The remaining other operating expenses in the
approximate amount of $47,000 included maintenance, contract labor, mileage,
billing and other operating expenses.
Sales and Marketing. Sales and marketing expenses remained constant at
approximately $200,000 from the first quarter of 1997 to the first quarter of
1998. The Company incurred a $16,000 increase in royalty expense attributable to
the growth in the number of passings. This increase is offset by a $19,000
reduction in salary expense coinciding with the streamlining and reorganization
of the Company's sales and marketing effort.
General and Administrative Expenses. General and administrative expenses
decreased by 14% from $700,330 in the first quarter of 1997 to $602,202 in the
first quarter of 1998.
Depreciation and Amortization. Depreciation and amortization increased by
74% from $401,601 in the first quarter of 1997 to $455,315 in the first quarter
of 1998. This increase is attributable to capitalized project costs associated
with the increased number of executed ROE Contracts and the plant and equipment
associated with the delivery of telephony and CATV services in 1998.
Interest Income. Interest income decreased by 57% from $32,099 in the first
quarter of 1997 compared to $144,930 in the first quarter of 1998.
Interest Expense. Interest expense increased by 33% from $485,305 in the
first quarter of 1997 to $775,186 in the first quarter of 1998. The increase is
attributable to borrowings from Silicon Valley Bank and other lenders to fund
expansion.
Other Expenses. Other expenses for the first quarter of 1998 were $32,582,
whereas the LLC incurred nominal expenses in the first quarter of 1997. These
expenses for 1998 resulted primarily from the sale of equipment.
Net Loss. As a result of the foregoing, the Company's net loss increased by
65% from $1,821,092 in the first quarter of 1997 compared to $2,283,804 in the
first quarter of 1998.
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1996.
Revenues. Revenues increased from $58,407 in 1996 to $2,721,293 in 1997,
primarily due to the continuing increase of subscribers in four new properties
in 1996 and the addition of 16 new properties in 1997. CATV service revenues of
$777,490 were not included in 1996 revenues because the LLC was using the equity
method of accounting during 1996. CATV service revenues for 1997 were
$1,888,280. Telephony service revenues for 1997 increased from $57,010 in 1996
to $705,193 in 1997, due to the acquisition of the remaining 50% ownership
interest of Cable. The operating results for 1997 have been consolidated, with
the elimination of the 50% interest in Cable's earnings for the period from
January 1, 1997 to September 7, 1997. The LLC began using the consolidation
method of accounting in September 1997, and continued to use this method through
1997.
Gross Profit. Gross profit increased from $17,658 in 1996 to $1,763,209 in
1997, primarily due to the substantial increase in revenues and the addition of
higher margin CATV services into the service mix. Gross margin in 1997 was 65%
of revenues compared to 30% of revenues in 1996. The increase in gross margin
was primarily attributable to the addition of CATV services into the product
mix. $506,183 of CATV gross profit in 1996 was not reflected in the LLC's
financial statements because the equity method of accounting was used in 1996.
Gross profit for telephony services increased from $16,261 in 1996 to $339,831
in 1997. Gross profit for CATV services was $1,295,558 in 1997. Gross margin for
telephony services in 1997 was 48% of revenues compared to 29% of revenues in
1996, and gross margin for CATV services, first introduced into the product mix
in 1997, was 69% of revenues for 1997.
Customer Support Expenses. Customer support expenses increased from $53,331
in 1996 to $426,471 in 1997. Since the LLC employed the equity method of
accounting for Cable in 1996, $265,923 of the increase to customer support
expense is attributable to the fact that customer support, general and
administrative
28
<PAGE> 30
expenses incurred by Cable were not included in 1996. The increase was also
attributable to the increase in customer support for a greater number of
passings (17,500 passings in 1997 compared with 7,584 passings in 1996).
Customer support expenses consist primarily of the national customer call center
expenses, operating and maintenance expenses, and engineering expenses.
Other Operating Expenses. Other operating expenses increased from $292,564
in 1996 to $2,519,825 in 1997. The increase was primarily attributable to lease
expense of $800,358 in connection with operating lease arrangements for
equipment, and an increase in fixed telephony delivery costs, specifically, T-1
costs in the amount of $487,000 associated with increased facilities-based
telephony services in 1997. $172,000 of the increase is attributable to other
operating expense associated with CATV not being included in 1996 due to the
equity method of accounting used in 1996. The remaining other operating expenses
in the approximate amount of $767,000 included maintenance expense, contract
labor, mileage expense, billing expenses, and other miscellaneous operating
expenses.
Sales and Marketing Expenses. Sales and marketing expenses increased from
$181,888 in 1996 to $838,525 in 1997. $321,831 of this increase was attributable
to sales and marketing expenses related to Cable's operations. Since the LLC
employed the equity method of accounting for Cable in 1996, sales and marketing
expenses were not included in the LLC's financial statements in 1996. The
remaining portions of the increase are attributable to growth in passings and
subscriber base. Sales and marketing expenses consist of salaries, royalties,
commissions, and promotional expenses.
General and Administrative Expenses. General and administrative expenses
increased from $1,983,862 in 1996 to $2,865,608 in 1997. $700,217 of this
increase was primarily attributable to increases in accounting and finance
expenses, corporate management and other administrative expenses related to the
LLC's growth and market penetration. General and administrative expenses related
to CATV operations were not included in the LLC's financial statements due to
the equity method of accounting used in 1996.
Depreciation and Amortization. Depreciation and amortization increased from
$209,711 in 1996 to $1,343,543 in 1997. $461,000 of this increase was
attributable to the depreciation expense incurred by Cable during 1996. Since
the LLC employed the equity method of accounting for Cable in 1996, depreciation
and amortization expense were not included in the LLC's financial statements in
1996. An additional $267,740 of the increase is attributable to amortization of
goodwill recognized in 1997. During 1997, the LLC revised the estimated lives
used to depreciate the costs of operational assets. The effect of this change
was to decrease depreciation expense by approximately $423,000. The remaining
$828,092 of the increase was attributable to capitalized project costs
associated with the increased number of executed ROE Contracts and the plant and
equipment associated with the delivery of telephony and CATV services in 1997.
Interest Income. Interest income decreased from $355,365 in 1996 to
$133,177 in 1997. $172,132 of the decrease is the result of interest income
associated with CATV operations not being included in 1996 due to the equity
method of accounting used during 1996.
Interest Expense. Interest expense increased from $1,111,156 in 1996 to
$3,104,809 in 1997. $22,780 of the increase is due to CATV operations not being
included in the LLC's financial statements in 1996 due to the LLC's use of the
equity method of accounting. The increase in interest expense was primarily due
to an increase in borrowings from the Silicon Valley Bank credit facility and
other lenders to support expansion activities during 1997.
Other Expenses. Other expenses for 1997 were $111,712, whereas the LLC did
not incur any other expenses in 1996. These expenses for 1997 consisted
primarily of disposal of obsolete equipment.
Net Loss. As a result of the foregoing factors, the Company's net loss
increased from $4,234,083 in 1996 to $8,446,349 in 1997. $864,461 of the
increase in net loss was attributable to the LLC's use of the equity method of
accounting for Cable in 1996.
29
<PAGE> 31
FISCAL YEAR ENDED DECEMBER 31, 1997 (HISTORICAL) COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1996 (PRO FORMA)
Revenues. Revenues increased by 225% from $836,876 in 1996 to $2,721,293 in
1997. The increase in revenues was primarily attributable to the continuing
increase in subscribers resulting from the addition of four new properties in
1996 and the addition of 16 new properties in 1997. CATV service revenues
increased 143% from $777,490 in 1996 to $1,888,280 in 1997. Telephony service
revenues increased 1,137% from $57,010 in 1996 to $705,193 in 1997. The
operating results for 1997 have been consolidated, with the elimination of the
50% interest in Cable's earnings for the period from January 1, 1997 to
September 7, 1997. The LLC began using the consolidation method of accounting in
September, 1997, and continued to use this method through 1997.
Gross Profit. Gross profit increased by 237% from $523,841 in 1996 to
$1,763,209 in 1997. This increase in gross profit was primarily attributable to
the increase in CATV revenue from $777,490 in 1996 to $1,888,280 in 1997. Gross
margin for 1997 was 65% of revenues compared with 63% of revenues for 1996.
Gross margin for CATV was 65% and 69% in 1996 and 1997, respectively, and gross
margin for telephony services was 29% and 48% for the same periods,
respectively.
Customer Support Expenses. Customer support expenses increased by 34% from
$319,254 in 1996 to $426,471 in 1997. This increase is primarily attributable to
the increased cost of servicing the increased number of passings, which
increased from 7,584 in 1996 to 17,500 in 1997.
Other Operating Expenses. Other operating expenses increased by 442% from
$464,734 in 1996 to $2,519,825 in 1997. This increase was primarily attributable
to lease expense of $800,358 in connection with operating lease arrangements for
equipment, and an increase in fixed telephony delivery costs, specifically T-1
costs in the amount of $487,000, associated with increased facilities-based
telephony services in 1997. The remaining other operating expenses in the
approximate amount of $767,000 included maintenance expense, contract labor,
mileage expense, billing expenses and other operating expenses.
Sales and Marketing Expenses. Sales and marketing expenses increased by 66%
from $503,719 in 1996 to $838,525 in 1997. In connection with the growth of ROE
Contracts, sales and marketing expenses increased, the number of passings
increased, and the subscriber base expanded.
General and Administrative Expenses. General and administrative expenses
increased by 7% from $2,684,079 in 1996 to $2,865,608 in 1997, primarily due to
the increase in services provided by the Company.
Depreciation and Amortization. Depreciation and amortization increased by
100% from $670,732 in 1996 to $1,343,543 in 1997. $267,740 of the increase is
attributable to amortization of goodwill recognized in 1997. During 1997, the
LLC revised the estimated lives used to depreciate the costs of operational
assets. The effect of this change was to decrease depreciation expense by
approximately $423,000. The remaining $828,092 of the increase was attributable
to capitalized project costs associated with the increased number of executed
ROE Contracts and the plant and equipment associated with the delivery of
telephony services and CATV in 1997.
Interest Income. Interest income decreased by 38% from $183,233 in 1996 to
$133,177 in 1997.
Interest Expense. Interest expense increased by 174% from $1,133,936 in
1996 to $3,104,809 in 1997. The increase is attributable to increased borrowings
under the Silicon Valley Bank credit facility and from other lenders to fund
expansion.
Other Expenses. Other expenses for 1997 were $111,712, whereas the LLC did
not incur any other expenses in 1996. These expenses for 1997 consisted
primarily of disposal of obsolete equipment.
Net Loss. As a result of the foregoing, the Company's net loss increased by
65% from $5,107,494 in 1996 to $8,446,349 in 1997.
30
<PAGE> 32
LIQUIDITY AND CAPITAL RESOURCES
Since inception in May 1994, the LLC has incurred cumulative losses
aggregating $14,909,214 and has not experienced a single quarter of profitable
operations. The Company, following the Asset Acquisition, expects to continue to
incur operating losses for the foreseeable future until it achieves more
significant sales of its CATV, telephony and other services. During the past
three years, the LLC has satisfied its cash requirements principally from
borrowings under the Silicon Valley Bank credit facility, equipment lease
financing and loans from affiliates. The LLC and Cable are current in their
obligations under the Silicon Valley Bank credit facility. U.S. OnLine
Communications, Inc. is in the process of negotiating a new facility between
U.S. OnLine Communications, Inc. and Silicon Valley Bank that would take effect
prior to the consummation of the Offering and would be on substantially the same
terms and conditions as the old credit facility between Silicon Valley Bank and
the LLC and Cable.
At December 31, 1997, the LLC had cash and cash equivalents of
approximately $949,471, and a working capital deficit of $7,501,719. As of April
30, 1998, the Company's total debt obligations (exclusive of trade debt)
consists primarily of the $7,126,830 note to Silicon Valley Bank, $3,250,000 in
principal amount of the Interim Notes, $1,500,000 under the Aspen Note and
$3,000,000 under the Asset Acquisition Note. See "Certain Transactions." The
Company intends to use a portion of the net proceeds from the Offering to retire
the Interim Notes. See "Use of Proceeds."
Net cash used in operating activities for 1997 and 1996 totaled
approximately $4,287,575 and $3,101,711, respectively. Net cash used in
investing activities for 1997 and 1996 totaled approximately $467,763 and
$12,900,942, respectively. Net cash provided by financing activities for 1997
and 1996 totaled approximately $5,417,994 and $16,007,235, respectively,
reflecting, in part, the proceeds from related party advances of $12,635,195 and
borrowings under the Silicon Valley Bank credit facility of $4,400,000 in 1996,
and the increase in leasing arrangements of $2,279,623 and borrowings under the
Silicon Valley Bank credit facility of $2,969,000 in 1997.
In March and April 1998, the Company issued the Interim Notes in the
aggregate principal amount of $3,250,000, which Interim Notes are due
immediately following the Offering. In the event that the Company fails to pay
the Interim Notes when due, the Interim Notes may be converted into such pro
rata portion of the Common Stock sufficient to give holders thereof an aggregate
of 75% voting control of the Company on a fully diluted basis.
In connection with the sale of substantially all of the assets of the LLC
to the Company and the assumption of certain liabilities of the LLC by the
Company, the Company issued a $3,000,000 10% promissory note to the LLC, payable
in three installments. The first installment is to be paid upon the day after
the consummation of the Offering and the remaining two installments are to be
paid on the first and second anniversaries of the first payment.
In connection with the Interim Financing, the Company issued to Aspen
OnLine Investments, L.L.C. a $1,500,000 14% subordinated promissory note,
maturing in March 2001. See Note 3 of the Notes to the Company's financial
statements.
The Silicon Valley Bank credit facility permits the LLC and Cable to borrow
a maximum of $7,200,000. As of December 31, 1997, the interest on the Silicon
Valley Bank credit facility was prime plus 1%, and the Company's outstanding
principal balance was $7,126,830. See Note 6 of the Notes to the LLC's financial
statements.
The LLC and Cable lease equipment from T&W on a continuous basis pursuant
to standard form T&W capital equipment lease agreements, none of which,
individually, is believed to be material. As of January 1, 1998, the LLC and
Cable together had received advances of $6,478,853 and had obligations for all
T&W leases totaling $7,114,467.
Over the next 12 to 18 months the Company intends to build-out
approximately 33,000 additional passings, in 23,000 units, at an estimated cost
of $14,000,000 to $16,000,000. The Company intends to finance
31
<PAGE> 33
the cost of this construction through a combination of proceeds of the Offering,
internally generated funds and bank borrowings.
Like other companies in the telecommunications industry, the Company relies
upon its MIS and billing system to accurately and quickly process large amounts
of data, which includes over 150,000 individual telephone calls and thousands of
other individual account transactions each month. The Company estimates that
$750,000 in capital expenditures will be required over the next 12 months to
upgrade the MIS and billing systems to be better able to track calls and to
process the substantial additional number of calls expected to be generated if
the Company meets its business goals.
The Company does not believe that the cost of implementing year 2000
compliant software and systems will have a material effect on the Company's
financial condition or results of operations.
The Company believes that the net proceeds from the Offering, together with
its existing resources and revenues from continuing operations, will to be
sufficient to satisfy its capital requirements for at least twelve months
following consummation of the Offering. In the event that the Company's plans
change or the proceeds of the Offering are insufficient to fund operations due
to unanticipated delays, problems, expenses or otherwise, the Company would be
required to seek additional funding sooner than anticipated. Further, depending
upon the Company's progress in marketing its services, the Company may determine
that it is advisable to raise additional capital sooner than anticipated.
INFLATION
Inflation has not had a significant effect on the Company's business to
date and the Company believes that inflation will not have a material effect on
its business in the foreseeable future.
32
<PAGE> 34
BUSINESS
BACKGROUND
The Company markets and provides CATV and enhanced local and long distance
telephone services to MDUs. It delivers these services under ROE Contracts with
MDU property owners and service agreements with MDU residents. The Company
offers property owners two significant incentives to enter into ROE Contracts
with it. First, because the Company enjoys the cost benefits available to it as
a private cable operator, the Company is able to offer property owners a share
of the revenue generated by the residents who purchase services from the
Company. Second, the Company believes it offers superior customer service, which
enhances the owner's ability to attract tenants.
The Company targets demographically appealing MDUs clustered in geographic
regions with growing populations and currently services MDUs located in Austin,
Dallas-Fort Worth, Denver, San Antonio, and the Washington, D.C. metropolitan
area (including the Virginia suburbs). The Company currently has ROE Contracts
with various property owners including institutional property owners such as
Amli Residential Properties Trust, Gables Residential Trust, Lincoln Property
Company and Equity Residential Properties Trust. Since inception, the Company
has experienced significant growth in the total number of passings, subscribers
and properties covered by ROE Contracts. From December 31, 1996 to March 31,
1998, the number of properties covered by the Company's ROE Contracts increased
from 28 to 43 (an increase of 54%), the number of passings increased from
approximately 7,600 to approximately 18,000 (an increase of approximately 135%),
and the number of subscribers increased from approximately 3,600 to
approximately 10,000 (an increase of approximately 180%).
The Company currently provides CATV and telephony services to MDU residents
at competitive rates. The Company's CATV service offers a full range of popular
programming tailored specifically for each MDU or region. The Company obtains
its CATV programming through program access agreements with suppliers. The
Company currently purchases standard and enhanced local and long-distance
telephony services in bulk and resells them over networked central office
telecommunications platforms.
As of March 31, 1998, the Company had approximately 18,000 operational
passings and approximately 10,000 subscribers, representing a penetration rate
for all units covered by its ROE Contracts of 57% and a penetration rate for
occupied units of 75%. Since many of the Company's operational passings are
located in newly constructed buildings in the initial lease-up phase, the
penetration rate for all units is expected to increase as units are occupied.
The Company maintains business interruption insurance in an amount that it
believes to be adequate.
INDUSTRY OVERVIEW
As a result of technological and regulatory changes that have occurred over
the past few years, smaller companies have been able to compete more effectively
in the CATV and telephony markets traditionally dominated by larger companies.
This shift has enabled the RMTS industry to evolve as an early stage competitor
in the CATV and telephony markets. 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 10 million units across
the United States located in MDUs of 50 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 ROE Contracts.
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 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
33
<PAGE> 35
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 telecommunication 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.
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, the Company believes that fewer than 15% are
currently served by an RMTS provider. The Company believes that it can increase
its penetration of this market by virtue of the revenue-sharing provisions in
its ROE Contracts, its ability to cross-market multiple products and services at
competitive prices, its point-of-sale marketing arrangements with property
owners, and by offering competitive products and superior customer service. The
Company believes 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, the Company
conducts a thorough review of each property, including engineering and cost
analyses, to determine if the Company's facilities can be installed on a cost-
effective basis. Once the Company selects a property, it closely monitors the
construction process so that the appropriate infrastructure is installed on a
timely basis and within budget. Management estimates that 70% of the Company's
future core passings will come from developed properties and the remaining 30%
will come from new construction.
PRODUCTS AND SERVICES
The Company offers standard and enhanced local and long distance
telecommunications and/or CATV services to MDU residents. In many properties,
primarily newly constructed MDUs, the Company also wires the buildings for
intrusion alarm services, which in the future may permit the Company to provide
security services, either directly or through a third party. Although the
Company's products and services are nearly identical to the telephone and CATV
services that apartment residents already purchase in large numbers, the Company
believes it offers comparable features at competitive prices with superior
customer service.
CATV SERVICES. The Company typically delivers its CATV services by
retransmitting programming signals via antenna and principal headend electronic
equipment that receive and process signals from satellites. The Company obtains
its programming through program access agreements with suppliers of programming.
The Company's private cable systems also process and distribute off-air
transmission signals from local network affiliates and independent television
stations. The Company's cable system architecture generally eliminates the need
for set-top converter boxes when it is connected to cable-ready television sets,
and enables the Company to activate service for subscribers without entering
into an apartment. Many of the Company's systems currently use 18 GHz microwave
relays to link more than one apartment community to a single headend, enabling
the Company to realize greater economies of scale. In the future, management
plans to employ whatever technology provides the most attractive return on
invested capital without compromising its service. In some instances, the
Company may simply resell the services of the local franchise cable operator.
The Company is also currently analyzing and/or beta testing other technologies
including fiber optics and interdiction (automated work order processing) to
provide expanded and enhanced services.
The Company 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
34
<PAGE> 36
operators. The Company also offers premium television services, including
uninterrupted full-length motion pictures, regional sports channels, sporting
events, concerts and other entertainment programming. Premium channels,
including HBO, Cinemax, Showtime and The Disney Channel, are generally offered
individually or in discounted packages with basic or other services. The Company
also offers movies, sporting events, concerts and other special events on a
pay-per-view basis. In addition, the Company offers each property its own
dedicated channel, called "Community Link," that provides on-site management
with the ability to communicate electronically with residents. In 1996 and 1997,
CATV services to customers accounted for 93% and 69% of the revenues of the
Company, respectively.
TELEPHONY SERVICES. The Company currently purchases standard and enhanced
local and long-distance telephony services in bulk from LECs, CLECs and
interexchange carriers ("IXCs"). The Company resells local and long-distance
telephony services to customers through networked central office
telecommunications platforms. Telephony services offered by the Company include
call waiting, call forwarding, caller ID, last number redial, three-party
conferencing, emergency 911 and a variety of other services. The Company does
not permit its customers to place 900-number calls or to accept collect calls,
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. The
Company's switching systems are software-driven and capable of feature
enhancement and efficient, remote servicing through software interfaces. In 1996
and 1997, telephony services to customers accounted for 7% and 26% of revenues
of the Company, respectively.
OTHER SERVICES. In addition to offering CATV and telephony services, in the
near future the Company intends to roll out related services such as paging,
intrusion alarm, Internet access and high-speed data. The Company is also
exploring additional services including utility metering and financial and
insurance products.
MARKETS AND INSTALLED BASE
The Company 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). The Company 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 March 31, 1998, the installed base of the Company included nearly
18,000 operational passings, of which approximately 31% were telephony and
approximately 69% were CATV. The installed base includes over 10,000
subscribers, which represents a total penetration rate of 57% of all units and a
penetration rate of 75% of occupied units. Since many of the Company's
operational passings are located in newly constructed buildings in the initial
lease-up phase, the penetration rate for all units is expected to increase as
units are occupied.
The table below summarizes the operational passings and subscriber base of
the Company as of March 31, 1998.
<TABLE>
<CAPTION>
OPERATIONAL PASSINGS SUBSCRIBERS
----------------------------- ----------------------------
MARKETS CATV TELEPHONY TOTAL CATV TELEPHONY TOTAL
------- ------ --------- ------ ----- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Austin.............................. 3,436 1,371 4,807 2,315 644 2,959
Dallas/Forth Worth.................. 2,374 2,374 4,748 1,422 971 2,393
Denver.............................. 1,424 496 1,920 982 136 1,118
San Antonio......................... 4,494 352 4,846 3,096 218 3,314
Washington, D.C. area............... 624 624 1,248 446 270 716
------ ----- ------ ----- ----- ------
Totals.................... 12,352 5,217 17,569 8,261 2,239 10,500
</TABLE>
MARKETING AND SALES
While revenue-sharing arrangements encourage property owners to enter into
service agreements with the Company, management believes that delivery of
competitive products and superior customer service is essential in retaining
such relationships.
35
<PAGE> 37
The Company's first objective is to acquire ROE Contracts. This requires a
two-tier strategy. First, the Company 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
("REITs"), insurance companies and other specialized forms of owners that
control 20,000 or more units. Second, the Company markets its services to
smaller owners whose properties typically lie within a single geographic market.
ROE Contracts with the Company offer property owners an attractive
additional revenue source in the form of fees and commissions. Under the
Company's revenue sharing arrangements, property owners generally are paid a
percentage of gross monthly receipts collected for services delivered by the
Company to subscribers on a property. The percentage paid to property owners
under this arrangement varies depending upon the total number of subscribers to
the Company's services in relation to the total number of dwelling units. A
commission is also paid to the property owner for each new subscriber. Fees
based on gross receipts are paid directly to the property owner. Sales
commissions may be paid either directly to the property owner or through a
leasing agent. The Company 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 the
Company 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 the Company's telephony services
exclusively.
The process of signing on new residents rests largely with the property
owner's leasing agent, who is paid a commission by the Company or through the
property owner's management company for signing up existing residents and new
residents at the time a lease is executed. The leasing agents are trained by the
Company and are provided with marketing and other support literature to
facilitate sales of the Company's products and services.
Efficiencies obtained through regulatory advantages and carefully selected
technology deployments enable the Company 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. The Company 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, "must
carry" regulations and franchise fees. In addition, the Company builds out only
the MDUs that it serves, and implements the most efficient delivery systems
appropriate for a particular geographic area. Accordingly, the Company faces
significantly lower capital expenditures than traditional cable operators and
LECs. The Company uses a scaleable telephone switch that enables it to provide
telephony service economically to smaller MDU properties. Management believes
many of the Company's RMTS competitors employ technology that can be
cost-prohibitive in providing telephony in MDUs consisting of fewer than 400
units.
In addition, competition in the housing market has forced property owners
to find new ways to differentiate their properties to attract new residents and
retain residents. The Company 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 the Company provides CATV and
telephony services are "retrofits," or existing units where hard-wiring is
already in place. Retrofits save the Company a substantial part of the cost of
building out passings, and generally have higher occupancy rates at the
commencement of the ROE Contract. The Company's objective is to convert as many
residents as possible to the Company's services through various marketing
promotions before the system goes "live," and then to continue marketing efforts
after the system is installed. To encourage residents to use the Company's
products, the Company invites them to attend pre-opening parties at which it
demonstrates its services and offers inducements, such as free cable service for
two to four weeks. The Company considers a property stabilized approximately
36
<PAGE> 38
12 months following activation of the Company's services on that property. The
Company's overall stabilized penetration rate for CATV service is 77%, and its
overall stabilized penetration rate for telephony service is 60%.
CUSTOMERS
The Company constructs passings on MDU properties, some of which are owned
by institutional property owners including Amli Residential Properties Trust,
Gables Residential Trust, Lincoln Property Company and Equity Residential
Properties Trust, and provides services to MDU residents. All of the revenues of
the Company are derived from providing CATV, telephony and other services to MDU
residents. The Company's goal is to secure ROE Contracts in demographically and
geographically favorable MDUs and to become the exclusive provider of CATV
services and a non-exclusive provider of telephony services to the residents of
those properties. No customer accounts for more than 10% of the Company's
revenues. Six of the eight properties in the Company's joint venture in Austin,
U.S.-Austin Cable Associates I, Ltd., are, however, commonly managed by an
affiliate of the Company's joint venture partner, Ocampo Partners, Ltd., a Texas
limited partnership. See Note 3 of Notes to Consolidated Financial Statements of
the LLC.
MDU residents may subscribe to a combination of services provided by the
Company. Customers of the Company typically receive equal or greater CATV
channel selection and more favorable pricing than they would from the incumbent
franchise cable operator. To assure access to MDU residents, the Company
typically enters into an exclusive marketing relationship with the property
owners and their on-site leasing agents regarding telephony services. While
residents have the ability to choose either the Company or the local telephone
company to provide telephone service, residents receive marketing materials
describing the Company as a high-quality, lower-cost alternative to the local
phone company.
GROWTH STRATEGY
The Company's primary objective is to become a leading RMTS provider in the
United States. The Company's plan to meet this objective is to:
- target MDUs with favorable demographics;
- capture the benefits of geographic clustering;
- offer competitive products and superior customer service; and
- use a flexible and reliable technology platform.
The Company's growth strategy requires the Company to accomplish the
following:
- 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; and
- pursue acquisition of other CATV and telephony service providers.
The Company does not have any current plans, agreements or understandings
with respect to any specific acquisition.
CUSTOMER SERVICE
Superior customer service is a significant element of the Company's
marketing strategy, and the Company believes that its customer service typically
exceeds expectations. The Company'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, including evenings and Saturdays. The
Company's customer service bureau utilizes account tracking and management
software developed by the Company. The Company's telephony server and software
packages provide a complete complement of call handling, routing and tracking
features. For example, when a customer service agent answers a customer's call,
the customer's file appears on the agent's screen.
37
<PAGE> 39
The Company 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 the Company's subscriber base, management believes
that the customer service bureau will be able to achieve greater economies of
scale while providing reliable and attentive customer service and support.
TECHNOLOGY PLATFORM
The Company 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. Management believes that many of the Company's RMTS
competitors currently employ technology that can be cost-prohibitive in
providing telephony in MDUs consisting of fewer than 400 units. By comparison,
the Company currently uses a scaleable central office telephone switch that
provides efficient telephony service to smaller MDU communities. In addition,
the Company is exploring alternative means of delivering telephony services to
MDU residents on a cost-effective and competitive basis, including resale
agreements with LECs and CLECs. The Company provides CATV services using a
variety of delivery methods, including a combination of satellite master antenna
television ("SMATV") headends, 18 GHz analog broadcast microwave systems, direct
broadcast satellite ("DBS") systems, and resale agreements with cable operators.
CATV SERVICES. The Company's standard cable lineup offers a wide selection
of programming, including the traditional local affiliate network channels,
property information and security channels, and a mix of popular basic and
premium satellite channels. The channel lineup generally offers between 50 and
150 channels, depending upon market demographics, deployment technology and
customer demand. The Company provides its cable services using a variety of
established delivery methods that allow the Company the flexibility to deploy
the most efficient and cost-effective CATV system to a particular MDU without
sacrificing features, quality or reliability of service.
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 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, the Company is able to
transmit this headend signal to multiple MDUs to link the network and achieve
greater economies of scale. The Company 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 the Company
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 the Company
to activate, modify and monitor service for its subscribers without having to
enter an apartment.
38
<PAGE> 40
The following diagram illustrates the Company's typical CATV services
delivery system:
[DIAGRAM]
TELEPHONY SERVICES. The Company has selected a scaleable central office
telephone switch ("DXC") designed and manufactured by Digital
Telecommunications, Inc. Management believes the Company has established a
flexible technology platform that allows it to provide high quality telephony
services on a cost-effective basis to small MDU communities. Management further
believes that many of the Company's RMTS competitors employ technology that may
be cost-prohibitive in providing telephony in MDUs consisting of fewer than 400
units.
The Company 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, last number redial, three-party conferencing,
emergency 911 and a variety of other services. All services provided by the
Company are comparable to, and priced competitively with, those offered by the
respective LEC, although the Company does not permit its customers to place
900-number calls or to accept collect calls.
The Company's telephone facilities equipment is usually located on-site at
each apartment complex. The DXC is strategically placed and Line Interface
Modules ("LIMs") are deployed on-site at each surrounding MDU serviced by the
respective DXC. All calls placed by the Company's customers are processed by the
on-site LIM, and then hauled back to the DXC by a local loop. The DXC processes
all inbound and outbound traffic and connects the calls via Primary Rate
Interface T-1s (i.e. ISDN circuits transmitting at T-1 speed) to the local
exchange or long distance provider, dependent on the call type. The Company
believes this structure provides a cost-effective and competitive solution for
delivering facilities-based telecommunications services to its MDU residents. In
addition, the Company is exploring alternative means of delivering telephony
services to MDU residents on a cost-effective and competitive basis, including
resale agreements with LECs and CLECs.
39
<PAGE> 41
The following diagram illustrates the Company's typical facilities-based
telephony delivery system:
[DIAGRAM]
COMPETITION
The market for CATV and telephony services is highly competitive. The
Company competes for ROE Contracts with other private cable operators and
telecommunications providers. Under the terms of its ROE Contracts, the Company
generally is required to provide products and services that are competitive with
products and services offered by other cable and telecommunications providers.
The Company competes for customers on the basis of price, services offered and
customer service. Franchise CATV operators, referred to as multiple system
operators ("MSOs"), and local telecommunications companies, known as regional
bell operating companies ("RBOCs"), represent the Company's principal
competition. These competitors are typically very large companies with
significantly greater resources than those of the Company. The Company competes
directly in every market 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 the Company are GE/RESCOM,
OpTel, Inc., Cable Plus Group Company, LP, and OnePoint Communications, L.L.C.
GOVERNMENT REGULATION--CATV REGULATORY ISSUES
Regulatory Status and Regulation of Private Cable Operators. Franchise
cable operators are subject to a wide range of FCC regulations regarding such
matters as the rates charged for certain services, transmission of local
television broadcast signals, customer service standards/procedures, performance
standards and system testing requirements. In addition, the operator's
franchise, which can be issued at the municipal, county or state level,
typically imposes additional requirements for operation. These relate to such
matters as system design and construction, provision of channel capacity and
production facilities for public educational and
40
<PAGE> 42
government use, and the payment of franchise fees and the provision of other "in
kind" benefits to the city. See "--Regulation of Franchise Cable Television
Rates."
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 SMATV
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.
The Company's use of 18 GHz microwave links to connect properties in the
Washington, D.C. area is limited by a recent FCC order establishing a zone in
the D.C. area where, to protect sensitive government operations, new facilities
will not be authorized. The use of 18 GHz microwave links nationwide could also
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 the proposed operations are
allowed, it is possible that the 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 Company to integrate
systems over a larger area.
Even structuring its operations in the foregoing manner, the Company must
comply with various FCC rules including the following: the FCC's signal leakage
rules, which require monitoring and testing of its facilities, various Equal
Employment Opportunity requirements (including annual reports and implementation
of a non-discrimination policy and a positive program to encourage equal
opportunity), requirements that the Company obtain the consent of commercial
broadcast stations for retransmission of the stations' signals and rules
requiring the closed captioning of programming.
Access to Property. Federal law provides franchise cable operators 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 franchise operators have not been able to use these rights to access the
interior of MDUs without owner consent. In some jurisdictions, franchise
operators have been able to use state or local access laws to gain access to
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 franchise cable
operators 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 Company. Thus, in
jurisdictions where a mandatory access provision has been enacted, a franchise
operator would be able to access an MDU and provide service in competition with
the Company regardless of whether the Company has an exclusive ROE Contract with
the owner. The ability of franchise operators to force access to an MDU and take
a portion of the subscriber base could negatively affect the Company's operating
margin at a particular property. The District of Columbia has enacted a
mandatory access provision, and other jurisdictions have done so or may do so in
the future. It is often the case, particularly at the local level, that the
mandatory access provision is suspect under constitutional principles because,
for example, it does not provide for the MDU owner to be compensated for the
"taking" of its property which results. While the Commonwealth of Virginia has
not enacted a mandatory access statute, it does prohibit a landlord from
accepting payment from a video services provider in exchange for access to an
41
<PAGE> 43
MDU, which limits the Company's ability to induce the owner to enter into ROE
Contracts. See "--Inside Wiring."
An ongoing FCC proceeding raises the possibility that DBS and multichannel,
multipoint distribution service ("MMDS") operators will be granted rights on a
national basis similar to the mandatory access provided to franchise cable
operators 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 installation, maintenance or use of DBS 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 individual residential units within MDUs without
the owner's consent.
Both the access rights of competitors and restrictions such as the Virginia
restriction on payments to owners could have a material adverse effect on the
Company's business, financial condition and results of operations.
Inside Wiring. Last year, 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. In some instances, a new
provider such as the Company faces 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 provisions, 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 (i) 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); (ii) limit
the ability of multichannel video programming distributors ("MVPDs") with market
power (typically the local franchisee) to enter into exclusive contracts; (iii)
take action to address the anti-competitive effects of perpetual exclusive
contracts (those continuing through all future renewals of the franchise), such
as by allowing MDU owners to void these contracts pursuant to a "fresh look"
mechanism; (iv) require competing providers to share a single system of wiring;
(v) extend existing rules on cable home wiring (that wiring within residential
units up to twelve inches outside each unit) to all MVPDs and not just franchise
operators; and/or (vi) 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 Company
to be able to rely upon exclusive contracts as a means of maximizing its revenue
at a particular property. Thus, if in implementing rules to address the
foregoing issues, the FCC imposes too short a cap on exclusive contracts or
otherwise unduly limits their use, it could have a material adverse effect on
the 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 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 number of MDUs at which the Company could compete would
be diminished, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Regulation of DBS Providers. Congress is considering legislation that, if
enacted, could make it easier for the 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 local TV stations and network signals and would reduce the license
fees that DBS providers must pay for
42
<PAGE> 44
carrying broadcast signals. Finally, proposed FCC regulations could limit the
ability of MDU owners to deny tenants the right to subscribe to DBS service. See
"--Access to Property."
Regulation of Franchise Cable Television Rates. The FCC regulates the rates
that franchise cable systems charge for basic monthly service, expanded basic
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 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 revisions 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. Although regulation of rates
for expanded basic service is scheduled to be eliminated in March 1999, recent
cable rate increases have resulted in pressure on Congress to extend this
"sunset" date.
Actions by the FCC that expand the freedom of franchise operators to set
rates or the termination of rate regulation altogether could allow franchise
operators to subsidize competition at MDUs through their city-wide operations.
This could have a material adverse effect on the Company's business, financial
condition and results of operations.
Copyright. The broadcast programming distributed by the Company contains
copyrighted material. Accordingly, the Company must 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 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.
GOVERNMENT REGULATION--TELEPHONY REGULATORY ISSUES
In providing telecommunications services to its customers, the Company will
operate as either a shared tenant service ("STS") provider or a CLEC, as well as
an IXC. Fewer than a dozen states impose certification and/or tariffing
requirements on STS providers, while virtually all states do so with respect to
CLECs. While the FCC and a majority of states impose certification and/or
tariffing requirements on IXCs, federal and state regulation of IXCs has been
relaxed substantially over the past few years. CLECs remain subject to a wide
array of regulatory constraints and obligations. By contrast, regulation of STS
providers is minimal. The Company is certified as a CLEC in the States of
Colorado and Texas and intends to seek like authority when it enters other
states. The Company also has authority to operate as an IXC in Colorado and
Texas and will seek authority to act as an IXC to the extent such authority is
required when the Company enters new states.
The Company purchases wholesale long distance services from IXCs, STS from
LECs (e.g., Southwestern Bell Telephone and U.S. West Communications) on a
tariffed basis, and plans to resell local telephony service as a CLEC. As a
CLEC, the Company has the statutory right to collocate and interconnect its
switching and other equipment with, and/or obtain unbundled access to, the
network facilities of incumbent LECs, and to secure from the incumbent LEC
retail services at wholesale rates for resale. Over the next one to two years,
incumbent LECs are also required by statute to provide customers with the
ability to (i) retain their telephone numbers when switching local service
providers (i.e. "local number portability") and (ii) access all communications
within Local Access Transport Area ("intra LATA") IXCs on a "1+" basis without
use of access codes (i.e. dialing parity), thereby eliminating two critical
barriers to local telecommunications competition.
43
<PAGE> 45
The 1996 Act opened the local telecommunications market to competition by
mandating the elimination of legal, regulatory, economic and operational
barriers to competitive entry. These charges provided the Company 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 Company will benefit
significantly from the market-opening provisions of the 1996 Act.
SUPPLIERS
The Company is not materially dependent upon any suppliers of goods or
services.
PROPERTIES
The corporate headquarters and national customer services bureau of the
Company 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. The Company also maintains leased facilities in Farmer's Branch and San
Antonio, Texas, and McLean, Virginia.
EMPLOYEES
The Company has 67 full-time employees and one part-time employee. The
Company believes that its relations with its employees are good.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
44
<PAGE> 46
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert G. Solomon 36 Chairman; Chief Executive Officer; Director
Donald E. Barlow 51 President; Chief Financial Officer
Rudy D. Belton 51 Director
Marc S. Seriff 50 Director
Chris B. Tyson 42 Director
David Smith 35 Director of Sales
Joseph R. Jarmusch 43 Director of Engineering & Construction
Robert J. Walentynowicz, Jr. 37 Director of Customer Service Operations
</TABLE>
Set forth below is information regarding the business experience during the
last five years for each of the above-named persons. There are currently three
vacancies on the board of directors of the Company to be filled after
consummation of the Offering.
ROBERT G. SOLOMON has served as President of Cable since 1994, as President
of the LLC since 1995, and as Chairman and CEO of the Company since March 1998.
Since 1987, Mr. Solomon has been a Senior Vice President and principal
stockholder 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 stockholder 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 Chief Financial Officer of the LLC since
1996 and as President of the LLC and the Company since March 1998. From 1973 to
1978, Mr. Barlow served as a commercial manager with Southwestern Bell Telephone
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. 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.
RUDY D. BELTON is a director of the Company. Mr. Belton founded Belco
Equities, Inc. and has served as its President since 1984. Mr. Belton founded
Bouldin Development, Inc. and has served as its President since 1984. Mr. Belton
also founded D.R. Management, Inc. and has served as its President since 1983.
In addition, Mr. Belton has served as Vice President of Boulder Financial Group,
Inc. since 1996, and as President of Belton Real Estate, Inc. since 1979. Belco
Equities, Inc. owns a 1% general partnership interest in, and Mr. Belton owns a
99% limited partnership interest in Ocampo Partners, Ltd. Ocampo Partners, Ltd.
owns a 50% limited partnership interest in USAC. Cable owns a 50% limited
partnership interest in USAC. Mr. Belton received his B.A. from the University
of Kansas and a J.D. from Whittier College.
MARC S. SERIFF is a director of the Company. Mr. Seriff served as Chief
Executive Officer of Eos Management, LLC from January to June 1998, and as a
director of InteliHome, which merged with Global Converging Technologies, from
August 1997 to May 1998. Mr. Seriff co-founded America Online, Inc. in 1985 and
served as a Senior Vice President until 1996. From 1974 to 1985, Mr. Seriff
served as an executive officer of several audio and data communications
companies, including GTE Corporation, Control Video Corp., Venture Technology,
Digital Music, Inc., and Telenet Communications. Mr. Seriff received his B.S. in
45
<PAGE> 47
Mathematics and Computer Science from the University of Texas at Austin in 1971
and an M.S. in Electrical Engineering and Computer Science from Massachusetts
Institute of Technology in 1974.
