<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 4, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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>
8307 SHOAL CREEK BLVD.
AUSTIN, TEXAS 78757
(512) 451-8765
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ROBERT G. SOLOMON, CHIEF EXECUTIVE OFFICER
8307 SHOAL CREEK BLVD.
AUSTIN, TEXAS 78757
(512) 451-8765
(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) 5,675,000 $ 8.50 $48,237,500 $14,231
- -------------------------------------------------------------------------------------------------------------------------------
Representative's Options(3)(4) 333,333 $10.20 $ 3,399,997 $ 1,003
- -------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value,
underlying Representative's Options 333,333 $10.20 $ 0(5) $ 0(5)
- -------------------------------------------------------------------------------------------------------------------------------
Total 6,341,666 $51,637,497 $15,234(5)
===============================================================================================================================
</TABLE>
(1) Estimated pursuant to Rule 457(a) under the Securities Act solely for the
purpose of calculating the registration fee.
(2) Includes 3,333,333 shares of Common Stock offered by the Company; 500,000
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 are presently outstanding.
(3) Represents five-year Representative's Options to purchase 333,333 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 Representative's
Options.
(5) Pursuant to Rule 457(i) no filing fee is due with respect to the 333,333
shares of Common Stock issuable on exercise of the Representative's 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 MAY 4, 1998
PROSPECTUS
3,333,333 SHARES
LOGO
COMMON STOCK
------------------------
U.S. OnLine Communications, Inc. (the "Company") hereby offers 3,333,333
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 between $6.50 and
$8.50 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 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 7 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 REPRESENTATIONS 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, the representative of the several underwriters (the
"Representative"), in an amount equal to 3% of the gross proceeds of the
Offering, the value of five-year options (the "Representative's Options") to
purchase 333,333 shares of Common Stock at an exercise price equal to 120%
of the initial public offering price being issued to the Representative 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
$1,195,000, including the Representative's non-accountable expense
allowance.
(3) The Company has granted the Underwriters a 45-day option to purchase up to
500,000 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
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.
2
<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 telecommunications services, collectively referred to as
residential multi-tenant services ("RMTS"), to multifamily dwelling units
("MDUs") such as apartment complexes, condominiums and other concentrated
residential sites. Through cost benefits available to the Company as a result of
its regulatory status as a private cable operator, the Company is generally able
to offer revenue sharing agreements to property owners as an inducement to
property owners to contract for the Company's services. The Company believes
that it offers superior customer service, which provides another incentive for
property owners and MDU tenants to use the Company's services. The Company
targets demographically appealing 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).
The Company provides its services pursuant to right of entry contracts
("ROE Contracts") with property owners and agreements with MDU residents. 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. 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.
Since inception, 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 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 5% are currently serviced by an RMTS provider. The Company further
believes that approximately 45% of the MDU market is served by franchise CATV
operators that do not offer revenue sharing packages with property owners or
superior customer service. 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.
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 currently
purchases standard and enhanced local and long-distance telephony services in
bulk and resells them over networked central office telecommunications
platforms. The Company obtains its CATV programming through program access
agreements with suppliers. 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 offering
additional services including utility metering and financial and insurance
products.
MARKETING
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 RMTS to property owners to secure ROE
Contracts. After entering into a ROE Contract, the Company builds out its
passings on the property. Once the passings are operational, the property
owner's on-site leasing agents market the Company's CATV and telephony services
to MDU residents. The Company typically maintains an exclusive marketing
relationship with the property owners and provides training and support to the
on-site leasing agents.
The Company believes that its ability to secure ROE Contracts will be a key
component of its success and has contributed to its substantial growth to date.
When the Company executes a ROE Contract, it generally becomes the exclusive
provider of CATV services to that MDU and a non-exclusive provider of telephony
and related services. ROE Contracts executed by the Company generally have a
term of eight to fifteen years. The Company believes that its ROE Contracts,
which provide strong financial incentives to property owners, 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, thereby
increasing occupancy and resident retention in MDUs served by the Company.
4
<PAGE> 6
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, 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. In addition, the Company also
benefits from the fact that it is not subject to uniform pricing restrictions
and 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 under the laws of the State of Delaware in
March of 1998 in anticipation of the Offering. Prior to consummation of the
Offering, the Company will acquire substantially all of the assets and assume
certain of the liabilities of the LLC in the Asset Acquisition, and immediately
preceding the Asset Acquisition, Cable will be merged with and into the LLC. The
Company's principal executive offices are located at 8307 Shoal Creek Boulevard,
Austin, Texas 78757, and its telephone number is (512) 451-8765.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.................. 3,333,333 shares
Common Stock outstanding:
Before the Offering(1)............................. 2,166,667 shares
After the Offering................................. 5,500,000 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 connection with
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
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) 333,333
shares of Common Stock issuable upon exercise of the Representative's
Options. See "Certain Transactions," "Management--Benefit Plans,"
"Description of Capital Stock" and "Underwriting."
5
<PAGE> 7
SUMMARY 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 the 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 audited 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
Consolidated Financial Statements of the LLC.) The unaudited pro forma statement
of operations data for the Company for the year ended December 31, 1997 gives
effect to the Interim Financing and the Asset Acquisition as if those
transactions had occurred on January 1, 1997.
<TABLE>
<CAPTION>
U.S. ONLINE
U.S. ONLINE COMMUNICATIONS L.L.C. COMMUNICATIONS, INC.
------------------------------------------ --------------------
DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1996 DECEMBER 31, 1997
1996 PRO FORMA(1) 1997 PRO FORMA(2)
------------ ------------ ------------ --------------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue............................. $ 58,407 $ 836,876 $ 2,721,293 $ 2,721,293
Gross profit.............................. 17,658 523,841 1,763,209 1,763,209
Loss from operations...................... (2,703,698) (4,118,677) (6,230,763) (6,608,518)
Net loss.................................. (4,243,083) (5,107,494) (8,446,349) (7,988,998)
Net loss per share:
Basic................................... $ (3.69)
-----------
Diluted................................. $ (2.82)
===========
Weighted average shares used for computing
net loss per share:
Basic................................... 2,166,667
===========
Diluted................................. 2,836,667
===========
OPERATING DATA:
Number of passings...................... 7,584 16,873
Number of subscribers................... 3,614 9,662
</TABLE>
<TABLE>
<CAPTION>
U.S. ONLINE COMMUNICATIONS, INC.
-------------------------------------------------
DECEMBER 31, 1997
-------------------------------------------------
PRO FORMA,
ACTUAL PRO FORMA(3) AS ADJUSTED(3)(4)
------------ ------------ -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 949,741 $ 7,851,596 $25,406,596
Working capital......................................... 7,501,719 (5,488,033) 16,316,967
Total assets............................................ 16,465,329 25,655,480 42,712,842
Long-term obligations, net of current maturities........ 20,702,692 5,386,248 5,386,248
Stockholders' equity.................................... (13,712,982) 5,922,613 27,229,975
</TABLE>
- ---------------
(1) Pro forma summary financial data gives effect to 100% consolidation of the
LLC and Cable as of January 1, 1996.
(2) Pro forma summary financial data gives effect to (a) the sale of 65 units,
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% senior subordinated promissory note
(the "Aspen Note") (together, the "Interim Financing"); (b) the Asset
Acquisition, including the 10% promissory note (the "Asset Acquisition
Note") and 800,000 shares of Common Stock issued in connection with the
Asset Acquisition; and (c) the merger of Cable into the LLC.
(3) Pro forma summary balance sheet data gives effect to the following as if
they occurred on December 31, 1997, (a) the proceeds from the issuance of 65
units and the Aspen Note in the Interim Financing, (b) 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 connection with the Asset Acquisition, (c) the issuance
of 500,000 shares of Common Stock under the 1998 Restricted Stock Award
Plan, and (d) a payment of $393,375 to T&W Funding Company V, L.L.C. ("T&W")
to bring the Company current with respect to all amounts in arrears.
(4) Pro forma summary balance sheet data gives effect to the following as if
they occurred on December 31, 1997: (a) the proceeds from the issuance of
3,333,333 shares of Common Stock from the Offering (at an assumed offering
price of $7.50 per share), resulting in additions to stockholders' equity of
$25,000,000 reduced by issuance costs of $3,195,000; and (b) payments by the
Company of $3,250,000 to repay the Interim Notes (and a related charge of
$497,638 to expense related issuance costs,) and $1,000,000 representing
payment of the first installment of the Asset Acquisition Note.
6
<PAGE> 8
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 Conditions and Results of Operations" and "Business."
HISTORY OF LOSSES; UNCERTAIN FUTURE PROFITABILITY. 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, has
expressed doubt as to the ability of the Company to continue as a going concern
based on its accumulated losses from operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 1 of
Notes to Consolidated 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 (the "Bank
Credit Facility"), which expires on October 15, 1998. The Bank Credit Facility
contains covenants which, among other things, restrict the ability of the
Company 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 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 favorable terms with owners of demographically attractive MDUs. In
addition, the Company depends upon third-party lenders to finance the build-out
of 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 the Company is unable to procure and finance suitable
ROE Contracts in the future, 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."
Although the exclusivity of property rights similar to those contained in
the Company's existing ROE Contracts has been upheld in some jurisdictions by
state and federal appellate courts, current trends at the state and federal
levels, if they continue, may render the legality of such exclusivity provisions
uncertain in different jurisdictions. 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, in the near future by judicial, legislative or
regulatory action. Certain states in which the Company may choose to operate
have enacted legislation providing that no resident of an MDU may be denied
access to programming provided by hard-wire cable systems, notwithstanding the
fact that the MDU owner may have entered into an exclusive agreement with a
cable distributor. It is possible that such laws will be enacted in other states
in the future, increasing the competition for subscribers in MDUs. In several
courts, however, mandatory access laws have been held unconstitutional. In
addition, the FCC is reviewing the rights of various video programming service
providers
7
<PAGE> 9
to access private property, including MDUs, and is considering various
restrictions on the use of contracts which grant exclusive access rights. The
inability to enforce the exclusivity provisions of the ROE Contracts, in whole
or in part, could have a material adverse effect on the Company and its ability
to implement the Company's current strategy. Moreover, even if the exclusivity
provisions of the 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 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 system's ability to track some
types of billable calls, in part due to technology limitations and in part due
to the fact that the current management information 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 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 systems consulting firm to assist it in its
efforts to enhance its management information and billing systems. Nonetheless,
there can be no assurance that the Company will not encounter material
unforeseen difficulties and delays in upgrading its management information and
billing systems. Any such difficulties or delays could have a material adverse
effect on the Company's business, financial condition and results of operations.
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 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" and "--Government Regulation."
8
<PAGE> 10
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.
RELATIONSHIP WITH MCI. The Company currently purchases long distance
services from MCI Communications Corporation, Inc. ("MCI") but does not have a
written contract with MCI. The Company is in negotiations with MCI to obtain a
written contract. If MCI were to terminate its provision of long distance
services to the Company or were to change materially the terms under which the
Company currently receives such services, the Company could be required to
obtain long distance service from another source. There can be no assurance that
the Company will continue to receive such services from MCI at the current
rates, nor can there be any assurance that the Company could receive replacement
services from other providers at rates which are competitive with those that it
currently receives from MCI. In addition, changing providers of long distance
services could disrupt service to the customers of the Company, which could
adversely affect the relationship of the Company with such customers.
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 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.
GOVERNMENT REGULATION. The business of the Company is subject to extensive
and changing laws and regulations, including those of the Federal Communications
Commission ("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 could not have a material adverse effect on the
Company. See "Business--Government Regulation."
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. Assuming an offering price of $7.50 per share, dilution
to new investors will be $3.75 per share of Common Stock. Additional dilution
will occur to the extent that outstanding warrants and options are exercised.
See "Dilution."
9
<PAGE> 11
EFFECT OF FUTURE SALES OF COMMON STOCK. The Company will have 5,500,000
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 5,500,000 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. 2,175,000 shares of Common Stock (including 175,000 shares issuable
upon exercise of the Warrants and 333,333 shares issuable upon exercise of the
Representative's 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 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.
10
<PAGE> 12
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,333,333 shares of
Common Stock offered hereby, at the assumed initial public offering price of
$7.50 per share, after deducting underwriting discounts and the estimated
expenses of the Offering, including the Representative's non-accountable expense
allowance, payable by the Company, are estimated to be approximately $21,805,000
($25,145,000, 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 67.3%
Repayment of indebtedness................................... 4,380,000 20.1
Upgrades and enhancements to management information and
billing systems........................................... 750,000 3.4
Sales and marketing......................................... 500,000 2.3
General corporate purposes and working capital.............. 1,500,000 6.9
------------ -----
Total............................................. $ 21,805,000 100.0%
============ =====
</TABLE>
The Company plans to invest 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. In building out new systems, the Company will
expend funds to purchase and install CATV headend equipment, telephony switching
equipment and related wiring. In conjunction with these installation costs, the
Company will incur related customer service, licensing and administrative
expenses.
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 such
installment 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 management information and billing systems to enable
such systems to process the estimated 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, promoting its public relations and
pursuing direct marketing efforts.
The Company will use the remaining approximately $1,500,000 ($4,840,000, 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 economic 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. In addition, the Bank
Credit Facility prohibits the payment of dividends.
11
<PAGE> 13
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 December 31, 1997, 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 of the
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 Award Plan, the Company had a
pro forma net tangible book value (deficit) of approximately $(1,186,898) or
$(0.55) per share of Common Stock. After giving effect to the sale by the
Company of the 3,333,333 shares of Common Stock offered hereby at the assumed
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
December 31, 1997, would have been approximately $20,618,102 or $3.75 per share.
This represents an immediate increase in the pro forma net tangible book value
of $4.30 per share of Common Stock to present stockholders and an immediate
dilution of $3.75 per share of Common Stock to new investors. The following
table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed offering price per share............................ $7.50
Pro forma net tangible book value (deficit) per share at
December 31, 1997(1)................................... $(0.55)
Increase per share attributable to new investors.......... 4.30
------
Pro forma net tangible book value per share after the
Offering.................................................. 3.75
-----
Dilution per share to new investors......................... $3.75
=====
</TABLE>
- ---------------
(1) As of December 31, 1997, the LLC's actual net tangible book value (deficit)
was $(18,517,028).
The following table summarizes, at December 31, 1997, 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 the assets of the LLC to the Company,
the assumption by the Company of certain of the 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 Award 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 39.4% $ 6,422,113 20.4% $2.96
----------- ------ -----
New investors......................... 3,333,333 60.6 25,000,000 79.6 $7.50
--------- ----- ----------- ------
Total(1).................... 5,500,000 100.0% $31,422,113 100.0%
========= ===== =========== ======
</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 333,333 shares of Common Stock issuable upon
exercise of the Representative's Options. See "Certain Transactions,"
"Management--Benefit Plans," "Description of Capital Stock" and
"Underwriting."
12
<PAGE> 14
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
December 31, 1997; (ii) as of December 31, 1997, 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;
(iii) the issuance of 500,000 shares of Common Stock under the 1998 Restricted
Stock Award Plan, and (iv) as of December 31, 1997, on a pro forma, as adjusted
basis, to reflect (a) the sale by the Company of the 3,333,333 shares of Common
Stock offered hereby at the assumed 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 the Financial Statements appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
U.S. ONLINE COMMUNICATIONS INC.
---------------------------------------------
DECEMBER 31, 1997 PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------ ----------------- --------------
<S> <C> <C> <C>
Short-term debt:
Interim Notes............................................ $-- $ 3,250,000 $ --
Bank Credit Facility..................................... -- 7,127,000 7,127,000
Asset Acquisition Note................................... -- 1,000,000 --
--- ----------- -----------
Total short-term debt.................................... $-- $11,377,000 $ 7,127,000
=== =========== ===========
Long-term debt:
Other long-term indebtedness............................. $-- $ 1,886,000 $ 1,886,000
Asset Acquisition Note................................... -- 2,000,000 2,000,000
Aspen Note............................................... -- 1,500,000 1,500,000
--- ----------- -----------
Total long-term debt..................................... -- 5,386,000 5,386,000
--- ----------- -----------
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 5,500,000 shares issued and outstanding pro
forma, as adjusted(3)................................. -- 2,167 5,500
Additional paid-in capital................................. -- 6,419,833 28,221,500
Deferred Compensation...................................... -- (380,000) (380,000)
Accumulated deficit........................................ -- (120,000) (617,000)
--- ----------- -----------
Stockholders' equity..................................... -- 5,922,000 27,230,000
--- ----------- -----------
Total capitalization............................. $-- $11,308,000 $32,616,000
=== =========== ===========
</TABLE>
- ---------------
(1) Pro forma to give effect to the Interim Financing, 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 and the issuance of 500,000
shares of Common Stock under the 1998 Restricted Stock Award Plan. Under 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 because 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
3,333,333 shares of Common Stock offered hereby at the assumed 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 debt issuance costs and interest
associated with the indebtedness to be repaid.
(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 two outstanding warrants to Aspen OnLine Investments, LLC
(100,000 shares) and Silicon Valley Bank (75,000 shares); (ii) 1,000,000
shares of Common Stock reserved for issuance upon exercise of options 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) 333,333 shares of
Common Stock issuable upon exercise of the Representative's Options. See
"Certain Transactions," "Management--Benefit Plans," "Description of Capital
Stock" and "Underwriting."
13
<PAGE> 15
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 the 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 audited financial statements of the LLC. The LLC owned a minority 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 Consolidated Financial
Statements of the LLC.) The unaudited pro forma statement of operations data for
the Company for the year ended December 31, 1997, gives effect to the Interim
Financing and the Asset Acquisition as if those transactions had occurred on
January 1, 1997.
<TABLE>
<CAPTION>
U.S. ONLINE
COMMUNICATIONS,
U.S. ONLINE COMMUNICATIONS L.L.C. INC.
-------------------------------------------- ---------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1997 1997
AUDITED PRO FORMA(1) AUDITED PRO FORMA(2)
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Telephony revenue................... $ 57,010 $ 57,010 $ 705,193 $ 705,193
Cable revenue....................... -- 777,490 1,888,280 1,888,280
Other revenue....................... 1,397 2,376 127,820 127,820
----------- ----------- ----------- -----------
Total revenue............. 58,407 836,876 2,721,293 2,721,293
Cost of service
Telephony........................... 40,749 40,749 365,362 365,362
Cable............................... -- 272,286 592,722 592,722
----------- ----------- ----------- -----------
Total cost of service..... 40,749 313,035 958,084 958,084
----------- ----------- ----------- -----------
Gross profit.............. 17,658 523,841 1,763,209 1,763,209
Operating expenses:
Customer support.................. 53,331 319,254 426,471 426,471
Other operating expenses.......... 292,564 464,734 2,519,825 2,519,825
Sales and marketing............... 181,888 503,719 838,525 838,525
General and administrative........ 1,983,862 2,684,079 2,865,608 3,315,108
Depreciation and amortization..... 209,711 670,732 1,343,543 1,653,381
----------- ----------- ----------- -----------
Total operating
expenses................ 2,721,356 4,642,518 7,993,972 8,753,310
Loss from operations................ (2,703,698) (4,118,677) (6,230,763) (6,990,101)
Other income (expense):
Interest income................... 355,365 183,233 133,177 133,177
Interest expense.................. (1,111,156) (1,133,936) (3,104,809) (1,358,508)
Other income (expense)............ -- -- (111,712) (111,712)
----------- ----------- ----------- -----------
Total other income
(expense)............... (755,791) (950,703) (3,083,344) (1,337,043)
Loss before minority interest....... (3,459,489) (5,069,380) (9,314,107) (8,327,144)
Equity in losses of Cable........... (783,594) -- -- --
Minority interest in loss of
Cable............................. -- -- 911,195 --
Minority interest in income of
partnership....................... -- (38,114) (43,437) (43,437)
----------- ----------- ----------- -----------
Net loss.................. $(4,243,083) $(5,107,494) $(8,446,349) $(8,370,581)
=========== =========== =========== ===========
Net loss per share........ $ (3.86)
===========
Weighted average shares
used for computing net
loss per share.......... 2,166,667
===========
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
U.S. ONLINE COMMUNICATIONS, INC.
------------------------------------------------
MARCH 31, 1998
------------------------------------------------
PRO FORMA,
ACTUAL(3) PRO FORMA(3) AS ADJUSTED(3)(4)
----------- ------------ -----------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash.............................................. $5,648,500 $ 7,851,596 $25,406,596
Working Capital................................... 5,100,134 (4,124,281) 14,430,719
Total Assets...................................... 6,518,796 25,655,480 42,712,842
Long-Term Obligations, net of current
maturities...................................... 1,500,000 3,500,000 3,500,000
Stockholders' Equity.............................. 2,135,430 5,922,613 27,229,975
</TABLE>
- ---------------
(1) Pro forma summary financial data gives effect to the LLC's acquisition of
100% of Cable as if it had occurred January 1, 1996.
(2) Pro forma summary financial data gives effect to (a) the sale of 65 units,
each unit consisting of an Interim Note and 13,333.33 shares of Common
Stock, and the Aspen Note; (b) the Asset Acquisition, including the issuance
of the Asset Acquisition Note and 800,000 shares of Common Stock issued in
connection with the Asset Acquisition; and (c) the merger of Cable into the
LLC. Expense items of a non-recurring nature are not included in this pro
forma.
(3) Pro forma summary balance sheet data to give effect to the following as if
they occurred on January 1, 1998: (a) the proceeds from the issuance of 18.3
units in the second and third closings of 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; (b) 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 connection with the Asset Acquisition; and
(c) a payment of $393,375 to T&W to bring the Company current with respect
to all amounts owing.
(4) Pro forma summary balance sheet data to give effect to the following as if
they occurred on January 1, 1998: (a) the proceeds from the issuance of
3,333,333 shares of Common Stock in the Offering (at an assumed offering
price of $7.50 per share), resulting in additions to stockholders' equity of
$25,000,000 and issue costs of $3,195,000; and (b) payments by the Company
of $3,250,000 to repay the Interim Notes and a related charge of $497,638 to
expense related issue costs, and $1,000,000 representing the first
installment of the Asset Acquisition Note.
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 historical financial statements
of the LLC, the unaudited balance sheet of the Company as of March 31, 1998 and,
in each case, the related notes included elsewhere in this Prospectus.
The pro forma balance sheet as of March 31, 1998 has been prepared as if
any such transaction not yet consummated on that date had occurred on March 31,
1998 including the Asset Acquisition and Interim Financing ("Completed
Transactions") and the Offering. The 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 historical balance sheet for the LLC as of December 31, 1997 has been
used to compile the pro forma balance sheet as of March 31, 1998 because the
historical balance sheet for the LLC as of March 31, 1998 is not yet available.
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 consolidated 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 and liabilities
acquired based upon an estimate of their respective fair values at March 31,
1998.
16
<PAGE> 18
UNAUDITED PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 1997
The pro forma balance sheet below gives effect to the following as if they
occurred as of December 31, 1997: (i) issuance by the Company of 65 units and
the Aspen Note from the Interim Financing; (ii) acquisition of substantially all
the LLC's assets and certain of its liabilities in accordance with the Asset
Acquisition and issuance of the Asset Acquisition Note and 800,000 shares of
Common Stock in connection with the Asset Acquisition; (iii) payment to T&W to
bring the Company current with all amounts owing in arrears; (iv) issuance of
3,333,333 shares of Common Stock and resulting issue costs from the Offering;
(v) payments by the Company to repay the Interim Notes and a charge to expense
related issue costs; and (vi) payment of the first installment due under the
Asset Acquisition Note.
<TABLE>
<CAPTION>
PRO FORMA
PREDECESSOR FOR THE ADJUSTMENTS
(LLC) AS OF COMPLETED COMPLETED FOR THE PRO FORMA,
DECEMBER 31, 1997 TRANSACTIONS TRANSACTIONS OFFERING AS ADJUSTED
----------------- ------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......... $ 949,471 $ 7,295,000(a) $ 7,851,596 $21,805,000(f) $25,406,596
(393,375)(c) (4,250,000)(g)
500(e)
Subscriber receivables, net....... 457,911 457,911 457,911
Supply inventory.................. 223,961 223,961 223,961
Other current assets.............. 83,433 (17,439)(b) 65,994 65,994
----------- ----------- ----------- ----------- -----------
Total current assets....... 1,714,776 6,884,686 8,599,462 17,555,000 26,154,462
Property and equipment, net....... 9,502,270 9,502,270 9,502,270
Excess of cost over fair value of
net assets acquired, net........ 3,913,228 (3,913,228)(b) 5,273,530 5,273,530
5,273,530(b)
Deferred loan cost................ 890,818 497,638(a) 1,835,981 (497,638)(g) 1,338,343
330,725(a)
97,000(a)
72,750(d)
(52,950)(b)
Other assets...................... 444,237 444,237 444,237
----------- ----------- ----------- ----------- -----------
Total assets............... $16,465,329 $ 9,190,151 $25,655,480 $17,057,362 $42,712,842
=========== =========== =========== =========== ===========
LIABILITIES
Current liabilities:
Current portion of notes
payable......................... $ 7,126,830 $ 1,000,000(b) $ 8,126,830 $(1,000,000)(g) $ 7,126,830
Accounts payable.................. 1,595,643 292,641(a) 1,888,284 1,888,284
Accrued expenses.................. 202,417 328,359(a) 530,776 530,776
Interim Note...................... 3,250,000(a) 3,250,000 (3,250,000)(g)
Deferred revenue.................. 291,605 291,605 291,605
----------- ----------- ----------- ----------- -----------
Total current
liabilities.............. 9,216,495 4,871,000 14,087,495 (4,250,000) 9,837,495
Payable to related parties 18,423,069 (18,423,069) -- --
Aspen Note........................ 1,500,000(a) 1,500,000 1,500,000
Asset Acquisition Note............ 2,000,000(b) 2,000,000 2,000,000
Other liabilities................. 2,279,623(b) (393,375)(c) 1,886,248 1,886,248
----------- ----------- ----------- ----------- -----------
Total liabilities.......... 29,919,187 (10,445,444) 19,473,743 (4,250,000) 15,223,743
=========== =========== =========== ===========
Minority interest -- USAC........... 259,124 259,124 259,124
STOCKHOLDERS' EQUITY:
Common Stock...................... -- 867(a) 2,167 3,333(f) 5,500
800(b)
500(e)
Preferred Stock................... -- -- -- -- --
Additional paid in capital........ 1,196,232 (1,196,232)(b) 6,419,946 24,996,667(f) 28,221,613
3,249,133(a) (3,195,000)(f)
(497,637)(a)
97,000(a)
2,999,200(b)
499,500(e)
72,750(d)
Deferred compensation expense..... (379,620)(e) (379,620) (379,620)
Accumulated deficit............... (14,909,214) 14,909,214(b) (119,880) (497,638)(g) (617,518)
(119,880)(e)
----------- ----------- ----------- ----------- -----------
Total stockholders'
equity................... (13,712,982) 19,635,595 5,922,613 21,307,362 27,229,975
----------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity..... $16,465,329 $ 9,190,151 $25,655,480 $17,057,362 $42,712,842
=========== =========== =========== =========== ===========
</TABLE>
17
<PAGE> 19
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 $ 119,880(e) 2,985,488 2,985,488
Depreciation and
amortization............. 1,343,543 257,875(h) 1,601,418 1,601,418
----------- ---------- ----------- -------- -----------
Total operating
expenses............... 7,993,972 377,755 8,371,727 8,371,727
----------- ---------- ----------- -------- -----------
Loss from operations.......... (6,230,763) (377,755) (6,608,518) (6,608,518)
Other income (expense):
Interest income............. 133,177 133,177 133,177
Interest expense............ (3,104,809) 1,746,301(h) (1,358,508) $487,500(i) (871,008)
Other income (expense)...... (111,712) (111,712) (111,712)
----------- ---------- ----------- -------- -----------
Total other income
(expense).............. (3,083,344) 1,746,301 (1,337,043) 487,500 (849,543)
----------- ---------- ----------- -------- -----------
Loss before minority
interest.................... (9,314,107) 1,368,546 (7,945,561) 487,500 (7,458,061)
Equity in losses of Cable..... 911,195 (911,195)(h) -- --
Minority interest in income of
USAC........................ (43,437) (43,437) (43,437)
----------- ---------- ----------- -------- -----------
Net loss................. $(8,446,349) $ 457,351 $(7,988,998) $487,500 $(7,501,498)
=========== ========== =========== ======== ===========
Net loss per share:
Basic....................... $ (3.69) $ (3.46)
=========== ===========
Diluted..................... $ (2.82) $ (2.20)
=========== ===========
Weighted average shares used
for computing net loss per
share:
Basic....................... 2,166,667 2,166,667
=========== ===========
Diluted..................... 2,836,667 3,408,334
=========== ===========
</TABLE>
18
<PAGE> 20
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 866,667 shares of Common Stock at
$3.75 per share, the placement of $3,250,000 of the Interim Notes and the
issuance of the Aspen Note (collectively, the "Interim Financing"), reduced
by issuance costs of $1,423,000.
(b) Gives effect to the acquisition of the LLC's assets and assumption
of certain liabilities by the Company 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
$5,273,530.
<TABLE>
<S> <C>
Purchase price................................. $6,000,000
Net assets acquired............................ (726,470)
Excess of cost over fair value of net assets $5,273,530
acquired.....................................
</TABLE>
(c) Gives effect to a payment of $393,375 to T&W of amounts in
arrears.
(d) Gives effect to a warrant to purchase 75,000 shares of Common
Stock at an exercise price of $3.75 per share issued to Silicon Valley Bank
in connection with the LLC's Bank Credit Facility. The warrant was valued
at $72,750.
(e) Gives effect to the issuance of 500,000 shares of Common Stock
pursuant to the 1998 Restricted Stock Award Plan at a purchase price of
$.001 and a market value of $1.00, resulting in a $119,880 increase in
general and administrative expenses for the corresponding compensation
expense, as well as a $379,620 charge to deferred compensation for the
unvested shares.
(f) Gives effect to the issuance of 3,333,333 shares of Common Stock
at $7.50 per share by the Company in connection with the Offering,
resulting in additions to stockholders' equity of $25,000,000 reduced by
related issuance costs of $3,195,000.
(g) Gives effect to payments by the Company of $3,250,000 to repay the
Interim Notes along with a charge of $497,638 to expense related issuance
costs and $1,000,000 representing the payment of the first installment
towards the Asset Acquisition Note.
STATEMENT OF OPERATIONS
(h) Gives effect to the Interim Financing and Asset Acquisition,
resulting in an increase in amortization expense based on the increase in
goodwill (using a ten year life) a decrease in interest expense because of
the related party note not assumed as part of the Asset Acquisition, and
elimination of the equity in losses of Cable.
(i) Gives effect to the Offering, resulting in a reduction in interest
expense from the payment of the Interim Notes and the first installment of
the Asset Acquisition Note.
(j) Pro Forma Net Loss Per Common Share.
The FASB issued SFAS No. 128 in February of 1997. This pronouncement
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:
19
<PAGE> 21
<TABLE>
<CAPTION>
PRO FORMA
FOR THE PRO FORMA,
COMPLETED AS
TRANSACTION ADJUSTED
------------ -----------
<S> <C> <C>
Basic Pro Forma Net Loss per Share:
Net loss.................................................. $(7,988,998) $(7,501,498)
=========== ===========
Basic weighted average common shares outstanding.......... 2,166,667 2,166,667
=========== ===========
Basic pro forma net loss per share........................ $ (3.69) $ (3.46)
=========== ===========
Diluted Pro Forma Net Loss per Share:
Net loss.................................................. $(7,988,998) $(7,501,498)
=========== ===========
Basic weighted average common shares outstanding.......... 2,166,667 2,166,667
Effect of dilutive securities:
Options and warrants................................... 670,000 670,000
Offering shares used to pay down existing 566,667
indebtedness..........................................
----------- -----------
Diluted weighted average common shares outstanding........ 2,836,667 3,403,334
=========== ===========
Diluted pro forma net loss per share...................... $ (2.82) $ (2.20)
=========== ===========
</TABLE>
20
<PAGE> 22
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 the 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 currently provides its services
pursuant to 43 ROE Contracts with property owners.
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 by
54% from 28 to 43, the number of operational passings increased by approximately
135% from approximately 7,600 to approximately 18,000, and the number of
subscribers to the Company's services increased by approximately 180% from
approximately 3,600 to approximately 10,000.
The Company derives revenues principally from delivering CATV and telephony
services to MDU residents, rather than installation of passings on properties.
The Company derived 93% and 69% of its revenues from CATV services,
respectively, 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 a service is
provided. The Company also recognizes installation fees 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 from operations, had a working
capital deficit of $7,501,719 at December 31, 1997, and an accumulated deficit
of $14,909,214 at December 31, 1997. The Company expects to incur additional
operating losses for the foreseeable future. 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. The audit opinion on the financial statements of the LLC and Cable
includes a "going concern" paragraph due to the operational losses of these
companies, negative working capital and negative cash flows.
RESULTS OF OPERATIONS
The results of operations described below are based on two criteria: (i)
comparison of the historical results of operations of the LLC for each of the
two years ended December 31, 1996 and 1997, and (ii) comparison of the unaudited
pro forma statement of operations for the LLC for the year ended December 31,
1996 to the historical results of operations of the LLC for the year ended
December 31, 1997. Cable was previously 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 give effect
to the LLC's acquisition of 100% of Cable as if it had occurred on January 1,
1996. This pro forma presentation was prepared to provide a meaningful
comparison in analyzing the Company's operations.
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,
resulting from 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 since the LLC was using the equity method of
accounting during that period. CATV service revenues for 1997 were $1,888,280.
Telephony services 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
21
<PAGE> 23
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, which continued through the end 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 expenses incurred in 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 to 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 principally 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 an increase in project completion
costs associated with a greater number of executed ROE Contracts and the
installed service of plant, property and equipment associated with the delivery
of telephony 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 that period.
22
<PAGE> 24
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 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 through the dissolution of Austin
Cable Venture.
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.
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 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, which continued through the end of 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 customer support necessary to service 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 and 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.
Depreciation and Amortization. Depreciation and amortization increased by
100% from $670,732 for 1996 to $1,343,543. $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 an increase in project completion costs associated with a greater number of
executed ROE Contracts and the installed service of plant, property and
equipment associated with the delivery of telephony services in 1997.
23
<PAGE> 25
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 borrowings from
Silicon Valley Bank and 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 through the dissolution of a 50%
owned subsidiary.
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.
LIQUIDITY AND CAPITAL RESOURCES
From inception in May 1994, the LLC incurred cumulative losses aggregating
$14,909,214 and has not experienced a single quarter of profitable operations.
The LLC expects to continue to incur operating losses for the foreseeable future
until the LLC achieves more significant commercial sales in its CATV services,
telephony services and other services. During the past three years, the LLC has
satisfied its cash requirements principally from borrowings under its credit
facility with Silicon Valley Bank, equipment lease financing, loans from
affiliates, and private financings.
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
principal amount of the Interim Notes, $1,500,000 Aspen Notes and $3,000,000
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 from Silicon Valley Bank of $4,400,000 in 1996; and for 1997, the
increase in leasing arrangements of $2,279,623 and borrowings from Silicon
Valley Bank of $2,969,000.
In April and March 1998 the Company issued Interim Notes in the aggregate
principal amount of $3,250,000, which 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 to the Company of substantially all of the
assets and assumption of certain of the liabilities of the LLC, the Company will
issue at the closing of such sale a $3,000,000 10% convertible subordinated
promissory note to the LLC, payable in three installments, the first to be paid
upon the day after the consummation of the Offering and the remaining two 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% senior subordinated promissory note,
maturing in March 2001. See Note 3 of the Notes to the Company's Financial
Statements.
The Company has a credit facility with Silicon Valley Bank, under which the
Company may borrow a maximum of $7,200,000. As of December 31, 1997, the
interest on the 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.
24
<PAGE> 26
The Company has entered into a series of equipment lease transactions with
T&W. As of January 1, 1998, the LLC had received advances of $6,478,853 and had
obligations for all T&W leases totaling $7,114,467.
Over the next 12-18 months the Company intends to build-out approximately
49,000 passings, in 24,500 units, at an estimated cost of $13,000,000 to
$16,000,000. The Company intends to finance the cost of this construction
through a combination of proceeds of the Offering, internally generated funds,
bank borrowings and private financing.
Like other companies in the telecommunication industry, the Company relies
upon its management information and billing systems ("MIS and billing") 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 processed.
The Company believes that the net proceeds from the Offering, together with
its existing resources and revenues from continuing operations, are expected to
be sufficient to satisfy its capital requirements for at least the twelve month
period 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. The Company has no current arrangements with respect to, or
specific sources of, any such capital, and there can be no assurance that such
additional capital will be available to the Company when needed on commercially
reasonable terms, or at all.
INFLATION
Inflation has not had a significant effect on the Company's business to
date and the Company believes that it will not have a significant effect on its
business for the foreseeable future.
25
<PAGE> 27
BUSINESS
BACKGROUND
The Company markets and provides CATV and enhanced local and long distance
telecommunications services, collectively referred to as RMTS, to MDUs such as
apartment complexes, condominiums and other concentrated residential sites. 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 provides its services pursuant to ROE Contracts with property
owners and agreements with MDU residents. 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.
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 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.
26
<PAGE> 28
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 5% 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 a competitive price, 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 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
27
<PAGE> 29
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 telecommunications
services in bulk from LECs. The Company then offers customers access to these
services 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 currently offers long
distance services provided by MCI. 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 offering 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 1,731 5,167 2,226 622 2,848
Dallas.............................. 2,374 2,374 4,748 1,333 907 2,240
Denver.............................. 1,424 496 1,920 943 129 1,072
San Antonio......................... 4,494 352 4,846 3,009 202 3,211
Washington, D.C..................... 624 624 1,248 398 256 654
------ ----- ------ ----- ----- ------
Totals.................... 12,352 5,577 17,929 7,909 2,116 10,025
</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.
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, REITs, insurance companies and
other
28
<PAGE> 30
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. 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 expansion of 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.
Typically, the property owner agrees to market and promote the Company's
telephony services exclusively.
Certain 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 services provide MDU owners with an amenity package that helps
distinguish their properties from the competition.
A significant number of MDUs in which the Company provides service are
retrofits, as opposed to new construction. These retrofit MDUs have existing
residents who already have CATV and telephony services. 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 the services and offers inducements, such as free cable
service for two to four weeks. The Company's overall stabilized penetration rate
for CATV service is 77%, and its stabilized penetration rate for telephony
service is 60%. The Company considers a property stabilized after approximately
12 months following activation of the Company's services on that property.
The routine process of signing on new residents rests largely with the
property owner's leasing agent, who is compensated 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.
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 attractive 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,
29
<PAGE> 31
commonly managed by an affiliate of the Company's joint venture partner,
Savannah, Ltd., a California limited partnership. See Note 3 of the Notes to the
Financial Statements.
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 provider of RMTS in
the United States. The Company's plan to meet this objective is to:
O target MDUs with favorable demographics;
O capture the benefits of geographic clustering;
O offer competitive products and superior customer service; and
O use a flexible and reliable technology platform.
The Company's growth strategy requires the Company to accomplish the
following:
O generate additional ROE Contracts in existing markets;
O offer products in new markets;
O cross-sell additional related products and services to its existing
subscriber base once a market has been developed; and
O 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 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, with the ability to
broaden the 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 economies of scale while
providing reliable and attentive customer service and support. 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.
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
30
<PAGE> 32
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 headends, 18 GHz analog broadcast microwave systems, direct broadcast
satellite ("DBS") systems, and resale agreements with cable operators. These
technologies give the Company the flexibility to deploy the most cost-effective
CATV and telecommunications platforms to a particular MDU without sacrificing
features, quality or reliability.
CATV SERVICES. The Company's standard cable line up 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 line up 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, including SMATV headends, 18 GHz microwave
broadcast systems, DBS systems, and resale agreements with local franchise cable
operators. These different delivery methods 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.
31
<PAGE> 33
The following diagram illustrates the Company's typical CATV services
delivery system:
LOGO
TELEPHONY SERVICES. The Company has selected a scaleable central office
telephone switch 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. In addition, the Company resells
MCI long distance services.
The Company's telephone facilities equipment is usually located on-site at
each apartment complex. The central switch ("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 ("PRI") T-1s 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.
32
<PAGE> 34
The following diagram illustrates the Company's typical facilities-based
telephony delivery system:
LOGO
COMPETITION
The market for CATV and telephony services is highly competitive. 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 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") allowed 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.
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.
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
33
<PAGE> 35
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. 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.
In order to remain exempt from extensive FCC regulation and local
franchising requirements, the Company will confine its video distribution
facilities to contiguous private property and obtain programming primarily via
SMATV facilities. It will 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'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, in order 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 in order 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 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 franchised 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
franchised operators have not able to use these rights to access the interior of
MDUs without owner consent. In some jurisdictions, franchised 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 franchised cable operators
to force access to an MDU in order 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 franchised
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 franchised 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 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
34
<PAGE> 36
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 MMDS
operators will be granted rights on a national basis similar to the mandatory
access provided to franchised 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 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 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 (1) 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); (2) limit
the ability of multichannel video programming distributors ("MVPDs") with market
power (typically the local franchisee) to enter into exclusive contracts; (3)
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; (4) require competing providers to share a single system of wiring;
(5) 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
franchised operators; and/or (6) extend rights of subscribers to install their
own cable home wiring to subscribers 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 of 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 franchised 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
franchised 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 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."
35
<PAGE> 37
Regulation of Franchise Cable Television Rates. The FCC regulates the rates
that franchised cable systems charge for basic monthly service, expanded basic
and certain customer premises equipment. As an exception to the general uniform
rate requirement, the regulations allow certain "bulk" discounts to MDU
customers, enabling franchised cable systems to be more competitive with private
operators such as the Company. In addition, rate regulation does not apply if
the franchised operator is subject to "effective competition" as defined by the
FCC or if the operator qualified for the "small operator" exemption. The FCC is
currently considering revisions to the uniform rate regulations and the
foregoing exemptions which may affect the level of protection they 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 which expand the freedom of franchised operators to set
rates or the termination of rate regulation altogether could allow franchised
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. Since the broadcast programming distributed by the Company contains
copyrighted material, 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 in order 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 Competitive
Local Exchange Carrier ("CLEC"), as well as an interexchange carrier ("IXC").
Less 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
Federal Communications Commission ("FCC") and a majority of states imposes
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. In
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 MCI, and STS
from LECs (e.g., Southwestern Bell Telephone and U.S. West Communications) on a
tariffed basis. 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. The Company has not
yet undertaken efforts to take advantage of its status as a CLEC. 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
intraLATA IXCs on a "1+" basis without use of access codes (i.e. dialing parity)
eliminating two critical barriers to local telecommunications competition.
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 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,
introducing a number of substantial new
36
<PAGE> 38
competitors to the Company 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 of the Company is currently located at 8307
Shoal Creek Boulevard in Austin, Texas, in approximately 2,630 square feet of
commercial office space under a long-term lease. Its national customer service
bureau is located at 2210 Denton Drive in Austin, Texas, where it occupies
approximately 5,200 square feet of leased commercial office space. The Company
also maintains leased facilities in Farmer's Branch and San Antonio, Texas, and
McLean, Virginia. The Company is currently negotiating a lease that would
consolidate its corporate headquarters and customer service bureau in one
location in Austin, Texas, occupying approximately 25,000 square feet of
commercial office space. See "Certain Transactions."
EMPLOYEES
The Company has 68 full-time employees and six part-time employees. The
Company believes that its relations with its employees are good.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
37
<PAGE> 39
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 50 President; Chief Financial Officer
David Smith 35 Director of Sales
Joseph R. Jarmusch 43 Director of Engineering & Construction
Robert J. Walentynowicz, Jr. 35 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 six
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 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.
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, where he was responsible for expanding its Los Angeles,
California operation into a national provider of telephony services. 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
38
<PAGE> 40
wholly owned subsidiary of EDS that provided electronic security protection for
residential and commercial real estate. He graduated cum laude with a B.S. in
Business Administration from Strayer College, and is also a Certified Protection
Professional with the American Society of Industrial Security. Since 1993, Mr.
Walentynowicz has been an officer of National Alarm Association of America.
COMPENSATION OF DIRECTORS
Directors of the Company do not receive cash compensation for their
services as directors or members of committees of the board of directors, but
are reimbursed for their reasonable expenses incurred in attending board of
directors or committee meetings.
BOARD COMMITTEES
The Company intends to establish an Audit Committee and a Compensation
Committee.
The functions of the Audit Committee will be 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 functions of the Compensation Committee will be 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 Company's stock
option plans and to make recommendations to the board of directors regarding
such matters.
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 Mr. Barlow, its President and
Chief Financial Officer. Mr. Solomon's employment agreement has an initial term
of five years and provides for a 1998 base compensation of $150,000. Mr.
Barlow's employment agreement has an initial term of three years and provides
for a 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
agreements contain provisions providing severance benefits, including payments
upon a "change in control"
39
<PAGE> 41
(as defined in the agreements) and indemnification. 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. 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.
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 some are 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.
1998 RESTRICTED STOCK AWARD PLAN. The 1998 Restricted Stock Award 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, under which 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 $0.01 per share if the employee terminates his or her employment
before March 1, 2001. As of March 10, 1998, all 500,000 shares of Common Stock
under the plan had been granted. 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.
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 law. As permitted by the General Corporation Law of the
State of Delaware (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 care. The Company has obtained directors' and officers' insurance.
40
<PAGE> 42
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 7 of the Notes to Financial Statements. The Company believes that each
of the foregoing transactions was 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
(the "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 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.
Between the Interim Financing and closing under of the Asset Acquisition,
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%
convertible promissory note maturing on March 30, 1999 (the "Pre-Acquisition
Note"), which will be cancelled upon the closing under the Asset Acquisition.
In connection with the Asset Acquisition, the Company has agreed to
purchase substantially all of the assets and to assume certain of the
liabilities of the LLC. Upon the closing of the Asset Acquisition, the LLC will
receive 800,000 shares of Common Stock, a promissory note in the principal
amount of $3,000,000 (the "Asset Acquisition Note"), and cancellation of all
indebtedness under the Pre-Acquisition Note. The Asset Acquisition Note bears
interest at the rate of 10% and is payable in three installments. The first
installment is to be paid the day immediately following 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.
Mr. Solomon, the Company's Chief Executive Officer, 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 one of the Company's
customers, Springwood Apartments, located in San Antonio, Texas.
The Company currently subleases 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 partially owned by Mr. Solomon. The sublease
has a 36-month term and a rental rate of approximately $13.20 per square foot
plus triple net expenses.
41
<PAGE> 43
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the ownership of
Common Stock as of March 31, 1998 (assuming the closing under of the Asset
Acquisition, which will occur before consummation of the Offering), 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% 15%
Aspen OnLine Investments, LLC(3)....... 433,333 20% 8%
Robert G. Solomon(4)................... 250,000 12% 6%
Donald E. Barlow(4).................... 50,000 2% 1%
All directors and executive officers as
a group (2 persons).................. 300,000 14% 7%
</TABLE>
- ---------------
(1) Beneficial ownership is determined in accordance with rules of 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) The business address of the LLC is 8307 Shoal Creek Blvd., Austin, Texas
78757.
(3) The business address of 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 Mr. Solomon and Mr. Barlow is 8307 Shoal Creek
Blvd., Austin, Texas 78757.
42
<PAGE> 44
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.
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
Representative's Options, (ii) 333,333 shares of Common Stock issuable upon
exercise of the Representative's 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 Representative and the holders of the
Warrants have "demand" registration rights with respect to the shares issuable
upon exercise of the Representative's 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) 500,000 shares of Common
Stock to cover the Underwriters' over-allotment option; (ii) the
Representative's Options; (iii) 333,333 shares of Common Stock underlying the
Representative's 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
500,000 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 20 consecutive trading days
ending within five days of the date of such sale, and such sale is completed at
a
43
<PAGE> 45
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
ChaseMellon Shareholder Services, L.L.C., Dallas, Texas, 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.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have 5,500,000 shares
of Common Stock outstanding (assuming no exercise of outstanding warrants or
stock options). Of these shares, the 3,333,333 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.
44
<PAGE> 46
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 registration statements on
Form S-8 under the Securities Act to register the shares of Common Stock
reserved for issuance under the 1998 Stock Option Plan and 1998 Restricted Stock
Award 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."