CHRIS B. TYSON is a director of the Company. Mr. Tyson has served as
President and Chief Executive Officer of World Satellite Network since mid-1997.
In 1994, Mr. Tyson founded TeleVentures, Inc. and currently serves as its
President and Chief Executive Officer. Mr. Tyson also founded Healthway
Interactive Corporation in 1990, and currently serves as a Director. Mr. Tyson
attended the University of Houston from 1975 to 1977.
DAVID SMITH, DIRECTOR OF SALES. Mr. Smith came to the Company in January of
1997 from Southwestern Bell Telephone ("SWBT"), where he worked from January
1996 to January 1997 to establish key MDU owner relationships in the SWBT
five-state service area. At SWBT, Mr. Smith was instrumental in securing
contracts with large apartment owners. Prior to joining SWBT, Mr. Smith served
as Director of Marketing and Customer Service at Multi-Technology Services from
April 1994 to January 1996, and as Director of Marketing and Sales with Times
Mirror Cable Television from October 1982 to April 1994. Mr. Smith attended the
University of Central Arkansas, where he majored in marketing.
JOSEPH R. JARMUSCH, DIRECTOR OF ENGINEERING & CONSTRUCTION. Mr. Jarmusch
joined the Company in January 1995. From October 1993 to December 1994, Mr.
Jarmusch was President of J. Russell Corporation Int'l, which procured and
managed telecommunications contracts throughout North America. Mr. Jarmusch was
General Manager of Progressive Communications Services from August 1988 to
September 1993. Mr. Jarmusch graduated from RETS Electronics Engineering
Institute in 1979, and obtained a Lifetime General Class Radio and Telephone
Operator License from the FCC in 1980.
ROBERT J. WALENTYNOWICZ JR., DIRECTOR OF CUSTOMER SERVICE OPERATIONS. Mr.
Walentynowicz joined the Company in April 1997. He is responsible for the
development and operations of the Company's customer service bureau. Prior to
joining the Company, 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.
TERM AND COMPENSATION OF DIRECTORS
Directors of the Company serve for a term of one year and hold office until
their successors are elected and qualified. Directors are not entitled to fees
for serving on the board of directors or on committees of the board of
directors. All directors, however, are reimbursed for their reasonable expenses
incurred in attending board of directors or committee meetings. In addition,
directors may receive options under the terms of the 1998 Stock Option Plan. To
date, each director who is not an executive officer of the Company has received
an option to purchase 20,000 shares of Common Stock at an exercise price of
$6.00 per share, half of which shares are currently exercisable and half of
which become exercisable after twelve months of service.
BOARD COMMITTEES
The functions of the Audit Committee are to make recommendations to the
board of directors regarding the selection of independent auditors, to review
the results and scope of the audit and other services provided by the
independent auditors of the Company and to evaluate the internal controls of the
Company. The members of the Audit Committee are Marc S. Seriff and Chris B.
Tyson.
The functions of the Compensation Committee are to review and approve the
compensation and benefits for the executive officers of the Company, and, if
requested by the Company's board of directors, to administer the 1998 Stock
Option Plan and 1998 Restricted Stock Plan and to make recommendations to the
board of directors regarding such matters. The members of the Compensation
Committee are Marc S. Seriff, Chris B. Tyson and Rudy D. Belton.
46
<PAGE> 48
VOTING AGREEMENT
The Company, Mr. Solomon, Mr. Barlow, the LLC and Aspen OnLine Investments,
LLC have entered into a Voting Agreement respecting representation on the
Company's board of directors. Each party has agreed to vote its/his shares for
one nominee selected by Aspen OnLine Investments, LLC (until the Aspen Note is
paid in full) and one nominee selected by the LLC.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
received by the Chief Executive Officer and by each executive officer of the
Company whose salary and bonus paid by the LLC and Cable exceeded $100,000 in
1997 ("Named Executive Officers") for services rendered to the LLC and Cable in
all capacities during the year ended December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
------------
NAME AND PRINCIPAL POSITION SALARY($)
--------------------------- ---------
<S> <C>
Robert G. Solomon(1)........................................ $127,884
Chief Executive Officer
</TABLE>
- ---------------
(1) Includes $19,167 accrued but not paid in 1997.
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company has entered into Employment and Noncompetition Agreements with
Mr. Solomon, its Chief Executive Officer, and with Mr. Barlow, its President and
Chief Financial Officer. Mr. Solomon's employment agreement has an initial term
of five years and provides for 1998 base compensation of $150,000. Mr. Barlow's
employment agreement has an initial term of three years and provides for 1998
base compensation of $125,000. Both Mr. Solomon and Mr. Barlow will be eligible
for performance bonuses of up to 50% of their base salaries in the event that
performance criteria set by the board of directors are met. The performance
criteria set by the board of directors to award bonuses have not yet been
determined. The agreements provide severance benefits, including payments upon a
"change in control" and indemnification. Under the agreements, a "change in
control" means the acquisition by a person or group of 35% or more of the
Company's outstanding securities or sale of all or substantially all of the
Company's assets. In the event of termination for any reason, Mr. Solomon and
Mr. Barlow have agreed not to compete with the Company for a period of twelve
months following termination. Courts may determine to enforce, not enforce or
partially enforce noncompetition agreements. In the event of termination other
than "for cause" (as defined in the agreements), all stock options and stock
awards become fully vested and exercisable. Substantially all of Mr. Solomon and
Mr. Barlow's time is spent managing the Company.
BENEFIT PLANS
1998 NON-QUALIFIED STOCK OPTION AND INCENTIVE STOCK OPTION PLAN. The 1998
Stock Option Plan was adopted by the board of directors and approved by the
stockholders of the Company in March 1998. The board of directors supervises and
administers the plan, which provides for the grant of incentive and
non-qualified options to employees, officers, directors and consultants. Powers
exercised by the board may also be exercised by committee. 1,000,000 shares of
Common Stock have been reserved for issuance under the 1998 Stock Option Plan,
and options to purchase 495,000 shares of Common Stock have been granted at an
exercise price of $3.75 per share. Of the options granted, options for 250,000
shares have been granted to the Chief Executive Officer and options for 125,000
shares have been granted to the President and Chief Financial Officer. No
options have been exercised. Options granted under the 1998 Stock Option Plan
generally vest over six years, and the vesting for some is subject to
acceleration upon the occurrence of specified performance criteria. All options
granted become immediately exercisable upon the occurrence of certain events
including, without limitation, a merger, acquisition or change in control of the
Company.
47
<PAGE> 49
1998 RESTRICTED STOCK AWARD PLAN. The 1998 Restricted Stock Plan was
adopted by the board of directors to provide incentives to attract and retain
highly competent persons as officers and key employees. The board of directors
administers the plan. Powers exercised by the board may also be exercised by
committee. Under the 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 a declining number of the shares at a
price of $0.001 per share if the employee terminates his or her employment
before March 10, 2001. The number of shares subject to repurchase decreases by
one-third on each of the first, second and third anniversary dates following the
date of the award; however, for accounting reasons, the board of directors has
determined to accelerate vesting of these shares upon completion of the
Offering. As of March 10, 1998, all 500,000 shares of Common Stock under the
plan had been awarded. Of the 250,000 shares of Common Stock granted to the
Chief Executive Officer, 100,000 shares are no longer subject to repurchase by
the Company, and of the 50,000 shares of Common Stock granted to the President
and Chief Financial Officer, 20,000 shares are no longer subject to repurchase
by the Company.
All shares of Common Stock issued under the 1998 Restricted Stock Plan are
also subject to repurchase by the majority member of the LLC, Paul H. Pfleger,
under a Shareholders Agreement dated March 30, 1998 by and among Paul Pfleger,
the Company and the holders of the shares under the 1998 Restricted Stock Plan,
at a price of $0.01 per share, solely upon the Company's failure to complete a
public offering of its Common Stock on or before September 30, 1998.
INDEMNIFICATION
The Certificate of Incorporation and Bylaws of the Company provide for the
indemnification of the Company's directors and officers to the fullest extent
permitted under Delaware General Corporation Law ("Delaware Corporation Law").
As permitted by the Delaware Corporation Law, the Company's Certificate of
Incorporation provides that directors of the Company shall not be personally
liable to the Company or its stockholders for monetary damages for any breach of
fiduciary duty as a director. As a result, the Company and its stockholders may
be unable to obtain monetary damages from a director for breach of his or her
duty of care. The Company has obtained directors' and officers' insurance.
48
<PAGE> 50
CERTAIN TRANSACTIONS
The following is a summary of certain related party transactions to which
the Company was or is a party or in which certain executive officers, directors
or stockholders of the Company had or have a direct or indirect interest. See
also Note 1 and Note 7 of Notes to Financial Statements. The Company believes
that each of the following transactions was made, and future transactions will
be made, on terms at least as fair to the Company as could have been obtained
from unaffiliated third parties.
In connection with the Interim Financing, the Company issued to Aspen
OnLine Investments, LLC (i) a $1,500,000 14% senior subordinated promissory note
(Aspen Note), maturing in March 2001, (ii) a warrant to purchase 100,000 shares
of Common Stock at a purchase price of $3.75 per share, and (iii) 25 units
consisting of 333,333.25 shares of Common Stock and Interim Notes in the
aggregate principal amount of $1,250,000, for a total purchase price of
$2,500,000. The terms of the Aspen Note give Aspen OnLine Investments, LLC the
right, at its election, to designate one representative on the Company's board
of directors, until the Aspen Note is paid in full.
Following the Interim Financing, the Company extended $7,200,000 from the
proceeds of the Interim Financing to fund the operations of the LLC. The
indebtedness is evidenced by a 15% senior subordinated promissory note (the
"Pre-Acquisition Note"), which will be canceled upon closing of the Asset
Acquisition.
In the Asset Acquisition, the Company will purchase substantially all of
the assets and assume certain liabilities of the LLC, and the LLC will receive
800,000 shares of Common Stock, a promissory note in the principal amount of
$3,000,000 (Asset Acquisition Note), and cancellation of all indebtedness under
the Pre-Acquisition Note. The Asset Acquisition Note will bear interest at the
rate of 10% and will be payable in three installments. The first installment
will be due the day immediately following consummation of the Offering and the
remaining two installments will be due on the first and second anniversaries of
the first payment. Following the Asset Acquisition, the LLC will have no
independent business operations. Mr. Solomon, the Company's Chief Executive
Officer, has a 3.59% interest in the LLC.
Mr. Solomon has a 7.5% interest in Highpoint Apartments, a property located
in San Antonio, Texas, which is served by the Company and which has
approximately 260 residential units. The property is owned by Highpoint
Holdings, Ltd. Mr. Solomon serves as the Vice President of Regional Holdings,
Inc., the General Partner of Highpoint Holdings, Ltd. CS Management, Inc., a
company which is 25% owned by Mr. Solomon, manages the Highpoint Apartments. CS
Management, Inc. also manages another of the Company's customers, Springwood
Apartments, located in San Antonio, Texas.
Until May 1998, the Company subleased approximately 2,630 square feet for
its corporate offices at 8307 Shoal Creek Boulevard in Austin, Texas. The
property is owned by ZAJA Holdings, Ltd. ("ZAJA"). The General Partner of ZAJA
is MAZA Holdings, Inc., a corporation 100% owned by Mr. Solomon. In addition,
Mr. Solomon is a 49% limited partner in ZAJA. The Company entered into a
sublease with CS Management, Inc., a company 25% owned by Mr. Solomon. The
sublease had a 36-month term and a rental rate of approximately $13.20 per
square foot plus triple net expenses.
Mr. Belton, one of the Company's directors, owns and operates Belco
Equities, Inc. Belco Equities, Inc. owns a 1% general partnership interest in,
and Mr. Belton owns a 99% limited partnership interest in, Ocampo Partners, Ltd.
Ocampo Partners, Ltd. owns a 50% limited partnership interest in USAC. The
Company owns a 50% limited partnership interest in USAC.
Pursuant to a Shareholders Agreement entered into on March 30, 1998 between
the Company and the holders of 500,000 shares of Common Stock granted pursuant
to the 1998 Restricted Stock Plan, such shareholders have agreed not to transfer
their shares to any person other than Paul H. Pfleger and, in addition, if the
Offering is not consummated by September 30, 1998, such shareholders have
granted Mr. Pfleger the option, but not the obligation, to purchase their shares
at $.01 per share as described in the Shareholders Agreement.
49
<PAGE> 51
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the ownership of
Common Stock as of June 1, 1998, by (i) each person known to be the beneficial
owner of more than five percent of the Common Stock, (ii) each director and
executive officer, and (iii) all executive officers and directors of the Company
as a group.
<TABLE>
<CAPTION>
NUMBER OF PERCENT BEFORE PERCENT AFTER
NAME SHARES(1) THE OFFERING THE OFFERING
---- --------- -------------- -------------
<S> <C> <C> <C>
U.S. OnLine Communications L.L.C.(2)... 800,000 37% 14%
Aspen OnLine Investments, LLC(3)....... 433,333 20% 7%
Robert G. Solomon(4)................... 250,000 12% 4%
Donald E. Barlow(4).................... 50,000 2% .9%
Rudy D. Belton(4)...................... 10,000 .5% .2%
Marc S. Seriff(4)...................... 10,000 .5% .2%
Chris B. Tyson(4)...................... 10,000 .5% .2%
All directors and executive officers as
a group (5 persons).................. 330,000 15% 6%
</TABLE>
- ---------------
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission (the "Commission") and includes shares
over which the indicated beneficial owner exercises voting and/or investment
power. Shares of Common Stock subject to options currently exercisable or
exercisable within 60 days are deemed outstanding for computing the
percentage ownership of the person holding the options but are not deemed
outstanding for computing the percentage ownership of any other person.
Except as indicated, and subject to community property laws where
applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
(2) Paul H. Pfleger is beneficial owner of 78% of the LLC, Robert G. Solomon is
beneficial owner of 3.59% of the LLC, and the remaining 18.41% is
beneficially owned by nonaffiliated private individuals. The business
address of the LLC is 1201 Third Avenue, Suite 5400, Seattle, Washington
98101.
(3) The principal beneficial owners of Aspen OnLine Investments, LLC are Aspen
Enterprises, Ltd. (45%) and Elsa A. Prince Living Trust, Elsa A. Prince,
Trustee (37%). The business address of Aspen Enterprises, Ltd. and Aspen
OnLine Investments, LLC is 2757 44th Street, S.W., Suite 306, Grand Rapids,
Michigan 49500. Includes warrants and shares owned of record by Aspen OnLine
Investments, LLC.
(4) The business address of Messrs. Barlow, Belton, Seriff, Solomon and Tyson is
c/o U.S. OnLine Communications, Inc., 10300 Metric Blvd., Austin, Texas
78758.
50
<PAGE> 52
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, $.001 par value, and 1,000,000 shares of preferred stock, $.001
par value.
COMMON STOCK
The Company has 20,000,000 shares of Common Stock authorized, of which
2,166,667 were issued and outstanding prior to the Offering. 500,000 shares have
been issued to key employees of the Company, with a declining number of these
shares subject to repurchase by the Company, at a price of $0.01 per share, if
the employee terminates his or her employment with the Company before March 10,
2001.
There are 120 owners of record of Common Stock. Holders of Common Stock are
entitled to receive dividends when, as and if declared by the board of directors
from funds legally available therefor. Upon liquidation, holders of Common Stock
are entitled to share pro rata in any distribution to holders of Common Stock
following payment to creditors. Holders of shares of Common Stock have one vote
per share and have no cumulative voting or preemptive rights.
PREFERRED STOCK
The Company has 1,000,000 shares of preferred stock authorized, none of
which are issued and outstanding. The Company's Certificate of Incorporation
authorizes the board of directors to issue the preferred stock in series and to
designate the rights and preferences of each such series.
WARRANTS
The Company has granted Silicon Valley Bank and Aspen OnLine Investments,
LLC warrants to purchase 75,000 and 100,000 shares of Common Stock,
respectively, at an exercise price of $3.75 per share. The warrants are
exercisable for a period of five years.
REGISTRATION RIGHTS
Subject to lock-up agreements with Barington, the Company has granted
rights to registration under the Securities Act with respect to (i) the
Representatives' Options, (ii) 350,000 shares of Common Stock issuable upon
exercise of the Representatives' Options, (iii) 866,667 shares of Common Stock
purchased by investors in the Interim Financing, (iv) 800,000 shares of Common
Stock issued to the LLC in the Asset Acquisition, and (v) 175,000 shares
issuable upon exercise of the Warrants (collectively, the "Registrable
Securities"). Subject to specified conditions and limitations, the registration
rights generally grant to the holders of Registrable Securities "piggyback"
registration rights. In addition, the Representatives and the holders of the
Warrants have "demand" registration rights with respect to the shares issuable
upon exercise of the Representatives' Options and Warrants.
LOCK-UP AGREEMENTS
Pursuant to the terms of the Underwriting Agreement, for a period of two
years after consummation of the Offering, the Company may not sell or otherwise
dispose of any shares of Common Stock without the prior written consent of
Barington, except in connection with the sale of: (i) 525,000 shares of Common
Stock to cover the Underwriters' over-allotment option; (ii) the
Representatives' Options; (iii) 350,000 shares of Common Stock underlying the
Representatives' Options; (iv) 1,000,000 shares of Common Stock that may be
issued pursuant to the 1998 Stock Option Plan, of which options to purchase
495,000 shares of Common Stock have been granted; and (v) securities in
connection with mergers approved by a majority of the independent directors of
the Company. In addition, all of the 2,166,667 shares of Common Stock
outstanding prior to the Offering and all of the shares of Common Stock issuable
upon exercise of the Warrants are subject to two-year lock-up agreements with
Barington, except that any stockholder subject to such an agreement may sell
shares of Common Stock commencing 12 months after consummation of the Offering
in the event that the last trading price for the Common Stock has been at least
200% of the price in the Offering for a period of
51
<PAGE> 53
20 consecutive trading days ending within five days of the date of such sale,
and such sale is completed at a price in excess of 200% of the price in the
Offering. Barington has no plans, arrangements or understandings to modify,
shorten or waive the lock-up agreements.
TRANSFER AGENT AND REGISTRAR
Continental Stock Transfer & Trust Company, New York, New York, will act as
transfer agent and registrar for the Common Stock.
DELAWARE ANTI-TAKEOVER LAW
Section 203 of the Delaware General Corporation Law. The Company is subject
to the provisions of Section 203 of the Delaware Corporation Law ("Section 203")
regulating corporate takeovers. Section 203 prevents certain Delaware
corporations, including those whose securities are quoted on the Nasdaq, from
engaging, under certain circumstances, in a "business combination" (which
includes a merger or sale of more than 10% of a corporation's assets) with any
"interested stockholder" (a stockholder who acquired 15% or more of a
corporation's outstanding voting stock without the prior approval of a
corporation's board of directors) for three years following the date that such
stockholder became an "interested stockholder." A Delaware corporation may "opt
out" of Section 203 with an express provision in its original certificate of
incorporation, or an express provision in its certificate of incorporation or
bylaws resulting from a stockholders' amendment approved by at least a majority
of the outstanding voting shares. The Company has not "opted out" of the
application of Section 203.
Charter Provisions with Anti-Takeover Effects. The Company's Certificate of
Incorporation contains provisions that may have the effect of discouraging
certain transactions involving an actual or threatened change in control of the
Company. The Certificate of Incorporation grants to the board of directors the
authority to issue shares of preferred stock in one or more series without
stockholder approval. The ability to issue such preferred stock could have the
effect of discouraging unsolicited acquisition proposals or making it more
difficult for a third party to commence such an acquisition.
52
<PAGE> 54
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have 5,666,667 shares
of Common Stock outstanding (assuming no exercise of outstanding warrants or
stock options). Of these shares, the 3,500,000 shares sold in the Offering will
be freely tradeable without restriction unless they are held by "affiliates" of
the Company, as that term is defined in Rule 144 promulgated under the
Securities Act. The remaining 2,166,667 shares will be "restricted securities"
as defined in Rule 144 ("Restricted Shares"). All of the Restricted Shares are
subject to lock-up agreements with Barington. As a result of the lock-up
agreements and the provisions of Rule 144 generally, including Rule 144(k), all
currently outstanding shares will be available for sale in the public market
upon expiration of the lock-up agreements two years after the date of this
Prospectus. Barington has advised the Company that it has no specific policy
regarding early release of lock-ups generally, but that Barington has no current
or future plans, proposals, arrangements or understandings to modify, shorten or
waive the lock-up arrangements. See "Underwriting."
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned "restricted securities"
for at least one year is entitled to sell, within any three-month period, a
number of such shares that does not exceed the greater of (i) 1% of the then
outstanding shares of the common stock and (ii) the average weekly trading
volume during the four calendar weeks preceding such sale. Sales under Rule 144
are also currently subject to certain requirements as to the manner of sale,
notice and availability of current public information about the Company. Rule
144 also provides that affiliates who own securities that are not "restricted
securities" must nonetheless comply with the same restrictions applicable
thereunder to "restricted securities," as if such securities were "restricted
securities," with the exception of the one-year holding period requirement. A
person who has not been an affiliate of the Company at any time within three
months prior to the sale and has beneficially owned the "restricted securities"
for at least two years is entitled to sell such shares under Rule 144(k) without
regard to the volume limitations or the other general requirements described
above.
An employee, officer or director of, or consultant to, the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 promulgated under the Securities Act, which permits
affiliates and non-affiliates to sell their Rule 701 shares without having to
comply with the holding period restrictions of Rule 144, in each case commencing
90 days after the date of this Prospectus. In addition, non-affiliates may sell
Rule 701 shares without complying with the public information, volume and notice
provisions of Rule 144.
The Company intends to file with the Commission a registration statement on
Form S-8 under the Securities Act to register the issuance of Common Stock
reserved under the 1998 Stock Option Plan and 1998 Restricted Stock Plan, thus
permitting the resale of shares issued under such plans by non-affiliates in the
public market without restriction under the Securities Act.
Any sale of substantial amounts of Common Stock in the open market may
adversely affect the market price of Common Stock offered hereby. See "Risk
Factors--Effect of Future Sales of Common Stock."
53
<PAGE> 55
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
("Underwriting Agreement"), the form of which has been filed as an exhibit to
the registration statement of which this Prospectus forms a part, Barington,
Cruttenden and each of the underwriters for whom Barington and Cruttenden are
acting as representatives have severally agreed to purchase from the Company the
aggregate number of shares of Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Barington Capital Group, L.P................................
Cruttenden Roth Incorporated................................
---------
Total............................................. 3,500,000
=========
</TABLE>
The Common Stock is being sold on a firm commitment basis. The Underwriting
Agreement provides, however, that the obligations of the Underwriters are
subject to certain conditions precedent. The Representatives and the
Underwriters are committed to purchase all the Common Stock offered hereby if
any is purchased.
The Representatives have advised the Company that they propose to offer the
shares of Common Stock offered hereby to the public at the initial offering
price set forth on the cover page of this Prospectus. The Underwriters may allow
to certain dealers, who are members of the National Association of Securities
Dealers (the "NASD"), concessions not in excess of $ per share of Common
Stock, of which not in excess of $ may be reallowed to other dealers
who are members of the NASD. After consummation of the Offering, the offering
price, the concessions and the reallowance may be changed. The Representatives
will not make sales to any discretionary accounts over which they have
authority.
The Company has granted an over-allotment option to the Underwriters,
exercisable during the 45-day period after consummation of the Offering, to
purchase up to an aggregate of 525,00 additional shares of Common Stock at the
initial offering price, less underwriting discounts and commissions. The
Underwriters may exercise such option only for the purpose of covering any
over-allotments made in connection with the sale of the Common Stock offered
hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, losses and expenses, including liabilities under the Securities
Act, or to contribute to payments that the Underwriters may be required to make
in respect thereof.
The Company has agreed to pay the Representatives a non-accountable expense
allowance of three percent of the aggregate offering price of the shares of
Common Stock offered hereby (including any shares of Common Stock purchased
pursuant to the Underwriters' over-allotment option), of which $55,000 has been
paid to date.
The Company has also agreed to sell to the Representatives, or their
designees, the Representatives' Options to purchase 350,000 shares at a price of
$.001 per option. The Representatives' Options will be exercisable for a period
of five years, commencing on consummation of the Offering, at an initial per
share exercise price equal to 120% of the offering price. Neither the
Representatives' Options nor the shares of Common Stock underlying the
Representatives' Options may be transferred, assigned or hypothecated, in whole
or in part, for one year from the effective date of the registration statement
of which this Prospectus forms a part, except to any successor, officer or
partner of a Representative (or to officers or partners of any such successor or
partner), any other Underwriter or member of the selling group which
participated in the Offering, any purchaser of substantially all of the assets
of a Representative or otherwise by operation of law. The Representatives'
Options may be exercised on one or a number of occasions as to all or a portion
of the shares covered by the option, and contain certain registration rights and
anti-dilution provisions for appropriate
54
<PAGE> 56
adjustment of the exercise price and number of shares that may be purchased upon
exercise upon the occurrence of certain events.
The Company also has agreed, for a period of three years following
consummation of the Offering, to use its best efforts (including the
solicitation of proxies) to elect two designees of Barington to the board of
directors of the Company, if Barington so chooses to nominate such designees.
Pursuant to agreements between the Company, the existing stockholders and
Barington, the Company and all of the existing stockholders of the Company as of
the effective date of the Registration Statement have agreed not to offer,
issue, sell, contract to sell, grant any option for or otherwise dispose of any
securities of the Company for a period of two years from the consummation of the
Offering without the prior written consent of Barington. Notwithstanding these
lock-up agreements, any stockholder subject to such agreement may sell shares of
Common Stock commencing 12 months after the consummation of the Offering in the
event the last sale price for the Common Stock on its principal exchange has
been at least 200% of the initial public offering price for a period of 20
consecutive trading days ending within five days of the date of such sale, and
such sale is completed at a price in excess of 200% of the initial public
offering price.
The foregoing discussion of the material terms and provisions of the
Underwriting Agreement is qualified in its entirety by reference to the detailed
provisions of the Underwriting Agreement.
The Underwriters may engage in certain transactions which may stabilize,
maintain or otherwise affect the price of the Common Stock. Such transactions
may include over-allotments of Common Stock and purchases of the Common Stock.
Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the offering price of the shares of Common Stock offered
and sold in the Offering has been determined by arm's-length negotiations
between the Company and the Representatives and does not necessarily bear any
relationship to the Company's book value, assets, past operating results,
financial condition or other established criteria of value. Factors considered
in determining such price include an assessment of the Company's recent
financial results and current financial condition, future prospects of the
Company, the qualifications of the Company's management and other relevant
factors.
LEGAL MATTERS
The validity of the shares of Common Stock being sold in the Offering is
being passed upon for the Company by Graham & James LLP/Riddell Williams P.S.,
Seattle, Washington. Certain legal matters in connection with the Offering will
be passed upon for the Underwriters by Kramer, Levin, Naftalis & Frankel, New
York, New York.
EXPERTS
The balance sheet of U.S. OnLine Communications, Inc. at March 31, 1998,
the consolidated balance sheet of U.S. OnLine Communications L.L.C. at December
31, 1997, and the related consolidated statements of operations, changes in
members' deficit and cash flows for the years ended December 31, 1997 and 1996,
and the consolidated statements of operations, changes in members' equity
(deficit) and cash flows of U.S. On-Line Cable, L.L.C. for the year ended
December 31, 1996, included in this Prospectus, have been included herein in
reliance on the reports of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
55
<PAGE> 57
ADDITIONAL INFORMATION
The Company has filed a registration statement on Form SB-2, together with
all exhibits and amendments thereto ("Registration Statement"), of which this
Prospectus ("Prospectus") is a part, under the Securities Act with the
Commission with respect to the Common Stock offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement,
certain portions of which are omitted in accordance with the rules and
regulations of the Commission. Statements made in this Prospectus concerning
documents, while complete in material respects, are nonetheless summaries.
Reference is made to each exhibit for a full description of each such document,
and in each case summary descriptions are qualified by reference to complete
exhibits. For further information with respect to the Company and its Common
Stock, reference is made to the Registration Statement and the exhibits and
schedules thereto, which may be inspected without charge at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located in New York (Seven World Trade Center, 13th Floor, New York,
New York 10048) and Chicago (Northwest Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661). The Commission also maintains a Web site
at http://www.sec.gov at which filings may be obtained. Copies of these
documents may be obtained at prescribed rates from the Public Reference Section
of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of these documents are also available for
inspection at the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006.
56
<PAGE> 58
GLOSSARY OF INDUSTRY TERMS
CATV.......................... Cable television.
CLEC.......................... Competitive Local Exchange Carrier: A company
that provides its customers with an
alternative to the local telephone company for
local and interstate transport of private
lines, special access and switched access
telecommunications services, as well as
switched local telecommunications services.
CLECs are sometimes also referred to as
"co-carriers."
DBS........................... Direct Broadcast Satellite: A facility that
retransmits video programming via satellite
directly to a subscriber's home.
DXC........................... A scaleable central office telephone switch
designed and manufactured by Digital
Telecommunications, Inc.
FAA........................... Federal Aviation Administration.
FCC........................... Federal Communications Commission: The federal
agency that oversees the implementation and
enforcement of federal communications policy,
including the 1992 Cable Act and the 1996 Act.
Cable-related rules are generally issued and
enforced by two divisions within the FCC: the
cable services bureau (which contains a
competition, cable rates and programming
division) and the office of plans and policy.
HEADEND....................... The point(s) of a cable system where various
antennae are located to receive off-air,
satellite and other signals distributed to
subscribers. The location of the principal
headend is used to determine the applicability
of must-carry rules to the cable system. The
principal headend designated by a cable
operator must be based on whether:
- it serves the majority of a system's
population;
- it contains the majority of the system's
population;
- it contains the majority of the system's
signal processing equipment; or
- it is the closest headend to the cable
system's geographic center.
If a cable system has only one headend, that
is its principal headend.
INTRALATA..................... Communication within a Local Access Transport
Area.
ISDN.......................... Integrated services digital network.
IXC........................... Interexchange Carrier.
LEC........................... Local Exchange Carrier: The local or regional
telephone company that owns and operates lines
to customer locations and switches.
LIM........................... Line Interface Modules.
MDU........................... Multiple Dwelling Unit: A housing structure
containing several units. For purposes of the
1992 Cable Act, each unit is treated as a
separate household.
MMDS.......................... Multichannel multipoint distribution service:
an alternative video provider that analogizes
to numerous microwave broadcast stations
transmitting from a central location.
57
<PAGE> 59
MSO........................... Multiple System Operator: A cable operator
that owns or operates more than one cable
system.
MUST-CARRY.................... Provisions of the 1996 Communications Act that
require cable operators to carry certain local
commercial and noncommercial, educational
television broadcast stations on their
systems, as well as allow broadcasters to
demand advance permission and, in some cases,
compensation, from multichannel video
programming distributors for the ability to
carry their programming.
MVPD.......................... Multichannel video programming distributors.
PBX........................... Private (automatic) branch telephone exchange
system providing telephone switching in an
office or building.
PUC........................... Public Utility Commission.
RBOC.......................... Regional Bell Operating Company: The acronym
used for local telephone companies created in
1984 as part of the breakup of AT&T. The six
RBOCs are Ameritech, Bell Atlantic, Bell
South, Pacific Telesis Group, Southwestern
Bell Telephone and U.S. West Communications.
RMTS.......................... Residential Multi-Tenant Services: Services
provided to an MDU by a private operator.
Services include, but are not limited to,
cable, telephone, intrusion alarm, Internet
access and utility metering.
ROE CONTRACTS................. Right of Entry Contracts: Agreements between
property owners and RMTS providers which
govern the terms under which the RMTS
providers will offer their services to
residents of the MDUs.
SMATV......................... Satellite Master Antenna Television System.
STS........................... Shared Tenant Service: The provision of local
telephone services to multiple customers
located in the same building or group of
buildings.
T-1........................... High-speed leased line used for the
transmission of voice and data.
18 GHZ SYSTEMS................ A wireless method of transmitting or
retransmitting video and audio signals from a
headend to an MDU.
WAN........................... Wide area network: Remote computer
communications system that allows file sharing
among geographically distributed workgroups.
58
<PAGE> 60
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
U.S. ONLINE COMMUNICATIONS, INC.
Report of Independent Accountants........................... F-2
Balance Sheet as of March 31, 1998.......................... F-3
Notes to the Financial Statement............................ F-4
U.S. ONLINE COMMUNICATIONS L.L.C.
Report of Independent Accountants........................... F-9
Consolidated Balance Sheets as of December 31, 1997 and
March 31, 1998 (unaudited)................................ F-10
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996 and for the three months ended
March 31, 1998 (unaudited) and 1997 (unaudited)........... F-11
Consolidated Statements of Changes in Members' Deficit for
the years ended December 31, 1997 and 1996 and for the
three months ended March 31, 1998 (unaudited)............. F-12
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996 and for the three months ended
March 31, 1998 (unaudited) and 1997 (unaudited)........... F-13
Notes to Consolidated Financial Statements.................. F-14
U.S. ON-LINE CABLE, L.L.C.
Report of Independent Accountants........................... F-24
Consolidated Statement of Operations for the year ended
December 31, 1996......................................... F-25
Consolidated Statement of Changes in Members' Equity
(Deficit) for the year ended December 31, 1996............ F-26
Consolidated Statement of Cash Flows for the year ended
December 31, 1996......................................... F-27
Notes to Consolidated Financial Statements.................. F-28
</TABLE>
F-1
<PAGE> 61
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
U.S. ONLINE COMMUNICATIONS, INC.
We have audited the accompanying balance sheet of U.S. OnLine Communications,
Inc. (the "Company") as of March 31, 1998. This balance sheet is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this balance sheet 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 balance sheet referred to above presents fairly, in all
material respects, the financial position of U.S. OnLine Communications, Inc. as
of March 31, 1998 in conformity with generally accepted accounting principles.
The accompanying financial statement has been prepared assuming that the Company
will continue as a going concern. As discussed in Notes 1 and 5 to the financial
statement, the Company has agreed to acquire substantially all of the assets and
assume certain liabilities of U.S. OnLine Communications L.L.C. This entity has
incurred losses and negative cash flows from operations and has negative working
capital, which raise substantial doubt about the Company's ability to continue
as a going concern following the acquisition. Management's plans in regard to
these matters are also described in the Notes to the financial statement. The
financial statement does not include any adjustments that might result from the
outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
Austin, Texas
June 23, 1998
F-2
<PAGE> 62
U.S. ONLINE COMMUNICATIONS, INC.
BALANCE SHEET
MARCH 31, 1998
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents................................. $5,648,500
----------
Total current assets.............................. 5,648,500
Deferred loan costs, net.................................... 870,296
----------
Total assets...................................... $6,518,796
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 292,641
Accrued expenses.......................................... 255,725
Convertible shareholder notes payable..................... 2,335,000
----------
Total current liabilities......................... 2,883,366
Noncurrent liabilities:
Note payable.............................................. 1,500,000
----------
Total liabilities................................. 4,383,366
Commitments and contingencies (Note 5)
Stockholders' equity:
Preferred stock, $.001 par value, 1,000,000 shares
authorized; no shares issued or outstanding............ --
Common stock, $.001 par value; 20,000,000 shares
authorized; 1,122,667 shares issued and outstanding.... 1,123
Additional paid-in capital................................ 2,134,307
----------
Total stockholders' equity........................ 2,135,430
----------
Total liabilities and stockholders' equity........ $6,518,796
==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-3
<PAGE> 63
U.S. ONLINE COMMUNICATIONS, INC.
NOTES TO THE FINANCIAL STATEMENT
1. FORMATION AND BUSINESS DESCRIPTION:
U.S. OnLine Communications, Inc. (the "Company"), a Delaware corporation,
was incorporated on March 5, 1998 in anticipation of an initial public offering
of the Company's common stock (the "Offering"). Prior to consummation of the
Offering, the Company will acquire substantially all of the assets and certain
of the liabilities of U.S. OnLine Communications L.L.C. (the "LLC"), a
Washington limited liability company, and its subsidiaries (the "Asset
Acquisition").
Following the Asset Acquisition, the Company will market and provide cable
television and enhanced local and long distance telecommunications services,
collectively referred to as residential multi-tenant services to multifamily
dwelling units ("MDUs") such as apartment complexes and other concentrated
residential sites. The Company will target demographically favorable MDUs
clustered in growing geographic regions and serve MDUs located in Austin, San
Antonio, Dallas-Fort Worth, Denver and the Washington, D.C. metropolitan area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH EQUIVALENTS
The Company considers all highly liquid investments and time deposits with
an original maturity at time of purchase of three months or less to be cash
equivalents.
USE OF ESTIMATES
The preparation of the financial statement 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
statement. Actual results could differ from those estimates.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by Statement of Financial Accounting
Standards No. 105, consist primarily of cash and cash equivalents. From time to
time, the Company's demand deposit accounts and money market accounts exceed
existing federally insured limits. The Company has not experienced any losses on
these accounts.
DEFERRED LOAN COSTS, NET
Deferred loan costs, net, at March 31, 1998, consists of loan costs
amounting to $72,750 (the fair value of a warrant issued to a commercial bank
determined using the Black-Scholes model, see Note 7), which will be amortized
using the interest method over the term of the related loan after assumption of
the debt from the LLC as part of the Asset Acquisition and $797,546 of debt
issuance costs associated with 15% senior subordinated promissory notes and the
14% subordinated promissory note (see Note 3), which have been recognized as
original issue discount and are being amortized using the interest method over
the lives of the related indebtedness.
YEAR 2000
Many computer systems experience problems handling dates beyond the year
1999. Some computer software may need to be modified prior to the year 2000 in
order to remain functional. The Company is assessing the readiness of its
internal computer systems for handling the year 2000 issue. The Company does not
believe that the cost of implementing year 2000 compliant software and systems
will have a material effect on the Company's financial condition or results of
operation. The Company expects to implement the internal
F-4
<PAGE> 64
U.S. ONLINE COMMUNICATIONS, INC.
NOTES TO THE FINANCIAL STATEMENT (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
information systems changes necessary to address year 2000 issues by the end of
fiscal 1998. Moreover, the Company could be adversely impacted by year 2000
issues faced by major distributors, suppliers and financial service
organizations with which the Company interacts.
3. INTERIM FINANCING:
On March 31, 1998, the Company closed on the sale of 622,667 shares of
common stock at $3.75 per share and the placement of $2,335,000 of 15%
Convertible Senior Subordinated Promissory Notes (the "Interim Notes"), for
total proceeds of $4,670,000, with associated issuance costs of $739,641.
Subsequent to March 31, 1998, the Company closed on the sale of 244,000
additional shares of common stock at $3.75 per share and the placement of
$915,000 of Interim Notes, for total proceeds of $1,830,000, reduced by issuance
costs of $255,634 (collectively, the "Interim Financing").
The Interim Notes mature on the earlier of (i) March 29, 1999, (ii) the day
after an initial public offering of the Company's common shares, or (iii) the
date of closing of a sale of the Company's common stock with gross proceeds of
at least 125% of the principal balance outstanding of the Interim Notes.
Interest on the Interim Notes is payable quarterly commencing on July 1, 1998.
If the Company fails to consummate an initial public offering of its equity
securities within twelve months from the date of issuance of the Interim Notes,
the holders have the right to convert the Interim Notes into 75% of the common
stock of the Company on a fully-diluted basis, according to each holder's pro
rata ownership. The Interim Notes will be subordinated to bank debt following
the Asset Acquisition, and will rank pari passu with the $3,000,000 10%
promissory note (the "Asset Acquisition Note") owed to the LLC as part of the
Asset Acquisition. If the Company fails to make principal payments when due, the
holders of the Interim Notes may convert their holdings into common stock of the
Company such that the holders of the Interim Notes will have at least 75%, on a
fully diluted basis, of the total voting and economic control in the Company.
In connection with the Interim Financing, the Company issued to Aspen
OnLine Investments, L.L.C. ("Aspen") (i) a $1,500,000 14% subordinated
promissory note (the "Aspen Note"), maturing in March 2001, and (ii) a warrant
to purchase 100,000 shares of common stock at a purchase price of $3.75 per
share, which the Company has valued at $97,000. Total issuance costs, including
the warrant value, for the Aspen Note aggregate $427,725. Interest is payable
quarterly beginning July 1, 1998. The terms of the Aspen Note give Aspen the
right, at its election, to designate two representatives on the Company's board
of directors prior to the consummation of the Offering, and one representative
after consummation of the Offering, until the Aspen Note is paid in full.
4. LOAN COMMITMENT TO THE LLC:
Between the date of the closing of the Interim Financing and the effective
date of the Offering, the Company agreed to loan up to $7,200,000 of the
proceeds of the Interim Financing to fund the operations of the LLC, evidenced
by a 15% convertible promissory note (the "Pre-Acquisition Note") maturing on
March 30, 1999. Borrowings under the agreement are convertible at the holder's
option at any time while an Event of Default (as defined in the promissory note)
has occurred and is continuing into interests in the LLC such that the Company
will have at least 75%, on a fully diluted basis, of the total voting and
economic control in the LLC. The Pre-Acquisition Note will be canceled upon
closing of the Asset Acquisition. Through May 1998, approximately $7.2 million
has been advanced to the LLC.
5. COMMITMENTS AND CONTINGENCIES:
The Company has agreed to purchase substantially all of the assets and to
assume certain liabilities of the LLC pursuant to an asset acquisition agreement
dated March 27, 1998, in exchange for 800,000 shares of the
F-5
<PAGE> 65
U.S. ONLINE COMMUNICATIONS, INC.