45
<PAGE> 47
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 and
each of the underwriters for whom Barington is acting as representative 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................................
---------
Total............................................. 3,333,333
=========
</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 Representative and the Underwriters
are committed to purchase all the Common Stock offered hereby if any is
purchased.
The Representative has advised the Company that it proposes 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 the commencement of the Offering, the
offering price, the concessions and the reallowance may be changed.
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 500,000 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 Representative 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 Representative, or its
designees, the Representative's Options to purchase 333,333 shares at a price of
$.001 per option. The Representative's 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
Representative's Options nor the shares of Common Stock underlying the
Representative's 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 the 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 the Representative or otherwise by operation of law. The Representative's
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 will contain certain registration
rights and anti-dilution provisions for appropriate
46
<PAGE> 48
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 put forth 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 24 months 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 Representative 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 consolidated balance sheet of the LLC at December 31, 1997, the
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
Cable 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.
47
<PAGE> 49
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.
48
<PAGE> 50
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.
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.
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 the 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.
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.
PRI........................... Primary Rate Interface: An ISDN circuit
transmitting at T1 speed.
PUC........................... Public Utility Commission.
49
<PAGE> 51
PRINCIPAL 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.
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. Such
services include, but are not limited to,
cable, telephone, intrusion alarm, Internet
access, and utility metering.
ROE CONTRACTS................. Right of Entry Contracts: An agreement between
property owner and RMTS provider which governs
the terms under which the RMTS provider will
offer its services to residents of the MDU.
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.
50
<PAGE> 52
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
U.S. ONLINE COMMUNICATIONS L.L.C.
Report of Independent Accountants........................... F-2
Consolidated Balance Sheet as of December 31, 1997.......... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996................................ F-4
Consolidated Statements of Changes in Members' Deficit for
the years ended December 31, 1997 and 1996................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996................................ F-6
Notes to Consolidated Financial Statements.................. F-7
U.S. ON-LINE CABLE, L.L.C.
Report of Independent Accountants........................... F-17
Consolidated Statement of Operations for the year ended
December 31, 1996......................................... F-18
Consolidated Statement of Changes in Members' Equity
(Deficit) for the year ended December 31, 1996............ F-19
Consolidated Statement of Cash Flows for the year ended
December 31, 1996......................................... F-20
Notes to Consolidated Financial Statements.................. F-21
U.S. ONLINE COMMUNICATIONS, INC.
Unaudited Balance Sheet as of March 5, 1998 (date of
incorporation)............................................ F-27
Note to the Unaudited Financial Statement................... F-28
</TABLE>
F-1
<PAGE> 53
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-2
<PAGE> 54
U.S. ONLINE COMMUNICATIONS L.L.C.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents................................. $ 949,471
Subscriber receivables -- net of allowance for doubtful
accounts of $29,072.................................... 457,911
Receivable from SP Investments............................ 17,439
Supply inventory.......................................... 223,961
Other current assets...................................... 65,994
------------
Total current assets.............................. 1,714,776
Property and equipment, net................................. 9,502,270
Excess of cost over fair value of net assets acquired, net
of accumulated amortization of $421,796................... 3,913,228
Deferred loan and organization costs, net of accumulated
amortization of $322,201.................................. 890,818
Other assets................................................ 444,237
------------
Total assets...................................... $ 16,465,329
============
LIABILITIES AND MEMBERS' DEFICIT
Current liabilities:
Note payable to bank...................................... $ 7,126,830
Accounts payable.......................................... 1,595,643
Accrued expenses.......................................... 202,417
Deferred revenue.......................................... 291,605
------------
Total current liabilities......................... 9,216,495
------------
Noncurrent liabilities:
Other noncurrent liabilities.............................. 2,279,623
Payable to related parties................................ 18,423,069
------------
Total noncurrent liabilities...................... 20,702,692
------------
Total liabilities................................. 29,919,187
------------
Commitments and contingencies (Note 8)
Minority interest -- USAC (Note 1).......................... 259,124
Members' deficit:
Contributed capital....................................... 1,196,232
Accumulated deficit....................................... (14,909,214)
------------
Total members' deficit............................ (13,712,982)
------------
Total liabilities and members' deficit............ $ 16,465,329
============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 55
U.S. ONLINE COMMUNICATIONS L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Telephony revenue........................................... $ 705,193 $ 57,010
Cable revenue............................................... 1,888,280 --
Other revenue............................................... 127,820 1,397
----------- -----------
Total revenue..................................... 2,721,293 58,407
----------- -----------
Cost of service -- telephony................................ 365,362 40,749
Cost of service -- cable.................................... 592,722 --
----------- -----------
Total cost of service............................. 958,084 40,749
----------- -----------
Gross profit (loss)............................... 1,763,209 17,658
----------- -----------
Operating expenses:
Customer support.......................................... 426,471 53,331
Other operating expenses.................................. 2,519,825 292,564
Sales and marketing....................................... 838,525 181,888
General and administrative................................ 2,865,608 1,983,862
Depreciation and amortization............................. 1,343,543 209,711
----------- -----------
Total operating expenses.......................... 7,993,972 2,721,356
----------- -----------
Loss from operations........................................ (6,230,763) (2,703,698)
----------- -----------
Other income (expense):
Interest income........................................... 133,177 355,365
Interest expense.......................................... (3,104,809) (1,111,156)
Other income (expense).................................... (111,712) --
----------- -----------
Total other income (expense)...................... (3,083,344) (755,791)
----------- -----------
Loss before losses in equity investees and minority
interests................................................. (9,314,107) (3,459,489)
Equity in losses of U.S. On-Line Cable, L.L.C............... -- (783,594)
Minority interest in losses of U.S. On-Line Cable, L.L.C.... 911,195 --
Minority interest in net income of subsidiary............... (43,437) --
----------- -----------
Net loss.......................................... $(8,446,349) $(4,243,083)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 56
U.S. ONLINE COMMUNICATIONS L.L.C.
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<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)
========== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 57
U.S. ONLINE COMMUNICATIONS L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(8,446,349) $ (4,243,083)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 1,343,543 209,711
Provision for doubtful accounts........................ 25,121 --
Minority interest in losses of U.S. On-Line Cable,
L.L.C................................................. (911,195) --
Minority interest in net income of subsidiary.......... 43,437 --
Gain on dissolution of joint venture................... (23,629) --
Equity loss -- U.S. On-Line Cable, L.L.C............... -- 783,594
Changes in operating assets and liabilities:
Interest receivable -- U.S. On-Line Cable, L.L.C..... -- (350,346)
Subscriber receivables............................... (304,992) (15,976)
Receivable from affiliates........................... 89,228 (106,667)
Supply inventory..................................... (223,961) --
Other current assets................................. 236,852 (4,044)
Accounts payable and accrued expenses................ 560,951 74,635
Deferred revenue..................................... 206,168 --
Interest payable to related parties.................. 3,117,251 550,465
----------- ------------
Net cash used in operating activities............. (4,287,575) (3,101,711)
----------- ------------
Cash flows from investing activities:
Purchase of property and equipment........................ (258,016) (4,817,897)
Change in other assets.................................... (209,747) --
Payments for organization costs........................... -- (43,257)
Loan to U.S. On-Line Cable, L.L.C......................... -- (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 used in investing activities............. (467,763) (12,900,942)
----------- ------------
Cash flows from financing activities:
Advances from related parties............................. 519,516 12,635,195
Net change in obligations under leasing arrangement....... 2,279,623 --
Borrowings under note payable to bank..................... 2,969,000 4,400,000
Payments on note payable to bank.......................... (242,170) --
Loan costs................................................ (107,975) (1,027,960)
----------- ------------
Net cash provided by financing activities......... 5,417,994 16,007,235
----------- ------------
Net increase in cash and cash equivalents................... 662,656 4,582
Cash and cash equivalents, beginning of period.............. 286,815 --
----------- ------------
Cash and cash equivalents, end of period.................... $ 949,471 $ 4,582
=========== ============
Non-cash financing activities:
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-6
<PAGE> 58
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 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 USOL 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 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, the LLC's bank indebtedness approximated $7.2
million under a credit facility (the "Bank Credit Facility"). At December 31,
1997, the LLC had failed to comply with certain restrictive covenants under the
Bank Credit Facility. Subsequent to the balance sheet date, the loan agreement
was renegotiated. As amended, the 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 Bank Credit Facility. In the event that any
such default is not cured, the bank could elect to declare all amounts borrowed
under the 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 Bank Credit Facility and
the other creditors of the LLC in full. In addition, as a result of these
covenants, the ability of the LLC to respond to changing business and economic
conditions and to secure additional financing, if needed, may be significantly
restricted, and the LLC may be prevented from engaging in transactions that
might otherwise be considered beneficial to the LLC.
F-7
<PAGE> 59
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)
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 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 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 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 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 $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 April 1998, the LLC
has borrowed approximately $4.95 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 and certain liabilities
to U.S. OnLine Communications, Inc. in return for a 10% promissory note in the
amount of $3,000,000 and 800,000 shares of the common stock of U.S. OnLine
Communications, Inc. 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, condominium
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., 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 Paul H. Pfleger, as
nominee for Black Creek Limited Partnership, on December 19, 1996, and 1,366,667
shares remain
F-8
<PAGE> 60
U.S. ONLINE COMMUNICATIONS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
THE LLC (CONTINUED)
as contributed 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, consists
of loan costs amounting to $819,734 which are being amortized using the interest
method over the four-year term of the loan and FCC
F-9
<PAGE> 61
U.S. ONLINE COMMUNICATIONS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
license and organizational costs amounting to $71,084 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 $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.
The Company currently purchases long distance services from a single
supplier, MCI Communications Corporation, Inc. ("MCI"), but does not have a
written contract with MCI. The Company is in negotiations with MCI to obtain a
written contract. If MCI were to terminate its provision of long distance
services to the
F-10
<PAGE> 62
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)
Company or were to change materially the terms under which the Company currently
receives such services, the Company could be required to obtain long distance
service from another source.
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
The LLC is taking actions to insure that its 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.
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, 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 December 31, 1997. The advances are eliminated in consolidation at December
31, 1997.
F-11
<PAGE> 63
U.S. ONLINE COMMUNICATIONS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT IN CABLE: (CONTINUED)
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 December 31, 1997 was approximately
$3,913,000.
3. INVESTMENTS IN JOINT VENTURES AND PARTNERSHIPS:
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 1997 with Savannah's portion of the cash distributions of
the partnership. The balance due under the note is $235,172 at December 31,
1997.
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 December 31, 1997:
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Cable systems............................................... $ 7,138,295
Telephone switch equipment.................................. 2,144,127
Furniture and fixtures...................................... 788,237
-----------
10,070,659
Accumulated depreciation.................................... (1,322,096)
Construction in progress.................................... 753,707
-----------
$ 9,502,270
===========
</TABLE>
Depreciation expense was approximately $778,000 and $177,000 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
F-12
<PAGE> 64
U.S. ONLINE COMMUNICATIONS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENT IN MIDCOM COMMUNICATIONS INC.: (CONTINUED)
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 December 31, 1997, the LLC had approximately $7.2 million outstanding
under the Bank Credit Facility, with interest at the bank's prime rate (8.5% at
December 31, 1997) plus two percent (2%). The 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. The LLC may borrow additional amounts up to a total of $8.0
million prior to March 31, 1998, subject to providing certain additional
personal guarantees. 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 Bank Credit Facility. All principal and outstanding
interest under the 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 December 31, 1997, the LLC was not in compliance with certain
restrictive covenants under the 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 USOL, to fund start up costs. Interest accrued at
a rate of The Wall Street Journal prime (8.5% at December 31, 1997) plus 2%
compounded annually. As of December 31, 1997, the LLC had borrowed $13,854,988
under these note agreements. Such amounts plus $2,174,862 of accrued interest in
1997 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.
Mr. Pfleger has entered into a guaranty and subordination agreement with
the LLC whereby he has guaranteed the repayment of the loans under the 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 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
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, $1,539,871 was due at December 31, 1997.
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 $170,071 and $394,138 for the years
ended 1997 and 1996, respectively. At December 31, 1997, $113,004 related to
such services was included in payable to related parties.
F-13
<PAGE> 65
U.S. ONLINE COMMUNICATIONS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS: (CONTINUED)
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 $69,000
and $64,000 in 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 $51,000 and $43,000 in 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.
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>
FISCAL YEAR 1997
----------- ----------
<S> <C>
1998........................................... $ 863,607
1999........................................... 2,047,828
2000........................................... 2,015,637
2001........................................... 1,321,528
2002........................................... 701,483
Thereafter..................................... 608,937
----------
$7,559,020
==========
</TABLE>
Rental expense incurred in connection with these leases approximated
$940,000 and $205,000 for the years ended December 31, 1997 and 1996,
respectively.
REGULATORY MATTERS
Two significant regulatory acts have affected, and will continue to affect,
the telecommunications and CATV industries: the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Act") and the
Telecommunications Act of 1996 (the "1996 Act").
Cable Television Consumer Protection and Competition Act of 1992
The basic premise of the 1992 Act was to curb CATV consumer rates and
improve customer service. This was to be accomplished by increasing competition
among cable systems and alternative multi-channel video programming distribution
technologies, making CATV programming services widely available to the
F-14
<PAGE> 66
U.S. ONLINE COMMUNICATIONS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
REGULATORY MATTERS (CONTINUED)
public through non-discriminatory distribution arrangements, and ensuring the
economic viability of over-the-air broadcast television through mandatory
carriage requirements.
The 1992 Act's requirements extend to numerous areas of CATV operations.
Some of the law's provisions apply only to certain types of multi-channel video
programming distributors, while others affect all players involved in providing
video programming.
The 1992 Act re-regulates the industry, dramatically changing the way
broadcasters, cable systems, local governments and programmers conduct business.
While the Cable Communications Policy Act of 1984 took a general hands-off
approach to cable, there now exist federal rules for almost all aspects of
cablecasting, ranging from what broadcast stations must be carried and how they
must be arranged to parameters for rate setting and minimum standards for
customer service. The 1992 Act gave the FCC and state and local franchising
authorities new power, while it placed new restrictions on cable operators and
other video programming distributors in their dealings with programming vendors.
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 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 in 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 December 31, 1997, Cable had deferred tax assets of approximately
$210,977, 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.
F-15
<PAGE> 67
U.S. ONLINE COMMUNICATIONS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-16
<PAGE> 68
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-17
<PAGE> 69
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
Loss from disposal of asset............................... --
-----------
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-18
<PAGE> 70
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-19
<PAGE> 71
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-20
<PAGE> 72
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 SMA
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-21
<PAGE> 73
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-22
<PAGE> 74
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-23
<PAGE> 75
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
Two significant regulatory acts have affected, and will continue to affect,
the telecommunications and CATV industries: the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Act") and the
Telecommunications Act of 1996 (the "1996 Act").
Cable Television Consumer Protection and Competition Act of 1992
The basic premise of the 1992 Act was to curb CATV consumer rates and
improve customer service. This was to be accomplished by increasing competition
among cable systems and alternative multi-channel video programming distribution
technologies, making CATV programming services widely available to the public
through non-discriminatory distribution arrangements, and ensuring the economic
viability of over-the-air broadcast television through mandatory carriage
requirements.
The 1992 Act's requirements extend to numerous areas of CATV operations.
Some of the law's provisions apply only to certain types of multi-channel video
programming distributors, while others affect all players involved in providing
video programming.
The 1992 Act re-regulates the industry, dramatically changing the way
broadcasters, cable systems, local governments and programmers conduct business.
While the Cable Communications Policy Act of 1984 took a general hands-off
approach to cable, there now exist federal rules for almost all aspects of
cablecasting, ranging from what broadcast stations must be carried and how they
must be arranged to parameters for rate setting and minimum standards for
customer service. The 1992 Act gave the FCC and state and local franchising
authorities new power, while it placed new restrictions on cable operators and
other video programming distributors in their dealings with programming vendors.
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,
F-24
<PAGE> 76
U.S. ON-LINE CABLE, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CAPITAL AND ALLOCATION OF EARNINGS/LOSSES (CONTINUED):
$147,455 was paid to an original member in satisfaction of his accumulated
preferred return, and $73,032 was 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
F-25
<PAGE> 77
U.S. ON-LINE CABLE, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS (CONTINUED):
fee. Management fees recorded during 1996 in conjunction with this consulting
agreement were approximately $90,000.
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.
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-26
<PAGE> 78
U.S. ONLINE COMMUNICATIONS, INC.
UNAUDITED BALANCE SHEET
MARCH 5, 1998
ASSETS
<TABLE>
<CAPTION>
ACTUAL
-----------
<S> <C>
Total assets...................................... $ --
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Commitments and contingencies (Note 2)
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; no shares issued or outstanding............ --
-----------
Total stockholders' equity........................ --
-----------
Total liabilities and stockholders' equity........ $ --
===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-27
<PAGE> 79
U.S. ONLINE COMMUNICATIONS, INC.
NOTES TO THE UNAUDITED 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, condominiums and other
concentrated residential sites. The Company will target demographically
appealing 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. SUBSEQUENT EVENTS
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.
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 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% senior subordinated
promissory note (the "Aspen Note"), maturing in March 2001, ad (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.
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 under certain
conditions as set forth in the agreement 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
F-28
<PAGE> 80
U.S. ONLINE COMMUNICATIONS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENT (CONTINUED)
2. SUBSEQUENT EVENTS (CONTINUED)
LOAN COMMITMENT TO THE LLC (CONTINUED)
the Asset Acquisition (see Note 5). Subsequent to March 5, 1998, approximately
$4.95 million has been advanced to the LLC.
COMMITMENTS AND CONTINGENCIES
The Company has agreed to purchase substantially all of the assets and to
assume certain of the liabilities of the LLC pursuant to an asset acquisition
agreement dated March 27, 1998, in exchange for 800,000 shares of the Company's
Common Stock, the Asset Acquisition Note, 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 Company will assume the LLC's operating leases for office space, roof
rentals, head ends and transmission facilities.
RELATED PARTY TRANSACTIONS
Subsequent to March 5, 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 a 1998 base compensation of $150,000. The chief financial officer's
employment agreement has an initial term of three years and provides for a 1998
base compensation of $125,000. Both 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 agreements contain provisions
providing severance benefits, including payments upon a "change in control" (as
defined therein), indemnification and certain termination provisions. In the
event of termination for any reason, both officers have agreed not to compete
with the Company, not to disclose any of the confidential information of the
Company, and to assign to the Company any interest in proprietary information.
Substantially all of both 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 currently subleases 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 Company's Chief Executive Officer. The
Company's Chief Executive Officer is also a limited partner in the partnership.
The LLC subleases a portion of the space from a company partially owned by the
Company's Chief Executive Officer.
3. 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 5, 1998, there are no outstanding shares of common or preferred stock. As
of March 5, 1998, the date of incorporation, the initial capitalization funding
had not occurred.
F-29
<PAGE> 81
U.S. ONLINE COMMUNICATIONS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENT (CONTINUED)
3. CAPITAL STOCK: (CONTINUED)
1998 RESTRICTED STOCK AWARD PLAN
The 1998 Restricted Stock Award Plan (the "1998 Restricted Award Plan") was
adopted on March 24, 1998 by the board of directors of the Company to provide
incentives to attract and retain key employees and directors. The board of
directors administers the plan, under which 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 $0.01 per share if the employee terminates his or her
employment before March 1, 2001. As of March 10, 1998, all 500,000 shares of
Common Stock under the plan had been issued. During the restricted period,
shares subject to restriction may not be sold, exchanged, transferred, pledged,
hypothecated or otherwise disposed of, unless they have been offered to the
Company for repurchase at the original issuance price ($.001). At March 24,
1998, 500,000 shares were awarded to key employees and directors under the 1998
Restricted Award Plan, of which 120,000 shares were fully vested at the date of
award.
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. 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 some are 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 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.
A summary of the status of the Company's fixed stock option plan for grants
subsequent to March 5, 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>
F-30
<PAGE> 82
U.S. ONLINE COMMUNICATIONS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENT (CONTINUED)
3. CAPITAL STOCK: (CONTINUED)
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, will be
recorded as an asset pending the acquisition of assets and assumption of the
bank debt from the LLC.
F-31
<PAGE> 83
======================================================
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............................... 7
Use of Proceeds............................ 11
Dividend Policy............................ 11
Dilution................................... 12
Capitalization............................. 13
Selected Consolidated Financial Data....... 14
Unaudited Pro Forma Financial
Information.............................. 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 21
Business................................... 26
Management................................. 38
Certain Transactions....................... 41
Principal Stockholders..................... 42
Description of Capital Stock............... 43
Shares Eligible for Future Sale............ 44
Underwriting............................... 46
Legal Matters.............................. 47
Experts.................................... 47
Additional Information..................... 48
Glossary of Industry Terms................. 49
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.
======================================================
======================================================
3,333,333 SHARES
U.S. ONLINE COMMUNICATIONS, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
BARINGTON CAPITAL GROUP
, 1998
======================================================
<PAGE> 84
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........................... $ +
Directors' and Officers' Insurance Expenses................. $ +
--------
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 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.
(2) 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.
(3) 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> 85
(4) 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.
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 Representative's Option
2.1 Agreement and Plan of Merger between U.S. On-Line Cable,
L.L.C. and U.S. OnLine Communications L.L.C. dated March 27,
1998
2.2 Asset Acquisition Agreement between U.S. OnLine
Communications L.L.C., 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, U.S. OnLine
Communications, L.L.C., 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
U.S. OnLine Communications L.L.C.
10.4 Form of 15% Promissory Note in the principal amount of up to
$7,200,000 provided by U.S. OnLine Communications L.L.C. 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
11.1* Statement regarding computation of earnings per share
15.1* Letter on Unaudited Interim Financial Information
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 (Cable)
23.2.2 Consent of Coopers & Lybrand (LLC)
</TABLE>
II-2
<PAGE> 86
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
24.1 Power of Attorney (included in signature page)
27.1 Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
(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.
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
II-3
<PAGE> 87
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> 88
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Austin, State of Texas,
on May 4, 1998.
U.S. ONLINE COMMUNICATIONS, INC.
By: /s/ ROBERT G. SOLOMON
------------------------------------
Robert G. Solomon
Chief Executive Officer
POWER OF ATTORNEY
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 ever 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 DATE
--------- ----- ----
<C> <S> <C>
/s/ ROBERT G. SOLOMON Chairman of the Board Chief May 4, 1998
- ----------------------------------------------------- Executive Officer, Director
Robert G. Solomon
/s/ DONALD E. BARLOW President Chief Financial Officer May 4, 1998
- ----------------------------------------------------- (Principal Financial and
Donald E. Barlow Accounting Officer)
</TABLE>
II-5
<PAGE> 89
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- ------------
<C> <S> <C>
1.1* Form of Underwriting Agreement..............................
1.2* Form of Representative's Option.............................
2.1 Agreement and Plan of Merger between U.S. On-Line Cable,
L.L.C. and U.S. OnLine Communications L.L.C. dated March 27,
1998........................................................
2.2 Asset Acquisition Agreement between U.S. OnLine
Communications L.L.C., 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, U.S. OnLine
Communications, L.L.C., 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
U.S. OnLine Communications L.L.C............................
10.4 Form of 15% Promissory Note in the principal amount of up to
$7,200,000 provided by U.S. OnLine Communications L.L.C. 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..................
11.1* Statement regarding computation of earnings per share.......
15.1* Letter on Unaudited Interim Financial Information...........
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 (Cable)........................
23.2.2 Consent of Coopers & Lybrand (LLC)..........................
</TABLE>
<PAGE> 90
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- ------------
<C> <S> <C>
24.1 Power of Attorney (included in signature page)..............
27.1 Financial Data Schedule.....................................
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER ("Agreement") is made this 27TH day of
March, 1998 by and between U.S. On-Line Cable, L.L.C. ("On-Line Cable"), a Texas
limited liability company, and U.S. OnLine Communications L.L.C. ("OnLine
Communications"), a Washington limited liability company (collectively, the
"Companies").
WHEREAS, the Board of Managers of the Companies have determined that it is
advisable that On-Line Cable be merged with and into OnLine Communications (the
"Merger");
WHEREAS, On-Line Cable is a limited liability company duly organized and
existing under the laws of the State of Texas, having been organized on May 11,
1994;
WHEREAS OnLine Communications is a limited liability company duly organized
and existing under the laws of the State of Washington, having been organized on
June 21, 1995;
NOW, THEREFORE, the parties hereto agree that On-Line Cable shall be merged
with and into OnLine Communications and that the terms and conditions of the
Merger shall be as follows:
I
Legal Certification
Upon the approval of the members of the Companies, Articles of Merger in
substantially the form annexed hereto as Exhibit A shall be executed in
duplicate by each limited liability company and shall be delivered to the
Secretary of State of the State of Washington and the Secretary of State of the
State of Texas for filing. The Managers and officers of the Companies are
authorized to execute and deliver Articles of Merger for filing with such
Secretaries of State, and to execute and deliver such other certificates,
documents and agreements, and to take such other action, as they deem necessary
or desirable to accomplish the Merger.
II
Effective Date of the Merger
Upon filing of the Articles of Merger with the Secretary of State of the
State of Washington and the Secretary of State of the State of Texas (the
"Effective Date"), this Agreement and the Merger contemplated herein shall be
effective; On-Line Cable (the "Disappearing Company") shall be merged with and
into OnLine Communications and the separate existence of the Disappearing
Company shall cease. OnLine Communications (the "Surviving Company") shall
continue its limited liability company existence under the laws of
1
<PAGE> 2
the State of Washington. Upon the Effective Date of the Merger contemplated
herein, all of the outstanding equity interests of On-Line Cable, and the
percentage interests of any of its members represented thereby, shall be
canceled without further action on the part of On-Line Cable or its members.
III
Managers
The managers of OnLine Communications on the Effective Date of the Merger
shall continue as the managers of the Surviving Company until their resignation
or removal or until their respective successors are duly elected by the members
of the Surviving Company.
IV
Articles of Organization
The Articles of Organization of OnLine Communications in effect on the
Effective Date shall be the Articles of Organization of the Surviving Company
until the same shall be further altered, amended or repealed in the manner
provided therein and as prescribed by law, and the terms and provisions thereof
are hereby incorporated in this Agreement with the same force and effect as
though herein set forth in full.
V
Principal Office
The principal office of OnLine Communications in the State of Washington is
1201 Third Avenue, Suite 5400, Seattle, WA 98101.
VI
Effect of the Merger
The limited liability company existence of On-Line Cable, with all its
purposes, power and objects, shall cease upon the Effective Date of the Merger.
All of On-Line Cable's privileges, immunities and franchises, both public and
private, all of its properties, real, personal and mixed, all of its debts due
on whatever account, all of its other choses-in-action, and all and every other
interest of, belonging to or due to On-Line Cable shall be taken by, transferred
to, and vested in OnLine Communications, as the Surviving Company, without
further act or deed as of the Effective Date, and the title to any real estate
or any interests therein shall not revert or be in any way impaired by reason of
this Merger.
The Surviving Company shall, as of the Effective Date, be responsible
and liable for all
2
<PAGE> 3
liabilities and obligations of On-Line Cable. Neither the rights of creditors
nor any liens upon the property of the Disappearing Company shall be impaired by
the Merger; provided, however, that all inter-company debts and obligations owed
by On-Line Cable and OnLine Communications to each other shall be canceled.
The Disappearing Company shall take or cause to be taken all action, or do
or cause to be done all things necessary or advisable and proper under all
applicable laws to consummate this Merger.
VII
Manner and Basis of Treating Outstanding Interests
The manner and basis of converting the outstanding interests of each
limited liability company into interests of the successor limited liability
company are as follows:
The members' interests in On-Line Cable as it exists immediately prior to
the Merger will be canceled as of the effective date of the Merger and no
interest in the Surviving Company will be issued in respect thereof. All
interests in OnLine Communication, as the Surviving Company, will remain
unchanged.
VIII
Approval of Members
The terms and conditions of the Merger were authorized and approved by the
members of each limited liability company by the requisite vote of its members
as set forth in its operating agreement or its regulations.
IX
Exclusivity of the Agreement
This Agreement embodies the entire understanding of the parties with
respect to the subject matter hereof and may not be modified except in a writing
duly executed by each of the parties hereto. No waiver of any rights hereunder
shall be effective unless in writing and duly executed by the waiving party.
This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original, but all of which together will constitute one and
the same instrument.
IN WITNESS WHEREOF, each party has caused this Agreement to be signed in
its name and on its behalf by its authorized person. Each authorized person
acknowledges this Agreement to be the act and deed of the limited liability
company on whose behalf the authorized person has executed this Agreement and,
under the penalties of perjury, certifies that the matters and facts
3
<PAGE> 4
set forth herein are true in all material respects to the best of that person's
knowledge, information and belief.
U.S. OnLine Communications, L.L.C. U.S. On-Line Cable, L.L.C.
By: By:
--------------------------------- ------------------------------------
Its Its
----------------------------- --------------------------------
4
<PAGE> 5
EXHIBIT A
ARTICLES OF MERGER OF
U.S. ONLINE COMMUNICATIONS L.L.C., A WASHINGTON LIMITED LIABILITY COMPANY
AND
U.S. ON-LINE CABLE, L.L.C., A TEXAS LIMITED LIABILITY COMPANY
THESE ARTICLES OF MERGER are executed for the purpose of merging U.S.
On-Line Cable, L.L.C. a Texas limited liability company (the "Disappearing
Company") with and into U.S. OnLine Communications L.L.C., a Washington limited
liability company (the "Surviving Company"). The name of the surviving company
in the merger is U.S. OnLine Communications L.L.C., a Washington limited
liability company.
1) The Agreement and Plan of Merger is attached hereto and made a part
hereof.
2) The merger has been duly approved by the Members of each of the limited
liability companies pursuant to the provisions of the Washington Limited
Liability Company Act and the Texas Limited Liability Company Act.
3) U.S. OnLine Communications L.L.C. is the "parent entity" of U.S. On-Line
Cable, L.L.C. as set forth in Article 10.05 of the Texas Limited Liability
Company Act. U.S. On-Line Cable, L.L.C. has one class of membership interests,
99.09% of which are owned by U.S. OnLine Communications L.L.C.
4) The members of U.S. OnLine Communications L.L.C. duly approved the
Agreement and Plan of Merger on March __, 1998, pursuant to the following
resolution:
RESOLVED, that the Agreement and Plan of Merger (the "Merger
Agreement") presented to the members of the Company, pursuant to which
Merger Agreement U.S. On-Line Cable, L.L.C., a Texas limited liability
company ("Cable") will be merged with and into the Company, is hereby
authorized and approved. Each of the managers, the CEO, the President and
the Secretary of the Company (the "Authorized Officers") are hereby
authorized and directed to take any and all such action as they deem
necessary or desirable to consummate the transactions contemplated in the
Merger Agreement, subject to the receipt of such third party consents as
such managers and Authorized Officers deem necessary or advisable prior to
the consummation of such transactions. Without limiting the generality of
the forgoing, each of the managers and each of such officers are hereby
authorized and directed to execute, deliver and cause the Company to
perform the Merger Agreement, to execute and deliver for filing to the
5
<PAGE> 6
Washington Secretary of State and the Texas Secretary of State Articles of
Merger, and to take any and all such action as any of such managers and
officers deem necessary or advisable to cause the Company to consummate the
transactions contemplated in the Merger Agreement.
5) Article VII of the Agreement and Plan of Merger sets forth the manner
and basis under which membership interests of the Disappearing Company will be
treated.
6) The address of the principal office of the Surviving Company in the
State of Washington is 1201 Third Avenue, Suite 5400, Seattle, Washington 98101.
Dated: _____________, 1998.
U.S. ON-LINE CABLE, L.L.C.,
a Texas limited liability company
By:
------------------------------------
Its
--------------------------------
U.S. ONLINE COMMUNICATIONS L.L.C.,
a Washington limited liability company
By:
------------------------------------
Its
--------------------------------
6
<PAGE> 1
EXHIBIT 2.2
ASSET ACQUISITION AGREEMENT
THIS AGREEMENT is made and executed as of March 27, 1998, by and between
U.S. OnLine Communications, L.L.C., a Washington limited liability company
("Seller"), and U.S. OnLine Communications, Inc., a Delaware corporation
("Buyer").
RECITALS
A. Seller is engaged in the business of providing cable television and
telecommunications services to residential customers (the "Business").
B. Seller is willing and desires to sell substantially all of the assets of
the Business to Buyer.
C. Buyer desires to purchase substantially all of the assets and assume
certain of the liabilities of the Business, all on the terms and conditions as
set forth below.
In consideration of the representations, warranties, mutual covenants and
agreements of the parties contained herein, the parties agree as follows:
1. ACQUISITION OF CERTAIN ASSETS.
a. Purchase and Sale. Seller agrees to sell, convey, transfer and
assign to Buyer and Buyer agrees to purchase from Seller substantially all of
the "Assets" currently owned or being used in the Business (the "Assets"), and
any and all other tangible and intangible assets, including but not limited to
(a) trademarks, service marks, intellectual property, goodwill associated
therewith, licenses and sublicenses granted and obtained with respect thereto,
and rights thereunder, remedies against infringements thereof, and rights to
protection of interests therein under the laws of all jurisdictions, (b) leases,
subleases and rights thereunder, (c) agreements, contracts, insurance contracts,
indentures, mortgages, instruments, security interests, guaranties and other
similar arrangements, (d) accounts, notes, and other receivables, (e) claims,
deposits, prepayments, refunds, causes of action, rights of recovery, rights of
set off and rights of recoupment, (f) franchises, approvals, permits, licenses,
orders, registrations, certificates, variances, and similar rights obtained from
governments and governmental agencies, and (g) any and all goodwill, necessary
to operate the Business, (h) any and all financial or
<PAGE> 2
business records of Seller (but excluding Seller's limited liability company
records), and (i) all equipment and inventory.
b. Allocation. Buyer and Seller agree to allocate the Purchase Price
(and all other capitalizable costs) among the Assets for all purposes (including
financial accounting and tax purposes) in accordance with Internal Revenue Code
Section 1060 as such allocation shall be detailed, at Closing, on IRS Form 8594.
2. ASSUMED LIABILITIES. Buyer shall assume substantially all liabilities
and obligations of Seller (whether known or unknown, whether asserted or
unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due) (the
"Assumed Liabilities"), including but not limited to (a) all liabilities of
Seller for unpaid taxes with respect to periods prior to the Closing, (b) all
liabilities of Seller for income, transfer, sales, use, and other taxes arising
in connection with the consummation of the transactions contemplated hereby, (c)
all liabilities of Seller for the unpaid taxes of persons for which Seller may
be legally liable, (d) all liabilities of Seller for costs and expenses
(including legal fees and expenses) Seller and Seller's members and/or managers
have incurred in connection with this Agreement and the transactions
contemplated hereby, (e) all liabilities and obligations of Seller under any
employee benefit plans, (f) all liabilities and obligations of or relating to
Seller with respect to environmental matters, including without limitation those
arising under Environmental, Health, and Safety Requirements, (g) all
obligations of Seller to indemnify any person by reason of the fact that such
person was a member, manager, employee, or agent of Seller (whether such
indemnification is for judgments, damages, penalties, fines, costs, amounts paid
in settlement, losses, expenses, or otherwise and whether such indemnification
is pursuant to any statute, charter document, bylaw, agreement, or otherwise),
(h) all accrued vacation and sick leave, if any, owed to employees of Seller,
and (i) all other liabilities and/or obligations of Seller under this Agreement
(or under any agreement between Seller on the one hand and Buyer on the other
hand entered into on or after the date of this Agreement). Notwithstanding the
foregoing, Buyer will not assume any of the liabilities or obligations of Seller
which are listed on the attached Exhibit 2, which liabilities and obligations
will remain the sole responsibility of Seller (the "Seller Retained
Liabilities").
3. PURCHASE PRICE.
a. Purchase Price. In consideration of Seller's transfer of the Assets
to Buyer, Buyer will deliver to Seller at Closing (i) its promissory note
<PAGE> 3
(the "Buyer Note") in the form of Exhibit 3.a attached hereto in the aggregate
principal amount of $3,000,000 and (ii) 800,000 shares of common stock of Buyer.
b. Transfer Taxes, Etc. To the extent applicable, any sales, use or
other transfer taxes due as a result of the purchase and sale of the Assets
contemplated hereby shall be paid by Buyer.
4. CLOSING.
a. Closing Date. Unless otherwise agreed to by the parties, closing of
the purchase of the Assets and the assumption of the Assumed Liabilities (the
"Closing") shall occur within one (1) business day following the satisfaction or
waiver of the conditions to Closing set forth in Section 6 ("Closing Date"), at
the offices of Buyer. If the Closing does not occur on or before March 31, 1999
(the "Termination Date") this Agreement will automatically terminate without any
further action by Buyer or Seller.
b. Seller's Obligations. At Closing, Seller shall deliver to Buyer the
following:
(i) A Bill of Sale in the form of Exhibit 4.b.(i) and all other
appropriate documents and instruments in customary form and substance
sufficient to transfer all of Seller's right, title and interest in and to
the Assets, subject to the liens, claims and encumbrances assumed by Buyer
hereunder.
(ii) An Assignment and Assumption Agreement in the form of
Exhibit 4.b.(ii) to assign all contracts and agreements relating to the
Business to Buyer.
(iii) All business records pertaining to any of the Assets.
(iv) All other instruments and documents as shall be reasonably
necessary to fulfill the obligations of Seller hereunder which are required
to be fulfilled on the Closing Date, and to evidence satisfaction of any
conditions to Closing referred to in Section 6 hereof.
c. Buyer's Obligations. At Closing, Buyer shall deliver the following:
(i) The Buyer Note as set forth in Section 3.a.
<PAGE> 4
(ii) The certificate for the 800,000 shares of Buyer's common
stock, duly issued to Seller.
(iii) All other instruments and documents as shall be reasonably
necessary to fulfill the obligations of Buyer hereunder which are
required to be fulfilled on or before the Closing Date.
d. Cancellation of "Pre-Acquisition Note". At Closing, that certain
fifteen percent (15%) Subordinated Convertible Promissory Note dated as of March
27, 1998, issued by Seller to Buyer in the original principal amount of up to
$7,200,000 shall be canceled, and Buyer shall deliver such promissory note to
Seller so marked.
5. REPRESENTATIONS AND WARRANTIES.
a. Seller's Representations. Seller represents and warrants to Buyer
that the following statements are materially true and correct on the date
hereof, and will be materially true and correct on the Closing Date as though
made on such date:
(i) Authority. Seller is a limited liability company duly organized
under the laws of the State of Washington and has authority to enter into
this Agreement and to carry out the transactions contemplated hereby. This
Agreement and the transactions contemplated hereby have been duly
authorized by the Members and Board of Managers of Seller, and no other
proceeding on the part of Seller is necessary to authorize Seller's members
and/or managers to perform this Agreement and the transactions contemplated
herein. The Agreement is enforceable against Seller in accordance with the
terms hereof.
(ii) Consents and Approvals. Except as described on Schedule
5.a.(ii) hereto, neither the execution of this Agreement nor the
consummation of the sale of the Assets hereunder requires the approval or
consent of any authority having jurisdiction over the business of Seller
nor of any party to any material agreement with Seller. Buyer, in its sole
discretion, shall have the ability to waive Seller's obligation to obtain
any third party consent described in Schedule 5.a.(ii).
(iii) Title. When executed and delivered by Seller, the Bill of
Sale in the form attached to this Agreement as Exhibit 4.b (i) will
<PAGE> 5
transfer good and marketable title to the Assets to Buyer, subject to the
Assumed Liabilities (including but not limited to liens asserted by Silicon
Valley Bank, T & W Funding Company V, L.L.C., and purchase options held by
property owners under right of entry agreements).
(b) Buyer's Representations. Buyer represents and warrants to Seller
that the following statements are materially true and correct as of the date
hereof, and will be true and correct on the Closing Date as though made on such
date: Buyer is a corporation duly organized and in good standing under the laws
of the State of Delaware and has authority to enter into this Agreement and to
carry out the transactions contemplated hereby. This Agreement and the
transactions contemplated hereby have been duly authorized by Buyer, AND no
other corporate proceeding on the part of Buyer is necessary to authorize
Buyer's officers to perform this Agreement and the transactions contemplated
herein. The Agreement is enforceable against Buyer in accordance with the terms
hereof.
6. CONDITIONS TO CLOSING.
(a) To Seller's Performance. The obligation of Seller to close
hereunder on the Closing Date is subject to the fulfillment at or prior to the
Closing Date of the following conditions (any one or more of which may be waived
in whole or in part by Seller in writing):
All material governmental and other consents and approvals, if
any, necessary to permit the consummation of the transactions
contemplated by this Agreement shall have been received, except such
third party consents as may be waived by Buyer in its sole discretion.
Buyer and Seller agree to cooperate and take all reasonably necessary
actions to obtain receipt of such approvals.
(b) To Buyer's Performance. The obligations of Buyer to close
hereunder on the Closing Date are subject to the fulfillment at or prior to the
Closing Date of the following conditions (ANY ONE OR MORE OF WHICH MAY BE WAIVED
IN WHOLE OR IN PART BY BUYER IN WRITING):
All material governmental and other consents and approvals, if
any, necessary to permit the consummation of the transactions
contemplated by this Agreement shall have been received, except such
third party consents as may be waived by Buyer in its sole discretion.
Buyer and Seller agree to cooperate and take all reasonably
<PAGE> 6
necessary actions to obtain receipt of such approvals.
7. COVENANTS.
(a) Conduct of the Business of Seller. From the date of this Agreement
until the Closing Date, Seller will conduct its Business in the ordinary and
usual course, consistent with Seller's past practices, except as Buyer may
otherwise consent.
(b) Publicity. All notices to third parties and all other publicity
concerning the transactions contemplated by this Agreement shall be jointly
planned and coordinated by and between Buyer and Seller.
(c) Access to Records. After Closing, Buyer shall permit Seller to
have reasonable access during regular business hours to business records of
Seller acquired pursuant to this Agreement for legitimate business or legal
purposes.
(d) Name Change. Seller agrees to change its name, within fifteen (15)
days following Closing, to a name that will permit Buyer to use the name "U.S.
OnLine Communications, Inc." in all states in which Seller is currently doing
business.
(e) Indemnification. Seller will defend, indemnify and hold Buyer
harmless from any claims or liability asserted by Seller's members against Buyer
which challenge the validity or fairness of the sale of the Assets under this
Agreement.
8. NOTICES.
Notices contemplated or required by this Agreement shall be deemed given
when served personally on an officer of Seller or Buyer, two (2) days after
deposited in the United States mail, postage prepaid, registered or certified
mail, and addressed to the party entitled to notice, or when received if
delivered by overnight courier, at the following addresses (or such other
address as designated by either party hereafter by notice):
Seller: U.S. OnLine Communications, L.L.C.
Suite 5400
1201 Third Avenue
Seattle, WA 98101
Attention: John M. Orehek
<PAGE> 7
Buyer: U.S. OnLine Communications, Inc.
8307 Shoal Creek Boulevard
Austin, TX 78757
Attention: Robert Solomon
9. SUCCESSORS; GOVERNING LAW.
This Agreement shall be binding on and enforceable by the heirs, successors
and assigns of the parties hereto. The entire Agreement shall be construed and
enforced in accordance with the laws of the State of Delaware without giving
effect to any choice or conflict of law provision or rule (whether of the State
of Delaware or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of Delaware.
10. COMPLETE AGREEMENT.
This Agreement and the exhibits and other instruments attached set forth
the entire agreement of the parties with respect to the transactions
contemplated herein, and cannot be amended or changed except by written
instrument signed by the party to be bound. This Agreement is the complete and
integrated expression of the dealings between the parties.
11. FURTHER ASSURANCES
The parties hereto agree to take all reasonable actions, including
executing certificates of title and other documents, to effect the transactions
contemplated hereby.
12. COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
"SELLER":
U.S. ONLINE COMMUNICATIONS, L.L.C.,
a Washington limited liability company
<PAGE> 8
By
-------------------------------------
Its
---------------------------------
"BUYER":
U.S. ONLINE COMMUNICATIONS, INC., a
Delaware corporation
By
-------------------------------------
Its
---------------------------------
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
U.S. ONLINE COMMUNICATIONS, INC.
A Stock Corporation
I. NAME
The name of the corporation is U.S. Online Communications, Inc.
II. DURATION
The corporation is organized under the General Corporation Law of
Delaware and shall have perpetual existence.
III. REGISTERED OFFICE AND AGENT
The corporation's Registered Office in the state of Delaware shall be
located at Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, Zip Code 19801. The Registered Agent in charge
thereof shall be The Corporation Trust Company.
IV. PURPOSE
The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware, or any amendment thereto or substitute therefor.
V. STOCK AND STOCKHOLDERS
5.1 The total authorized capital of this corporation is Twenty-One
Thousand Dollars ($21,000), consisting of twenty-one million (21,000,000)
authorized shares divided into two classes as follows:
5.1.1 Twenty million (20,000,000) shares of common stock, having
a par value of $.001 per share; and
5.1.2 One million (1,000,000) shares of preferred stock having a
par value of $.001 per share. The shares of the preferred class may be divided
into and issued in series. Authority shall be vested in the Board of Directors,
subject to
<PAGE> 2
the limitations and procedures prescribed by law, to divide any part or all of
such preferred class into any number of series, to fix and determine the voting
powers, designations, preferences and relative, participating, optional, or
other rights, if any, or the qualifications, limitations, or restrictions, of
the shares of any series to be established and to amend the voting powers,
designations, preferences and relative, participating, optional, or other
rights, if any, or the qualifications, limitations, or restrictions, of the
shares of any series that has been previously established, to the extent
permitted by law. Within any limits stated in this Certificate or in the
resolution of the Board of Directors establishing a series, the Board of
Directors may, after the issuance of shares of a series, amend the resolution
establishing the series to decrease (but not below the number of shares of such
series then outstanding) the number of shares of that series, and the number of
shares constituting the decrease shall resume the status of authorized but
undesignated shares. The authority herein granted to the Board of Directors to
determine the voting powers, designations, preferences and relative,
participating, optional, or other rights, if any, or the qualifications,
limitations, or restrictions, of the preferred stock shall be limited to
supplying such terms in the case of unissued shares, and no power shall exist to
alter or change the terms of any shares which have been issued.
5.2 Stockholders of this corporation shall not have the right to
cumulate votes with respect to elections of directors in the manner prescribed
by Title 8, Section 214, of the General Corporation Law of Delaware, except as
such right may be expressly conferred on the holders of one or more series of
preferred stock as specified in the resolution of the Board of Directors
establishing such series; provided that, notwithstanding the foregoing, no
holders of preferred stock, of any series whatever, shall have any right to
cumulate votes with respect to any such elections held at a time when the
corporation is subject to the requirements of Section 12 or Section 15(d) of the
Securities Exchange Act of 1934.
5.3 A quorum shall exist at any meeting of stockholders if a majority of
the votes entitled to be cast is represented in person or by proxy. In the case
of any meeting of stockholders that is adjourned more than once because of the
failure of a quorum to attend, those who attend the third convening of such
meeting, although less than a quorum, shall nevertheless constitute a quorum for
the purpose of electing directors, provided that the percentage of shares
represented at the third convening of such meeting shall not be less than one
third of the shares entitled to vote.
5.4 Except in circumstances where special stockholder voting
requirements are prescribed by applicable law, any contract, transaction, or act
of the corporation or of any director or officer of the corporation that shall
be authorized, approved or ratified by the affirmative vote of a majority of
shares
<PAGE> 3
shall, insofar as permitted by law, be as valid and as binding as though
ratified by every stockholder of the corporation.
5.5 No stockholder of this corporation shall have, solely by reason of
being a stockholder, any preemptive or preferential right or subscription right
to any stock of this corporation or to any obligations convertible into stock of
this corporation, or to any warrant or option for the purchase thereof, except
to the extent provided by resolution or resolutions of the Board of Directors
establishing a series of preferred stock or by written agreement with this
corporation.
5.6 At any time at which the corporation is subject to the requirements
of Section 12 or Section 15(d) of the Securities Exchange Act of 1934, special
meetings of the stockholders for any purpose or purposes may be called at any
time only by a majority of the Board of Directors or the Chairman of the Board
(if one be appointed) or the President or one or more stockholders holding not
less than twenty-five percent (25%) of all the shares entitled to be cast on any
issue proposed to be considered at that meeting.
5.7 The Board of Directors shall have the authority to issue shares of
the capital stock of this corporation and the certificates therefor subject to
such transfer restrictions and other limitations as it may deem necessary to
promote compliance with applicable federal and state securities laws, and to
regulate the transfer thereof in such manner as may be calculated to promote
such compliance or for any other reasonable purpose.
VI. BOARD OF DIRECTORS
6.1 The initial Board of Directors of this corporation shall consist of
the following persons, who shall serve as the directors until the first annual
meeting of stockholders or until their successors are elected and qualified:
<TABLE>
<CAPTION>
Name Mailing Address
---- ---------------
<S> <C>
Robert G. Solomon 8307 Shoalcreek Blvd., Austin, TX 78757
Ronald L. Piasecki 78067 San Timoteo, LaQuinta, CA 92253
Robert Haveman c/o EDP Management Company, 190 River Ave.
Ste. 300, Holland, MI 49423
Paul H. Pfleger 1201 Third Avenue, Ste. 5400
Seattle, WA 98101
</TABLE>
<PAGE> 4
6.2 Except as may otherwise be specified in a resolution of the Board of
Directors establishing a series of preferred stock, the number of directors of
the corporation shall be fixed as provided in the Bylaws and may be changed from
time to time by amending the Bylaws.
6.3 The election of directors need not be by written ballot.
6.4 Subject to the limitations of the General Corporation Law of
Delaware, and subject to the power of the stockholders of the corporation to
change or repeal the Bylaws, the Board of Directors is expressly authorized to
make, amend, or repeal the Bylaws of the corporation unless the stockholders in
adopting, amending or repealing a particular bylaw have provided expressly that
the Board of Directors may not amend or repeal that bylaw.
VII. INDEMNIFICATION
7.1 The corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he or she is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or her in connection with such action, suit or proceeding if he
or she acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner in which he or she reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had reasonable cause to believe that his
or her conduct was unlawful.
7.2 The corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that he or she is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust
<PAGE> 5
or other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by him or her in connection with the defense or settlement
of such action or suit if he or she acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his or her duty to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
7.3 To the extent that a director, officer, employee or agent of the
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Sections 7.1 and 7.2, or in defense of
any claim, issue or matter therein, he or she shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him or
her in connection therewith.
7.4 Any indemnification under Sections 7.1 or 7.2 (unless ordered by a
court) shall be made by the corporation only as authorized in the specific case
upon a determination that indemnification of the director, officer, employee or
agent is proper in the circumstances because he or she has met the applicable
standard of conduct set forth in Sections 7.1 or 7.2. Such determination shall
be made (a) by the Board of Directors by a majority vote of a quorum consisting
of directors who were not parties to such action, suit or proceeding, or (b) if
such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (c) by the stockholders.
7.5 Expenses (including attorneys' fees) incurred by an officer or
director in defending a civil or criminal action, suit or proceeding may be paid
by the corporation in advance of the final disposition of such action, suit or
proceeding as authorized in the manner provided in Section 7.4 upon receipt of
an undertaking by or on behalf of such officer or director to repay such amount
unless it shall ultimately be determined that he or she is entitled to be
indemnified by the corporation as authorized in this Article. Such expenses
incurred by other employees and agents shall be so paid upon such terms and
conditions, if any, as the Board of Directors deems appropriate.
7.6 The indemnification and advancement of expenses provided by or
granted pursuant to the other Sections of this Article shall not be deemed
<PAGE> 6
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors, or otherwise, both as to action in his
or her official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person. The indemnification powers of the
corporation shall be as broad as is allowed under applicable law.
7.7 Upon the majority vote of a quorum of the Board of Directors, the
corporation may purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, trustee,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation shall have indemnified him or her against such
liability under the provisions of this Article.
VIII. DIRECTOR LIABILITY
To the fullest extent permitted by the General Corporation Law of
Delaware, as it exists on the date hereof or may hereafter be amended, a
director of this corporation shall not be personally liable to the corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director. Any amendment to or repeal of this Article shall not adversely affect
a director of this corporation with respect to any conduct of such director
occurring prior to such amendment or repeal.
IX. INCORPORATOR
The name and mailing address of the incorporator is Karin A. McCullough,
c/o Graham & James LLP/Riddell Williams P.S., 1001 Fourth Ave. Plz., Ste. 4500,
Seattle, WA 98154-1065. The powers and liabilities of the incorporator shall
terminate upon the filing of the Certificate of Incorporation.
X. MISCELLANEOUS
10.1 Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
application of any
<PAGE> 7
receiver or receivers appointed for this corporation under the provisions of
section 291 of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for this corporation under
the provisions of section 279 of Title 8 of the Delaware Code order a meeting of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of this corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this corporation, as the case may be, and also on this
corporation.
10.2 Except as otherwise provided in this Certificate, as amended from
time to time, the corporation reserves the right to amend, alter, change, or
repeal any provisions contained in this Certificate in any manner now or
hereafter prescribed or permitted by statute. All rights of stockholders of the
corporation are subject to this reservation. A stockholder of the corporation
does not have a vested property right resulting from any provision of this
Certificate of Incorporation.
10.3 The corporation shall have authority to correct clerical errors in
any documents filed with the Secretary of State of Delaware, including this
Certificate or any amendments hereto, without the necessity of special
stockholder approval of such corrections.
THE UNDERSIGNED, for the purpose of forming a corporation under the laws
of the State of Delaware, does make, file and record this Certificate, and does
certify that the facts herein stated are true, and have accordingly hereunto set
his hand this 4th day of March, 1998.
Karin A. McCullough, Incorporator
<PAGE> 8
STATE OF DELAWARE
CERTIFICATE OF CORRECTION
FILED TO CORRECT A CERTAIN ERROR
IN THE CERTIFICATE OF INCORPORATION
FILED IN THE OFFICE OF THE
SECRETARY OF STATE OF DELAWARE
ON MARCH 5, 1998
U.S. ONLINE COMMUNICATIONS, INC., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
1. The name of the corporation is U.S. OnLine Communications, Inc.
2. That a Certificate of Incorporation was filed by the Secretary of State
of Delaware on March 5, 1998, and that said Certificate requires
correction as permitted by Section 103 of the General Corporation Law of
the State of Delaware.
3. The inaccuracy or defect of said Certificate to be corrected is as
follows:
Section 6.1 erroneously lists Ronald L. Piasecki and Robert Haveman as
directors. The only initial directors are Robert G. Solomon and Paul H.
Pfleger. Section 6.1 erroneously states Mr. Solomon's street address as
8307 Shoalcreek Blvd., Austin, TX 78757. Mr. Solomon's correct street
address is 8307 Shoal Creek Blvd., Austin, TX 78757. Section 7.2
erroneously includes the phrase "for negligence or misconduct in the
performance of his or her duty" in the last sentence of Section 7.2.
4. Section 6.1 of the Certificate is corrected to read in its entirety as
follows:
6.1 The initial Board of Directors of this corporation shall
consist of the following persons, who shall serve as the
directors until the first annual meeting of stockholders or until
their successors are elected and qualified:
<TABLE>
<CAPTION>
Name Mailing Address
---- ---------------
<S> <C>
Robert G. Solomon 8307 Shoal Creek Blvd.
Austin, TX 78757
Paul H. Pfleger 1201 Third Avenue, Ste. 5400
Seattle, WA 98101
</TABLE>
5. Section 7.2 of the Certificate is corrected to read in its entirety as
follows:
1
<PAGE> 9
7.2 The corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the
fact that he or she is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually
and reasonably incurred by him or her in connection with the
defense or settlement of such action or suit if he or she acted
in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the corporation,
except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such
action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
IN WITNESS WHEREOF, THE UNDERSIGNED, for the purpose of correcting the
Certificate of Incorporation of U.S. OnLine Communications, Inc. filed on March
5, 1998 under the laws of the State of Delaware, does make, file and record this
Certificate of Correction, and does certify that the facts herein stated are
true, and have accordingly hereunto set his hand this 24th day of March, 1998.
By:
Donald E. Barlow, President
2
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
U.S. ONLINE COMMUNICATIONS, INC.
ADOPTED MARCH 24, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I Stockholders' Meetings.......................................................... 1
(1) Meeting Place............................................................... 1
(2) Annual Meeting Time......................................................... 1
(3) Annual Meeting - Order of Business.......................................... 1
(4) Special Meetings............................................................ 2
(5) Notice of Meetings.......................................................... 2
(6) Voting List................................................................. 2
(7) Quorum...................................................................... 2
(8) Manner of Acting............................................................ 3
(9) Voting of Shares............................................................ 3
(10) Fixing of Record Date....................................................... 3
(11) Proxies..................................................................... 4
(12) Action by Stockholders Without a Meeting.................................... 5
(13) Waiver of Notice............................................................ 5
(14) Action of Stockholders by Communications Equipment.......................... 5
ARTICLE II Stock.......................................................................... 5
(1) Issuance of Shares.......................................................... 5
(2) Certificates................................................................ 5
(3) Stock Records............................................................... 6
(4) Legends and Restrictions on Transfer........................................ 6
(5) Transfers.................................................................... 7
(6) Registered Owner............................................................. 7
(7) Mutilated, Lost or Destroyed Certificates.................................... 8
(8) Fractional Shares or Scrip.................................................. 8
ARTICLE III Board of Directors............................................................ 8
(1) Number and Powers........................................................... 8
(2) Change of Number............................................................. 9
(3) Vacancies................................................................... 9
(4) Resignation................................................................. 9
(5) Removal of Directors........................................................ 9
(6) Regular Meetings............................................................ 9
(7) Special Meetings............................................................ 10
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Page
<S> <C>
(8) Quorum...................................................................... 10
(9) Waiver of Notice............................................................ 11
(10) Registering Dissent......................................................... 11
(11) Executive and Other Committees.............................................. 11
(12) Remuneration................................................................ 12
(13) Loans and Guarantees........................................................ 12
(14) Action by Directors Without a Meeting....................................... 12
(15) Action of Directors by Communications Equipment............................. 12
ARTICLE IV Officers....................................................................... 13
(1) Designations................................................................ 13
(2) The Chairman of the Board................................................... 13
(3) The President............................................................... 13
(4) The Vice Presidents......................................................... 14
(5) The Secretary............................................................... 14
(6) The Treasurer............................................................... 15
(7) Delegation.................................................................. 15
(8) Other Officers and Agents................................................... 15
(9) Vacancies................................................................... 16
(10) Resignation................................................................. 16
(11) Term and Removal............................................................ 16
(12) Bonds....................................................................... 16
(13) Salaries.................................................................... 16
ARTICLE V Contracts, Loans, Checks and Deposits........................................... 16
ARTICLE VI Dividends and Finance.......................................................... 18
(1) Dividends................................................................... 18
(2) Reserves.................................................................... 18
(3) Depositories................................................................ 18
ARTICLE VII Notices....................................................................... 18
ARTICLE VIII Seal........................................................................ 19
ARTICLE IX Indemnification of Officers, Directors,
Employees and Agents................................................. 19
ARTICLE X Books and Records............................................................... 21
ARTICLE XI Amendments..................................................................... 21
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
Page
<S> <C>
(1) By Stockholders............................................................. 21
(2) By Directors................................................................ 21
(3) Emergency Bylaws............................................................ 21
</TABLE>
<PAGE> 5
BYLAWS
OF
U.S. ONLINE COMMUNICATIONS, INC.
ARTICLE I
Stockholders' Meetings
(1) Meeting Place: All meetings of the stockholders shall be held
at the principal office of the corporation, or at such other place as shall be
determined from time to time by the Board of Directors, and the place at which
any such meeting shall be held shall be stated in the notice and call of the
meeting.
(2) Annual Meeting Time: The annual meeting of the stockholders
for the election of directors and for the transaction of such other business as
may properly come before the meeting, shall be held each year on a day and at a
time to be set by the Board of Directors. The time and place of holding any
annual meeting may be changed by resolution of the Board of Directors, provided
that notification of such change shall meet the notice requirements pursuant to
Article I(5) hereunder. If the annual meeting is not held on the date designated
therefor, the Board shall cause the meeting to be held as soon thereafter as may
be convenient.
(3) Annual Meeting - Order of Business: At the annual meeting of
stockholders, the order of business shall be as follows unless otherwise
determined by the presiding officer:
(a) Calling the meeting to order.
(b) Proof of notice of meeting (or filing waiver) and proxy
report.
(c) Reading of minutes of last annual meeting.
(d) Reports of officers.
(e) Reports of committees.
(f) Confirmation of selection of independent accountants.
(g) Election of directors.
(h) Miscellaneous business.
<PAGE> 6
(4) Special Meetings: Special meetings of the stockholders for
any purpose other than those regulated by statute may be called at any time by
the Chairman of the Board, the President, the Board of Directors, and shall be
called by the Secretary at any time, upon written request of the holder or
holders of not less than one-tenth of all shares entitled to vote at the
meeting; provided, that at any time at which the corporation is subject to the
requirements of Section 12 or Section 15(d) of the Securities Exchange Act of
1934, special meetings of the stockholders for any purpose or purposes may be
called at any time only by a majority of the Board of Directors or the Chairman
of the Board (if one be appointed) or the President or one or more stockholders
holding not less than twenty-five percent (25%) of all the shares entitled to be
cast on any issue proposed to be considered at the meeting.
(5) Notice of Meetings:
(a) Notice of the place, day, and time of the annual
meeting of stockholders shall be given by delivering personally or by
mailing a written or printed notice of the same, at least ten days, and
not more than sixty days, prior to the meeting, with postage prepaid, to
each stockholder of record entitled to vote at such meeting and
addressed to the stockholder's last known post office address appearing
on the books of the corporation.
(b) At least ten days and not more than sixty days prior
to the meeting, written or printed notice of each special meeting of
stockholders, stating the place, day, and time of such meeting, and the
purpose or purposes for which the meeting is called, shall be delivered
personally, or mailed, with postage prepaid, to each stockholder of
record entitled to vote at such meeting.
(6) Voting List: At least ten days before each meeting of
stockholders, a complete list of the stockholders entitled to vote at such
meeting, or any adjournment thereof, shall be made, arranged in alphabetical
order, with the address of and number of shares held by each stockholder. This
list shall be kept open at such meeting for the inspection of any stockholder
and shall also be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of ten days
prior to such meeting either at a place within the city where the meeting is to
be held, which place shall be specified in the notice of the meeting, or, if not
so specified, at the place where the meeting is to be held.
(7) Quorum: Except as otherwise required by law, a quorum shall
<PAGE> 7
exist at any meeting of stockholders if a majority of the votes entitled to be
cast is represented in person or by proxy. In the case of any meeting of
stockholders that is adjourned more than once because of the failure of a quorum
to attend, those who attend the third convening of such meeting, although less
than a quorum, shall nevertheless constitute a quorum for the purpose of
electing directors, provided that the percentage of votes represented at the
third convening of such meeting shall not be less than one-third of the votes
entitled to be cast. If less than a majority of the outstanding shares entitled
to vote are represented at a meeting, a majority of the shares so represented
may adjourn the meeting from time to time without further notice. If a quorum is
present or represented at a reconvened meeting following such an adjournment,
any business may be transacted that might have been transacted at the meeting as
originally called. The stockholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough stockholders to leave less than a quorum.
(8) Manner of Acting: If a quorum is present, the affirmative
vote of the majority of the votes represented at the meeting and entitled to be
cast on the subject matter shall be the act of the stockholders, unless the vote
of a greater number is required by these Bylaws, the Certificate of
Incorporation, or the General Corporation Law of Delaware.
(9) Voting of Shares: Except as otherwise provided in these
Bylaws or to the extent that voting rights of the shares of any class or classes
are limited or denied by the Certificate of Incorporation, each stockholder, on
each matter submitted to a vote at a meeting of stockholders, shall have one
vote for each share of stock registered in his or her name in the books of the
corporation. Stockholders of this corporation shall not have the right to
cumulate votes with respect to elections of directors in the manner prescribed
by Title 8, Section 214, of the General Corporation Law of Delaware, except as
such right may be expressly conferred on the holders of one or more series of
preferred stock as specified in the resolution of the Board of Directors
establishing such series; provided that, notwithstanding the foregoing, no
holders of preferred stock, of any series whatever, shall have any right to
cumulate votes with respect to any such elections held at a time when the
corporation is subject to the requirements of Section 12 or Section 15(d) of the
Securities Exchange Act of 1934.
(10) Fixing of Record Date:
(a) For the purpose of determining stockholders entitled
to notice of or to vote at any meeting of stockholders, or any
adjournment thereof, the Board of Directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing
the record date
<PAGE> 8
is adopted by the Board, for such determination of stockholders, such
date to be not more than sixty days and not less than ten days prior to
the date of such meeting. If no record date is fixed, the record date
for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the
meeting is held. A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
(b) In order that the corporation may determine the
stockholders entitled to consent to corporate action in writing without
a meeting, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the
record date is adopted by the Board, and which date shall not be more
than ten days after the date upon which the resolution fixing the record
date is adopted by the Board. If no record date has been fixed by the
Board, the record date for determining stockholders entitled to consent
to corporate action in writing without a meeting, when no prior action
by the Board is required by law, shall be the first date on which a
signed written consent setting forth the action taken or proposed to be
taken is delivered to the corporation by delivery to its registered
office in Delaware, its principal place of business, or an officer or
agent of the corporation having custody of the book in which proceedings
of meetings of stockholders are recorded. Delivery made to the
corporation's registered office in Delaware shall be by hand or by
certified or registered mail, return receipt requested. If no record
date has been fixed by the Board and prior action by the Board is
required by law, the record date for determining stockholders entitled
to consent to corporate action in writing without a meeting shall be at
the close of business on the day on which the Board adopts the
resolution taking such prior action.
(c) In order that the corporation may determine the
stockholders entitled to receive payment of any dividend or other
distribution or allotment of any rights or the stockholders entitled to
exercise any rights in respect of any change, conversion, or exchange of
stock, or for the purpose of any other lawful action, the Board of
Directors may fix a record date, which record date shall not precede the
date upon which the resolution fixing the record date is adopted, and
which record date shall be not more than sixty days prior to such
action. If no record date is fixed, the record date for determining
stockholders for any such purpose shall be at the close of business on
the day on which the Board adopts the resolution
<PAGE> 9
relating thereto.
(11) Proxies: A stockholder may vote either in person or by proxy
executed in writing by the stockholder or his or her duly authorized
attorney-in-fact. Such proxy shall be filed with the Secretary of the
corporation before or at the time of the meeting. A proxy shall become invalid
three years after the date of its execution, unless otherwise provided in the
proxy. A proxy with respect to a specified meeting shall entitle the holder
thereof to vote at any reconvened meeting following adjournment of such meeting
but shall not be valid after the final adjournment thereof.
(12) Action by Stockholders Without a Meeting: Any action
required or which may be taken at a meeting of stockholders of the corporation
may be taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted.
(13) Waiver of Notice: A waiver of any notice required to be
given any stockholder, signed by the person or persons entitled to such notice,
whether before or after the time stated therein for the meeting, shall be
equivalent to the giving of such notice. The attendance of a stockholder at a
meeting shall constitute a waiver of notice of such meeting, except when a
stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Any stockholder so waiving shall be bound by
the proceedings of any such meeting in all respects as if due notice thereof had
been given.
(14) Action of Stockholders by Communications Equipment:
Stockholders may participate in a meeting of stockholders by means of a
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other at the same time, and
participation by such means shall constitute presence in person at a meeting.
ARTICLE II
Stock
(1) Issuance of Shares: No shares of the corporation shall be
issued unless authorized by the Board of Directors, which authorization shall
include the maximum number of shares to be issued and the consideration to be
received for each share.
<PAGE> 10
(2) Certificates: Certificates of stock shall be issued in
numerical order, and each stockholder shall be entitled to a certificate signed
by the President and the Secretary, and may be sealed with the seal of the
corporation or a facsimile thereof. The signatures of such officers may be
facsimiles if the certificate is manually signed on behalf of a transfer agent,
or registered by a registrar, other than the corporation itself or an employee
of the corporation. If an officer who has signed or whose facsimile signature
has been placed upon such certificate ceases to be such officer before the
certificate is issued, it may be issued by the corporation with the same effect
as if the person were an officer on the date of issue. All certificates shall
include conspicuous written notice of any restrictions which may be imposed on
the transferability of such shares.
Each certificate of stock shall state:
(a) that the corporation is organized under the laws of
the State of Delaware;
(b) the name of the person to whom issued; and
(c) the number and class of shares and the designation of
the series, if any, which such certificate represents.
(3) Stock Records: The stock transfer books shall be kept at the
principal place of business of the corporation or at the office of the transfer
agent or registrar of the corporation. The name and address of the person to
whom the shares represented thereby are issued, together with the class, number
of shares and date of issue, shall be entered on the stock transfer books of the
corporation.
(4) Legends and Restrictions on Transfer: As long as the
corporation is authorized to issue more than one class of stock or more than one
series of any class, 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 shall be set forth in full or summarized on the face
or back of the certificate which the corporation shall issue to represent such
class or series of stock, provided that, except as otherwise provided in Section
202 of Title 8, General Corporation Law of Delaware, in lieu of the foregoing
requirements, there may be set forth on the face or back of the certificate
which the corporation shall issue to represent such class or series of stock, a
statement that the corporation will furnish without charge to each stockholder
who so requests 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
<PAGE> 11
restrictions of such preferences and/or rights.
Except to the extent that the corporation has obtained an opinion of
counsel acceptable to the corporation that transfer restrictions are not
required under applicable securities laws, all certificates representing shares
of the corporation shall bear a reference to the legend on the face and the
following legend on the reverse of the certificate:
"The securities evidenced by this certificate have not been
registered under the Securities Act of 1933 or any applicable
state law, and no interest therein may be sold, distributed,
assigned, offered, pledged, or otherwise transferred unless there
is an effective registration statement under such Act and
applicable state securities laws covering any such transaction
involving said securities or (b) this corporation receives an
opinion of legal counsel for the holder of these securities
(concurred in by legal counsel for this corporation) stating that
such transaction is exempt from registration or this corporation
otherwise satisfies itself that such transaction is exempt from
registration."
(5) Transfers: Transfers of stock shall be made only upon the
stock transfer books of the corporation pursuant to authorization or document of
transfer made by the holder of record thereof or by his or her legal
representative, who shall furnish proper evidence of authority to transfer, or
by his or her attorney-in-fact authorized by power of attorney duly executed and
filed with the Secretary of the corporation. All certificates surrendered to the
corporation for transfer shall be canceled and no new certificate shall be
issued until the former certificates for a like number of shares shall have been
surrendered and canceled.
(6) Registered Owner: Registered stockholders shall be treated by
the corporation as the holders in fact of the stock standing in their respective
names and the corporation shall not be bound to recognize any equitable or other
claim to or interest in any share on the part of any other person, whether or
not it shall have express or other notice thereof, except as expressly provided
below or by the laws of the State of Delaware. The Board of Directors may adopt
by resolution a procedure whereby a stockholder of the corporation may certify
in writing to the corporation that all or a portion of the shares registered in
the name of such stockholder are held for the account of a specified person or
persons. The resolution shall set forth:
(a) The classification of stockholder who may certify;
<PAGE> 12
(b) The purpose or purposes for which the certification
may be made;
(c) The form of certification and information to be
contained therein;
(d) If the certification is with respect to a record date
or closing of the stock transfer books, the date within which the
certification must be received by the corporation; and
(e) Such other provisions with respect to the procedure as
are deemed necessary or desirable.
Upon receipt by the corporation of a certification complying with
the procedure, the persons specified in the certification shall be deemed, for
the purpose or purposes set forth in the certification, to be the holders of
record of the number of shares specified in place of the stockholder making the
certification.
(7) Mutilated, Lost or Destroyed Certificates: In case of any
mutilation, loss or destruction of any certificate of stock, another may be
issued in its place on proof of such mutilation, loss or destruction. The Board
of Directors may impose conditions on such issuance and may require the giving
of a satisfactory bond or indemnity to the corporation in such sum as they might
determine or establish such other procedures as they deem necessary.
(8) Fractional Shares or Scrip: The corporation may: (a) issue
fractions of a share which shall entitle the holder to exercise voting rights,
to receive dividends thereon, and to participate in any of the assets of the
corporation in the event of liquidation; (b) arrange for the disposition of
fractional interests by those entitled thereto; (c) pay in cash the fair value
of fractions of a share as of the time when those entitled to receive such
shares are determined; or (d) issue scrip in registered or bearer form which
shall entitle the holder to receive a certificate for a full share upon the
surrender of such scrip aggregating a full share.
ARTICLE III
Board of Directors
(1) Number and Powers: The management of all the affairs,
property and interests of the corporation shall be vested in a Board of
Directors. The Board of Directors shall consist of seven (7) persons who shall
be elected for a term of one year, and shall hold office until their successors
are elected and
<PAGE> 13
qualified. Directors need not be stockholders or residents of the State of
Delaware. In addition to the powers and authorities expressly conferred upon the
Board of Directors by these Bylaws and the Certificate of Incorporation, the
Board may exercise all such powers of the corporation and do all such lawful
acts as are not by statute or by the Certificate of Incorporation or by these
Bylaws directed or required to be exercised or done by the stockholders.
(2) Change of Number: Notwithstanding the power and authority of
the Board of Directors to amend these Bylaws, including, without limitation,
provisions relating to the number of directors, the number of directors may at
any time be increased or decreased by a vote of the majority of the voting stock
issued and outstanding, at any regular or special meeting of stockholders, if
the notice of such meeting contains a statement of the proposed increase or
decrease; and, in case of any such increase, the Board of Directors or the
stockholders at any regular or special meeting held before the Board of
Directors takes action, shall have power to elect such additional directors, to
hold office until the next annual meeting of the stockholders and until their
successors are elected and qualified.
(3) Vacancies: All vacancies in the Board of Directors, whether
caused by resignation, death or otherwise, may, except as otherwise provided in
the Certificate of Incorporation, be filled by the affirmative vote of a
majority of the remaining directors attending a regular or special meeting
called for that purpose, even though less than a quorum of the Board of
Directors be present, or by the stockholders at any regular or special meeting
held prior to the filling of such vacancies by the Board of Directors as above
provided. A director thus elected to fill any vacancy shall hold office for the
unexpired term of the newly created position and until his successor is elected
and qualified. Any directorship to be filled by reason of an increase in the
number of directors may be filled by the Board of Directors for a term of office
continuing only until the next election of directors by the stockholders.
(4) Resignation: Any director may resign at any time by
delivering written notice to the Chairman of the Board, the President, the
Secretary, or the Board, or to the registered office of the corporation in
Delaware. Any such resignation shall take effect at the time specified therein,
or if the time is not specified, upon delivery thereof and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
(5) Removal of Directors: At a meeting of stockholders called
expressly for that purpose, the entire Board of Directors, or any member
thereof, may be removed by a vote of the holders of a majority of shares then
entitled to vote at an election of such directors. However, if any stockholders
have the right to cumulate their votes in the election of certain directors, if
less than the entire
<PAGE> 14
Board is to be removed, no such director may be removed without cause if the
votes cast against his or her removal would be sufficient to elect him or her if
then cumulatively voted at an election of the entire Board, or, if there be
classes of directors, at an election of the class of directors of which he or
she is a part.
(6) Regular Meetings: Regular meetings of the Board of Directors
or any committee may be held without notice at the principal office of the
corporation or at such other place or places, either within or without the State
of Delaware, as the Board of Directors or such committee, as the case may be,
may from time to time designate. The annual meeting of the Board of Directors
shall be held without notice immediately after the adjournment of the annual
meeting of stockholders.
(7) Special Meetings:
(a) Special meetings of the Board of Directors may be
called at any time by the Chairman of the Board, the President, the
Secretary, or by any one or more directors, to be held at the principal
office of the corporation or at such other place or places as the Board
of Directors or the person or persons calling such meeting may from time
to time designate. Notice of the place, day, and time of all special
meetings of the Board of Directors shall be given to each director by
delivering, telegraphing, or mailing a written or printed notice of the
same at least three days prior to the meeting and, if by mail, with
postage prepaid, Sundays and holidays excluded; provided that if a
meeting by telephone is to be held as permitted by statute, verbal or
written notice thereof shall be given at least three hours prior to the
scheduled time for such meeting. Notice need not specify the business to
be transacted at, nor the purpose of, the meeting.
(b) Special meetings of any committee may be called at any
time by such person or persons and with such notice as shall be
specified for such committee by the Board of Directors, or in the
absence of such specification, in the manner and with the notice
required for special meetings of the Board of Directors.
(8) Quorum:
(a) Except as provided in subsection (b) of this section,
a majority of the whole Board of Directors shall be necessary at all
meetings to constitute a quorum for the transaction of business, but, if
less than a majority are present at a meeting, a majority of the
directors present may adjourn the meeting from time to time without
further notice.
<PAGE> 15
(b) At each meeting of the Board at which a quorum is
present, the act of a majority of the directors present at the meeting
shall be the act of the Board of Directors, unless the vote of a greater
number is required by these Bylaws, the Certificate of Incorporation, or
the General Corporation Law of Delaware.
(c) Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board of
Directors or of a committee which authorizes a contract or transaction
between the corporation and one or more of its directors or officers,
or between the corporation and any other corporation, partnership,
association, or other organization in which one or more of its
directors or officers are directors or officers, or have a financial
interest.
(9) Waiver of Notice: Attendance of a director at a meeting shall
constitute a waiver of notice of such meeting, except where a director attends
for the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Whenever any notice is required to be given to any director under the
provisions of these Bylaws, the Certificate of Incorporation, or the General
Corporation Law of Delaware, a waiver of notice signed by the director or
directors entitled to such notice, whether before or after the time stated for
the meeting, shall be equivalent to the giving of such notice. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the Board of Directors or any committee appointed by the Board need be
specified in the waiver of notice of such meeting.
(10) Registering Dissent: A director who is present at a meeting
of the Board of Directors at which action on a corporate matter is taken shall
be presumed to have assented to such action unless his or her dissent shall be
entered in the minutes of the meeting, or unless he or she shall file his or her
written dissent to such action with the person acting as the secretary of the
meeting, before the adjournment thereof, or shall forward such dissent by
registered mail to the Secretary of the corporation immediately after the
adjournment of the meeting. Such right to dissent shall not apply to a director
who voted in favor of such action.
(11) Executive and Other Committees: The Board of Directors, by
resolution adopted by a majority of the full Board of Directors, may designate
from among its members an Executive Committee and one or more other standing or
special committees. The Executive Committee shall have and may exercise all the
authority of the Board of Directors, and other standing or special committees
may be invested with such powers, subject to such conditions, as the Board of
<PAGE> 16
Directors shall see fit; provided that, notwithstanding the above, no committee
of the Board of Directors shall have the authority to amend the Certificate of
Incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the Board of Directors as provided in the Certificate of Incorporation and by
law, fix the designations and any of the preferences or rights of such shares
relating to dividends, redemption, dissolution, any distribution of assets of
the corporation or the conversion into, or the exchange of such shares for,
shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation or fix the number of shares
of any series of stock or authorize the increase or decrease of the shares of
any series), adopt an agreement of merger or consolidation under Section 251 or
252 of the General Corporation Law of Delaware, recommend to the stockholders
the sale, lease, or exchange of all or substantially all of the corporation's
property and assets, recommend to the stockholders a dissolution of the
corporation or a revocation of a dissolution, amend the Bylaws of the
corporation, declare a dividend, authorize the issuance of stock, or adopt a
certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware. All committees so appointed shall keep regular
minutes of their meetings and shall cause them to be recorded in books kept for
that purpose in the office of the corporation and shall report the same to the
Board of Directors at its next meeting. The designation of any such committee
and the delegation of authority thereto shall not relieve the Board of
Directors, or any member thereof, of any responsibility imposed by law.
(12) Remuneration: By resolution of the Board of Directors, a
fixed sum and attendance fee, together with expenses of attendance, if any, may
be allowed the directors who are not salaried by the corporation for their
services and for attendance at each regular or special meeting of such Board;
provided, that nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity and receiving
compensation therefor. Members of standing or special committees may be allowed
like compensation for attending committee meetings.
(13) Loans and Guarantees: The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the corporation or of its subsidiary, including any officer or employee who
is a director of the corporation or of its subsidiary, whenever, in the judgment
of the directors, such loan, guaranty, or assistance may reasonably be expected
to benefit the corporation. The loan, guaranty, or other assistance may be with
or without interest, and may be unsecured or secured in such manner as the Board
of Directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation.
<PAGE> 17
(14) Action by Directors Without a Meeting: Any action required
or which may be taken at a meeting of the directors, or of a committee thereof,
may be taken without a meeting if a consent in writing, setting forth the action
so taken or to be taken, shall be signed by all of the directors, or all of the
members of the committee, as the case may be, and filed with the minutes of the
proceedings of such board or committee. Such consent shall have the same effect
as a unanimous vote.
(15) Action of Directors by Communications Equipment: Any action
required or which may be taken at a meeting of directors, or of a committee
thereof, may be taken by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other at the same time. Participation by such means shall
constitute presence in person at a meeting.
ARTICLE IV
Officers
(1) Designations: The officers of the corporation shall be a
Chairman of the Board, a President, one or more Vice-Presidents (one or more of
whom may be Executive Vice-Presidents), a Secretary and a Treasurer, and such
Assistant Secretaries and Assistant Treasurers as the Board may designate, who
shall be elected for one year by the directors at their meeting after the annual
meeting of stockholders, and who shall hold office until their successors are
elected and qualified. Any two or more offices may be held by the same person.
(2) The Chairman of the Board: The Chairman of the Board (if such
an officer be appointed) shall be a director and shall perform such duties as
shall be assigned to him or her by the Board of Directors and in any employment
agreement. The Chairman shall be the chief executive officer of the corporation
and, subject to the control of the Board and the Executive Committee (if one be
established), shall supervise and control all of the assets, business, and
affairs of the corporation. The Chairman shall preside at all meetings of the
stockholders and at all meetings of the Board. The Chairman may sign
certificates for shares of the corporation, deeds, mortgages, bonds, contracts,
or other instruments, except when the signing and execution thereof have been
expressly delegated by the Board or by these Bylaws to some other officer or
agent of the corporation or are otherwise required by law to be signed or
executed by some other officer or in some other manner. If the President dies or
becomes unable to act, the Chairman shall perform the duties of the President,
except as may be limited by resolution of the Board of Directors, with all the
powers of and subject to all the restrictions upon the President.
<PAGE> 18
(3) The President: The President shall be the chief operating
officer of the corporation, and, if no Chairman of the Board has been appointed,
shall also be the chief executive officer of the corporation and a director. The
President may sign deeds, mortgages, bonds, contracts, or other instruments,
except when the signing and execution thereof have been expressly delegated by
the Board or by these Bylaws to some other officer or agent of the corporation
or are otherwise required by law to be signed or executed by some other officer
or in some other manner. The President shall vote the shares owned by the
corporation in other corporations, domestic or foreign, unless otherwise
prescribed by law or resolution of the Board. In general, the President shall
perform all such duties as shall be assigned to him or her by the Board and in
any employment agreement, subject at all times, however, to the direction and
supervision of the Board of Directors. In the absence of the Chairman of the
Board, the President, if a director, shall preside over all meetings of the
stockholders and over all meetings of the Board of Directors. The President
shall have the authority to appoint one or more Assistant Secretaries and
Assistant Treasurers, as he or she deems necessary.
(4) The Vice Presidents: If no Chairman of the Board has been
appointed, in the absence or disability of the President, the Vice Presidents,
if any, in order of their rank as fixed by the Board of Directors or, if not
ranked, a Vice President designated by the Board shall perform all the duties of
the President and when so acting shall have all the powers of, and be subject to
all the restrictions upon, the President; provided that no such Vice President
shall assume the authority to preside as Chairman of meetings of the Board
unless such Vice President is a member of the Board. The Vice Presidents shall
have such other powers and perform such other duties as from time to time may be
respectively prescribed for them by the Board, these Bylaws, the President, or
the Chairman of the Board (if one be appointed).
(5) The Secretary: The Secretary shall:
(a) have responsibility for preparing minutes of meetings
of the stockholders and the Board of Directors and for authenticating
records of the corporation;
(b) see that all notices (except notices for special
meetings of directors called at the request of two directors as provided
in Section 6 of Article III of these Bylaws) are duly given in
accordance with the provisions of these Bylaws and as required by law;
(c) be custodian of the corporate records and seal of the
<PAGE> 19
corporation, if one be adopted;
(d) keep a register of the post office address of each
stockholder and director;
(e) sign certificates for shares of the corporation;
(f) have general charge of the stock transfer books of the
corporation;
(g) when required by law or authorized by resolution of
the Board of Directors, sign with the President, or other officer
authorized by the President or the Board, deeds, mortgages, bonds,
contracts, or other instruments; and
(h) in general, perform all duties incident to the office
of Secretary and such other duties as from time to time may be assigned
by the President or the Board of Directors.
In the absence of the Secretary, an Assistant Secretary may perform the
duties of the Secretary.
(6) The Treasurer: If required by the Board of Directors, the
Treasurer shall give a bond for the faithful discharge of his duties in such sum
and with such surety or sureties as the Board shall determine. The Treasurer
shall:
(a) have charge and custody of and be responsible for all
funds and securities of the corporation;
(b) receive and give receipts for moneys due and payable
to the corporation from any source whatsoever and deposit all such
moneys in the name of the corporation in banks, trust companies, or
other depositories selected in accordance with the provisions of these
Bylaws; and
(c) in general, perform all of the duties incident to the
office of Treasurer and such other duties as from time to time may be
assigned by the President or the Board of Directors.
In the absence of the Treasurer, an Assistant Treasurer may perform the
duties of the Treasurer.
(7) Delegation: In the case of absence or inability to act of any
officer of the corporation and of any person herein authorized to act in his
place,
<PAGE> 20
the Board of Directors may from time to time delegate the powers or duties of
such officer to any other officer or any director or other person whom it may
select.
(8) Other Officers and Agents: One or more Vice Presidents and
such other officers and assistant officers as may be deemed necessary or
advisable may be appointed by the Board of Directors or, to the extent provided
in Section (2) above, by the President. Such other officers and assistant
officers shall hold office for such periods, have such authorities, and perform
such duties as are provided in these Bylaws or as may be provided by resolution
of the Board. Any officer may be assigned by the Board any additional title that
the Board deems appropriate. The Board may delegate to any officer or agent the
power to appoint any such assistant officers or agents and to prescribe their
respective terms of office, authorities, and duties.
(9) Vacancies: Vacancies in any office arising from any cause may
be filled by the Board of Directors at any regular or special meeting of the
Board. The appointee shall hold office for the unexpired term and until his
successor is duly selected and qualified.
(10) Resignation: Any officer may resign at any time by
delivering written notice to the Chairman of the Board, the President, the
Secretary, or the Board of Directors. Any such resignation shall take effect at
the time specified therein, or if the time is not specified, upon delivery
thereof and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
(11) Term and Removal: The officers of the corporation shall hold
office until their successors are appointed and qualified. Any officer or agent
may be removed by the Board with or without cause. An officer empowered to
appoint another officer or assistant officer also has the power to remove any
officer he or she would have the power to appoint whenever in his or her
judgment the best interests of the corporation would be served thereby. The
removal of an officer or agent shall be without prejudice to the contract
rights, if any, of the corporation or the person so removed. Appointment of an
officer or agent shall not of itself create contract rights.
(12) Bonds: The Board of Directors may, by resolution, require
any and all of the officers to give bonds to the corporation, with sufficient
surety or sureties, conditioned for the faithful performance of the duties of
their respective offices, and to comply with such other conditions as may from
time to time be required by the Board of Directors.
<PAGE> 21
(13) Salaries: The salaries of all officers and agents of the
corporation shall be fixed from time to time by the Board of Directors or by any
person or persons to whom the Board has delegated such authority. No officer
shall be prevented from receiving such salary by reason of the fact that such
officer is also a director of the corporation.
ARTICLE V
Contracts, Loans, Checks and Deposits
(1) The Board of Directors may authorize any officer or officers,
agent or agents, to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the corporation. Such authority may
be general or confined to specific instances.
(2) No loans shall be contracted on behalf of the corporation and
no evidences of indebtedness shall be issued in its name unless authorized by a
resolution of the Board. Such authority may be general or confined to specific
instances. The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty, or assistance may reasonably be expected to benefit the
corporation.
(3) All checks, drafts, or other orders for the payment of money,
notes, or other evidences of indebtedness issued in the name of the corporation
shall be signed by such officer or officers, or agent or agents, of the
corporation and in such manner as is from time to time determined by resolution
of the Board.
(4) All funds of the corporation not otherwise employed shall be
deposited from time to time to the credit of the corporation in such banks,
trust companies, or other depositories as the Board may elect.
(5) No contract or transaction between the corporation and one or
more of its directors or officers, or between the corporation and any other
corporation, partnership, association, or other organization in which one or
more of its directors or officers are directors or officers, or have a financial
interest, shall be void or voidable solely for this reason, or solely because
the director or officer is present at or participates in the meeting of the
Board of Directors or committee thereof which authorizes the contract or
transaction, or solely because his or her or their votes are counted for such
purpose, if:
(a) The material facts as to his or her relationship or
interest
<PAGE> 22
and as to the contract or transaction are disclosed or are known to
the Board of Directors or the committee, and the Board or committee
in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even
though the disinterested directors be less than a quorum; or
(b) The material facts as to his or her relationship or
interest and as to the contract or transaction are disclosed or are
known to the stockholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of the
stockholders; or
(c) The contract or transaction is fair as to the
corporation as of the time it is authorized, approved, or ratified, by
the Board of Directors, a committee thereof, or the stockholders.
ARTICLE VI
Dividends and Finance
(1) Dividends: Dividends may be declared by the Board of
Directors and paid out of the annual net profits of the corporation, or out of
its net assets in excess of its capital, subject to the conditions and
limitations imposed by the Certificate of Incorporation and the laws of the
State of Delaware.
(2) Reserves: Before making any distribution of profits, there
may be set aside out of the net profits of the corporation such sum or sums as
the directors from time to time in their absolute discretion deem expedient as a
reserve fund to meet contingencies, or for equalizing dividends, or for
maintaining any property of the corporation, or for any other purposes. Any
profits of any year not distributed as dividends shall be deemed to have been
thus set apart until otherwise disposed of by the Board of Directors.
(3) Depositories: The moneys of the corporation shall be
deposited in the name of the corporation in such bank or banks or trust company
or trust companies as the Board of Directors shall designate, and shall be drawn
out only by instrument signed by such persons and in such manner as may be
determined by resolution of the Board of Directors.
ARTICLE VII
Notices
(1) Whenever the provisions of the statute or these Bylaws
require
<PAGE> 23
notice to be given to any director, officer, or stockholder, they shall not be
construed to mean personal notice; such notice may be given in writing by
depositing the same in a post office or letter box, in a postpaid, sealed
wrapper, addressed to such director, officer, or stockholder at his or her or
its address as the same appears on the books of the corporation, and the time
when the same shall be mailed shall be deemed to be the time of the giving of
such notice. Notice may also be given by telegraph, in which event proof of
delivery shall be required.
(2) A waiver of any notice in writing, signed by a director,
officer, or stockholder, whether before or after the time stated in said waiver
for holding a meeting, shall be deemed equivalent to a notice required to be
given to any director, officer, or stockholder.
ARTICLE VIII
Seal
The corporate seal of the corporation shall be in such form and
bear such inscription as may be adopted by resolution of the Board of Directors,
or by usage of the officers on behalf of the corporation.
ARTICLE IX
Indemnification of Officers, Directors,
Employees and Agents
(1) The corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he or she is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or her in connection with such action, suit or proceeding if he
or she acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner in which he or she reasonably believed to
be in or not opposed to the best interests
<PAGE> 24
of the corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his or her conduct was unlawful.
(2) The corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he or she is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by him or
her in connection with the defense or settlement of such action or suit if he or
she acted in good faith and in a manner he or she reasonably believed to be in
or not opposed to the best interests of the corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
the Court of Chancery or such other court shall deem proper.
(3) To the extent that a director, officer, employee or agent of
the corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (1) and (2), or in defense
of any claim, issue or matter therein, he or she shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him or
her in connection therewith.
(4) Any indemnification under subsections (1) or (2) (unless
ordered by a court) shall be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he or she has
met the applicable standard of conduct set forth in subsections (1) or (2). Such
determination shall be made (a) by the Board of Directors by a majority vote of
a quorum consisting of directors who were not parties to such action, suit or
proceeding, or (b) if such a quorum is not obtainable, or, even if obtainable a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, or (c) by the stockholders.
(5) Expenses (including attorneys' fees) incurred by an officer
or director in defending a civil or criminal action, suit or proceeding may be
paid by the corporation in advance of the final disposition of such action, suit
or proceeding as authorized in the manner provided in section (4) upon receipt
of an
<PAGE> 25
undertaking by or on behalf of such officer or director to repay such amount
unless it shall ultimately be determined that he or she is entitled to be
indemnified by the corporation as authorized in this Article. Such expenses
incurred by other employees and agents shall be so paid upon such terms and
conditions, if any, as the Board of Directors deems appropriate.
(6) The indemnification and advancement of expenses provided by
or granted pursuant to the other Sections of this Article shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors, or otherwise, both as to action in his
or her official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person. The indemnification powers of the
corporation shall be as broad as is allowed under applicable law.
(7) Upon the majority vote of a quorum of the Board of Directors,
the corporation may purchase and maintain insurance on behalf of any person who
is or was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer, trustee,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation shall have indemnified him or her against such
liability under the provisions of this Article.
ARTICLE X
Books and Records
The corporation shall keep correct and complete books and records
of account and shall keep minutes of the proceedings of its stockholders and
Board of Directors, and shall keep at its registered office or principal place
of business, or at the office of its transfer agent or registrar, a record of
its stockholders, giving the names and addresses of all stockholders and the
number and class of the shares held by each. Any books, records, and minutes may
be in written form or any other form capable of being converted into written
form within a reasonable time.
ARTICLE XI
Amendments
<PAGE> 26
(1) By Stockholders: These Bylaws may be altered, amended or
repealed by the affirmative vote of a majority of the voting stock issued and
outstanding at any regular or special meeting of the stockholders.
(2) By Directors: The Board of Directors shall have power to
make, alter, amend and repeal the Bylaws of this corporation, unless the
stockholders in adopting, amending or repealing a particular Bylaw have provided
expressly that the Board of Directors may not amend or repeal that Bylaw. Any
such Bylaws made or adopted by the Board of Directors, or any alteration,
amendment or repeal of the Bylaws by the Board of Directors, may be changed or
repealed by the holders of a majority of the stock entitled to vote at any
stockholders' meeting.
(3) Emergency Bylaws: The Board of Directors may adopt emergency
Bylaws, subject to repeal or change by action of the stockholders, which shall
be operative during any emergency in the conduct of the business of the
corporation resulting from an attack on the United States or any nuclear or
atomic disaster.
Adopted by resolution of the corporation's Board of Directors on
March 24, 1998.
Donald E. Barlow
President
Paul F. Mutty
Secretary
<PAGE> 1
EXHIBIT 9.1
VOTING AGREEMENT
THIS VOTING AGREEMENT ("Agreement") is made on this 27th day of March,
1998, by and among U.S. OnLine Communications, Inc., a Delaware corporation
("Company"), U.S. OnLine Communications, L.L.C., a Washington limited liability
company ("L.L.C."), Donald E. Barlow ("Barlow"), Robert G. Solomon ("Solomon"),
and Aspen Online Investments, LLC ("Aspen"). L.L.C., Barlow, Solomon, and Aspen
are collectively referred to in this Agreement as the "Shareholders."
R e c i t a l s
A. The Shareholders are entering into this Agreement in connection with a
private placement of securities of the Company (the "Private Placement") as
described in the Company's Private Placement Memorandum dated March 13, 1998
(the "Memorandum"). Unless otherwise defined in this Agreement, all capitalized
terms are as defined in the Memorandum.
B. Following the closing of that certain Asset Acquisition Agreement by and
between L.L.C. and the Company, at the First Closing, the Shareholders will own
shares of common stock of the Company ("Shares") constituting a majority of the
outstanding Shares, assuming certain warrants are not exercised.
C. The parties desire to enter into this Agreement to help ensure specific
representation on the Board of Directors of the Company.