NOTES TO THE FINANCIAL STATEMENT (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Company's common stock (valued at $3,000,000), the Asset Acquisition Note
(principal amount of $3,000,000), and cancellation of all indebtedness under the
Pre-Acquisition Note. The Asset Acquisition Note bears interest at the rate of
10% per annum and is payable in three equal installments. The first installment
is to be paid the day after consummation of the Offering and the remaining two
installments are to be paid on the first and second anniversaries of the first
payment. Following the Asset Acquisition, the LLC will have no independent
business operations. The acquisition will be accounted for using the purchase
method.
The Company will assume the LLC's operating leases for office space, roof
rentals, head ends and transmission facilities.
6. RELATED PARTY TRANSACTIONS:
During March 1998, the Company entered into employment and noncompetition
agreements with certain officers of the Company. The Chief Executive Officer's
employment agreement has an initial term of five years and provides for 1998
base compensation of $150,000. The President and Chief Financial Officer's
employment agreement has an initial term of three years and provides for 1998
base compensation of $125,000. These officers will be eligible for performance
bonuses of up to 50% of their base salary in the event that performance criteria
set by the board of directors are met. The performance criteria set by the board
of directors to award bonuses have not yet been determined. The agreements
provide severance benefits, including payments upon a "change in control" and
indemnification. Under the agreements, a "change in control" means the
acquisition by a person or group of 35% or more of the Company's outstanding
securities or sale of all or substantially all of the Company's assets. In the
event of termination for any reason, these officers have agreed not to compete
with the Company for a period of twelve months following termination. Courts may
determine to enforce, not enforce or partially enforce noncompetition
agreements. In the event of termination other than "for cause" (as defined in
the agreements), all stock options and stock awards become fully vested and
exercisable. Substantially all of these officers' time is spent managing the
Company.
The Company's Chief Executive Officer has beneficial ownership interest in
two multiple dwelling units served by the LLC. The properties are owned by
separate limited partnerships; the Company's Chief Executive Officer is an
officer of the general partner of the partnerships and is a limited partner of
one of the partnerships. Both properties are managed by a company partially
owned by the Company's Chief Executive Officer.
The LLC subleased space for its corporate offices in Austin, Texas. The
property was owned by a limited partnership, the general partner of which is a
corporation owned by the Company's Chief Executive Officer. The Company's Chief
Executive Officer is also a limited partner in the partnership. The LLC
subleased a portion of the space from a company partially owned by the Company's
Chief Executive Officer.
7. CAPITAL STOCK:
The authorized capital stock of the Company consists of 20,000,000 shares
of common stock, and 1,000,000 shares of preferred stock, $.001 par value. At
March 31, 1998, there are no shares of preferred stock outstanding.
1998 RESTRICTED STOCK AWARD PLAN
The 1998 Restricted Stock Award Plan (the "1998 Restricted Stock Plan") was
adopted on March 10, 1998 by the board of directors of the Company to provide
incentives to attract and retain highly competent persons as officers and key
employees. The board of directors administers the plan. Powers exercised by the
board may also be exercised by committee. Under the 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
F-6
<PAGE> 66
U.S. ONLINE COMMUNICATIONS, INC.
NOTES TO THE FINANCIAL STATEMENT (CONTINUED)
7. CAPITAL STOCK: (CONTINUED)
right to repurchase a declining number of the shares at a price of $0.001 per
share if the employee terminates his or her employment before March 10, 2001.
Generally, common stock issued under the 1998 Restricted Stock Plan vests
ratably over three years, with one-third of any shares granted vesting on each
of the first, second and third anniversary dates following the date of the
award; however, for accounting reasons, the Board of Directors has determined to
accelerate vesting of these shares upon completion of an initial public offering
of the Company's common stock. The number of shares subject to repurchase
decreases by one-third on each of the first, second and third anniversary dates
following the date of the award. During the restricted period, shares subject to
restriction may not be sold, exchanged, transferred, pledged, hypothecated or
otherwise disposed of, unless they have been offered to the Company for
repurchase at the original issuance price ($.001). At March 10, 1998, all
500,000 shares had been awarded under the 1998 Restricted Stock Plan, of which
120,000 shares were fully vested at the date of award and are no longer subject
to repurchase by the Company. All shares of Common Stock issued under the 1998
Restricted Stock Plan are also subject to repurchase by the majority member of
the LLC under a Shareholders Agreement dated March 30, 1998 among the majority
member of the LLC, the Company, and the holders of the restricted shares, at a
price of $0.01 per share, solely upon the Company's failure to complete a public
offering of its common stock on or before September 30, 1998.
The 1998 Restricted Stock Plan is treated as a variable plan under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Since a measurement date had not occurred on the date of the award,
the Company will record a charge for $3,749,500 at effective date of the
Offering, if applicable.
1998 NON-QUALIFIED STOCK OPTION AND INCENTIVE STOCK OPTION PLAN
Under the Company's 1998 Non-Qualified Stock Option and Incentive Stock
Option Plan (the "1998 Stock Option Plan"), which was adopted in March 1998, up
to 1,000,000 options may be granted for the purchase of common stock, pursuant
to actions by the board of directors, to eligible participants. Options granted
are either incentive stock options or nonstatutory stock options and are
exercisable within the times or upon the events determined by the board of
directors as specified in each option agreement. Incentive stock options granted
under the 1998 Stock Option Plan are at prices not less than 100% of the fair
value at the date of grant, as determined by the board of directors.
Nonstatutory options granted under the 1998 Stock Option Plan are at prices not
less than 85% of the fair value on the date of the grant, as determined by the
board of directors. Incentive stock options granted to a 10% stockholder shall
not be less than 110% of the fair value at the date of grant. Options granted
generally vest over a period of six years, and the vesting for some is subject
to acceleration upon the occurrence of specified performance criteria. All
options granted become immediately exercisable upon the occurrence of certain
events including, without limitation, a merger, acquisition or change in
control. The term of the 1998 Stock Option Plan is ten years.
The Company has reserved 1,000,000 shares of common stock for issuance
under the 1998 Stock Option Plan. Options to purchase 495,000 shares of common
stock were granted at an exercise price of $3.75 per share on April 1, 1998. The
Company will apply Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations, in accounting for the
1998 Stock Option Plan. Accordingly, no compensation expense will be recognized
for the options granted on April 1, 1998 under the 1998 Stock Option Plan.
F-7
<PAGE> 67
U.S. ONLINE COMMUNICATIONS, INC.
NOTES TO THE FINANCIAL STATEMENT (CONTINUED)
7. CAPITAL STOCK: (CONTINUED)
A summary of the status of the Company's fixed stock option plan for grants
subsequent to March 31, 1998 is presented below:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE
------------- -------- ----------------
<S> <C> <C>
Granted..................................................... 495,000 $ 3.75
Exercised................................................... -- --
Forfeited................................................... -- --
-------- ------
Outstanding and exercisable................................. 495,000
Weighted-average fair value of options granted during the
period.................................................... $ 3.75
</TABLE>
The following table summarizes information about fixed stock options
outstanding:
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
------------------------------ -----------
WEIGHTED-AVERAGE
NUMBER REMAINING NUMBER
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
--------------- ----------- ---------------- -----------
<S> <C> <C> <C>
$3.75.................................................... 495,000 10 yrs. 495,000
-------- ------- --------
Number outstanding....................................... 495,000 495,000
======== ========
</TABLE>
WARRANTS
In connection with a lending arrangement between the LLC and a commercial
bank, the Company granted the lender a warrant on March 30, 1998 to purchase an
aggregate of 75,000 shares of the Company's common stock at an exercise price of
$3.75 per share. The warrant is exercisable for a period of five years. Deferred
loan costs of $72,750, approximating the fair value of the warrant determined
using the Black-Scholes model, will be recorded as an asset pending the Asset
Acquisition, including the Company's assumption of the bank debt from the LLC.
F-8
<PAGE> 68
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members,
U.S. ONLINE COMMUNICATIONS L.L.C.
We have audited the accompanying consolidated balance sheet of U.S. OnLine
Communications L.L.C. and Subsidiaries (the "LLC") as of December 31, 1997 and
the related consolidated statements of operations, changes in members' deficit
and cash flows for the years ended December 31, 1997 and 1996. These
consolidated financial statements are the responsibility of the LLC's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of U.S.
OnLine Communications L.L.C. and Subsidiaries as of December 31, 1997, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1997 and 1996, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the LLC will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the LLC has incurred losses and negative cash
flows from operations and has negative working capital, which raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
COOPERS & LYBRAND L.L.P.
Austin, Texas
April 22, 1998
F-9
<PAGE> 69
U.S. ONLINE COMMUNICATIONS L.L.C.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 79,122 $ 949,471
Subscriber receivables -- net of allowance for doubtful
accounts of $39,143 and $29,072........................ 458,221 457,911
Receivable from U.S. OnLine Communications, Inc........... 208,834 --
Receivable from SP Investments............................ -- 17,439
Supply inventory.......................................... 211,794 223,961
Other current assets...................................... 62,992 65,994
------------ ------------
Total current assets.............................. 1,020,963 1,714,776
Property and equipment, net................................. 8,823,382 9,502,270
Excess of cost over fair value of net assets acquired, net
of accumulated amortization of $530,172 and $421,796...... 3,804,852 3,913,228
Deferred loan and organization costs, net of accumulated
amortization of $395,423 and $322,201..................... 852,431 890,818
Other assets................................................ 440,525 444,237
------------ ------------
Total assets...................................... $ 14,942,153 $ 16,465,329
============ ============
LIABILITIES AND MEMBERS' DEFICIT
Current liabilities:
Note payable to bank...................................... $ 7,126,830 $ 7,126,830
Accounts payable.......................................... 1,928,434 1,595,643
Accrued expenses.......................................... 285,721 202,417
Accrued interest.......................................... 75,921 --
Deferred revenue.......................................... 326,667 291,605
------------ ------------
Total current liabilities......................... 9,743,573 9,216,495
------------ ------------
Noncurrent liabilities:
Other noncurrent liabilities.............................. 2,066,529 2,279,623
Payable to related parties................................ 18,873,393 18,423,069
------------ ------------
Total noncurrent liabilities...................... 20,939,922 20,702,692
------------ ------------
Total liabilities................................. 30,683,495 29,919,187
------------ ------------
Commitments and contingencies (Note 8)
Minority interest -- USAC (Note 1).......................... 255,444 259,124
Members' deficit:
Contributed capital....................................... 1,196,232 1,196,232
Accumulated deficit....................................... (17,193,018) (14,909,214)
------------ ------------
Total members' deficit............................ (15,996,786) (13,712,982)
------------ ------------
Total liabilities and members' deficit............ $ 14,942,153 $ 16,465,329
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-10
<PAGE> 70
U.S. ONLINE COMMUNICATIONS L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------------- -------------------------
1998 1997 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Telephony revenue........................... $ 386,287 $ 67,498 $ 705,193 $ 57,010
Cable revenue............................... 686,933 -- 1,888,280 --
Other revenue............................... 35,851 159 127,820 1,397
----------- ----------- ----------- -----------
Total revenue..................... 1,109,071 67,657 2,721,293 58,407
----------- ----------- ----------- -----------
Cost of service -- telephony................ 203,867 34,994 365,362 40,749
Cost of service -- cable.................... 231,603 -- 592,722 --
----------- ----------- ----------- -----------
Total cost of service............. 435,470 34,994 958,084 40,749
----------- ----------- ----------- -----------
Gross profit (loss)............... 673,601 32,663 1,763,209 17,658
----------- ----------- ----------- -----------
Operating expenses:
Customer support.......................... 130,579 11,218 426,471 53,331
Other operating expenses.................. 889,398 117,723 2,519,825 292,564
Sales and marketing....................... 204,130 72,112 838,525 181,888
General and administrative................ 602,202 432,739 2,865,608 1,983,862
Depreciation and amortization............. 455,315 174,952 1,343,543 209,711
----------- ----------- ----------- -----------
Total operating expenses.......... 2,821,624 808,744 7,993,972 2,721,356
----------- ----------- ----------- -----------
Loss from operations........................ (1,608,023) (776,081) (6,230,763) (2,703,698)
----------- ----------- ----------- -----------
Other income (expense):
Interest income........................... 13,805 177,096 133,177 355,365
Interest expense.......................... (644,061) (481,990) (3,104,809) (1,111,156)
Other income (expense).................... (32,582) (1,329) (111,712) --
----------- ----------- ----------- -----------
Total other income (expense)...... (662,838) (306,223) (3,083,344) (755,791)
----------- ----------- ----------- -----------
Loss before losses in equity investees and
minority interests........................ (2,270,861) (1,082,304) (9,314,107) (3,459,489)
Equity in losses of U.S. On-Line Cable,
L.L.C..................................... -- (299,299) -- (783,594)
Minority interest in losses of U.S. On-Line
Cable, L.L.C.............................. -- -- 911,195 --
Minority interest in net income of
subsidiary................................ (12,943) -- (43,437) --
----------- ----------- ----------- -----------
Net loss.......................... $(2,283,804) $(1,381,603) $(8,446,349) $(4,243,083)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-11
<PAGE> 71
U.S. ONLINE COMMUNICATIONS L.L.C.
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
CONTRIBUTED ACCUMULATED MEMBERS'
CAPITAL DEFICIT DEFICIT
----------- ------------ ------------
<S> <C> <C> <C>
Balances, January 1, 1996.......................... $1,196,232 $ (2,219,782) $ (1,023,550)
Net loss........................................... -- (4,243,083) (4,243,083)
---------- ------------ ------------
Balances, December 31, 1996........................ 1,196,232 (6,462,865) (5,266,633)
Net loss........................................... -- (8,446,349) (8,446,349)
---------- ------------ ------------
Balances, December 31, 1997........................ $1,196,232 $(14,909,214) $(13,712,982)
Net loss........................................... -- (2,283,804) (2,283,804)
---------- ------------ ------------
Balance, March 31, 1998............................ $1,196,232 $(17,193,018) $(15,996,786)
========== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-12
<PAGE> 72
U.S. ONLINE COMMUNICATIONS L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------------- --------------------------
1998 1997 1997 1996
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................... $(2,283,804) $(1,381,603) $(8,446,349) $ (4,243,083)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization....................... 455,316 174,952 1,343,543 209,711
Provision for doubtful accounts..................... 10,071 -- 25,121 --
Minority interest in losses of U.S. On-Line Cable,
L.L.C............................................. -- -- (911,195) --
Minority interest in net income of subsidiary....... 12,943 -- 43,437 --
Equity loss -- U.S. On-Line Cable, L.L.C............ -- -- -- 783,594
Gain on dissolution of joint venture................ -- 299,300 (23,629) --
Loss on sale of contracts and equipment............. 26,108 -- -- --
Changes in operating assets and liabilities:
Interest receivable -- U.S. On-Line Cable,
L.L.C.......................................... -- (177,096) -- (350,346)
Subscriber receivables............................ (10,381) -- (304,992) (15,976)
Receivable from affiliates........................ (191,395) 63,106 89,228 (106,667)
Supply inventory.................................. 12,167 -- (223,961) --
Other current assets.............................. 3,002 (8,505) 236,852 (4,044)
Accounts payable and accrued expenses............. 416,095 (376,716) 560,951 74,635
Deferred revenue.................................. 35,064 -- 206,168 --
Accrued interest.................................. 75,921 -- -- --
Interest payable to related parties............... 450,324 357,828 3,117,251 550,465
----------- ----------- ----------- ------------
Net cash used in operating activities.......... (988,569) (1,048,734) (4,287,575) (3,101,711)
----------- ----------- ----------- ------------
Cash flows from investing activities:
Proceeds from sale of property and equipment........... 405,034 -- -- --
Purchase of property and equipment..................... (25,974) (175,042) (258,016) (4,817,897)
Change in other assets................................. (12,911) -- (209,747) --
Payments for organization costs........................ -- (49,877) -- (43,257)
Loan to U.S. On-Line Cable, L.L.C...................... -- (1,284,325) -- (6,002,143)
Deferred acquisition costs............................. -- -- -- 22,348
Purchase of 50% interest in U.S. On-Line Cable,
L.L.C............................................... -- -- -- (2,059,993)
----------- ----------- ----------- ------------
Net cash provided by (used in) investing
activities................................... 366,149 (1,509,244) (467,763) (12,900,942)
----------- ----------- ----------- ------------
Cash flows from financing activities:
Advances from related parties.......................... -- 671,396 519,516 12,635,195
Net change in obligations under leasing arrangement.... (213,094) -- 2,279,623 --
Borrowings under note payable to bank.................. -- 1,882,000 2,969,000 4,400,000
Payments on note payable to bank....................... -- -- (242,170) --
Loan costs............................................. (34,835) -- (107,975) (1,027,960)
----------- ----------- ----------- ------------
Net cash provided by (used in) financing
activities................................... (247,929) 2,553,396 5,417,994 16,007,235
----------- ----------- ----------- ------------
Net increase in cash and cash equivalents................ (870,349) (4,582) 662,656 4,582
Cash and cash equivalents, beginning of period........... 949,471 4,582 286,815 --
----------- ----------- ----------- ------------
Cash and cash equivalents, end of period................. $ 79,122 $ -- $ 949,471 $ 4,582
=========== =========== =========== ============
Supplemental cash flow information:
Cash paid for interest................................. $ 111,000 $ 124,161 $ 406,000 $ 26,000
Acquisition of 50% interest in U.S. On-Line Cable,
L.L.C. (Note 2)..................................... $ -- $ -- $ 2,486,387 $ --
Dissolution of Austin Cable Venture.................... $ -- $ -- $ 117,424 $ --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-13
<PAGE> 73
U.S. ONLINE COMMUNICATIONS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of U.S. OnLine
Communications L.L.C. (the "LLC") and entities over which it has voting control.
As described in Note 2, in 1997 the LLC gained voting control over U.S. On-Line
Cable, L.L.C. ("Cable"). The LLC's investment in Cable is accounted for under
the equity method for the year ended December 31, 1996. For the three months
ended March 31, 1997, the statement of operations includes equity in losses of
Cable. For the year ended December 31, 1997, the consolidated statement of
operations includes revenues and expenses and the consolidated statement of cash
flows includes sources and uses of cash of Cable as though voting control had
been acquired at the beginning of the year and the minority interest in the
losses of Cable is recognized from January 1, 1997 to September 7, 1997, the
date the LLC gained voting control over Cable. For the year ended December 31,
1996, the consolidated statements of operations include equity in losses of
Cable from February 23, 1996 through December 31, 1996. Intercompany accounts
and transactions are eliminated in consolidation.
Minority interest in net income of subsidiary in 1997 represents the
limited partner's proportionate share of the equity in the earnings of
U.S.-Austin Cable Associates I, Ltd. ("USAC"), a subsidiary of Cable. Although
Cable does not have a majority ownership interest in USAC, USAC's financial
statements have been fully consolidated with the financial statements of Cable
to reflect the exercise of control by Cable. All significant intercompany
balances have been eliminated in consolidation.
GOING CONCERN
The LLC has incurred losses from operations since inception and management
expects that the LLC will continue to incur operating losses for the foreseeable
future. Revenues in 1998 will not be sufficient to fund the LLC's operating
expenses, capital investment and other working capital needs.
The accompanying consolidated financial statements have been prepared
assuming the LLC will continue as a going concern. Losses, negative working
capital and negative cash flows from operating and investing activities raise
substantial doubt about the LLC's ability to continue as a going concern. The
LLC's ability to make scheduled payments of principal of, or interest on, or to
refinance its indebtedness depends on the availability of borrowing capacity,
the success of its growth strategy and its future performance, and its ability
to raise additional equity capital, each of which is subject to general
economic, financial, competitive, legislative, regulatory and other factors
beyond the LLC's control.
As of December 31, 1997 and March 31, 1998, the LLC's bank indebtedness
approximated $7.2 million under the Silicon Valley Bank credit facility. At
December 31, 1997 and March 31, 1998, the LLC had failed to comply with certain
restrictive covenants under the Silicon Valley Bank credit facility. Subsequent
to the balance sheet date, the loan agreement was renegotiated. As amended, the
Silicon Valley Bank credit facility requires repayment of all amounts
outstanding plus accrued but unpaid interest on October 15, 1998 and contains a
number of significant covenants which, among other things, restrict the ability
of the LLC and its subsidiaries to dispose of assets or merge, incur debt, pay
distributions, repurchase or redeem capital stock, create liens, make capital
expenditures and make certain investments or acquisitions and otherwise engage
in certain corporate activities. The breach of any of these covenants could
result in a default under the Silicon Valley Bank credit facility. In the event
that any such default is not cured, the bank could elect to declare all amounts
borrowed under the Silicon Valley Bank credit facility, together with accrued
interest and other fees, to be due and payable. There can be no assurance that
the assets of the LLC would be sufficient to repay all borrowings under the
Silicon Valley Bank credit facility and the other creditors of the LLC in full.
The LLC had failed to make the required payments under operating lease
agreements with T&W Funding Company V, L.L.C. ("T&W"), but the LLC obtained a
deferment of all amounts due until
F-14
<PAGE> 74
U.S. ONLINE COMMUNICATIONS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
GOING CONCERN (CONTINUED)
March 31, 1998. On March 31, 1998, the LLC made payments totaling $393,375 to
T&W, thereby bringing the LLC current with all amounts due under the respective
leasing agreements.
Successful implementation of the LLC's business plan will require
significant expenditures to enable the LLC to compete with other cable
television and telecommunications technologies and providers. In addition, if
the LLC underestimates its capital or other expenditure requirements or
overestimates future results of operations, the need for additional debt or
equity financing may increase. By October 15, 1998, the LLC expects that it will
need to renegotiate or replace the Silicon Valley Bank credit facility, if it
has not previously done so, or to obtain additional financing. The LLC's ability
to secure additional debt or equity financing will be restricted by the terms of
its outstanding indebtedness, including the Silicon Valley Bank credit facility.
The inability to obtain financing when required would have a material adverse
effect on the LLC and the implementation of its growth strategy. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty. On March 30, 1998, U.S. OnLine
Communications, Inc., a company formed to acquire substantially all the assets
and assume certain liabilities of the LLC, extended credit of up to $7,200,000
from the proceeds of its completed private placement to the LLC in the form of a
15% convertible promissory note ("Pre-Acquisition Note") maturing on March 30,
1999. Through May 1998, the LLC has borrowed approximately $7.2 million of the
available $7.2 million. Upon the closing of the Asset Acquisition, the
Pre-Acquisition Note will be cancelled.
In connection with an asset acquisition agreement dated March 27, 1998, the
LLC has agreed to sell substantially all of its assets to U.S. OnLine
Communications, Inc., and U.S. OnLine Communications, Inc. has agreed to assume
certain liabilities of the LLC. The LLC will receive a 10% promissory note in
the amount of $3,000,000 and 800,000 shares of U.S. OnLine Communications, Inc.
common stock. The consummation of this transaction is dependent upon receipt of
consents from various governmental regulatory bodies and certain entities with
which the LLC has continuing commitments. The LLC has also entered into a merger
agreement dated March 27, 1998 with Cable. Under the merger agreement,
intercompany indebtedness owed by Cable to the LLC will be eliminated.
THE LLC
The LLC was formed under a Limited Liability Company Agreement (the "LLC
Agreement") dated June 21, 1995, as a Washington limited liability company for
the purpose of providing telecommunications, cable television and related
services to multi-unit housing developments, apartment complexes and other
similar residential developments. The LLC Agreement, as amended, terminates on
December 14, 2025. The LLC provides services to subscribers in Austin, San
Antonio and Dallas, Texas, Washington, D.C., including the Virginia suburbs, and
Denver, Colorado and, prior to March 6, 1998, to subscribers in Atlanta, Georgia
(Note 12).
The LLC was capitalized on October 31, 1995 with 1,666,667 shares of MIDCOM
Communications Inc. ("MIDCOM") common stock with a market value of $25 million
at October 31, 1995, valued for financial reporting purposes at approximately
$1.2 million based upon the historical cost basis of the contributing members.
The stock was contributed by Black Creek Limited Partnership (zero basis) and
Madrona Ridge Limited Partnership ($1.2 million basis) (collectively, the
"Contributing Members"). Prior to amendment on September 7, 1997, member
interests were issued to certain persons or entities whose efforts in
originating the business concept of the LLC or whose continued services to the
LLC were considered to be essential to its economic success. Of the original
1,666,667 MIDCOM shares, 300,000 shares were transferred to a nominee for Black
Creek Limited Partnership, on December 19, 1996, and 1,366,667 shares remain as
contributed
F-15
<PAGE> 75
U.S. ONLINE COMMUNICATIONS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
capital at December 31, 1996. At December 31, 1996, the Contributing Members'
interests accounted for the total amount in members' equity.
In general, and as described in greater detail in the LLC Agreement,
through September 6, 1997, losses were allocated to the Class A members to the
extent of their initial capital contributions with losses in excess of such
investment allocated to the Class B members. On September 7, 1997, the remaining
1,366,667 MIDCOM shares were distributed to the Contributing Members, who
thereafter ceased to be members of the LLC.
As amended and restated on September 7, 1997, the LLC Agreement provides
for a single class of members. In general, as described in greater detail in the
amended LLC Agreement, income and losses are allocated to the members in an
amount equal to the excess, if any, of the cumulative income over losses for all
prior years, with the remaining difference, if any, to the members in accordance
with their percentage interests, as defined in the LLC Agreement. A member will
not be personally liable, solely by reason of being a member, for any debts or
losses of the LLC beyond the member's debts or contributions, except as
otherwise provided by law.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, which includes amounts for
construction materials and direct labor. Depreciation is provided for using the
straight-line method over ten years for cable systems and telephone equipment
and five years for furniture and other equipment. When property and equipment is
disposed of, the costs and related accumulated depreciation are removed from the
accounts, and any resulting gain or loss is reflected in income for the period.
Cost of maintenance and repairs is charged to operations as incurred;
significant renewals and betterments are capitalized.
CHANGE IN ESTIMATE
During 1997, the LLC revised the estimated lives used to depreciate the
costs of operational assets. The effect of this change in accounting estimates
was to decrease depreciation expense and net loss for 1997 by approximately
$423,000.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
Excess of cost over fair value of net assets acquired consists of goodwill
related to the purchase of 100% of the membership interests of Cable during 1996
and 1997. The purchase price of $2,059,993 exceeded the fair value of net assets
acquired in the amount of $4,335,024. Excess of cost over fair value of net
assets acquired is being amortized on a straight-line basis over the estimated
future periods benefited of ten years.
The LLC periodically evaluates whether events and circumstances have
occurred that indicate the remaining useful life of goodwill may warrant
revision or that the remaining balance of goodwill may not be recoverable. An
impairment of goodwill is recognized when estimated undiscounted future cash
flows generated by acquired businesses are determined to not be sufficient to
recover goodwill. The amount of goodwill impairment, if any, is measured based
on forecasted discounted cash flows using a discount rate reflecting the LLC's
average cost of funds.
DEFERRED LOAN AND ORGANIZATION COSTS, NET
Deferred loan and organization costs, net, at December 31, 1997 and March
31, 1998, consists of loan costs amounting to $819,734 and $756,653,
respectively, which are being amortized using the interest method
F-16
<PAGE> 76
U.S. ONLINE COMMUNICATIONS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
over the four-year term of the loan, and FCC license and organizational costs
amounting to $71,084 and $75,675, respectively, which are being amortized using
the straight-line method over five years.
SUPPLY INVENTORY
Supply inventory consisted of various service and maintenance type items
related to the LLC's transmission systems and are stated at the lower of cost
(determined by the first-in, first-out method) or market.
INCOME TAXES
The LLC is organized as a limited liability company and is classified as a
partnership for federal, state and local income tax purposes. The members are
responsible for their respective tax liabilities, if any, related to their share
of income and expenses of the LLC.
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 and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates. The LLC evaluates the
recoverability and useful lives of its system-related assets based upon current
conditions. Because of the current stage of development of the LLC's business
and technological nature of such assets, it is reasonably possible that the
LLC's asset recoverability and useful life estimates will change in the near
term.
REVENUE RECOGNITION
Revenue from subscribers is recognized in the month that service is
provided. Installation fees are recognized as revenue upon origination of
service to subscribers. Costs incurred to obtain the subscriber are expensed as
incurred.
ADVERTISING
The LLC expenses the cost of advertising as it is incurred or the first
time the advertising takes place. Advertising expense was approximately $5,422
for the three months ended March 31, 1998, and $92,000, $92,242 and $26,000 for
1997 and 1996, respectively.
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the LLC to concentrations of
credit risk consist primarily of cash and cash equivalents, subscriber
receivables and amounts due from affiliates and related parties. The LLC
generally maintains its cash balances below federally insured limits. The
collectibility of subscriber receivables can be impacted by economic trends
within the LLC's markets.
Financial instruments for which fair value approximates carrying value
include cash and cash equivalents, receivables and accounts payable. The
carrying value of the LLC's notes payable to bank and related party approximate
fair value as they are subject to interest rates which increase and decrease
with changes in market rates.
F-17
<PAGE> 77
U.S. ONLINE COMMUNICATIONS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK (CONTINUED)
Approximately 83% of the LLC's revenues are derived in Austin, Dallas and
San Antonio, Texas. A sustained economic downturn or significant increases in
competition in this region could impact revenues derived from this region.
CASH EQUIVALENTS
The LLC considers all highly liquid investments and time deposits with
original maturity at time of purchase of three months or less to be cash
equivalents. Cash and cash equivalents at the beginning of period are not the
same as cash and cash equivalents at the end of the period due to the
consolidation of Cable effective January 1, 1997.
YEAR 2000
Many computer systems experience problems handling dates beyond the year
1999. Some computer software may need to be modified prior to the year 2000 in
order to remain functional. The Company is assessing the readiness of its
internal computer systems for handling the year 2000 issue. The Company does not
believe that the cost of implementing year 2000 compliant software and systems
will have a material effect on the Company's financial condition or results of
operation. The Company expects to implement the internal information systems
changes necessary to address the year 2000 issues by the end of fiscal 1998.
Moreover, the Company could be adversely impacted by year 2000 issues faced by
major distributors, suppliers and financial service organizations with which the
Company interacts.
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited financial statements as of and for the three
months ended March 31, 1998 and 1997 are unaudited and have been prepared on
substantially the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial information set forth therein.
2. INVESTMENT IN CABLE:
On November 30, 1995, the LLC entered into an investment agreement (the
"Agreement") with Cable, a Texas limited liability company, to purchase a 50%
membership interest in Cable. Cable provides cable television services to
multiple dwelling units primarily in Texas. As part of the Agreement, the LLC
also acquired the rights and title to the U.S. OnLine name and service mark. On
February 23, 1996, the LLC completed its purchase of a 50% membership interest
in Cable under the Agreement for $2,000,000 plus acquisition expenses of
$59,993.
Under the Agreement, on September 7, 1997, the original members of Cable
exercised an option to sell their remaining interest in Cable to the LLC in
exchange for a 13% interest of the membership of the LLC, $1,157,000 (through
the forgiveness of an existing $1,000,000 loan from Cable to such members plus
8.5% of such amount per annum from February 15, 1996 through the date of
exercise) and any interests in ventures affiliated with the LLC, as specified in
the option agreement. Upon exercise of this option, the LLC acquired the
remaining 50% member interest in Cable, making it a wholly-owned subsidiary as
of the exercise date. The acquisition was accounted for as a purchase.
The following unaudited pro forma consolidated results of operations for
the years ended December 31, 1997 and 1996, which are based on certain
estimates, assume the acquisition of Cable occurred on January 1,
F-18
<PAGE> 78
U.S. ONLINE COMMUNICATIONS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT IN CABLE: (CONTINUED)
1997 and 1996, respectively. This unaudited pro forma financial information has
been prepared for comparative purposes only and does not purport to be
indicative of future operating results.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net revenue..................................... $ 2,721,293 $ 836,876
Net loss........................................ $(9,977,220) $(5,107,494)
</TABLE>
Cable and the LLC entered into a credit facility ("Credit Facility
Agreement") on November 30, 1995 in the amount of $13 million whereby the LLC
agreed to provide Cable with funding to build out additional cable systems.
Interest compounds annually on the loan at 8.5%. Cable granted the LLC a
security interest in its assets as collateral. Advances totaled $10,055,173 as
of March 31, 1998 and December 31, 1997. The advances are eliminated in
consolidation at March 31, 1998 and December 31, 1997.
The excess of the cost of the LLC's investment over its share of the fair
value of the reported underlying net assets of Cable, after eliminations, is
being amortized over the estimated life of Cable's franchises of ten years. The
amortized balance of such excess at March 31, 1998 and December 31, 1997 was
approximately $3,804,852 and $3,913,000, respectively.
3. INVESTMENTS IN JOINT VENTURES AND PARTNERSHIPS:
In 1996, Cable formed USAC, a limited partnership of which Cable is the
general partner and Ocampo Partners, Ltd. ("Ocampo"), a Texas limited
partnership, is the limited partner. Both partners have a 50% interest in the
partnership. The partnership was established to design, develop, own, construct
and manage private cable television receiving equipment and related services to
serve eight apartment complexes located in Austin, Texas. Upon completion of the
transmission system's construction and installation during 1996, the assets were
contributed by Cable to the partnership, and Cable received a non-recourse note
in the amount of $279,310 from Ocampo for Ocampo's portion of the required
capital contribution. The note is collateralized by the assets of the
partnership and has a term of five years. Principal and interest payments on the
note were made during 1997 with Ocampo's portion of the cash distributions of
the partnership. The balance due under the note is $235,172 at December 31, 1997
and $255,410 at March 31, 1998.
The financial statements of USAC have been consolidated with those of Cable
to reflect Cable's full control of USAC.
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at March 31, 1998 and
December 31, 1997:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
Cable systems..................................... $ 7,139,597 $ 7,138,295
Telephone switch equipment........................ 2,144,427 2,144,127
Furniture and fixtures............................ 789,452 788,237
----------- -----------
10,073,476 10,070,659
Accumulated depreciation.......................... (1,595,813) (1,322,096)
Construction in progress.......................... 345,719 753,707
----------- -----------
$ 8,823,382 $ 9,502,270
=========== ===========
</TABLE>
F-19
<PAGE> 79
U.S. ONLINE COMMUNICATIONS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT: (CONTINUED)
Depreciation expense was approximately $274,000, $778,000 and $177,000 for the
three months ended March 31, 1998 and for the years ended December 31, 1997 and
1996, respectively.
5. INVESTMENT IN MIDCOM COMMUNICATIONS INC.:
The LLC was capitalized through the initial contribution of shares of
MIDCOM common stock by its contributing members (Black Creek Limited Partnership
and Madrona Ridge Limited Partnership). Ownership of the MIDCOM stock enabled
the LLC, indirectly through its members, to exercise significant influence over
the operating and financial policies of MIDCOM. Although less than 10% of
MIDCOM's outstanding common stock was held by the LLC, generally accepted
accounting principles require that the equity method of accounting be used.
Under the equity method, the carrying amount of the investment would be adjusted
to report the LLC's proportionate share of the investee's earnings and losses.
The amount of the adjustment would then be included in operations. The LLC's
proportionate share of MIDCOM's net loss for the year ended December 31, 1995
exceeded the balance of the LLC's related investment account, thus the
investment in MIDCOM was carried at zero at December 31, 1995. No losses have
been reported in the LLC's statements of operations subsequent to December 31,
1995, as the LLC does not guarantee the debt or losses of MIDCOM. In 1997,
MIDCOM filed for bankruptcy protection.
6. NOTE PAYABLE TO BANK:
As of March 31, 1998 and December 31, 1997, the LLC had approximately $7.2
million outstanding under the Silicon Valley Bank credit facility, with interest
at the bank's prime rate (8.5% at March 31, 1998 and December 31, 1997) plus two
percent (2%). The Silicon Valley Bank credit facility is collateralized by
substantially all of the assets of the LLC, and the indebtedness is backed by
certain personal guarantees, including that of the majority member. In 1998, the
agreement was amended requiring the LLC to obtain an aggregate of $6.0 million
in new equity and/or debt by March 31, 1998, and an aggregate of $19.0 million
in new equity and/or debt (inclusive of the $6.0 million by March 31, 1998) by
August 15, 1998. All such indebtedness must be subordinated to the Silicon
Valley Bank credit facility. All principal and outstanding interest under the
Silicon Valley Bank credit facility is due and payable on October 15, 1998. As
further consideration for the bank's entering into the revised loan agreement,
U.S. OnLine Communications, Inc. granted the bank a warrant to purchase up to
75,000 shares of its common stock with an exercise price of $3.75 per share.
U.S. Online Communications, Inc. expects to record original issue discount
associated with the warrant of approximately $72,750, which will be amortized to
interest expense over the expected term of the debt.
At March 31, 1998 and December 31, 1997, the LLC was not in compliance with
certain restrictive covenants under the Silicon Valley Bank credit facility.
Although the LLC has received contingent waivers of these violations based on
the LLC's ability to raise additional capital of $6.0 million, the entire
balance outstanding to the bank has been classified as a current liability in
the balance sheet due to the uncertainty concerning the LLC's ability to raise
the capital.
7. RELATED PARTY TRANSACTIONS:
The LLC entered into various promissory note agreements with Paul H.
Pfleger, a majority member of the LLC, to fund start up costs. Interest accrued
at a rate of The Wall Street Journal prime (8.5% at March 31, 1998 and December
31, 1997) plus 2% compounded annually. As of March 31, 1998 and December 31,
1997, the LLC had borrowed $13,854,988 under these note agreements. Such amounts
plus $2,569,108 and $2,174,862 of accrued interest as of March 31, 1998 and
December 31, 1997, respectively, have been included in payable to related
parties. The entire principal balance, together with all accrued unpaid
interest, are to be paid in full on or before November 1, 2000.
F-20
<PAGE> 80
U.S. ONLINE COMMUNICATIONS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS: (CONTINUED)
Mr. Pfleger has entered into a guaranty and subordination agreement with
the LLC whereby he has guaranteed the repayment of the loans under the Silicon
Valley Bank credit facility (see Note 6). In addition, Mr. Pfleger has agreed
that repayment of amounts due him are subordinate to the loans under the Silicon
Valley Bank credit facility. Under the terms of such guaranty and subordination
agreement, Mr. Pfleger receives a fee equal to .125% of the average daily
outstanding balance of the Silicon Valley Bank credit facility during such month
and 6% of the amount of principal and interest outstanding on the promissory
notes to Mr. Pfleger as of December 2 of each year during which the agreement is
in effect. Under the terms of the agreement, $1,568,155 and $1,539,871 was due
at March 31, 1998 and December 31, 1997, respectively.
An affiliate of the LLC provided management, administrative and consulting
services to the LLC. These services include management consulting, risk
management, employee benefit administration, legal, accounting and tax,
management information systems and general office operations. The amounts paid
to the affiliate for these services was $66,667, $170,071 and $394,138 for the
three months ended March 31, 1998 and for the years ended 1997 and 1996,
respectively. At March 31, 1998 and December 31, 1997, $1,836 and $113,004
related to such services was included in payable to related parties.
The LLC's CEO has a beneficial ownership interest in two multiple dwelling
units served by the LLC. The properties are owned by separate limited
partnerships; the LLC's CEO is an officer of the general partner of the
partnerships and is a limited partner of one of the partnerships. Both
properties are managed by a company partially owned by the LLC's CEO. Service
revenues received by the LLC from these two properties was approximately
$19,000, $69,000 and $64,000 for the three months ended March 31, 1998 and for
the years ended December 31, 1997 and 1996, respectively.
The LLC currently leases space for its corporate offices in Austin, Texas.
The property is owned by a limited partnership, the general partner of which is
a corporation owned by the LLC's CEO. The LLC's CEO is also a limited partner in
the partnership. The LLC subleases a portion of the space to a company partially
owned by the LLC's CEO. Net lease expense under the lease agreements was
approximately $14,000, $51,000 and $43,000 for the three months ended March 31,
1998 and for the years ended December 31, 1997 and 1996, respectively.
8. COMMITMENTS AND CONTINGENCIES:
On July 14, 1995, the LLC entered into a $15 million purchase agreement
(the "Purchase Agreement") with Digital Telecommunications, Inc. ("DTI") whereby
the LLC acquired the exclusive right to purchase DTI's Digital Cross Connect
equipment, Line Interface Modules and other equipment for multi-family
applications. The Purchase Agreement, which expires July 31, 1998, was amended
on August 1, 1996 to reduce the minimum required purchase amounts under the
Purchase Agreement (the "Amended Agreement"). The LLC has purchased the majority
of its equipment from this vendor and at December 31, 1997 had fulfilled its
commitments under the Amended Agreement.
F-21
<PAGE> 81
U.S. ONLINE COMMUNICATIONS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
The LLC has entered into various operating lease agreements for office and
warehouse space, towers, microwave and headend equipment and office equipment.
Future minimum rental commitments under all noncancelable operating leases are
as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
FISCAL YEAR 1998 1997
----------- ---------- ------------
<S> <C> <C>
1998............................................. $1,870,392 $2,047,828
1999............................................. 2,354,250 2,015,627
2000............................................. 1,522,948 1,321,538
2001............................................. 839,719 701,483
2002............................................. 739,120 685,977
Thereafter....................................... 610,860 607,137
---------- ----------
$7,937,289 $7,379,590
========== ==========
</TABLE>
Rental expense incurred in connection with these leases approximated
$514,000, $940,000 and $205,000 for the three months ended March 31, 1998 and
for the years ended December 31, 1997 and 1996, respectively.