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
1. Voting Agreement. Each Shareholder agrees to vote all of the Shareholder's
Shares (including Shares now owned, hereafter acquired, or authorized to vote by
proxy), to effect the election of persons designated as provided below to the
Company's Board of Directors (whether at a special meeting, at an annual
meeting, or to fill a vacancy):
1.1 Prior to any initial public offering ("IPO") of the common stock of the
Company, Aspen shall have the right to designate two (2) persons to be elected
to the Board of Directors of the Company; provided, however, that following
closing of the IPO, Aspen shall have the right to designate one (1) person to be
elected to the Board of Directors.
1.2 L.L.C. shall have the right to designate one (1) person to be elected
to the Board of Directors before and after any IPO.
2. Affiliates. Each Shareholder agrees to cause any affiliates controlled by
the Shareholder to vote any Shares held by such person (including Shares now
owned, hereafter acquired, or authorized to vote by proxy) to effect the
election of persons designated as provided in Section 1 above.
<PAGE> 2
3. Company's Efforts. The Company shall, at its expense, use its best
reasonable best efforts (including, without limitation, the solicitation of
proxies) to effect the election of the persons designated as provided in Section
1 above.
4. Removal. On all matters relating to the removal of directors of the
Company, each Shareholder agrees to vote the Shareholder's Shares, and to cause
any affiliate controlled by the Shareholder to vote any Shares held by such
person, (including Shares now owned, hereafter acquired, or authorized to vote
by proxy) to ensure that no director of the Company may be removed from the
Company's Board of Directors without cause, except upon the prior authorization
or request, by vote or written consent, of the party that, pursuant to Section 1
of this Agreement, designated the director sought to be removed. Upon removal of
a director for cause, the party that designated such director shall have the
right to designate a replacement director in accordance with Section 1 of this
Agreement.
5. Change in Size of Board. The parties agree to take all actions necessary to
prevent a change in the size of the Board of Directors of the Company.
6. Term. This Agreement shall be effective upon consummation of the final
closing of the Private Placement and shall terminate upon the earlier of: (a)
the written agreement of all Shareholders (including assignees) who hold Shares
at the time the parties seek to terminate the Agreement or (b) three (3) years
from the date of this Agreement.
7. Miscellaneous.
7.0.1 Legend Requirement. During the term of this Agreement, all
certificates evidencing the Shares held by the Shareholders shall bear the
following legend (in addition to any other legends required by law or
agreement):
THESE SHARES ARE SUBJECT TO THE TERMS AND CONDITIONS OF A VOTING
AGREEMENT, AS MAY BE AMENDED, A COPY OF WHICH WILL BE FURNISHED BY THE
COMPANY TO A HOLDER OR PURCHASER HEREOF UPON WRITTEN REQUEST.
7.0.2 Specific Enforcement. The parties acknowledge and agree that the
parties would be irreparably damaged in the event that any of the provisions of
this Agreement were not performed or were otherwise breached. Accordingly, it is
agreed that each party to this Agreement is entitled to an injunction to prevent
breaches of this Agreement, and to specific enforcement of the terms and
provisions of this Agreement, in addition to any other remedy to which the
parties may be entitled at law or in equity.
7.1 Assignment. This Agreement shall inure to the benefit of and be binding
upon
-2-
<PAGE> 3
the respective executors, administrators, heirs, successors, and assigns of the
parties.
7.2 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware excluding those laws that
direct the application of the laws of another jurisdiction.
7.3 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original (including signatures
sent by facsimile), but all of which together shall constitute one and the same
instrument.
7.4 Notices. Notice to parties shall be sent to the addresses listed on the
execution page. Any notice required or permitted under this Agreement shall be
given in writing and shall be conclusively deemed effectively given: (a) upon
delivery if delivered personally or by courier, (b) when actually received, as
evidenced by written or printed acknowledgment of receipt, if delivered by telex
or facsimile, or (c) five (5) days after deposit in the United States mail, by
registered or certified mail, postage prepaid.
7.5 Enforceability; Severability; Further Assurances. The parties agree
that each provision of this Agreement shall be interpreted so as to be effective
and valid under applicable law. If any provision of this Agreement shall
nevertheless be held to be prohibited by or invalid under applicable law, (a)
such provision shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Agreement, and (b) the parties shall, to the extent
permissible by applicable law, amend this Agreement, or enter into a voting
trust agreement under which the Shares shall be transferred to the voting trust
created thereby, so as to make effective and enforceable the intent of this
Agreement. The parties shall take all other actions and sign such other
documents as shall be reasonably necessary to make effective and enforceable the
intent of this Agreement.
7.6 Costs of Enforcement. If any party to this Agreement seeks to enforce
his, her or its rights under this Agreement by legal proceedings, the
non-prevailing party shall pay all costs and expenses incurred by the prevailing
party, including, without limitation, all reasonable attorneys' fees, including
any such fees incurred upon appeal.
7.7 Entire Agreement; Amendment. This Agreement contains the entire
agreement of the parties with regard to its subject matter and supersedes any
and all prior negotiations, oral discussions, correspondence, understandings and
agreements between the parties regarding its subject matter. This Agreement may
be amended or modified only by a written instrument executed by each of the
Shareholders (including assignees) who hold Shares at the time the parties seek
to amend the Agreement.
IN WITNESS WHEREOF, the parties have executed this Voting Agreement as of
the date first above written.
-3-
<PAGE> 4
COMPANY: U.S. ONLINE COMMUNICATIONS, INC.
By:
------------------------------------
Robert G. Solomon
Chief Executive Officer
Address:
U.S. OnLine Communications, Inc.
8307 Shoal Creek Blvd.
Austin, TX 78757
Tel:(512) 451-8765
Fax:(512) 451-8732
L.L.C.: U.S. ONLINE COMMUNICATIONS, L.L.C.
A Washington limited liability
By:
------------------------------------
Robert G. Solomon
Chief Executive Officer
Address:
U.S. OnLine Communications, L.L.C.
1201 Third Avenue, Suite 5400
Seattle, Washington 98101
Tel:(206) 622-9900
Fax:(206) 628-8031
BARLOW: DONALD E. BARLOW,
an Individual
Donald E. Barlow
Address:
-4-
<PAGE> 5
Tel:
-----------------------------------
Fax:
-----------------------------------
5
<PAGE> 6
SOLOMON: ROBERT G. SOLOMON,
an Individual
Robert G. Solomon
Address:
U.S. OnLine Communications, L.L.C.
1201 Third Avenue, Suite 5400
Seattle, Washington 98101
Tel:(206) 622-9900
Fax:(206) 628-8031
ASPEN: ASPEN ONLINE INVESTMENTS, LLC
By:
Its:
Address:
Aspen Onlline Investments, LLC
2757 44th Street, SW
Suite 306
Grand Rapids, Michigan 49509
Tel: (616) 531-9100
Fax: (616) 531-9141
6
<PAGE> 1
EXHIBIT 10.1
U.S. ONLINE COMMUNICATIONS, INC.
1998 NON-QUALIFIED STOCK OPTION AND INCENTIVE STOCK OPTION PLAN
(EFFECTIVE MARCH 10, 1998)
<PAGE> 2
U.S. ONLINE COMMUNICATIONS, INC.
1998 NON-QUALIFIED STOCK OPTION AND INCENTIVE STOCK OPTION PLAN
1. PURPOSE.
The Plan is intended to provide to selected employees of U.S. OnLine
Communications, Inc., a Delaware corporation, (the "Participants"), an
opportunity to acquire shares of common stock of U.S. OnLine
Communications, Inc. (the "Corporation"). The Corporation intends to use
the Plan to attract, retain and motivate Participants to attain
exceptional levels of performance and provide Participants with an
opportunity to participate in the increased value of the Corporation
which their efforts, initiative, and skill have helped produce. The Plan
design enables the Corporation to grant to Participants either
Non-Qualified Stock Options or Incentive Stock Options to purchase
shares of common stock of the Corporation. The Plan is effective March
10, 1998.
2. DEFINITIONS.
(a) "Board" shall mean the Board of Directors of the Corporation.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Committee" shall mean the committee appointed by the Board in
accordance with Section 4(b) to administer the Plan.
(d) "Common Stock" shall mean the voting common stock of the
Corporation.
(e) "Corporation" shall mean U.S. OnLine Communications, Inc., a
Delaware corporation and any Subsidiary of the Corporation.
(f) "Employee" shall mean any individual who is employed, within the
meaning of Section 3401 of the Code and the regulations
thereunder, by the Corporation or any Subsidiary. The Committee
shall be responsible for determining when an Employee's period
of employment is deemed to be continued during an approved leave
of absence.
(g) "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
(h) "Exercise Price" shall mean the price per Share at which an
Option may be exercised, as determined by the Committee and as
specified in the Participant's Option Agreement.
(i) "Fair Market Value" shall mean the value of each Share
determined as of any specified date as follows:
(1) If the Shares are traded on any United States securities
exchange, the
2
<PAGE> 3
value per Share shall be the closing price on such
exchange on the business day immediately preceding such
specified date;
(2) If the Shares are not traded on any United States
securities exchange but are traded on any formal
over-the-counter quotation system in general use in the
United States, the value per Share shall be the mean
between the closing high bid and low asked quotations on
such system on the business day immediately preceding
such specified date; or
(3) If neither Paragraph (1) nor (2) applies, the value per
Share shall be determined by the Board in accordance
with Section 4(e) in good faith and based on uniform
principles consistently applied. Such determination
shall be conclusive and binding on all persons.
(j) "Incentive Stock Option" shall mean an Option of the type which
is described in Section 422(b) of the Code.
(k) "Non-qualified Stock Option" shall mean an Option which is not
of the type described in Section 422(b) or 423(b) of the Code.
(l) "Option" shall mean an option which is granted pursuant to the
Plan to purchase Shares of Common Stock, whether granted as an
Incentive Stock Option or as a Non-qualified Stock Option.
(m) "Option Agreement" shall mean, with respect to each Option, the
signed written agreement between the Corporation and the
Participant setting forth the terms and conditions of the
Option.
(n) "Participant" shall mean any individual to whom an Option has
been granted or issued under the Plan.
(o) "Plan" shall mean this U.S. OnLine Communications, Inc. 1998
Non-Qualified Stock Option and Incentive Stock Option Plan, as
amended. The Plan is effective March 10, 1998.
(p) "Plan Year" shall mean the 12 consecutive month period
coinciding with the Corporation's fiscal year.
(q) "Purchase Price" shall mean, at any specified time, the Exercise
Price per Share times the number of Options being exercised.
(r) "Pyramiding" shall mean, for purposes of Section 7(g), a
Participant's exercise of an Option by paying the Exercise Price
through the exchange of a Share or Shares of Common Stock which
the Participant had immediately acquired by exercising an
Option.
3
<PAGE> 4
(s) "Retirement" shall mean termination of employment with the
Corporation or any Subsidiary on or after attaining age 65.
(t) "Share" shall mean one authorized share of Common Stock.
(u) "Subsidiary" shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with
the Corporation if, at the time of granting an Option, each of
the corporations (other than the last corporation in the
unbroken chain) owns stock possessing 50% or more of the total
combined voting power of all classes of stock in one of the
other corporations in such chain.
(v) "Vest" or "Vesting" shall mean the event or point in time at
which an Option becomes exercisable for the first time.
3. EFFECTIVE DATE.
The Plan was adopted by the Corporation effective March 10, 1998 subject
to the approval of the Corporation's shareholders in accordance with Section 18.
4. ADMINISTRATION.
(a) Administration by the Board or the Committee.
The Board shall appoint a Committee to administer the Plan. If no
Committee has been appointed or is currently constituted, the Board
shall have the powers and authority otherwise delegated to the Committee
in this Plan document. In any event, the Board shall have the authority
to determine the Fair Market Value of the Common Stock in accordance
with Section 4(e).
(b) Composition of the Committee.
(i) The Committee shall consist of not less than three
members, who may also be members of the Board. Each
Committee member shall serve until the member resigns,
dies or is removed by the Board, whichever is the first
event to occur. The Board may, from time to time,
increase the size of the Committee, fill vacancies
however caused, remove members with or without cause,
and disband the Committee and thereafter directly
administer the Plan. The Board shall designate one
member as Chairman of the Committee. The Committee shall
hold meetings at such times and places as it may
determine. A majority of the members of the Committee
shall constitute a quorum. All determinations of the
Committee shall be made by a majority of its members.
Any decision or determination reduced to writing and
signed by all of the members of the Committee shall be
fully effective as if it had been made by a majority
vote at a meeting duly called.
(ii) Members of the Board or the Committee who are either
eligible for Options or have been granted an Option may
vote on any matters affecting the administration of the
Plan or the grant of any
4
<PAGE> 5
Option pursuant to the Plan. However, no such member
shall act upon the granting of an Option to himself or
herself (unless such grant is part of a plan under which
Options are to be granted to a classification of
Employees). In the event of cases such as those
described in the preceding sentence, such member shall
be counted in determining the existence of a quorum at a
meeting of the Committee but shall be excluded in
determining the number of members voting or taking
written action with respect to an Option granted to such
member.
(iii) If the Corporation registers any class of equity
security pursuant to Section 13 of the Exchange Act,
from the effective date of such registration until six
months after the termination of such registration, the
Plan shall be administered by a Committee which shall
consist of not less than three members, who may also be
members of the Board. During such period, the Committee
shall be comprised of individuals who:
(A) Shall be ineligible to participate in the Plan
and in any plan sponsored by the Corporation
which provides for the grant of stock of the
Corporation; and
(B) Shall have been ineligible to participate in the
Plan and any such other plan for a one-year
period prior to the time such individual becomes
a member of the Committee. The Board may from
time to time designate individuals as ineligible
to participate in the Plan for such one-year
period in order to become eligible to be a
member of the Committee.
(c) Powers of the Committee.
On behalf of the Corporation and subject to the provisions of
the Plan, the Committee shall have the authority and discretion
to:
(i) Prescribe, amend and rescind rules and regulations
relating to the Plan;
(ii) Select Participants to receive Options;
(iii) Determine the form and terms of Options;
(iv) Determine the number of Shares or other consideration
subject to Options;
(v) Determine whether Options will be granted singly, in
combination or in tandem with, in replacement of, or as
alternatives to, other Options under the Plan or any
other incentive or compensation plan of the Corporation;
(vi) Construe and interpret the Plan, any Option Agreement
and any other agreement or document executed pursuant to
the Plan;
(vii) Correct any defect or omission, or reconcile any
inconsistency in the Plan, any Option or any Option
Agreement;
(viii) Determine whether an Option has been earned and/or
Vested;
(ix) Accelerate or defer, with the consent of the
Participant, the Vesting of any Option;
(x) Authorize any person to execute on behalf of the
Corporation any instrument required to effectuate the
grant of an Option as made by the Committee;
(xi) With the consent of the Participant, reprice, cancel and
reissue, or otherwise adjust the terms of an Option
previously issued to the Participant; and
(xii) Make all other determinations deemed necessary or
advisable for the administration of the Plan.
5
<PAGE> 6
(d) Committee's Interpretation of the Plan.
The Committee's interpretation and construction of any provision of the
Plan, of any Option granted under the Plan, or of any Option Agreement
shall be final and binding on all parties claiming an interest in an
Option granted or issued under the Plan. No member of the Committee nor
any director shall be liable for any action or determination made in
good faith with respect to the Plan.
(e) Board's Determination of Fair Market Value.
The Board shall have the authority to determine, upon review of relevant
information, the Fair Market Value of the Common Stock, subject to the
provisions of the Plan and irrespective of whether the Board has
appointed a Committee to administer the Plan.
5. ELIGIBILITY FOR PARTICIPATION.
Plan Participants shall be limited to such Employees as the Board or
Committee may select. A Participant may be granted more than one type of Option
under the Plan. Any Employee who owns stock of the Corporation possessing more
than 10% of the total combined voting power of all classes of outstanding stock
of the Corporation and its affiliates shall not be eligible to receive an
Incentive Stock Option.
6
<PAGE> 7
6. SHARES OF STOCK OF THE CORPORATION.
(a) Shares Subject to This Plan.
Stock with respect to which Options are granted or issued under this
Plan shall be authorized but unissued or reacquired Shares of the
Corporation's Common Stock. The aggregate number of Shares which may be
issued under this Plan shall not exceed 1,000,000 (one million), subject
to adjustment under Section 9.
(b) Adjustment of Shares.
In the event of an adjustment described in Section 9, then (i) the
number of Shares reserved for issuance under the Plan, (ii) the Exercise
Prices of and number of Shares subject to outstanding Options, and (iii)
any other factor pertaining to outstanding Options shall be duly and
proportionately adjusted, subject to any required action by the Board or
the shareholders of the Corporation and compliance with applicable
securities laws; provided, however, that fractions of a Share shall not
be issued but shall either be paid in cash at Fair Market Value or shall
be rounded up to the nearest Share, as determined by the Committee; and
provided, further, that the Exercise Price of any Option may not be
decreased to below the par value of the Shares.
(c) Options Not to Exceed Shares Available.
The number of Shares subject to Options which have been granted under
this Plan at any time during the Plan Term shall not exceed the number
of Shares authorized for issuance under the Plan. The number of Shares
subject to an Option which expires, is cancelled, is forfeited or is
terminated for any reason, shall again be available for issuance under
the Plan.
7. TERMS AND CONDITIONS OF OPTIONS.
(a) Option Agreement.
Each Option shall be evidenced by a written Option Agreement which shall
set forth the terms and conditions pertaining to such Option, provided
that all such terms shall be subject to and consistent with this Plan.
(b) Number of Shares Covered by an Option.
Each Option Agreement shall state the number of Shares for which the
Option is exercisable and shall provide for the adjustment of such
Shares in accordance with Section 9.
7
<PAGE> 8
(c) Exercise of Options.
A Participant may exercise an Option only on or after the date on which
the Option Vests, as provided in Subsection (d) below, and only on or
before the date on which the Option expires, as provided in Subsection
(e) below.
(d) Vesting of Options.
A Participant may exercise an Option to purchase Shares only on or after
the date the Option has Vested with respect to such Shares. Each Option
Agreement shall include a Vesting schedule applicable to the Shares to
which such Option pertains. The Vesting schedule shall not impose upon
the Corporation or any Subsidiary any obligation to retain the
Participant in its employ for any period. A Participant's Option
Agreement shall so specify if all or any non-Vested Options held by the
Participant on the date of death or total and permanent disability shall
become Vested.
(e) Term and Lapse of Options.
A Participant may exercise an Option to purchase Shares only on or
before the date on which the term of the Option expires. Each Option
Agreement shall set forth the term of the Option and the events
described in the immediately following sentence which will cause the
Option to lapse or otherwise end, in whole or in part, as of an earlier
date. An Option shall lapse on the first to occur of the following
events:
(i) The tenth anniversary of the date the Option was
granted;
(ii) The date determined under Section 7(j) for a Participant
who ceases to be an Employee by reason of the
Participant's death;
(iii) The date determined under Section 7(k) for a Participant
who ceases to be an Employee by reason the Participant's
total and permanent disability, within the meaning of
Section 22(e)(3) of the Code, or Retirement;
(iv) The date determined under Section 7(i) for a Participant
who ceases to be an Employee for any reason, other than
by reason of death, total and permanent disability, or
Retirement, unless the Committee at its discretion
extends such date before the applicable expiration date
(but no longer than three months after the date the
Participant ceases to be an Employee with respect to any
Incentive Stock Option the Participant holds); or
(v) The expiration date specified in the Participant's
Option Agreement.
8
<PAGE> 9
(f) Exercise Price.
Each Option Agreement shall state the Exercise Price for the Shares to
which the Option pertains, provided that the Exercise Price of an Option
shall not be less than 100% of the Fair Market Value of the Shares
determined on the date the Option is granted.
(g) Medium and Time of Payment of Purchase Price.
A Participant exercising an Option shall pay the Purchase Price of the
Shares to which such exercise pertains in full in cash (in U.S. dollars)
as a condition of such exercise, unless the Committee at its discretion
allows the Participant to pay the Purchase Price in any manner allowable
under Section 14, so long as the sum of cash so paid and such other
consideration equals the Purchase Price. Notwithstanding the sequential
exercise of an Option through Pyramiding is specifically allowable under
the Plan, subject to the consent of the Committee.
(h) Nontransferability of Options.
An Option granted to a Participant shall, during the lifetime of the
Participant, be exercisable only by the Participant or the Participant's
conservator or legal representative and shall not be assignable or
transferable. In the event of the Participant's death, the Option is
transferable by the Participant only by will or the laws of descent and
distribution.
(i) Termination Other than by Death, Disability or Retirement.
(i) If a Participant ceases to be an Employee for any reason other
than death, total and permanent disability (as defined in
Section 7(k)) or Retirement, any unexercised Option (whether
Vested or not) shall expire at 12:00 p.m. on the 30th day
following the date the Participant's employment with the
Corporation (or a Subsidiary) terminates. In addition, the
Committee may Vest any non-Vested Options within 30 days
following the applicable event described above.
(ii) For purposes of this Section 7(i), the employment relationship
shall be treated as continuing intact while the Participant is
an active employee of the Corporation (or a Subsidiary) or is on
military leave, sick leave or other bona fide leave of absence,
as determined by the Committee at its discretion. The preceding
sentence notwithstanding, in the case of an Incentive Stock
Option, employment shall be deemed to terminate on the date the
Participant ceases active employment with the Corporation (or a
Subsidiary) unless the Participant's reemployment rights are
guaranteed by statute or contract.
9
<PAGE> 10
(j) Death of Participant.
If a Participant dies while an Employee, any Option granted to the
Participant may be exercised, to the extent it was Vested on the date of
the Employee's death, at any time within 12 months after the
Participant's death (but not beyond the otherwise applicable term of the
Option) by the executors or administrators of the Participant's estate
or by any person who has acquired the Option directly from the
Participant by will or the laws of descent and distribution.
(k) Disability or Retirement of Participant.
If a Participant ceases to be an Employee as a consequence of becoming
totally and permanently disabled (within the meaning of Section 22(e)(3)
of the Code) or otherwise retires, any Option granted to the Participant
may be exercised, to the extent it was Vested on the date of termination
of employment, at any time within 12 months after the Participant's
termination of employment (but not beyond the otherwise applicable term
of the Option), by the Participant or the Participant's conservator or
legal representative.
(l) Rights as a Stockholder.
A Participant, or an allowable transferee of a Participant, shall have
no rights as a shareholder of the Corporation with respect to any Shares
for which an Option is exercisable until the date a stock certificate
for such Shares is issued. No adjustment shall be made for dividends
(ordinary or extraordinary or whether in currency, securities, or other
property), distributions, or other rights for which the record date is
prior to the date such stock certificate is issued, except as provided
in Section 10.
(m) Modification, Extension, and Renewal of Options.
Within the limitations of the Plan, the Committee may at its discretion
modify, extend or renew outstanding any Option or accept the
cancellation of an outstanding Option for the granting of a new Option
in substitution. Notwithstanding the preceding sentence, no modification
of an Option shall, without the consent of the Participant, alter or
impair any rights or obligations under any Option previously granted.
(n) Other Provisions.
An Option Agreement may contain such other provisions as the Committee
deems advisable which are not inconsistent with the terms of the Plan,
including but not limited to:
10
<PAGE> 11
(i) Restrictions on the exercise of the Option;
(ii) Submission by the Participant of such forms and documents as the
Committee may require; and/or
(iii) Procedures to facilitate the broker-assisted exercise of the
Option.
(o) No Disqualification of Incentive Stock Options.
Notwithstanding any other provision of the Plan, the Plan shall not be
interpreted, amended or altered, nor shall any discretion or authority
granted under the Plan be exercised, so as to disqualify the Plan under
Section 422 of the Code or, without the consent of the Participant
affected, disqualify any Incentive Stock Option under Section 422 of the
Code.
(p) Limitations on Incentive Stock Options.
The aggregate Fair Market Value (determined as of the date of grant) of
Shares subject to grant(s) of Incentive Stock Options which will become
Vested by a Participant during any calendar year (under the Plan or
under any other incentive stock option plan of the Corporation) shall
not exceed $100,000. If the Fair Market Value of the Shares described in
the preceding sentence exceeds $100,000, the Options for the first
$100,000 worth of Shares to become Vested shall be Incentive Stock
Options and the Options for the amount in excess of $100,000 that become
Vested shall be Non-qualified Stock Options. In the event the Code or
the regulations promulgated thereunder are amended after the Effective
Date of the Plan to provide for a different limit on the Fair Market
Value of Shares permitted to be subject to Incentive Stock Options, such
different limit shall be automatically incorporated into this Section
7(p) and shall apply to any Options granted on or after the effective
date of such amendment.
8. TERM OF PLAN.
Options may be granted pursuant to the Plan through the period ending
on March 9, 2008. All Options which are outstanding on such date shall
remain in effect until they are exercised or expire by their terms. The
Plan shall expire for all purposes on March 9, 2008.
9. RECAPITALIZATIONS, TAKEOVERS, AND LIQUIDATIONS.
(a) Reorganizations.
Notwithstanding any other provision of the Plan to the contrary, but
subject to any required action by the stockholders of the Corporation,
the Committee shall make any adjustments to the class and/or number of
Shares covered by the Plan, the number of Shares for which each
outstanding Option pertains, the Exercise Price of an Option, and/or any
other aspect of this Plan to prevent the dilution or enlargement of the
rights of Participants under this Plan in connection with any increase
or decrease in the number of issued Shares resulting from the payment of
a Common Stock dividend, a stock split, a reverse stock split or any
other event which results in an increase or decrease in the
11
<PAGE> 12
number of issued Shares effected without receipt of adequate
consideration by the Corporation.
(b) Mergers and Consolidations.
Subject to any required action by the stockholders of the Corporation:
(i) In the event the Corporation is a party to a merger or
consolidation in which the Corporation is the surviving
corporation, each outstanding Option shall pertain to
the securities of the Corporation to which a holder of
the number of Shares subject to the Option would be
entitled; and
(ii) In the event the Corporation is a party to a merger or
consolidation in which it is not the surviving
corporation, unless the surviving corporation expressly
assumes outstanding Options, each outstanding Option
shall become 100% Vested and the Committee shall
exercise reasonable efforts to give each Participant as
much advance notice as practicable before the effective
date of such transaction to enable such Participant to
exercise Vested Options.
(c) Change of Control.
If the Corporation experiences a "change of control," all Options will
become fully Vested and become immediately exercisable. For purposes of
this Subsection (c), a "change of control" will occur if the Corporation
is acquired, merged with another company, makes a substantial public or
private placement of stock, or the current shareholders of the
Corporation otherwise lose control of the Corporation.
(d) Determination by the Committee.
All adjustments described in this Section 9 shall be made by the
Committee, whose determination shall be conclusive and binding on all
persons.
(e) Limitation on Rights of Participants.
Except as expressly provided in this Section 9, no Participant shall
have any rights by reason of any payment of any stock dividend, stock
split, reverse stock split, or any other change in the number of shares
of stock of any class, or by reason of any reorganization,
consolidation, dissolution, liquidation, merger, exchange, split-up or
reverse split-up, or spin-off of assets or stock of another corporation.
Any issuance by the Corporation of Options shall not affect, and no
adjustment by reason thereof shall be made with respect to, Options
under the Plan.
(f) No Limitation on Rights of Corporation.
The grant of an Option pursuant to the Plan shall not affect in any way
the right or power of the Corporation to make adjustments,
reclassifications, reorganizations, or changes of its capital or
business structure, or to merge or consolidate, or to dissolve,
liquidate, sell, or transfer all or any part of its business or assets.
12
<PAGE> 13
10. SECURITIES LAW REQUIREMENTS.
(a) Legality of Issuance.
No Share shall be issued upon the exercise of any Option unless and
until the Committee has determined that:
(i) The Corporation and the Participant have taken all
actions required to register the Shares under the
Securities Act of 1933, as amended (the "Act"), or to
perfect an exemption from registration requirements of
the Act, or to determine that the registration
requirements of the Act do not apply to such exercise;
(ii) Any applicable listing requirement of any stock exchange
on which the Share is listed has been satisfied; and
(iii) Any other applicable provision of state, federal or
foreign law has been satisfied.
(b) Restrictions on Transfer; Representations of Participant;
Legends.
Regardless of whether the offering and sale of Shares under the Plan
have been registered under the Act or has been registered or qualified
under the securities laws of any state, the Corporation may impose
restrictions upon the sale, pledge, or other transfer of such Shares
(including the placement of appropriate legends on stock certificates)
if, in the judgment of the Corporation and its counsel, such
restrictions are necessary or desirable to achieve compliance with the
provisions of the Act, the securities laws of any state, or any other
law. If the offering and/or sale of Shares under the Plan is not
registered under the Act and the Corporation determines that the
registration requirements of the Act apply but an exemption is available
which requires an investment representation or other representation, the
Participant shall be required, as a condition to acquiring such Shares,
to represent that such Shares are being acquired for investment, and not
with a view to the sale or distribution thereof, except in compliance
with the Act, and to make such other representations as are deemed
necessary or appropriate by the Corporation and its counsel. Stock
certificates evidencing Shares acquired pursuant to an unregistered
transaction to which the Act applies shall bear a restrictive legend
substantially in the following form and such other restrictive legends
as are required or deemed advisable under the Plan or the provisions of
any applicable law:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 ("ACT"). THEY MAY NOT BE TRANSFERRED, SOLD OR OFFERED FOR SALE
UNLESS A REGISTRATION STATEMENT UNDER THE ACT IS IN EFFECT AS TO SUCH
TRANSFER OR IN THE OPINION OF COUNSEL FOR THE ISSUER EITHER SUCH
REGISTRATION IS UNNECESSARY IN ORDER FOR SUCH TRANSFER TO COMPLY WITH
THE ACT OR THE REGISTRATION PROVISIONS OF THE ACT DO NOT APPLY TO SUCH
PROPOSED TRANSFER.
The Corporation shall also place legends on stock certificates
representing its right of
13
<PAGE> 14
repurchase under Section 11 and the forfeiture provisions (if
applicable) under Section 12. Any determination by the Corporation and
its counsel in connection with any of the matters set forth in this
Section 10 shall be conclusive and binding on all persons.
(c) Registration or Qualification of Securities.
The Corporation may, but shall not be obligated to, register or qualify
the offering or sale of Shares under the Act or any other applicable
law.
(d) Exchange of Certificates.
If, in the opinion of the Corporation and its counsel, any legend placed
on a stock certificate representing Shares issued pursuant to the Plan
is no longer required, the Participant or the holder of such certificate
shall be entitled to exchange such certificate for a certificate
representing the same number of Shares but lacking such legend.
11. LIMITATIONS ON SHARES.
(a) Repurchase Option. The Participant shall grant to the Company the
option (the "Repurchase Option") to repurchase all or part of the
Shares, upon the Participant's purchase of the Company's Common Stock
pursuant to the exercise of stock options granted in the Option
Agreement ("Offering Event"). Upon the occurrence of an Offering Event,
the Company may exercise the Repurchase Option by delivering a notice
pursuant to the Participant (or his permitted transferee or legal
representative, as the case may be), within ninety (90) days after the
date of the Offering Event (the "90-Day Period"). The Company's notice
to the Participant shall indicate the Company's election to exercise its
Repurchase Option and the number of Shares to be purchased by the
Company or the Company's designee, who shall be identified in such
notice, and the notice shall set forth a date for closing not later than
thirty (30) days from the date of the giving of such notice.
(b) Right of First Refusal. Except as provided in this Section 11, the
Participant shall not sell, assign, transfer, pledge or otherwise
dispose of any of the Shares, or any right or interest therein, either
voluntarily or involuntarily, without first delivering a written notice
(the "Transfer Notice") to the Company, which shall have the option to
purchase such Shares as provided herein (the "Right of First Refusal").
The Transfer Notice must specify: (i) the name and address of the
proposed transferee; (ii) the number of Shares, or interest therein,
proposed to be sold or transferred; (iii) the price or amount to be paid
for the proposed transfer (including the amount of any debt to be paid,
cancelled or forgiven upon foreclosure of a security interest in the
Shares or upon any other transfer to the Participant's creditors); and
(iv) all other material terms and conditions of the proposed transfer.
(c) Closing for Repurchase of Shares. The closing for the repurchase of
the Shares pursuant to either the exercise of the Repurchase Option or
the Right of First Refusal
14
<PAGE> 15
shall take place at the Company's principal offices. At the closing, the
holder of the certificate(s) representing the Shares being transferred
shall deliver such certificate or certificates evidencing the Shares to
the Company, duly endorsed for transfer, and the Company (or its
designee) shall tender payment of the purchase price for the Shares
being purchased. The purchase price for the Shares shall be payable in
full in cash, or by certified check or cashier's check; provided,
however, that the Company may elect to offset against and deduct from
any payment of the purchase price any indebtedness then owed by the
Participant to the Company.
12. EXERCISE OF UNVESTED OPTIONS
(a) Purpose of Section 12.
This Section 12 is intended to apply for the benefit of a Participant
prior to the time Shares held by the Participant are freely transferable
under applicable federal and state securities laws without the
Participant holding the Shares for a minimum period of time (e.g., the
two/three year holding period requirement of Rule 144 adopted by the
Securities and Exchange Commission under the Act). More specifically, a
Participant with an unvested Option may commence this holding period for
the Shares subject to the Option by exercising the unvested Option and
receiving Shares of restricted stock which will Vest on the same date as
the Option would have Vested. In this way, the Participant is able to
begin the holding period for the Shares prior to the date the Option
would have Vested.
(b) Exercise of Unvested Options and Issuance of Restricted Stock.
The Committee, at its discretion, may grant any Participant the right to
exercise any Option prior to the Vesting of such Option, provided that
the Shares issued upon such exercise shall remain subject to Vesting, as
restricted stock, at the same rate as under the Option so exercised and:
(i) Shares which have become Vested shall be subject to the
Corporation's Shareholder Agreement, on the terms and
conditions set forth in Section 11, if a Participant
proposes to sell, pledge or otherwise transfer any such
Shares, or any interest in such Shares, to any person or
entity; and
(ii) Shares which have not become Vested on or before the
applicable date described in Section 7 for determining
the forfeiture or lapsing of the Option pursuant to
which such Shares were issued under this Section 11,
shall be forfeited at the Exercise Price paid by the
Participant to the Corporation to acquire such Shares.
13. AMENDMENT OF THE PLAN.
The Board or the Committee may, from time to time, terminate, suspend or
discontinue the Plan,
15
<PAGE> 16
in whole or in part, or revise or amend it in any respect whatsoever
including, but not limited to, the adoption of any amendment deemed
necessary or advisable to qualify the Options under rules and
regulations promulgated by the Securities and Exchange Commission with
respect to Employees who are subject to the provisions of Section 16 of
the Exchange Act, or to correct any defect or supply any omission or
reconcile any inconsistency in the Plan or in any Option granted under
the Plan, with or without approval of the shareholders of the
Corporation, but if any such action is taken without the approval of the
Corporation's shareholders, no such revision or amendment shall:
(a) Increase the number of Shares subject to the Plan, other than
any increase pursuant to Section 10;
(b) Change the designation of the class of persons eligible to
receive Options;
(c) Permit any individual while a member of the Committee to be
eligible to receive and hold an Option granted or issued under
the Plan;
(d) Withdraw administration of the Plan from the Committee;
(e) Increase the maximum duration of an Option;
(f) Change the manner of determining the Exercise Price of an
Option;
(g) Extend the term of the Plan; or
(h) Amend this Section 14 to defeat its purpose.
No amendment, termination or modification of the Plan shall, without the
consent of the Participant, affect any Option previously granted.
14. PAYMENT FOR SHARE PURCHASES.
(a) Payment.
Payment of the Purchase Price for any Shares purchased pursuant to the
Plan may be made in cash (in U.S. dollars) or, where expressly approved
for the Participant by the Committee and where permitted by law:
(i) By check;
(ii) By cancellation of indebtedness of the Corporation to
the Participant;
(iii) By surrender of Shares that either: (A) have been owned
by Participant for more than six (6) months and have
been paid for within the meaning of SEC Rule 144 (and,
if such shares were purchased from the Corporation by
use of a promissory note, such note has been fully paid
with respect to such Shares); or (B) were obtained by
Participant in the public market (unless the Committee
permits a Participant to exercise an Option by
Pyramiding, in which event the six months holding
16
<PAGE> 17
period set forth in (A), above, shall not apply);
(iv) By tender of a full recourse promissory note having such
terms as may be approved by the Committee and bearing
interest at a rate sufficient to avoid imputation of
income under Sections 483 and 1274 of the Code;
provided, however, that Participants who are not
employees of the Corporation shall not be entitled to
purchase Shares with a promissory note unless the note
is adequately secured by collateral other than the
Shares; provided, further, that the portion of the
Purchase Price equal to the par value of the Shares, if
any, must be paid in cash;
(v) By waiver of compensation due or accrued to Participant
for services rendered;
(vi) With respect only to purchases upon exercise of an
Option, and provided that a public market for the
Corporation's stock exists (A)Through a "same day sale"
commitment from Participant and a broker-dealer that is
a member of the National Association of Securities
Dealers (an "NASD dealer") whereby Participant
irrevocably elects to exercise the Option and to sell a
portion of the Shares so purchased to pay for the
Exercise Price, and whereby the NASD Dealer irrevocably
commits upon receipt of such Shares to forward the
Exercise Price directly to the Corporation; or (B)
Through a "margin" commitment from Participant and an
NASD Dealer whereby Participant irrevocably elects to
exercise the Option and to pledge the Shares so
purchased to the NASD Dealer in a margin account as
security for a loan from the NASD Dealer in the amount
of the Exercise Price, and whereby the NASD Dealer
irrevocably commits upon receipt of such Shares to
forward the Exercise Price directly to the Corporation;
or
(vii) By any combination of the foregoing.
(b) Loan Guarantees.
The Committee may help the Participant pay for Shares purchased under
the Plan by authorizing a guarantee by the Corporation of a third-party
loan to the Participant.
15. APPLICATION OF FUNDS.
The proceeds received by the Corporation from the sale of Common
Stock pursuant to the exercise of an Option shall be used for general corporate
purposes.
16. PRIVILEGES OF STOCK OWNERSHIP.
No Participant shall have any of the rights of a shareholder with
respect to any Shares until the date a stock certificates for such Shares are
issued to the Participant. After certificates are issued to the Participant, the
Participant shall be a shareholder and have all the rights of a shareholder with
respect to such Shares, including the right to vote and receive all dividends or
other distributions made or paid with respect to such Shares. The preceding
sentence notwithstanding, a Participant who, pursuant to Section 12, (i)
exercises an unvested Option and receives Shares of restricted stock and (ii)
forfeits such Shares by terminating employment prior to the date such Shares
Vest shall have no right to retain dividends or distributions received with
respect to such Shares and shall return such dividends and distributions to the
Corporation without consideration.
17
<PAGE> 18
17. TRANSFERABILITY.
Options granted under the Plan, and any interest therein, shall not be
transferable or assignable by Participant, and may not be made subject
to execution, attachment or similar process, otherwise than by will or
by the laws of descent and distribution or as consistent with the
specific Plan and Option Agreement provisions relating thereto. During
the lifetime of the Participant an Option may be exercisable only by the
Participant, and any elections with respect to any Option may be made
only by the Participant.
18. APPROVAL OF SHAREHOLDERS.
The Plan shall be subject to approval by the affirmative vote of the
holders of a majority of all classes of the outstanding shares present
and entitled to vote at the first annual meeting of shareholders of the
Corporation adopting the Plan following the adoption of the Plan, and in
no event later than March 9, 1998. Prior to such approval, Options may
be granted but may not be exercised or settled. Any amendment described
in Section 13 shall also be subject to approval by the Corporation's
shareholders.
19. WITHHOLDING OF TAXES.
(a) General.
Whenever Shares are to be issued under the Plan, the Corporation may
require the Participant to remit to the Corporation an amount sufficient
to satisfy federal, state and local withholding tax requirements prior
to the delivery of any certificate or certificates for such Shares.
Whenever, under the Plan, payments in satisfaction of Options are to be
made in cash, such payment shall be net of an amount sufficient to
satisfy federal, state, and local withholding tax requirements.
(b) Stock Withholding.
When, under applicable tax laws, a Participant incurs tax liability in
connection with the exercise of any Option that is subject to tax
withholding and the Participant is obligated to pay the Corporation the
amount required to be withheld, the Committee may at its sole discretion
allow the Participant to satisfy the minimum withholding tax obligation
by electing to have the Corporation withhold from the Shares to be
issued the specific number of Shares having a Fair Market Value equal to
the minimum amount required to be withheld, determined on the date that
the amount of tax to be withheld is to be determined (the "Tax Date").
All elections by a Participant to have Shares withheld for this purpose
shall be made in writing in a form acceptable to the Committee and shall
be subject to the following restrictions:
(i) The election must be made on or prior to the applicable
Tax Date;
18
<PAGE> 19
(ii) Once made, then except as provided below, the election
shall be irrevocable as to the particular Shares as to
which the election is made;
(iii) All elections shall be subject to the consent or
disapproval of the Committee;
(iv) In the event that the Tax Date is deferred until six (6)
months after the delivery of Shares under Section 83(b)
of the Code, the Participant shall receive the full
number of Shares with respect to which the exercise
occurs, but such Participant shall be unconditionally
obligated to tender back to the Corporation the proper
number of Shares on the Tax Date; and
(v) If the Participant is an "insider" and if the
Corporation is subject to Section 16(b) of the Exchange
Act: the election may not be made within six (6) months
of the date of grant of the Option, except as otherwise
permitted by SEC Rule 16b-3(e) under the Exchange Act;
and either:
(A) the election to use stock withholding must
be irrevocably made at least six (6) months
prior to the Tax Date (although such election
may be revoked at any time at least six (6)
months prior to the Tax Date); or
(B) the exercise of the Option or election to
use stock withholding must be made in the ten
day period beginning on the third day following
the release of the Corporation's quarterly or
annual summary statement of sales or earnings.
20. STATEMENT TO PARTICIPANTS.
Within a reasonable time after the last day of each Plan Year, the
Committee shall furnish to each Participant a statement setting forth
the Participant's total number of Shares subject to Options, the date
such Options were granted, the Fair Market Value of such Options as of
the grant or issuance date, and such other information as the Committee
shall deem advisable to furnish.
21. RIGHTS AS AN EMPLOYEE.
The Plan shall not be construed to give any individual the right to
remain in the employ of the Corporation (or a Subsidiary) or to affect
the right of the Corporation (or such Subsidiary) to terminate such
individual's employment at any time, with or without cause. The grant
of an Option shall not entitle the Participant to, or disqualify the
Participant from, participation in the grant of any other Option under
the Plan or participation in any other plan maintained by the
Corporation.
22. INSPECTION OF RECORDS.
Copies of the Plan, records reflecting each Participant's Options and
any other documents and records which a Participant is entitled by law
to inspect shall be open to inspection by the Participant and his or
her duly authorized representative at the office of the Corporation at
any reasonable business hour upon reasonable advance notice from the
Participant.
19
<PAGE> 20
ON BEHALF OF U.S. ONLINE COMMUNICATIONS, INC.:
Date:
20
<PAGE> 21
<TABLE>
<S> <C>
1. PURPOSE .................................................................. 1
2. DEFINITIONS .............................................................. 1
(a) "Board" ......................................................... 1
(b) "Code" .......................................................... 1
(c) "Committee" ..................................................... 1
(d) "Common Stock" .................................................. 1
(e) "Corporation" ................................................... 1
(f) "Employee" ...................................................... 1
(g) "Exchange Act" .................................................. 1
(h) "Exercise Price" ................................................ 1
(i) "Fair Market Value" ............................................. 1
(j) "Incentive Stock Option" ........................................ 2
(k) "Non-qualified Stock Option" .................................... 2
(l) "Option" ........................................................ 2
(m) "Option Agreement" .............................................. 2
(n) "Participant" ................................................... 2
(o) "Plan" .......................................................... 2
(p) "Plan Year" ..................................................... 2
(q) "Purchase Price" ................................................ 2
(r) "Pyramiding" .................................................... 2
(s) "Share" ......................................................... 3
(t) "Subsidiary" .................................................... 3
(u) "Vest" or "Vesting" ............................................. 3
3. EFFECTIVE DATE ........................................................... 3
4. ADMINISTRATION ........................................................... 3
(a) Administration by the Board or the Committee .................... 3
(b) Composition of the Committee .................................... 3
(c) Powers of the Committee ......................................... 4
(d) Committee's Interpretation of the Plan .......................... 5
(e) Board's Determination of Fair Market Value ...................... 5
5. ELIGIBILITY FOR PARTICIPATION ............................................ 5
6. SHARES OF STOCK OF THE CORPORATION ....................................... 5
(a) Shares Subject to This Plan ..................................... 6
(b) Adjustment of Shares ............................................ 6
(c) Options Not to Exceed Shares Available .......................... 6
7. TERMS AND CONDITIONS OF OPTIONS .......................................... 6
(a) Option Agreement ................................................ 6
(b) Number of Shares Covered by an Option ........................... 6
(c) Exercise of Options ............................................. 6
(d) Vesting of Options .............................................. 7
</TABLE>
21
<PAGE> 22
<TABLE>
<S> <C>
(e) Term and Lapse of Options ....................................... 7
(f) Exercise Price .................................................. 7
(g) Medium and Time of Payment of Purchase Price .................... 8
(h) Nontransferability of Options ................................... 8
(i) Termination Other than by Death, Disability or Retirement ....... 8
(j) Death of Participant ............................................ 8
(k) Disability or Retirement of Participant ......................... 9
(l) Rights as a Stockholder ......................................... 9
(m) Modification, Extension, and Renewal of Options ................. 9
(n) Other Provisions ................................................ 9
(o) No Disqualification of Incentive Stock Options .................. 10
(p) Limitations on Incentive Stock Options .......................... 10
8. TERM OF PLAN ............................................................. 10
9. RECAPITALIZATIONS, TAKEOVERS, AND LIQUIDATIONS ........................... 10
(a) Reorganizations ................................................. 10
(b) Mergers and Consolidations ...................................... 11
(c) Change of Control ............................................... 11
(d) Determination by the Committee .................................. 11
(e) Limitation on Rights of Participants ............................ 11
(f) No Limitation on Rights of Corporation .......................... 12
10. SECURITIES LAW REQUIREMENTS ............................................. 12
(a) Legality of Issuance ............................................ 12
(b) Restrictions on Transfer; Representations of Participant; Legends 12
(c) Registration or Qualification of Securities ..................... 13
(d) Exchange of Certificates ........................................ 13
11. LIMITATIONS OF SHARES ...................................................
12. EXERCISE OF UNVESTED OPTIONS ............................................ 15
(a) Purpose of Section 12 ........................................... 15
(b) Exercise of Unvested Options and Issuance of Restricted Stock ... 16
13. AMENDMENT OF THE PLAN ................................................... 16
14. PAYMENT FOR SHARE PURCHASES ............................................. 17
(a) Payment ......................................................... 17
(b) Loan Guarantees ................................................. 19
15. APPLICATION OF FUNDS .................................................... 19
16. PRIVILEGES OF STOCK OWNERSHIP ........................................... 19
17. TRANSFERABILITY ......................................................... 19
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C>
18. APPROVAL OF SHAREHOLDERS ................................................ 19
19. WITHHOLDING OF TAXES .................................................... 20
(a) General ......................................................... 20
(b) Stock Withholding ............................................... 20
20. STATEMENT TO PARTICIPANTS ............................................... 21
21. RIGHTS AS AN EMPLOYEE ................................................... 21
22. INSPECTION OF RECORDS ................................................... 21
</TABLE>
23
<PAGE> 1
EXHIBIT 10.2
U.S. ONLINE COMMUNICATIONS, INC.
1998 RESTRICTED STOCK AWARD PLAN
SECTION 1. PURPOSE.
The U.S. OnLine Communications, Inc. 1998 Stock Award Plan (the "Plan")
is intended to provide incentives which will attract and retain highly competent
persons as officers and key employees of U.S. OnLine Communications, Inc. a
Delaware corporation and its subsidiaries (the "Company"), by providing them
with opportunities to acquire common stock of the Company pursuant to Awards
described herein. It is further intended that this Plan compensate key employees
for their contributions to the growth and profits of the Company and thereby
induce them to make such contributions in the future.
SECTION 2. DEFINITIONS.
(a) "Award" or "Award Share" shall mean the specific allocation
of Common Stock detailed in each Participant's individual
"Award Certificate" (as described in Appendix A.)
(b) "Board" shall mean the Board of Directors of the
Corporation.
(c) "Common Stock" shall mean the voting common stock of the
Corporation.
(d) "Corporation" shall mean U.S. OnLine Communications, Inc., a
Delaware corporation and any Subsidiary of the Corporation.
(e) "Date of Issuance" shall mean that date upon which the
Participant has made the final payment for purchase of
his/her Shares under this Plan and such Shares are
transferred to the Participant's name.
(f) "Participant" shall mean any individual to whom an Award has
been granted or issued under the Plan.
(g) "Plan" shall mean this U.S. OnLine Communications, Inc. 1998
Restricted Stock Award Plan, as amended. The Plan is
effective March 10, 1998.
(h) "Purchase Price" shall mean, at any specified time, the
price paid by the Participant per Share (in accordance with
the individual Award) times the number of Shares being
purchased.
(i) "Restricted Period" shall mean a period starting on the Date
of Issuance of such Award Shares to the Participant and
ending on such date not less than three (3) years after the
Date of Issuance, as the Committee may establish at the time
of allocation of shares hereunder.
(j) "Share" shall mean one authorized share of Common Stock.
1
<PAGE> 2
(k) "Subsidiary" shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning
with the Corporation if, at the time of granting an Award,
each of the corporations (other than the last corporation in
the unbroken chain) owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one
of the other corporations in such chain.
SECTION 3. ADMINISTRATION.
(a) The Board shall supervise and administer the Plan. Any questions
of interpretation of the Plan or of any Awards issued under it
shall be determined by the Board and such determination shall be
final and binding upon all persons. Any or all powers and
discretions vested in the Board under the Plan (except the power
to amend or terminate the Plan) may be exercised by a committee
of at least three directors (the "Committee") authorized by the
Board to do so. A majority of members of the Committee shall
constitute a quorum, and all determinations of the Committee
shall be made by a majority of its members. Any determination of
the Committee under the Plan may be made without notice or
meeting of the Committee, by a writing signed by a majority of
the Committee members.
(b) The Plan will be governed by the laws of Delaware.
(c) All costs and expenses incurred in the operation and
administration of this Plan will be borne by the Company.
SECTION 4. PARTICIPANTS.
Participants will consist of such key employees of the Company
(including officers and directors, except for persons serving as directors only)
as the Board, in its sole discretion may designate from time to time to receive
Awards under the Plan. In selecting those employees whom it wishes to recommend
for allocations and in determining the number of Awards it wishes to recommend,
the Board shall consider the position and responsibilities of the eligible
employees, the value of their services to the Company and such other factors as
the Board deems pertinent. Awards may be granted under this Plan to persons who
have previously received Awards or other benefits under this or other plans of
the Company.
SECTION 5. SHARES RESERVED UNDER THE PLAN.
(a) Shares Reserved. There is hereby reserved for issuance
as Awards under the Plan an aggregate of 500,000 shares
of Common Stock, par value $.001, which may be
authorized but unissued or treasury shares. Any shares
subject to Awards may thereafter be subject to new
Awards under this Plan if shares of Common Stock are
issued under such Awards and are thereafter reacquired
by the Company pursuant to rights reserved by the
Company upon issuance thereof.
(b) Adjustments to Reserve. Upon the allocation of Shares
hereunder, the reserve will be reduced by the number of
shares so allocated and, upon the failure to make the
required payment on the issuance of any Shares pursuant
to Section 6 or upon the
2
<PAGE> 3
repurchase thereof pursuant to Section 7, the reserve
shall be increased by such number of shares, and such
Shares may again be the subject of allocations
hereunder.
(c) Distributions of Shares. Distributions of Shares under
this Plan, as the Board shall in its sole discretion
determine, may be made from authorized but unissued
shares or from treasury shares. All authorized and
unissued shares issued as Shares under this Plan shall
be fully paid and non-assessable shares and free from
preemptive rights.
SECTION 6. PAYMENT REQUIRED OF PARTICIPANTS.
(a) Award Allocation. When an allocation is made pursuant to an individual
Award, the Board shall advise the Participant and the Company thereof by
delivery of written notice in the form of Appendix A to this Plan.
Within 15 days from the date of allocation, the Participant shall, if
he/she desires to accept the Award allocation, pay to the Company an
amount equal to $.001, in cash or by certified or bank cashier's check..
(b) Death of Participant. In the event of the death of a Participant during
employment or prior to the termination of any Award held by him
hereunder, each Award theretofore granted to him shall be payable to the
extent provided therein but not later than one year after his death (and
not beyond the stated duration of the Award.) Any such payment shall be
made only:
(1) To the executor or administrator of the estate of the deceased
Participant or the person or persons to whom the deceased
Participant's rights under the Award shall pass by will or the
laws of descent and distribution; and
(2) To the extent, if any, that the deceased Participant was
entitled at the date of his death.
SECTION 7. RESTRICTIONS ON AWARD SHARES.
The restrictions to which Award Shares shall be subject are:
(a) Investment Intention. The Company may require that, in acquiring any
Award Shares, the Participant agree with, and represent to, the Company
that the Participant is acquiring such Award Shares for the purpose of
investment and with no present intent to transfer, sell, or otherwise
dispose of such shares except for such distribution by will or the laws
of descent and distribution.
(b) Right of First Refusal. During the Restricted Period applicable to such
Award Shares and except as otherwise specifically provided in the Plan,
none of such Award Shares shall be sold, exchanged, transferred,
pledged, hypothecated or otherwise disposed of unless they first, by
written notice, have been offered to the Company for repurchase for the
same amount as was paid therefor under Section 6, with appropriate
adjustment for any change in the Award Shares for stock splits, etc.
(described in Section 8) and the Company shall not have so repurchased
the shares and made payment in full therefor. Unless such repurchase is
otherwise prohibited by the laws of the State of Delaware currently in
effect at the time of an offer of Award Shares to the Company for
repurchase pursuant to the terms of this Plan, the
3
<PAGE> 4
Company shall repurchase said shares and make payment in full therefor
within thirty (30) days following such offer.
(c) Vesting. If a Participant's employment is terminated for any reason
(including such Participant's death or disability), at any time before
the Restricted Period ends, such termination shall be deemed to be an
offer to the Company as described in Section 7(b) above as to:
(i) All such shares issued to such Participant, if such
termination occurs within one year from the Date of
Issuance:
(ii) 66.6% of the total number of such shares originally
issued (including any other or additional securities
issued in respect thereof, as contemplated by Section 8
to such Participant, if such termination occurs more
than one year after the Date of Issuance but prior to
two years after that date;
(iii) 33.3% of the total number of such shares originally
issued (including any other or additional securities
issued in respect thereof, as contemplated by Section 8
to such Participant, if such termination occurs on or
after two years after the Date of Issuance but prior to
the end of the Restricted Period.
If a Participant's individual Award Certificate states that there is to
be another vesting schedule than that mentioned above in (i) through
(iii), then the vesting schedule stated in such Award Certificate shall
override any vesting stated in this Plan.
(d) Delivery of Written Notice. All notices in writing required pursuant to
this Section 7 will be sufficient only if actually delivered or if sent
via registered or certified mail, postage prepaid, to the Company,
attention Treasurer, and/or the escrow agent at it principal office
within the City of Austin, and will be conclusively deemed given on the
date of delivery, if delivered or on the first business day following
the date of such mailing if mailed.
SECTION 8. ADJUSTMENT PROVISIONS.
(a) Generally. If the Company shall at any time change the number of issued
shares of Common Stock without new considerations to the Company (by
stock dividends, stock splits, or similar transactions), the total
number of shares reserved for issuance under the Plan and the number of
shares covered by each outstanding Award shall be adjusted so that the
value of each such Award shall not be changed. Awards may also contain
provisions for their continuation or for other equitable adjustments
after changes in the Common Stock resulting from reorganization, sale,
merger, consolidation or similar occurrences.
(b) Listing on the Stock Exchange. The Company shall take such action as
shall be necessary to cause any Shares issued under this Plan and not
previously listed to be listed on the NASDAQ Stock Exchange and/or such
other exchange(s) on which shares of the same class as the Shares are
then listed.
SECTION 9. ESCROW OF SHARE CERTIFICATES.
Certificates for the Award Shares shall be issued in the Participant's
name and shall be held in escrow by the Company until all restrictions lapse or
such shares are forfeited as provided herein; provided, however, that the terms
of such escrow shall make allowance for the
4
<PAGE> 5
transactions contemplated by Section 8 above. A certificate or certificates
representing the Award Shares as to which restrictions have lapsed shall be
delivered to the Participant upon such lapse.
SECTION 10. OTHER PROVISIONS.
(a) Generally. Any Award under the Plan may also be subject to such
other provisions (whether or not applicable to an Award to any
other Participant) as the Board determines appropriate,
including without limitation, provisions for the forfeiture of
and restrictions on the sale, resale or other disposition of
shares acquired under any Award, provisions giving the Company
the right to repurchase shares acquired under any Award,
provisions to comply with federal and state securities laws, or
understandings or conditions as to the Participant's employment
in addition to those specifically provided for under this Plan.
(b) Rights of Participants. Participants of allocations will have no
rights with respect Award Shares other than those set forth in
the Plan. Except as provided in Section 6, such rights may not
be assigned or transferred except by will or by the laws of
descent and distributions. If any attempt is made to sell,
exchange, transfer, pledge, hypothecate, or otherwise dispose of
any Shares held by the Participant under restrictions which have
not yet lapsed, the shares that are the subject of such
attempted disposition will be deemed offered to the Company for
repurchase, and the Company will repurchase them, as described
in Section 7(b). Before issuance of Awards, no Shares will be
earmarked for any Participant's accounts nor will such
Participants have any rights as stockholders with respect to
such Shares.
(c) Limitation on Actions. Every right of action by or on behalf of
the Company or by any shareholder against any past, present, or
future member of the Board, the Committee, or any officer or
employee of the Company arising out of in connection with this
Plan shall, regardless of the place where the action may be
brought and regardless of the place of residence of any such
director, committee member, officer or employee, cease and be
barred by the expiration of three years from the later of:
(i) the date of the act or omission in respect of which such
right of action arises or
(ii) the first date upon which there has been made generally
available to shareholders an annual report of the
Company and a proxy statement for the annual meeting of
shareholders following the issuance of such annual
report, which annual report and proxy statement alone or
together set forth, for the related period, the amount
of the allocations.
In addition, any and all right of action by any employee (past, present
or future) against the Company or any member of the Committee arising
out of or in connection with this Plan will, regardless of the place
where the action may be brought and regardless of the place of residence
of any Committee member, cease and be barred by the expiration of three
years from the date of the act or omission in respect of which such
right of action arises.
5
<PAGE> 6
SECTION 11. EMPLOYMENT RIGHTS.
A Participant's right, if any, to continue to serve the Company and its
Subsidiaries as an officer, employee or otherwise, shall not be enlarged or
otherwise affected by his designation as a Participant under the Plan.
SECTION 12. DURATION, AMENDMENT AND TERMINATION.
No Award shall be granted more than 10 years after the date of adoption
of this Plan; provided, however, that the terms and conditions applicable to any
Award granted within such period may thereafter be amended or modified by mutual
agreement between the Company and the Participant or such other persons as may
then have an interest therein. Also, by mutual agreement between the Company and
the Participant in substitution and exchange for, and in cancellation of, any
Awards previously granted such participant under this Plan, or any benefit
previously or thereafter granted to him under any future plan of the Company.
The Board may amend the Plan from time to time or terminate the Plan at any
time. However, no action authorized by this paragraph shall reduce the amount of
any existing Award or change the terms and conditions thereof without the
Participant's consent.
SECTION 13. REGISTRATION OF AWARD SHARES.
(a) Registration Requirement. If the Company determines at any time
to register any of its securities under the Securities Act of
1933 (or similar statute then in effect) the Company, at its
expense, will include among the securities which it then
registers all Award Shares or other stock or securities issued
in respect thereof, in exchange therefor, or in replacement
thereof as to which the Restricted Period has expired. The
requirement of the preceding sentence, however, will not apply
to the extent that any participant at that time has no present
intent to sell or distribute the relevant shares. Also, in the
case of stock or securities not of the Company, the Company's
obligation under this Section 13 will be limited to using its
best efforts to effect such registration.
(b) Written Notification. As to each registration pursuant to this
Section 13, the Company will keep the Participants advised in
writing as to the initiation of proceedings for such
registration and as to the completion thereof, and at tits
expense will keep such registration effective for a period of
nine months, or until all sales and distributions contemplated
in connection therewith are completed, whichever period is
shorter. Each Participant will at his own expense furnish to the
Company such information regarding the Participant and the
Participant's ownership of Award Shares (or other stock or
securities) as the Company may reasonable request in writing in
connection with any such registration.
(c) Prospectus; Indemnification. The Company, at its expense, will
furnish to each Participant such number of prospectuses incident
to any such registration as such Participant from time to time
reasonably may request. In addition, the Company will indemnify
each such Participant against all claims, losses, damages, and
liabilities caused by any untrue statement of a material fact
contained in such prospectus (or in any related registration
statement) or by any omission to state therein a material fact
6
<PAGE> 7
required to be stated therein or necessary to make the
statements therein not misleading, except insofar as the same
may have been caused by an untrue statement or omission based
upon information furnished in writing to the Company by such
Participant expressly for use therein. Further as a condition
precedent to the obligations of the Company pursuant to this
Section 13, each Participant will agree in writing to indemnify
the Company against all claims, losses, damages and liabilities
caused by an untrue statement or omission based upon information
furnished to the Company by such Participant expressly for use
therein.
U.S. ONLINE COMMUNICATIONS, INC.
By:___________________
Date: _________________
7
<PAGE> 8
APPENDIX "A"
AWARD CERTIFICATE
FOR
RESTRICTED STOCK AGREEMENT
This Agreement is made as of the ___ day of March, 1998 ("Date of
Award"). between U.S. OnLine Communications, Inc., a Delaware corporation (the
"Company"), and _____ (the "Participant.") In consideration of the agreements
set forth below, the Company and the Participant agree as follows:
1. Grant. A restricted stock award ("Award") of _____ shares ("Award
Shares") of the Company's common stock, $.001 par value per share
("Common Stock"), is hereby granted by the Company to the Participant
subject to the following terms and conditions and to the provisions of
the U.S. OnLine Communications, Inc. 1998 Stock Award Plan (the "Plan"),
the terms of which are incorporated by reference herein.
2. Payment. For the grant of Award Shares to be issued, the Participant
must make payment of $.001 and deliver to the Treasurer of the Company
an this Agreement in duplicate, within 30 days from the date of this
notice. The Participant acknowledges that he/ she will deposit any Award
Shares received (together with a stock power duly endorsed in blank)
with an escrow agent appointed pursuant to Section 9 of the Plan.
3. Transfer Restrictions. None of the Award Shares shall be sold, assigned,
pledged or otherwise transferred, voluntarily or involuntarily, by the
Grantee. The transfer restrictions shall lapse in accordance with
Section 7 of the Plan. The Participant represents that he/she is
acquiring the Award Shares for investment and that there is no present
intention to transfer, sell or otherwise dispose of such shares, except
as permitted pursuant to the Plan and in compliance with applicable
securities laws. The Participant further agrees that he/she is acquiring
the Award Shares in accordance with, and subject to, the terms,
provisions and conditions of the Plan, and that these restrictions will
bind and inure to the benefit of my heirs, legal representatives,
successors and assigns.
4. Forfeiture. The Award Shares shall be forfeited to the Company upon the
Participant's termination of employment with the Company prior to the
date the restrictions lapse as provided in Section 7 of the Plan, unless
his employment terminates because of his death or disability.
5. Rights as a Stockholder. The Participant shall be entitled to all of the
rights of a stockholder with respect to the Award Shares including the
right to vote such shares and to receive dividends and other
distributions payable with respect to such shares since the Date of
Issuance.
6. Governing Law. This Agreement shall be construed under the laws of the
State of Delaware.
In Witness Whereof, the Company has caused this Award to be granted on the date
first above written.
8
<PAGE> 9
U.S. OnLine Communications, Inc.
Accepted:_____________
By: _______________ Grantee:______________
ELECTION TO INCLUDE VALUE OF RESTRICTED PROPERTY IN GROSS INCOME
IN YEAR OF TRANSFER UNDER INTERNAL REVENUE CODE SECTION 83(B)
The undersigned hereby elects pursuant to Section 83(b) of the Internal
Revenue Code with respect to the property described below and supplies the
following information in accordance with the regulations promulgated thereunder:
1. THE NAME, ADDRESS AND SOCIAL SECURITY NUMBER OF THE UNDERSIGNED ARE:
2. DESCRIPTION OF PROPERTY WITH RESPECT TO WHICH THE ELECTION IS BEING
MADE:
___ (__) shares of common stock of U.S. OnLine Communications,
Inc., par value $.001 per share.
3. THE DATE ON WHICH PROPERTY WAS TRANSFERRED IS MARCH 10, 1998.
The taxable year to which this election relates is calendar year
1998.
4. THE NATURE OF THE RESTRICTIONS TO WHICH THE PROPERTY IS SUBJECT IS:
If, on or before March 10, 1999, the taxpayer ceases to be
employed by U.S. OnLine Communications, Inc. (other than by reason of
his/her death or disability) the taxpayer must resell the property
transferred to U.S. OnLine Communications, Inc. for $.001 per share.
5. FAIR MARKET VALUE:
The fair market value at time of transfer (determined without
regard to any restrictions other than restrictions which by their terms
will never lapse) of the property with respect to which this election is
being made is $.001 per share.
6. AMOUNT PAID FOR THE PROPERTY:
The amount paid by taxpayer for said property is $_____.
7. FURNISHING STATEMENT TO EMPLOYER:
A copy of this statement has been furnished to U.S. OnLine
Communications, Inc.
9
<PAGE> 10
Dated: March 27, 1998 ________________________________ (Taxpayer)
10
<PAGE> 1
EXHIBIT 10.3
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.
10% Convertible Subordinated Promissory Note
$3,000,000 ____________, 1998
New York, New York
U.S. ONLINE COMMUNICATIONS, INC., a Delaware corporation (the
"Borrower"), for value received, hereby promises to pay to U.S. OnLine
Communications L.L.C., with an address at 1201 Third Avenue, Suite 5400,
Seattle, WA 98101, or registered assigns (the "Holder"), the principal amount of
THREE MILLION DOLLARS ($3,000,000.00) on the terms and conditions set forth
below. The unpaid principal balance of this Note will bear interest at the rate
of 10% per annum (calculated on the basis of a 360-day year consisting of 30-day
months), 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) Borrower shall repay this Note in three equal installments of
principal, plus all interest accrued and unpaid as of the date of each such
installment. The first such installment shall be due on the earlier to occur of
(i) one year from the date of this Note, or (ii) the day after the date the
Borrower, or any successor or assign of the Borrower, closes a public offering
of its securities pursuant to the Act. The second and third installments of
principal and interest under this Note shall be due and payable on the first and
second anniversary of the first installment.
(b) If any payment would otherwise be due on a day that is not a
Business Day (as defined below), the payment due on such day will be made on the
next
1
<PAGE> 2
succeeding Business Day. "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.
(c) 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(c) 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(c), 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.
(d) 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.
(e) 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 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
<PAGE> 3
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
"Aspen Note" (as defined below) until the Bridge Notes have been paid in full;
following payment of the Bridge Notes, this Note shall be junior to the Aspen
Note, but shall be paid in accordance with its terms until and unless there is
an Event of Default under the Aspen Note. "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 "Aspen 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 of which have duly executed any and all subordination
agreements reasonably acceptable to the Holder and the Holders of Senior Debt,
(iv) equipment lease
3
<PAGE> 4
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 $1,500,000 14% Senior Subordinated Promissory Note
issued by Borrower to Aspen OnLine Investments, L.L.C. (the "Aspen 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 not create, acquire, or maintain any subsidiaries other than
those referred to in the Memorandum.
(c) 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.
(d) Shall not change its primary line of business.
(e) 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.
(f) 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(g), for services
as an officer, director, partner or employee).
(g) 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.
(h) Shall use the proceeds of the "Offering " (as defined in the
Memorandum) in substantially the manner specified in the Memorandum.
(i) 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
4
<PAGE> 5
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;
(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
5
<PAGE> 6
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.
(j) 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.
(k) 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.
(l) Shall not create, incur or assume any guarantee obligation except:
(i) guaranties in existence on the date hereof and listed on
Schedule 3(l)(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.
(m) 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 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.
(n) Shall not become an investment company subject to registration under
the Investment Company Act of 1940, as amended.
(o) 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
6
<PAGE> 7
payments on this Note, any portion thereof, or perform its other obligations
under this Note.
(p) 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.
(q) 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.
(r) 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.
(s) 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.
(t) 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,
7
<PAGE> 8
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.
(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
8
<PAGE> 9
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, 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.
9
<PAGE> 10
(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. Conversion.
(a) Prior to IPO. At any time prior to the date on which the Borrower
closes a public offering of its common stock in accordance with the Act (an
"IPO"), the Holder of this Note shall have the right, but not the obligation, to
convert this Note into that number of shares of common stock of the Borrower
equal to the outstanding balance of principal interest under this Note, divided
by the per share price under which such shares of common stock are offered in
the IPO.
(b) Conversion at One (1) Year Anniversary. At any time from and after
March 31, 1999, the Holder shall have the right to convert all or any part of
the then outstanding balance of principal and interest under this Note into
shares of common stock of the Borrower at the conversion price of Three Dollars
and Seventy-Five Cents ($3.75) per share. The conversion right set forth in this
Subparagraph (b) shall terminate automatically upon the closing of an IPO
without further action on the part of Borrower or Holder.
(c) Lock-up Letter. Any shares issued to the Holder pursuant to this
Section 6 shall be subject to the terms and conditions in that certain Lock-up
Letter made by Holder in favor of Borrower as of March 30, 1998.
7. 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
10
<PAGE> 11
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 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.
8. 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),
11
<PAGE> 12
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.
(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 such waiver or
amendment 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 Washington 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 8(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(l)(i)
None-
13
<PAGE> 1
EXHIBIT 10.4
THE RIGHTS OF THE HOLDER OF THIS NOTE WITH RESPECT TO THE SALE, TRANSFER,
ASSIGNMENT, PLEDGE OR OTHER ENCUMBRANCE OR DISPOSITION OF THIS NOTE OR OF THE
L.L.C. INTERESTS (AS DEFINED BELOW) OF COMMUNICATIONS (AS DEFINED BELOW)
ISSUABLE UPON CONVERSION OF THIS NOTE ARE SUBJECT TO THE RESTRICTIONS SET FORTH
IN SECTION 6 OF THIS NOTE.
U.S. ONLINE COMMUNICATIONS L.L.C.
U.S. ON-LINE CABLE, L.L.C.
15% Convertible Promissory Note
$7,200,000.00 March 30, 1998
New York, New York
U.S. ONLINE COMMUNICATIONS L.L.C., a Washington limited liability
company ("Communications"), and U.S. ON-LINE CABLE, L.L.C., a Texas limited
liability company ("Cable," and collectively with Communications, the
"Borrowers"), for value received, hereby, jointly and severally, promise to pay
to U.S. OnLine Communications, Inc., a Delaware corporation with an address at
8307 Shoal Creek Boulevard, Austin, Texas 78757 (the "Initial Holder"), or its
registered assigns (collectively, with the Initial Holder, "Holder"), the
principal amount of up to seven million two hundred thousand dollars
($7,200,000.00) on the Maturity Date (as defined below), and to pay interest on
the unpaid principal balance hereof at the rate of 15% per annum (calculated on
the basis of a 360-day year consisting of twelve 30-day months) on the last
Business Day (as defined below) of each of December, March, June and September
commencing March 31, 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 Maturity Date.
The "Maturity Date" shall be the first anniversary of the date hereof.
(b) Interest on this Note shall accrue from the
most recent Interest Payment Date to which interest has been
-1-
<PAGE> 2
paid or, if no interest has been paid on this Note, from March 30, 1998 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, the payment due on such
Interest Payment 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 New York, New
York.
(d) The Borrowers may not prepay all or any part
of the principal of this Note. 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 in immediately available funds sent to
Holder's address set forth above or to such other address as 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
Borrowers hereby expressly waive demand and presentment for payment, notice of
non-payment, notice of dishonor, protest, notice of protest and diligence in
taking any action to collect any amount called for hereunder, and shall each be
directly and primarily liable for the payment of 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. Conversion of this Note.
2.1 Conversion Privilege. Subject to and upon compliance with the
provisions of this Section 2 and Section 8 hereof, Holder may convert, at
Holder's option at any time while an Event of Default (as set forth in Section 7
hereof, but subject to the limitations set forth in Section 8 hereof) has
occurred and is continuing, all of the unpaid principal amount of this Note into
limited liability interests of Communications (the "L.L.C. Interests") such that
Holder has at least 75%, on a fully diluted basis, of the total voting and
economic control in Communications.
- 2 -
<PAGE> 3
2.2 Manner of Exercise of Conversion Privilege. In order to
exercise the conversion privilege of this Note, Holder shall deliver written
notice, substantially in the form attached to this Note as EXHIBIT 1, to
Communications during regular business hours at its principal executive office
(as set forth herein). Conversion shall be deemed to have been effected on the
date when such notice is delivered to Communications (the "Conversion Date") and
at that time the rights of Holder as such shall cease, except with respect to
the payment of accrued interest in accordance with Section 2.4 below. An
election to convert this Note, in whole or in part, shall be irrevocable once
made.
2.3 Issuance of Certificates. As promptly after the Conversion
Date as practicable, Communications shall instruct its transfer agent or other
appropriate agency or entity to issue and deliver to Holder at the address of
Holder set forth on the Note Register of Communications, without any charge to
Holder, a certificate or certificates (issued in the name of Holder or, subject
to the provisions of Section 6.2 hereof, in such name as Holder may designate)
for the number of L.L.C. Interests issuable upon the conversion of this Note. In
case this Note is surrendered for a partial conversion, the Borrowers shall
execute and deliver to Holder a new Note in an aggregate principal amount equal
to the unconverted portion of the principal amount of the surrendered Note.
2.4 Interest on Conversion. On conversion of this Note, interest
shall cease to accrue as of the Conversion Date on the principal amount
converted, but interest accrued to the Conversion Date shall be payable on or
before the third (3rd) business day following the Conversion Date. No payment or
adjustment shall be made on conversion of this Note for any distribution on
L.L.C. Interests issued upon conversion that were declared before the Conversion
Date. Upon such conversion, Holder shall be deemed to have become the
equityholder of record on the Conversion Date (unless the transfer books of
Communications are closed on that date, in which event Holder shall be deemed to
have become the equityholder of record on the next succeeding day on which the
transfer books of Communications are open and the conversion shall be at the
rate in effect on such date).
2.5 Taxes Upon Conversion. The Borrowers shall pay any and all
taxes that may be payable in respect of the issuance or delivery of any L.L.C.
Interests on conversion of this Note or any portion thereof. The Borrowers shall
not, however, be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of L.L.C. Interests in a name
other than that of Holder, as listed on the
- 3 -
<PAGE> 4
Note Register of Communications, and Communications shall not be required to
issue or deliver such L.L.C. Interests unless or until the person or persons
requesting the issuance thereof shall have paid to Communications the amount of
any such tax or shall have established to the satisfaction of Communications
that such taxes have been paid.
2.6 Effect of Reclassification, Consolidation, Merger, etc. In
case of the reclassification or change of outstanding L.L.C. Interests, or in
the case of any consolidation or merger of Communications with or into a
corporation or any other entity (other than a consolidation or merger in which
Communications is the surviving corporation which does not result in any
reclassi- fication or change of outstanding L.L.C. Interests or a merger of the
Borrowers with and into the Initial Holder or a wholly-owned subsidiary of the
Initial Borrower), or in the case of a sale or conveyance to another corporation
or any other entity of all or substantially all of the assets of the Borrowers
(other than a sale of all or substantially all of Communications' assets to the
Initial Holder), Holder thereafter shall have the right to convert this Note
into the kind and number of L.L.C. Interests and/or other securities or property
receivable upon such reclassification, change, consolidation, merger, sale or
conveyance by a holder of the number of L.L.C. Interests of Communications into
which this Note might have been converted immediately before the time of
determination of the equityholders of the Borrower entitled to receive such
L.L.C. Interests and/or other securities or property. Communications shall be
obligated to retain and set aside or otherwise make fair provision for exercise
of the right of Holder to receive the L.L.C. Interests and/or other securities
or property provided for in this Section 2.6.
2.7 Notice of Certain Corporate Actions. Nothing contained in
this Note shall be construed as conferring upon Holder the right to vote or to
consent or to receive notice on account of the L.L.C. Interests into which this
Note is convertible, or as having any rights whatsoever as an equityholder of
Communications with respect to such L.L.C. Interests. If, however, any of the
following events shall occur:
(a) Communications shall establish a record date
for the purpose of entitling the holders of its L.L.C.
Interests to receive a dividend or distribution;
(b) Communications shall offer to the holders of its
L.L.C. Interests any additional L.L.C. Interests or securities
convertible into or exchangeable for L.L.C. Interests, or any right,
option or warrant to subscribe for or purchase the same;
- 4 -
<PAGE> 5
(c) Communications shall authorize the distribution to all
holders of its L.L.C. Interests of evidences of its indebtedness or
assets;
(d) a dissolution, liquidation or winding up of
Communications or a sale of all or substantially all of Communications'
property, assets and business as an entirety shall be approved by
Communications' Members or Board of Managers (or entity having a similar
function); or
(e) a merger or consolidation of Communications with or
into any other corporation which shall be approved by Communications'
Members or Board of Managers (or entity having a similar function);
then, in any one or more of such events, Communications shall give written
notice of such event to Holder at least thirty (30) days before the date fixed
as a record date or the date of closing the transfer books for the determination
of the equityholders entitled to such dividend, distribution, additional L.L.C.
Interests, convertible or exchangeable securities or subscription or purchase
rights, options or warrants or entitled to vote on such proposed dissolution,
liquidation, winding up, sale, merger or consolidation. Such notice shall
specify such record date or the date of closing the transfer books, as the case
may be.
2.8 Listing of Shares for Issuance. Communications covenants that
all L.L.C. Interests issued upon conversion of this Note in compliance with the
terms hereof will be duly and validly issued and fully paid and non-assessable
and that the issuance of the L.L.C. Interests as provided for herein shall not
give rise to any preemptive rights. As long as this Note shall be outstanding,
Communications shall use its best efforts to cause all L.L.C. Interests issuable
upon conversion of this Note to be listed (subject to official notice of
issuance) on all securities exchanges, if any, on which the L.L.C. Interests are
then listed.
3. Ranking of Note.
(a) The Borrowers, for themselves, their
successors and assigns, covenant and agree 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 senior in
right of payment of up to $7.2 million of principal and/or interest and costs
thereon owed by the Borrower to Silicon Valley Bank ("Senior Debt"). "Junior
Debt" shall mean all existing and future Indebtedness (as hereinafter defined)
other than (i) Senior Debt and (ii) equipment lease obligations existing on the
date hereof of approximately $6.0 million in aggregate principal amount.
- 5 -
<PAGE> 6
"Indebtedness" shall mean (A) any liability of the Borrowers for borrowed money,
(x) 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 capitalized lease
obligations; (B) any liability of others described in Section 3(a)(A) which the
Borrowers have guaranteed or which is otherwise its legal liability; and (C) any
modification, renewal, extension, replacement or refunding of any such liability
described in Section 3(a)(A) or (B); provided, that Indebtedness does not
include unsecured trade credit.
(b) The Borrowers, jointly and severally,
covenant and agree to use their best efforts to cause any current holder of
Junior Debt and to cause any future holder of Junior Debt to execute such
subordination agreements or intercreditor agreements, instruments or waivers as
may be reasonably necessary in the opinion of Barington Capital Group, L.P.
("Barington") to reflect the terms set forth herein.
(c) Until the payment in full of all amounts of
principal of and interest on this Note, and all other amounts owing under this
Note and any subordination agreement or intercreditor agreements, no payment may
be made 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.
4. Representations and Warranties of the Borrowers. The
Borrowers, jointly and severally, represent and warrant to, and agree with,
Holder that:
(a) Communications and Cable are duly organized,
validly existing and in good standing under the laws of the States of Washington
or Texas, as applicable, with full power and authority to own, lease, license
and use their properties and assets and to carry out the businesses in which
they are engaged as described in that certain Confidential Private Placement
Memorandum (the Memorandum"), dated March 13, 1998, relating to the sale of
certain securities of the Initial Holder. Communications has taken all necessary
actions to sell all of its assets to the Initial Holder pursuant to that certain
Asset Purchase Agreement by and between the Initial Holder and Communications
(the "Asset Purchase Agreement"). The Borrowers are duly qualified to transact
the businesses in which they are engaged as described in the Memorandum and are
in good standing as a foreign entity in every jurisdiction in which their
ownership, leasing, licensing or use of property or assets or the conduct of
their businesses make such qualification necessary, except where the failure to
be so qualified would not have a Material Adverse Effect (as defined below) on
either of
- 6 -
<PAGE> 7
the Borrowers. Communications has no subsidiaries other than Cable. The
Borrowers have taken all necessary action, subject to certain governmental and
third party consents, to merge Cable with and into Communications. Except as set
forth in the Memorandum, Cable has no subsidiaries.
(b) The capitalization of each of Communications
and Cable is as set forth in the SCHEDULE 4(b) attached hereto and made a part
hereof. Each outstanding membership interest in each of Communications and Cable
is validly authorized, validly issued, fully paid and nonassessable, without any
personal liability attaching to the ownership thereof (except for certain income
tax liabilities to the extent each of Communications and Cable elects to
continue to be taxed as a partnership and has taxable income) and has not been
issued and is not owned or held in violation of any preemptive rights of any
equityholders. There is no commitment, plan or arrangement to issue, and no
outstanding option, warrant or other right calling for the issuance of, any
equity of either of Cable or Communications or any security or other instrument
which by its terms is convertible into, exercisable for or exchangeable for
equity of either of Cable or Communications, except as may be described in the
Memorandum. There is outstanding no security or other instrument which by its
terms is convertible into or exchangeable for equity of either of Cable or
Communications, except as may be described in the Memorandum.
(c) Except as set forth and described in the
Memorandum, (i) the financial statements of the Borrowers included in the
Memorandum fairly present the financial position, the results of operations, and
the other information purported to be shown therein at the respective dates and
for the respective periods to which they apply, and (ii) such financial
statements have been prepared in accordance with generally accepted accounting
principles (except to the extent that certain footnote disclosure has been
omitted) consistently applied throughout the periods involved, and are in
accordance with the books and records of the Borrowers.
(d) There is no litigation, arbitration, claim,
governmental or other proceeding (formal or informal), or investigation pending
or, to the best knowledge of the Borrowers, threatened (or any basis therefor)
with respect to the Borrowers or any of their operations, businesses, properties
or assets, except as may be described in the Memorandum or such as, individually
or in the aggregate, do not now have and will not in the future have a Material
Adverse Effect. The Borrowers are not in violation of, or in default with
respect to, any law, rule, regulation, order, judgment or decree except as may
be described in the Memorandum or such as in the aggregate do not now have and
will not in the future have a Material Adverse
- 7 -
<PAGE> 8
Effect; nor are the Borrowers required to take any action in order to avoid any
such violation or default.
(e) The Borrowers have all requisite power and
authority to execute, deliver and perform their obligations under this Note. All
necessary proceedings of the Borrowers have been duly taken to authorize the
execution, delivery and performance of this Note. This Note has been duly
authorized by the Borrowers and, when executed and delivered by the Borrowers,
will constitute the legal, valid and binding obligation of the Borrowers,
enforceable against each of Communications or Cable in accordance with its
terms.
(f) No consent, authorization, approval, order,
license, certificate or permit of or from, or declaration or filing with, any
federal, state, local or other governmental authority, or any court or any other
tribunal, is required by either of Communications or Cable for the execution,
delivery or performance by the Borrowers of this Note (except such filings and
consents as may be required and have been made or obtained under federal and
state securities laws).
(g) No consent of any party to any contract,
agreement, instrument, lease, license, arrangement or understanding to which
either Communications or Cable is a party or to which any of their properties or
assets are subject (the "Contracts") is required for the execution, delivery or
performance by the Borrowers of this Note, except for consents which have
already been obtained or waived.
(h) The execution, delivery and performance of
this Note will not violate or result in a breach of, conflict with or entitle
any party (with or without the giving of notice or the passage of time or both)
to terminate or call a default under any Contract or violate or result in a
breach of any term of the certificate of formation or operating agreement of, or
violate any law, rule, regulation, order, judgment or decree binding upon, the
Borrowers or to which any of their operations, businesses, properties or assets
are subject, the breach, termination or violation of which, or default under
which, would, individually or in the aggregate, have a Material Adverse Effect.
(j) The Memorandum does not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading.
Without limiting the generality of the foregoing, there has been no material
adverse change in the financial condition, results of operations, business,
properties, assets, liabilities or future prospects of either Communications or
Cable from the latest information set forth in the Memorandum.
- 8 -
<PAGE> 9
5. Covenants.
5.1 Affirmative Covenants. The Borrowers hereby, jointly and
severally, covenant and agree that from and after the date hereof, so long as
this Note or any portion of this Note remains outstanding:
(a) Inspection Of Property. The Borrowers, jointly and severally,
covenant and agree that they and each of their subsidiaries will permit any
Person or Persons (as defined below) designated, in writing, by the Initial
Holder or, if this Note is transferred in accordance with the provisions hereof,
by a majority (in aggregate principal amount) of Holders of this Note, to visit
and inspect any of the properties of the Borrowers and any of their
subsidiaries, to examine the books and financial records of the Borrowers and
any of their subsidiaries and make copies thereof or extracts therefrom and to
discuss its affairs, finances and accounts with its officers or individuals
performing similar functions and its independent public accountants, all at such
reasonable times, during normal business hours and as often as reasonably
requested. The Holders hereby covenant and agree to keep confidential, and to
require any Person or Persons designated by it or them to keep confidential, any
confidential business information that may be provided to it or them by the
Borrowers or any of their subsidiaries, unless disclosure of such information is
required by law or any governmental authority. For purposes of this Note, the
term, "Person" shall mean an individual, partnership, corporation (including a
business trust), joint stock company, limited liability company, trust,
unincorporated association, joint venture or other entity, or a government or
any political subdivision or agency thereof.
(b) Existence, Etc. The Borrowers will, and will cause each of
their subsidiaries (other than the merger of Cable with and into Communications)
to, at all times, preserve and keep in full force and effect its existence as a
limited liability company, and rights, licenses, franchises, trademarks, trade
names, patents and other proprietary information material to its business, and
will qualify and cause each of their subsidiaries to qualify to do business in
any jurisdiction where the ownership of property or the operation of its
business makes such qualification necessary, except where the failure to so
qualify does not have a Material Adverse Effect. For purposes of this Note, the
term "Material Adverse Effect" shall mean a material adverse effect on the
business, condition (financial or other), assets, properties or results of
operations or prospects of the Borrowers and their subsidiaries, taken as a
whole.
(c) Payment of Taxes and Claims. The Borrowers will, and will
cause each of their subsidiaries to, pay all Taxes (as
- 9 -
<PAGE> 10
defined below), assessments and other governmental charges imposed upon them or
any of their respective properties or assets or in respect of any of their
respective 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 applicable Borrower in accordance with generally acceptable accounting
principles, consistently applied ("GAAP"). For purposes of this Note, the term
"Taxes" shall mean, as to any Person, any present or future income, stamp or
other taxes, levies, imposts, duties, charters, fees, deductions or
withholdings, of every kind and nature, now or hereafter imposed, levied,
collected, withheld or assessed by any governmental authority (federal, state,
local or any subdivision thereof), including any and all net income and
franchise taxes.
(d) Compliance. The Borrowers will, and will cause each of their
subsidiaries to, comply with the requirements of all material applicable laws,
rules, regulations and orders of any court or other federal, state, or local
authorities (including any subdivision thereof). The Borrowers will timely make
all material filings required to be made by them with all relevant federal,
state and/or local (including any subdivision thereof) regulatory bodies.
(e) Reports and other Deliverables. The Borrowers shall deliver
to Holder and to Barington:
(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 Borrowers or, if either of Communications or Cable 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 Securities and Exchange Commission (the
"Commission"), whichever is later, consolidated statements of income, retained
earnings and cash flow of the Borrowers, 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 Borrowers 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 each of
Communications and Cable, which certificate
- 10 -
<PAGE> 11
shall state that (A) such financial statements fairly present in all material
respects the financial position and results of operations of the applicable
Borrower, all in accordance with GAAP, 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
Communications or Cable, as applicable, 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 Borrowers or, if either
Communications or Cable 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 each of Communications and Cable for such
fiscal year, and the related consolidated balance sheet of the applicable
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 Borrowers in
conformity with GAAP, and (B) a certificate of the chief financial officer of
each of Communications and Cable 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 Communications or Cable, as
applicable, has taken or proposes to take with respect thereto;
(iii) promptly upon their becoming available, copies of all
registration statements which either of Communications and Cable shall have
filed with the Commission (or any governmental agency substituted therefor) or
any national securities exchange;
(iv) promptly after either of Communications and Cable 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 either of Communications or Cable, except proceedings
which, if adversely determined, would not have a Material Adverse Effect; and
(v) promptly after either of Communications or Cable shall obtain
knowledge of the occurrence of any Event of 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
- 11 -
<PAGE> 12
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 applicable Borrower has taken or proposes to take
with respect thereto.
(f) Communications will, as promptly as possible, cause and take
all necessary action to cause Cable to merge with and into Communications
whereby Communications will be the surviving entity.
5.2. Negative Covenants. The Borrowers, jointly and severally,
hereby covenant and agree that from and after the date hereof and thereafter, so
long as this Note or any portion of this Note remains outstanding:
(a) Limitation on Indebtedness. Except for Permitted Indebtedness
(as defined below), the Borrowers shall not, and shall not permit their
subsidiaries to, create, incur, suffer to exist or assume any Indebtedness
without the prior written consent of Barington.
"Permitted Indebtedness" shall mean the following:
(i) Indebtedness due to Silicon Valley Bank, in aggregate
principal amount of $7.2 million and any refinancing or amendment thereof;
(ii) Indebtedness of the Borrowers and any of their subsidiaries
incurred to finance the acquisition of fixed or capital assets in the ordinary
course of business (whether pursuant to a loan, a financing lease or otherwise),
including, without limitation, the obligations owed to T&W Funding Company V,
L.L.C., in aggregate principal amount of $6.0 million; and
(iii) $14 million plus accrued but unpaid interest owned to Paul
H. Pfleger, subject to the terms and conditions of that certain Forbearance
Agreement by Mr. Pfleger in favor of the Borrowers.
(b) Limitation on Liens. Except for Permitted Liens (as defined
below), the Borrowers shall not, and shall not permit their subsidiaries to,
create, incur, suffer to exist, or assume any lien upon any of its property,
assets or revenues, whether now owned or hereafter.
"Permitted Liens" shall mean the following:
(i) liens in favor of Silicon Valley Bank in
connection with the Senior Debt;
- 12 -
<PAGE> 13
(ii) liens for Taxes, assessments or other governmental charges
not yet due or which are being contested in good faith by appropriate
proceedings, provided that adequate reserves with respect thereto are
maintained on the books of the Borrowers or its subsidiaries, as the
case may be, in conformity with GAAP;
(iii) carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like liens incurred in good faith and arising in
the ordinary course of business which are not overdue for a period of
more than twenty (20) days or which are being contested in good faith by
appropriate proceedings and as to which adequate reserves with respect
thereto are maintained on the books of the Borrowers or their
subsidiaries, as the case may be, in conformity with GAAP;
(iv) pledges or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and
other social security legislation and deposits securing liability to
insurance carriers under insurance or self-insurance arrangements;
(v) deposits to secure the performance of bids, trade contracts
(other than for borrowed money), leases, statutory obligations, surety
and appeal bonds, performance bonds and other obligations of a like
nature incurred in the ordinary course of business consistent with past
practice;
(vi) easements, rights-of-way, restrictions and other similar
encumbrances which, individually or in the aggregate, are not
substantial in amount and which do not in any case materially detract
from the value of the property subject thereto or materially interfere
with the ordinary conduct of the business of the Borrowers or such
subsidiary;
(vii) liens securing Indebtedness of the Borrowers and their
subsidiaries incurred to finance the acquisition of fixed or capital
assets, provided that (i) such liens shall be created substantially
simultaneously with the acquisition of such fixed or capital assets,
(ii) such liens do not at any time encumber any property other than the
property financed by such Indebtedness, (iii) the amount of Indebtedness
secured thereby is not increased and (iv) the principal amount of
Indebtedness secured by any such lien shall at no time exceed 100% of
the fair value (as determined in good faith by the Borrowers) of such
property at the time it was acquired;
(viii) with respect to leasehold interest, liens
- 13 -
<PAGE> 14
arising by, through or under a landlord or owner of the leased property;
(ix) liens in existence on the date hereof and listed on SCHEDULE
5.2(b)(IX) (other than liens arising in connection with the Senior Debt)
and any renewals thereof, but not any increase in amount thereof and not
any extension thereof to other property;
(x) liens not in excess of $50,000, in the aggregate, arising out
of judgments or awards in respect of which the Borrowers or any of their
subsidiaries shall in good faith be prosecuting an appeal or proceedings
for review and in respect of which it shall have secured a subsisting
stay of execution pending such appeal or proceedings for review,
provided it shall have set aside on its books adequate reserves, in
accordance with GAAP, with respect to such judgment or award; and
(xi) unperfected liens arising by operation of law under Article
2 of the Uniform Commercial Code in favor of unpaid sellers or prepaying
buyers of goods relating to amounts that are not past due in accordance
with their respective terms of sale.
(c) Limitation on Guaranties. The Borrowers shall not, and shall
not permit their subsidiaries to, create, incur or assume from and after the
date hereof guarantee obligation except:
(i) guaranties in existence on the date hereof and
listed on SCHEDULE 5.2(c)(i);
(ii) guaranties incurred by the Borrowers after the date hereof
and not to exceed $50,000, in the aggregate, at any one time outstanding; and
(iii) guaranties in connection with the Senior Debt.
(d) Limitation on Fundamental Changes. The Borrowers shall not,
and shall not permit their subsidiaries to, enter into any merger, consolidation
or amalgamation (other than a merger of a subsidiary with a subsidiary or merger
of a subsidiary with and into Communications or Cable), or liquidate, wind up or
dissolve itself (or 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, Communications may sell all or
substantially all of its assets to the Initial Holder, on the terms and subject
to the conditions, previously voted on and approved by Communications and the
Initial Holder.
- 14 -
<PAGE> 15
(e) Limitation on Dividends and Other Payments. The Borrowers
shall not, and shall not permit their subsidiaries to, declare or pay any
dividend or repurchase their or a subsidiary's equity, make any payment on
account of, or set apart assets for a sinking or other analogous fund, for the
purchase, redemption, defeasance, retirement or other acquisition of, any class
of equity securities of either Communications or Cable or any warrants or
options to purchase any such equity securities, whether now or hereafter
outstanding, or make any other distribution in respect thereof, either directly
or indirectly, whether in cash or property or in obligations of either of
Communications or Cable or any of their subsidiaries; provided, however, that a
wholly-owned subsidiary may pay dividends or make other payments to another
wholly-owned subsidiary or to Communications. In addition, the Borrowers shall
not repurchase or make any mandatory or optional principal payment of any
Indebtedness subordinate to this Note, any pari passu Indebtedness or refinance
any such Indebtedness subordinate to this Note or pari passu Indebtedness in any
manner which would shorten the weighted average maturity of such Indebtedness
subordinate to this Note or pari passu Indebtedness.
(f) Limitation on Transactions with Affiliates. The Borrowers
shall not, and shall not permit their subsidiaries to, enter into any
transaction, including, without limitation, any purchase, sale, lease or
exchange of property or the rendering of any service (including management
service), with any affiliate, unless such transaction is (a) otherwise permitted
under this Note, (b) in the ordinary course of the Borrowers or their
subsidiaries' business consistent with past practice and described in the
Memorandum and (c) upon fair and reasonable terms no less favorable to the
Borrowers or such subsidiary, as the case may be, than it would obtain in a
comparable arm's length transaction with a Person which is not an affiliate; and
provided that the Borrowers may pay the reasonable expenses of each of its
directors actually incurred by them in connection with attending meetings of the
board of directors (or other entity performing similar functions) of the
Borrowers.