REGULATORY MATTERS
Regulatory Status and Regulation of Private Cable Operators
Franchise cable operators are subject to a wide range of FCC regulations
regarding such matters as the rates charged for certain services, transmission
of local television broadcast signals, customer service standards/procedures,
performance standards and system testing requirements. In addition, the
operator's franchise, which can be issued at the municipal, county or state
level, typically imposes additional requirements for operation. These relate to
such matters as system design and construction, provision of channel capacity
and production facilities for public educational and government use, and the
payment of franchise fees and the provision of other "in kind" benefits to the
city.
The operator of a video distribution system that serves subscribers without
using any public right-of-way, referred to generally as a private cable
operator, is exempt from the majority of FCC regulations applicable to
franchised systems which do use public rights-of-way. Moreover, a state or local
government cannot impose a franchise requirement on such operators.
To remain exempt from extensive FCC regulation and local franchising
requirements, the LLC intends to confine its video distribution facilities to
contiguous private property and obtain programming primarily via SMATV
facilities. The LLC 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 LLC is
considered a private cable operator in all of the markets that it serves.
Telecommunications Act of 1996
The Telecommunications Act of 1996 (the "1996 Act") opened the local
telecommunications market to competition by mandating the elimination of legal,
regulatory, economic and operational barriers to competitive entry, providing
the LLC 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
F-22
<PAGE> 82
U.S. ONLINE COMMUNICATIONS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
REGULATORY MATTERS (CONTINUED)
market, introducing a number of substantial new competitors to the LLC in that
market. On balance, management believes that the market-opening provisions of
the 1996 Act are favorable to the LLC.
9. EMPLOYEE BENEFIT PLAN:
The LLC offers a Profit Sharing and 401(k) Salary Deferral Plan (the
"Plan") to its employees. The Plan, available to all employees, permits them to
defer a portion of their salary until future years. The LLC may make
discretionary contributions to the Plan equal to 50% of the amount of each
eligible employee's contribution up to 6% of the employee's compensation.
Contributions to the Plan are available to employees upon termination,
retirement, death or disability. The LLC contributed $238 to the Plan in 1996.
The LLC did not make a contribution to the Plan as of March 31, 1998 or during
1997.
10. INCOME TAXES:
The LLC is organized as a limited liability company and is classified as a
partnership for federal income tax purposes. The members are responsible for
their respective tax liabilities, if any, related to their share of income and
expenses of the LLC. Accordingly, the LLC's financial statements include no
provision for income taxes.
Cable is subject to state taxes and utilizes the liability method of
accounting for such taxes. Deferred taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the period in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
At March 31, 1998 and December 31, 1997, Cable had deferred tax assets of
approximately $296,884 and $210,977, respectively, primarily from net operating
loss carryforwards, which expire within 3 to 5 years. In accordance with the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes," the deferred tax assets have been fully reserved due to the
uncertainty of realization of the assets.
11. SALE OF ATLANTA CONTRACTS AND EQUIPMENT:
On March 6, 1998, the LLC executed a purchase agreement in which it agreed
to sell its rights, title and interest in and to certain telecommunications
agreements with multi-dwelling units in Atlanta, Georgia, including certain
equipment and infrastructure for $400,000 in cash.
12. RECENTLY ISSUED ACCOUNTING STANDARDS:
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). Adoption is required for interim and annual periods
beginning after December 15, 1997. SFAS No. 130 requires that comprehensive
income and its components, as defined in the Statement, be reported in the LLC's
financial statements. Management does not believe that the adoption of this
standard will have a significant impact on the LLC.
Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). Adoption is required for interim and annual
periods beginning after December 15, 1997. SFAS No. 131 requires certain
information about operating segments to be reported in addition to disclosures
related to products and services, geographic areas and major customers.
Management has not yet determined the impact this standard will have on the LLC.
F-23
<PAGE> 83
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members,
U.S. ON-LINE CABLE, L.L.C.
We have audited the accompanying consolidated statements of operations, changes
in members' equity (deficit) and cash flows of U.S. On-Line Cable, L.L.C. and
Subsidiaries ("Cable") for the year ended December 31, 1996. These consolidated
financial statements are the responsibility of Cable's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of U.S. On-Line Cable, L.L.C. and Subsidiaries for the year ended
December 31, 1996 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Cable will continue as a going concern. As discussed in Note 1 to the
financial statements, Cable has suffered recurring losses from operations and
has a net capital deficiency that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
Austin, Texas
February 21, 1997, except as to Notes 5
through 8 for which the date is
February 27, 1998, and Note 9, for which
the date is March 27, 1998
F-24
<PAGE> 84
U.S. ON-LINE CABLE, L.L.C.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Cable revenue............................................... $ 777,490
Other revenue............................................... 979
-----------
Total revenue..................................... 778,469
Cost of service............................................. 272,286
-----------
Gross profit...................................... 506,183
-----------
Operating expenses:
Customer support.......................................... 265,923
Other operating expenses.................................. 272,322
Sales and marketing....................................... 321,831
General and administrative................................ 700,217
Depreciation and amortization............................. 274,968
-----------
Total operating expenses.......................... 1,835,261
-----------
Loss from operations........................................ (1,329,078)
-----------
Other income (expense):
Interest income........................................... 183,233
Interest expense and other................................ (378,145)
Management fees........................................... 100,152
-----------
Total other income (expense)...................... (94,760)
-----------
Loss before minority interest............................... (1,423,838)
Minority interest in net income of subsidiary............... (38,114)
-----------
Net loss.......................................... $(1,461,952)
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-25
<PAGE> 85
U.S. ON-LINE CABLE, L.L.C.
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
NOTES TOTAL
ACCUMULATED RECEIVABLE MEMBERS'
CONTRIBUTED PREFERRED ACCUMULATED FROM EQUITY
CAPITAL RETURN DEFICIT MEMBERS (DEFICIT)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1996...... $ 1,238,000 $(115,000) $ (612,419) $(1,000,000) $ (489,419)
Contributions from members....... 2,000,000 -- -- -- 2,000,000
Accumulated preferred return..... -- (32,455) -- -- (32,455)
Distributions to members......... (1,852,545) -- -- -- (1,852,545)
Transfer of preferred return to
deficit upon distribution...... -- 147,455 (147,455) -- --
Net loss......................... -- -- (1,461,952) -- (1,461,952)
----------- --------- ----------- ----------- -----------
Balances at December 31, 1996.... $ 1,385,455 $ -- $(2,221,826) $(1,000,000) $(1,836,371)
=========== ========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-26
<PAGE> 86
U.S. ON-LINE CABLE, L.L.C.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(1,461,952)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 274,968
Loss from disposal of asset............................ --
Minority interest in net income of subsidiary.......... 38,114
Changes in operating assets and liabilities:
Subscriber receivables, net.......................... (148,557)
Interest receivable.................................. (90,356)
Other current assets................................. (130,115)
Receivable -- U.S. OnLine Communications L.L.C....... (1,038,847)
Accounts payable and accrued expenses................ 458,200
Subscriber deposits and deferred revenue............. 84,167
Interest payable..................................... 352,828
-----------
Net cash used in operating activities............. (1,661,550)
-----------
Cash flows from investing activities:
Increase in notes receivable from members................. --
Receipts on notes receivable -- other..................... 28,230
Purchase of property and equipment........................ (4,222,069)
Change in other assets, net............................... 18,446
-----------
Net cash used in investing activities............. (4,175,393)
-----------
Cash flows from financing activities:
Advances under credit facility -- U.S. Online
Communications L.L.C................................... 6,002,526
Payments of installment indebtedness -- Austin Cable
Venture................................................ (5,452)
Contributions from members................................ 2,000,000
Distribution to members................................... (1,852,545)
Distribution to minority partner in U.S. -- Austin Cable
Associates I, Ltd...................................... (52,995)
Distribution of accumulated preferred return.............. (147,455)
-----------
Net cash provided by financing activities......... 5,944,079
-----------
Net increase in cash and cash equivalents................... 107,136
Cash and cash equivalents, beginning of year................ 175,097
-----------
Cash and cash equivalents, end of year...................... $ 282,233
===========
Noncash investing and financing activities:
Increase in preferred return payable...................... $ 32,455
===========
Investment in Austin Cable Venture (and related
installment indebtedness).............................. $ 3,190
===========
Notes receivable -- other in exchange for assets
contributed to U.S. Austin Cable Associates I, Ltd. on
behalf of minority partner (Note 3).................... $ 279,310
===========
Transfer of property and equipment to U.S. OnLine
Communications L.L.C................................... $ 867,874
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-27
<PAGE> 87
U.S. ON-LINE CABLE, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS DESCRIPTION:
U.S. On-Line Cable, L.L.C. ("Cable") was formed effective May 11, 1994 as a
limited liability company under the Texas Limited Liability Company Act to
construct, own, maintain, improve, manage and operate microwave and satellite
master antenna television systems. Cable currently provides service to
subscribers in Austin, San Antonio and Dallas, Texas, Atlanta, Georgia and
Denver, Colorado. Under its current charter, Cable's life is limited to 30 years
from the effective date of the formation.
GOING CONCERN
Cable has incurred losses from operations since inception and management
expects that revenues for the foreseeable future will not be sufficient to fund
its operating expenses, capital investments and other working capital needs.
The accompanying financial statements have been prepared assuming Cable
will continue as a going concern. Losses, negative working capital and negative
cash flows from operating and investing activities raise substantial doubt about
Cable's ability to continue as a going concern. Management is currently in the
process of negotiating equity financing for Cable. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Cable and its
subsidiaries, San Antonio Cable Associates I ("SACA") in 1995 and U.S. -- Austin
Cable Associates I, Ltd. ("USAC") in 1996. Although Cable does not have a
majority interest in either of these entities, their financial statements have
been fully consolidated with the financial statements of Cable to reflect the
exercise of control by Cable. All significant intercompany balances and
transactions have been eliminated in consolidation.
Minority interest in 1996 represents the limited partner's proportionate
share of the equity in the earnings of USAC.
Cable accounts for its investment in Austin Cable Venture under the equity
method of accounting. The investment is being amortized over the seven year life
of the underlying assets.
See Note 3 for further information regarding joint ventures and
partnerships.
CASH EQUIVALENTS
Cable considers all highly liquid investments and time deposits with an
original maturity at time of purchase of three months or less to be cash
equivalents.
PROPERTY AND EQUIPMENT
Cable television distribution systems are accounted for at cost and are
depreciated using the composite method over a seven year life. All other
property and equipment is depreciated using the straight-line method over the
estimated useful lives of the assets. When property and equipment is disposed
of, the costs and related accumulated depreciation are removed from the
accounts, and any resulting gain or loss is reflected in income for the period.
Cost of maintenance and repairs is charged to operations as incurred;
significant renewals and betterments are capitalized.
Construction in progress is reclassified to a particular system as that
system is completed and placed in service. Construction in progress includes
internal and external costs incurred in the construction of the cable television
distribution systems. Internal costs include direct labor and construction
overhead costs.
F-28
<PAGE> 88
U.S. ON-LINE CABLE, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
REVENUE RECOGNITION
Revenue from subscribers is recognized in the month that service is
provided. Installation fees are recognized as revenue upon origination of
service to subscribers. Costs incurred to obtain the subscriber are expensed as
incurred.
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 expense during the reporting
period. Actual results could differ from those estimates. Cable evaluates the
recoverability and useful lives of its system related assets based upon current
conditions. Because of the current stage of development of Cable's business and
technological nature of such assets, it is reasonably possible that Cable's
asset recoverability and useful life estimates will change over time.
YEAR 2000
Cable is taking actions to ensure that their computer systems are capable
of processing for the periods beginning January 1, 2000 and beyond. The costs
associated with this matter are not expected to materially affect operating cash
flow.
3. INVESTMENTS IN JOINT VENTURES AND PARTNERSHIPS:
On February 4, 1995, Cable entered into a joint venture agreement with
Apartment Multimedia I, L.L.C. ("Multimedia") for equal 50% ownership interests
in SACA, a general partnership. SACA was established to design, develop, own,
construct and manage private cable television equipment and services for three
apartment complexes in San Antonio, Texas. Cable transferred $196,812 in newly
constructed cable television and video system assets to SACA in exchange for a
non-recourse note receivable from SACA. Expenses for the operation and
management of the system are accrued and paid by SACA. These expenses include
management fees which were paid to Cable for various operational and
administrative costs. The intercompany note, income and expense were eliminated
from these financial statements. Any excess cash flow, as defined in the joint
venture agreement, is applied to service the debt to Cable. The financial
statements of SACA have been fully consolidated with Cable to reflect the
exercise of control and the extent of risk retained by Cable with respect to the
contributed assets.
SACA was dissolved on February 2, 1996. The contractual rights to provide
cable service were distributed to Multimedia and then transferred to the
separate owners of each of the apartment locations receiving cable service. As
part of the transaction, the existing cable service agreement was canceled. The
apartment owners subsequently entered into separate service agreements with
Cable for a percentage of the gross revenues. All assets other than the contract
rights were distributed to Cable upon dissolution of SACA. Cable assumed all
liabilities and obligations of SACA.
In May 1995, Cable and Multitechnology Services, L.P. ("MTS") formed the
Austin Cable Venture to construct, own, maintain, improve, manage, operate,
lease, and otherwise use a transmission system in the Austin, Texas area. MTS
made the initial capital contributions of $6,380 and $247,774 during 1996 and
1995, respectively, to fund the construction of the transmission system, which
was substantially completed during December 1995. For use of the transmission
system, Cable is obligated to pay 50% of the initial capital costs amortized
over 180 monthly installments at a 10% interest rate. Cable will also be charged
for 50% of the operating/managing costs incurred and any agreed upon upgrades to
the system. The transmission system is solely for the partners and their
affiliates use in their operations. Cable has accounted for the Austin Cable
Venture using the equity method, recognizing 50% of the initial capital cost as
an investment and installment
F-29
<PAGE> 89
U.S. ON-LINE CABLE, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS IN JOINT VENTURES AND PARTNERSHIPS: (CONTINUED)
indebtedness. The investment will be amortized over the seven year life of the
underlying assets. As the assets were not completed until the end of 1995, no
amortization expense was recognized in 1995. Amortization expense recognized in
1996 was $18,154.
In 1996, Cable formed USAC, a limited partnership of which Cable is the
general partner and Savannah, Ltd. ("Savannah"), a California limited
partnership, is the limited partner. Both partners have a 50% interest in the
partnership. The partnership was established to design, develop, own, construct
and manage private cable television receiving equipment and related services to
serve eight apartment complexes located in Austin, Texas. Upon completion of the
transmission system's construction and installation during 1996, the assets were
contributed by Cable to the partnership, and Cable received a non-recourse note
in the amount of $279,310 from Savannah for Savannah's portion of the required
capital contribution. The note is collateralized by the assets of the
partnership and has a term of five years. Principal and interest payments on the
note were made during 1996 with Savannah's portion of the cash distributions of
the partnership. The balance due under the note at December 31, 1996 is
$251,080.
The financial statements of USAC have been consolidated with those of Cable
to reflect Cable's full control of USAC.
4. INCOME TAXES:
Cable is organized as a limited liability company and is classified as a
partnership for federal income tax purposes. The members are responsible for
their respective tax liabilities, if any, related to their share of income and
expenses of Cable. Accordingly, Cable's financial statements include no
provision for income taxes.
Cable is, however, subject to state taxes and utilizes the liability method
of accounting for such taxes. Deferred taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the period in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
5. COMMITMENTS AND CONTINGENCIES:
Cable also has operating leases for office space, roof rentals, head ends
and transmission facilities. Rental expenses incurred in connection with these
leases approximated $91,000 and $42,000 for the years ended December 31, 1996
and 1995.
Future minimum lease payments due under noncancelable operating leases are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, 1996
------------------------ --------
<S> <C>
1997.............................................. $164,016
1998.............................................. 113,832
1999.............................................. 81,934
2000.............................................. 30,750
2001.............................................. 14,280
Thereafter........................................ 10,800
--------
$415,612
========
</TABLE>
F-30
<PAGE> 90
U.S. ON-LINE CABLE, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
PROGRAMMING
Cable has various contracts to obtain basic and premium programming from
program suppliers whose compensation is typically based on a fixed fee per
subscriber. Cable has negotiated programming agreements with premium service
suppliers that offer cost incentives to Cable under which premium unit prices
decline as certain premium service growth thresholds are met. In addition to
volume pricing discounts, some program suppliers offer marketing support to
Cable in the form of advertising funds, promotional materials, rebates and other
incentives. Cable's programming contracts are generally for a fixed period of
time, typically three to five years, and are subject to negotiated renewal.
REGULATORY MATTERS
Regulatory Status and Regulation of Private Cable Operators
Franchise cable operators are subject to a wide range of FCC regulations
regarding such matters as the rates charged for certain services, transmission
of local television broadcast signals, customer service standards/procedures,
performance standards and system testing requirements. In addition, the
operator's franchise, which can be issued at the municipal, county or state
level, typically imposes additional requirements for operation. These relate to
such matters as system design and construction, provision of channel capacity
and production facilities for public educational and government use, and the
payment of franchise fees and the provision of other "in kind" benefits to the
city.
The operator of a video distribution system that serves subscribers without
using any public right-of-way, referred to generally as a private cable
operator, is exempt from the majority of FCC regulations applicable to
franchised systems which do use public rights-of-way. Moreover, a state or local
government cannot impose a franchise requirement on such operators.
To remain exempt from extensive FCC regulation and local franchising
requirements, Cable intends to confine its video distribution facilities to
contiguous private property and obtain programming primarily via SMATV
facilities. Cable 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. Cable is
considered a private cable operator in all of the markets that it serves.
Telecommunications Act of 1996
The Telecommunications Act of 1996 (the "1996 Act") opened the local
telecommunications market to competition by mandating the elimination of legal,
regulatory, economic and operational barriers to competitive entry, providing
Cable 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, introducing a number of substantial new
competitors to Cable in that market. On balance, management believes that
market-opening provisions of the 1996 Act are favorable to Cable.
6. CAPITAL AND ALLOCATION OF EARNINGS/LOSSES:
On November 30, 1995, Cable entered into an investment agreement with U.S.
OnLine Communications L.L.C. (the "LLC"). During February of 1996, regulatory
approval was obtained and the LLC transferred $2 million to Cable in exchange
for a 50% interest in Cable. In accordance with the investment agreement, Cable
distributed the proceeds as follows: $1,779,513 went to the original members as
return of capital, $147,455 was paid to an original member in satisfaction of
his accumulated preferred return, and $73,032 was
F-31
<PAGE> 91
U.S. ON-LINE CABLE, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CAPITAL AND ALLOCATION OF EARNINGS/LOSSES: (CONTINUED)
used to cover the legal expenses associated with the transaction. The annual
accumulated preferred return was paid to a certain original member in the amount
of 12% of his initial capital contribution adjusted for available cash in
accordance with the First Amended and Restated Regulations of Cable. At December
31, 1995, $115,000 was accrued for payment of this preferred return.
Upon closing of the investment agreement, an Option/Put Agreement was
executed granting the original members of Cable an option (the "Option") to
purchase from the LLC 15% of the original members' interest of the LLC owned at
the time of exercise. The Option was exercised during 1997, through the transfer
to the LLC of the original members' interests aggregating 50% of Cable. In
addition to the LLC interests, the original members will be entitled to receive
$1,000,000 at 8.5% compounded annually from the date of the Option/Put
Agreement. This payment will be required to repay all outstanding amounts
remaining under the loan to the original members discussed in Note 7.
Capital accounts are maintained for each member and adjusted for
contributions, distributions, and allocations of profits and losses. Profits are
allocated first to members who have been allocated losses to the extent of those
losses; next to the extent of any cumulative priority return; and last to the
members in accordance with their ownership ratios. Losses are allocated first to
the members to the extent of the accumulated profits allocated to each member.
The balance is allocated to the members having positive capital account balances
in accordance with their ownership ratios. Any losses that cannot be allocated
due to insufficient positive capital account balances will be allocated to
members in accordance with their ownership ratios.
7. RELATED PARTY TRANSACTIONS:
During 1996 and 1995, Cable incurred management fees from CS Management,
Inc. ("CSM") for management and other administrative functions. Certain of
Cable's original members are equitable owners and/or officers of CSM. In
addition, Cable subleases office space from CSM. Rent expense paid to CSM during
1996 and 1995 was $32,000 and $13,000, respectively.
Cable's CEO has a beneficial ownership interest in two multiple dwelling
units served by the LLC. The properties are owned by separate limited
partnerships; Cable's CEO is an officer of the general partner of the
partnerships and is a limited partner of one of the partnerships. Both
properties are managed by a company partially owned by Cable's CEO.
As stipulated by the investment agreement, discussed in Note 6, the initial
advance of $1 million under the Credit Facility was subsequently loaned to the
original members during 1995 at an interest rate of 8.5% per annum and recorded
as a note receivable on Cable's books. This initial advance under the Credit
Facility was jointly and severally guaranteed by the original members. The
Option discussed in Note 6 was exercised by the original members in 1997, and
effective September 7, 1997, the LLC acquired the remaining 50% member interests
in Cable, making Cable a wholly-owned subsidiary of the LLC as of that date.
During 1996, Cable began providing administrative, operational and sales
and marketing on behalf of the LLC. Cable records a receivable for expenses
incurred directly related to the LLC. Expenses that are incurred on behalf of
both companies are allocated to the LLC based on ratios agreed upon by
management of both companies. Expenses allocated to the LLC, net of direct
expenses charged, amounted to $969,689 for the year ended December 31, 1996. As
such, the results of operations presented herein may not reflect actual results
of operations of Cable had Cable operated autonomously from the LLC. As of
December 31, 1996, the receivable from the LLC was approximately $1,907,000. In
addition, Cable signed a consulting agreement with the LLC whereby Cable
provides services of certain executives of Cable to the LLC in exchange for a
fee. Management fees recorded during 1996 in conjunction with this consulting
agreement were approximately $90,000.
F-32
<PAGE> 92
U.S. ON-LINE CABLE, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SALE OF ATLANTA CONTRACTS AND EQUIPMENT:
On March 6, 1998, Cable executed a purchase agreement in which it agreed to
sell its rights, title and interest in and to certain telecommunications
agreements with multi-dwelling units in Atlanta, Georgia, including certain
equipment and infrastructure for $400,000 in cash. The Company does not expect
the sale of these agreements to have a material effect on future operating
results, liquidity or cash flows.
9. MERGER WITH U.S. ONLINE COMMUNICATIONS L.L.C.:
On March 27, 1998, Cable agreed to merge with and into the LLC and
following the merger, will cease to exist as a separate entity.
F-33
<PAGE> 93
======================================================
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or any of the
Underwriters. This Prospectus does not constitute an offer to sell or
solicitation of an offer to buy any security other then the securities offered
by this Prospectus or any offer to sell or a solicitation of an offer to buy the
securities in any jurisdiction to any person to whom it is unlawful to make such
an offer or solicitation in such jurisdiction. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that information contained herein is correct as of any time
subsequent to the date hereof.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 9
Use of Proceeds............................ 13
Dividend Policy............................ 13
Dilution................................... 14
Capitalization............................. 15
Unaudited Pro Forma Financial
Information.............................. 16
Selected Consolidated Financial Data....... 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 25
Business................................... 33
Management................................. 45
Certain Transactions....................... 49
Principal Stockholders..................... 50
Description of Capital Stock............... 51
Shares Eligible for Future Sale............ 53
Underwriting............................... 54
Legal Matters.............................. 55
Experts.................................... 55
Additional Information..................... 56
Glossary of Industry Terms................. 57
Index to Financial Statements.............. F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
3,500,000 SHARES
U.S. ONLINE COMMUNICATIONS, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
BARINGTON CAPITAL GROUP
CRUTTENDEN ROTH
INCORPORATED
, 1998
======================================================
<PAGE> 94
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware Corporation Law ("Delaware Corporation Law")
authorizes a court to award, or a corporation's board of directors to grant,
indemnity to directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended ("Securities Act"). The Registrant's Certificate of Incorporation and
Bylaws provide for indemnification of the Registrant's directors, officers,
employees and other agents to the maximum extent permitted by Delaware
Corporation Law. In addition, the Registrant intends to enter into
Indemnification Agreements with its officers and directors. The Underwriting
Agreement also provides for cross-indemnification among the Company and the
Underwriters with respect to certain matters, including matters arising under
the Securities Act.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee*........ $ 15,234
NASD Filing Fee*............................................ $ 5,664
Nasdaq Listing Fee *........................................ $ 48,750
Legal Fees and Expenses..................................... $200,000
Accountants' Fees and Expenses.............................. $120,000
Blue Sky Filing and Counsel Fees and Expenses............... $ +
Printing and Engraving Expenses............................. $ 75,000
Transfer Agent and Registrar Fees........................... $ 2,500
Directors' and Officers' Insurance Expenses................. $ 28,000
--------
Miscellaneous Expenses...................................... $ +
--------
Total............................................. $ +
========
</TABLE>
- ---------------
* All expenses other than the Commission registration fee, the NASD filing fee
and the Nasdaq National Market fee are estimated.
+ Not presently known.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since its incorporation on March 5, 1998, the Registrant has sold the
following unregistered securities:
(1) On March 10, 1998, pursuant to its 1998 Restricted Stock Award
Plan, the Company sold Common Stock to 41 employees at a purchase price of
$0.001 per share. The Company relied upon Section 4(2) for the sale.
(2) On March 27, 1998, as part of the consideration paid in the Asset
Acquisition, the Company entered into an agreement pursuant to which the
Company will issue 800,000 shares of Common Stock to the LLC at $3.75 per
share. The Company relied upon Section 4(2) for the sale.
(3) On March 30, 1998, the Company completed an interim financing to
Aspen OnLine Investments, LLC, an accredited investor, consisting of a 14%
subordinated promissory note and warrants to purchase 100,000 shares of
Common Stock at an exercise price of $3.75 per share. The Company received
$1,500,000 in exchange for the note. The Company relied upon Section 4(2)
and Rule 506 for the sale.
(4) On March 30, 1998, as part of the interim financing of the
Company, in consideration for services rendered, Aspen OnLine Investments,
LLC received a warrant to purchase 100,000 shares of Common Stock at an
exercise price of $3.75 per share. The Company relied upon Section 4(2) for
the sale.
II-1
<PAGE> 95
(5) On March 30, 1998, Silicon Valley Bank, an accredited investor, in
consideration for banking services rendered, received a warrant to purchase
75,000 shares of Common Stock at an exercise price of $3.75 per share. The
Company relied upon Section 4(2) for the sale.
(6) On April 15, 1998, the Company completed an interim financing of
65 Units to 79 accredited investors, in reliance upon Section 4(2) and Rule
506. Each Unit consists of one 15% subordinated promissory note and
13,333.33 shares of Common Stock. The aggregate amount received for sale of
these securities was $6,500,000.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement
1.2 Form of Representatives' Option
2.1** Agreement and Plan of Merger between Cable and the LLC,
dated March 27, 1998
2.2** Asset Acquisition Agreement between the LLC, as seller, and
the Company, as buyer, dated March 27, 1998
3.1** Certificate of Incorporation
3.2** Bylaws
4.1 Specimen of Common Stock Certificate
5.1 Opinion and Consent of Graham & James LLP/Riddell Williams
P.S.
9.1** Voting Agreement between the Company, the LLC, Donald E.
Barlow, Robert G. Solomon and Aspen OnLine Investments, LLC
dated March 30, 1998
10.1** 1998 Non-Qualified Stock Option and Incentive Stock Option
Plan
10.2** 1998 Restricted Stock Award Plan
10.3** Form of 10% Convertible Subordinated Promissory Note in the
principal amount of $3,000,000 provided by the Company to
the LLC
10.4** Form of 15% Promissory Note in the principal amount of up to
$7,200,000 provided by the LLC to the Company
10.5 14% Convertible Promissory Note in the principal amount of
$1,500,000 provided by the Company to Aspen OnLine
Investments, LLC, dated March 30, 1998
10.6** Form of 15% Convertible Promissory Notes issued by the
Company in the Interim Financing
10.7** Aspen Online Investments, LLC warrant to purchase 100,000
shares of Common Stock, dated March 30, 1998
10.8** Form of Barington Capital Group, L.P. warrant to purchase
shares of Common Stock
10.9** Form of Registration Rights Agreement between the Company
and certain stockholders
10.10* Silicon Valley Bank Credit Facility
10.11 Form of Subordination Agreement between Silicon Valley Bank
and creditors
10.12** Employment and Noncompetition Agreement between the Company
and Robert G. Solomon, dated March 26, 1998
10.13** Employment and Noncompetition Agreement between the Company
and Donald E. Barlow, dated March 26, 1998
10.14 Form of Registration Rights Agreement between the Company
and the LLC
10.15* Form of Indemnification Agreement
10.16 Form of T&W Funding Company V, L.L.C. Equipment Lease
</TABLE>
II-2
<PAGE> 96
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.17 Shareholders Agreement dated March 27, 1998
10.18 Form of Video Right of Entry Agreement
10.19 Form of Telecommunications Right of Entry Agreement
21.1** Subsidiaries of the Company
23.1 Consent of Graham & James LLP/Riddell William P.S. (included
in Exhibit 5.1)
23.2.1 Consent of Coopers & Lybrand L.L.P. (Cable)
23.2.2 Consent of Coopers & Lybrand L.L.P. (LLC)
23.2.3 Consent of Coopers & Lybrand L.L.P. (U.S. OnLine
Communications, Inc.)
24.1 Power of Attorney (included on page II-5)
27.1** Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
(b) FINANCIAL STATEMENT SCHEDULE
Attached as Exhibit 27.1
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes:
(1) That for purposes of determining any liability under the
Securities Act, the information omitted from the form of Prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of Prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be a
part of this Registration Statement as of the time it was declared
effective.
(2) That for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 97
The undersigned Registrant hereby undertakes:
(3) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in this Prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of Prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate Offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the Registration Statement is on Form S-3 (sec. 239.13 of this
chapter) or Form S-8, and the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed by the registrant pursuant to section 13 or section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by
reference in the Registration Statement.
(4) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(5) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the Offering.
II-4
<PAGE> 98
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Austin,
State of Texas, on June 24, 1998.
U.S. ONLINE COMMUNICATIONS, INC.
By: /s/ ROBERT G. SOLOMON
------------------------------------
Robert G. Solomon
Chief Executive Officer
Each person whose signature appears below constitutes and appoints Robert
G. Solomon and Donald E. Barlow, and each of them, as his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective amendments)
to this Registration Statement and a new Registration Statement filed pursuant
to Rule 462(b) under the Securities Act of 1933, as amended, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the foregoing, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S> <C>
/s/ ROBERT G. SOLOMON Chairman of the Board Chief June 24, 1998
- ----------------------------------------------------- Executive Officer, Director
Robert G. Solomon
/s/ DONALD E. BARLOW President Chief Financial June 24, 1998
- ----------------------------------------------------- Officer (Principal Financial and
Donald E. Barlow Accounting Officer)
/s/ RUDY D. BELTON Director June 24, 1998
- -----------------------------------------------------
Rudy D. Belton
/s/ MARC S. SERIFF Director June 24, 1998
- -----------------------------------------------------
Marc S. Seriff
/s/ CHRIS B. TYSON Director June 24, 1998
- -----------------------------------------------------
Chris B. Tyson
</TABLE>
II-5
<PAGE> 99
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- ------------
<C> <S> <C>
1.1* Form of Underwriting Agreement..............................
1.2 Form of Representatives' Option.............................
2.1** Agreement and Plan of Merger between Cable and the LLC,
dated March 27, 1998........................................
2.2** Asset Acquisition Agreement between the LLC, as seller, and
the Company, as buyer, dated March 27, 1998.................
3.1** Certificate of Incorporation................................
3.2** Bylaws......................................................
4.1 Specimen of Common Stock Certificate........................
5.1 Opinion and Consent of Graham & James LLP/Riddell Williams
P.S.........................................................
9.1** Voting Agreement between the Company, the LLC, Donald E.
Barlow, Robert G. Solomon and Aspen OnLine Investments, LLC
dated March 30, 1998........................................
10.1** 1998 Non-Qualified Stock Option and Incentive Stock Option
Plan........................................................
10.2** 1998 Restricted Stock Award Plan............................
10.3** Form of 10% Convertible Subordinated Promissory Note in the
principal amount of $3,000,000 provided by the Company to
the LLC.....................................................
10.4** Form of 15% Promissory Note in the principal amount of up to
$7,200,000 provided by the LLC to the Company...............
10.5 14% Convertible Promissory Note in the principal amount of
$1,500,000 provided by the Company to Aspen OnLine
Investments, LLC, dated March 30, 1998......................
10.6** Form of 15% Convertible Promissory Notes issued by the
Company in the Interim Financing............................
10.7** Aspen Online Investments, LLC warrant to purchase 100,000
shares of Common Stock, dated March 30, 1998................
10.8** Form of Barington Capital Group, L.P. warrant to purchase
shares of Common Stock......................................
10.9** Form of Registration Rights Agreement between the Company
and certain stockholders....................................
10.10* Silicon Valley Bank Credit Facility.........................
10.11 Form of Subordination Agreement between Silicon Valley Bank
and creditors...............................................
10.12** Employment and Noncompetition Agreement between the Company
and Robert G. Solomon, dated March 26, 1998.................
10.13** Employment and Noncompetition Agreement between the Company
and Donald E. Barlow, dated March 26, 1998..................
10.14 Form of Registration Rights Agreement between the Company
and the LLC.................................................
10.15* Form of Indemnification Agreement...........................
10.16 Form of T&W Funding Company V, L.L.C. Equipment Lease.......
10.17 Shareholders Agreement......................................
10.18 Form of Standard Video Right of Entry Agreement.............
10.19 Form of Standard Telecommunications Rights of Entry.........
21.1** Subsidiaries of the Company.................................
</TABLE>
<PAGE> 100
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- ------------
<C> <S> <C>
23.1 Consent of Graham & James LLP/Riddell William P.S. (included
in
Exhibit 5.1)................................................
23.2.1 Consent of Coopers & Lybrand L.L.P. (Cable).................
23.2.2 Consent of Coopers & Lybrand L.L.P. (LLC)...................
23.2.3 Consent of Coopers & Lybrand L.L.P. (U.S. OnLine
Communications, Inc.).......................................
24.1 Power of Attorney (included on page II-5)...................
27.1** Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
<PAGE> 1
EXHIBIT 1.2
FORM OF UNDERWRITER'S OPTION AGREEMENT
THE SHARES ISSUABLE UPON EXERCISE OF THE OPTION
REPRESENTED BY THIS CERTIFICATE HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT TO A
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION (THE "REGISTRATION STATEMENT").
HOWEVER, NEITHER THIS OPTION NOR SUCH SHARES MAY BE
OFFERED OR SOLD EXCEPT PURSUANT TO (i) A POST-EFFECTIVE
AMENDMENT TO SUCH REGISTRATION STATEMENT, (ii) A SEPARATE
REGISTRATION STATEMENT UNDER SUCH ACT, OR (iii) AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT.
THE TRANSFER OF THIS
OPTION IS RESTRICTED AS
DESCRIBED HEREIN.
U.S. ONLINE COMMUNICATIONS, INC.
Option for the Purchase of
Common Stock
No. __ _______ Shares
THIS CERTIFIES that, for receipt in hand of $_____ and other value
received, __________, ___________ (the "Holder"), is entitled to subscribe for
and purchase from U.S. OnLine Communications, Inc., a Delaware corporation (the
"Company"), upon the terms and conditions set forth herein, at any time or from
time to time after the date hereof, and before 5:00 P.M. on _______, 2003 New
York time (the "Exercise Period"), up to _______ shares (the "Option Shares")
of the Company's common stock, par value $.001 per share ("Common Stock"), at a
price of $____ (120% of the public offering price) per Option Share (the
"Exercise Price"). This Option is the option or one of the options
(collectively, including any options issued upon the exercise or transfer of
any such options in whole or in part, the "Options") issued pursuant
<PAGE> 2
to the Underwriting Agreement, dated ________, 1998 among the Company and
Barington Capital Group, L. P. and Cruttenden Roth Incorporated, as
Representatives of the several underwriters (the "Underwriting Agreement"). As
used herein the term "this Option" shall mean and include this Option and any
Option or Options hereafter issued as a consequence of the exercise or transfer
of this Option in whole or in part. This Option may not be sold, transferred,
assigned or hypothecated until one year after the effective date of the
Registration Statement (the "Effective Date") except that it may be transferred,
in whole or in part, to (i) one or more officers or partners of the Holder (or
the officers or partners of any such partner); (ii) any other underwriting firm
or member of the selling group which participated in the public offering of
_________ shares of the Company's Common Stock which commenced on ________, 1998
(or the officers or partners of any such firm); (iii) a successor to the Holder,
or the officers or partners of such successor; (iv) a purchaser of substantially
all of the assets of the Holder; or (v) by operation of law; and the term the
"Holder" as used herein shall include any transferee to whom this Option has
been transferred in accordance with the above.
1. (a) This Option may be exercised during the Exercise Period, as to
the whole or any lesser number of whole Option Shares, by the surrender of this
Option (with the election at the end hereof duly executed) to the Company at its
office at 10300 Metric Boulevard, Austin, Texas 78758,or at such other place as
is designated in writing by the Company, together with a certified or bank
cashier's check payable to the order of the Company in an amount equal to the
Exercise Price multiplied by the number of Option Shares for which this Option
is being exercised.
(b) All or any part of this Option may be exercised on a
"cashless" basis, by stating in the exercise notice such intention, and the
maximum number (the "Maximum Number") of shares of Common Stock the Holder
elects to purchase pursuant to such exercise. The number of shares of Common
Stock the Holder shall receive (the "Cashless Exercise Number") shall equal the
Maximum Number minus the quotient that is obtained when the product of the
Maximum Number and the then current Exercise Price is divided by the then
Current Market Price per share (as hereinafter defined).
2. Upon each exercise of the Holder's rights to purchase Option Shares
and the payment of the Exercise Price in accordance with the terms of this
Option, the Holder shall be deemed to be the holder of record of the Option
Shares issuable upon such exercise, notwithstanding that the transfer books of
the Company shall then be closed or certificates representing such Option Shares
shall not then have been actually delivered to the Holder. As soon as
practicable after each such exercise of this Option, the Company shall issue and
deliver to the Holder a certificate or certificates for the Option Shares
issuable upon such
- 2 -
<PAGE> 3
exercise, registered in the name of the Holder or its designee. If this Option
should be exercised in part only, the Company shall, upon surrender of this
Option for cancellation, execute and deliver a new Option evidencing the right
of the Holder to purchase the balance of the Option Shares (or portions thereof)
subject to purchase hereunder.
3. Any Options issued upon the transfer or exercise in part of this
Option shall be numbered and shall be registered in an Option Register as they
are issued. The Company shall be entitled to treat the registered holder of any
Option on the Option Register as the owner in fact thereof for all purposes and
shall not be bound to recognize any equitable or other claim to or interest in
such Option on the part of any other person, and shall not be liable for any
registration or transfer of Options which are registered or to be registered in
the name of a fiduciary or the nominee of a fiduciary unless made with the
actual knowledge that a fiduciary or nominee is committing a breach of trust in
requesting such registration or transfer, or with the knowledge of such facts
that its participation therein amounts to bad faith. This Option shall be
transferable only on the books of the Company upon delivery thereof duly
endorsed by the Holder or by his duly authorized attorney or representative, or
accompanied by proper evidence of succession, assignment, or authority to
transfer. In all cases of transfer by an attorney, executor, administrator,
guardian, or other legal representative, duly authenticated evidence of his or
its authority shall be produced. Upon any registration of transfer, the Company
shall deliver a new Option or Options to the person entitled thereto. This
Option may be exchanged, at the option of the Holder thereof, for another
Option, or other Options of different denominations, of like tenor and
representing in the aggregate the right to purchase a like number of Option
Shares (or portions thereof), upon surrender to the Company or its duly
authorized agent. Notwithstanding the foregoing, the Company shall have no
obligation to cause Options to be transferred on its books to any person if, in
the opinion of counsel to the Company, such transfer does not comply with the
provisions of the Securities Act of 1933, as amended (the "Act"), and the rules
and regulations thereunder.
4. The Company shall at all times reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of providing for
the exercise of the Options, such number of shares of Common Stock as shall,
from time to time, be sufficient therefor. The Company covenants that all shares
of Common Stock issuable upon exercise of this Option, upon receipt by the
Company of the Exercise Price, shall be validly issued, fully paid,
nonassessable, and free of preemptive rights.
5. (a) Subject to the provisions of this Section 5, the Exercise Price
in effect from time to time shall be subject to adjustment, as follows:
- 3 -
<PAGE> 4
In case the Company shall at any time after the date hereof (A)
declare a dividend on the outstanding Common Stock payable in shares of
its capital stock, (B) subdivide the outstanding Common Stock, (C)
combine the outstanding Common Stock into a smaller number of shares, or
(D) issue any shares of its capital stock by reclassification of the
Common Stock (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing
corporation), then, in each case, the Exercise Price, and the number of
shares of Common Stock issuable upon exercise of the Options in effect
at the time of the record date for such dividend or of the effective
date of such subdivision, combination, or reclassification, shall be
proportionately adjusted so that the Exercise Price shall equal the
price determined by multiplying the Exercise Price in effect prior to
such action by a fraction, the denominator of which shall be the number
of shares of Common Stock outstanding after giving effect to such
action, and the numerator of which shall be the number of shares of
Common Stock outstanding immediately prior to such action. Such
adjustment shall be made successively whenever any event listed above
shall occur. Whenever the Exercise Price is adjusted as set forth above,
the number of shares of Common Stock issuable upon exercise of the
Options in effect at such time shall simultaneously be adjusted by
multiplying the number of shares of Common Stock initially issuable upon
exercise of the Options by the Exercise Price in effect prior to such
action and dividing the product so obtained by the Exercise Price, as
adjusted.
(b) No adjustment in the Exercise Price shall be required if such
adjustment is less than $.05; provided, however, that any adjustments which by
reason of this Section 5 are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under this
Section 5 shall be made to the nearest cent or to the nearest one thousandth of
a share, as the case may be.
(c) In any case in which this Section 5 shall require that an
adjustment in the Exercise Price be made effective as of a record date for a
specified event, the Company may elect to defer, until the occurrence of such
event, issuing to the Holder of the Option, if any Holder has exercised an
Option after such record date, the shares of Common Stock, if any, issuable upon
such exercise over and above the shares of Common Stock, if any, issuable upon
such exercise on the basis of the Exercise Price in effect prior to such
adjustment; provided, however, that the Company shall deliver to such exercising
Holder a due bill or other appropriate instrument evidencing such Holder's right
to receive such additional shares upon the occurrence of the event requiring
such adjustment.
(d) In case of any capital reorganization, other than in the
cases referred to in Section 5(a) hereof, or the consoli-
- 4 -
<PAGE> 5
dation or merger of the Company with or into another corporation (other than a
merger or consolidation in which the Company is the continuing corporation and
which does not result in any reclas- sification of the outstanding shares of
Common Stock or the conversion of such outstanding shares of Common Stock into
shares of other stock or other securities or property), or the sale of the
property of the Company as an entirety or substantially as an entirety
(collectively such actions being hereinafter referred to as "Reorganizations"),
there shall thereafter be deliverable upon exercise of any Option (in lieu of
the number of shares of Common Stock theretofore deliverable) the number of
shares of stock or other securities or property to which a holder of the number
of shares of Common Stock which would otherwise have been deliverable upon the
exercise of such Option would have been entitled upon such Reorganization if
such Option had been exercised in full immediately prior to such Reorganization.
In case of any Reorganization, appropriate adjustment, as determined in good
faith by the board of directors of the Company, shall be made in the application
of the provisions herein set forth with respect to the rights and interests of
Holders so that the provisions set forth herein shall thereafter be applicable,
as nearly as possible, in relation to any shares or other property thereafter
deliverable upon exercise of Options. Any such adjustment shall be made by and
set forth in a supplemental agreement between the Company, or any successor
thereto, and Continental Stock Transfer & Trust Company, New York, New York and
shall for all purposes hereof conclusively be deemed to be an appropriate
adjustment. The Company shall not effect any such Reorganization, unless upon or
prior to the consummation thereof the successor corporation, or if the Company
shall be the surviving corporation in any such Reorganization and is not the
issuer of the shares of stock or other securities or property to be delivered to
holders of shares of the Common Stock outstanding at the effective time thereof,
then such issuer, shall assume by written instrument the obligation to deliver
to the registered Holder of the Options such shares of stock, securities, cash
or other property as such Holder shall be entitled to purchase in accordance
with the foregoing provisions. In the event of sale or conveyance or other
transfer of all or substantially all of the assets of the Company as a part of a
plan for liquidation of the Company, all rights to exercise any Option shall
terminate 30 days after the Company gives written notice to each registered
Holder of an Option that such sale or conveyance of other transfer has been
consummated.
(e) Whenever the Exercise Price is adjusted as provided in this
Section 5, the Company will promptly obtain a certificate of a firm of
independent public accountants of recognized standing selected by the board of
directors of the Company (who may be the regular auditors of the Company)
setting forth the exercise price as so adjusted and a brief statement of the
facts accounting for such adjustment, and will make available a brief summary
thereof to the Holders of the Options, at their
- 5 -
<PAGE> 6
addresses listed on the register maintained for the purpose by
the Company.
(f) Whenever any adjustment is made pursuant to Section 5 or 6,
the Company shall cause notice of such adjustment to be mailed to each
registered Holder of an Option within 15 Business Days (as hereinafter defined)
thereafter, such notice to include in reasonable detail (i) the events
precipitating the adjustment, (ii) the computation of any adjustments, and (iii)
the Exercise Price, the number of shares or the securities or other property
purchasable upon exercise of each Option after giving effect to such adjustment.
For purposes hereof, "Business Day" shall mean any day other than a Saturday, a
Sunday, or a day on which banking institutions in the State of New York are
authorized or obligated by law or executive order to close.
(g) Irrespective of any adjustments pursuant to Section 5 or 6,
Options theretofore or thereafter issued need not be amended or replaced, but
Options thereafter issued shall bear an appropriate legend or other notice of
any adjustments.
(h) The Company shall not be required upon the exercise of any
Option to issue fractional shares of Common Stock which may result from
adjustments in accordance with this Section 5 to the Exercise Price or number of
shares of Common Stock purchasable under each Option. If more than one Option is
exercised at one time by the same registered Holder, the number of full shares
of Common Stock which shall be deliverable shall be computed based on the number
of shares deliverable in exchange for the aggregate number of Options exercised.
With respect to any final fraction of a share called for upon the exercise of
any Option or Options, the Company shall pay a cash adjustment in respect of
such final fraction in an amount equal to the same fraction of the Current
Market Price of a share of Common Stock calculated in accordance with Subsection
5(i).
(i) For the purpose of any computation under this Section 5 the
Current Market Price per share of Common Stock on any date shall be deemed to be
the average of the daily closing prices for the 30 consecutive trading days
immediately preceding the date in question. The closing price for each day shall
be the last reported sales price regular way or, in case no such reported sale
takes place on such day, the closing bid price regular way, in either case on
the principal national securities exchange (including, for purposes hereof, the
Nasdaq National Market ("Nasdaq") or The Nasdaq SmallCap Market) on which the
Common Stock is listed or admitted to trading or, if the Common Stock is not
listed or admitted to trading on any national securities exchange, the highest
reported bid price for the Common Stock as furnished by the National Association
of Securities Dealers, Inc. through Nasdaq or a similar organization if Nasdaq
is no longer reporting such information. If on any such date the Common Stock is
not listed or admitted to trading on any national securities exchange and is not
quoted by Nasdaq
- 6 -
<PAGE> 7
or any similar organization, the fair value of a share of Common Stock on such
date shall be as determined in good faith by the board of directors of the
Company, excluding any director(s) nominated by Barington Capital Group, L.P.,
whose determination shall be conclusive absent manifest error.
6. (a) In case of any reclassification or change of the shares of Common
Stock issuable upon exercise of the Options (other than a change in par value or
from no par value to a specified par value, or as a result of a subdivision or
combination, but including any change in the shares into two or more classes or
series of shares), or in case of any consolidation with or merger of the Company
with or into another corporation (other than a merger or consolidation in which
the Company is the surviving or continuing corporation), or in case of any sale,
lease, or conveyance to another corporation of the property and assets of any
nature of the Company as an entirety or substantially as an entirety, such
successor, leasing, or purchasing corporation, as the case may be, shall (i)
execute with the Holder an agreement providing that the Holder shall have the
right thereafter to receive upon exercise of this Option solely the kind and
amount of shares of stock and other securities, property, cash, or any
combination thereof receivable upon such consolidation, merger, sale, lease, or
conveyance by a holder of the number of shares of Common Stock for which this
Option might have been exercised immediately prior to such consolidation,
merger, sale, lease, or conveyance and (ii) make effective provision in its
certificate of incorporation or otherwise, if necessary, to effect such
agreement. Such agreement shall provide for adjustments which shall be as nearly
equivalent as practicable to the adjustments provided for in Section 5.
(b) In case of any consolidation or merger of another corporation
into the Company in which the Company is the continuing corporation and in which
there is a reclassification or change (including a change to the right to
receive cash or other property) of the shares of Common Stock (other than a
change in par value, or from no par value to a specified par value, or as a
result of a subdivision or combination, but including any change in the shares
into two or more classes or series of shares), the Holder shall have the right
thereafter to receive upon exercise of this Option solely the kind and amount of
shares of stock and other securities, property, cash, or any combination thereof
receivable upon such reclassification, change, consolidation, or merger by a
holder of the number of shares of Common Stock for which this Option might have
been exercised immediately prior to such reclassification, change,
consolidation, or merger. Thereafter, appropriate provision shall be made for
adjustments which shall be as nearly equivalent as practicable to the
adjustments in Section 5.
(c) The above provisions of this Section 6 shall similarly apply
to successive reclassifications and changes of
- 7 -
<PAGE> 8
shares of Common Stock and to successive consolidations, mergers,
sales, leases, or conveyances.
7. In case at any time the Company shall propose:
(a) to pay any dividend or make any distribution on shares of
Common Stock in shares of Common Stock or make any other distribution (other
than regularly scheduled cash dividends which are not in a greater amount per
share than the most recent such cash dividend) to all holders of Common Stock;
or
(b) to issue any rights, warrants, or other securities to all
holders of Common Stock entitling them to purchase any additional shares of
Common Stock or any other rights, warrants, or other securities; or
(c) to effect any reclassification or change of outstanding
shares of Common Stock, or any consolidation, merger, sale, lease, or conveyance
of property, described in Section 6; or
(d) to effect any liquidation, dissolution, or
winding-up of the Company; or
(e) to take any other action which would cause an adjustment to
the Exercise Price;
then, and in any one or more of such cases, the Company shall give written
notice thereof, by registered mail, postage prepaid, to the Holder at the
Holder's address as it shall appear in the Option Register, mailed at least 15
days prior to (i) the date as of which the holders of record of shares of Common
Stock entitled to receive any such dividend, distribution, rights, warrants, or
other securities are to be determined, (ii) the date on which any such
reclassification, change of outstanding shares of Common Stock, consolidation,
merger, sale, lease, conveyance of property, liquidation, dissolution, or
winding-up is expected to become effective, and the date as of which it is
expected that holders of record of shares of Common Stock shall be entitled to
exchange their shares for securities or other property, if any, deliverable upon
such reclassification, change of outstanding shares, consolidation, merger,
sale, lease, conveyance of property, liquidation, dissolution, or winding-up, or
(iii) the date of such action which would require an adjustment to the Exercise
Price pursuant to Section 5 hereof.
8. The issuance of any shares or other securities upon the exercise of
this Option, and the delivery of certificates or other instruments representing
such shares or other securities, shall be made without charge to the Holder for
any tax or other charge in respect of such issuance. The Company shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of any certificate in a name other
than that of the Holder and the
- 8 -
<PAGE> 9
Company shall not be required to issue or deliver any such certificate unless
and until the person or persons requesting the issue thereof shall have paid to
the Company the amount of such tax or shall have established to the satisfaction
of the Company that such tax has been paid.
9. (a) If, at any time prior to ________, 2005 (seven years from the
Effective Date), the Company shall file a registration statement (other than on
Form S-4, Form S-8, or any successor form) with the Securities and Exchange
Commission (the "Commission") while this Option or any Underwriter's Securities
(as hereinafter defined) are outstanding, the Company shall give all the then
Holders of this Option or any Underwriter's Securities (collectively, the
"Eligible Holders") at least 45 days prior written notice of the filing of such
registration statement. If requested by any Eligible Holder in writing within 30
days after receipt of any such notice, the Company shall, at the Company's sole
expense (other than the fees and disbursements of counsel for the Eligible
Holders and the underwriting discounts, if any, payable in respect of the
Underwriter's Securities sold by any Eligible Holder), register or qualify all
or, at each Eligible Holder's option, any portion of the Underwriter's
Securities of any Eligible Holders who shall have made such request,
concurrently with the registration of such other securities, all to the extent
requisite to permit the public offering and sale of the Underwriter's Securities
through the facilities of all appropriate securities exchanges and the
over-the-counter market, and will use its best efforts through its officers,
directors, auditors, and counsel to cause such registration statement to become
effective as promptly as practicable. Notwithstanding the foregoing, if the
managing underwriter of any such offering shall advise the Company in writing
that, in its opinion, the distribution of all or a portion of the Underwriter's
Securities requested to be included in the registration concurrently with the
securities being registered by the Company would materially adversely affect the
distribution of such securities by the Company for its own account, then any
Eligible Holder who shall have requested registration of his or its
Underwriter's Securities shall delay the offering and sale of such Underwriter's
Securities (or the portions thereof so designated by such managing underwriter)
for such period, not to exceed 90 days (the "Delay Period"), as the managing
underwriter shall request, provided that no such delay shall be required as to
any Underwriter's Securities if any securities of the Company are included in
such registration statement and eligible for sale during the Delay Period for
the account of any person other than the Company and any Eligible Holder unless
the securities included in such registration statement and eligible for sale
during the Delay Period for such other person shall have been reduced pro rata
to the reduction of the Underwriter's Securities which were requested to be
included and eligible for sale during the Delay Period in such registration. As
used herein, "Underwriter's Securities" shall mean the Option Shares which have
not been previously sold
- 9 -
<PAGE> 10
pursuant to a registration statement or Rule 144 promulgated
under the Act.
(b) If, at any time during the five-year period commencing one
year after the Effective Date, the Company shall receive a written request, from
Eligible Holders who in the aggregate own (or upon exercise of all Options then
outstanding would own) a majority of the total number of shares of Common Stock
then included (or upon such exercises that would be included) in the
Underwriter's Securities (the "Majority Holders"), to register the sale of all
or part of such Underwriter's Securities, the Company shall, as promptly as
practicable, prepare and file with the Commission a registration statement
sufficient to permit the public offering and sale of the Underwriter's
Securities through the facilities of all appropriate securities exchanges and
the over-the-counter market, and will use its best efforts through its officers,
directors, auditors, and counsel to cause such registration statement to become
effective as promptly as practicable; provided, however, that the Company shall
only be obligated to file one such registration statement for which all expenses
incurred in connection with such registration (other than the fees and
disbursements of counsel for the Eligible Holders and underwriting discounts, if
any, payable in respect of the Under- writer's Securities sold by the Eligible
Holders) shall be borne by the Company and one additional such registration
statement for which all such expenses shall be paid by the Eligible Holders.
Within three business days after receiving any request contemplated by this
Section 9(b), the Company shall give written notice to all the other Eligible
Holders, advising each of them that the Company is proceeding with such
registration and offering to include therein all or any portion of any such
other Eligible Holder's Underwriter's Securities, provided that the Company
receives a written request to do so from such Eligible Holder within 30 days
after receipt by him or it of the Company's notice.
(c) In the event of a registration pursuant to the provisions of
this Section 9, the Company shall use its best efforts to cause the
Underwriter's Securities so registered to be registered or qualified for sale
under the securities or blue sky laws of such jurisdictions as the Holder or
such holders may reasonably request; provided, however, that the Company shall
not be required to qualify to do business in any state by reason of this Section
9(c) in which it is not otherwise required to qualify to do business.
(d) The Company shall keep effective any registration or
qualification contemplated by this Section 9 and shall from time to time amend
or supplement each applicable registration statement, preliminary prospectus,
final prospectus, application, document, and communication for such period of
time as shall be required to permit the Eligible Holders to complete the offer
and sale of the Underwriter's Securities covered thereby. The
- 10 -
<PAGE> 11
Company shall in no event be required to keep any such registration or
qualification in effect for a period in excess of nine months from the date on
which the Eligible Holders are first free to sell such Underwriter's Securities;
provided, however, that, if the Company is required to keep any such
registration or qualification in effect with respect to securities other than
the Underwriter's Securities beyond such period, the Company shall keep such
registration or qualification in effect as it relates to the Underwriter's
Securities for so long as such registration or qualification remains or is
required to remain in effect in respect of such other securities.
(e) In the event of a registration pursuant to the provisions of
this Section 9, the Company shall furnish to each Eligible Holder such number of
copies of the registration statement and of each amendment and supplement
thereto (in each case, including all exhibits), such reasonable number of copies
of each prospectus contained in such registration statement and each supplement
or amendment thereto (including each preliminary prospectus), all of which shall
conform to the requirements of the Act and the rules and regulations thereunder,
and such other documents, as any Eligible Holder may reasonably request to
facilitate the disposition of the Underwriter's Securities included in such
registration.
(f) In the event of a registration pursuant to the provisions of
this Section 9, the Company shall furnish, at the request of the Eligible Holder
of any Underwriter's Securities so registered, on the date that such
Underwriter's Securities are delivered for sale in connection with a
registration pursuant to an underwritten public offering, if such securities are
being sold through underwriters, or, if such securities are not being sold
through underwriters, on the date that the registration statement, with respect
to such securities, becomes effective, (i) an opinion dated such date, of the
counsel representing the Company for the purposes of such registration, in form
and substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Eligible Holder and
(ii) a letter dated such date, from the independent certified public accountants
of the Company, in form and substance as is customarily given to underwriters in
an underwritten public offering, addressed to the underwriters, if any, and to
the Eligible Holder. Any opinion or letter given shall be subject to all of the
qualifications, exceptions and conditions appropriate to the then existing
circumstances.
(g) In the event of a registration pursuant to the provision of
this Section 9, the Company shall enter into a cross-indemnity agreement and a
contribution agreement, each in customary form, with each underwriter, if any,
and, if requested, enter into an underwriting agreement containing conventional
representations, warranties, allocation of expenses, and customary closing
conditions, including, but not limited to,
- 11 -
<PAGE> 12
opinions of counsel and accountants' cold comfort letters, with any underwriter
who acquires any Underwriter's Securities.
(h) The Company agrees that until all the Under- writer's
Securities have been sold under a registration statement or pursuant to Rule 144
under the Act, it shall keep current in filing all reports, statements and other
materials required to be filed with the Commission to permit holders of the
Underwriter's Securities to sell such securities under Rule 144.
(i) Except for rights granted to Holders of the Options and
rights existing prior to the issuance of the Options, the Company will not,
without the written consent of the Majority Holders, grant to any persons the
right to request the Company to register any securities of the Company, provided
that the Company may grant such registration rights to other persons so long as
such rights are subordinate to the rights of the Eligible Holders.
10. (a) Subject to the conditions set forth below, the Company agrees to
indemnify and hold harmless each Eligible Holder, its officers, directors,
partners, employees, agents, and counsel, and each person, if any, who controls
any such person within the meaning of Section 15 of the Act or Section 20(a) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and
against any and all loss, liability, charge, claim, damage, and expense
whatsoever (which shall include, for all purposes of this Section 10, but not be
limited to, attorneys' fees and any and all reasonable expense whatsoever
incurred in investigating, preparing, or defending against any litigation,
commenced or threatened, or any claim whatsoever, and any and all amounts paid
in settlement of any claim or litigation), as and when incurred, arising out of,
based upon, or in connection with (i) any untrue statement or alleged untrue
statement of a material fact contained (A) in any registration statement,
preliminary prospectus, or final prospectus (as from time to time amended and
supplemented), or any amendment or supplement thereto, relating to the sale of
any of the Underwriter's Securities, or (B) in any application or other document
or communication (in this Section 10 collectively called an "application")
executed by or on behalf of the Company or based upon written information
furnished by or on behalf of the Company filed in any jurisdiction in order to
register or qualify any of the Underwriter's Securities under the securities or
blue sky laws thereof or filed with the Commission or any securities exchange;
or any omission or alleged omission to state a material fact required to be
stated therein or necessary to make the statements therein not misleading,
unless such statement or omission was made in reliance upon and in conformity
with written information furnished to the Company with respect to such Eligible
Holder by or on behalf of such person expressly for inclusion in any
registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be, or
(ii) any breach of any
- 12 -
<PAGE> 13
representation, warranty, covenant, or agreement of the Company contained in
this Option. The foregoing agreement to indemnify shall be in addition to any
liability the Company may otherwise have, including liabilities arising under
this Option. The Company shall not be liable for losses based on untrue
statements or omissions contained in Preliminary Prospectuses if an Underwriter
failed to deliver a final Prospectus prior to or simultaneously with the
delivery of written confirmation of any public sale of the Underwriter's
Securities and a court of competent jurisdiction in a judgment not subject to
appeal or final review shall have determined that such final Prospectus would
have corrected such untrue statement or omission.
If any action is brought against any Eligible Holder or any of its
officers, directors, partners, employees, agents, or counsel, or any controlling
persons of such person (an "indemnified party") in respect of which indemnity
may be sought against the Company pursuant to the foregoing paragraph, such
indemnified party or parties shall promptly notify the Company in writing of the
institution of such action (but the failure so to notify shall not relieve the
Company from any liability other than pursuant to this Section 10(a)) and the
Company shall promptly assume the defense of such action, including the
employment of counsel (reasonably satisfactory to such indemnified party or
parties) and payment of expenses. Such indemnified party or parties shall have
the right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless the employment of such counsel shall have been authorized in
writing by the Company in connection with the defense of such action or the
Company shall not have in a timely manner employed counsel reasonably
satisfactory to such indemnified party or parties to have charge of the defense
of such action or such indemnified party or parties shall have reasonably
concluded that there may be one or more legal defenses available to it or them
or to other indemnified parties which are different from or additional to those
available to the Company, in any of which events such fees and expenses shall be
borne by the Company and the Company shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties. Anything
in this Section 10 to the contrary notwithstanding, the Company shall not be
liable for any settlement of any such claim or action effected without its
written consent, which shall not be unreasonably withheld. The Company shall
not, without the prior written consent of each indemnified party that is not
released as described in this sentence, settle or compromise any action, or
permit a default or consent to the entry of judgment in or otherwise seek to
terminate any pending or threatened action, in respect of which indemnity may be
sought hereunder (whether or not any indemnified party is a party thereto),
unless such settlement, compromise, consent, or termination includes an
unconditional release of each indemnified party from all liability in respect of
such action. The Company agrees promptly to notify the Eligible Holders of the
- 13 -
<PAGE> 14
commencement of any litigation or proceedings against the Company or any of its
officers or directors in connection with the sale of any Underwriter's
Securities or any preliminary prospectus, prospectus, registration statement, or
amendment or supplement thereto, or any application relating to any sale of any
Underwriter's Securities.
(b) The Holder agrees to indemnify and hold harmless the Company,
each director of the Company, each officer of the Company who shall have signed
any registration statement covering Underwriter's Securities held by the Holder,
each other person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, and its or their
respective counsel, to the same extent as the foregoing indemnity from the
Company to the Holder in Section 10(a), but only with respect to statements or
omissions, if any, made in any registration statement, preliminary prospectus,
or final prospectus (as from time to time amended and supplemented), or any
amendment or supplement thereto, or in any application, in reliance upon and in
conformity with written information furnished to the Company with respect to the
Holder by or on behalf of the Holder expressly for inclusion in any such
registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be. If
any action shall be brought against the Company or any other person so
indemnified based on any such registration statement, preliminary prospectus, or
final prospectus, or any amendment or supplement thereto, or in any application,
and in respect of which indemnity may be sought against the Holder pursuant to
this Section 10(b), the Holder shall have the rights and duties given to the
Company, and the Company and each other person so indemnified shall have the
rights and duties given to the indemnified parties, by the provisions of Section
10(a).
(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 10(a) or
10(b) (subject to the limitations thereof) but it is found in a final judicial
determination, not subject to further appeal, that such indemnification may not
be enforced in such case, even though this Agreement expressly provides for
indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Act, the Exchange Act or otherwise, then the
Company (including for this purpose any contribution made by or on behalf of any
director of the Company, any officer of the Company who signed any such
registration statement, any controlling person of the Company, and its or their
respective counsel), as one entity, and the Eligible Holders of the
Underwriter's Securities included in such registration in the aggregate
(including for this purpose any contribution by or on behalf of an indemnified
party), as a second entity, shall contribute to the losses, liabilities, claims,
damages, and expenses whatsoever to which any of them may be subject, on the
basis of relevant equitable considerations
- 14 -
<PAGE> 15
such as the relative fault of the Company and such Eligible Holders in
connection with the facts which resulted in such losses, liabilities, claims,
damages, and expenses. The relative fault, in the case of an untrue statement,
alleged untrue statement, omission, or alleged omission, shall be determined by,
among other things, whether such statement, alleged statement, omission, or
alleged omission relates to information supplied by the Company or by such
Eligible Holders, and the parties' relative intent, knowledge, access to
information, and opportunity to correct or prevent such statement, alleged
statement, omission, or alleged omission. The Company and the Holder agree that
it would be unjust and inequitable if the respective obligations of the Company
and the Eligible Holders for contribution were determined by pro rata or per
capita allocation of the aggregate losses, liabilities, claims, damages, and
expenses (even if the Holder and the other indemnified parties were treated as
one entity for such purpose) or by any other method of allocation that does not
reflect the equitable considerations referred to in this Section 10(c). In no
case shall any Eligible Holder be responsible for a portion of the contribution
obligation imposed on all Eligible Holders in excess of its pro rata share based
on the number of shares of Common Stock owned (or which would be owned upon
exercise of all Underwriter's Securities) by it and included in such
registration as compared to the number of shares of Common Stock owned (or which
would be owned upon exercise of all Underwriter's Securities) by all Eligible
Holders and included in such registration. No person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. For purposes of this Section 10(c), each person, if any, who
controls any Eligible Holder within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act and each officer, director, partner, employee,
agent, and counsel of each such Eligible Holder or control person shall have the
same rights to contribution as such Eligible Holder or control person and each
person, if any, who controls the Company within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act, each officer of the Company who shall
have signed any such registration statement, each director of the Company, and
its or their respective counsel shall have the same rights to contribution as
the Company, subject in each case to the provisions of this Section 10(c).
Anything in this Section 10(c) to the contrary notwithstanding, no party shall
be liable for contribution with respect to the settlement of any claim or action
effected without its written consent. This Section 10(c) is intended to
supersede any right to contribution under the Act, the Exchange Act or
otherwise.
11. Unless registered pursuant to the provisions of Section 9 hereof,
the Option Shares issued upon exercise of the Options shall be subject to a stop
transfer order and the certificate or certificates evidencing such securities
shall bear the following legend:
- 15 -
<PAGE> 16
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT
TO A REGISTRATION STATEMENT FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION. HOWEVER, SUCH SHARES MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO (i) A POST-EFFECTIVE AMENDMENT TO SUCH
REGISTRATION STATEMENT, (ii) A SEPARATE REGISTRATION STATEMENT
UNDER SUCH ACT, OR (iii) AN EXEMPTION FROM REGISTRATION UNDER
SUCH ACT."
12. Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction, or mutilation of any Option (and upon surrender of any
Option if mutilated), and upon reimbursement of the Company's reasonable
incidental expenses, the Company shall execute and deliver to the Holder thereof
a new Option of like date, tenor, and denomination.
13. The Holder of any Option shall not have, solely on account of such
status, any rights of a stockholder of the Company, either at law or in equity,
or to any notice of meetings of stockholders or of any other proceedings of the
Company, except as provided in this Option.
14. This Option shall be construed in accordance with the laws of the
State of New York applicable to contracts made and performed within such State,
without regard to principles of conflicts of law.
15. All communications hereunder, except as may be otherwise
specifically provided herein, shall be in writing and, if sent to the
Underwriters, shall be mailed, delivered, or telexed or telegraphed and
confirmed by letter, to Barington Capital Group, L.P., 888 Seventh Avenue, New
York, New York 10019, Attention: Carl G. Kleidman; or if sent to the Company,
shall be mailed, delivered, or telexed or telegraphed and confirmed by letter,
to the Company, 10300 Metric Boulevard, Austin, Texas 78758, Attention: Chief
Executive Officer. All notices hereunder shall be effective upon receipt by the
party to which it is addressed.
16. The Company irrevocably consents to the jurisdiction of the courts
of the State of New York and of any federal court located in such State in
connection with any action or proceeding arising out of or relating to this
Option, any document or instrument delivered pursuant to, in connection with or
simultaneously with this Option, or a breach of this Option or any such document
or instrument. In any such action or proceeding, the Company waives personal
service of any summons, complaint or other process and agrees that service
thereof may be made in accordance with Section 12 of the Underwriting Agreement.
Within 30 days after such service, or such other time as may be mutually agreed
upon in writing by the attorneys for the parties
- 16 -
<PAGE> 17
to such action or proceeding, the Company shall appear to answer such summons,
complaint or other process.
- 17 -
<PAGE> 18
Dated: _______, 1998
U.S. ONLINE COMMUNICATIONS, INC.
By: ________________________
Robert G. Solomon
Chief Executive Officer
- ----------------------
Secretary
- 18 -
<PAGE> 19
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
attached Option.)
FOR VALUE RECEIVED, ______________________ hereby sells, assigns, and
transfers unto _________________ an Option to purchase __________ shares of
common stock, par value $0.001 per share, of the Company together with all
right, title, and interest therein, and does hereby irrevocably constitute and
appoint ___________ attorney to transfer such Option on the books of the
Company, with full power of substitution.
Dated: _________________
Signature_______________________
<PAGE> 20
NOTICE
The signature on the foregoing Assignment must correspond to the name as
written upon the face of this Option in every particular, without alteration or
enlargement or any change whatsoever.
To: U.S. OnLine Communications, Inc.
10300 Metric Boulevard
Austin, TX 78758
<PAGE> 1
EXHIBIT 4.1
[U.S. ONLINE COMMUNICATIONS, INC. LOGO]
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that SEE REVERSE FOR ABBREVIATIONS
A STATEMENT OF RIGHTS
GRANTED TO EACH CLASS
OF SHARES
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $0.001 PAR VALUE, OF
U.S. ONLINE COMMUNICATIONS, INC.
transferable on the share register of the Corporation in person or by duly
authorized attorney upon surrender of this Certificate properly endorsed. This
Certificate is not valid unless countersigned by the Transfer Agent and
registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
/s/ [SIG] /s/ [SIG]
SECRETARY PRESIDENT
[U.S. ONLINE COMMUNICATIONS, INC. SEAL]
COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(Jersey City, NJ)
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED OFFICER
AMERICAN BANK NOTE COMPANY
3504 ATLANTIC AVENUE
SUITE 12
LONG BEACH, CA 90807
(562) 989-2333
(FAX) (562) 426-7450
MAY 25, 1998 fm
056934fc
Proof [INIT] NEW
<PAGE> 2
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights as established, from time to time, by the Certificate
of Incorporation of the Corporation and by any certificate of determination,
the number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge
at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT - ________________ Custodian ________________
(Cust) (Minor)
under Uniform Gifts to Minors
Act________________________________________
(State)
UNIF TRF MIN ACT - ____________ Custodian (until age _________)
(Cust)
___________________ under Uniform Transfers
(Minor)
to Minors Act _____________________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________
________________________
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
- ------------------------------------------------------------------------
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
- ----------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated
-------------------
X
---------------------------------
X
---------------------------------
NOTICE: THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF
THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By
---------------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS,
SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
_____________________________________________
AMERICAN BANK NOTE COMPANY MAY 25, 1998 fm
3504 ATLANTIC AVENUE
SUITE 12
LONG BEACH, CA 90807 056934bk
(562) 989-2333
(FAX) (562) 425-7450 Proof [SIG] NEW
_____________________________________________
<PAGE> 1
EXHIBIT 5.1
June ___, 1998
U.S. OnLine Communications, Inc.
10300 Metric Boulevard
Austin, Texas 78758
RE: FORM SB-2 REGISTRATION STATEMENT
Ladies and Gentlemen:
We have acted as counsel to U.S. OnLine Communications, Inc., a Delaware
corporation (the "Company"), in connection with the preparation of its
Registration Statement on Form SB-2 (Registration No. 333-51781), as amended
(the "Registration Statement"), which the Company will file with the Securities
and Exchange Commission with respect to an aggregate of 5,866,667 shares of
Common Stock of the Company (the "Common Stock"), together with a
Representative's Option to purchase 350,000 shares of Common Stock and the
350,000 shares of Common Stock issuable upon exercise of the Representative's
Option (all of such shares will be referred to as the "Shares").
As counsel for the Company, we are familiar with the Company's Certificate of
Incorporation, the Company's Bylaws, and the records of the corporate
proceedings of the Company as we have deemed relevant and necessary for the
purpose of this opinion, and we have assisted in the preparation of the
Registration Statement, including the Prospectus contained therein.
Based upon the foregoing, we are of the opinion that, when (a) the Registration
Statement shall have been declared effective by order of the Securities and
Exchange Commission, (b) the Shares shall have been offered and sold in the
manner referred to in the Registration Statement, (c) certificates for the
Shares shall have been duly issued by the Company and registered by its
registrar, and (d) the Company shall have received the consideration required
for the Shares as contemplated by the Registration Statement, the Shares will be
validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving such consent, we do not admit that we are in
the category of persons whose consent is required under Section 7 of the Act.
Sincerely,
GRAHAM & JAMES LLP/RIDDELL WILLIAMS P.S.
<PAGE> 1
EXHIBIT 10.5
THIS PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER THIS NOTE, NOR
ANY INTEREST HEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE
TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS
EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE
BORROWER (AS DEFINED BELOW) RECEIVES AN OPINION OF COUNSEL TO THE HOLDER (AS
DEFINED BELOW) OF THIS NOTE, WHICH COUNSEL AND OPINION ARE REASONABLY
SATISFACTORY TO THE BORROWER, THAT THIS NOTE OR ANY INTEREST HEREIN MAY BE
OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER CONTEMPLATED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE
SECURITIES LAWS.
U.S. ONLINE COMMUNICATIONS, INC.
14% Senior Subordinated Promissory Note
$1,500,000 March 30, 1998
New York, New York
U.S. ONLINE COMMUNICATIONS, INC., a Delaware corporation (the
"Borrower"), for value received, hereby promises to pay to Aspen OnLine
Investments, LLC, a Michigan limited liability company, with an address at 2757
- - 44th Street SW, Suite 306, Grand Rapids, Michigan 49509, or registered assigns
(the "Holder"), the principal amount of ONE MILLION FIVE HUNDRED THOUSAND
DOLLARS ($1,500,000.00) on the Maturity Date (as defined below), and to pay
interest on the unpaid principal balance hereof at the rate of 14% per annum
(calculated on the basis of a 360-day year consisting of twelve 30-day months)
on the 1st day of each of January, April, July and October commencing July 1,
1998 and on the Maturity Date (each such date being an ("Interest Payment Date")
all as hereafter further provided.
In no event shall any interest to be paid hereunder exceed the maximum
rate permitted by law. In any such event, this Note shall automatically be
deemed amended to permit interest charges at an amount equal to, but no greater
than, the maximum rate permitted by law.
1. Payments.
(a) Principal of, and any accrued and unpaid interest on, this Note
shall be due and payable in full on the third anniversary of the date hereof
(the "Maturity Date").
(b) Interest on this Note shall accrue from the most recent Interest
Payment Date to which interest has been paid or, if no interest has been paid on
this Note, from the date hereof, to, but excluding, the next Interest Payment
Date, and shall be payable in arrears on each Interest Payment Date.
(c) If any Interest Payment Date or the Maturity Date would fall on a
day that is not a Business Day (as defined below), the payment due on such
Interest Payment
1
<PAGE> 2
date or Maturity Date will be made on the next succeeding Business Day with the
same force and effect as if made on the Interest Payment Date or the Maturity
Date, as the case may be. "Business Day" means any day which is not a Saturday
or Sunday and is not a day on which banking institutions are generally
authorized or obligated to close in the City of Austin, Texas.
(d) The Borrower may not prepay all or any portion of this Note
unless the Borrower has received the prior written consent (the "Required
Pre-Payment Consent") of registered holders holding more than fifty percent
(50%) of the aggregate amounts unpaid, as of the date of such prepayment, under
those certain 15% Senior Subordinated Promissory Notes (the "Bridge Notes")
issued by the Borrower pursuant to a certain Confidential Private Placement
Memorandum dated March 13, 1998 (the "Memorandum"). In the event the Borrower
receives the Required Pre-Payment Consent, the Borrower may prepay all or any
portion of this Note without payment of any premium or penalty. In the event the
Bridge Notes are no longer outstanding, the Borrower may prepay all or any
portion of this Note, without payment of any premium or penalty from the
proceeds of any new financing (other than the initial public offering);
provided, however, that no such prepayment may be made if (a) in connection with
such new financing the Company is required to issue any Securities (as defined
below) or pay any consideration other than customary fees and (b) at the time of
such new financing, the shares of common stock of the Company issued in
connection with the private placement described in the Memorandum are subject to
a prohibition on resale pursuant to that certain Lock-Up Agreement dated March
30, 1998 as described in the Memorandum, unless the Borrower shall first obtain,
prior to such prepayment, either (x) the unanimous consent of the Independent
Directors of the Borrower (which, for purposes of this Section 1(d) shall not
include any director who is the nominee of the Holder or of Barington Capital
Group, L.P. ("Barington")) or (y) the consent of Barington to such prepayment,
which consent shall not be unreasonably withheld. For purposes of this Section
1(d), the term "Securities" shall mean any equity security of the Borrower or
any security which is convertible or exchangeable for any equity security of the
Borrower. All payments on this Note shall be applied first to accrued interest
on this Note and then to the balance of principal on this Note.
(e) Payments of principal and interest on this Note shall be made by
wire transfer of immediately available funds sent to the Holder's address set
forth above or to such other address as the Holder may designate for such
purpose from time to time by written notice to the Borrower, in such coin or
currency of the United States of America as at the time of payment shall be
legal tender for the payment of public and private debts.
(f) The obligations to make the payments provided for in this Note
are absolute and unconditional and not subject to any defense, set-off,
counterclaim, rescission, recoupment or adjustment whatsoever. The Borrower
hereby expressly waives demand and presentment for payment, notice of
nonpayment, notice of dishonor, protest, notice of protest and diligence in
taking any action to collect any amount called for hereunder, and shall be
directly and primarily liable for the payment of
2
<PAGE> 3
all sums owing and to be owing hereon, regardless of and without any notice,
diligence, act or omission with respect to the collection of any amount called
for hereunder.
2. Ranking of Note.
The Borrower, for itself, its successors and assigns, covenants and
agrees that the payment of the principal of and interest on this Note is senior
in right of payment to the payment of all existing and future Junior Debt (as
hereinafter defined) but not to the payment of principal of and/or interest on
any Senior Debt (as defined below). This Note shall be pari passu with the
"OnLine Note" (as defined below) until the Bridge Notes have been paid in full;
following payment of the Bridge Notes, this Note shall be senior to the OnLine
Note (as defined below), "Junior Debt" shall mean all existing and future
Indebtedness (as hereinafter defined) other than (i) the Senior Debt (as defined
below), (ii) the Indebtedness represented by this Note, (iii) equipment lease
obligations to T&W Funding Company V, L.L.C., in an amount not to exceed Six
Million Dollars ($6,000,000) in the aggregate and existing on the date hereof,
and (iv) the "OnLine Note" as defined below. "Indebtedness" shall mean (A) any
liability or obligation of the Borrower (x) for borrowed money, including any
liability or obligation evidenced by a note, debenture, bond or other instrument
of indebtedness (including, without limitation, a purchase money obligation),
including any given in connection with the acquisition of property, assets or
service, or (y) for the payment of rent or other amounts relating to equipment
lease obligations; (B) any liability of others described in Section 2 (A) which
the Borrower has guaranteed or which is otherwise its legal liability; and (C)
any modification, renewal, extension, replacement or refunding of any such
liability described in Section 2 (A) or (B), provided, that Indebtedness shall
not include Trade Debt (as defined below) incurred in the ordinary course of
business. "Senior Debt" shall mean (A) Silicon Valley Bank Debt, (B) subject to
Section 5(b) of this Note, Indebtedness represented by the Bridge Notes, and (C)
Indebtedness incurred by the Borrower in connection with loan financing from a
bank or similar financial institution, but only to the extent and in the amount
of such Indebtedness that is prior to the occurrence of an Event of Default
hereunder secured by a perfected first priority security interest in personal
property of the Borrower or a duly recorded first mortgage on real property of
the Borrower. "Silicon Valley Bank Debt" shall mean any Indebtedness of U.S.
OnLine Communications, LLC ("L.L.C."), to Silicon Valley Bank: (x) that is
existing on the date hereof; (y) to which Borrower becomes a successor pursuant
to Borrower's acquisition of all or substantially all of the assets of L.L.C.,
as described in the Memorandum; and (z) that does not exceed $7,200,000 in the
aggregate.
3. Covenants.
The Borrower covenants and agrees with the Holder that, so long as any
amount remains unpaid on this Note, unless the consent of the Holder is
obtained, the Borrower:
(a) Shall not create, incur, or suffer to exist any Indebtedness
except (i) the Indebtedness represented by this Note, (ii) the Senior Debt,
(iii) Junior Debt, the holders
3
<PAGE> 4
of which have duly executed any and all subordination agreements reasonably
acceptable to the Holder and the Holders of Senior Debt, (iv) equipment lease
obligations to T&W Funding Company V, L.L.C., in an amount not to exceed Six
Million Dollars ($6,000,000) in the aggregate and existing on the date hereof,
(v) Trade Debt incurred in the ordinary course of business, and (vi)
Indebtedness represented by a $3,000,000 Promissory Note to be issued by
Borrower to U.S. OnLine Communications L.L.C. ("OnLine LLC") upon closing of the
Asset Acquisition Agreement between Borrower and OnLine LLC (the "OnLine Note").
"Trade Debt" shall mean accounts payable that are properly classified as current
liabilities in accordance with generally accepted accounting principles
consistently applied ("GAAP"): (i) the amount or validity of which are currently
being contested by the Borrower in good faith by appropriate proceedings
diligently prosecuted and as to which an adequate reserve is maintained on the
books of the Borrower in accordance with GAAP or (ii) that are not more than 60
days past due under customary trade practices.