(g) Margin and Other Regulations. Neither Communications, Cable
nor any of their subsidiaries shall become an investment company subject to
registration under the Investment Company Act of 1940, as amended.
(h) Payment of This Note. The Borrowers will not, and will not
permit any of their subsidiaries to, 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
- 15 -
<PAGE> 16
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
Borrowers' ability or obligation to make scheduled payments on this Note, any
portion thereof, or perform its other obligations under this Note.
(i) Limitation on Sale of Assets. Except for a Permitted Sale
(defined below), the Borrowers shall not, and shall not permit their
subsidiaries to, 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 Borrowers
and their subsidiaries. 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 Borrowers' 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.
(j) Investments. The Borrowers 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 Person, 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 obligation issued or guaranteed by the United States or an agency
thereof, and (v) Eurodollar time deposits with financial institutions with a
published rating of not less than A-1 or P-1 (or the equivalent rating).
(k) Line of Business. The Borrowers shall not change their lines
of business from the businesses the Borrowers conduct on the date hereof as
described in the Memorandum.
(l) Limitation on the Ability to Raise Capital. Without the prior
written consent of Barington, the Borrowers shall not, in any manner, raise any
money or other capital, including, without limitation, through the issuance of
any additional equity securities or the issuance of any securities exchangeable
or convertible into equity securities of either
- 16 -
<PAGE> 17
Communications or Cable.
6. Acquisition for Investment and Restrictions
On Transfer.
6.1 Investment Intent.
(a) Holder, by acceptance of this Note, represents that
this Note, and any L.L.C. Interests issuable upon conversion of this
Note, will be acquired for Holder's own account for investment and not
with a view to, or for resale in connection with, the distribution
thereof, and that Holder has no present intention of distributing or
reselling this Note or any such L.L.C. Interests.
(b) Holder, by acceptance of this Note, further represents
that, it has not offered or sold this Note, or any L.L.C. Interests into
which this Note is convertible, directly or indirectly, to any other
individual or entity, including, without limitation, any Person and that
Holder is not acquiring this Note or any such L.L.C. Interests for the
account of any other Person.
6.2 Restrictions on Transfer. Holder, by acceptance of this Note,
agrees that Holder will not sell, transfer, assign, pledge, hypothecate or
otherwise dispose of this Note or any of the L.L.C. Interests issuable upon
conversion of this Note unless: (i) a registration statement under the
Securities Act of 1933, as amended (the "Act"), covering the sale or transfer of
this Note or the L.L.C. Interests issuable upon conversion of this Note, as the
case may be, is in effect; or (ii) Holder first provides Communications with an
opinion of counsel (which may be counsel for Communications) reasonably
acceptable to Communications to the effect that such sale, transfer, assignment,
pledge, hypothecation or other disposition will be exempt from the registration
and the prospectus delivery requirements of the Act. Any such sale, transfer,
assignment, pledge, hypothecation or other disposition shall also comply with
applicable state securities and/or "blue sky" laws.
6.3 Legends. Certificates evidencing L.L.C. Interests issuable
upon conversion of this Note shall bear a legend substantially in the form of
the following:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND HAVE BEEN TAKEN FOR INVESTMENT
PURPOSES ONLY AND NOT WITH A VIEW TO THE DISTRIBUTION THEREOF, AND SUCH
SECURITIES MAY NOT BE SOLD OR TRANSFERRED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES OR U.S.
ONLINE COMMUNICATIONS L.L.C. RECEIVES AN OPINION OF COUNSEL (WHICH MAY
BE
- 17 -
<PAGE> 18
COUNSEL FOR U.S. ONLINE COMMUNICATIONS L.L.C.) REASONABLY ACCEPTABLE TO
U.S. ONLINE COMMUNICATIONS L.L.C. STATING THAT SUCH SALE OR TRANSFER IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF
SUCH ACT."
The certificates representing such L.L.C. Interests, and each certificate issued
upon transfer thereof, shall also bear any legend required under any applicable
state securities and/or "blue sky" laws. Holder consents to Communications'
making a notation on its records or giving instructions to any transfer agent of
L.L.C. Interests in order to implement the restrictions on transfer of this Note
and L.L.C. Interests issuable upon conversion hereof, all as set forth herein.
Communications shall remove any legend endorsed on this Note or on a certificate
representing the L.L.C. Interests issued upon conversion hereof, and any equity
transfer instructions and record notations with respect to this Note and L.L.C.
Interests issuable upon conversion hereof, and shall issue a Note or certificate
without such legend to Holder if: (i) this Note or any L.L.C. Interests issuable
upon conversion hereof is registered under the Act and under any applicable
state securities and/or "blue sky" laws, as the case may be; or (ii) Holder
provides Communications with an opinion of counsel (which may be counsel for
Communications) reasonably acceptable to Communications to the effect that a
public sale or transfer of this Note or such L.L.C. Interests may be made
without registration under the Act or under any applicable state securities
and/or "blue sky" laws, as the case may be.
7. 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 or the Senior Debt, when and as the same shall become
due and payable.
(b) A default in the payment of any interest on
this Note or the Senior Debt, when and as the same shall become
due and payable.
(c) A default in the performance, or a breach, of
any of the covenants of either Communications or Cable contained in this Note,
if such default is not cured within five days after Holder provides either
Communications or Cable notice of such default.
(d) A default in the performance, or a breach, of
any covenant or agreement of either Communications or Cable under any
subordination agreement or intercreditor agreement
- 18 -
<PAGE> 19
which default or breach shall have continued beyond any grace or cure period
provided therein.
(e) 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.
(f) 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 either
Communications or Cable.
(g) Any representation, warranty or certification
made by either Communications or Cable in or pursuant to this Note or any
subordination agreement or intercreditor agreement shall prove to have been
false or misleading as of the date made.
(h) The transactions contemplated by the Asset
Purchase Agreement have not been consummated by at least five Business Days
prior to the first anniversary of the date hereof.
(i) A final judgment or judgments for the payment
of money in excess of $25,000 in the aggregate shall be rendered by one or more
courts, administrative or arbitral tribunals or other bodies having jurisdiction
against either Communications or Cable 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
neither Communications nor Cable shall, 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 either Communications or Cable a bankrupt or
insolvent, or approving a petition seeking reorganization, arrangement,
adjustment or composition of or in respect of either Communications or Cable,
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 unstated and in effect for a period of
sixty (60) days; or the commencement by either Communications or Cable 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 either Communications or Cable to the institution of
bankruptcy or insolvency proceedings against it, or the filing by either
Communications or Cable of a petition or answer or consent
- 19 -
<PAGE> 20
seeking reorganization or relief under federal bankruptcy law or any other
applicable federal or state law, or the consent by either Communications or
Cable to the filing of such petition or to the appointment of a receiver,
liquidator, assignee, trustee, sequestrator or similar official of either
Communications or Cable or of any substantial part of the property of either
Communications or Cable, or the making by either Communications or Cable of an
assignment for the benefit of creditors, or the admission by either
Communications or Cable, in writing, of its inability to pay its debts generally
as they become due, or the taking of corporate action by either Communications
or Cable in furtherance of any such action.
8. Remedies Upon Default.
(a) Upon the occurrence of an Event of Default
referred to in Section 7(j), the principal amount then outstanding of, and the
accrued interest on, this Note shall automatically become immediately due and
payable without presentment, demand, protest or other formalities of any kind,
all of which are hereby expressly waived by either of Communications and Cable.
Upon the occurrence of an Event of Default other than one referred to in Section
7(j), Holder may declare the principal amount then outstanding of, and the
accrued interest on, this Note to be due and payable immediately, and upon such
declaration the same shall become due and payable immediately, without
presentation, demand, protest or other formalities of any kind, all of which are
expressly waived by the Borrower; provided, however, that Holder may elect, in
lieu of declaring all or a portion of the principal amount and accrued interest
on this Note immediately due and payable, to convert all or a portion of this
Note to L.L.C. Interests pursuant to Section 2 hereof; further provided,
however, upon the occurrence of an Event of Default referred to in Section 7(h),
Holder shall have the right to convert this Note into 75%, on a fully diluted
basis, of the then outstanding equity of Communications such that the Holder
owns 75%, on a fully diluted basis, of the voting control and economic interest
of Communications. In any case, Holder or Barington also may take any action
available to it under any instrument, agreement or other document executed in
connection herewith or therewith.
(b) Holder may institute such actions or proceed-
ings 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 each of
Communications or Cable, and in connection with any such action or proceeding
shall be entitled to receive from each of Communications or Cable, payment of
the principal amount of this Note plus accrued interest to the date of payment
plus reasonable expenses of collection, including, without limitation,
attorneys' fees and expenses.
- 20 -
<PAGE> 21
9. 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 Communications or Cable, at its
address at U.S. OnLine Communications L.L.C., 8307 Shoal Creek Boulevard,
Austin, Texas 78757, Attention: President, (ii) if to 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 9(a). Notice to the estate of any party shall be sufficient if
addressed to the party as provided in this Section 9(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 9(a) shall be deemed given at the time of
receipt thereof.
(b) Upon receipt of evidence satisfactory to
either Communications or Cable of the loss, theft, destruction or mutilation of
this Note (and upon surrender of this Note if mutilated), including an affidavit
of Holder thereof that this Note has been lost, stolen, destroyed or mutilated,
together with an indemnity against any claim that may be made against either
Communications or Cable on account of such lost, stolen, destroyed or mutilated
Note, and upon reimbursement of either Communications' or Cable's reasonable
incidental expenses, each of Communications and Cable shall execute and deliver
to Holder a new Note of like date, tenor and denomination.
(c) No course of dealing and no delay or omission
on the part of Holder in exercising any right or remedy shall operate as a
waiver thereof or otherwise prejudice Holder's rights, powers or remedies. No
right, power or remedy conferred by this Note upon 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 executed by the Borrowers and Initial Holder
or, if this Note is transferred in accordance with the terms hereof to more than
one Person, then, only by the written consent or consents of Holders of Notes
- 21 -
<PAGE> 22
representing a majority (in principal amount) of this Note issued and
outstanding; 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 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 Borrowers irrevocably consent 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 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 Borrowers
waive personal service of any summons, complaint or other process and agrees
that service thereof may be made in accordance with Section 9(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
Borrowers shall appear or answer such summons, complaint, or other process.
IN WITNESS WHEREOF, the Borrowers have caused this Note to be
executed and dated the day and year first above
- 22 -
<PAGE> 23
written.
U.S. ONLINE COMMUNICATIONS L.L.C.
By: ___________________________
Name: Donald Barlow
Title: President
U.S. ON-LINE CABLE, L.L.C.
By:________________________________
Name: Donald Barlow
Title: President
- 23 -
<PAGE> 24
EXHIBIT 1
To_______________________:
The undersigned owner of this Note hereby irrevocably exercises
the option to convert $____________ principal amount of this Note into limited
liability company interests in U.S. OnLine Communications L.L.C, a Washington
limited liability company, in accordance with the terms of this Note, and
directs that the limited liability interests issuable and deliverable upon the
conversion be issued and delivered to the registered holder hereof unless a
different name has been indicated below. If the limited liability interests are
to be issued in the name of a person other than the undersigned, the undersigned
will pay all transfer taxes payable with respect thereto.
Dated: ________________
____________________________________
Signature
Fill in for registration of limited liability interests if to be issued
otherwise than to the registered holder.
____________________________ Social Security or Other
(Name) Taxpayer Identifying Number
____________________________
____________________________
(Name) Principal Amount to be
Converted
____________________________ ____________________________
Please print name and
address (including zip
code number)
<PAGE> 1
EXHIBIT 10.6
NEITHER THIS PROMISSORY NOTE NOR THE COMMON STOCK INTO WHICH THIS NOTE IS
CONVERTIBLE HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER THIS NOTE, ANY INTEREST
THEREIN OR ANY COMMON STOCK INTO WHICH THIS NOTE MAY BE CONVERTIBLE 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 RECEIVES AN OPINION OF
COUNSEL TO THE HOLDER OF THIS NOTE OR THE COMMON STOCK INTO WHICH THIS NOTE IS
CONVERTIBLE, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE
BORROWER, THAT THIS NOTE OR THE COMMON STOCK INTO WHICH THIS NOTE IS CONVERTIBLE
MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER
CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR
APPLICABLE STATE SECURITIES LAWS.
U.S. ONLINE COMMUNICATIONS, INC.
15% Senior Subordinated Promissory Note
$__,000.00 March 30, 1998
New York, New York
U.S. ONLINE COMMUNICATIONS, INC., a Delaware corporation (the
"Borrower"), for value received, hereby promises to pay to ___________________
with an address at _______________________, ________________, or registered
assigns (the "Holder"), the principal amount of __________ thousand dollars
($__0,000.00) on the Maturity Date (as defined below), and to pay interest on
the unpaid principal balance hereof at the rate of 15% 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 April 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. Offering and Subscription Agreement.
This Note was issued by the Borrower in an offering (the
"Offering") of Units, each whole Unit consisting of one 15% Senior Subordinated
Promissory Note in the principal amount of $50,000 and 13,333.33 shares of
common stock, par value $.001 per share (the "Common Stock"), of the Borrower,
made
<PAGE> 2
pursuant to a certain Confidential Private Placement Memorandum, dated March 13,
1998, as it may be supplemented and amended (the "Memorandum"), and a
subscription agreement (the "Subscription Agreement") between the Borrower and
the original Holder hereof. The series of promissory notes issued in connection
with the Offering is referred to hereafter as the "Notes."
2. Payments.
(a) Principal of, and any accrued and unpaid
interest on, this Note shall be due and payable in full on the Maturity Date.
The "Maturity Date" shall be the date which is the earliest of (i) March 29,
1999, (ii) the day after the date of the closing of the initial public offering
of equity securities of the Borrower or any subsidiary of the Borrower pursuant
to a registration statement filed with the Securities and Exchange Commission
(the "Commission") under the Act, and (iii) the date of the closing of a sale
(or the closing of the last of a series of sales) of securities of the Borrower
or any subsidiaries of the Borrower after the date hereof (other than pursuant
to the Memorandum), the gross proceeds of which, in the aggregate, equal or
exceed the 125% of the initial aggregate principal amount outstanding of the
Notes (the "Initial Principal Amount") (exclusive of proceeds of the Offering).
(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 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 New York, New York.
(d) The Borrower may, at its option, prepay all
or any part of the principal of this Note, without payment of any premium or
penalty. 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 check sent to the Holder's address set forth above or to
such other address as the Holder may
2
<PAGE> 3
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 pro-
vided 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 non-payment, notice of dishonor, 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 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.
3. Ranking of Note.
(a) 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). "Junior Debt" shall mean all
existing and future Indebtedness (as hereinafter defined) other than (i) the
Indebtedness represented by the Notes, (ii) Senior Debt (as defined below)and
(iii) equipment lease obligations not to exceed $6 million, in the aggregate,
and existing on the date hereof. "Indebtedness" shall mean (A) any liability of
the Borrower (x)for borrowed money, including any liability 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 3(a)(A) which the Borrower has guaranteed or any
other liability of others described in Section 3(a)(A) which is otherwise its
legal liability; and (C) any modification, renewal, extension, replacement or
refunding of any such liability described in Section 3(a)(A) or (B); provided,
that Indebtedness does not include unsecured trade debt incurred in the ordinary
course of business. As described in the Memorandum, the Borrower has taken all
necessary action to acquire all or substantially all of the assets of (the
"Sale") U.S. OnLine Communications, L.L.C. ("L.L.C."). Upon the consummation of
the Sale, the Borrower will become the successor to up to a $7.2 million credit
facility with Silicon Valley Bank (the "Facility"). The Facility upon the
consummation of the Sale shall be "Senior Debt." The Borrower, upon consummation
of the Sale, shall have outstanding a $3.0 million 10% Promissory Note owed to
L.L.C. (the "L.L.C. Note"). The L.L.C. Note is pari passu with the Notes.
3
<PAGE> 4
(b) The Borrower covenants and agrees to use its
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 Barington Capital Group, L.P. ("Barington") to reflect the terms set forth
herein.
(c) Except as provided in the Memorandum, until
the payment in full of all amounts of principal of and interest on the Notes,
and all other amounts owing under the Notes, no payment may be made 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.
4. Covenants.
The Borrower covenants and agrees with the Holder that, so long
as any amount remains unpaid on the Notes, unless the consent of the Holders of
a majority of the principal amount outstanding under the Notes is obtained, the
Borrower:
(a) Shall not create, incur, or suffer to exist
any Indebtedness except (i) the Indebtedness represented by the Notes, (ii)
Indebtedness represented by the Senior Debt, (iii) Junior Debt, the holders of
which have duly executed a subordination agreement or intercreditor agreements,
(iv) Indebtedness as set forth in the Memorandum, (v) an aggregate total of up
to $6.0 million of equipment lease obligations existing as of the date hereof,
and (vi) trade debt incurred in the ordinary course of business.
(b) 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 with appropriate reserves maintained on the books of such
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 4(a)(vi), and (vi) landlord Liens with
respect to real property leased by such Borrower.
4
<PAGE> 5
(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 pay dividends payable solely in shares of its capital stock.
(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
4(h), for services as an officer, director, partner or employee).
(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.
(i) Shall use the proceeds of the Offering in
substantially the manner specified in the Memorandum.
(j) Shall deliver to each Holder and to Barington:
(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
5
<PAGE> 6
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;
(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 of 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
6
<PAGE> 7
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) The Borrower covenants and agrees that, at
all times, it will reserve and keep available out is its authorized but unissued
Common Stock, for purposes of the conversion of this Note (as set forth in
Section 8), such number of shares of its duly authorized Common Stock as shall
be sufficient to effect the conversion of this Note. The Borrower covenants and
agrees that all of the Common Stock issued upon conversion of this Note will be
duly and validly issued and fully paid and non-assessable and that the issuance
of the Common Stock as provided for herein shall not give rise to any preemptive
rights. As long as this Note shall be outstanding, the Borrower shall use its
best efforts to cause all of the Common Stock issuable upon conversion of this
Note to be listed (subject to official notice of issuance) on all securities
exchanges, if any, on which the Common Stock is then listed.
(l) The Borrower 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
generally acceptable accounting principles, consistently applied ("GAAP"). For
purposes of this Note, the term "Taxes" shall mean, as to any individual,
partnership, corporation, limited liability company or other similar
organization or entity ("Person"), any present or future income, stamp or other
taxes, levies, imposts, duties, charters, fees, deductions or withholdings, of
every kind and nature, now or hereafter imposed, levied, collected, withheld or
assessed by any governmental authority (federal, state, local or any subdivision
thereof), including any and all net income and franchise taxes.
(m) The Borrower 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
7
<PAGE> 8
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.
(n) The Borrower shall not create, incur or assume any
guarantee obligation except:
(i) guaranties in existence on the date hereof
and listed on Schedule 4(n)(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.
(o) The Borrower shall not enter into any merger,
consolidation or amalgamation, or liquidate, wind up or dissolve itself (or
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 Sale.
(p) Borrower shall not become an investment company
subject to registration under the Investment Company Act of 1940, as amended.
(q) The Borrower 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.
(r) Except for a Permitted Sale (defined below),
the Borrower 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.
(s) The Borrower 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,
8
<PAGE> 9
any Person, 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, and (v) Eurodollar time deposits with
financial institutions with a published rating of not less than A-1 or P-1 (or
the equivalent rating).
5. 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 any
Note or the Senior Debt, when and as the same shall become due and payable.
(b) A default in the payment of any interest on
any Note or the Senior 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) A default in the performance, or a breach, of any
of the covenants of the Borrower contained in Section 3 or 4 of this Note.
(d) A default in the performance, or a breach, of any
covenant or agreement of the Borrower under any subordination agreement or
intercreditor which default or breach shall have continued beyond any grace or
cure period provided therein.
(e) 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.
(f) 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.
9
<PAGE> 10
(g) Any representation, warranty or certification made
by the Borrower in or pursuant to this Note, the Subscription Agreement or any
subordination agreement or inter-creditor agreement shall prove to have been
false or misleading as of the date made in any material respect.
(h) Any covenant or condition set forth in the
Subscription Agreement shall not be fulfilled or performed within a reasonable
time for such fulfillment or performance.
(i) A default in the payment of the principal or
interest on or a breach of any covenant or condition contained in or any
representation, warranty or certificate made by L.L.C. shall prove to have been
false and misleading with respect to, that certain 15% Convertible Promissory
Note made by L.L.C. in favor of the Borrower.
(j) 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.
(k) 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
10
<PAGE> 11
by the Borrower in furtherance of any such action.
6. Remedies Upon Default.
(a) Upon the occurrence of an Event of Default
referred to in Section 5(k), the principal amount then outstanding of, and the
accrued interest on, this Note shall automatically become immediately due and
payable without presentment, demand, 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 5(a) or 5(b), the Holders of not less
than 50% in principal amount of then outstanding Notes (excluding any Notes held
by or for the account of the Borrower or any affiliate of the Borrower), by
notice, in writing, given to the Borrower, may declare the entire principal
amount then outstanding of, and the accrued interest on, this 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. Upon
the occurrence of an Event of Default other than one referred to in Sections
5(a), (b) and (k), Barington or the Holders of not less than 50% in principal
amount of then outstanding Notes (excluding any Notes held by or for the account
of the Borrower or any affiliate of the Borrower) may declare the principal
amount then outstanding of, and the accrued interest on, the Notes to be due and
payable immediately, and upon such declaration the same shall become due and
payable immediately, without presentation, demand, protest or other formalities
of any kind, all of which are expressly waived by the Borrower. Nothwithstanding
the foregoing, should the Borrower fail to pay the principal of this Note when
due and payable this Note may be converted in accordance with Section 8 hereof.
In any case, the Holder or Barington also may take any action available to it
under any instrument, agreement or other document executed in connection
herewith or therewith.
(b) 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, and in connection with any such action or proceeding shall be entitled
to receive from the Borrower, payment of the principal amount of this Note plus
accrued interest to the date of payment plus reasonable expenses of collection,
including, without limitation, attorneys' fees and expenses.
7. Transfer.
(a) Any Notes issued upon the transfer of this
Note shall be numbered and shall be registered in a Note Register by the
Borrower as they are issued. The Borrower
11
<PAGE> 12
shall be entitled to treat the registered holder of any Note on the Note
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 Note on the part
of any other person, and shall not be liable for any registration or transfer of
Notes 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 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
Notes to be transferred on its books to any person unless (i) the sale,
assignment or transfer of the Notes is registered under the Act; (ii) the Notes
are 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 and any Common Stock into which it may be converted has
not been registered under the Act, that the Note and any Common Stock into which
it may be converted is being or has been issued on the basis of 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 made by the original Holder in the original Holder's
Subscription Agreement executed and delivered in accordance with the terms of
the Offering. 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 the Note
shall be valid or effective, and the Borrower shall not be required to give any
effect to
12
<PAGE> 13
any such sale, assignment or transfer, unless (i) the sale, assignment or
transfer of the Note or the Common Stock into which it may be converted is
registered under the Act, it being understood that neither the Note nor the
Common Stock into which it may be converted is currently registered for sale and
that the Borrower has no obligation or intention to so register the Notes or the
Common Stock into which it may be converted except as specifically provided
herein, or (ii) the Note or the Common Stock into which it may be converted is
sold, assigned or transferred in accordance with all the requirements and
limitations of Rule 144 promulgated 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 the Note or the Common Stock into which it may be converted 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 the Note or the
Common Stock into which it may be converted.
8. Conversion.
(a) Conversion Ratio. Should the Borrower fail
to pay the principal of this Note when due, this Note may be converted into its
pro rata portion of Common Stock of the Borrower such that all of the Holders of
the Notes then outstanding receive an aggregate of 75% of the voting control of
the Borrower on a fully diluted basis (for purposes of the calculations to be
made hereunder, any Notes held by the Borrower, its subsidiaries and affiliates
shall not be deemed outstanding).
(b) Manner of Exercise of Conversion Privilege.
In order to exercise the conversion privilege of this Note, the Holder shall
deliver written notice, substantially the form attached to this Note as Exhibit
1, to the Borrower during regular business hours at its principal executive
office (as set forth herein). Conversion shall be deemed to have been effected
on the date when such notice is delivered to the Borrower (the "Conversion
Date") and at that time the rights of the Holder as such shall cease, except
with respect to the payment of accrued interest in accordance with Section 8(d)
below. An election to convert this Note, in whole or in part, shall be
irrevocable once made.
(c) Issuance of Certificates. As promptly after
the Conversion Date as practicable, the Borrower shall instruct its transfer
agent or other appropriate agency or entity to issue and deliver to the Holder
at the address of the Holder set forth on the Note Register of the Borrower,
without any charge to the Holder, a certificate or certificates (issued in the
name of the Holder or, subject to the provisions of
13
<PAGE> 14
Section 8, in such name as the Holder may designate) for the number of shares of
Common Stock of the Borrower issuable upon the conversion of this Note. In case
this Note is surrendered for a partial conversion, the Borrower shall execute
and deliver to the Holder a new Note in an aggregate principal amount equal to
the unconverted portion of the principal amount of the surrendered Note.
(d) Interest on Conversion. On conversion of
this Note, interest shall cease to accrue as of the Conversion Date on the
principal amount converted, but interest accrued to the Conversion Date shall be
payable on or before the third (3rd) business day following the Conversion Date.
No payment or adjustment shall be made on conversion of this Note for any
distribution on the shares of Common Stock issued upon conversion that were
declared before the Conversion Date. Upon such conversion, the Holder shall be
deemed to have become the stockholder of record on the Conversion Date (unless
the transfer books of the Borrower are closed on that date, in which event the
Holder shall be deemed to have become the stockholder of record on the next
succeeding day on which the transfer books of the Borrower are open and the
conversion shall be at the rate in effect on such date).
(e) Taxes Upon Conversion. The Borrower shall
pay any and all taxes that may be payable in respect of the issuance or delivery
of any shares of Common Stock on conversion of this Note or any portion thereof.
The Borrower shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issuance and delivery of shares of
Common Stock in a name other than that of the Holder, as listed on the Note
Register of the Borrower, and the Borrower shall not be required to issue or
deliver such shares of Common Stock unless or until the person or persons
requesting the issuance thereof shall have paid to the Borrower the amount of
any such tax or shall have established to the satisfaction of the Borrower that
such taxes have been paid.
(f) Elimination of Fractional Interests. No
fractional shares of Common Stock shall be issued upon conversion of this Note.
The Borrower shall pay cash in lieu of fractional shares of Common Stock.
(g) Notice of Certain Corporate Actions.
Nothing contained in this Note shall be construed as conferring upon the Holder
the right to vote or to consent or to receive notice on account of the shares of
Common Stock into which this Note is convertible, or as having any rights
whatsoever as a stockholder of the Borrower with respect to such shares of
Common Stock. If, however, any of the following events shall occur:
i. the Borrower shall establish a record date
14
<PAGE> 15
for the purpose of entitling the holders of its Common Stock to receive
a dividend or distribution;
ii. the Borrower shall offer to the holders of its Common
Stock any additional Common Stock or securities convertible into or
exchangeable for shares of Common Stock, or any right, option or warrant
to subscribe for or purchase the same;
iii. the Borrower shall authorize the distribution of
evidences of its indebtedness or assets to all holders of its shares of
Common Stock;
iv. a dissolution, liquidation or winding up of the
Borrower or a sale of all or substantially all of the Borrower's
property, assets and business as an entirety shall be approved by the
Borrower's Board of Directors; or
v. a merger or consolidation of the Borrower with or into
any other corporation which shall be approved by the Borrower's Board of
Directors (other than as contemplated in the Memorandum);
then, in any one or more of such events, the Borrower shall give written notice
of such event to the Holder at least thirty (30) days before the date fixed as a
record date or the date of closing the transfer books for the determination of
the stockholders entitled to such dividend, distribution, additional shares of
Common Stock, convertible or exchangeable securities or subscription or purchase
rights, options or warrants or entitled to vote on such proposed dissolution,
liquidation, winding up, sale, merger or consolidation. Such notice shall
specify such record date or the date of closing the transfer books, as the case
may be.
9. 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 U.S.
OnLine Communications, Inc., 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 9(a). Notice to the estate of any party shall be sufficient if addressed
to the party as provided in this Section 9(a). Any notice or other communication
given by certified mail shall be deemed given at
15
<PAGE> 16
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 9(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.
(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) Subject to the provisions of Section 9(g),
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 Holders of Notes representing a
majority (in principal amount) of the Notes issued to investors pursuant to the
Memorandum, provided, however, that any waiver or amendment to the interest
rate, Maturity Date, conversion right set forth in Section 8 hereof 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 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 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
16
<PAGE> 17
thereof may be made in accordance with Section 9(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.
(g) The Holder hereby grants to Barington, with
full power of substitution, an irrevocable proxy to vote, or to execute and
deliver written consents and agreements of debt holders and amendments thereto
or otherwise act in any manner with respect to this Note, including, but not
limited to, the ability to vote to amend, modify or alter any of the provisions
contained in this Note, to the same extent and with the same effect as the
undersigned might or could personally do. This proxy is coupled with an interest
and is irrevocable. It is further understood by the undersigned that this proxy
shall remain in full force and effect and be binding upon any donee, transferee
or assignee of the Borrower and any subsequent donee, transferee or assignee.
The proxy granted by this Section 9(g) shall automatically terminate and be of
no further force and effect upon the consummation of an initial public offering
of the equity securities of the Borrower or any of its subsidiaries.
17
<PAGE> 18
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: Donald Barlow
Title: President
18
<PAGE> 1
EXHIBIT 10.7
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE UPON
EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH SECURITIES
NOR ANY INTEREST HEREIN OR THEREIN 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
COMPANY (AS DEFINED BELOW) RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF SUCH
SECURITIES, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE
COMPANY, THAT SUCH SECURITIES 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.
THE TRANSFER OF THIS WARRANT IS
RESTRICTED AS DESCRIBED HEREIN.
U.S. ONLINE COMMUNICATIONS, INC.
Warrant for the Purchase of Shares of Common Stock,
$.001 par value per share
THIS WARRANT EXPIRES ON MARCH 30, 2003
100,000 Shares of Common Stock
THIS CERTIFIES that, for value received, Aspen OnLine Investments, LLC,
a Michigan limited liability company, with an address at 2757 - 44th Street SW,
Suite 306, Grand Rapids, Michigan 49509 (in its individual capacity, "Aspen,"
and, including any transferee, 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 before 5:00 P.M. on March 30, 2003, New York time (the "Exercise
Period"), up to 100,000 shares of the Company's Common Stock, $.001 par value
per share ("Common Stock"), at a price equal to $3.75 per share, subject to
adjustment as provided herein (the "Exercise Price").
As used herein the term "this Warrant" shall mean and include this
Warrant and any warrant or warrants hereafter issued as a consequence of the
exercise or transfer of this Warrant in whole or in part.
The number of shares of Common Stock issuable upon exercise of this
Warrant (the "Warrant Shares") and the Exercise Price may be adjusted from time
to time as hereinafter set forth.
1
<PAGE> 2
1. (a) This Warrant may be exercised during the Exercise Period, as
to the whole or any lesser number of whole Warrant Shares, by the surrender of
this Warrant (with the election at the end hereof duly executed) to the Company
at its office at U.S. OnLine Communications, Inc., 8307 Shoal Creek Boulevard,
Austin, Texas 78757, or at such other place as is designated in writing by the
Company. Subject to Section 1(b) hereof, such executed election must be
accompanied by payment in an amount equal to the Exercise Price multiplied by
the number of Warrant Shares for which this Warrant is being exercised. Such
payment may be made by certified or bank cashier's check payable to the order of
the Company, or as otherwise provided in Section 1(b) hereof.
(b) All or any part of this Warrant 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
desires to purchase in consideration of cancellation of Warrants in payment for
such exercise. The number of shares of Common Stock the Holder shall receive
(the "Cashless Exercise Number") upon such exercise pursuant to this Section
1(b) shall equal the difference between the Maximum Number and 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. 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 thirty (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) on which the Common Stock is 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 or
any similar organization, the fair value of a share of Common Stock on such
date, as determined in good faith by the board of directors of the Company,
whose determination shall be conclusive absent manifest error, shall be used.
2. Upon each exercise of the Holder's rights to purchase Warrant Shares,
the Holder shall be deemed to be the holder of record of the Warrant Shares
issuable upon such exercise, notwithstanding that the transfer books of the
Company shall then be closed or certificates representing such Warrant Shares
shall not then have been actually delivered to the Holder. As soon as
practicable after each such exercise of this Warrant, the Company shall issue
and deliver to the Holder a certificate or certificates for the Warrant Shares
issuable upon such exercise, registered in the name of the Holder or its
designee. If this Warrant should be exercised in part only, the Company shall,
upon surrender of this Warrant for cancellation, execute and deliver a new
Warrant evidencing the right of the Holder to purchase the balance of the
Warrant Shares (or portions thereof) subject to purchase hereunder.
2
<PAGE> 3
3. (a) Any Warrants issued upon the transfer or exercise in part of
this Warrant shall be numbered and shall be registered in a Warrant Register as
they are issued. The Company shall be entitled to treat the registered holder of
any Warrant on the Warrant 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 Warrant on the part of any other person, and shall not be
liable for any registration or transfer of Warrants 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 Warrant 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 Warrant or Warrants to the person
entitled thereto. This Warrant may be exchanged, at the option of the Holder
thereof, for another Warrant, or other Warrants of different denominations, of
like tenor and representing, in the aggregate, the right to purchase a like
number of Warrant 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 any Warrants 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.
(b) The Holder acknowledges that it has been advised by the
Company that neither this Warrant nor the Warrant Shares have been registered
under the Act, that this Warrant is being or has been issued and the Warrant
Shares may be issued on the basis of 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. The Holder
acknowledges that it has been informed by the Company 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 Warrant or the
Warrant Shares issuable upon exercise hereof shall be valid or effective, and
the Company shall not be required to give any effect to any such sale,
assignment or transfer, unless (i) the sale, assignment or transfer of this
Warrant or such Warrant Shares is registered under the Act, it being understood
that neither this Warrant nor such Warrant Shares are currently registered for
sale and that the Company has no obligation or intention to so register this
Warrant or such Warrant Shares except as specifically provided herein, or (ii)
this Warrant or such Warrant Shares are 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 Warrant for the sale of this Warrant or such Warrant Shares and
that there can be no assurance that Rule 144 sales will be available
3
<PAGE> 4
at any subsequent time, or (iii) such sale, assignment, or transfer is otherwise
exempt from registration under the Act.
(c) Following any assignment or other transfer resulting in the
issuance of warrants to purchase Warrant Shares purchasable hereunder to more
than one person or entity, all elections that may be made by the Holders under
such warrants shall be made by written notice of Holders representing rights to
purchase a majority of the Warrant Shares for which such warrants are then
exercisable.
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 rights to purchase all Warrant Shares granted pursuant to
this Warrant, such number of shares of Common Stock as shall, from time to time,
be sufficient therefor. The Company covenants and agrees that all shares of
Common Stock are validly authorized and, if and when this Warrant is exercised,
in whole or in part or any lesser extent in accordance with the terms hereof,
the shares of Common Stock issued upon such exercise, upon receipt by the
Company of the full Exercise Price therefor, shall be validly issued, fully
paid, nonassessable, without any personal liability attaching to the ownership
thereof, and will not be issued in violation of any preemptive or other rights
of stockholders.
5. (a) In case the Company shall at any time after the date this Warrant
is first issued (i) declare a dividend on the outstanding Common Stock of the
Company payable in shares of its Common Stock, (ii) subdivide the outstanding
Common Stock, or (iii) combine the outstanding Common Stock into a smaller
number of shares, then, in each case, the Exercise Price, and the number of
Warrant Shares issuable upon exercise of this Warrant, in effect at the time of
the record date for such dividend or of the effective date of such subdivision,
or combination, shall be proportionately adjusted so that the Holder after such
time shall be entitled to receive the aggregate number and kind of shares for
such consideration which, if such Warrant had been exercised immediately prior
to such time at the then-current Exercise Price, the Holder would have owned
upon such exercise and been entitled to receive by virtue of such dividend,
subdivision, or combination. Such adjustment shall be made successively whenever
any event listed above shall occur.
(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, if the Holder exercised this Warrant after such
record date, the shares of Common Stock, if any,
4
<PAGE> 5
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 the
Holder a due bill or other appropriate instrument evidencing the Holder's right
to receive such additional shares upon the occurrence of the event requiring
such adjustment.
(d) Upon each adjustment of the Exercise Price as a result of the
calculations made in this Section 5, this Warrant shall thereafter evidence the
right to purchase, at the adjusted Exercise Price, that number of shares
(calculated to the nearest thousandth) obtained by dividing (i) the product
obtained by multiplying the number of shares purchasable upon exercise of this
Warrant prior to adjustment of the number of shares by the Exercise Price in
effect prior to adjustment of the Exercise Price by (ii) the Exercise Price in
effect after such adjustment of the Exercise Price.
(e) Whenever there shall be an adjustment as provided in this
Section 5, the Company shall promptly cause written notice thereof to be sent by
certified mail, postage prepaid, to the Holder, at its address as it shall
appear in the Warrant Register, which notice shall be accompanied by an
officer's certificate setting forth the number of Warrant Shares purchasable
upon the exercise of this Warrant and the Exercise Price after such adjustment
and setting forth a brief statement of the facts requiring such adjustment and
the computation thereof, which officer's certificate shall be conclusive
evidence of the correctness of any such adjustment absent manifest error.
(f) The Company shall not be required to issue fractions of
shares of Common Stock or other capital stock of the Company upon the exercise
of this Warrant. If any fraction of a share would be issuable on the exercise of
this Warrant (or specified portions thereof), the Company shall purchase such
fraction for an amount, in cash, equal to the same fraction of the Current
Market Price of such share of Common Stock on the date of exercise of this
Warrant.
6. (a) 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 Warrant 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
Warrant might have been exercised immediately prior to such consolidation,
merger, sale, lease, or conveyance, and (ii) make effective provisions 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 in Section 5.
5
<PAGE> 6
(b) In case of any reclassification or change of the shares of
Common Stock issuable upon exercise of this Warrant (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 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 Warrant 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 Warrant 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 to shares of Common Stock and to
successive consolidations, mergers, sales, leases, or conveyances.
7. In case at any time the Company shall propose to:
(a) 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) 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) 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 hereof; or
(d) effect any liquidation, dissolution, or winding-up of the
Company; or
(e) 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 certified mail, postage prepaid, to the Holder at the
Holder's address as it shall appear in the Warrant Register, mailed at least
fifteen (15) days prior to (i) the date as of which the
6
<PAGE> 7
holders of record of shares of Common Stock to be 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
other action which would require an adjustment to the Exercise Price.
8. The issuance of any shares or other securities upon the exercise of
this Warrant, 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 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 following the date of issuance of this Warrant,
the Company shall file a registration statement (other than any registration
statement on Form S-4, Form S-8, or any successor form) with the Securities and
Exchange Commission (the "Commission") while any Registrable Securities (as
defined below) are outstanding, and for any reason the Holder will not otherwise
have as of the effective date of such registration statement, the benefit of an
effective registration statement, including all required amendments and
supplements filed pursuant to 9(b) hereof, registering for sale the Registrable
Securities, the Company shall give the Holder at least thirty-five (35) days'
prior written notice of the filing of such registration statement. If requested
by the Holder in writing within twenty (20) 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 Holder and the underwriting fees and
discounts, if any, payable in respect of the Registrable Securities sold by the
Holder), register or qualify all or, at the Holder's option, any portion of the
Registrable Securities of the Holder concurrently with the registration of such
other securities, all to the extent requisite to permit the public offering and
sale of the Registrable Securities through the facilities of all securities
exchanges and the over-the-counter markets on which the Company's securities are
traded, 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 Registrable 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
7
<PAGE> 8
Company for its own account, then the Holder if it has requested registration of
its Registrable Securities shall not be entitled to have such Holder's
Registrable Securities (or the portions thereof so designated by the managing
underwriter) included in such registration statement, provided that no such
exclusion or reduction shall be made as to any Registrable Securities if any
securities of the Company are included in such registration statement for the
account of any person other than the Company and the Holder unless the
securities so included in such registration statement for each such other person
or persons requesting registration shall have been reduced by the same
proportion (based upon the total amount of securities for which each person is
entitled to request registration in such registration statement) as the
Registrable Securities which were requested to be included in such registration
were reduced. As used herein, "Registrable Securities" shall mean the Warrant
Shares, if any, which, in each case, have not been previously sold pursuant to a
registration statement or Rule 144 promulgated under the Act.
(b) If, at any time after twelve (12) months after the closing of
initial public offering of the equity securities of the Company, and for any
reason the Holder cannot freely sell the Registrable Securities pursuant to Rule
144 under the Act and does not have as of such date the benefit of an effective
registration statement including all required amendments and supplements
thereto, filed pursuant to Section 9(a) hereof, registering for sale the
Registrable Securities, and the Company shall receive a written request from the
Holder to register the sale of all or part of such Registrable 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 Registrable Securities through the facilities of all securities exchanges
and the over-the-counter markets on which the Company's securities are traded,
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
Holder and underwriting fees and discounts, if any, payable in respect of the
Registrable Securities sold by the Holder) shall be borne by the Company and one
additional such registration statement for which all such expenses shall be paid
by the Holder. The Company shall not be obligated to effect any registration of
its securities pursuant to this Section 9(b) within six (6) months after the
effective date of a previous registration statement prepared and filed in
accordance with Section 9(a) (in which Registrable Securities could have been
included by the Holder) or 9(b).
(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 Registrable
Securities so registered to be registered or qualified for sale under the
securities or blue sky laws of such jurisdictions as the Holder may reasonably
request; provided, however, that the Company shall not by reason of this Section
9(c) be required to qualify to do business in
8
<PAGE> 9
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 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 Holder to complete the offer and sale of
the Registrable Securities covered thereby. The Company shall in no event be
required to keep any such registration or qualification in effect for a period
in excess of nine (9) months from the date on which the Holder is first free to
sell such Registrable Securities taking into account any lock-up agreed to by
the Holder; provided, however, that, if the Company is required to keep any such
registration or qualification in effect with respect to securities other than
the Registrable Securities beyond such period, the Company shall keep such
registration or qualification in effect as it relates to the Registrable
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 the Holder such reasonable 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 the Holder may reasonably request to facilitate the
disposition of the Registrable 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 Holder, on the
date that such Registrable 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 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
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 and the Holder shall enter into a cross-indemnity
agreement and
9
<PAGE> 10
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, without limitation, opinions of counsel and accountants'
cold comfort letters, with any underwriter who acquires any Registrable
Securities.
(h) The Company agrees that, until all the Registrable 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 Registrable
Securities to sell such securities under Rule 144.
10. (a) Subject to the conditions set forth below, the Company agrees to
indemnify and hold harmless the 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, without
limitation, reasonable attorneys' fees and any and all 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 Registrable 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 Registrable 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 the 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 representation, warranty, covenant, or agreement of the Company
contained in this Warrant. The foregoing agreement to indemnify shall be in
addition to any liability the Company may otherwise have, including liabilities
arising under this Warrant.
If any action is brought against the 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
10
<PAGE> 11
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 under this Section 10(a)
unless the Company shall have been materially prejudiced by such failure or
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 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 agrees promptly to notify
the Holder 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 preliminary prospectus, prospectus, registration
statement, or amendment or supplement thereto, or any application relating to
any sale of any Registrable 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 Registrable 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,
11
<PAGE> 12
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 Warrant 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 Holder of the Registrable 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 such as the relative fault of the Company and the Holder 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
Holder, 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 Holder 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). 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 representation. For purposes of this Section 10(c), each person, if
any, who controls the 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 the Holder or control person shall have the same rights to
contribution as the 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.
12
<PAGE> 13
11. Unless registered pursuant to the provisions of Section 9 hereof,
the Warrant Shares issued upon exercise of this Warrant shall be subject to a
stop transfer order and the certificate or certificates evidencing such Warrant
Shares shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH SECURITIES
NOR ANY INTEREST THEREIN 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 COMPANY RECEIVES AN OPINION OF
COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH COUNSEL AND
OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
SECURITIES 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."
12. Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction, or mutilation of this Warrant (and upon surrender of any
Warrant if mutilated), including an affidavit of the Holder that this Warrant
has been lost, stolen, destroyed or mutilated, together with an indemnity
against any claim that may be made against the Company on account of such lost,
stolen, destroyed or mutilated Warrant, and upon reimbursement of the Company's
reasonable incidental expenses, the Company shall execute and deliver to the
Holder a new Warrant of like date, tenor, and denomination.
13. The Holder of this Warrant 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 Warrant.
14. This Warrant shall be construed in accordance with the laws of the
State of Delaware applicable to contracts made and performed within such State,
without regard to principles governing conflicts of law.
15. The Company 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
Warrant, any document or instrument delivered pursuant to, in connection with or
simultaneously with this Warrant, or a breach of this Warrant or any such
document or instrument. In any such action or proceeding, the
13
<PAGE> 14
Company waives personal service of any summons, complaint or other process and
agrees that service thereof may be made in accordance with Section 16. 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 Company shall appear to answer such summons, complaint or other
process.
16. 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 Company, at its address at U.S. OnLine
Communications, Inc., 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 16. Notice to the estate of any party shall be sufficient if addressed
to the party as provided in this Section 16. 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 16 shall be deemed given at the time of receipt thereof.
17. 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 Warrant 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.
18. This Warrant may be amended only by a written instrument executed by
the Company and the Holder hereof. Any amendment shall be endorsed upon this
Warrant, and all future Holders shall be bound thereby.
Dated: March 30, 1998
U.S. ONLINE COMMUNICATIONS, INC.
-------------------------------
Name: Donald E. Barlow
Title: President
[Seal]
- -------------------------------
Paul F. Mutty, Secretary
14
<PAGE> 15
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
attached Warrant.)
FOR VALUE RECEIVED, ______________ hereby sells, assigns, and transfers unto
__________________________ a Warrant to purchase _______________ shares of
Common Stock, $.001 par value per share, of U.S. OnLine Communications, Inc.
(the "Company"), together with all right, title, and interest therein, and does
hereby irrevocably constitute and appoint attorney to transfer such Warrant on
the books of the Company, with full power of substitution. Dated:
Signature_____________________________
-------------------------------
Signature Guarantee
NOTICE
The signature on the foregoing Assignment must correspond to the name as written
upon the face of this Warrant in every particular, without alteration or
enlargement or any change whatsoever.
15
<PAGE> 16
To: U.S. OnLine Communications, Inc.
8307 Shoal Creek Boulevard
Austin, Texas 78757
ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to purchase
Warrant Shares covered by the within Warrant, and tenders payment herewith in
the aggregate amount of $ , including (i) $ by certified or bank cashier's
check, and/or (ii) cancellation of Warrants to purchase Warrant Shares based
upon a Maximum Number (as therein defined) of , in accordance with the terms
thereof, and requests that certificates for such securities be issued in the
name of, and delivered to:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Warrant Shares shall not be all the Warrant Shares
covered by the within Warrant and the remaining portion of the within Warrant be
not canceled in payment of the Exercise Price, that a new Warrant for the
balance of the Warrant Shares covered by the within Warrant be registered in the
name of, and delivered to, the undersigned at the address stated below.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Print Name, Address and Social Security
or Tax Identification Number)
16
<PAGE> 17
Dated:________________________________ Name:___________________________________
Address _______________________________________________
-------------------------------
(Signature)
-------------------------------
(Signature Guarantee)
-------------------------------
(Signature Guarantee)
17
<PAGE> 1
EXHIBIT 10.8
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE UPON
EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH SECURITIES
NOR ANY INTEREST THEREIN 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
COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH
COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
SECURITIES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER
CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR
APPLICABLE STATE SECURITIES LAWS.
THE TRANSFER OF THIS WARRANT IS
RESTRICTED AS DESCRIBED HEREIN.
U.S. ONLINE COMMUNICATIONS, INC.
Warrant for the Purchase of Shares of Common Stock,
$.001 par value per share
THIS WARRANT EXPIRES ON ___________
Shares
THIS CERTIFIES that, for value received, Barington Capital Group,
L.P. with an address at 888 Seventh Avenue, New York, New York 10019 (in its
individual capacity, "Barington," and, including any transferee, 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 before 5:00 P.M. on ___________, New
York time (the "Exercise Period"), _________ shares of the Company's Common
Stock, $.001 par value per share ("Common Stock"), at a price equal to $3.75 per
share, subject to adjustment as provided herein (the "Exercise Price").