(b) Shall use its best efforts (which shall include, but shall not be
limited to, the solicitation of proxies, if necessary, at the Borrower's
expense) to cause two (2) persons designated by the Holder to be nominated for,
and elected to, the Borrower's Board of Directors (or other entity performing
similar functions); provided, however, that upon any initial public offering of
capital stock of the Borrower, the Borrower shall use such best efforts to cause
only one (1) person designated by the Holder to be nominated for and, elected
to, the Borrower's Board of Directors (or other entity performing similar
functions).
(c) Shall not create, acquire, or maintain any subsidiaries other
than those referred to in the Memorandum.
(d) Except as contemplated by the Memorandum, shall not pay any
dividend or make any distribution on, or purchase, redeem, or retire, any shares
of its capital stock or other securities or any warrants, options, or other
rights to reacquire any such shares or other securities, except that the
Borrower may (i) pay dividends payable solely in shares of its capital stock and
(ii) may redeem shares of its capital stock pursuant to its 1998 Restricted
Stock Award Plan.
(e) Shall not change its primary line of business.
(f) Except as contemplated by the Memorandum, shall not (i) enter
into any merger or consolidation, (ii) liquidate, wind up its affairs or
dissolve, or (iii) except in the ordinary course of business, convey, sell,
lease, transfer or otherwise dispose of, or purchase or acquire, any business,
assets, capital stock or other property.
(g) Except as contemplated by the Memorandum, shall not, directly or
indirectly, enter into any transaction with or for the benefit of an affiliate
(other than reasonable compensation, consistent with Section 3(h), for services
as an officer, director, partner or employee).
4
<PAGE> 5
(h) Shall not in any manner increase the compensation of its existing
officers or directors and partners from the levels in effect on the date of
issuance of this Note other than in the ordinary course of business and in an
amount not to exceed, in the aggregate, five percent (5%) annually, except with
the approval of the majority of the Borrower's Board of Directors, excluding any
directors who are employees of Borrower.
(i) Shall use the proceeds of the "Offering" (as defined in the
Memorandum) in substantially the manner specified in the Memorandum.
(j) Shall deliver to the Holder:
(i) as soon as available, and in any event within fifty (50)
days after the end of each of the first three quarterly fiscal periods of each
fiscal year of the Borrower or, if the Borrower is subject to the periodic
reporting requirements set forth in Sections 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), when such reports are
filed with the Commission, whichever is later, consolidated statements of
income, retained earnings and cash flow of the Borrower, for such period and for
the period from the beginning of the respective fiscal year to the end of such
period, and the related consolidated balance sheet of the Borrower as at the end
of such period setting forth in the case of each such statement in comparative
form the corresponding figures for the corresponding period in the preceding
fiscal year, accompanied by a certificate of the chief financial officer of the
Borrower, which certificate shall state that (A) such financial statements
fairly present in all material respects the financial position and results of
operations of the Borrower, all in accordance with generally accepted accounting
principles consistently applied, and (B) no Default (as hereinafter defined) has
occurred and is continuing or, if any Default has occurred and is continuing, a
description thereof in reasonable detail and of the action the Borrower has
taken or proposes to take with respect thereto;
(ii) as soon as available and in any event within ninety-five
(95) days after the end of each fiscal year of the Borrower or, if the Borrower
is subject to the periodic reporting requirements set forth in Sections 13 or
15(d) of the Exchange Act, when such reports are filed with the Commission,
whichever is later, consolidated statements of income, retained earnings and
cash flow of the Borrower for such fiscal year, and the related consolidated
balance sheet of the Borrower as at the end of such fiscal year, setting forth
in the case of each such statement in comparative form the corresponding figures
for the preceding fiscal year, and accompanied by (A) an opinion thereon of
independent certified public accountants of recognized national standing, which
opinion shall state that such consolidated financial statements present fairly,
in all material respects, the financial position and results of operations of
the Borrower in conformity with generally accepted accounting principles
consistently applied, and (B) a certificate of the chief financial officer of
the Borrower stating that no Default has occurred and is continuing or, if any
Default has occurred and is continuing, a description thereof in reasonable
detail and of the action the Borrower has taken or proposes to take with respect
thereto;
5
<PAGE> 6
(iii) promptly upon their becoming available, copies of all
registration statements which the Borrower shall have filed with the Commission
(or any governmental agency substituted therefor) or any national securities
exchange;
(iv) promptly after the Borrower shall obtain knowledge of
such, written notice of all legal or arbitral proceedings, and of all
proceedings by or before any governmental or regulatory authority or agency, and
each material development in respect of such legal or other proceedings,
affecting the Borrower, except proceedings which, if adversely determined, would
not have a material adverse effect on the Borrower; and
(v) promptly after the Borrower shall obtain knowledge of the
occurrence of any Event or Default (as hereinafter defined) or any event which
with notice or lapse of time or both would become an Event of Default (an Event
of Default or such other event being a "Default"), a notice specifying that such
notice is a "Notice of Default" and describing such Default in reasonable
detail, and, in such Notice of Default or as soon thereafter as practicable, a
description of the action the Borrower has taken or proposes to take with
respect thereto.
(k) Will pay all Taxes (as defined below), assessments and other
governmental charges imposed upon it or its properties or assets or in respect
of its franchises, business income or properties before any penalty or interest
accrues thereon, and all claims (including, without limitation, claims for
labor, services, materials and supplies) for sums which have become due and
payable and which by law have or may become due and payable and which by law
have or may become a lien upon any of their properties or assets; provided,
however, that no such charge or claim need be paid if being contested in good
faith by appropriate proceedings promptly instituted and diligently conducted
and if adequate reserves shall have been made therefor on the books and records
of the Borrower in accordance with GAAP.
(l) Will comply with the requirements of all applicable laws, rules,
regulations and orders of any court or other federal, state, or local
authorities (including any subdivision thereof). The Borrower will timely make
all filings required to be made by it with all relevant federal, state and/or
local (including any subdivision thereof) regulatory bodies.
(m) Shall not create, incur or assume any guarantee obligation
except:
(i) guaranties in existence on the date hereof and listed on
Schedule 3(m)(i);
(ii) guaranties incurred by the Borrower after the date hereof
and in an aggregate amount not to exceed $25,000 at any one time outstanding;
and
(iii) guaranties in connection with the Senior Debt.
(n) Shall not enter into any merger, consolidation or amalgamation
(other than one in which Borrower is the surviving entity), or liquidate, wind
up or dissolve itself (or
6
<PAGE> 7
suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer
or otherwise dispose of, all or substantially all of its property, business or
assets; provided, however, the Borrower may complete the transaction by which it
will acquire all or substantially all of the assets of U.S. OnLine
Communications L.L.C. as described in the Memorandum.
(o) Shall not become an investment company subject to registration
under the Investment Company Act of 1940, as amended.
(p) Will not enter into or become a party to any instrument
evidencing or governing the terms of any Indebtedness or other contract or
agreement with respect to any matter or any amendments or modifications of the
foregoing, other than in connection with the Senior Debt, the provisions of
which by their terms could reasonably be expected to restrict or limit the
Borrower's ability or obligation to make scheduled payments on this Note, any
portion thereof, or perform its other obligations under this Note.
(q) Except for a Permitted Sale (defined below), shall not sell or
otherwise dispose, in a single transaction or a series of related transactions,
property or assets having a net book value in excess of five percent (5%) of the
consolidated total property and assets of the Borrower. A "Permitted Sale" shall
mean (i) the sale, abandonment or other disposition of obsolete or worn out
property or assets or property or assets no longer useful in the Borrower's
business in the ordinary course of business, but not to exceed $250,000, or (ii)
the sale or other disposition of any property or assets in the ordinary course
of business consistent with past practice.
(r) Shall not purchase or acquire obligations or stock of, or any
other equity interest in, or make any loans or advances to, or other investment
in or to, any individual, partnership, corporation, limited liability company or
other similar organization or entity, except (i) obligations issued or
guaranteed by the United States or any agency thereof, (ii) commercial paper
with maturities of not more than one hundred-eighty (180) days and a published
rating of not less than A-1 or P-1 (or the equivalent rating), (iii)
certificates of time deposit and bankers' acceptances having maturities of not
more than one hundred-eighty (180) days and repurchase agreements backed by
United States government securities of a commercial bank if (x) such bank has a
combined capital and surplus of at least $500,000,000, or (y) its debt
obligations, or those of a holding company of which it is a subsidiary, are
rated not less than A (or the equivalent rating) by a nationally recognized
investment rating agency, (iv) United States money market funds that invest
solely in obligations issued or guaranteed by the United States or an agency
thereof, (vi) Eurodollar time deposits with financial institutions with a
published rating of not less than A-1 or P-1 (or the equivalent rating) and (v)
amounts not to exceed $500,000 in any transaction, or $2,000,000 in the
aggregate.
(s) Shall use its reasonable best efforts to cause any current holder
of Junior Debt and to cause any future holder of Junior Debt to execute such
subordination agreements, intercreditor agreements, instruments or waivers as
may be reasonably necessary in the opinion of the Holder to reflect the terms
set forth herein.
7
<PAGE> 8
(t) Until the payment in full of all amounts of principal of and
interest on the Note, and all other amounts owing under the Note, shall make no
payment with respect to the principal of or interest on or other amounts owing
with respect to any Junior Debt, or in respect of any redemption, retirement,
purchase or other acquisition thereof provided, however, that Borrower may make
payments of principal and interest owing under the Online Note as long as there
has not occurred an Event of Default as defined in Section 4.
(u) Shall not create, incur or suffer to exist any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind on any of its
property or assets (collectively, "Liens"), except, with respect to property or
assets other than intellectual property, for (i) the Liens in connection with
the Senior Debt, (ii) Liens for taxes not yet due or contested in good faith
appropriate reserves maintained on the books of Borrower, (iii) carriers',
warehousemen's, mechanics', and similar Liens and purchase money Liens arising
in the ordinary course of business which are not overdue for more than ninety
(90) days or are being contested in good faith, (iv) easements, rights of way,
zoning restrictions, and similar Liens on real property, which in the aggregate
are not material and do not materially detract from the use of such property,
(v) Liens for Indebtedness permitted to be incurred or in existence under
Section 3(a)(v), and (vi) landlord Liens with respect to real property leased by
Borrower.
4. Events of Default.
The occurrence of any of the following events shall constitute an event
of default (an "Event of Default"):
(a) A default in the payment of the principal on this Note, any
Senior Debt or any Junior Debt, when and as the same shall become due and
payable.
(b) Prior to the closing of an initial public offering of capital
stock of the Borrower, a default in the payment of any interest on this Note,
any Senior Debt or any Junior Debt, when and as the same shall become due and
payable, which default shall continue for twenty (20) business days after the
date fixed for the making of such interest payment.
(c) Following the closing of an initial public offering of capital
stock of the Borrower, a default in the payment of any interest on this Note,
any Senior Debt or any Junior Debt, when and as the same shall become due and
payable, which default shall continue for five (5) business days after the date
fixed for the making of such interest payment.
(d) A material default in the performance, or a material breach, of
any of the covenants of the Borrower contained in Section 2 or 3 of this Note.
(e) A material default in the performance, or a material breach, of
any covenant or agreement of the Borrower contained in any of the documentation
relating to the any Senior Debt or any subordination or intercreditor agreement
which default or breach shall have continued beyond any grace or cure period
provided therein.
8
<PAGE> 9
(f) A default or event of default which remains uncured following any
applicable cure period shall have occurred with respect to any Senior Debt,
Junior Debt or any subordination agreement or intercreditor agreement.
(g) A default or event of default which remains uncured following any
applicable cure period shall have occurred (A) with respect to any Indebtedness
or (B) under any other material agreement of the Borrower.
(h) Any representation, warranty or certification that has been or in
the future is made by the Borrower in or pursuant to this Note, or any
subordination or intercreditor agreement shall prove to have been false or
misleading as of the date made in any material respect.
(i) A final judgment or judgments for the payment of money in excess
of $50,000 in the aggregate shall be rendered by one or more courts,
administrative or arbitral tribunals or other bodies having jurisdiction against
the Borrower and the same shall not be discharged (or provision shall not be
made for such discharge), or a stay of execution thereof shall not be procured,
within sixty (60) days from the date of entry thereof and the Borrower shall
not, within such 60-day period, or such longer period during which execution of
the same shall have been stayed, appeal therefrom and cause the execution
thereof to be stayed during such appeal.
(j) The entry of a decree or order by a court having jurisdiction
adjudging the Borrower a bankrupt or insolvent, or approving a petition seeking
reorganization, arrangement, adjustment or composition of or in respect of the
Borrower, under federal bankruptcy law, as now or hereafter constituted, or any
other applicable federal or state bankruptcy, insolvency or other similar law,
and the continuance of any such decree or order unstayed and in effect for a
period of sixty (60) days; or the commencement by the Borrower of a voluntary
case under federal bankruptcy law, as now or hereafter constituted, or any other
applicable federal or state bankruptcy, insolvency, or other similar law, or the
consent by the Borrower to the institution of bankruptcy or insolvency
proceedings against it, or the filing by the Borrower of a petition or answer or
consent seeking reorganization or relief under federal bankruptcy law or any
other applicable federal or state law, or the consent by the Borrower to the
filing of such petition or to the appointment of a receiver, liquidator,
assignee, trustee, sequestrator or similar official of the Borrower or of any
substantial part of the property of the Borrower, or the making by the Borrower
of an assignment for the benefit of creditors, or the admission by the Borrower,
in writing, of its inability to pay its debts generally as they become due, or
the taking of corporate action by the Borrower in furtherance of any such
action.
5. Remedies Upon Default.
(a) Upon the occurrence of an Event of Default referred to in Section
4(j), the principal amount then outstanding of, and the accrued interest on,
this Note and all or any part of all other indebtedness and obligations then
owing by Borrower to Holder other than indebtedness or obligations represented
by a Bridge Note, shall automatically become immediately due and payable without
presentment, demand,
9
<PAGE> 10
protest or other formalities of any kind, all of which are hereby expressly
waived by the Borrower. Upon the occurrence of an Event of Default referred to
in Section 4 (other than Section 4(j)), the Holder by notice in writing given to
the Borrower, may declare the entire principal amount then outstanding of, and
the accrued interest on, this Note and all or any part of all other indebtedness
and obligations then owing by Borrower to Holder other than indebtedness or
obligations represented by a Bridge Note, to be due and payable immediately, and
upon any such declaration the same shall become and be due and payable
immediately, without presentation, demand, protest or other formalities of any
kind, all of which are expressly waived by the Borrower.
(b) Upon the occurrence of any Event of Default under this Note, the
Bridge Notes shall automatically cease being Senior Debt and shall thereafter
rank pari passu with this Note for all purposes.
(c) The Holder may institute such actions or proceedings in law or
equity as it shall deem expedient for the protection of its rights and may
prosecute and enforce its claims against all assets of the Borrower. The Holder
shall have all rights and remedies provided by law and by agreement with
Borrower, including but not limited to the right to receive from the Borrower,
payment of the principal amount of this Note plus accrued interest to the date
of payment and payment of any and all other indebtedness and obligations owing
by Borrower to Holder. Borrower shall pay any and all expenses, including
reasonable attorneys' and experts' fees and legal expenses, paid or incurred by
the Holder in protecting and enforcing the rights of and obligations to the
Holder under any provision of this Note.
6. Transfer.
(a) This Note shall be transferable only on the books of the Borrower
upon delivery thereof to the Borrower, duly endorsed by the Holder or by his
duly authorized attorney or representative, or accompanied by proper evidence of
succession, assignment, or authority to transfer. In all cases of transfer by an
attorney, executor, administrator, guardian, or other legal representative, duly
authenticated evidence of his or its authority shall be produced. Upon any
registration of transfer, the Borrower shall deliver a new Note or Notes to the
person entitled thereto. This Note may be exchanged, at the option of the Holder
thereof, for another Note, or other Notes of different denominations, of like
tenor and representing in the aggregate a like principal amount, upon surrender
to the Borrower, or its duly authorized agent. Notwithstanding the foregoing,
the Borrower shall have no obligation to cause this Note to be transferred on
its books to any person unless (i) the sale, assignment or transfer of this Note
is registered under the Act; (ii) this Note is sold, assigned or transferred in
accordance with all the requirements and limitations of Rule 144 under the Act;
or (iii) such sale, assignment or transfer is otherwise exempt from registration
under the securities laws, and the Borrower receives an opinion of counsel to
the Holder reasonably acceptable to the Borrower to such effect.
(b) The Holder acknowledges that he has been advised that this Note
has not been registered under the Act, that this Note is being or has been
issued on the basis of
10
<PAGE> 11
the statutory exemption provided by Section 4(2) of the Act or Regulation D
promulgated thereunder, or both, relating to transactions by an issuer not
involving any public offering, and that the Borrower's reliance thereon is based
in part upon the representations and warranties made by the Holder in that
certain Subscription Agreement, of even date herewith, executed by the Holder.
The Holder acknowledges that he has been informed of, or is otherwise familiar
with, the nature of the limitations imposed by the Act and the rules and
regulations thereunder on the transfer of securities. In particular, the Holder
agrees that no sale, assignment or transfer of this Note shall be valid or
effective, and the Borrower shall not be required to give any effect to any such
sale, assignment or transfer, unless (i) the sale, assignment or transfer of
this Note is registered under the Act, it being understood that this Note is not
currently registered for sale and that the Borrower has no obligation or
intention to so register this Note except as specifically provided herein, or
(ii) this Note is sold, assigned or transferred in accordance with all the
requirements and limitations of Rule 144 under the Act, it being understood that
Rule 144 is not available at the time of the original issuance of this Note for
the sale of this Note and that there can be no assurance that Rule 144 sales
will be available at any subsequent time, or (iii) such sale, assignment, or
transfer is otherwise exempt from registration under the Act. The Holder further
understands that an opinion of counsel and other documents may be required to
transfer this Note.
7. Miscellaneous.
(a) Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested, or by Federal Express, Express Mail or similar
overnight delivery or courier service or delivered (in person or by telecopy,
telex or similar telecommunications equipment) against receipt to the party to
whom it is to be given, (i) if to the Borrower, at its address at 8307 Shoal
Creek Boulevard, Austin, Texas 78757, Attention: President, (ii) if to the
Holder, at its address set forth on the first page hereof, or (iii) in either
case, to such other address as the party shall have furnished in writing in
accordance with the provisions of this Section 7(a). Notice to the estate of any
party shall be sufficient if addressed to the party as provided in this Section
7(a). Any notice or other communication given by certified mail shall be deemed
given at the time of certification thereof, except for a notice changing a
party's address which shall be deemed given at the time of receipt thereof. Any
notice given by other means permitted by this Section 7(a) shall be deemed given
at the time of receipt thereof.
(b) Upon receipt of evidence satisfactory to the Borrower of the
loss, theft, destruction or mutilation of this Note (and upon surrender of this
Note if mutilated), including an affidavit of the Holder thereof that this Note
has been lost, stolen, destroyed or mutilated, together with an indemnity
against any claim that may be made against the Borrower on account of such lost,
stolen, destroyed or mutilated Note, and upon reimbursement of the Borrower's
reasonable incidental expenses, the Borrower shall execute and deliver to the
Holder a new Note of like date, tenor and denomination.
11
<PAGE> 12
(c) No course of dealing and no delay or omission on the part of the
Holder in exercising any right or remedy shall operate as a waiver thereof or
otherwise prejudice the Holder's rights, powers or remedies. No right, power or
remedy conferred by this Note upon the Holder shall be exclusive of any other
right, power or remedy referred to herein or now or hereafter available at law,
in equity, by statute or otherwise, and all such remedies may be exercised
singly or concurrently.
(d) This Note may be amended, or any of its provisions waived (which
amendment or waiver shall be binding upon all future Holders) only by written
consent or consents executed by the Borrower and the Holder or, if this Note is
transferred to more than one Holder, then the Holders representing a majority
(in principal amount) of the Notes, provided, however that any waiver or
amendment to the interest rate, Maturity Date or any Interest Payment Date
provided hereunder shall be effective only with respect to Notes the Holders of
which have consented thereto.
(e) This Note shall be governed by and construed in accordance with
the laws of the State of Delaware, without giving effect to principles governing
conflict of laws.
(f) The Borrower irrevocably consents to the jurisdiction of the
courts of the State of Michigan and of any federal court located in such State
in connection with any action or proceeding arising out of or relating to this
Note, any document or instrument delivered pursuant to, in connection with or
simultaneously with this Note, or a breach of this Note or any such document or
instrument. In any such action or proceeding, the Borrower waives personal
service of any summons, complaint or other process and agrees that service
thereof may be made in accordance with Section 7(a). Within thirty (30) days
after such service, or such other time as may be mutually agreed upon in writing
by the attorneys for the parties to such action or proceeding, the Borrower
shall appear or answer such summons, complaint, or other process.
IN WITNESS WHEREOF, the Borrower has caused this Note to be executed and
dated the day and year first above written.
U.S. ONLINE COMMUNICATIONS, INC.
By: _________________________________
Name: Robert G. Solomon
Title: Chairman and CEO
12
<PAGE> 13
SCHEDULE 3(m)(i)
None
13
<PAGE> 1
EXHIBIT 10.11
SUBORDINATION AGREEMENT
BORROWER: U.S. OnLine Communications, Inc.
CREDITOR: ________________________________
DATE: ________________________________
This Subordination Agreement is entered into between Silicon Valley Bank
("Silicon") and the creditor named above (the "Creditor").
1. Subordination. To induce Silicon to extend credit to the
above-named borrower (the "Borrower") at any time, in such manner, upon such
terms and for such amounts as may be mutually agreeable to Silicon and the
Borrower (but without obligation on Silicon's part to do so), the Creditor
hereby agrees to subordinate and does hereby subordinate payment by the Borrower
of any and all indebtedness of the Borrower, now or hereafter incurred, created
or evidenced, to the Creditor, however such indebtedness may be hereafter
extended, renewed or evidenced (together with all collateral, security and
guarantees, if any, for the payment of any such indebtedness) (collectively, the
"Junior Debt"), to the payment in full in cash to Silicon of any and all present
and future indebtedness, liabilities, guarantees and the other obligations, of
every kind and description, of the Borrower to Silicon (collectively, the
"Senior Debt"). The Creditor agrees not to ask for, demand, sue for, take or
receive any payments with respect to all or any part of the Junior Debt or any
security therefor, whether from the Borrower or any other source, unless and
until all of the Senior Debt has been paid and performed in full; PROVIDED,
HOWEVER, THAT THE BORROWER MAY PAY, AND THE CREDITOR MAY RECEIVE, AMOUNTS DUE
FROM TIME TO TIME AS PRINCIPAL AND INTEREST PAYMENTS ON THE JUNIOR DEBT AS LONG
AS (i) THERE IS NO PENDING "EVENT OF DEFAULT" AT THE TIME (AS SUCH TERM IS
DEFINED IN THE LOAN AND SECURITY AGREEMENT BETWEEN BORROWER AND SILICON), AND
(ii) SUCH PAYMENTS WOULD NOT CAUSE AN EVENT OF DEFAULT.
The word "indebtedness" is used herein in its most comprehensive sense
and includes without limitation any and all present and future loans, advances,
credit, debts, obligations, liabilities, representations, warranties, and
guarantees, of any kind and nature, absolute or contingent, liquidated or
unliquidated, and individual or joint. The Creditor represents and warrants to
Silicon that the Borrower is now indebted to the Creditor in the amounts, and
only the amounts, as described on the attached Exhibit A, pursuant to the notes
and/or documents described on the attached Exhibit A. The Creditor also
represents and warrants that the Junior Debt is unsecured. Upon request, the
Creditor shall render accountings to Silicon stating the balance due on the
Junior Debt, including accrued interest.
Any payment made by Borrower and/or received by the Creditor in
violation of any provision of this Agreement shall be segregated from all other
funds, and shall be held in trust by the Creditor for Silicon and shall be
promptly delivered, in kind, to Silicon for application in reduction of the
Senior Debt.
1
<PAGE> 2
2. Distribution of Assets or Liquidation Proceeds. The Creditor
further agrees that upon any distribution of money or assets, or readjustment of
the indebtedness of the Borrower whether by reason of foreclosure, liquidation,
composition, bankruptcy, arrangement, receivership, assignment for the benefit
of creditors or any other action or proceeding involving the Junior Debt, or the
application of the assets of the Borrower to the payment or liquidation thereof,
Silicon shall be entitled to receive payment in full in cash of all of the
Senior Debt prior to the payment of all or any part of the Junior Debt. In order
to enable Silicon to enforce its rights hereunder in any such action or
proceeding, Silicon is hereby irrevocably authorized and empowered in its
discretion (but without any obligation on Silicon's part) to receive and collect
any and all dividends or other payments or disbursements made thereon in
whatever form the same may be paid or issued and to apply same on account of the
Senior Debt. The Creditor further agrees to execute and deliver to Silicon such
assignments or other instruments as may be required by Silicon in order to
enable Silicon to enforce any and all such claims and to collect any and all
dividends or other payments or disbursements which may be made at any time on
account of all and any of the Junior Debt.
3. Transfer of Subordinated Debt. The Creditor shall not sell,
pledge, assign or otherwise transfer, at any time while this Agreement remains
in effect, any rights, claim or interest of any kind in or to any of the Junior
Debt, either principal or interest, without first notifying Silicon and making
such transfer expressly subject to this Subordination Agreement in form and
substance satisfactory to Silicon. The Creditor represents and warrants to
Silicon that the Creditor has not sold, pledged, assigned or other wise
transferred any of the Junior Debt, or any interest therein or collateral or
security therefor to any other person. The Creditor shall concurrently endorse
all notes and other written evidence of the Junior Debt with a statement that
they are subordinated to the Senior Debt pursuant to the terms of this
Agreement, in such form as Silicon shall require, and the Creditor shall exhibit
the originals of such notes and other written evidence of the Junior Debt to
Silicon so that Silicon can confirm that such endorsement has been made (but no
failure to do any of the foregoing shall affect the subordination of the Junior
Debt provided for herein, which shall be fully effective upon execution of this
Agreement).
4. Silicon's Rights. This is a continuing agreement of subordination
and Silicon may continue, without notice to the Creditor, to extend credit or
other accommodation or benefit and loan monies to or for the account of the
Borrower in reliance hereon. Silicon may at any time, in its discretion, renew
or extend the time of payment of all or any Senior Debt, modify the Senior Debt
and any terms or provisions thereof or of any agreement relating thereto, waive
or release any collateral which may be held therefor at any time, and make and
enter into any such agreement or agreements as Silicon may deem proper or
desirable relating to the Senior Debt, without notice to or further consent from
the Creditor and without any manner impairing or affecting this Agreement or any
of Silicon's rights hereunder. The Creditor waives notice of acceptance hereof,
notice of the creation of any Senior Debt, the giving or extension of any credit
by Silicon to the Borrower, or the taking, waiving or releasing of any security
therefor, or the making of any modifications, and the Creditor waives
presentment, demand, protest, notice of protest, notice of default, and all
other notices to which the Creditor might otherwise be entitled.
5. Mutual Waiver of Jury Trial. SILICON AND THE CREDITOR EACH HEREBY
WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON,
2
<PAGE> 3
ARISING OUT OF, OR IN ANY WAY RELATING TO: (a) THIS AGREEMENT; OR (b) ANY OTHER
PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN SILICON AND THE CREDITOR; OR
(c) ANY CONDUCT, ACTS OR OMISSIONS OF SILICON OR THE CREDITOR OR ANY OF THEIR
DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS
AFFILIATED WITH SILICON OR THE CREDITOR; IN EACH OF THE FOREGOING CASES, WHETHER
SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
6. Specific Performance. Silicon is hereby authorized to demand
specific performance of the provisions set forth in this agreement, and Creditor
hereby irrevocably waives any defense based on the adequate remedy at law which
might be asserted as a bar to such remedy of specific performance.
7. Continuing Effect. The provisions of this agreement shall
continue in effect and be reinstated if at any time payment or performance of
the Senior Debt is, pursuant to applicable law, rescinded or reduced in amount,
or must otherwise be restored or returned, whether as a preference, fraudulent
conveyance or otherwise, all as if such payment or performance had not been
made.
8. Governing Law; Jurisdiction; Venue. This agreement and all acts
and transactions hereunder and all rights and obligations of Silicon and
Creditor shall be governed by, and construed in accordance with, the laws of the
State of Washington. Creditor (i) agrees that all actions and proceedings
relating directly or indirectly hereto shall at Silicon's option, be litigated
in courts located within Washington, and that the exclusive venue therefor shall
be, at Silicon's option, King County, Washington; (ii) consents to the
jurisdiction and venue of any such court and consents to service of process in
any such action or proceeding by personal delivery or any other method permitted
by law; and (iii) waives any and all rights the Creditor may have to object to
the jurisdiction of any such court, or to transfer or change the venue of any
such action or proceeding.
9. General. This agreement sets forth in full all of the
representations and agreements of the parties with respect to the subject matter
hereof and supersedes all prior discussions, representations, agreements and
understandings between the parties. This Agreement may not be modified or
amended, nor may any rights hereunder be waived, except in a writing signed by
the parties hereto. In the event of any litigation between the parties based
upon, arising out of, or in any way relating to this Agreement, the prevailing
party shall be entitled to recover all of his costs and expenses (including
without limitation attorneys' fees at trial, and on appeal or review) from the
non-prevailing party. The parties agree to cooperate fully with each other and
take all further actions and execute all further documents from time to time as
may be reasonably necessary to carry out the purposes of this Agreement.
CREDITOR:
_________________________________________
SILICON:
3
<PAGE> 4
SILICON VALLEY BANK
By
Title
4
<PAGE> 5
BORROWER'S AGREEMENT
The undersigned Borrower hereby acknowledges receipt of a copy of the
foregoing Subordination Agreement and agrees not to pay any Junior Debt, except
as provided therein. If Borrower breaches this Agreement or any of the
provisions of the foregoing Subordination Agreement, Borrower agrees that, in
addition to all other rights and remedies Silicon has, all of the Senior Debt
shall, at Silicon's option and without notice or demand, become immediately due
and payable, unless Silicon expressly agrees in writing to waive such breach. No
waiver by Silicon of any breach shall be effective unless in writing signed by
one of Silicon's authorized officers, and no such waiver shall be deemed to
extend to or waive any other or subsequent breach. Borrower further agrees that
any default or event of default by Borrower on the Junior Debt, or under any
present or future instrument or agreement between Borrower and the Creditor, or
any breach of the foregoing Subordination Agreement by Borrower or the Creditor
shall constitute a default and event of default under all present and future
instruments and agreements between Borrower and Silicon. Borrower further agrees
that, at any time and from time to time, the foregoing Subordination Agreement
may be altered, modified or amended by Silicon and the Creditor without notice
to Borrower and without further consent by Borrower.
BORROWER:
U.S. ONLINE COMMUNICATIONS, INC.
By:
Title: ______________________________
5
<PAGE> 1
Exhibit 10.14
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made this __
day of June, 1998 by and between U.S. OnLine Communications, Inc., a Delaware
corporation (the "Company"), and U.S. OnLine Communications, L.L.C., a
Washington limited liability company ("Investor").
W I T N E S S E T H
WHEREAS, pursuant to that certain Asset Acquisition Agreement dated
March 27, 1998, the Company purchased substantially all of the assets and
assumed certain liabilities of Investor in exchange for (i) 800,000 shares (the
"Shares") of the Company's common stock, $.001 par value ("Common Stock"), (ii)
a 10% promissory note in the amount of $3,000,000, and (iii) cancellation of
indebtedness under that certain Pre-Acquisition Note dated March 30, 1998 (as
used herein, "Registrable Securities" means the Shares and any shares of Common
Stock issued or acquired with respect to the Shares (or any such additional
shares) in connection with stock splits, dividends, mergers, recapitalizations,
and similar dilutive events, but excluding (x) any shares of Common Stock that
may be sold subsequent to the date hereof pursuant to a registration statement,
and (y) any shares of Common Stock that subsequently become eligible for resale
pursuant to Rule 144(k) under the Securities Act of 1933, as amended
("Securities Act"), each on the date the Company notifies the Investor that it
intends to file a registration statement as described herein.
WHEREAS, in connection with the Asset Acquisition Agreement, the
Company has agreed to provide Investor with the registration rights described
herein to register the Registrable Securities for sale under the Securities Act,
following which Investor will register the Registrable Securities for resale
pursuant to Section 1(a) of this Agreement.
NOW THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties hereto agree as follows:
1. Piggyback Registration Rights.
(a) If the Company registers any Common Stock pursuant to the
Securities Act with the Commission on registration statement Form S-1, S-2, S-3,
SB-1, or SB-2 (the "Company Registration Statement"), the Company shall at its
sole expense (excluding fees and disbursements of counsel for the Investor and
underwriting discounts, if any, payable in respect of the sale of Registrable
Securities by the Investor), register under the federal securities laws all or,
at the option of the Investor, any portion of the Registrable Securities to the
extent necessary to permit the offer and sale of the Registrable Securities in
the public market. The Company will use its best efforts to cause the Company
Registration Statement filed pursuant to this Section 1(a) to become effective
as promptly as practicable after filing. The Company shall give the Investor at
least sixty (60) days of prior written notice of Company's intention to file the
Company Registration Statement. The Investor shall then have thirty (30) days
after receipt of such notice to advise the Company, in writing, of its election
to exercise the registration rights granted
1
<PAGE> 2
pursuant to this Section 1(a). If the Investor does not notify the Company
within thirty (30) days of its intention to exercise the registration rights
granted pursuant to this Section 1(a), the Investor shall be deemed to have
waived its registration rights with respect to the Company Registration
Statement that was the subject of notice. Notwithstanding the foregoing, if the
Company Registration Statement is filed in connection with a firm commitment
underwriting and the managing underwriter advises the Company, in writing, that
in its opinion the distribution of all or a portion of the Registrable
Securities requested to be registered by the Investor on the Company
Registration Statement, along with any other securities being registered on the
Company Registration Statement, would materially and adversely affect the
distribution of the securities to be registered on the Company Registration
Statement, then the Investor shall not be entitled to have its Registrable
Securities (or the portions thereof so designated by the managing underwriter)
included in the Company Registration Statement; provided, however, that no such
exclusion or reduction of Registrable Securities shall be made if any securities
of the Company are included in the Company Registration Statement for the
account of any person other than the Company and the Investor, unless the other
securities so included in such registration statement for such other person
shall also have been reduced by the same proportion (based upon the total amount
of securities requested to be registered by all persons) as the Registrable
Securities were reduced. Notwithstanding the foregoing, if and when the Company
files a registration statement with respect to an initial public offering of its
Common Stock in which Barington Capital Group, L.P. ("Barington") is the lead or
co-lead underwriter, the Company shall, at its sole cost and expense (other than
the fees and disbursements of the Investor's counsel and underwriting discounts,
if any), automatically and with no action necessary on the part of the Investor
register the Registrable Securities on the same terms and subject to the same
limitations described in this Section 1(a).
(b) If the Company files a registration statement with the Commission
(other than on Form S-1, S-2, S-3, SB-1, SB-2, S-4, or S-8, or any successor
forms) while any Registrable Securities are outstanding, and for any reason the
Investor will not otherwise have the benefit of an effective registration
statement as of the expected effective date of a registration statement filed
pursuant to this Section 1(b), the Company shall give the Investor at least
fifteen (15) days prior written notice of the filing of such registration
statement. If requested by the Investor, in writing, within thirty (30) days
after receipt of any such notice, the Company shall, its sole expense (excluding
fees and disbursements of counsel for the Investor and underwriting discounts,
if any, payable in respect of the sale of Registrable Securities by the
Investor), register all or, at the option of the Investor, any portion of the
Registrable Securities to the extent necessary to permit the offer and sale of
the Registrable Securities under the federal securities laws in the public
market. The Company will use its best efforts to cause a registration statement
filed pursuant to this Section 1(b) to become effective as promptly as
practicable after filing. Notwithstanding the foregoing, if a registration
statement is filed pursuant to this Section 1(b) in connection with a firm
commitment underwriting and the managing underwriter shall advise the Company,
in writing, that in its opinion the distribution of all or a portion of the
Registrable Securities requested to be included in the registration statement
concurrently with the other securities being registered by the Company, would
materially and adversely affect the distribution by the Company, then the
Investor shall not be entitled to have such Registrable Securities (or the
portions thereof so designated by the managing underwriter) included on such
registration statement, provided, however, that no such exclusion or reduction
of Registrable Securities shall be made if any securities of the Company are
included in such registration statement for the account of any person other than
the Company and the Investor, unless the other securities so included on such
registration statement for such other person shall also have been reduced by the
same proportion (based
2
<PAGE> 3
upon the total amount of securities requested to be registered by all persons)
as the Registrable Securities were reduced.
(c) In the event of a registration pursuant to the provisions of this
Section 1, the Company shall use its best efforts to cause the Registrable
Securities so registered to be qualified for sale under the state securities
laws of each jurisdiction reasonably requested by the Investor; provided,
however, that the Company shall not by reason of this Agreement be required to
qualify to do business in any state in which it is not otherwise required to
qualify to do business or to file a general consent to service of process.
(d) The Company shall update each registration statement covered by
this Agreement as required to comply with the federal securities laws, and shall
also update any application, document, or communication filed with state
securities regulators as required to be current and permit the Investor to offer
and sell Registrable Securities covered thereby; provided however, that with
respect to an initial public offering of the Common Stock of the Company in
which Barington is the lead or co-lead underwriter on which Registrable
Securities are included, the Company Registration Statement shall be kept
effective for two (2) years and updated when intended to be used, considering
any lock-up agreements. Notwithstanding the foregoing, the Company shall in no
event be required to keep any such registration statement covered by this
Agreement in effect for more than six (6) months from the date on which the
Investor is first free to sell the Registrable Securities, taking into account
any lock-up agreements. Notwithstanding the foregoing, if the Company is
required to keep any registration statement covered by this Agreement in effect
with respect to securities other than the Registrable Securities beyond the
period described in this Section 1(d), the Company shall keep the registration
statement in effect as it relates to the Registrable Securities for only so long
as the registration statement remains or is required to remain in effect with
respect to such other securities.
(e) In the event of a registration pursuant to the provisions of this
Section 1, the Company shall furnish the Investor with a reasonable number of
copies of the registration statement (including amendments, supplements, and
exhibits), all of which shall conform to the requirements of the federal
securities laws, and shall provide such other documents as the Investor may
reasonably request to facilitate the offer and sale of the Registrable
Securities.
(f) In the event of a registration pursuant to the provisions of this
Section 1, at the request of the Investor, the Company shall furnish on the date
that the Registrable Securities are delivered to the underwriter(s) for sale, if
the securities are being sold through underwriters or, if such securities are
not being sold through underwriters, on the effective date of the registration
statement (i) an opinion of Company counsel, dated as of the effective date of
the registration statement, in form and substance customarily given to
underwriters in underwritten offerings, addressed to the underwriters, if any,
and to the Investor and (ii) a letter from the independent certified public
accountants of the Company, dated as of the effective date of the registration
statement, in form and substance customarily given to underwriters in
underwritten offerings, addressed to the underwriters, if any, and to the
Investor. Any opinion or letter given shall be subject to all of the
qualifications, exceptions and conditions appropriate to the circumstances then
existing.
(g) In the event of a registration pursuant to the provisions of this
Section 1, the Company and the Investor shall enter into a cross-indemnity
agreement and a contribution
3
<PAGE> 4
agreement, each in customary form, with each underwriter, if any. If requested,
the Company and the Investor shall enter into an underwriting agreement
containing customary representations, warranties, allocation of expense and
closing conditions, with any underwriter who acquires any Registrable
Securities.
(h) Until all the Registrable Securities have been sold under a
Company Registration Statement, registration statement filed pursuant to Section
1(b) hereof, or pursuant to Rule 144 under the Securities Act, the Company
agrees to keep current in its filing of all reports, statements and other
filings required to be filed with the Commission pursuant to the federal
securities laws to permit the Registrable Securities to be sold under Rule 144
under the Securities Act.
(i) Until such time as the Company shall have fully performed its
obligations under this Section 1, the Company shall not grant piggyback
registration rights to any persons without the written consent of Investor.
Notwithstanding the foregoing, the Company may grant piggyback registration
rights to other persons so long as such rights are pari passu or subordinate to
the rights of Investor, provided, however, that nothing shall prohibit the
Company from granting demand registration rights to any person.
(j) If the Company, at any time after giving written notice of its
intention to register Common Stock pursuant to this Agreement, shall determine
for any reason not to cause the registration statement to become effective
pursuant to section 8(a) of the Securities Act, the Company shall give written
notice to the Investor and, after giving notice, the Company shall be relieved
of its obligation to register any Registrable Securities in connection with such
abandoned registration statement.
2. Indemnification and Contribution.
(a) Subject to the conditions set forth below, the Company agrees to
indemnify and hold harmless the Investor, its respective officers, directors,
partners, employees, agents, and counsel, and "controlling persons" of the
foregoing as defined in Section 15 of the Securities Act and Section 20(a) of
the Exchange Act, from and against any and all loss, liability, charge, claim,
damage, and expense whatsoever (which shall include, for all purposes of this
Section 2, reasonable attorneys' fees and any and all expenses whatsoever
incurred in investigating, preparing, or defending against any litigation,
commenced or threatened, or any claim whatsoever, and any and all amounts paid
in settlement of any claim or litigation), as and when incurred, arising out of,
based upon, or in connection with (i) any untrue statement or alleged untrue
statement of a material fact contained (A) in any registration statement or
prospectus (including amendments and supplements), relating to the offer and
sale of Registrable Securities, or (B) in any application, other document or
communication (in this Section 2 collectively called an "application") executed
by or on behalf of the Company and filed in any state in order to register or
qualify any of the Registrable Securities under securities laws, or filed with
the Commission or any securities exchange or NASDAQ; (ii) any omission or
alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, unless such statement
or omission was made in reliance upon and in conformity with written information
furnished to the Company with respect to the Investor by or on behalf of the
Investor expressly for inclusion in any registration statement, prospectus, or
any amendment or supplement thereto, or in any application, as the case may be,
or (iii) any breach of any representation, warranty, covenant, or agreement of
the Company
4
<PAGE> 5
contained in this Agreement or any agreement pursuant to which the Registrable
Securities were issued. The foregoing agreement to indemnify shall be in
addition to any liability the Company may otherwise have to the Investor.
(b) If any action is brought against the Investor or any of its
respective officers, directors, partners, employees, agents, or counsel, or any
controlling persons of such person (an "indemnified party") in respect of which
indemnity may be sought against the Company pursuant to Section 2(a), such
indemnified party or parties shall promptly notify the Company, in writing, of
the institution of such action (but the failure so to notify shall not relieve
the Company from any liability under this Agreement unless the Company shall
have been materially prejudiced by such failure) and the Company shall promptly
assume the defense of such action, including the employment of counsel
(reasonably satisfactory to such indemnified party or parties) and payment of
expenses. Such indemnified party or parties shall have the right to employ their
own counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party or parties unless the employment of such counsel shall
have been authorized, in writing, by the Company in connection with the defense
of such action or the Company shall not have employed counsel reasonably
satisfactory to such indemnified party or parties to have charge of the defense
of such action or such indemnified party or parties shall have reasonably
concluded that there may be one or more legal defenses available to it or them
or to other indemnified parties which are different from or additional to those
available to the Company, in any of which events such fees and expenses shall be
borne by the Company and the Company shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties.
Notwithstanding any other provision of this Section 2, the Company shall not be
liable for any settlement of any such claim or action effected without its
written consent, which shall not be unreasonably withheld. The Company agrees
promptly to notify the Investor of the commencement of any litigation or
proceedings against the Company or any of its officers or directors in
connection with the sale of any Registrable Securities or any registration
statement or prospectus (including amendments or supplements), or any
application relating to any sale of any Registrable Securities.
(c) The Investor agrees to indemnify and hold harmless the Company,
each director of the Company, each officer of the Company who signed any
registration statement covering Registrable Securities held by the Investor,
each "controlling person," if any, who controls the Company within the meaning
of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, and
their respective counsel, to the same extent as the foregoing indemnity from the
Company to the Investor in Section 2(a), but only with respect to statements or
omissions, if any, made in any registration statement or prospectus (including
amendments or supplements), or any amendment or supplement thereto, or in any
application, in reliance upon and in conformity with written information
furnished to the Company for inclusion in any such registration statement or
prospectus, including any amendment or supplement thereto, or in any
application, as the case may be.
(d) If any action shall be brought against the Company or any other
person so indemnified based on any such registration statement or prospectus, or
any amendment or supplement thereto, or in any application, and in respect of
which indemnity may be sought against the Investor pursuant to Section 2(c), the
Investor shall have the rights and duties given to the Company, and the Company
and each other person so indemnified shall have the rights and duties given to
the indemnified parties, by the provisions of Section 2(a) and Section 2(b),
including any and all of the procedures set forth therein.
5
<PAGE> 6
(e) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 2(a) or
2(c) (subject to the limitations in those Sections) but it is found in a final
judicial determination, not subject to further appeal, that such indemnification
may not be enforced in such case, even though this Agreement expressly provides
for indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Securities Act, the Exchange Act or otherwise, then
the Company (including for this purpose any contribution made by or on behalf of
any director of the Company, any officer of the Company who signed any such
registration statement, any controlling person of the Company, and their
respective counsel), as one entity, and the Investor (including for this purpose
any contribution by or on behalf of an indemnified party), as a second entity,
shall contribute to the losses, liabilities, claims, damages, and expenses
whatsoever to which any of them may be subject, on the basis of relevant
equitable considerations such as the relative fault of the Company and the
Investor in connection with the facts which resulted in such losses,
liabilities, claims, damages, and expenses. The relative fault, in the case of
an untrue statement, alleged untrue statement, omission, or alleged omission,
shall be determined by, among other things, whether such statement, alleged
statement, omission, or alleged omission relates to information supplied by the
Company or by the Investor, and the parties' relative intent, knowledge, access
to information, and opportunity to correct or prevent such statement, alleged
statement, omission, or alleged omission. The Company and the Investor agree
that it would be unjust and inequitable if the respective obligations of the
Company and the Investor for contribution were determined by pro rata or per
capita allocation of the aggregate losses, liabilities, claims, damages, and
expenses (even if the Investor and the other indemnified parties were treated as
one entity for such purpose) or by any other method of allocation that does not
reflect the equitable considerations referred to in this Section 2(e). No person
guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who is not
guilty of such fraudulent representation. For purposes of this Section 2(e),
each "controlling person," if any, of the Investor within the meaning of Section
15 of the Securities Act or Section 20(a) of the Exchange Act, and each officer,
director, partner, employee, agent, and counsel of the Investor or "controlling
person" shall have the same rights to contribution as the Investor or
"controlling person" of the Investor and each "controlling person," if any, of
the Company within the meaning of Section 15 of the Securities Act or Section
20(a) of the Exchange Act, each officer of the Company who shall have signed any
such registration statement, each director of the Company, and its or their
respective counsel shall have the same rights to contribution as the Company,
subject in each case to the provisions of this Section 2(e). Notwithstanding any
other provision of this Section 2(e), no party shall be liable for contribution
with respect to the settlement of any claim or action effected without its
written consent. This Section 2(c) is intended to supersede any right to
contribution under the Securities Act, the Exchange Act or otherwise.
6
<PAGE> 7
3. General.
(a) Amendments and Waivers. No amendment or waiver of any term or
provision of this Agreement shall be effective unless in made writing and signed
by the party to be charged. The waiver by any party of a breach of any term or
provision of this Agreement shall not be construed as a waiver of any subsequent
breach.
(b) Notices. Except as otherwise provided in this Agreement, notices
and other communications under this Agreement shall be made in writing and shall
be deemed to have been duly given on the date received by hand delivery,
overnight delivery, facsimile transmission or registered mail, postage prepaid,
addressed as follows:
to the Company:
U.S. OnLine Communications, Inc.
8307 Shoal Creek Boulevard
Austin, Texas 78757
Attn: Chief Executive Officer
Telephone No. (512) 451-8765
Facsimile No. (512) 451-8732
and to the Investor:
U.S. OnLine Communications, L.L.C.
8307 Shoal Creek Boulevard
Austin, Texas 78757
Attn: Chief Executive Officer
Telephone No. (512) 451-8765
Facsimile No. (512) 451-8732
The Company and the Investor may change the address to which such notice or
other communications are to be sent by written notice given in accordance with
this Section 3(b).
(c) Company Representations. The Company represents and warrants to
the Investor that:
(i) The Company has all requisite power and authority to enter
into this Agreement and to consummate the transactions contemplated hereby;
(ii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of the Company;
(iii) This Agreement has been duly executed and delivered by the
Company and (assuming the due authorization, execution and delivery hereof by
the Investor) constitutes a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except that such
enforceability may be subject to (i) bankruptcy, insolvency, reorganization or
other similar laws affecting or relating to enforcement of creditors' rights
generally, and (ii) general equitable principles;
7
<PAGE> 8
(iv) The execution and delivery of this Agreement does not, and
the consummation of the transactions contemplated hereby and compliance with the
provisions hereof will not, result in any violation or default (with or without
notice or lapse of time, or both) under (i) any provision of the charter or
organizational documents of the Company, or (ii) any judgment, order, decree,
statute, law, ordinance, rule or regulation by which the Company is bound or to
which any of its properties or assets is subject, other than, in which any of
its properties or assets is subject, other than, in the case of clause (ii)
hereof, any such violation or default that would not reasonably be expected to
have a material adverse effect on the financial condition or operations of the
Company and its consolidated subsidiaries, taken as a whole, and would not
impair the ability of the Company to perform its obligations under this
Agreement; and
(v) No filing or registration with, or authorization, consent or
approval of, any governmental authority is required by or with respect to the
Company in connection with the execution and delivery by the Company of this
Agreement or the consummation by the Company of the transactions contemplated
hereby, except as otherwise expressly provided herein or in the agreements
pursuant to which the Registrable Securities were issued.
(d) Investor Representations. The Investor represents and warrants to
the Company that:
(i) The Investor has all requisite power and authority to enter
into this Agreement and to consummate the transactions contemplated hereby;
(ii) This Agreement has been duly executed and delivered by the
Investor and (assuming the due authorization, execution and delivery hereof by
the Company) constitutes a valid and binding obligation of the Investor,
enforceable against the Investor in accordance with its terms, except that such
enforceability may be subject to (i) bankruptcy, insolvency, reorganization or
other similar laws affecting or relating to enforcement of creditors' rights
generally and (ii) general equitable principles;
(iii) The execution and delivery of this Agreement do not, and
the consummation of the transactions contemplated hereby and compliance with the
provisions hereof will not, result in any violation of or default (with or
without notice or lapse of time, or both) under any judgment, order, decree,
statute, law, ordinance, rule or regulation by which the Investor is bound or to
which any of its properties or assets is subject; and
(iv) No filing or registration with, or authorization, consent or
approval of, any governmental authority is required by or with respect to the
Investor in connection with the execution and delivery by such Investor of this
Agreement or the consummation by such Investor of the transactions contemplated
hereby, except as otherwise expressly provided herein.
(e) The Investor agrees not to effect any public sale or distribution
of Registrable Securities, or any securities convertible into or exchangeable or
exercisable for Registrable Securities, during the seven (7) days prior to and
the period after (as requested by the underwriters, but not to exceed 180 days)
the effectiveness of the first registration of the Company's securities to be
sold in an underwritten public offering for the account of the Company; provided
that, all officers and directors of the Company agree to be similarly bound
8
<PAGE> 9
with respect to equity securities of the Company held by such officers and
directors; provided further, that any discretionary waiver or termination of the
restrictions of such agreements by the representatives of the underwriters shall
apply to all persons subject to such agreements pro rata based on the number of
equity securities held by such persons and subject to such agreements, and
provided further that the Investor is given reasonable notice of such
registration. Without limiting the foregoing, it is expressly agreed that the
provisions of this Section 3(e) shall not (i) apply to any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock acquired by the Investor directly from the underwriters in a
registered public offering of the Company's securities or in an established
trading market from any party other than the Company, and (ii) apply to any
initial public offering of Common Stock in which Barington is the lead or
co-lead underwriter.]
(f) The rights granted under this Agreement may be assigned or
otherwise conveyed by the Investor, in compliance with federal and applicable
state securities laws, to any transferee or assignee who, after such assignment
or transfer, holds at least 3,300 shares of Registrable Securities (subject to
appropriate adjustment for stock splits, stock dividends, mergers,
recapitalizations and other similarly dilutive events). For the purposes of
determining the number of shares of Registrable Securities held by a transferee
or assignee, the holdings of a transferee or assignee who is (A) a shareholder,
partner, retired partner, member, retired member or beneficiary of an Investor;
(B) a spouse or child of a shareholder, partner, retired partner, member,
retired member or beneficiary of an Investor; (C) a trust for the benefit of the
persons set forth in (A) or (B) or for the issue of the persons set forth in (A)
or (B); and (D) an entity (corporation, partnership, limited liability company
or other juridical entity) of which at least 75 percent in interest is owned or
controlled, directly or indirectly through other entities, or by one or more of
the persons set forth in (A), (B) or (C), shall be aggregated together with the
corporation, partnership or limited liability company as the case may be.
(g) Miscellaneous.
(i) This Agreement shall be binding upon, inure to the benefit
of, and be enforceable by the parties hereto and their respective successors and
assigns.
(ii) This Agreement constitutes the entire understanding between
the parties with respect to the subject matter hereof and supersedes any and all
previous agreements among them relating to the subject matter hereof, whether
written, oral or implied.
(iii) This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Delaware, without giving effect to the
conflicts of law principles thereof.
(iv) The section and other headings contained in this Agreement
are for reference purposes only and shall not affect the meaning or
interpretation of this Agreement.
(v) This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original and all of which together shall
be deemed to be one and the same agreement.
(vi) Should any term or condition of this Agreement be determined
by a court of competent jurisdiction to be unenforceable for any reason
including, without limitation, violation of statute or public policy, such
provision shall, if possible, be reformed by the parties
9
<PAGE> 10
hereto, or if the parties cannot agree, by the appropriate court of competent
jurisdiction to comply with applicable legal requirements in a matter that is as
close in its intent and effect to the original provision as possible or, if such
reformation cannot be accomplished shall be stricken without affecting the
validity of any other term or condition of this Agreement.
(vii) Each party hereto shall do and perform or cause to be done
and performed all such further acts and things and shall execute and deliver all
such other agreements, certificates, instruments, and documents as any other
party hereto reasonably may request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
U.S. ONLINE COMMUNICATIONS, INC.
By: _______________________________
Robert G. Solomon
Chief Executive Officer
U.S. ONLINE COMMUNICATIONS, L.L.C.
By: _______________________________
Paul H. Pfleger
President
10
<PAGE> 1
EXHIBIT 10.16
<TABLE>
<S> <C> <C>
6416 Pacific Hwy. E., Tacoma WA 98424
T&W Funding Company V, L.L.C. P.O. Box 3028, Federal Way WA 98063 Lease Number 1926101
- ----------------------------------------------------------------------------------------------------
ADDRESSEE: U.S. ONLINE COMMUNICATIONS. L.L.C.
ADDRESS: 8307 Shoal Creek Blvd. EQUIPMENT: DTI - 889 Bendix Dr.
Austin, TX 78757 LOCATION: Jackson TN 38301 (Madison County)
EQUIPMENT & VENDOR(S): SEE SCHEDULE "A" ATTACHED HERETO AND MADE A PART HEREOF
TERMS: 36 Monthly Rentals of $18,738.22 + Applicable TN Tax of 0.00 = 18,738.22 (U.S.) SECURITY DEPOSIT: $18,738.22
-------------------------------------------------------------------------------- ----------
</TABLE>
TERMS AND CONDITIONS OF LEASE
LEASE. Lessee hereby leases from Lessor, and Lessor leases to Lessee,
the personal property described above, together with any replacement parts,
additions, repairs or accessories nor or hereafter incorporated in or affixed to
it (hereinafter referred to as the "Equipment").
ACCEPTANCE OF EQUIPMENT. Lessee agrees to inspect the Equipment and to
execute an Acknowledgement and Acceptance of Equipment by Lessee notice as
provided by Lessor, after the equipment has been delivered and after Lessee is
satisfied that the Equipment is satisfactory in every respect Lessee hereby
authorizes Lessor to insert in this Lease serial numbers or other identifying
data with respect to the Equipment.
- --------------------------------------------------------------------------------
DISCLAIMER OF WARRANTIES AND CLAIMS; LIMITATION OF REMEDIES. THERE ARE
NO WARRANTIES BY OR ON BEHALF OF LESSOR. Lessee acknowledges and agrees by his
signature below as follows:
(a) LESSOR MAKES NO WARRANTIES EITHER EXPRESS OR IMPLIED AS TO THE
CONDITION OF THE EQUIPMENT, ITS MERCHANTABILITY, ITS FITNESS OR SUITABILITY FOR
ANY PARTICULAR PURPOSE, ITS DESIGN, ITS CAPACITY, ITS QUALITY, OR WITH RESPECT
TO ANY CHARACTERISTICS OF THE EQUIPMENT;
(b) Lessee has fully inspected the Equipment which it has requested
Lessor to acquire and lease to Lessee, and the Equipment is in good condition
and to Lessee's complete satisfaction;
(c) Lessee leases the Equipment "as is" and with all faults;
(d) Lessee specifically acknowledges that the Equipment is leased to
Lessee solely for commercial or business purposes and not for personal, family,
household, or agricultural purposes;
(e) If the Equipment is not properly installed, does not operate as
represented or warranted by the supplier or manufacturer, or is unsatisfactory
for any reason, regardless of cause or consequence, Lessee's only remedy, if
any, shall be against the supplier or manufacturer of the Equipment and not
against Lessor;
(f) Provided Lessee is not in default under this Lease, Lessor
assigns to Lessee any warranties made by the supplier or the manufacturer of the
Equipment;
(g) LESSEE SHALL HAVE NO REMEDY FOR CONSEQUENTIAL OR INCIDENTAL
DAMAGES AGAINST LESSOR; and
(h) NO DEFECT, DAMAGE, OR UNFITNESS OF THE EQUIPMENT FOR ANY PURPOSE
SHALL RELIEVE LESSEE OF THE OBLIGATION TO PAY RENT OR RELIEVE LESSEE OF ANY
OTHER OBLIGATION UNDER THIS LEASE.
CHOICE OF LAW, JURISDICTION AND VENUE. This Lease shall INITIALS:
not be effective until signed by Lessor at its principal place of
business listed above, Tacoma, WA, and shall be considered to ---------
have been made and shall be construed under the laws of the State
of Washington. Lessee agrees that should any legal action, suit,
or proceeding be initiated by any party to this Agreement with
regard to or arising out of this Lease, or the Equipment covered
hereby, such action shall be brought in the Superior Court of the
State of Washington in and for all parties consent to the
jurisdiction of such Court as to all such actions.
- --------------------------------------------------------------------------------
STATUTORY FINANCE LEASE. Lessee agrees and acknowledges that it is the
intent of both parties to this Lease that it qualify as a statutory finance
lease under Article 2A of the Uniform Commercial Code. Lessee acknowledges and
agrees that lessee has selected both: (1) the Equipment; and (2) the supplier
from whom Lessor is to purchase the Equipment. Lessee acknowledges that Lessor
has not participated in any way in Lessee's selection of the Equipment or of the
supplier, and Lessor has not selected, manufactured, or supplied the Equipment.
<PAGE> 2
LESSEE IS ADVISED THAT IT MAY HAVE RIGHTS UNDER THE CONTRACT EVIDENCING
THE LESSOR'S PURCHASE OF THE EQUIPMENT FROM THE SUPPLIER CHOSEN BY LESSEE AND
THAT LESSEE SHOULD CONTACT THE SUPPLIER OF THE EQUIPMENT FOR A DESCRIPTION OF
ANY SUCH RIGHTS.
ASSIGNMENT BY LESSEE PROHIBITED. Lessee is expressly prohibited from
making any assignment of this Lease, subleasing the Equipment or any interest
therein, pledging or transferring the Lease, or otherwise disposing of the
Equipment covered hereby, in the absence of prior written consent of Lessor.
RENTAL PAYMENTS. Lessee agrees to pay rent in accordance with the terms
herein, the first monthly payment to be due on the 25th day of May, 1997, and a
like amount on the same day of each succeeding calendar month thereafter,
payments to be made at Lessor's address set forth above, or as otherwise
directed by Lessor.
(a) THIS LEASE IS NOT CANCELABLE OR TERMINABLE BY LESSEE.
(b) SEE REVERSE SIDE FOR ADDITIONAL TERMS AND CONDITIONS WHICH ARE A
PART OF THIS LEASE.
(c) LESSEE UNDERSTANDS AND ACKNOWLEDGES THAT NO BROKER OR SUPPLIER,
NOR ANY SALESMAN, BROKER, OR AGENT OF ANY BROKER OR SUPPLIER IS AN AGENT OF
LESSOR, NO BROKER OR SUPPLIER, NOR ANY SALESMAN, BROKER, OR AGENT OF ANY BROKER
OR SUPPLIER IS AUTHORIZED TO WAIVE OR ALTER ANY TERM OR CONDITION OF THIS LEASE
AND NO REPRESENTATION AS TO THE EQUIPMENT OR ANY OTHER MATTER BY THE BROKER OR
SUPPLIER, NOR ANY SALESMAN, BROKER, OR AGENT OF ANY BROKER OR SUPPLIER, SHALL IN
ANY WAY EFFECT LESSEE'S DUTY TO PAY THE RENTALS AND TO PERFORM LESSEE'S
OBLIGATIONS SET FORTH IN THIS LEASE.
LESSEE ACKNOWLEDGES HAVING READ AND UNDERSTOOD ALL OF THE TERMS AND
PROVISIONS OF THIS LEASE, INCLUDING THE REVERSE SIDE HEREOF, AND AGREES TO BE
BOUND BY ALL OF THE TERMS AND PROVISIONS CONTAINED HEREIN UPON THE EXECUTION OF
THIS LEASE AGREEMENT OR EARLIER ACCEPTANCE OF THE LEASED EQUIPMENT.
<TABLE>
<S> <C>
LESSOR: T & W Funding Company V, L.L.C. LESSEE: U.S. ONLINE COMMUNICATIONS, L.L.C.
/S/ DATE 4/28/97 /S/ DATE 4-24-97
- ---------------------------------------- -------------------------------------------
J. Robert Bozman, President
DATE
-------------------------------------------
</TABLE>
2
<PAGE> 1
EXHIBIT 10.17
AGREEMENT
THIS SHAREHOLDERS AGREEMENT (the "Agreement") is made as of March 30,
1998, among PAUL H. PFLEGER ("Pfleger"), U.S. ONLINE COMMUNICATIONS, INC., a
Delaware corporation (the "Company"), and the individuals designated as
"Management Shareholders" on the signature pages to this Agreement.
A. The Company and U.S. OnLine Communications, L.L.C., a Washington
limited liability company (the "LLC") are parties to an Asset Acquisition
Agreement dated as of March 27, 1998 (the "Asset Agreement"), under which,
subject to the fulfillment of certain conditions, the LLC has agreed to sell
substantially all of its assets to the Company.
B. Pfleger has guaranteed certain obligations of the LLC, which
obligations will become obligations of the Company upon consummation of the
Asset Agreement. As a material inducement to Pfleger's approval of the Asset
Agreement in his capacity as a member of the LLC, the Management Shareholders
and the Company have agreed to enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the other
covenants set forth herein, the Management Shareholders, the Company and Pfleger
hereby agree as follows:
1. Restriction on Transfer. During the term of this Agreement, each
Management Shareholder agrees that he or she shall not sell, devise, encumber,
pledge or otherwise transfer (whether by operation of law or otherwise) the
Shares owned by such Management Shareholder, except to Pfleger in compliance
with Section 3 below, or to the Company pursuant to the Award Certificates For
Restricted Stock Agreement dated March 10, 1998. As used in this Agreement, the
word "Shares" refers to all of the shares of common stock of the Company now
owned by a Management Shareholder, and any shares of common or preferred stock
of the Company received in respect of such shares, whether pursuant to a stock
split, reverse stock split, stock dividend or otherwise.
2. Grant of Voting Rights. The following grant of voting rights will be
effective solely upon the Company's failure to complete a public offering of its
common stock (the "Offering") pursuant to the Securities Act of 1933, as amended
(the "Act"), on or before September 30, 1998 (the "Effective Date"). If the
Company fails to complete the Offering under the Act on or before the Effective
Date, effective upon the Effective Date and without the requirement of any
further action by the Company, the Management Shareholders or Pfleger, each of
the Management Shareholders hereby irrevocably and unconditionally appoints
Pfleger as his or her proxy to vote the Shares as set forth below. This
appointment grants Pfleger the right to vote in Pfleger's sole discretion all
Shares which the Management Shareholder would be entitled to vote at any meeting
SHAREHOLDERS AGREEMENT PAGE 1
- --------------------------------------------------------------------------------
<PAGE> 2
of shareholders of the Company, upon any and all matters that may properly come
before such meetings. In addition, as the Management Shareholders' proxy,
Pfleger may execute any and all written consent documents that come before the
shareholders of the Company in lieu of a meeting of shareholders. This
appointment is coupled with an interest, and the Management Shareholders
acknowledge that the term of this appointment is for more than 11 months and is
of indefinite duration, and shall remain in effect until this Agreement is
terminated as provided in Section 5 below.
3. Grant of Purchase Option. If the Company fails to complete the
Offering under the Act on or before the Effective Date, effective upon the
Effective Date and without the requirement of any further action by the Company,
the Management Shareholders or Pfleger, each of the Management Shareholders
hereby irrevocably and unconditionally grants Pfleger the option, but not the
obligation, to purchase all or any portion of such Management Shareholder's
Shares on the terms and conditions set forth herein. Pfleger may exercise this
option at any time after the Effective Date and on or before September 30, 2000,
by providing written notice thereof to each Management Shareholder from whom he
elects to acquire such Shares. The purchase price for any Shares purchased by
Pfleger under this option shall be $0.01 per Share. Closing of the purchase of
any Shares purchased by Pfleger under this Section shall take place in the
offices of the Company within five (5) days following Pfleger's provision of
written notice of exercise of the option to the Management Shareholder(s) from
whom he is purchasing Shares. At closing, Pfleger shall deliver the purchase
price for the purchased Shares by check payable to the Management Shareholder in
U.S. funds. The Management Shareholder shall deliver title to the Shares free
and clear of all liens, claims and encumbrances, and shall deliver the
certificate for the Shares duly endorsed to permit transfer of the Shares to
Pfleger on the books and records of the Company, or accompanied by a duly
executed assignment separate from certificate. Each party agrees to execute and
deliver such assignments, certificates, receipts, instruments, agreements and
other documents, and to take such other actions, as may be reasonably requested
by the other party to evidence the purchase and sale of the Shares as
contemplated in this Section.
4. Legend. Each party to this Agreement consents to the placement of a
legend on all stock certificates which represent the Shares, substantially in
the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS
ON VOTING, SALE, TRANSFER , PLEDGE OR OTHER DISPOSITION PURSUANT TO A
SHAREHOLDERS AGREEMENT DATED AS OF MARCH 30, 1998, AMONG THE HOLDER, THE
COMPANY AND CERTAIN OTHERS."
5. Termination. This Agreement shall remain in full force and effect
until terminated by (i) the written agreement of the Company, Pfleger and
Management Shareholders holding Shares representing at that time not less than
seventy-five percent
SHAREHOLDERS AGREEMENT PAGE 2
- --------------------------------------------------------------------------------
<PAGE> 3
(75%) of all Shares owned by Management Shareholders and then outstanding, or
(ii) the completion of the Offering by the Company, in which event this
Agreement and the rights and restrictions placed on the Shares hereunder will
terminate without the requirement of any action by Pfleger, the Company or the
Management Shareholders.
6. Assignment. No party may assign its rights or obligations under this
Agreement to any other party without the written consent of the other parties,
which will not be withheld unreasonably.
7. Resolution of Disputes. Any dispute arising under or related to this
Agreement shall be resolved by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association, in Seattle,
Washington. The arbitration hearing shall be conducted by a single neutral
arbitrator, who shall be an active Washington State Bar member in good standing.
In addition to all other powers, the arbitrator shall have the right to
determine all issues of arbitrability and shall have the authority to issue
subpoenas. The parties shall be entitled to conduct discovery in connection with
any claims that are arbitrated under this Section. All discovery shall be
completed within ninety (90) days after the request for arbitration is filed
with the appropriate authorities and the first hearing date shall be set for no
later than thirty (30) days after the completion of discovery. The arbitrator
may extend such period for any reason, including without limitation, legal
objections raised to such discovery or unavailability of a witness due to
absence or illness. Depositions may be taken by either party upon seven (7) days
written notice, and requests for production or inspection of documents shall be
responded to within ten days (10) after service. All disputes relating to
discovery that cannot be resolved by the parties shall be submitted to the
arbitrator, whose decision shall be final and binding upon the parties. The
prevailing party in any such arbitration shall be entitled to an award of its
reasonable attorneys' fees and expenses. Any party shall be entitled to file an
action in King County Court, which shall have jurisdiction over the parties to
this Agreement, to compel or aid in the arbitration, or for injunctive relief.
Judgment on any arbitration award may be entered in any court of appropriate
jurisdiction.
8. Notices. All notices, requests, demands, and other communications
called for by this Agreement shall be in writing and shall be deemed to have
been given upon delivery if personally delivered (including delivery by
confirmed telephone facsimile or overnight commercial delivery service with
receipt) or three (3) days after deposit in the U.S. Mail, first class, postage
prepaid for registered or certified delivery:
(a) If to the Management Shareholders, to the addresses listed
on the signature page of this Agreement.
SHAREHOLDERS AGREEMENT PAGE 3
- --------------------------------------------------------------------------------
<PAGE> 4
(b) If to Pfleger, to:
Paul H. Pfleger
1210 Third Avenue
Suite 5400
Seattle, WA 98101
Fax No. (206) 628-8031
(c) If to Company, to:
U.S. OnLine Communications, Inc.
8307 Shoal Creek Boulevard
Austin, TX 78730
Fax No. (512) 451-8732
Attn: President
9. Counterparts. For the convenience of the parties, this Agreement may
be executed in one or more counterparts, each of which shall be deemed to be an
original but all of which together shall constitute one and the same instrument.
10. The headings of the articles and sections are inserted for
convenience of reference only and are not intended to be a part of, or affect
the meaning or interpretation of, this Agreement.
11. This Agreement shall benefit and bind the parties and their
respective successors and assigns.
12. This Agreement shall be construed and enforced in accordance with
the laws of the State of Delaware.
13. Entire Agreement; Amendment. This Agreement contains the entire
understanding of the parties relating to the subject matter hereof and
supersedes any prior agreements, written or oral, with respect to the same
subject matter. This Agreement may be amended by written instrument executed by
all of the parties hereto.
14. Each party shall separately bear the expenses incurred by it in
connection with this Agreement; provided, however, that if either party shall
commence legal action to specifically enforce or otherwise seek redress under or
for breach of this Agreement, the prevailing party in such action shall be
entitled to recover its costs and reasonable attorneys' fees therein, including
costs and fees incurred in any appellate proceeding.
15. Any of the terms or conditions of this Agreement may be waived at
any time by the party which is entitled to the benefit thereof.
SHAREHOLDERS AGREEMENT PAGE 4
- --------------------------------------------------------------------------------
<PAGE> 5
16. Construction. The parties have participated jointly in the
negotiation and drafting of this Agreement. If an ambiguity or question of
intent or interpretation arises, this Agreement shall be construed as if drafted
jointly by the parties and no presumption or burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship of any of the
provisions of the Agreement.
17. Further Assurances. Each party agrees to execute and deliver any
agreements, certificates, documents and instruments, and to take such other
actions, as may be reasonably requested by the other parties to evidence the
transactions contemplated in this Agreement.
18. Spousal Consent. The execution of this Agreement by a Management
Shareholder's Spouse signifies that he or she authorizes, ratifies, confirms and
approves the execution of this Agreement by the Management Shareholder, with the
same force and effect as if a party hereto, and further appoints his or her
spouse as his or her attorney-in-fact to exercise all rights he or she may have
with respect to ownership of any Shares, including the encumbrance and
disposition of such Shares.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date and year first above written.
PFLEGER:
--------------------------------------------
Paul H. Pfleger
THE COMPANY:
U.S. ONLINE COMMUNICATIONS, INC.
By:
-----------------------------------------
Robert Solomon, Chief Executive Officer
MANAGEMENT SHAREHOLDERS:
--------------------------------------------
Print Address:
-----------------------------
-----------------------------
-----------------------------
SHAREHOLDER'S SPOUSE:
Signature:
-----------------------------------
Print Name:
----------------------------------
SHAREHOLDERS AGREEMENT PAGE 5
- --------------------------------------------------------------------------------
<PAGE> 1
EXHIBIT 10.18
VIDEO SERVICES AGREEMENT
This Video Services Agreement (this "Agreement") is made as of
_____________, 199 between ________________________, a , with an office address
at __________________________, Fax No. (____) ___-____ ("Owner"), and U.S.
OnLine Communications, Inc., a Delaware corporation, d/b/a U.S. OnLine, with an
office address at 10300 Metric Blvd., Austin, Texas 78758, Fax No. (512)
451-8732 ("Operator"). Owner's United States federal taxpayer identification
number is _____________.
A. Owner desires Operator to provide video services to the multi-family
residential complex known as the , located at , the legal description of which
is set forth as Exhibit A (the "Property").
B. Owner is (CHECK ONE): ____ (i) the owner of the Property; (ii) ____
the manager of or the operator of the Property; (iii) ____ the cooperative or
condominium association for the Property; or (iv) ____ otherwise owns, manages,
controls or operates the Property. Owner has the authority to enter into this
Agreement to allow Operator to make use of the Property as described herein.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants set forth below, Owner and Operator agree as follows:
1. OPERATOR'S RIGHTS AND OBLIGATIONS.
(a) Owner hereby grants to Operator: (I) the right to install,
own, operate, maintain, repair, replace and remove (the "Work") wire, cable and
associated equipment, including but not limited to satellite receivers,
antennas, conduit, duct, L-Band equipment, innerduct, computers, switches,
nodes, converters and laterals (the "System") on, in, under, over and on the
roof and grounds of the Property; and (II) to the fullest extent allowed by law,
the sole and exclusive right to provide to the Property multichannel video and
audio programming, including cable television services, satellite master antenna
television, 18 gigahertz technology, L-Band and digital conversion, direct feed
from a local franchise cable provider or video delivery provider, multichannel
multipoint distribution service, direct broadcast satellite, telephone company
provided video programming delivery services (including a service commonly known
as open video systems) and video on demand, which may be delivered through any
medium including coaxial cable, copper wire, fiber optics, wireless, telephone
cable, satellite, master antenna, microwave, and other forms of video
distribution, whether now existing or hereafter developed (the "Services"). If
there is a master antenna system at the Property, Owner will terminate such
system upon activation of the Services. The programming will initially consist
of the basic and premium services described in Exhibit B.
(b) Operator will pay Owner the fees described in Exhibit C for
the use of and access to its Property and for Owner's provision of marketing
support to Operator.
(c) Owner will provide at no cost to Operator a locked room on
the Property for Operator's equipment (the "System Site"). The System Site will
meet the specifications set forth on Exhibit D. Operator, at its cost, will
construct and maintain the interior of the System Site.
(d) Owner will make available existing building riser conduit,
cable, wire and innerduct to Operator so that Operator may install, access and
maintain the System and provide the Services.
VIDEO SERVICES AGREEMENT PAGE 1
REV. 06/05/98
<PAGE> 2
(e) Owner will permit Operator to connect the System from the
streets or sidewalks to the Property via underground, ground and rooftop
equipment of Operator's choice, provided that such equipment does not interfere
with Owner's use of the Property or materially disturb the aesthetics of the
Property. Operator has the right to provide Services to other properties from
the Property.
(f) If Operator uses facilities, equipment, wire, cable, conduit,
satellite equipment, antennas, duct, innerduct, computers, switches, nodes,
converters and systems which are owned or controlled by Owner, Operator may, at
its own expense, upgrade, modify, repair and maintain them.
(g) Nothing in this Agreement grants Operator any ownership
rights in the Property or creates a partnership or joint venture between Owner
and Operator.
(h) Owner hereby grants Operator the right to market its Services
to residents and prospective residents at the Property in a manner reasonably
approved by Owner. Operator may, in its sole discretion, provide incentive
payments (the "Commissions") to Owner's employees, leasing agents and staff for
promoting and marketing the Services at the Property under the Commission
schedule attached as Exhibit C.
(i) Operator may enter the residential units at the Property to
perform installation, maintenance and repair work for the Services. Operator's
staff will not enter a resident's unit without a written work order request
signed by the resident. Upon request, Owner will help Operator collect
Operator's equipment from residential units.
(j) Operator may record a memorandum, substantially in the form
of Exhibit E, in the real property records of the county or state in which the
Property is located.
(k) Operator may offer residents additional video products and
related video services as they become available to Operator, including video
technologies yet to be developed (the "Future Products and Services"). Before
Operator offers residents any Future Products and Services, Operator and Owner
will agree on a revenue participation compensation arrangement for the Future
Products and Services, similar to the Fee arrangement described in Exhibit C.
(l) Operator will furnish Owner without charge the items and
services specified in Exhibit F. All other services provided to Owner will be
billed to Owner at the rates then charged to residents of the Property for the
same services.
(m) Operator will provide Services which are substantially
equivalent to or better than the services provided by the cable franchise
provider that serves the area in which the Property is located. Operator will
adhere in all material respects to the standards specified in Exhibit G.
2. ELECTRIC UTILITIES. Owner will pay the electric utility bills
attributable to the System.
3. CONSTRUCTION. Before beginning any Work, Operator will, at its
cost and expense, provide Owner working drawings, plans and specifications (the
"Plans") showing the location and size of the System and describing the proposed
construction and Work. No Work will commence by Operator or its subcontractor
until Owner has approved the Plans, which approval will not be unreasonably
withheld.
VIDEO SERVICES AGREEMENT PAGE 2
REV. 06/05/98
<PAGE> 3
4. SYSTEM. The System and any other personal property of Operator in
or upon the Property will belong to Operator. Operator will bear the sole cost
and expense for the installation, maintenance and repair of the System, except
to the extent repairs are required for damages caused by the negligence or
willful misconduct of Owner or Owner's employees or agents. Operator will own
all infrastructure which is installed and paid for by Operator, and Operator may
remove any such infrastructure and personal property within thirty (30) days of
the termination of this Agreement; provided, however, Operator may not remove
any conduit or wiring from the Property after the termination of this Agreement.
Operator will repair all damage caused by such removal.
5. ACCESS. Owner will provide Operator access to the Property,
including the System Site, 24 hours a day, seven days a week, 365 days a year so
that Operator may perform installation, maintenance, upgrade and repair
functions. Except in emergencies Operator will use reasonable efforts to perform
all Work during regular business hours. Operator will notify on-site personnel
before entering the Property during business hours, or on the next business day
if after-hours entry is necessary.
6. TERM AND TERMINATION.
(a) This Agreement will have a term of 15 years commencing on the
date Operator first provides Services to the Property. Thereafter, this
Agreement will be automatically renewed for one additional five year period
unless either party gives notice to the other in writing of its election to
terminate the Agreement; the termination notice must be delivered at least 60
days prior to, and will be effective as of, the end of the initial term.
(b) Following a termination of this Agreement, Operator will
continue to provide the Services to the then existing subscribers until the
earlier of: (i) the date on which such subscribers are able to receive such
services from another source; (ii) thirty (30) days after the date of the
termination; or (iii) as otherwise required by the terms of the subscriber
agreements or applicable law. Provisions of this Agreement which by their terms
are necessary for such continued services will remain effective during such
period. Operator will continue to pay Owner Fees during this period, unless this
Agreement is terminated by Operator because of a breach of this Agreement by
Owner, in which case Operator will not be required to pay the Fees.
(c) Upon termination of this Agreement for any reason, Operator
will have the right (but not the obligation), upon reasonable notice to Owner,
to enter upon the Property to dismantle and remove or render inoperative any and
all equipment or other property comprising the System (other than wiring, cable,
or other hardware or software which is the property of Owner or any resident).
7. INDEMNIFICATION. Operator will indemnify and hold Owner, its
principals, officers, directors, owners, agents, employees and servants (the
"Owner Representatives") harmless from and against any loss, cost, damage and
expense of whatever kind arising directly from the construction, operation,
maintenance and repair of the System or from Operator's breach of this
Agreement, including, but not limited to, reasonable attorneys' fees and court
costs, except to the extent such loss, damage, cost or expense is due to the
negligence or willful misconduct of Owner or the Owner Representatives. Owner
will indemnify and hold Operator, its principals, officers, directors, owners,
agents, employees and servants (the "Operator Representatives") harmless from
and against any loss, cost, damage and expense of whatever kind arising directly
from the negligent or willful misconduct of Owner with respect to the System or
from Owner's breach of this Agreement, including, but not limited to, reasonable
attorneys' fees and court costs, except to the extent such loss, damage, cost or
expense is due to the negligence or willful
VIDEO SERVICES AGREEMENT PAGE 3
REV. 06/05/98
<PAGE> 4
misconduct of Operator or the Operator Representatives. The provisions of this
Section 7 will survive termination of this Agreement. NEITHER PARTY WILL BE
LIABLE TO THE OTHER FOR ANY CONSEQUENTIAL, SPECIAL, PUNITIVE OR INCIDENTAL
DAMAGES SUFFERED OR CLAIMED BY THE OTHER PARTY FOR CIRCUMSTANCES ARISING UNDER
OR RELATED TO THIS AGREEMENT, BUT THIS LIMITATION WILL NOT APPLY TO A PARTY'S
OBLIGATION TO INDEMNIFY AND HOLD THE OTHER PARTY HARMLESS FOR CLAIMS FOR SUCH
DAMAGES WHICH ARE ASSERTED BY A THIRD PARTY.
8. INSURANCE. The Operator will, for so long as it provides the
Services to the Property under this Agreement, obtain and maintain commercial
general liability and casualty insurance coverage with combined single limits of
not less than $5,000,000, with respect to the Operator's operation, maintenance
and installation of the System and personal injury and property damage. The
Operator will name Owner as an additional insured on its general liability
coverage, and upon request will provide Owner with a certificate of insurance
for such policy. The Operator will also maintain worker's compensation insurance
as required by law during the term of this Agreement.
9. DEFAULT AND REMEDIES. If a party breaches any of its material
obligations under this Agreement, the other party may provide it written notice
of the breach. The notice will describe the breach, and will give the breaching
party 30 days to cure it, measured from the date the notice is given. If
Operator fails to cure a breach within the cure period, Owner may elect to
terminate this Agreement, and (i) Operator will remove its System from the
Property in a neat and orderly manner, (ii) as of the date of such removal
neither party will have any claim against the other, except for claims that may
have arisen prior to such termination, and (iii) this Agreement will be deemed
terminated and of no force and effect. However, if Operator is diligently
attempting to cure the breach in good faith, but the breach is not susceptible
to cure (through no fault of Operator) within the 30 day cure period, then Owner
will not have the right to exercise its termination remedy unless and until
Operator fails to continue to diligently and in good faith attempt to cure the
breach. If Owner fails to cure a breach within the cure period, Operator may
commence an action for specific performance and/or pursue any other remedies
available to it at law or in equity. However, if Owner is diligently attempting
to cure the breach in good faith, but the breach is not susceptible to cure
(through no fault of Owner) within the 30 day cure period, then Operator will
not have the right to exercise such remedies unless and until Owner fails to
continue to diligently and in good faith to cure the breach. In no event will
either party have more than 90 days to cure a breach under this Section, even if
the party is acting diligently and in good faith to cure it.