This Warrant is issued to Holder as compensation for acting as
financial advisor in connection with an offering (the "Offering") by the Company
of units (the "Units"), each consisting of (A) a 15% Senior Subordinated
Promissory Note with a $50,000 aggregate principal amount and (B) 13,333.33
shares of Common Stock, pursuant to a Confidential Private Placement Memorandum,
dated March 13, 1998, together with all Exhibits thereto as it may be amended or
supplemented (the "Memorandum"). As used herein the term "this Warrant" shall
mean and include this Warrant and any Warrant or Warrants hereafter issued as a
consequence of the exercise or transfer of this Warrant in whole or in part.
The number of shares of Common Stock issuable upon exercise of
this Warrant (the "Warrant Shares") and the Exercise Price may be adjusted from
time to time as hereinafter set
<PAGE> 2
forth.
1. (a) This Warrant may be exercised during the Exercise Period,
as to the whole or any lesser number of whole Warrant Shares, by the surrender
of this Warrant (with the election at the end hereof duly executed) to the
Company at its office at U.S. OnLine Communications, Inc., 8307 Shoal Creek
Boulevard, Austin, Texas 78757, or at such other place as is designated in
writing by the Company. Subject to Section 1(b) hereof, such executed election
must be accompanied by payment in an amount equal to the Exercise Price
multiplied by the number of Warrant Shares for which this Warrant is being
exercised. Such payment may be made by certified or bank cashier's check payable
to the order of the Company, or as otherwise provided in Section 1(b) hereof.
(b) All or any part of this Warrant 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
desires to purchase in consideration of cancellation of Warrants in payment for
such exercise. The number of shares of Common Stock the Holder shall receive
(the "Cashless Exercise Number") upon such exercise pursuant to this Section
1(b) shall equal the difference between the Maximum Number and 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 Warrant
Shares, the Holder shall be deemed to be the holder of record of the Warrant
Shares issuable upon such exercise, notwithstanding that the transfer books of
the Company shall then be closed or certificates representing such Warrant
Shares shall not then have been actually delivered to the Holder. As soon as
practicable after each such exercise of this Warrant, the Company shall issue
and deliver to the Holder a certificate or certificates for the Warrant Shares
issuable upon such exercise, registered in the name of the Holder or its
designee. If this Warrant should be exercised in part only, the Company shall,
upon surrender of this Warrant for cancellation, execute and deliver a new
Warrant evidencing the right of the Holder to purchase the balance of the
Warrant Shares (or portions thereof) subject to purchase hereunder.
3. (a) Any Warrants issued upon the transfer or exercise in part
of this Warrant shall be numbered and shall be registered in a Warrant Register
as they are issued. The Company shall be entitled to treat the registered holder
of any Warrant on the Warrant 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 Warrant on the part of any other person, and shall not be
liable for any registration or transfer of Warrants which are registered or to
be registered in
<PAGE> 3
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 Warrant 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 Warrant or Warrants to the person entitled thereto. This
Warrant may be exchanged, at the option of the Holder thereof, for another
Warrant, or other Warrants of different denominations, of like tenor and
representing in the aggregate the right to purchase a like number of Warrant
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 Warrants 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.
(b) The Holder acknowledges that it has been
advised by the Company that neither this Warrant nor the Warrant Shares have
been registered under the Act, that this Warrant is being or has been issued and
the Warrant Shares may be issued on the basis of 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.
The Holder acknowledges that it has been informed by the Company 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
Warrant or the Warrant Shares issuable upon exercise hereof shall be valid or
effective, and the Company shall not be required to give any effect to any such
sale, assignment or transfer, unless (i) the sale, assignment or transfer of
this Warrant or such Warrant Shares is registered under the Act, it being
understood that neither this Warrant nor such Warrant Shares are currently
registered for sale and that the Company has no obligation or intention to so
register this Warrant or such Warrant Shares except as specifically provided
herein, or (ii) this Warrant or such Warrant Shares are sold, assigned or
transferred in accordance with all the requirements and limitations of Rule 144
promulgated under the Act, it being understood that Rule 144 is not available at
the time of the original issuance of this Warrant for the sale of this Warrant
or such Warrant Shares 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.
<PAGE> 4
(c) Following any assignment or other transfer resulting in
the issuance of warrants to purchase Warrant Shares purchasable hereunder to
more than one person or entity, all elections that may be made by the Holders
under such warrants shall be made by written notice of Holders representing
rights to purchase a majority of the Warrant Shares for which such warrants are
then exercisable.
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 rights to purchase all Warrant Shares granted pursuant
to this Warrant, 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 are validly authorized and, if and when this Warrant is exercised in whole
or in part or any lesser extent in accordance with the terms hereof, the shares
of Common Stock issued upon such exercise, upon receipt by the Company of the
full Exercise Price therefor, shall be validly issued, fully paid,
nonassessable, without any personal liability attaching to the ownership
thereof, and will not be issued in violation of any preemptive or other rights
of stockholders.
5. (a) In case the Company shall at any time after the date this
Warrant is first issued (i) declare a dividend on the outstanding Common Stock
of the Company payable in shares of its Common Stock, (ii) subdivide the
outstanding Common Stock, or (iii) combine the outstanding Common Stock into a
smaller number of shares, then, in each case, the Exercise Price, and the number
of Warrant Shares issuable upon exercise of this Warrant, in effect at the time
of the record date for such dividend or of the effective date of such
subdivision, or combination, shall be proportionately adjusted so that the
Holder after such time shall be entitled to receive the aggregate number and
kind of shares for such consideration which, if such Warrant had been exercised
immediately prior to such time at the then-current exercise price, he would have
owned upon such exercise and been entitled to receive by virtue of such
dividend, subdivision, or combination. Such adjustment shall be made
successively whenever any event listed above shall occur.
(b) In case the Company shall issue or fix a record date for
the issuance to all holders of Common Stock of rights, options, or warrants to
subscribe for or purchase Common Stock (or securities convertible into or
exchangeable for Common Stock) at a price per share (or having a conversion or
exchange price per share, if a security convertible into or exchangeable for
Common Stock) less than the Current Market Price per share of Common Stock on
such record date, then, in each case, the Exercise Price shall be adjusted by
multiplying the Exercise Price in effect immediately prior to such record date
by a fraction, the numerator of which shall be the number of shares
<PAGE> 5
of Common Stock outstanding on such record date plus the number of shares of
Common Stock which the aggregate offering price of the total number of shares of
Common Stock so to be offered (or the aggregate initial conversion or exchange
price of the convertible or exchangeable securities so to be offered) would
purchase at such Current Market Price and the denominator of which shall be the
number of shares of Common Stock outstanding on such record date plus the number
of additional shares of Common Stock to be offered for subscription or purchase
(or into which the convertible or exchangeable securities so to be offered are
initially convertible or exchangeable); provided, however, that no such
adjustment shall be made which results in an increase in the Exercise Price.
Such adjustment shall become effective at the close of business on such record
date; provided, however, that, to the extent the shares of Common Stock (or
securities convertible into or exchangeable for shares of Common Stock) are not
delivered, the Exercise Price shall be readjusted after the expiration of such
rights, options, or warrants (but only with respect to Warrants exercised after
such expiration), to the Exercise Price which would then be in effect had the
adjustments made upon the issuance of such rights, options, or warrants been
made upon the basis of delivery of only the number of shares of Common Stock (or
securities convertible into or exchangeable for shares of Common Stock) actually
issued. In case any subscription price may be paid in a consideration part or
all of which shall be in a form other than cash, the value of such consideration
shall be as determined in good faith by the board of directors of the Company,
whose determination shall be conclusive absent manifest error. Shares of Common
Stock owned by or held for the account of the Company or any majority-owned
subsidiary shall not be deemed outstanding for the purpose of any such
computation.
(c) In case the Company shall distribute to all
holders of Common Stock (including any such distribution made to the
stockholders of the Company in connection with a consolidation or merger in
which the Company is the continuing corporation) evidences of its indebtedness,
cash (other than any cash dividend which, together with any cash dividends paid
within the twelve (12) months prior to the record date for such distribution,
does not exceed five percent (5%) of the Current Market Price at the record date
for such distribution) or assets (other than distributions and dividends payable
in shares of Common Stock), or rights, options, or warrants to subscribe for or
purchase Common Stock, or securities convertible into or changeable for shares
of Common Stock (excluding those with respect to the issuance of which an
adjustment of the Exercise Price is provided pursuant to Section 5(b) hereof),
then, in each case, the Exercise Price shall be adjusted by multiplying the
Exercise Price in effect immediately prior to the record date for the
determination of stockholders entitled to receive such distribution by a
fraction, the numerator of which shall be the Current Market Price per share of
Common Stock on such record date, less the fair market value (as determined in
good faith by the board of directors of the Company, whose
<PAGE> 6
determination shall be conclusive absent manifest error) of the portion of the
evidences of indebtedness or assets so to be distributed, or of such rights,
options, or warrants or convertible or exchangeable securities, or the amount of
such cash, applicable to one share, and the denominator of which shall be such
Current Market Price per share of Common Stock. Such adjustment shall become
effective at the close of business on such record date.
(d) In case the Company shall issue shares of
Common Stock or rights, options, or warrants to subscribe for or purchase Common
Stock, or securities convertible into or exchangeable for Common Stock
(excluding shares, rights, options, warrants, or convertible or exchangeable
securities issued or issuable (i) in any of the transactions with respect to
which an adjustment of the Exercise Price is provided pursuant to Sections 5(a),
5(b), or 5(c) above, (ii) upon any issuance of securities pursuant to the
Offering or the exercise of securities so issued, (iii) upon exercise of this
Warrant and (iv) upon the issuance of securities pursuant to the exercise of any
outstanding option, warrant, or right, or pursuant to any stock option plan, as
set forth in the Memorandum or any Exhibit thereto) at a price per share
(determined, in the case of such rights, options, warrants, or convertible or
exchangeable securities, by dividing (x) the total amount received or receivable
by the Company in consideration of the sale and issuance of such rights,
options, warrants, or convertible or exchangeable securities, plus the minimum
aggregate consideration payable to the Company upon exercise, conversion, or
exchange thereof, by (y) the maximum number of shares covered by such rights,
options, warrants, or convertible or exchangeable securities) lower than the
Current Market Price per share of Common Stock, in effect immediately prior to
such issuance, then the Exercise Price shall be reduced on the date of such
issuance to a price (calculated to the nearest cent) determined by multiplying
the Exercise Price in effect immediately prior to such issuance by a fraction,
(1) the numerator of which shall be an amount equal to the sum of (A) the number
of shares of Common Stock outstanding immediately prior to such issuance plus
(B) the quotient obtained by dividing the consideration received by the Company
upon such issuance by such Current Market Price, and (2) the denominator of
which shall be the total number of shares of Common Stock outstanding
immediately after such issuance; provided, however, that no such adjustment
shall be made which results in an increase in the Exercise Price. For the
purposes of such adjustments, the maximum number of shares which the holders of
any such rights, options, warrants, or convertible or exchangeable securities
shall be entitled to initially subscribe for or purchase or convert or exchange
such securities into shall be deemed to be issued and outstanding as of the date
of such issuance, and the consideration received by the Company therefor shall
be deemed to be the consideration received by the Company for such rights,
options, warrants, or convertible or exchangeable securities, plus the minimum
aggregate
<PAGE> 7
consideration or premiums stated in such rights, options, warrants, or
convertible or exchangeable securities to be paid for the shares covered
thereby. No further adjustment of the Exercise Price shall be made as a result
of the actual issuance of shares of Common Stock on exercise of such rights,
options, or warrants or on conversion or exchange of such convertible or
exchangeable securities. On the expiration or the termination of such rights,
options, or warrants, or the termination of such right to convert or exchange,
the Exercise Price shall be readjusted (but only with respect to this Warrant if
exercised after such expiration or termination) to such Exercise Price as would
have been obtained had the adjustments made upon the issuance of such rights,
options, warrants, or convertible or exchangeable securities been made upon the
basis of the delivery of only the number of shares of Common Stock actually
delivered upon the exercise of such rights, options, or warrants or upon the
conversion or exchange of any such securities; and on any change of the number
of shares of Common Stock deliverable upon the exercise of any such rights,
options, or warrants or conversion or exchange of such convertible or
exchangeable securities or any change in the consideration to be received by the
Company upon such exercise, conversion, or exchange, including, without
limitation, a change resulting from the antidilution provisions thereof. In case
the Company shall issue shares of Common Stock or any such rights, options,
warrants, or convertible or exchangeable securities for a consideration
consisting, in whole or in part, of property other than cash or its equivalent,
then the "price per share" and the "consideration received by the Company" for
purposes of the first sentence of this Section 5(d) shall be as determined in
good faith by the board of directors of the Company, whose determination shall
be conclusive absent manifest error. Shares of Common Stock owned by or held for
the account of the Company or any majority-owned subsidiary shall not be deemed
outstanding for the purpose of any such computation.
(e) 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 thirty (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) 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 or any similar organization, the fair value of a share of
Common Stock on such
<PAGE> 8
date, as determined in good faith by the board of directors of the Company,
whose determination shall be conclusive absent manifest error, shall be used. In
the case of a private offering, Current Market Price shall be defined as 70% of
the fair market value of the Common Stock on the date of such private offering.
(f) 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.
(g) 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, if the Holder exercised this
Warrant 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 the Holder a
due bill or other appropriate instrument evidencing the Holder's right to
receive such additional shares upon the occurrence of the event requiring such
adjustment.
(h) Upon each adjustment of the Exercise Price as
a result of the calculations made in Sections 5(b), 5(c), or 5(d) hereof, this
Warrant shall thereafter evidence the right to purchase, at the adjusted
Exercise Price, that number of shares (calculated to the nearest thousandth)
obtained by dividing (A) the product obtained by multiplying the number of
shares purchasable upon exercise of this Warrant prior to adjustment of the
number of shares by the Exercise Price in effect prior to adjustment of the
Exercise Price by (B) the Exercise Price in effect after such adjustment of the
Exercise Price.
(i) Whenever there shall be an adjustment as
provided in this Section 5, the Company shall promptly cause written notice
thereof to be sent by certified mail, postage prepaid, to the Holder, at its
address as it shall appear in the Warrant Register, which notice shall be
accompanied by an officer's certificate setting forth the number of Warrant
Shares purchasable upon the exercise of this Warrant and the Exercise Price
after such adjustment and setting forth a brief statement of the facts requiring
such adjustment and the computation thereof, which officer's certificate shall
be conclusive evidence of the correctness of any such adjustment absent manifest
error.
(j) The Company shall not be required to issue
fractions of shares of Common Stock or other capital stock of
<PAGE> 9
the Company upon the exercise of this Warrant. If any fraction of a share would
be issuable on the exercise of this Warrant (or specified portions thereof), the
Company shall purchase such fraction for an amount in cash equal to the same
fraction of the Current Market Price of such share of Common Stock on the date
of exercise of this Warrant.
6. (a) 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 Warrant 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
Warrant might have been exercised immediately prior to such consolidation,
merger, sale, lease, or conveyance, and (ii) make effective provisions 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 in Section 5.
(b) In case of any reclassification or change of the shares of
Common Stock issuable upon exercise of this Warrant (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 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 Warrant 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 Warrant 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
<PAGE> 10
shares of Common Stock and to successive consolidations, mergers, sales, leases,
or conveyances.
7. In case at any time the Company shall propose to:
(a) 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) 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) 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 hereof; or
(d) effect any liquidation, dissolution, or
winding-up of the Company; or
(e) 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 certified mail, postage prepaid, to the Holder at the
Holder's address as it shall appear in the Warrant Register, mailed at least
fifteen (15) days prior to (i) the date as of which the holders of record of
shares of Common Stock to be 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 other action which would
require an adjustment to the Exercise Price.
8. The issuance of any shares or other securities upon the
exercise of this Warrant, 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
<PAGE> 11
delivery of any certificate in a name other than that of the Holder and the
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) Upon the Company's filing a registration statement (the
"Offering Registration"), as contemplated by Section 1(e) of the Subscription
Agreements, as amended (the "Subscription Agreements") between the Company and
certain investors introduced to the Company by Barington in connection with the
Offering, with the Securities and Exchange Commission (the "Commission") while
any Registrable Securities (as defined below) are outstanding, the Company
shall, at the Company's sole expense (other than the fees and disbursements of
counsel for the Holder of any Registrable Securities and the underwriting
discounts, if any, payable in respect of the Registrable Securities sold by the
Holder), register or qualify all of the Registrable Securities of the Holder,
all to the extent necessary to permit the public offering and sale of the
Registrable Securities through the facilities of all securities exchanges and
the over-the-counter markets on which the Company's securities are traded, 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. As used herein, "Registrable Securities" shall mean the Warrants
and the Warrant Shares, if any, which, in each case, have not been previously
sold pursuant to a registration statement or Rule 144 promulgated under the Act.
(b) If, at any time following the date of issuance of this
Warrant, the Company shall file a registration statement (other than for the
Offering Registration, any registration statement on Form S-4, Form S-8, or any
successor form) with the Commission while any Registrable Securities are
outstanding, and for any reason the Holder will not otherwise have as of the
effective date of such registration statement, the benefit of an effective
registration statement, including all required amendments and supplements filed
pursuant to Section 9(a) or 9(c) hereof, registering for sale the Registrable
Securities, the Company shall give the Holder at least thirty-five (35) days'
prior written notice of the filing of such registration statement. If requested
by the Holder in writing within twenty (20) 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 Holder and the underwriting discounts, if
any, payable in respect of the Registrable Securities sold by the Holder),
register or qualify all or, at the Holder's option, any portion of the
Registrable Securities of the Holder concurrently with the registration of such
other securities, all to the extent requisite to permit the public offering and
sale of the Registrable Securities through the facilities of all securities
exchanges and the over-the-counter markets on which the Company's securities are
traded,
<PAGE> 12
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 Registrable 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 the Holder if it has
requested registration of its Registrable Securities shall not be entitled to
have such Holder's Registrable Securities (or the portions thereof so designated
by the managing underwriter) included in such registration statement, provided
that no such exclusion or reduction shall be made as to any Registrable
Securities if any securities of the Company are included in such registration
statement for the account of any person other than the Company and the Holder
unless the securities so included in such registration statement for each such
other person or persons requesting registration shall have been reduced by the
same proportion (based upon the total amount of securities for which each person
is entitled to request registration in such registration statement) as the
Registrable Securities which were requested to be included in such registration
were reduced.
(c) If, at any time after twelve (12) months
after the effective date of the Offering Registration, and for any reason the
Holder cannot freely sell the Registrable Securities pursuant to Rule 144
promulgated under the Act and does not have as of such date the benefit of an
effective registration statement including all required amendments and
supplements thereto, filed pursuant to Section 9(a) or 9(b) hereof, registering
for sale the Registrable Securities, the Company shall receive a written request
from the Holder to register the sale of all or part of such Registrable
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 Registrable Securities through the facilities of all securities
exchanges and the over-the-counter markets on which the Company's securities are
traded, 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 (1) such registration statement for which all expenses incurred in
connection with such registration (other than the fees and disbursements of
counsel for the Holder and underwriting fees and discounts, if any, payable in
respect of the Registrable Securities sold by the Holder) shall be borne by the
Company and one additional such registration statement for which all such
expenses shall be paid by the Holder. The Company shall not be obligated to
effect any registration of its securities pursuant to this Section 9(c) within
six (6) months after the effective date of a previous registration statement
prepared and filed in accordance with Section 9(a) (in which
<PAGE> 13
Registrable Securities could have been included), 9(b) or 9(c).
(d) In the event of a registration pursuant to
the provisions of this Section 9, the Company shall use its best efforts to
cause the Registrable Securities so registered to be registered or qualified for
sale under the securities or blue sky laws of such jurisdictions as the Holder
may reasonably request; provided, however, that the Company shall not by reason
of this Section 9(d) 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.
(e) 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 Holder to complete the offer
and sale of the Registrable Securities covered thereby. The Company shall in no
event be required to keep any such registration or qualification in effect for a
period in excess of nine (9) months from the date on which the Holder is first
free to sell such Registrable Securities taking into account any lockup agreed
to by the Holder and Barington; provided, however, that, if the Company is
required to keep any such registration or qualification in effect with respect
to securities other than the Registrable Securities beyond such period, the
Company shall keep such registration or qualification in effect as it relates to
the Registrable Securities for so long as such registration or qualification
remains or is required to remain in effect in respect of such other securities.
(f) In the event of a registration pursuant to
the provisions of this Section 9, the Company shall furnish to the Holder such
reasonable 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 the Holder may reasonably
request to facilitate the disposition of the Registrable Securities included in
such registration.
(g) In the event of a registration pursuant to
the provisions of this Section 9, the Company shall furnish, at the request of
the Holder, on the date that such Registrable 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,
<PAGE> 14
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 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 Holder. Any opinion or letter given shall be subject to all of the
qualifications, exceptions and conditions appropriate to the then existing
circumstances.
(h) In the event of a registration pursuant to the provision
of this Section 9, the Company and the Holder 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, without limitation, opinions of counsel
and accountants' cold comfort letters, with any underwriter who acquires any
Registrable Securities.
(i) The Company agrees that, until all the Registrable
Securities have been sold under a registration statement or pursuant to Rule 144
promulgated 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 Registrable Securities to sell such securities under Rule
144.
(j) Until such time as the Company shall have fully performed
its obligations under this Section 9, except for rights granted to holders of
this Warrant and any warrants issued or issuable to Barington or its designees
in connection with any other public or private offering, the Company will not
grant to any persons the right to request the Company to register any securities
of the Company without the written consent of the Holder, provided that the
Company may grant such registration rights to other persons so long as such
rights are pari passu or subordinate to the rights of the holders of the
Registrable Securities.
10. (a) Subject to the conditions set forth below, the Company
agrees to indemnify and hold harmless the 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, without
limitation, reasonable attorneys' fees and any and all expense whatsoever
incurred in investigating, preparing, or defending against any litigation,
<PAGE> 15
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 Registrable 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 Registrable 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 the 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 representation, warranty, covenant, or agreement of the Company
contained in this Warrant. The foregoing agreement to indemnify shall be in
addition to any liability the Company may otherwise have, including liabilities
arising under this Warrant.
If any action is brought against the 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 under this Section 10(a) unless the Company shall
have been materially prejudiced by such failure or 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 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
<PAGE> 16
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 agrees promptly to notify the Holder 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 preliminary prospectus, prospectus, registration statement, or amendment
or supplement thereto, or any application relating to any sale of any
Registrable 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 Registrable 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 contribu-
tion, 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 Warrant
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
<PAGE> 17
Company who signed any such registration statement, any controlling person of
the Company, and its or their respective counsel), as one entity, and the Holder
of the Registrable 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 such as the relative fault of the
Company and the Holder 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 Holder, 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 Holder 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). 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 representation. For purposes of this Section 10(c),
each person, if any, who controls the 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 the Holder or control person shall have
the same rights to contribution as the 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 Warrant Shares issued upon exercise of this Warrant shall be subject
to a stop transfer order and the certificate or certificates evidencing such
Warrant Shares shall bear the following legend:
<PAGE> 18
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH
SECURITIES NOR ANY INTEREST THEREIN 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
COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF SUCH
SECURITIES, WHICH COUNSEL AND OPINION ARE REASONABLY
SATISFACTORY TO THE COMPANY, THAT SUCH SECURITIES MAY BE
OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER
CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT OR APPLICABLE STATE SECURITIES LAWS."
12. Upon receipt of evidence satisfactory to the Company of the
loss, theft, destruction, or mutilation of this Warrant (and upon surrender of
any Warrant if mutilated), including an affidavit of the Holder that this
Warrant has been lost, stolen, destroyed or mutilated, together with an
indemnity against any claim that may be made against the Company on account of
such lost, stolen, destroyed or mutilated Warrant, and upon reimbursement of the
Company's reasonable incidental expenses, the Company shall execute and deliver
to the Holder a new Warrant of like date, tenor, and denomination.
13. The Holder of this Warrant 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 Warrant. The Holder hereby covenants
and agrees that it will forfeit this Warrant in the event that: (i) it is the
lead or co-lead underwriter in connection with an initial public offering of the
Common Stock of the Company; and (ii) such initial public offering of the Common
Stock of the Company is consummated within one year of the date hereof and on
the same terms and conditions as set forth in that certain Engagement Letter,
February 3, 1998, by and between the Company and the Holder.
14. This Warrant shall be construed in accordance with the laws
of the State of Delaware applicable to contracts made and performed within such
State, without regard to principles governing conflicts of law.
15. 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
Warrant, any document or instrument delivered pursuant to, in connection
<PAGE> 19
with or simultaneously with this Warrant, or a breach of this Warrant 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 7(b) of the
Subscription Agreement. 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 Company shall appear to answer such
summons, complaint or other process.
16. 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 Company, at its address at U.S. OnLine
Communications, Inc., 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 16. Notice to the estate of any party shall be sufficient if addressed
to the party as provided in this Section 16. 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 16 shall be deemed given at the time of receipt thereof.
17. 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 Warrant 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.
<PAGE> 20
18. This Warrant may be amended only by a written instrument
executed by the Company and the Holder hereof. Any amendment shall be endorsed
upon this Warrant, and all future Holders shall be bound thereby.
Dated: ______ __, 1998
U.S. ONLINE COMMUNICATIONS, INC.
____________________________________
Name: Donald Barlow
Title: President
[Seal]
______________________________
Paul Mutty, Secretary
<PAGE> 21
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
attached Warrant.)
FOR VALUE RECEIVED, _____________________ hereby sells, assigns,
and transfers unto _________________ a Warrant to purchase __________ shares of
Common Stock, $.001 par value per share, of U.S. OnLine Communications, Inc.
(the "Company"), together with all right, title, and interest therein, and does
hereby irrevocably constitute and appoint ___________________ attorney to
transfer such Warrant on the books of the Company, with full power of
substitution.
Dated: _________________
Signature_________________________
__________________________________
Signature Guarantee
NOTICE
The signature on the foregoing Assignment must correspond to the
name as written upon the face of this Warrant in every particular, without
alteration or enlargement or any change whatsoever.
<PAGE> 22
To: U.S. OnLine Communications, Inc.
8307 Shoal Creek Boulevard
Austin, Texas 78757
ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to purchase
_______ Warrant Shares covered by the within Warrant, and tenders payment
herewith in the aggregate amount of $________, including (i) $_______ by
certified or bank cashier's check, and/or (ii) cancellation of Warrants to
purchase ___ Warrant Shares based upon a Maximum Number (as therein defined) of
______, in accordance with the terms thereof, and requests that certificates for
such securities be issued in the name of, and delivered to:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Warrant Shares shall not be all the Warrant Shares
covered by the within Warrant and the remaining portion of the within Warrant be
not cancelled in payment of the Exercise Price, that a new Warrant for the
balance of the Warrant Shares covered by the within Warrant be registered in the
name of, and delivered to, the undersigned at the address stated below.
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Print Name, Address and Social Security
or Tax Identification Number)
<PAGE> 23
Dated: _________________
Name:______________________
(Print)
Address:________________________________________________________________________
___________________________
(Signature)
___________________________
(Signature Guarantee)
___________________________
(Signature Guarantee)
<PAGE> 1
EXHIBIT 10.9
EXHIBIT D
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and entered into
this __ day of March, 1998, by and between U.S. OnLine Communications, Inc., a
Delaware corporation (the "Company"), and the individuals listed on ANNEX A
attached hereto (such persons being herein referred to individually as an
"Investor" and collectively, as the "Investors").
W I T N E S S E T H
WHEREAS, pursuant to that certain Confidential Private Placement Memorandum,
dated March 13, 1998, the Company issued Units to the Investors consisting of
13,333.33 shares of common stock, $.001 par value per share (the "Common
Stock"), of the Company and a 15% Senior Subordinated Promissory Note, in
aggregate principal amount of $50,000 (the "Note"), which, subject to the terms
and conditions set forth in the Note, is convertible into Common Stock (the
"Private Placement");
WHEREAS, the Company, as of the date hereof, has no securities, including the
Common Stock, which are registered under the Securities Act of 1933, as amended
(the "Securities Act"); and
WHEREAS, the Company desires to grant, and the Investors desire to receive
certain rights with respect to the registration of Common Stock issued in the
Private Placement or received upon the conversion of the Notes under the
Securities Act.
NOW THEREFORE, in consideration of the premises and the mutual covenants and
agreements contained herein and other good and valuable consideration, the
parties hereto hereby agree as follows:
1. Piggy Back Registration Rights.
a. If the Company proposes to register or is required to register any Common
Stock pursuant to the Securities Act on a registration statement on Form S-1,
Form SB-1, Form S-2, Form SB-2 or Form S-3 (the "Offering Registration"), the
Company shall, at the Company's sole expense (other than the fees and
disbursements of counsel for the Participating Investors (as hereinafter
defined) of any Registrable Securities (as hereinafter defined) and the
underwriting discounts, if any, payable in respect of the Registrable Securities
sold by the Participating Investors), register or qualify all or, at the
Participating Investors' option, any portion of the Registrable Securities of
the Participating Investors, all to the extent necessary to permit the public
offering and sale of the Registrable Securities through the facilities of all
securities exchanges and the over-the-counter markets on which the Company's
securities are traded or are anticipated to be traded, 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. As used
herein, "Participating Investors" shall mean the Investors who elects to
participate in any offering of the Company's Common Stock pursuant to the
provisions of this Section 1. As used herein, "Registrable Securities" shall
mean any shares of Common Stock issued in the Private Placement or received upon
the conversion of the Notes held by an Investor on the date on which an Investor
notifies the Company that it elects to exercise the rights granted to it
pursuant to this Section 1, which, in each case, have not been previously sold
pursuant to a registration statement or are able to be sold pursuant to Rule
144(k) promulgated under the Securities Act on the date the Company notifies the
<PAGE> 2
Investors of an Offering Registration. If the Company intends to file an
Offering Registration, the Company shall give the Investors at least sixty (60)
days prior written notice of its intention to file such Offering Registration.
Each Investor shall then have thirty (30) days to advise the Company, in
writing, of its election to exercise the registration rights granted pursuant to
this Section 1(a). If an Investor does not notify the Company of its intention
to exercise the registration rights as provided for in the previous sentence,
such Investor shall be deemed to have waived such registration rights with
respect to such Offering Registration. 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 Registrable
Securities requested to be included in the registration concurrently with the
securities being registered by the Company would materially and adversely affect
the distribution of such securities by the Company for its own account, then the
Participating Investors shall not be entitled to have such Registrable
Securities (or the portions thereof so designated by the managing underwriter)
included in such registration statement, provided, however, that no such
exclusion or reduction shall be made as to any Registrable Securities if any
securities of the Company are included in such registration statement for the
account of any person other than the Company and the Participating Investors
unless the securities so included in such registration statement for each such
other person or persons requesting registration shall have been reduced by the
same proportion (based upon the total amount of securities for which each person
is entitled to request registration in such registration statement) as the
Registrable Securities which were requested to be included in such registration
were reduced; further, provided, however, that, notwithstanding the foregoing,
the Company shall, at is sole cost and expense (other than the fees and
disbursements of any Participating Investors' counsel and underwriting
discounts, if any), automatically and with no action necessary on the part of
the Investors or the Company register the shares of Common Stock issued to the
Investors in the Private Placement 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.
b. If the Company shall file a registration statement (other than for an
Offering Registration, any registration statement on Form S-4, Form S-8, or any
successor form) with the Securities and Exchange Commission (the "Commission")
while any Registrable Securities are outstanding, and for any reason the
Investors will not otherwise have as of the effective date of such registration
statement, the benefit of an effective registration statement, including all
required amendments and supplements filed pursuant to Section 1(a) hereof,
registering for sale the Registrable Securities, the Company shall give the
Investors at least fifteen (15) days' prior written notice of the filing of such
registration statement. If requested by any Investor, in writing, within thirty
(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 such
Participating Investors and the underwriting discounts, if any, payable in
respect of the Registrable Securities sold by the Participating Investors),
register or qualify all or, at each Participating Investor's option, any portion
of the Registrable Securities of such Participating Investors concurrently with
the registration of such other securities, all to the extent requisite to permit
the public offering and sale of the Registrable Securities through the
facilities of all securities exchanges and the over-the-counter markets on which
the Company's securities are traded or are anticipated to be traded, 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 Registrable Securities requested to be
included in the registration concurrently with the securities being registered
by the Company would materially and adversely affect the distribution of such
securities by the Company for its own account, then the Participating Investors,
if they have requested registration of their Registrable Securities shall not be
-2-
<PAGE> 3
entitled to have such Registrable Securities (or the portions thereof so
designated by the managing underwriter) included in such registration statement,
provided, however, that no such exclusion or reduction shall be made as to any
Registrable Securities if any securities of the Company are included in such
registration statement for the account of any person other than the Company and
the Participating Investors unless the securities so included in such
registration statement for each such other person or persons requesting
registration shall have been reduced by the same proportion (based upon the
total amount of securities for which each person is entitled to request
registration in such registration statement) as the Registrable Securities which
were requested to be included in such registration 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 registered or qualified for sale under the securities or blue
sky laws of such jurisdictions as any Participating Investor may reasonably
request; 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 keep effective any registration or qualification
contemplated by this Agreement 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 a Participating Investor to complete the offer and
sale of the Registrable Securities covered thereby; provided, that, with respect
to an Offering Registration for the initial public offering of the Common Stock
of the Company in which Barington is the lead or co-lead underwriter, such
registration statement shall be kept effective for two (2) years. Subject to the
preceding sentence, the Company shall in no event be required to keep any such
registration or qualification in effect for a period in excess of six (6) months
from the date on which the Investors are first free to sell such Registrable
Securities taking into account any lock-up agreed to by the Investors; provided,
however, that, if the Company is required to keep any such registration or
qualification in effect with respect to securities other than the Registrable
Securities beyond such period, the Company shall keep such registration or
qualification in effect as it relates to the Registrable 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 1,
the Company shall furnish to the Participating Investors such reasonable 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 Securities Act and the rules and regulations
promulgated thereunder, and such other documents, as the Participating Investors
may reasonably request to facilitate the disposition of the Registrable
Securities included in such registration.
f. In the event of a registration pursuant to the provisions of this Section 1,
furnish, at the request of any Participating Investor, on the date that such
Registrable Securities are delivered to the underwriters for sale in connection
with a registration pursuant to this Section 1, 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 requesting
Participating Investors and (ii) a letter dated such date, from the
-3-
<PAGE> 4
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 requesting Participating
Investors. 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 1,
the Company and the Participating Investors 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, with any underwriter who acquires any Registrable
Securities.
h. The Company agrees that, until all the Registrable Securities have been sold
under a registration statement or pursuant to Rule 144 promulgated under the
Securities 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 Registrable Securities to sell such securities under Rule 144 promulgated
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 Piggy Back registration rights
to any persons without the written consent of the Investors (as provided for
herein), provided, however, that the Company may grant Piggy Back registration
rights to other persons so long as such rights are pari passu or subordinate to
the rights of the Investors and, further provided, however, that nothing herein
contained shall prohibit the Company from granting to any person demand
registration rights.
j. If, at any time after giving written notice of its intention
to register any Common Stock and prior to the effective date of any Offering
Registration, the Company shall determine for any reason not to register the
Common Stock, the Company shall give written notice to the Participating
Investors and, thereupon, shall be relieved of its obligation to register any
Registrable Securities in connection with such abandoned Offering Registration.
2. Indemnification and Contribution.
a. Subject to the conditions set forth below, the Company agrees
to indemnify and hold harmless the Investors, their respective 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 Securities
Act or 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, without limitation, reasonable attorneys'
fees and any and all 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 Registrable Securities,
or (B) in any application or other document or communication (in this Section 2
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 Registrable
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
-4-
<PAGE> 5
in conformity with written information furnished to the Company with respect to
any Investors 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 representation, warranty, covenant, or agreement of the
Company contained in this Agreement or any agreement pursuant to which the
Registerable Securities were issued. The foregoing agreement to indemnify shall
be in addition to any liability the Company may otherwise have to the Investors.
If any action is brought against any Investor or any of their
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 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 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 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 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 2 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 agrees promptly to notify all the Investors
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 preliminary prospectus, prospectus, registration statement, or
amendment or supplement thereto, or any application relating to any sale of any
Registrable Securities.
b. The Participating Investors agree 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 Registrable Securities
held by such Participating Investor, each other 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 its or 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, 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 such Participating Investor by or on
behalf of such Participating Investor 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 any Participating
Investor pursuant to this Section 2(b), such Participating Investor shall have
the rights and duties given to the Company, and the
-5-
<PAGE> 6
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), including
any and all of the procedures set forth in Section 2(a).
c. To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 2(a) or
2(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 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 its or their
respective counsel), as one entity, and the Participating Investors, 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 such as the
relative fault of the Company and such Participating Investors 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 Participating
Investors, 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 Investors agree that it would
be unjust and inequitable if the respective obligations of the Company and the
Investors for contribution were determined by pro rata or per capita allocation
of the aggregate losses, liabilities, claims, damages, and expenses (even if the
Investors 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(c). 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(c),
each person, if any, who controls an 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 an Investor or control person
shall have the same rights to contribution as such Investor or control person
and each 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, 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(c). Anything in this Section 2(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 2(c) is
intended to supersede any right to contribution under the Securities Act, the
Exchange Act or otherwise.
3. General.
a. Amendments and Waivers. No amendment or waiver of any term or
provision of this Agreement shall be effective unless in writing signed by the
party to be charged; provided, however, that the Investors holding a majority of
the outstanding Registrable Securities under this Agreement may amend or waive
this Agreement and such amendment or waiver shall be effective against all of
the Investors. 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.
-6-
<PAGE> 7
b. Notices. Except as otherwise provided in this Agreement,
notices and other communications under this Agreement shall be 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 Investors at the addresses set forth for each Investor on the
signature page of this Agreement.
The Company and the Investor, by written notice given in accordance with this
Section 3(b), may change the address to which such notice or other
communications are to be sent.
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 by the
Company and the consummation by the Company 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;
iv. 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 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, (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), 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
-7-
<PAGE> 8
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 Registerable Securities or the securities which
were convertible for, or exchangeable into the Registerable Securities were
issued.
d. Investor Representation. Each of the Investors represents and
warrants to the Company that:
i. Such 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
such Investor and (assuming the due authorization, execution and delivery hereof
by the Company) constitutes a valid and binding obligation of such Investor,
enforceable against such 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 such 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 such 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. Each 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 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, provided further that such holders are given reasonable notice
of such registration. Without limiting the foregoing, it is expressly agreed
that the provisions of this Section shall not (i) apply to any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock acquired by any 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
-8-
<PAGE> 9
conveyed by any 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, combinations and other
recapitalizations). 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 and inure to the
benefit of and be enforceable by the parties hereto and the respective
successors and assigns of the parties hereto.
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 hereof.
v. This Agreement may be executed in one or more
counterparts, each of which when so executed and delivered 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 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,
-9-
<PAGE> 10
INC.
By: _______________________________
Name: Robert G. Solomon
Title: Chief Executive Officer
INVESTORS
Address: By:
Name:
Title:
Fax No.:
Address: By:
Name:
Title:
Fax No.:
Address: By:
Name:
Title:
Fax No.:
Address: By:
Name:
Title:
Fax No.:
Address: By:
Name:
Title:
Fax No.:
-10-
<PAGE> 1
EXHIBIT 10.12
EMPLOYMENT AND NONCOMPETITION AGREEMENT
(Robert G. Solomon)
THIS EMPLOYMENT AND NONCOMPETITION AGREEMENT ("Agreement") is entered
into to be effective March 26, 1998 ("Effective Date"), between U.S. ONLINE
COMMUNICATIONS L.L.C., a Washington limited liability company ("Company"), and
ROBERT G. SOLOMON ("Employee"). U.S. OnLine Communications, Inc., a Delaware
corporation (the "Corporation") is also executing this Agreement to confirm that
it will be bound by the terms and conditions contained herein upon the closing
of the Asset Sale (as defined below).
WHEREAS, the Company has requested Employee to serve as, and Employee
has agreed to serve as, the Chief Executive Officer ("CEO") of the Company; and
WHEREAS, the Company and Employee desire to enter into this Agreement to
formally set forth the terms and conditions under which Employee will be
employed by the Company.
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties contained herein and other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Company and Employee agree as follows:
1. Duties and Responsibilities.
a. Position. The Company and Employee agree that, subject to the terms
and conditions of this Agreement, the Company will employ Employee and Employee
will serve as an employee and as the Company's CEO. The Company shall endeavor
to cause the Employee to be elected to the Company's Board of Managers and as
the Chairman of the Board, and, in the sole discretion of the Board of Managers,
may be elected to the board of, and/or be appointed as an executive officer of,
affiliates and subsidiaries of the Company (including U.S. On-Line Cable,
L.L.C.), without the necessity for an amendment, modification to or additional
compensation under this Agreement.
b. Duties. Employee shall perform the following duties, and shall have
the following authority, and such other duties and authority as may from time to
time be assigned to him by the Board of Managers of the Company in their
reasonable discretion.
i. Corporate Development. Employee will be responsible for
assisting the President and Chief Financial Officer ("CFO") with acquisition and
merger opportunities consistent with the Company's business plan.
ii. Developing the Company's Infrastructure. Employee will be
responsible for assisting the President and CFO in streamlining and
strengthening the Company's systems and procedures, including systems and
procedures for processing of material information, completing organizational
charts and job descriptions, and human resource procedures.
iii. Finance. Employee will be responsible for assisting the
President and CFO in identifying and procuring new sources of capital and
credit.
iv. Development of General Managers. Employee will be responsible
for assisting the President and other Company officers/managers in hiring,
managing, training and developing General Managers for the Company's affiliates,
markets or divisions.
v. Sales/Marketing. Employee will be responsible for: (a)
assisting the Vice
<PAGE> 2
President of Sales in meeting sales quotas; (b) assisting the President and Vice
President of Sales in drafting and implementing strategy; (c) drafting and
implementing budgets; (d) assisting in locating and executing key strategic
alliances and ventures for the Company's products and services; and (e)
assisting the Vice President of Sales with development of new products and
services for the Company's subscribers.
vi. Customer Service Bureau. Employee will be responsible for
assisting the CFO, Vice President of Operations and the Manager of the Customer
Service Bureau ("CSB") in continuing to improve CSB operations and with the
development of CTM, billing platforms, training programs, and overall systems
and procedures.
c. Extent of Services.
i. Except as provided in this Agreement or otherwise permitted by
the Board of Managers of the Company, Employee shall devote his full time,
attention and energies to the business of the Company and to the performance of
his duties as described above. Employee will use his full time, attention and
energies to promote the interests and welfare of the Company.
ii. Employee may participate in other businesses as a passive
investor, provided that Employee shall not, without the prior approval of a
majority of the Board of Managers of the Company (other than Employee if he is
serving as a manager): (a) actively participate in the operation or management
of such businesses; or (b) make or maintain any investment in any entity with
which the Company has a commercial relationship of any kind, including that of
lessor, partner, investor, vendor, supplier, consultant or otherwise, or which
is in competition with the Company. The following exceptions apply to the
restrictions on Employee's activities in the preceding sentence: (1) Employee
may invest in the securities of any publicly traded companies so long as such
investments do not constitute more than five percent (5%) of the outstanding
voting securities of any such company, (2) Employee may continue to serve as a
principal, broker and/or officer of real estate development companies in the
State of Texas, as long as such activities do not interfere with the performance
of his duties under this Agreement and (3) Employee may continue to own
interests in and participate in the management of the entities which do business
with the Company under the related party agreements described on Schedule 1 to
this Agreement, as long as any material amendments to such agreements, and any
new agreements with such entities, are approved by a majority of the Board of
Managers.
2. Term of Employment.
a. Definitions. For the purposes of this Agreement the following terms
shall have the following meanings:
i. "Termination For Cause" shall mean termination by Company of
Employee's employment with Company (A) by reason of Employee's dishonesty
towards, fraud upon, or deliberate injury or attempted injury to, Company, or
(B) by reason of Employee's material breach of this Agreement which breach
remains uncured thirty (30) days after written notice of such material breach.
ii. "Termination Other Than For Cause" shall mean termination by
Company of Employee's employment with Company (other than in a Termination for
Cause) and shall include constructive termination of Employee's employment by
reason of material breach of this Agreement by Company; such termination shall
only be effective if Company has failed to cure such material breach within
thirty days after written notice from Employee to Company of a material breach.
iii. "Voluntary Termination" shall mean termination by Employee
of Employee's employment by Company other than (a) constructive termination as
described in Section 2.a.ii, (b) "
<PAGE> 3
Termination Upon a Change in Control," and (c) termination by reason of
Employee's death or disability as described in Sections 2.e and 2.f.
iv. "Termination Upon a Change in Control" shall mean a
termination by Employee of Employee's employment with Company within 120 days
following a "Change in Control."
v. "Change in Control" shall mean (A) the time that Company first
determines that any person and all other persons who constitute a group (within
the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934
("Exchange Act")) have acquired direct or indirect beneficial ownership (within
the meaning of Rule 13d-3 under the Exchange Act) of thirty-five percent (35%)
or more of Company's outstanding securities, or (B) a sale of all or
substantially all of the assets of the Company. Neither the Asset Sale nor the
IPO shall not constitute a Change In Control.
b. Initial Term. The term of employment of Employee by Company shall be
for a period of five (5) years beginning with the Effective Date ("Initial
Term"), unless terminated earlier pursuant to this Section 2. At any time prior
to the expiration of the Initial Term, Company and Employee may by mutual
written agreement extend Employee's employment under the terms of this Agreement
for such additional periods as they may agree. If Employee's employment by the
Company continues after the expiration of the term of this Agreement, the
Agreement shall continue to govern the parties' relationship, except that
Employee's employment may thereafter be terminated by either party at any time
for any or no reason upon sixty (60) days prior notice to the other party.
c. Termination For Cause. Termination For Cause may be effected by
Company at any time during the term of this Agreement after the occurrence of an
event which constitutes Termination For Cause and shall be effected by written
notification to Employee. Upon Termination For Cause, Employee shall promptly be
paid all accrued salary, bonus compensation to the extent earned, vested
deferred compensation (other than pension plan or profit sharing plan benefits
which will be paid in accordance with the applicable plan), any benefits under
any plans of the Company in which Employee is a participant to the full extent
of Employee's rights under such plans, accrued vacation pay and any appropriate
business expenses incurred by Employee in connection with his duties hereunder,
all to the date of termination, but Employee shall not be paid any other
compensation or reimbursement of any kind, including without limitation,
severance compensation. If at the time of a Termination For Cause Employee owes
any amounts to Company, such amounts shall be offset against the amounts payable
to Employee under the preceding sentence.
d. Termination Other Than For Cause. Notwithstanding anything else in
this Agreement, Company may effect a Termination Other Than For Cause at any
time upon giving written notice to Employee of such termination. Upon any
Termination Other Than For Cause, Employee shall promptly be paid all accrued
salary, bonus compensation to the extent earned, vested deferred compensation
(other than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of the
Company in which Employee is a participant to the full extent of Employee's
rights under such plans (including accelerated vesting of any awards granted to
Employee under any of the Company's stock option plans and stock award plans),
accrued vacation pay and any appropriate business expenses incurred by Employee
in connection with his duties hereunder, all to the date of termination, and all
severance compensation provided in Section 4.b, but no other compensation or
reimbursement of any kind. If at the time of a Termination Other Than For Cause
Employee owes any amounts to Company, such amounts shall be offset against the
amounts payable to Employee under the preceding sentence.
e. Termination by Reason of Disability. If, during the term of this
Agreement, Employee, in the reasonable judgment of the Board of Managers of
Company, has failed to perform his duties under
<PAGE> 4
this Agreement on account of illness or physical or mental incapacity, and such
illness or incapacity continues for a period of more than four (4) consecutive
months, Company shall (to the extent permitted by applicable law) have the right
to terminate Employee's employment hereunder by written notification to Employee
and payment to Employee of all accrued salary, bonus compensation to the extent
earned, vested deferred compensation (other than pension plan or profit sharing
plan benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of the Company in which Employee is a participant to
the full extent of Employee's rights under such plans, accrued vacation pay and
any appropriate business expenses incurred by Employee in connection with his
duties hereunder, all to the date of termination, with the exception of medical
and dental benefits which shall continue through the expiration of this
Agreement, but Employee shall not be paid any other compensation or
reimbursement of any kind, including without limitation, severance compensation.