10. FORCE MAJEURE. A party will not be in breach of this Agreement if
it fails to perform its obligations under this Agreement for any reason which is
beyond the reasonable control of the party, including, but not limited to, fire,
explosion, power failure or power surge, act of God, war, revolution, civil
commotion, requirement of any government or legal body, labor unrest including,
but not limited to, strikes, slowdowns, picketing or boycotts, vandalism, theft,
the cutting of cable lines to the System by persons other than Operator's
employees or agents, or the failure of third party programmers to provide
programming (each of the foregoing is a "Force Majeure"). If a party fails to
perform its obligations because of a Force Majeure, it must act diligently and
in good faith to commence performing them as soon as practicable following the
occurrence of the Force Majeure.
11. ASSIGNMENT. Operator will not assign or transfer this Agreement
without the written consent of the Owner, which consent will not be unreasonably
withheld; except that, upon written notice to the Owner, Operator may, without
obtaining Owner's prior consent, assign this Agreement to: (a) any entity or
company which controls, is controlled by, or is under common control with
Operator; or (b) any entity that succeeds to all or substantially all of its
assets whether by merger, sale, or otherwise. Operator
VIDEO SERVICES AGREEMENT PAGE 4
REV. 06/05/98
<PAGE> 5
may also assign this Agreement, for security purposes, to any entity which
provides financing to Operator ("Lender"). The Lender will not be liable for any
of the obligations of Operator hereunder, unless Lender notifies Owner in
writing that it has elected to succeed Operator as assignee; Owner further
acknowledges that the Lender may have a security interest in the System (other
than wiring and conduit). Owner will not assign this Agreement, except in
connection with a sale or other transfer of the Property. In connection with a
sale or transfer of the Property, Owner will require any subsequent owner of the
Property to assume this Agreement and the rights, liabilities and obligations of
Owner hereunder. Subject to the foregoing, this Agreement runs with the land and
will be binding upon and will inure to the benefit of the successors and assigns
of the respective parties to this Agreement.
12. NOTICE. All notices under this Agreement must be in writing and
will be deemed to have been duly given when delivered by hand, upon delivery by
telephone facsimile or by overnight express courier with receipt, or three (3)
business days after mailed by certified or registered mail, return receipt
requested, postage prepaid, to the party's address set forth in the introductory
paragraph of this Agreement. Each party may change its address for notice to it
by notice in accordance with the foregoing provisions.
13. MISCELLANEOUS; CONFIDENTIALITY. This Agreement constitutes the
entire agreement between the parties and will supersede all previous
negotiations, commitments, representations and agreements, whether, written or
oral. Any alteration or amendment to this Agreement will be effective only if in
writing and signed by the party against whom enforcement is sought. Terms and
conditions of this Agreement are confidential and may not be disclosed to any
third parties without the prior written consent of the non-disclosing party,
except (i) as contemplated in this Agreement, (ii) as required by law, or (iii)
to the party's employees, owners, investors, lenders, attorneys, accountants,
potential investors, and potential purchasers of the Property. Operator will
have ninety (90) days from the date of execution of this Agreement to review and
approve or disapprove any and all matters relating to the Property, including,
but not limited to, laws and regulations, plans, contracts, documents, and a
physical inspection of the Property. Within ninety (90) days of the date of
execution of this Agreement, Operator may decide, in its sole discretion, to
terminate this Agreement based on the results of its review of the Property. In
addition, Operator, in its sole discretion, may terminate this Agreement at any
time if, due to a changed legal or regulatory environment, it becomes infeasible
for Operator to provide the Services to Owner. Operator will provide Owner with
sixty (60) days' prior written notice of said termination. Upon termination of
this Agreement by Operator, neither party will have any further liability or
obligations with respect to this Agreement and this Agreement will become null
and void.
14. GOVERNING LAW. This Agreement will be governed by the laws of the
State of _____________.
15. CONDEMNATION, DAMAGE OR DESTRUCTION.
(a) CONDEMNATION OR OTHER APPROPRIATION. If the System, or any
material part of the System (including, without limitation, the System Site) is
taken, appropriated, or condemned pursuant to law or the police powers of the
government or quasi-government agencies, each of Owner and Operator may
prosecute, on its own behalf, any claim which that party has against the
governmental agency and third parties. If the taking, appropriation or
condemnation, as set forth above, renders the System uneconomical in Operator's
sole judgment, Operator may terminate this Agreement. If any part of the System
that is not condemned may continue to operate, then Operator may (but need not)
continue to operate the remaining part of the System.
VIDEO SERVICES AGREEMENT PAGE 5
REV. 06/05/98
<PAGE> 6
(b) DAMAGE OR DESTRUCTION. If the System, or any material part of
the System (including, without limitation, the System Site) is damaged by fire
or other casualty, and such damage or casualty renders the System uneconomical
in Operator's sole judgment, Operator may terminate this Agreement. If any part
of the System that is not the subject of such damage or casualty may continue to
operate, then Operator may (but need not) continue to operate the remaining part
of the System.
16. WARRANTIES. THE OPERATOR WARRANTS THAT THE SERVICES WILL BE
PROVIDED IN ACCORDANCE WITH ALL APPLICABLE LAWS AND REGULATIONS. EXCEPT AS
EXPRESSLY STATED IN THIS AGREEMENT, THE OPERATOR MAKES NO REPRESENTATIONS OR
WARRANTIES REGARDING THE SYSTEM OR THE SERVICES, EXPRESS OR IMPLIED, INCLUDING,
BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.
17. SEVERABILITY. If any provision of this Agreement is held to be
invalid or unenforceable, such provisions will not affect in any respect the
validity or enforceability of the remainder of this Agreement unless the
invalidity materially affects the ability of either party to receive the
economic benefits contemplated by this Agreement. If practicable, the parties
agree to substitute for any invalid provision, a valid provision that most
closely approximates the economic effect and intent of the invalid provision.
18. FURTHER ASSURANCES. Each party agrees, upon reasonable request
and at the expense of the requesting party, to execute and deliver any
additional documents and take such actions, as may be reasonably necessary to
carry out the terms of this Agreement.
19. NONDISTURBANCE. Owner will use its best efforts to obtain from
the owner and holder of any mortgage or other security instrument affecting the
Property, an agreement in form and substance reasonably satisfactory to Operator
providing that the rights of Operator under this Agreement will not be affected
by any foreclosure of, or enforcement proceedings under, such mortgage or other
security instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
OWNER: OPERATOR:
U.S. OnLine Communications, Inc.
A Delaware corporation
__________________________________ By:_____________________________
Print Name:_______________________ Print Name:_____________________
Print Title: _____________________ Print Title:____________________
VIDEO SERVICES AGREEMENT PAGE 6
REV. 06/05/98
<PAGE> 7
Exhibit A
LEGAL DESCRIPTION OF THE PROPERTY
<PAGE> 8
Exhibit B
Initial Cable Television Service Lineup
<PAGE> 9
Exhibit C
FEE AGREEMENT/MARKETING SUPPORT
FEES:
As consideration for the rights granted by Owner to Operator under this
Agreement, for each calendar quarter during the term of this Agreement, Operator
will pay to Owner an amount (the "Fees") equal to the product of (i) the Gross
Monthly Receipts, if any, and (ii) the Owner's Incentive Percentage.
Within 15 days after the end of each calendar quarter, Operator will
furnish to Owner a Fee Tracking Report. Operator will pay the Fees quarterly to
Owner in conjunction with and as calculated under the Fee Tracking Report.
Operator will keep the Fee Tracking Reports, and all supporting records,
at Operator's business office at which such records are customarily kept, for 12
months after the end of each calendar year in which the Gross Monthly Receipts
were generated. Owner may review Operator's books and records which relate
specifically to the Gross Monthly Receipts upon reasonable prior request during
regular business hours at the business office where such books and records are
kept, provided that a representative of Operator may be present during the
inspection, and provided, further, that Owner will not be entitled to review
such books and records more frequently than twice in any calendar year. Such
review rights will expire as to Gross Monthly Receipts for any calendar quarter
12 months after the expiration of such calendar quarter.
DEFINITIONS: As used in this Exhibit, the following terms have the following
meanings:
"PROPERTY PENETRATION PERCENTAGE" means the average, for the three
months in each calendar quarter, of the total number of resident subscribers as
of the end of each billing cycle in the calendar quarter that are not in default
under their respective Services Agreements, divided by the total number of
dwelling units at the Property then available for occupancy. However, if the
Property is a newly constructed property such that the certificate of occupancy
(or its equivalent) for the residential units on the Property has been issued
within two months prior to the time the Services were first activated on the
Property, then during the first six months that the Services are provided to the
Property the denominator used to calculate the Property Penetration Percentage
will be the actual number of occupied residential units on the last day of each
calendar month.
"FEE TRACKING REPORT" means the quarterly report which shows Operator's
calculation of the Fees due to Owner.
"GROSS MONTHLY RECEIPTS" means the total amount collected by Operator
for the Services for any month during the term of this Agreement, net of any
sales, direct excise or other similar taxes, trade or other discounts and
charges, and interest or other charges on credit sales and overdue amounts.
Gross Monthly Receipts will not include installation, repair or maintenance
fees.
"OWNER'S INCENTIVE PERCENTAGE" means the percentage of Gross Monthly
Receipts that Owner is entitled to receive from Operator during the term of this
Agreement with respect to the provision of the Services. This percentage is
based upon the Property Penetration Percentages set forth below:
<PAGE> 10
<TABLE>
<CAPTION>
PROPERTY PENETRATION OWNER'S INCENTIVE
PERCENTAGE PERCENTAGE
---------- ----------
<S> <C>
___% to ___% ___%
___% to ___% ___%
___% to ___% ___%
___% to ___% ___%
___% to ___% ___%
___% to 100% ___%
</TABLE>
COMMISSIONS: Operator will remit directly to the Owner's leasing agents
a commission for each new subscriber from whom the Property leasing agents
obtain an order for the Services (the "Commission"), such Commission amount to
be determined in the sole discretion of Operator.
If Owner's leasing agents and/or management personnel are not allowed to
participate in this Commission program, Owner's Incentive Percentage will be
reduced by one percent (1%).
MARKETING SUPPORT:
Owner will provide Operator a list of all residents and prospective
residents of the Property, including addresses and telephone numbers, along with
resident move-in and move-out information as it is received by Owner. Owner will
update such list and information monthly. Owner will distribute Operator's
pre-approved marketing materials when leasing rental units and will not
distribute any marketing materials of any competing service provider. Owner will
engage its employees, agents and staff at the Property to promote and market the
Services. The promotion and marketing efforts will include, but not be limited
to, handing out marketing material to residents, recommending the Services to
residents, and lobby presentations. The foregoing activities will be performed
and carried out in an aesthetically pleasing manner that will not reflect
unfavorably upon the Property. Neither Owner nor any of Owner's employees,
staff, agents or personnel will make any warranties or representations
concerning the Services other than those in the written materials to be provided
by Operator.
<PAGE> 11
Exhibit D
SYSTEM SITE SPECIFICATIONS
<PAGE> 12
Exhibit E
MEMORANDUM OF AGREEMENT
RECORDING REQUESTED BY AND
WHEN RECORDED RETURN TO:
Brent G. Stahl
Stahl, Martens & Bernal, L.L.P.
7320 N. MoPac, Suite 211
Austin, Texas 78731
MEMORANDUM OF AGREEMENT
Certain rights have been granted by _____________ ("Grantor") to
U.S. OnLine Communications, Inc., a Delaware corporation ("Grantee") under that
certain Video Services Agreement dated _____________, 199_ by and between
Grantor and Grantee (the "Agreement"). The Agreement gives Grantee, among other
things, the right to enter upon the Property (as defined in the Agreement) to
construct, install, inspect, maintain, alter, substitute, improve, repair,
service, operate and remove any System (as defined in the Agreement) equipment,
to engage in any other act or activity contemplated by the Agreement and to do
all other things in connection with the operation of the System at such times as
Grantee determines in its discretion (all subject to the terms and conditions of
the Agreement). The Agreement runs with the land and terminates upon the
termination of the Agreement. As used in the Agreement, the term "Property"
means the real property consisting of approximately ______ apartments,
condominiums, cooperative apartments, or other similar residential or commercial
dwelling unites located in City of ___________, County of ___________, State of
_______________ at the address commonly known as __________________________ and
more particularly described on Exhibit A attached hereto and made a part hereof.
In the event of any conflict between the terms and conditions of this
memorandum and the terms and conditions of the Agreement, the Agreement will
control.
Executed to be effective ______________, 199__.
GRANTOR:
________________________________________
By:_____________________________________
Print Name:_____________________________
Print Title:____________________________
Date Signed:____________________________
GRANTEE:
U.S. ONLINE COMMUNICATIONS, INC.
A Delaware corporation
By:_____________________________________
Print Name:_____________________________
Print Title:____________________________
Date Signed:____________________________
<PAGE> 13
THE STATE OF ___________________________ '
'
COUNTY OF ______________________________ '
BEFORE ME on this _____ day of , 199__, personally appeared ___________,
____________ of U.S. ONLINE COMMUNICATIONS, INC., a Delaware corporation d/b/a
U.S. OnLine, and acknowledged to me that he/she executed the foregoing
instrument for the purposes therein expressed on behalf of such corporation.
________________________________________
NOTARY PUBLIC, State of ________________
THE STATE OF ___________________________ '
'
COUNTY OF ______________________________ '
BEFORE ME on this _____ day of __________, 199__, personally appeared
________________, _______________ of ___________________, a ________________,
and acknowledged to me that he/she executed the foregoing instrument for the
purposes therein expressed on behalf of such _________________.
________________________________________
NOTARY PUBLIC, State of ________________
<PAGE> 14
Exhibit A - To Memorandum of Agreement
[ legal description of property ]
<PAGE> 15
Exhibit F
No Cost To Owner
If an Entry Gate Channel is included in the above items, Owner agrees that
Operator will not be liable to Owner or to Owner's residents, employees, agents,
guests or invitees, or to any other person whomever, for any claims, damages or
expenses of whatever kind (including attorneys fees) arising out of or caused by
any burglary, theft, vandalism, assault, battery, malicious mischief or other
illegal acts performed in, at or from the Property ("Illegal Acts"). Further,
Owner specifically agrees to be responsible for and indemnifies and holds
Operator harmless from any and all claims, damages or expenses of whatever kind
(including attorneys fees) caused by Illegal Acts.
<PAGE> 16
Exhibit G
Operator Performance Standards
<PAGE> 1
EXHIBIT 10.19
TELECOMMUNICATIONS SERVICES AGREEMENT
This Telecommunications Services Agreement (this "Agreement") is made as
of _____________, 199__ between _________________ a _______________, with an
office address at __________________, Fax No. (____) ___-____ ("Owner"), and
U.S. OnLine Communications, Inc., a Delaware corporation, d/b/a U.S. OnLine,
with an office address at 10300 Metric Blvd., Austin, Texas 78758, Fax No. (512)
451-8732 ("Operator"). Owner's United States federal taxpayer identification
number is _______________.
A. Owner desires Operator to provide telecommunications services to the
multi-family residential complex known as the ____________, located at
__________, the legal description of which is set forth as Exhibit A (the
"Property").
B. Owner is (CHECK ONE): ____ (i) the owner of the Property; (ii) ____
the manager of or the operator of the Property; (iii) ____ the cooperative or
condominium association for the Property; or (iv) ____ otherwise owns, manages,
controls or operates the Property. Owner has the authority to enter into this
Agreement to allow Operator to make use of the Property as described herein.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants set forth below, Owner and Operator agree as follows:
1. OPERATOR'S RIGHTS AND OBLIGATIONS.
(a) Owner hereby grants to Operator: (i) the right to install,
own, operate, maintain, repair, replace and remove (the "Work") telephone
equipment, electronic devices, conduit, duct, innerduct, computers, switches,
nodes, wire, cable and other related devices and equipment (the "System") on,
in, under and over the roof and grounds of the Property as may be necessary or
desirable to provide the Services (as defined below); and (ii) the right to
provide telephone and communication services, including two-way voice service,
conference calling, call waiting, call forwarding, speed dialing, internet
access, paging, information services, audio on demand and other similar services
(collectively, the "Services"). Operator may provide the Services through any
medium including, without limitation, coaxial cable, copper wire, fiber optics,
wireless, satellite transmission and other forms of broad band communication and
other means of communication distribution, whether now existing or developed
after the date of this Agreement.
(b) In consideration of Operator's substantial investment in the
System, Owner agrees that it will not (i) grant a license or right to any other
person or entity to provide services which are similar to or competitive with
the Services, or (ii) permit the installation, maintenance or operation at the
Property of any other equipment, wire, telephone cable or material by any person
or entity to provide services to the residents of the Property which are similar
to or competitive with the Services. The following exceptions apply to the
exclusive rights granted to Operator in the preceding sentence: (1) any rights
of access which Owner is required to grant under applicable law; (2) rights of
access granted to the incumbent local exchange carrier, or its successor.
(c) Operator will pay Owner the fees described in Exhibit B for
the use of and access to its Property and for Owner's provision of marketing
support to Operator.
(d) Owner will provide at no cost to Operator a locked room on
the Property for Operator's equipment (the "System Site"). The System Site will
meet the specifications set forth on Exhibit C. Operator, at its cost, will
construct and maintain the interior of the System Site.
TELECOM SERVICES AGREEMENT PAGE 1
REV. 06/05/98
<PAGE> 2
(e) Owner will make available existing building riser conduit,
cable, wire and innerduct to Operator so that Operator may install, access and
maintain the System and provide the Services.
(f) Owner will permit Operator to connect the System from the
streets or sidewalks to the Property via underground, ground and rooftop
equipment of Operator's choice, provided that such equipment does not interfere
with Owner's use of the Property or materially disturb the aesthetics of the
Property. Operator has the right to provide Services to other properties from
the Property.
(g) If Operator uses facilities, equipment, wire, cable, conduit,
satellite equipment, antennas, duct, innerduct, computers, switches, nodes,
converters and systems which are owned or controlled by Owner, Operator may, at
its own expense, upgrade, modify, repair and maintain them.
(h) Nothing in this Agreement grants Operator any ownership
rights in the Property or creates a partnership or joint venture between Owner
and Operator.
(i) Owner hereby grants Operator the right to market its Services
to residents and prospective residents at the Property in a manner reasonably
approved by Owner. Operator may, in its sole discretion, provide incentive
payments (the "Commissions") to Owner's employees, leasing agents and staff for
promoting and marketing the Services at the Property under the Commission
schedule attached as Exhibit B.
(j) Operator may enter the residential units at the Property to
perform installation work for the Services, but Operator's staff will not enter
a resident's unit without a written work order request signed by the resident.
Upon request, Owner will help Operator collect Operator's equipment from
residential units.
(k) Operator may record a memorandum, substantially in the form
of Exhibit D, in the real property records of the county or state in which the
Property is located.
(l) Operator may offer residents additional telecommunications
products and services as they become available to Operator, including wireless
personal communications systems, cellular telephones and other telecommunication
technologies which are yet to be developed (the "Future Products and Services").
Before Operator offers residents any Future Products and Services, Operator and
Owner will agree on a revenue participation compensation arrangement for the
Future Products and Services, similar to the Fee arrangement described in
Exhibit B.
(m) Operator will furnish Owner without charge the items and
services specified in Exhibit E. All other services provided to Owner will be
billed to Owner at the rates then charged to residents of the Property for the
same services.
(n) Operator's fees for Services will be less than or equal to
the fees charged for the same services by the incumbent local exchange carrier
that serves the area in which the Property is located.
2. ELECTRIC UTILITIES. Owner will pay the electric utility bills
attributable to the System.
3. CONSTRUCTION. Before beginning any Work, Operator will, at its
cost and expense, provide Owner working drawings, plans and specifications (the
"Plans") showing the location and size of the System and describing the proposed
construction and Work. Operator will not commence any Work until Owner has
approved the Plans, which approval will not be unreasonably withheld.
TELECOM SERVICES AGREEMENT PAGE 2
REV. 06/05/98
<PAGE> 3
4. SYSTEM. The System and any other personal property of Operator in
or upon the Property will belong to Operator. Operator will bear the sole cost
and expense for the installation, maintenance and repair of the System, except
to the extent repairs are required for damages caused by the negligence or
willful misconduct of Owner or Owner's employees or agents. Operator will own
all infrastructure which is installed and paid for by Operator, and Operator may
remove any such infrastructure and personal property within thirty (30) days of
the termination of this Agreement; provided, however, Operator may not remove
any conduit or wiring from the Property after the termination of this Agreement.
Operator will repair all damage caused by such removal.
5. ACCESS. Owner will provide Operator access to the Property,
including the System Site, 24 hours a day, seven days a week, 365 days a year so
that Operator may perform installation, maintenance, upgrade and repair
functions. Except in emergencies, Operator will use reasonable efforts to
perform all Work during regular business hours. Operator will notify on-site
personnel before entering the Property during business hours, or on the next
business day if after-hours entry is necessary.
6. TERM AND TERMINATION.
(a) This Agreement will have a term of 15 years commencing on the
date Operator first provides Services to the Property. Thereafter, this
Agreement will be automatically renewed for one additional five year period
unless either party gives notice to the other in writing of its election to
terminate the Agreement; the termination notice must be delivered at least 60
days prior to, and will be effective as of, the end of the initial term.
(b) Following a termination of this Agreement, Operator will
continue to provide the Services to the then existing subscribers until the
earlier of: (i) the date on which such subscribers are able to receive such
services from another source; (ii) thirty (30) days after the date of the
termination; or (iii) as otherwise required by the terms of the subscriber
agreements or applicable law. Provisions of this Agreement which by their terms
are necessary to continue the Services will remain effective during such period.
Operator will continue to pay Fees to Owner during this period, unless this
Agreement is terminated by Operator because of a breach of this Agreement by
Owner, in which case Operator will not be required to pay the Fees.
(c) Upon termination of this Agreement for any reason, Operator
will have the right (but not the obligation), upon reasonable notice to Owner,
to enter upon the Property to dismantle and remove or render inoperative any and
all equipment or other property comprising the System (other than wiring, cable,
or other hardware or software which is the property of Owner or any resident).
7. INDEMNIFICATION. Operator will indemnify and hold Owner, its
principals, officers, directors, owners, agents, employees and servants (the
"Owner Representatives") harmless from and against any loss, cost, damage and
expense of whatever kind arising directly from the construction, operation,
maintenance and repair of the System or from Operator's breach of this
Agreement, including, but not limited to, reasonable attorneys' fees and court
costs, except to the extent such loss, damage, cost or expense is due to the
negligence or willful misconduct of Owner or the Owner Representatives. Owner
will indemnify and hold Operator, its principals, officers, directors, owners,
agents, employees and servants (the "Operator Representatives") harmless from
and against any loss, cost, damage and expense of whatever kind arising directly
from the negligent or willful misconduct of Owner with respect to the System or
from Owner's breach of this Agreement, including, but not limited to, reasonable
attorneys' fees and court costs, except to the extent such loss, damage, cost or
expense is due to the negligence or willful misconduct of Operator or the
Operator Representatives. The provisions of this Section 7 will survive
termination of this Agreement. NEITHER PARTY WILL BE LIABLE TO THE OTHER FOR ANY
CONSEQUENTIAL, SPECIAL
TELECOM SERVICES AGREEMENT PAGE 3
REV. 06/05/98
<PAGE> 4
OR PUNITIVE DAMAGES SUFFERED OR CLAIMED BY THE OTHER PARTY FOR CIRCUMSTANCES
ARISING UNDER OR RELATED TO THIS AGREEMENT, BUT THIS LIMITATION WILL NOT APPLY
TO A PARTY'S OBLIGATION TO INDEMNIFY AND HOLD THE OTHER PARTY HARMLESS FOR
CLAIMS FOR SUCH DAMAGES WHICH ARE ASSERTED BY A THIRD PARTY.
8. INSURANCE. Operator will, for so long as it provides the Services
to the Property under this Agreement, obtain and maintain commercial general
liability and casualty insurance coverage with combined single limits of not
less than $5,000,000, with respect to Operator's operation, maintenance and
installation of the System and personal injury and property damage. Operator
will name Owner as an additional insured on its general liability coverage and
will provide Owner with a certificate of insurance for such policy upon request.
Operator will also maintain worker's compensation insurance as required by law
during the term of this Agreement.
9. DEFAULT AND REMEDIES. If a party breaches any of its material
obligations under this Agreement, the other party may provide it written notice
of the breach. The notice will describe the breach, and will give the breaching
party 30 days to cure it, measured from the date the notice is given. If
Operator fails to cure a breach within the cure period, Owner may elect to
terminate this Agreement, and (i) Operator will remove its System from the
Property in a neat and orderly manner, (ii) as of the date of such removal
neither party will have any claim against the other, except for claims that may
have arisen prior to such termination, and (iii) this Agreement will be deemed
terminated and of no force and effect. However, if Operator is diligently
attempting to cure the breach in good faith, but the breach is not susceptible
to cure (through no fault of Operator) within the 30 day cure period, then Owner
will not have the right to exercise its termination remedy unless and until
Operator fails to continue to diligently and in good faith attempt to cure the
breach. If Owner fails to cure a breach within the cure period, Operator may
commence an action for specific performance or any remedy available to it at law
or in equity. However, if Owner is diligently attempting to cure the breach in
good faith, but the breach is not susceptible to cure (through no fault of
Owner) within the 30 day cure period, then Operator will not have the right to
exercise such remedies unless and until Owner fails to continue to diligently
and in good faith to cure the breach. In no event will either party have more
than 90 days to cure a breach under this Section, even if the party is acting
diligently and in good faith to cure it.
10. FORCE MAJEURE. A party will not be in breach of this Agreement if
it fails to perform its obligations under this Agreement for any reason or
circumstances beyond the reasonable control of the party, including, but not
limited to, fire, explosion, power failure or power surge, act of God, war,
revolution, civil commotion, requirement of any government or legal body, labor
unrest including, but not limited to, strikes, slowdowns, picketing or boycotts,
vandalism, theft, the cutting of cable lines to the System by persons other than
Operator's employees or agents, or the failure of third party programmers to
provide programming (each of the foregoing is a "Force Majeure"). If a party
fails to perform its obligations because of a Force Majeure, it must act
diligently and in good faith to commence performing them as soon as practicable
following the occurrence of the Force Majeure.
11. ASSIGNMENT. Operator will not assign or transfer this Agreement
without the written consent of the Owner, which consent will not be unreasonably
withheld; except that, upon written notice to the Owner, Operator may, without
obtaining Owner's prior consent, assign this Agreement to: (a) any entity or
company which controls, is controlled by, or is under common control with
Operator; or (b) any entity that succeeds to all or substantially all of its
assets whether by merger, sale, or otherwise. Operator may also assign this
Agreement, for security purposes, to any entity which provides financing to
Operator ("Lender"). The Lender will not be liable for any of the obligations of
Operator hereunder, unless Lender notifies Owner in writing that it has elected
to succeed Operator as assignee; Owner further acknowledges that the Lender may
have a security interest in the System (other than wiring and conduit). Owner
will not assign this Agreement, except in connection with a sale or other
transfer of the Property. In connection
TELECOM SERVICES AGREEMENT PAGE 4
REV. 06/05/98
<PAGE> 5
with a sale or transfer of the Property, Owner will require any subsequent
owner of the Property to assume this Agreement and the rights, liabilities and
obligations of Owner hereunder. Subject to the foregoing, this Agreement runs
with the land and will be binding upon and will inure to the benefit of the
successors and assigns of the respective parties to this Agreement.
12. NOTICE. All notices under this Agreement must be in writing and
will be deemed to have been duly given when delivered by hand, upon delivery by
telephone facsimile or by overnight express courier with receipt, or three (3)
business days after mailed by certified or registered mail, return receipt
requested, postage prepaid, to the party's address set forth in the introductory
paragraph of this Agreement. Each party may change its address for notices by
providing notice in accordance with the foregoing provisions.
13. MISCELLANEOUS; CONFIDENTIALITY. This Agreement constitutes the
entire agreement between the parties and will supersede all previous
negotiations, commitments, representations and agreements, whether, written or
oral. Any alteration or amendment to this Agreement will be effective only if in
writing and signed by the party against whom enforcement is sought. Terms and
conditions of this Agreement are confidential and may not be disclosed to any
third parties without the prior written consent of the non-disclosing party,
except (i) as contemplated in this Agreement, (ii) as required by law, or (iii)
to the party's employees, owners, investors, lenders, attorneys, accountants,
potential investors, and potential purchasers of the Property. Operator will
have ninety (90) days from the date of execution of this Agreement to review and
approve or disapprove any and all matters relating to the Property, including,
but not limited to, laws and regulations, plans, contracts, documents, and a
physical inspection of the Property. Within ninety (90) days of the date of
execution of this Agreement, Operator may decide, in its sole discretion, to
terminate this Agreement based on the results of its review of the Property. In
addition, Operator, in its sole discretion, may terminate this Agreement at any
time if, due to a changed legal or regulatory environment, it becomes not
feasible for Operator to provide the Services to Owner. Operator will provide
Owner with sixty (60) days' prior written notice of said termination. Upon
termination of this Agreement by Operator, neither party will have any further
liability or obligations with respect to this Agreement and this Agreement will
become null and void.
14. GOVERNING LAW. This Agreement will be governed by the laws of the
State of _____________.
15. CONDEMNATION, DAMAGE OR DESTRUCTION.
(a) CONDEMNATION OR OTHER APPROPRIATION. If the System, or any
material part of the System (including, without limitation, the System Site) is
taken, appropriated, or condemned pursuant to law or the police powers of the
government or quasi-government agencies, each of Owner and Operator may
prosecute, on its own behalf, any claim which that party has against the
governmental agency and third parties. If the taking, appropriation or
condemnation, as set forth above, renders the System uneconomical in Operator's
sole judgment, Operator may terminate this Agreement. If any part of the System
that is not condemned may continue to operate, then Operator may (but need not)
continue to operate the remaining part of the System.
(b) DAMAGE OR DESTRUCTION. If the System, or any material part of
the System (including, without limitation, the System Site) is damaged by fire
or other casualty, and such damage or casualty renders the System uneconomical
in Operator's sole judgment, Operator may terminate this Agreement. If any part
of the System that is not the subject of such damage or casualty may continue to
operate, then Operator may (but need not) continue to operate the remaining part
of the System.
TELECOM SERVICES AGREEMENT PAGE 5
REV. 06/05/98
<PAGE> 6
16. WARRANTIES. THE OPERATOR WARRANTS THAT THE SERVICES WILL BE
PROVIDED IN ACCORDANCE WITH ALL APPLICABLE LAWS AND REGULATIONS. EXCEPT AS
EXPRESSLY STATED IN THIS AGREEMENT, THE OPERATOR MAKES NO REPRESENTATIONS OR
WARRANTIES REGARDING THE SYSTEM OR THE SERVICES, EXPRESS OR IMPLIED, INCLUDING,
BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.
17. SEVERABILITY. If any provision of this Agreement is held to be
invalid or unenforceable, such provisions will not affect in any respect the
validity or enforceability of the remainder of this Agreement unless the
invalidity materially affects the ability of either party to receive the
economic benefits contemplated by this Agreement. If practicable, the parties
agree to substitute for any invalid provision, a valid provision that most
closely approximates the economic effect and intent of the invalid provision.
18. FURTHER ASSURANCES. Each party agrees, upon reasonable request
and at the expense of the requesting party, to execute and deliver any
additional documents and take such actions, as may be reasonably necessary to
carry out the terms of this Agreement.
19. NONDISTURBANCE. Owner will use its best efforts to obtain from
the owner and holder of any mortgage or other security instrument affecting the
Property, an agreement in form and substance reasonably satisfactory to Operator
providing that the rights of Operator under this Agreement will not be affected
by any foreclosure of, or enforcement proceedings under, such mortgage or other
security instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
OWNER: OPERATOR:
U.S. OnLine Communications, Inc.,
a Delaware corporation
__________________________________ By:______________________________
Print Name:_______________________ Print Name:______________________
Print Title: _____________________ Print Title:_____________________
TELECOM SERVICES AGREEMENT PAGE 6
REV. 06/05/98
<PAGE> 7
Exhibit A
LEGAL DESCRIPTION OF THE PROPERTY
TELECOM SERVICES AGREEMENT
REV. 04/22/98
<PAGE> 8
Exhibit B
FEE AGREEMENT/ MARKETING SUPPORT
FEES:
As consideration for the rights granted by Owner to Operator under this
Agreement, for each calendar quarter during the term of this Agreement, Operator
will pay to Owner an amount (the "Fees") equal to the product of (i) the Gross
Monthly Receipts, if any, and (ii) the Owner's Incentive Percentage.
Within 15 days after the end of each calendar quarter, Operator will
furnish to Owner a Fee Tracking Report. Operator will pay the Fees quarterly to
Owner in conjunction with and as calculated under the Fee Tracking Report
Operator will keep the Fee Tracking Reports, and all supporting records,
at Operator's business office at which such records are customarily kept for 12
months after the end of each calendar year in which the Gross Monthly Receipts
were generated. Owner may review Operator's books and records which relate
specifically to the Gross Monthly Receipts upon reasonable prior request during
regular business hours at the business office where such books and records are
kept, provided that a representative of Operator may be present during the
inspection, and provided, further, that Owner will not be entitled to review
such books and records more frequently than twice in any calendar year. Such
review rights will expire as to Gross Monthly Receipts for any calendar quarter
12 months after the expiration of such calendar quarter.
DEFINITIONS: As used in this Exhibit, the following terms have the following
meanings:
"PROPERTY PENETRATION PERCENTAGE" means the average, for the three
months in each calendar quarter, of the total number of resident subscribers as
of the end of each billing cycle in the calendar quarter that are not in default
under their respective Services Agreements, divided by the total number of
dwelling units at the Property then available for occupancy. However, if the
Property is a newly constructed property such that the certificate of occupancy
(or its equivalent) for the residential units on the Property has been issued
within two months prior to the time the Services were first activated on the
Property, then during the first six months that the Services are provided to the
Property the denominator used to calculate the Property Penetration Percentage
will be the actual number of occupied residential units on the last day of each
calendar month.
"FEE TRACKING REPORT" means the quarterly report which shows Operator's
calculation of the Fees due to Owner.
"GROSS MONTHLY RECEIPTS" means the total amount collected by Operator
for the Services for any month during the term of this Agreement, net of any
sales, direct excise or other similar taxes, trade or other discounts and
charges, and interest or other charges on credit sales and overdue amounts.
Gross Monthly Receipts will not include installation, repair or maintenance
fees.
"OWNER'S INCENTIVE PERCENTAGE" means the percentage of Gross Monthly
Receipts that Owner is entitled to receive from Operator during the term of this
Agreement with respect to the provision of the Services. This percentage is
based upon the Property Penetration Percentages set forth below:
<TABLE>
<CAPTION>
PROPERTY PENETRATION OWNER'S INCENTIVE
PERCENTAGE PERCENTAGE
---------- ----------
<S> <C>
___% to ___% ___%
___% to ___% ___%
___% to ___% ___%
</TABLE>
<PAGE> 9
<TABLE>
<S> <C>
___% to ___% ___%
___% to ___% ___%
___% to 100% ___%
</TABLE>
COMMISSIONS: Operator will remit directly to Owner's leasing agents a
commission for each new subscriber from whom the Property leasing agents obtain
an order for the Services (the "Commission"), the amount of such Commission to
be determined by Operator in its sole discretion.
If Owner's leasing agents and/or management personnel are not allowed to
participate in this Commission program, Owner's Incentive Percentage will be
reduced by one percent (1%).
MARKETING SUPPORT:
Owner will provide Operator a list of all residents and prospective
residents of the Property, including addresses and telephone numbers, along with
resident move-in and move-out information as it is received by Owner. Owner will
update such list and information monthly. Owner will distribute Operator's
pre-approved marketing materials when leasing rental units and will not
distribute any marketing materials of any competing service provider. Owner will
engage its employees, agents and staff at the Property to promote and market the
Services. The promotion and marketing efforts will include, but not be limited
to, handing out marketing material to residents, recommending the Services to
residents, and lobby presentations. The foregoing activities will be performed
and carried out in an aesthetically pleasing manner that will not reflect
unfavorably upon the Property. Neither Owner nor any of Owner's employees,
staff, agents or personnel will make any warranties or representations
concerning the Services other than those in the written materials to be provided
by Operator.
TELECOM SERVICES AGREEMENT
REV. 04/22/98
<PAGE> 10
Exhibit C
SYSTEM SITE SPECIFICATIONS
TELECOM SERVICES AGREEMENT
REV. 04/22/98
<PAGE> 11
Exhibit D
Memorandum of Agreement
RECORDING REQUESTED BY AND
WHEN RECORDED RETURN TO:
Brent G. Stahl
Stahl, Martens & Bernal, L.L.P.
7320 N. MoPac, Suite 211
Austin, Texas 78731
MEMORANDUM OF AGREEMENT
Certain rights have been granted by _________________ ("Grantor") to
U.S. OnLine Communications, Inc., a Delaware corporation ("Grantee") under that
certain Telecommunications Services Agreement dated ____________, 199_ by and
between Grantor and Grantee (the "Agreement"). The Agreement gives Grantee,
among other things, the right to enter upon the Property (as defined in the
Agreement) to construct, install, inspect, maintain, alter, substitute, improve,
repair, service, operate and remove any System (as defined in the Agreement)
equipment, to engage in any other act or activity contemplated by the Agreement
and to do all other things in connection with the operation of the System at
such times as Grantee determines in its discretion (all subject to the terms and
conditions of the Agreement). The Agreement runs with the land and terminates
upon the termination of the Agreement. As used in the Agreement, the term
"Property" means the real property consisting of approximately ______
apartments, condominiums, cooperative apartments, or other similar residential
or commercial dwelling unites located in City of ___________, County of
___________, State of ______________ at the address commonly known as and more
particularly described on Exhibit A attached hereto and made a part hereof.
In the event of any conflict between the terms and conditions of this
memorandum and the terms and conditions of the Agreement, the Agreement will
control.
Executed to be effective ____________________, 199__.
GRANTOR: ___________________________________
A _________________________________
By:________________________________
Print Name:________________________
Print Title:_______________________
Date Signed:_______________________
GRANTEE: U.S. ONLINE COMMUNICATIONS, INC.
A Delaware corporation
By:________________________________
Print Name:________________________
Print Title:_______________________
Date Signed:_______________________
TELECOM SERVICES AGREEMENT
REV. 04/22/98
<PAGE> 12
THE STATE OF _______________________ )
) ss.:
COUNTY OF ___________________________ )
BEFORE ME on this ______ day of ____________, 199__, personally appeared
____________, ____________ of U.S. ONLINE COMMUNICATIONS, INC., a Delaware
corporation d/b/a U.S. OnLine, and acknowledged to me that he/she executed the
foregoing instrument for the purposes therein expressed on behalf of such
corporation.
_______________________________________
NOTARY PUBLIC, State of ______________
THE STATE OF _______________________ )
) ss.:
COUNTY OF ___________________________ )
BEFORE ME on this ______ day of ____________, 199__, personally appeared
____________, ____________ of ____________, a ____________, and acknowledged to
me that he/she executed the foregoing instrument for the purposes therein
expressed on behalf of such ________________.
_______________________________________
NOTARY PUBLIC, State of ______________
TELECOM SERVICES AGREEMENT
REV. 04/22/98
<PAGE> 13
Exhibit A - To Memorandum of Agreement
[ legal description of property ]
TELECOM SERVICES AGREEMENT
REV. 04/22/98
<PAGE> 14
Exhibit E
No Cost To Owner
VIDEO SERVICES AGREEMENT
REV. 4/28/97
<PAGE> 1
EXHIBIT 23.2.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form SB-2
(Registration No. 333-51781) of our report, which includes an explanatory
paragraph related to substantial doubt about U.S. On-Line Cable, L.L.C.'s
ability to continue as a going concern, dated February 21, 1997, except as to
Notes 5 through 8 for which the date is February 27, 1998, and Note 9, for which
the date is March 27, 1998, on our audit of the consolidated financial
statements of U.S. On-Line Cable, L.L.C. We also consent to the reference to our
firm under the caption "Experts".
COOPERS & LYBRAND L.L.P.
Austin, Texas
June 25, 1998
<PAGE> 1
EXHIBIT 23.2.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form SB-2
(Registration No. 333-51781 ) of our report, which includes an explanatory
paragraph related to substantial doubt about U.S. OnLine Communications L.L.C.'s
ability to continue as a going concern, dated April 22, 1998, on our audit of
the consolidated financial statements of U.S. OnLine Communications L.L.C. We
also consent to the reference to our firm under the caption "Experts".
COOPERS & LYBRAND L.L.P.
Austin, Texas
June 25, 1998
<PAGE> 1
EXHIBIT 23.2.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form SB-2
(Registration No. 333-51781) of our report, which includes an explanatory
paragraph related to substantial doubt about the Company's ability to continue
as a going concern, dated June 23, 1998, on our audit of the balance sheet of
U.S. OnLine Communications, Inc. We also consent to the reference to our firm
under the caption "Experts".
COOPERS & LYBRAND L.L.P.
Austin, Texas
June 25, 1998