If at the time of a Termination By Reason of Disability Employee owes any
amounts to Company, such amounts shall be offset against the amounts payable to
Employee under the preceding sentence.
f. Death. In the event of Employee's death during the term of this
Agreement, Employee's employment shall be deemed to have terminated as of the
last day of the month during which his death occurs and Company shall promptly
pay to his estate or such beneficiaries as Employee may from time to time
designate all accrued salary, bonus compensation to the extent earned, vested
deferred compensation (other than pension plan or profit sharing plan benefits
which will be paid in accordance with the applicable plan), any benefits under
any plans of the Company in which Employee is a participant to the full extent
of Employee's rights under such plans, accrued vacation pay and any appropriate
business expenses incurred by Employee in connection with his duties hereunder,
all to the date of termination, but Employee's estate shall not be paid any
other compensation or reimbursement of any kind, including without limitation,
severance compensation. If at the time of Employee's Death Employee owes any
amounts to Company, such amounts shall be offset against the amounts payable to
Employee under the preceding sentence.
g. Voluntary Termination. In the event of a Voluntary Termination,
Company shall promptly pay all accrued salary, bonus compensation to the extent
earned, vested deferred compensation (other than pension plan or profit sharing
plan benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of the Company in which Employee is a participant to
the full extent of Employee's rights under such plans, accrued vacation pay and
any appropriate business expenses incurred by Employee in connection with his
duties hereunder, all to the date of termination, but no other compensation or
reimbursement of any kind, including without limitation, severance compensation.
If at the time of a Voluntary Termination Employee owes any amounts to Company,
such amounts shall be offset against the amounts payable to Employee under the
preceding sentence.
h. Termination Upon a Change in Control. In the event of a Termination
Upon a Change in Control, Employee shall immediately be paid all accrued salary,
bonus compensation to the extent earned, vested deferred compensation (other
than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of the
Company in which Employee is a participant to the full extent of Employee's
rights under such plans (including accelerated vesting of any awards granted to
Employee under any of the Company's stock option plans and stock award plans),
accrued vacation pay and any appropriate business expenses incurred by Employee
in connection with his duties hereunder, all to the date of termination, and all
severance compensation provided in Section 4.a, but no other compensation or
reimbursement of any kind. If at the time of a Termination Upon A Change In
Control Employee owes any amounts to Company, such amounts shall be offset
against the amounts payable to Employee under the preceding sentence.
Notwithstanding the foregoing, a Termination Upon A Change In Control shall not
be deemed to have occurred upon the closing of the Asset Sale (as defined
below), upon the closing of the IPO, nor upon the exercise of any warrants or
options granted to parties prior to or simultaneous with the IPO.
<PAGE> 5
i. Notice of Termination. Other than a Termination For Cause, Company
may effect a termination of this Agreement pursuant to the provisions of this
Section 2 upon giving thirty (30) days written notice to Employee of such
termination. Company may effect a Termination For Cause immediately without any
prior notice other than the notice and cure period for material breaches.
Employee may effect a termination of this Agreement pursuant to the provisions
of this Section 2 upon giving thirty (30) days written notice to Company of such
termination.
3. Salary, Benefits and Bonus Compensation. As compensation for services to be
rendered by Employee under this Agreement, the Company shall compensate Employee
as follows:
a. Base Salary. As payment for the services to be rendered by Employee
as provided in Section 1 and subject to the terms and conditions of Section 2,
Company agrees to pay to Employee a "Base Salary" for the twelve (12) calendar
months beginning the Effective Date at the rate of $150,000 per annum, prorated
for any partial year. The Company shall pay Employee's Base Salary in
installments in accordance with the Company's payroll policy for other
employees. Employee's Base Salary shall be reviewed annually by the Board of
Managers. The Corporation (as defined below) contemplates that it will cause an
initial public offering of the Corporation's securities to be completed after
the Asset Sale and on or before August 15, 1998 (the "IPO"). Notwithstanding the
foregoing, Employee has agreed to be paid a reduced Base Salary of $130,000 per
annum until the effective date of the IPO.
b. Bonuses. Employee will be eligible for an annual bonus of up to fifty
percent (50%) of his then current base salary, subject to his continued
employment with the Company during the entire calendar year to which the bonus
applies. The amount of Employee's bonus will be determined by the Board of
Managers, based upon the Company's performance each year, and will be tied to
both qualitative and quantitative performance standards to be established by the
Board of Managers at the beginning of the calendar year. The Board of Managers
will provide written performance standards to Employee each year during the term
of this Agreement, not later than January 30 of the applicable year. Employee's
1998 bonus will be based on factors to be established by the Board of Managers
and provided to Employee.
c. Additional Benefits. During the term of this Agreement, Employee
shall be entitled to the following fringe benefits:
i. Employee Benefits. Employee shall be eligible to participate
in such of Company's benefits and deferred compensation plans as are now
generally available or later made generally available to executive officers of
the Company, including, without limitation, Company's stock option plans, profit
sharing plans, annual physical examinations, dental and medical plans, personal
catastrophe and disability insurance, financial planning, retirement plans and
supplementary executive retirement plans, if any.
ii. Vacation. Employee shall be entitled to three (3) weeks of
vacation during each year during the term of this Agreement and any extensions
thereof, prorated for partial years.
iii. Reimbursement for Expenses. During the term of this
Agreement, Company shall reimburse Employee for reasonable and properly
documented out-of-pocket business and/or entertainment expenses incurred by
Employee in connection with his duties under this Agreement.
d. Assignment to Corporation. The Company and Employee currently
contemplate that the Company will sell all or substantially all of its assets
(the "Asset Sale") to the Corporation. If the Asset Sale occurs, the Company
shall as a condition precedent to the Asset Sale, (i) require that the Company's
rights and obligations under this Agreement be assigned to the Corporation, and
(ii) that the Corporation
<PAGE> 6
assume all of the Company's obligations and liabilities under this Agreement.
Employee hereby consents to the assignment of this Agreement to the Corporation
upon the closing of the Asset Sale.
4. Severance Compensation.
a. Severance Compensation in the Event of a Termination Upon a Change in
Control. In the event Employee's employment is terminated in a Termination Upon
a Change in Control, Employee shall be paid as severance compensation his Base
Salary (at the rate payable at the time of such termination), for a period of
the lesser of the remaining portion of the Initial Term or eighteen (18) months
from the date of such termination. Employee is under no obligation to mitigate
the amount owed Employee pursuant to this Section 4.a by seeking other
employment or otherwise. Notwithstanding anything in this Section 4.a to the
contrary, Employee may in Employee's sole discretion, by delivery of a notice to
Company within thirty (30) days following a Termination Upon a Change in
Control, elect to receive severance compensation as a lump sum severance payment
by bank cashier's check equal to the present value of the flow of cash payments
that would otherwise be paid to Employee pursuant to this Section 4.a discounted
at a rate of 8% per annum. Employee shall also be entitled to an accelerated
vesting of any awards granted to Employee under the Company's stock option plans
and any other equity rights or participation plans under which Employee is a
participant; such accelerated vesting shall occur regardless of the terms and
conditions contained in any such plans. Employee shall continue to accrue
retirement benefits (if any) and shall continue to enjoy any benefits under any
plans of the Company in which Employee is a participant to the full extent of
Employee's rights under such plans, including any perquisites provided under
this Agreement, though the lesser of the remaining term of this Agreement or
twelve (12) months from the date of termination under this subsection; provided,
however, that the benefits under any such plans of the Company in which Employee
is a participant, including any such perquisites, shall cease upon re-employment
by a new employer.
b. Severance Compensation in the Event of a Termination Other Than for
Cause. In the event Employee's employment is terminated in a Termination Other
Than for Cause, Employee shall be paid as severance compensation his Base Salary
(at the rate payable at the time of such termination), for a period of the
lesser of the remaining portion of the Initial Term or twelve (12) months from
the date of such termination. Employee is under no obligation to mitigate the
amount owed Employee pursuant to this Section 4.b by seeking other employment or
otherwise. Employee shall also be entitled to an accelerated vesting of any
awards granted to Employee under the Company's stock option plans and any other
equity rights or participation plans under which Employee is a participant; such
accelerated vesting shall occur regardless of the terms and conditions contained
in any such plans. Employee shall continue to accrue retirement benefits (if
any) and shall continue to enjoy any benefits under any plans of the Company in
which Employee is a participant to the full extent of Employee's rights under
such plans, including any perquisites provided under this Agreement,, though the
lesser of the remaining term of this Agreement or twelve (12) months from the
date of termination under this subsection; provided, however, that the benefits
under any such plans of the Company in which Employee is a participant,
including any such perquisites, shall cease upon re-employment by a new
employer.
c. No Severance Compensation Upon Other Termination. In the event of a
Voluntary Termination, Termination For Cause, termination by reason of
Employee's disability pursuant to Section 2.e, or termination by reason of
Employee's death pursuant to Section 2.f, Employee or his estate shall not be
paid any severance compensation.
d. Limit on Aggregate Compensation Upon a Change in Control.
Notwithstanding anything else in this Agreement, solely in the event of a
Termination Upon a Change in Control pursuant to Section 2.h, the amount of
severance compensation paid to Employee under Sections 2 and 4 or otherwise, but
exclusive of any payments to Employee in respect of any stock options or
warrants then held by Employee
<PAGE> 7
(or any compensation deemed to be received by Employee in connection with the
exercise of any stock options or warrants at any time) or by virtue of
Employee's exercise of a limited right under any stock option plan upon a Change
in Control, shall not include any amount that Company is prohibited from
deducting for federal income tax purposes by virtue of Section 280G of the
Internal Revenue Code or any successor provision.
5. Indemnification. The Company shall defend, indemnify and hold Employee
harmless from any and all liabilities, obligations, claims or expenses which
arise in connection with or as a result of Employee's service as an officer,
manager, director or employee of the Company to the fullest extent allowed by
the Company's organizational documents; provided, that the Company shall not be
obligated to defend, indemnify or hold Employee harmless from any liabilities,
obligations, claims or expenses which result from or are related to Employee
having committed an act of dishonesty, obtained any benefit of money or other
property to which he was not entitled, engaged in any willful misconduct or
engaged in behavior that is grossly negligent.
6. Noncompetition and Confidentiality.
a. Fiduciary Obligations. During his employment hereunder, Employee
shall comply with his fiduciary obligations as an officer and, if elected, as a
member of the Board of Managers of the Company.
b. Noncompete and Nonsolicitation. During his employment hereunder and
for a period of twelve (12) months following the termination or other cessation
of his employment hereunder, Employee shall not, directly or indirectly, as a
director, officer, employee, owner, partner, agent, consultant, lessor, creditor
or otherwise, for any person, firm or entity, in any of the counties of the
states of the United States, engage in any of the following activities:
i. solicit or attempt to persuade any person or entity that was a
customer of the Company during Employee's employment hereunder to terminate or
rescind its business or contractual relationship with the Company;
ii. solicit for employment any employee of the Company or attempt
to persuade or entice any such employee to terminate his or her employment with
the Company; or
iii. engage or participate in the business of selling, installing
or servicing telecommunications or cable or broadcast television products,
services or software, or in any other business engaged in by the Company at any
time during Employee's employment hereunder.
The restrictions contained in this Section 6.b shall not thereafter apply if the
Company materially breaches this Agreement and fails to cure such breach within
thirty (30) days following receipt of written notice of such breach.
c. Confidentiality. Employee shall not, during his employment hereunder
or at any time thereafter, use for his own purposes or disclose to any other
person or entity any "Confidential Information" (defined below) concerning the
Company, its affiliates or any of their business operations, except as may be
consistent with his duties hereunder or as may be required by order of a court
of competent jurisdiction. "Confidential Information" means any information,
formula, pattern, compilation, program, device, method, technique, customer
list, or process concerning the Company or its business or customers: (i) that
derives independent economic value, actual or potential, from not being
generally known to, and not being readily ascertainable by proper means by,
other persons who can obtain economic value from its disclosure or use; or (ii)
the disclosure of which would be harmful to the interests of the
<PAGE> 8
Company.
d. Proprietary Rights. Employee hereby assigns and transfers to Company
all of his proprietary interest in any device, design, machine, practice,
process, method, product, literary composition, algorithm, or development,
innovation or improvement to existing Confidential Information (collectively,
the "Works") that is developed, conceived or created, in whole or in part,
during the term of this Agreement regardless of whether the Work is developed,
created or conceived while at Company facilities or another location or during
or after normal business hours; provided, however, that for the purposes of this
Agreement, Works shall only be deemed to include any of the foregoing that (i)
in any way relate to the present or anticipated business, activities or research
and development work of the Company, (ii) result from or are related to any work
performed for the Company, or (iii) were developed, created or conceived
utilizing the Company's time, equipment, supplies, facilities, materials,
software, resources or other Confidential Information. Any Work that involves
the creation of any copyrightable work shall be considered a "work made for
hire," to the maximum extent permitted by law. If any copyrightable work is not
considered a "work made for hire," Employee, without further consideration,
hereby assigns and transfers all copyrights in the Work to Company. Employee
recognizes that all Works shall be the exclusive property of the Company.
Employee agrees to assist the Company in obtaining any patents, copyrights or
other form of proprietary rights protection on any Work, to sign all documents
and take other actions as the Company may reasonably request to obtain such
protection for Company, and to assist Company in protecting the Works against
infringement by other parties. Employee appoints the executive officers of the
Company to act as his agent and attorney-in-fact to perform any act necessary to
obtain any patents, copyrights or other form of proprietary protection covering
the Works. Employee represents that there are no Works owned wholly or in part
by him that are to be excluded from the scope of this Agreement. Employee also
agrees to disclose to the Company, in confidence, (A) all Works that Employee
develops, conceives or creates while employed by the Company and (B) all patent
or copyright applications filed by Employee within one (1) year after
termination of employment with the Company.
e. Damages. Employee agrees that the provisions of this Section 6 may be
enforced by temporary or permanent injunction; the Company shall not be required
to post any bond or security in any such temporary or permanent injunction
proceeding. The right to such injunctive relief shall be in addition to and not
in place of any further remedies to which the Company may be entitled.
f. Enforcement. Employee agrees that the provisions of this Section 6
are reasonable. However, if any court of competent jurisdiction determines that
any provision within this Section 6 is unreasonable in any respect, the parties
intend that this Section 6 should be enforced to the fullest extent allowed by
such court.
g. Severable Units. Each county of each state covered by the covenant
not to compete set forth in Section 6.b, each of such states and each month
covered by this covenant not to compete shall be deemed a severable unit and
should any court determine that the inclusion of all such counties, states or
months would render such undertaking unreasonable or unenforceable for any
reason, those units which are necessary, in the judgment of the court, to be
deleted in order to render such an undertaking reasonable and enforceable shall
be deemed free of such noncompete and nonsolicitation undertaking but such
undertaking shall remain in full force and effect as to every other unit of
territory and time.
h. Survival. This Section 6 will survive the termination of this
Agreement except as otherwise indicated in Section 6.b.
7. Arbitration. Any dispute arising out of or relating to this Agreement shall
be resolved by arbitration before a single, neutral arbitrator in Austin, Texas,
in accordance with the Employment Dispute Resolution Rules of the American
Arbitration Association; provided, however, that nothing herein shall
<PAGE> 9
prevent a party from seeking injunctive relief to enforce compliance with this
Section 7 or Section 6, or to enforce any ruling of the arbitrator. The results
of the arbitration shall be binding on the parties. All reasonable costs of the
arbitration, including attorney's fees, shall be paid by the non-prevailing
party.
8. Notices. All notices, requests, consents and other communications required or
provided for in this Agreement shall be in writing and shall be deemed to be
given when: (a) delivered in person; (b) three days following deposit in the
U.S. mail for first class registered or certified mail with postage prepaid; (c)
delivered by overnight receipted courier service; or (d) sent by confirmed
facsimile transmission. Notices shall be addressed to the party at the address
set forth below, or such other addresses as may hereafter be designated in
writing by the party.
If to the Company, to:
U.S. OnLine
Attn: Mr. Don Barlow, President
8307 Shoal Creek Blvd.
Austin, Texas 78757
Facsimile: (512) 451-8732
With a copy to:
Stahl, Martens & Bernal, L.L.P.
Attn: Mr. Brent G. Stahl
7320 N. MoPac, Suite 211
Austin, Texas 78731
Facsimile: (512) 346-2712
If to Employee:
Mr. Robert G. Solomon
10805 Love Bird Cove
Austin, Texas 78730
Facsimile: (512) 453-6579
9. Miscellaneous.
a. Waiver of Breach. The waiver by a party of a breach of any provision
of this Agreement shall not operate or be construed as a waiver of any
subsequent breach
b. Assignment. Neither party may assign its rights or delegate its
duties hereunder without the prior written consent of the other party; provided,
however, the Company shall assign this Agreement to the Corporation upon the
closing of the Asset Sale, and (i) all references herein to the Company shall
thereafter mean the Corporation, and (ii) all references herein to the Board of
Managers shall thereafter mean the Board of Directors of the Corporation.
c. Entire Agreement. This Agreement and the transaction and documents
referred to herein contain the entire understanding of the parties with regard
to the subject matter of this Agreement and may only be changed by written
agreement signed by both parties. Any and all prior discussions, negotiations,
commitments and understandings related thereto are merged herein. Without
limiting the generality of the foregoing, the Employment Agreement dated as of
September 8, 1997 between the Company and Employee is hereby superseded in its
entirety, and is of no further force or effect. Without limiting the generality
of the foregoing, Employee explicitly agrees that the portions of the September
8, 1997 employment agreement regarding certain options to acquire equity
interests and regarding certain
<PAGE> 10
additional restricted membership interests are null and void and of no further
force and effect.
d. Binding effect. This Agreement shall be binding upon and inure to the
benefit of the respective parties, and their legal representatives, successors,
heirs, and permitted assigns.
e. Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of Texas, without giving
effect to principles and provisions thereof relating to conflict or choice of
laws and irrespective of the fact that any one of the parties is now or may
become a resident of a different state.
f. Validity. If any term of this Agreement shall be invalid, illegal, or
unenforceable, in whole or in part, the validity of any of the other terms of
this Agreement shall not in an way be affected thereby.
g. Survival of Terms. The applicable provisions of Sections 2, 4, 5, 6,
7 , 8, and 9 shall survive any termination of this Agreement.
<PAGE> 11
IN WITNESS WHEREOF, the Company and Employee have executed this Agreement to be
effective as of the date first above written.
COMPANY:
U.S. OnLine Communications L.L.C.
By: ________________________________
John Orehek, Manager
Date Signed: _________________________
By: ________________________________
Don Barlow, President
Date Signed: _________________________
EMPLOYEE:
-----------------------------------
Robert G. Solomon
Date Signed: _________________________
CORPORATION
U.S. OnLine Communications, Inc.
By: ________________________________
Print Name:__________________________
Print Title:___________________________
Date Signed: _________________________
(The Corporation is signing this Agreement for the
purpose of agreeing to be bound by the terms and
conditions contained herein upon the closing of the
Asset Sale)
<PAGE> 12
Schedule 1
Related Party Agreements
RIGHT-OF-ENTRY CONTRACTS:
Employee has a beneficial ownership interest in two properties that are served
by The Company. The properties are Highpoint Apartments and Springwood
Apartments, which are located in San Antonio, Texas and have approximately 260
and 176 units respectively. The properties are owned by Highpoint Holdings, Ltd.
and Springwood Holdings, Ltd. Employee serves as the Vice President of Regional
Holdings, Inc., the General Partner of both partnerships. In addition, Employee
is a limited partner in Highpoint Holdings, Ltd. Both properties are
furthermore managed by CSA Management, Inc., a company which is partially owned
by Employee.
OFFICE LEASE AND SUBLEASE:
The Company currently leases 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. The General Partner of ZAJA Holdings, Ltd. is Austin
Holdings, Inc., a corporation owned by Employee. In addition, Employee is a
limited partner in ZAJA Holdings, Ltd. The Company has also entered into a
sublease with CSA Management, Inc., a company partially owned by Employee. The
lease has a thirty-six (36) month term and a rental rate of approximately $13.20
(triple net).
OTHER MATTERS AS OF THE DATE OF THIS AGREEMENT:
Limited Guaranty of Employee to Silicon Valley Bank for additional advances made
under new credit facility.
Deferred Salary of approximately $50,000.
Deferred Bonus of approximately $75,000.
Personal Guaranty of DTI payables incurred since 12/15/97 totaling approximately
$18,600.
Personal Guaranty of outstanding payable to CSA Management, Inc. of $14,120.
CSA Outstanding payable of approx. $14,120 for rent, CAM, telephone charges and
other miscellaneous expenses.
Outstanding reimbursable expenses payable to Employee totaling approximately
$22,000.
<PAGE> 1
EXHIBIT 10.13
EMPLOYMENT AND NONCOMPETITION AGREEMENT
(Donald E. Barlow)
THIS EMPLOYMENT AND NONCOMPETITION AGREEMENT ("Agreement") is entered into to be
effective March 26, 1998 ("Effective Date"), between U.S. ONLINE COMMUNICATIONS,
L.L.C., a Washington limited liability company ("Company") and DONALD E. BARLOW
("Employee"). U.S. OnLine Communications, Inc., a Delaware corporation (the
"Corporation") is also executing this Agreement to confirm that it will be bound
by the terms and conditions contained herein upon the closing of the Asset Sale
(as defined below).
WHEREAS, the Company has requested Employee to serve as, and Employee
has agreed to serve as, the President and Chief Financial Officer ("CFO") of the
Company; and
WHEREAS, the Company and Employee desire to enter into this Agreement to
formally set forth the terms and conditions under which Employee will be
employed by the Company.
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties contained herein and other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Company and Employee agree as follows:
1. Duties and Responsibilities.
a. Position. The Company and Employee agree that, subject to the terms
and conditions of this Agreement, the Company will employ Employee and Employee
will serve as an employee and as the Company's President and CFO. Employee may
also be elected to the Company's Board of Managers, and, in the sole discretion
of the Board of Managers, may be elected to the board of, and/or be appointed as
an executive officer of, affiliates and subsidiaries of the Company (including
U.S. On-Line Cable, L.L.C.), without the necessity for an amendment,
modification to or additional compensation under this Agreement.
b. Duties. Employee shall perform the following duties, and shall have
the following authority, and such other duties and authority as may from time to
time be assigned to him by the Board of Managers and the Chief Executive Officer
("CEO") of the Company in their reasonable discretion.
i. Corporate Development. Employee will be responsible for
assisting the CEO with acquisition and merger opportunities consistent with the
Company's business plan.
ii. Developing the Company's Infrastructure. Employee will be
responsible for assisting the CEO in streamlining and strengthening the
Company's systems and procedures, including systems and procedures for
processing of material information, completing organizational charts and job
descriptions, and human resource procedures.
iii. Finance. Employee will be responsible for assisting the CEO
in identifying and procuring new sources of capital and credit.
iv. Development of General Managers. Employee will be responsible
for assisting the CEO and other Company officers/managers in hiring, managing,
training and developing General Managers for the Company's affiliates, markets
or divisions.
v. Sales/Marketing. Employee will be responsible for: (a)
assisting the Vice President of Sales in meeting sales quotas; (b) assisting the
CEO and Vice President of Sales in drafting and implementing strategy; (c)
drafting and implementing budgets; (d) assisting in locating and executing
<PAGE> 2
key strategic alliances and ventures for the Company's products and services;
and (e) assisting the Vice President of Sales with development of new products
and services for the Company's subscribers.
vi. Customer Service Bureau. Employee will be responsible for
assisting the CEO, Vice President of Operations and the Manager of the Customer
Service Bureau ("CSB") in continuing to improve CSB operations and with the
development of CTM, billing platforms, training programs, and overall systems
and procedures.
vii. Other Duties. Employee shall perform such other duties as
the Board of Managers and the CEO may from time to time prescribe.
c. Extent of Services.
i. Except as provided in this Agreement or otherwise permitted by
the Board of Managers of the Company, Employee shall devote his full time,
attention and energies to the business of the Company and to the performance of
his duties as described above. Employee will use his full time, attention and
energies to promote the interests and welfare of the Company.
ii. Employee may participate in other businesses as a passive
investor, provided that Employee shall not, without the prior approval of a
majority of the Board of Managers of the Company (other than Employee if he is
serving as a manager): (a) actively participate in the operation or management
of such businesses; or (b) make or maintain any investment in any entity with
which the Company has a commercial relationship of any kind, including that of
lessor, partner, investor, vendor, supplier, consultant or otherwise, or which
is in competition with the Company. The following exceptions apply to the
restrictions on Employee's activities in the preceding sentence: (1) Employee
may invest in the securities of any publicly traded companies so long as such
investments do not constitute more than five percent (5%) of the outstanding
voting securities of any such company.
2. Term of Employment.
a. Definitions. For the purposes of this Agreement the following terms
shall have the following meanings:
i. "Termination For Cause" shall mean termination by Company of
Employee's employment with Company (A) by reason of Employee's dishonesty
towards, fraud upon, or deliberate injury or attempted injury to, Company, or
(B) by reason of Employee's material breach of this Agreement which breach
remains uncured thirty (30) days after written notice of such material breach.
ii. "Termination Other Than For Cause" shall mean termination by
Company of Employee's employment with Company (other than in a Termination for
Cause) and shall include constructive termination of Employee's employment by
reason of material breach of this Agreement by Company; such termination shall
only be effective if Company has failed to cure such material breach within
thirty days after written notice from Employee to Company of a material breach.
iii. "Voluntary Termination" shall mean termination by Employee
of Employee's employment by Company other than (a) constructive termination as
described in Section 2.a.ii, (b) "Termination Upon a Change in Control," and (c)
termination by reason of Employee's death or disability as described in Sections
2.e and 2.f.
iv. "Termination Upon a Change in Control" shall mean a
termination by Employee of Employee's employment with Company within 120 days
following a "Change in Control."
<PAGE> 3
v. "Change in Control" shall mean (A) the time that Company first
determines that any person and all other persons who constitute a group (within
the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934
("Exchange Act")) have acquired direct or indirect beneficial ownership (within
the meaning of Rule 13d-3 under the Exchange Act) of thirty-five percent (35%)
or more of Company's outstanding securities, or (B) a sale of all or
substantially all of the assets of the Company. Neither the Asset Sale nor the
IPO shall constitute a Change In Control.
b. Initial Term. The term of employment of Employee by Company shall be
for a period of three (3) years and ten (10) days beginning with the Effective
Date ("Initial Term"), unless terminated earlier pursuant to this Section 2. At
any time prior to the expiration of the Initial Term, Company and Employee may
by mutual written agreement extend Employee's employment under the terms of this
Agreement for such additional periods as they may agree. If Employee's
employment by the Company continues after the expiration of the term of this
Agreement, the Agreement shall continue to govern the parties' relationship,
except that Employee's employment may thereafter be terminated by either party
at any time for any or no reason upon sixty (60) days prior notice to the other
party.
c. Termination For Cause. Termination For Cause may be effected by
Company at any time during the term of this Agreement after the occurrence of an
event which constitutes Termination For Cause and shall be effected by written
notification to Employee. Upon Termination For Cause, Employee shall promptly be
paid all accrued salary, bonus compensation to the extent earned, vested
deferred compensation (other than pension plan or profit sharing plan benefits
which will be paid in accordance with the applicable plan), any benefits under
any plans of the Company in which Employee is a participant to the full extent
of Employee's rights under such plans, accrued vacation pay and any appropriate
business expenses incurred by Employee in connection with his duties hereunder,
all to the date of termination, but Employee shall not be paid any other
compensation or reimbursement of any kind, including without limitation,
severance compensation. If at the time of a Termination For Cause Employee owes
any amounts to Company, such amounts shall be offset against the amounts payable
to Employee under the preceding sentence.
d. Termination Other Than For Cause. Notwithstanding anything else in
this Agreement, Company may effect a Termination Other Than For Cause at any
time upon giving written notice to Employee of such termination. Upon any
Termination Other Than For Cause, Employee shall promptly be paid all accrued
salary, bonus compensation to the extent earned, vested deferred compensation
(other than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of the
Company in which Employee is a participant to the full extent of Employee's
rights under such plans (including accelerated vesting of any awards granted to
Employee under any of the Company's stock option plans and stock award plans),
accrued vacation pay and any appropriate business expenses incurred by Employee
in connection with his duties hereunder, all to the date of termination, and all
severance compensation provided in Section 4.b, but no other compensation or
reimbursement of any kind. If at the time of a Termination Other Than For Cause
Employee owes any amounts to Company, such amounts shall be offset against the
amounts payable to Employee under the preceding sentence.
e. Termination by Reason of Disability. If, during the term of this
Agreement, Employee, in the reasonable judgment of the Board of Managers of
Company, has failed to perform his duties under this Agreement on account of
illness or physical or mental incapacity, and such illness or incapacity
continues for a period of more than four (4) consecutive months, Company shall
(to the extent permitted by applicable law) have the right to terminate
Employee's employment hereunder by written notification to Employee and payment
to Employee of all accrued salary, bonus compensation to the extent earned,
vested deferred compensation (other than pension plan or profit sharing plan
benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of the Company in which Employee is a
<PAGE> 4
participant to the full extent of Employee's rights under such plans, accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with his duties hereunder, all to the date of termination, with the
exception of medical and dental benefits which shall continue through the
expiration of this Agreement, but Employee shall not be paid any other
compensation or reimbursement of any kind, including without limitation,
severance compensation. If at the time of a Termination By Reason of Disability
Employee owes any amounts to Company, such amounts shall be offset against the
amounts payable to Employee under the preceding sentence.
f. Death. In the event of Employee's death during the term of this
Agreement, Employee's employment shall be deemed to have terminated as of the
last day of the month during which his death occurs and Company shall promptly
pay to his estate or such beneficiaries as Employee may from time to time
designate all accrued salary, bonus compensation to the extent earned, vested
deferred compensation (other than pension plan or profit sharing plan benefits
which will be paid in accordance with the applicable plan), any benefits under
any plans of the Company in which Employee is a participant to the full extent
of Employee's rights under such plans, accrued vacation pay and any appropriate
business expenses incurred by Employee in connection with his duties hereunder,
all to the date of termination, but Employee's estate shall not be paid any
other compensation or reimbursement of any kind, including without limitation,
severance compensation. If at the time of Employee's Death Employee owes any
amounts to Company, such amounts shall be offset against the amounts payable to
Employee under the preceding sentence.
g. Voluntary Termination. In the event of a Voluntary Termination,
Company shall promptly pay all accrued salary, bonus compensation to the extent
earned, vested deferred compensation (other than pension plan or profit sharing
plan benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of the Company in which Employee is a participant to
the full extent of Employee's rights under such plans, accrued vacation pay and
any appropriate business expenses incurred by Employee in connection with his
duties hereunder, all to the date of termination, but no other compensation or
reimbursement of any kind, including without limitation, severance compensation.
If at the time of a Voluntary Termination Employee owes any amounts to Company,
such amounts shall be offset against the amounts payable to Employee under the
preceding sentence.
h. Termination Upon a Change in Control. In the event of a Termination
Upon a Change in Control, Employee shall immediately be paid all accrued salary,
bonus compensation to the extent earned, vested deferred compensation (other
than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of the
Company in which Employee is a participant to the full extent of Employee's
rights under such plans (including accelerated vesting of any awards granted to
Employee under any of the Company's stock option plans and stock award plans),
accrued vacation pay and any appropriate business expenses incurred by Employee
in connection with his duties hereunder, all to the date of termination, and all
severance compensation provided in Section 4.a, but no other compensation or
reimbursement of any kind. If at the time of a Termination Upon A Change In
Control Employee owes any amounts to Company, such amounts shall be offset
against the amounts payable to Employee under the preceding sentence.
Notwithstanding the foregoing, a Termination Upon A Change In Control shall not
be deemed to have occurred upon the closing of the Asset Sale (as defined
below), upon the closing of the IPO, nor upon the exercise of any warrants or
options granted to parties prior to or simultaneous with the IPO.
i. Notice of Termination. Other than a Termination For Cause, Company
may effect a termination of this Agreement pursuant to the provisions of this
Section 2 upon giving thirty (30) days written notice to Employee of such
termination. Company may effect a Termination For Cause immediately without any
prior notice other than the notice and cure period for material breaches.
Employee may effect a termination of this Agreement pursuant to the provisions
of this Section 2 upon
<PAGE> 5
giving thirty (30) days written notice to Company of such termination.
3. Salary, Benefits and Bonus Compensation. As compensation for services to be
rendered by Employee under this Agreement, the Company shall compensate Employee
as follows:
a. Base Salary. As payment for the services to be rendered by Employee
as provided in Section 1 and subject to the terms and conditions of Section 2,
Company agrees to pay to Employee a "Base Salary" for the twelve (12) calendar
months beginning the Effective Date at the rate of $125,000 per annum, prorated
for any partial year. The Company shall pay Employee's Base Salary in
installments in accordance with the Company's payroll policy for other
employees. Employee's Base Salary shall be reviewed annually by the Board of
Managers. The Corporation (as defined below) contemplates that it will cause an
initial public offering of the Corporation's securities to be completed after
the Asset Sale and on or before August 15, 1998 (the "IPO"). Notwithstanding the
foregoing, Employee has agreed to be paid a reduced Base Salary of $100,000 per
annum until the effective date of the IPO.
b. Bonuses. Employee will be eligible for an annual bonus of up to fifty
percent (50%) of his then current base salary, subject to his continued
employment with the Company during the entire calendar year to which the bonus
applies. The amount of Employee's bonus will be determined by the Board of
Managers, based upon the Company's performance each year, and will be tied to
both qualitative and quantitative performance standards to be established by the
Board of Managers at the beginning of the calendar year. The Board of Managers
will provide written performance standards to Employee each year during the term
of this Agreement, not later than January 30 of the applicable year. Employee's
1998 bonus will be based on factors to be established by the Board of Managers
and provided to Employee.
c. Additional Benefits. During the term of this Agreement, Employee
shall be entitled to the following fringe benefits:
i. Employee Benefits. Employee shall be eligible to participate
in such of Company's benefits and deferred compensation plans as are now
generally available or later made generally available to executive officers of
the Company, including, without limitation, Company's stock option plans, profit
sharing plans, annual physical examinations, dental and medical plans, personal
catastrophe and disability insurance, financial planning, retirement plans and
supplementary executive retirement plans, if any.
ii. Vacation. Employee shall be entitled to three (3) weeks of
vacation during each year during the term of this Agreement and any extensions
thereof, prorated for partial years.
iii. Reimbursement for Expenses. During the term of this
Agreement, Company shall reimburse Employee for reasonable and properly
documented out-of-pocket business and/or entertainment expenses incurred by
Employee in connection with his duties under this Agreement.
d. Assignment to Corporation. The Company and Employee currently
contemplate that the Company will sell all or substantially all of its assets
(the "Asset Sale") to the Corporation. If the Asset Sale occurs, the Company
shall as a condition precedent to the Asset Sale, (i) require that the Company's
rights and obligations under this Agreement be assigned to the Corporation, and
(ii) that the Corporation assume all of the Company's obligations and
liabilities under this Agreement. Employee hereby consents to the assignment of
this Agreement to the Corporation upon the closing of the Asset Sale.
4. Severance Compensation.
a. Severance Compensation in the Event of a Termination Upon a Change in
Control. In the event Employee's employment is terminated in a Termination Upon
a Change in Control, Employee
<PAGE> 6
shall be paid as severance compensation his Base Salary (at the rate payable at
the time of such termination), for a period of the lesser of the remaining
portion of the Initial Term or twelve (12) months from the date of such
termination. Employee is under no obligation to mitigate the amount owed
Employee pursuant to this Section 4.a by seeking other employment or otherwise.
Notwithstanding anything in this Section 4.a to the contrary, Employee may in
Employee's sole discretion, by delivery of a notice to Company within thirty
(30) days following a Termination Upon a Change in Control, elect to receive
severance compensation as a lump sum severance payment by bank cashier's check
equal to the present value of the flow of cash payments that would otherwise be
paid to Employee pursuant to this Section 4.a discounted at a rate of 8% per
annum. Employee shall also be entitled to an accelerated vesting of any awards
granted to Employee under the Company's stock option plans and any other equity
rights or participation plans under which Employee is a participant; such
accelerated vesting shall occur regardless of the terms and conditions contained
in any such plans. Employee shall continue to accrue retirement benefits (if
any) and shall continue to enjoy any benefits under any plans of the Company in
which Employee is a participant to the full extent of Employee's rights under
such plans, including any perquisites provided under this Agreement, though the
lesser of the remaining term of this Agreement or twelve (12) months from the
date of termination under this subsection; provided, however, that the benefits
under any such plans of the Company in which Employee is a participant,
including any such perquisites, shall cease upon re-employment by a new
employer.
b. Severance Compensation in the Event of a Termination Other Than for
Cause. In the event Employee's employment is terminated in a Termination Other
Than for Cause, Employee shall be paid as severance compensation his Base Salary
(at the rate payable at the time of such termination), for a period of the
lesser of the remaining portion of the Initial Term or twelve (12) months from
the date of such termination. Employee is under no obligation to mitigate the
amount owed Employee pursuant to this Section 4.b by seeking other employment or
otherwise. Employee shall also be entitled to an accelerated vesting of any
awards granted to Employee under the Company's stock option plans and any other
equity rights or participation plans under which Employee is a participant; such
accelerated vesting shall occur regardless of the terms and conditions contained
in any such plans. Employee shall continue to accrue retirement benefits (if
any) and shall continue to enjoy any benefits under any plans of the Company in
which Employee is a participant to the full extent of Employee's rights under
such plans, including any perquisites provided under this Agreement, though the
lesser of the remaining term of this Agreement or twelve (12) months from the
date of termination under this subsection; provided, however, that the benefits
under any such plans of the Company in which Employee is a participant,
including any such perquisites, shall cease upon re-employment by a new
employer.
c. No Severance Compensation Upon Other Termination. In the event of a
Voluntary Termination, Termination For Cause, termination by reason of
Employee's disability pursuant to Section 2.e, or termination by reason of
Employee's death pursuant to Section 2.f, Employee or his estate shall not be
paid any severance compensation.
d. Limit on Aggregate Compensation Upon a Change in Control.
Notwithstanding anything else in this Agreement, solely in the event of a
Termination Upon a Change in Control pursuant to Section 2.h, the amount of
severance compensation paid to Employee under Sections 2 and 4 or otherwise, but
exclusive of any payments to Employee in respect of any stock options or
warrants then held by Employee (or any compensation deemed to be received by
Employee in connection with the exercise of any stock options or warrants at any
time) or by virtue of Employee's exercise of a limited right under any stock
option plan upon a Change in Control, shall not include any amount that Company
is prohibited from deducting for federal income tax purposes by virtue of
Section 280G of the Internal Revenue Code or any successor provision.
5. Indemnification. The Company shall defend, indemnify and hold Employee
harmless from any
<PAGE> 7
and all liabilities, obligations, claims or expenses which arise in connection
with or as a result of Employee's service as an officer, manager, director or
employee of the Company to the fullest extent allowed by the Company's
organizational documents; provided, that the Company shall not be obligated to
defend, indemnify or hold Employee harmless from any liabilities, obligations,
claims or expenses which result from or are related to Employee having committed
an act of dishonesty, obtained any benefit of money or other property to which
he was not entitled, engaged in any willful misconduct or engaged in behavior
that is grossly negligent.
7. Noncompetition and Confidentiality.
a. Fiduciary Obligations. During his employment hereunder, Employee
shall comply with his fiduciary obligations as an officer and, if elected, as a
member of the Board of Managers of the Company.
b. Noncompete and Nonsolicitation. During his employment hereunder and
for a period of twelve (12) months following the termination or other cessation
of his employment hereunder, Employee shall not, directly or indirectly, as a
director, officer, employee, owner, partner, agent, consultant, lessor, creditor
or otherwise, for any person, firm or entity, in any of the counties of the
states of the United States, engage in any of the following activities:
i. solicit or attempt to persuade any person or entity that was a
customer of the Company during Employee's employment hereunder to terminate or
rescind its business or contractual relationship with the Company;
ii. solicit for employment any employee of the Company or attempt
to persuade or entice any such employee to terminate his or her employment with
the Company; or
iii. engage or participate in the business of selling, installing
or servicing telecommunications or cable or broadcast television products,
services or software, or in any other business engaged in by the Company at any
time during Employee's employment hereunder.
The restrictions contained in this Section 6.b shall not thereafter apply if the
Company materially breaches this Agreement and fails to cure such breach within
thirty (30) days following receipt of written notice of such breach.
c. Confidentiality. Employee shall not, during his employment hereunder
or at any time thereafter, use for his own purposes or disclose to any other
person or entity any "Confidential Information" (defined below) concerning the
Company, its affiliates or any of their business operations, except as may be
consistent with his duties hereunder or as may be required by order of a court
of competent jurisdiction. "Confidential Information" means any information,
formula, pattern, compilation, program, device, method, technique, customer
list, or process concerning the Company or its business or customers: (i) that
derives independent economic value, actual or potential, from not being
generally known to, and not being readily ascertainable by proper means by,
other persons who can obtain economic value from its disclosure or use; or (ii)
the disclosure of which would be harmful to the interests of the Company.
d. Proprietary Rights. Employee hereby assigns and transfers to Company
all of his proprietary interest in any device, design, machine, practice,
process, method, product, literary composition, algorithm, or development,
innovation or improvement to existing Confidential Information (collectively,
the "Works") that is developed, conceived or created, in whole or in part,
during the term of this Agreement regardless of whether the Work is developed,
created or conceived while at Company
<PAGE> 8
facilities or another location or during or after normal business hours;
provided, however, that for the purposes of this Agreement, Works shall only be
deemed to include any of the foregoing that (i) in any way relate to the present
or anticipated business, activities or research and development work of the
Company, (ii) result from or are related to any work performed for the Company,
or (iii) were developed, created or conceived utilizing the Company's time,
equipment, supplies, facilities, materials, software, resources or other
Confidential Information. Any Work that involves the creation of any
copyrightable work shall be considered a "work made for hire," to the maximum
extent permitted by law. If any copyrightable work is not considered a "work
made for hire," Employee, without further consideration, hereby assigns and
transfers all copyrights in the Work to Company. Employee recognizes that all
Works shall be the exclusive property of the Company. Employee agrees to assist
the Company in obtaining any patents, copyrights or other form of proprietary
rights protection on any Work, to sign all documents and take other actions as
the Company may reasonably request to obtain such protection for Company, and to
assist Company in protecting the Works against infringement by other parties.
Employee appoints the executive officers of the Company to act as his agent and
attorney-in-fact to perform any act necessary to obtain any patents, copyrights
or other form of proprietary protection covering the Works. Employee represents
that there are no Works owned wholly or in part by him that are to be excluded
from the scope of this Agreement. Employee also agrees to disclose to the
Company, in confidence, (A) all Works that Employee develops, conceives or
creates while employed by the Company and (B) all patent or copyright
applications filed by Employee within one (1) year after termination of
employment with the Company.
e. Damages. Employee agrees that the provisions of this Section 6 may be
enforced by temporary or permanent injunction; the Company shall not be required
to post any bond or security in any such temporary or permanent injunction
proceeding. The right to such injunctive relief shall be in addition to and not
in place of any further remedies to which the Company may be entitled.
f. Enforcement. Employee agrees that the provisions of this Section 6
are reasonable. However, if any court of competent jurisdiction determines that
any provision within this Section 6 is unreasonable in any respect, the parties
intend that this Section 6 should be enforced to the fullest extent allowed by
such court.
g. Severable Units. Each county of each state covered by the covenant
not to compete set forth in Section 6.b, each of such states and each month
covered by this covenant not to compete shall be deemed a severable unit and
should any court determine that the inclusion of all such counties, states or
months would render such undertaking unreasonable or unenforceable for any
reason, those units which are necessary, in the judgment of the court, to be
deleted in order to render such an undertaking reasonable and enforceable shall
be deemed free of such noncompete and nonsolicitation undertaking but such
undertaking shall remain in full force and effect as to every other unit of
territory and time.
h. Survival. This Section 6 will survive the termination of this
Agreement except as otherwise indicated in Section 6.b.
7. Arbitration. Any dispute arising out of or relating to this Agreement shall
be resolved by arbitration before a single, neutral arbitrator in Austin, Texas,
in accordance with the Employment Dispute Resolution Rules of the American
Arbitration Association; provided, however, that nothing herein shall prevent a
party from seeking injunctive relief to enforce compliance with this Section 7
or Section 6, or to enforce any ruling of the arbitrator. The results of the
arbitration shall be binding on the parties. All reasonable costs of the
arbitration, including attorney's fees, shall be paid by the non-prevailing
party.
8. Notices. All notices, requests, consents and other communications required or
provided for in this Agreement shall be in writing and shall be deemed to be
given when: (a) delivered in person; (b) three days following deposit in the
U.S. mail for first class registered or certified mail with postage prepaid; (c)
<PAGE> 9
delivered by overnight receipted courier service; or (d) sent by confirmed
facsimile transmission. Notices shall be addressed to the party at the address
set forth below, or such other addresses as may hereafter be designated in
writing by the party.
If to the Company, to:
U.S. OnLine
Attn: Mr. Rob Solomon, CEO
8307 Shoal Creek Blvd.
Austin, Texas 78757
Facsimile: (512) 451-8732
With a copy to:
Stahl, Martens & Bernal, L.L.P.
Attn: Mr. Brent G. Stahl
7320 N. MoPac, Suite 211
Austin, Texas 78731
Facsimile: (512) 346-2712
If to Employee:
Mr. Donald E. Barlow
------------------------
Austin, Texas _____________
Facsimile: (512) ____-______
9. Miscellaneous.
a. Waiver of Breach. The waiver by a party of a breach of any provision
of this Agreement shall not operate or be construed as a waiver of any
subsequent breach
b. Assignment. Neither party may assign its rights or delegate its
duties hereunder without the prior written consent of the other party; provided,
however, the Company shall assign this Agreement to the Corporation upon the
closing of the Asset Sale, and (i) all references herein to the Company shall
thereafter mean the Corporation, and (ii) all references herein to the Board of
Managers shall thereafter mean the Board of Directors of the Corporation.
c. Entire Agreement. This Agreement and the transaction and documents
referred to herein contain the entire understanding of the parties with regard
to the subject matter of this Agreement and may only be changed by written
agreement signed by both parties. Any and all prior discussions, negotiations,
commitments and understandings related thereto are merged herein.
d. Binding effect. This Agreement shall be binding upon and inure to the
benefit of the respective parties, and their legal representatives, successors,
heirs, and permitted assigns.
e. Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of Texas, without giving
effect to principles and provisions thereof relating to conflict or choice of
laws and irrespective of the fact that any one of the parties is now or may
become a resident of a different state.
f. Validity. If any term of this Agreement shall be invalid, illegal, or
unenforceable, in whole or in part, the validity of any of the other terms of
this Agreement shall not in an way be affected thereby.
<PAGE> 10
g. Survival of Terms. The applicable provisions of Sections 2, 4, 5, 6,
7 , 8, and 9 shall survive any termination of this Agreement.
<PAGE> 11
IN WITNESS WHEREOF, the Company and Employee have executed this Agreement to be
effective as of the date first above written.
COMPANY:
U.S. OnLine Communications, L.L.C.
By: ________________________________
John Orehek, Manager
Date Signed: _________________________
By: ________________________________
Robert G. Solomon, CEO
Date Signed: _________________________
EMPLOYEE:
------------------------------------
Donald E. Barlow
Date Signed: _________________________
CORPORATION
U.S. OnLine Communications, Inc.
By: ________________________________
Print Name:__________________________
Print Title:___________________________
Date Signed: _________________________
(The Corporation is signing this
Agreement for the purpose of agreeing to
be bound by the terms and conditions
contained herein upon the closing of the
Asset Sale)
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
U.S. Austin Cable Associates I, Ltd.
<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- ) of our report, which includes an explanatory
paragraph related to substantial doubt about the Company'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
May 4, 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- ) of our report, which includes an explanatory
paragraph related to substantial doubt about the Company'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
May 4, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> MAR-05-1998
<PERIOD-END> MAR-05-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
